Helmerich & Payne Aktie

Good day, everyone, and welcome to the H&P Fiscal Second Quarter Earnings Call. [Operator Instructions] Please note this call is being recorded.

It is now my pleasure to turn the conference over to Mr. Kris Nicol, Vice President of Investor Relations.

Welcome, everyone, to Helmerich & Payne's conference call and webcast for the second fiscal quarter of 2026. On today's call, Trey Adams, our President and CEO, will be joined by Kevin Vann, our Chief Financial Officer; Todd Scruggs, incoming CFO; and Mike Lennox, Executive Vice President of the Western Hemisphere.

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. Adjusted EBITDA, direct margin, adjusted EPS and free cash flow are non-GAAP measures. The most directly comparable GAAP measures and reconciliations are included in our earnings release and investor materials on our Investor Relations website.

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 Trey.

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 fiscal second quarter results. I will then turn to discuss the broader macro environment, current dynamics in the rig market and several key commercial developments, including a specific update on our NAS business segment. Kevin will then walk through our financial results and provide guidance for the third quarter and full fiscal year. To wrap up, I will then return to summarize the key takeaways before we open the line for questions.

Turning to Slide 4 of the presentation. I'd like to begin by walking through some of our key highlights from the fiscal second quarter. Execution remains strong, leading to solid operational performance. Adjusted EBITDA for the period was $178 million, which aligned with the lower end to midpoint of our implied guidance. This was primarily led by the impacts of the conflict in the Middle East. Specifically, during the quarter, we were able to utilize our in-house engineering and aftermarket capabilities to reactivate the rigs in Saudi Arabia, leveraging in-country equipment and circumventing supply chain constraints. This move enhances returns and importantly, avoided delays for our customers. However, it did lead to more costs being classified as OpEx, which had an impact on our direct margins. While these dynamics are important, our top priority throughout the quarter was our people.

I am pleased to report that our teams have remained focused and safe. We continue to closely monitor developments in the region. And despite a fluid environment, our team has done an exceptional job in maintaining continuity of operations, supported by strong local leadership and the dedication of our people in the region. During the quarter, International Solutions delivered a direct margin of $11.5 million, aligning with the lower end of our guidance range. In addition to the incremental OpEx, the company experienced unplanned direct and indirect costs associated with the conflict in the Middle East, which Kevin will elaborate on shortly.

Overall, operational activity remained stable. During the quarter, we experienced 1 rig suspension in Iraq. Subsequently, we have received notification of the suspension of our 2 rigs operating in Bahrain for a period of up to 90 days. Outside of this, we continued rig reactivations in Saudi, although at a slightly slower pace than originally planned. So far, we've been able to spud 3 out of 7 rigs. 2 more are expected to commence drilling imminently with the sixth rig anticipated to be active later this quarter and the seventh rig to follow next quarter.

Even with these disruptions, the broader portfolio continues to perform as expected. We remain confident in achieving the 58 to 68 annual rig guidance range we set out at the start of the year with strong growth in Latin America, offsetting some of the weakness in the Middle East.

Turning now to North America Solutions. We averaged 136 rigs, slightly ahead of expectations. Our industry-leading technology and talented teams continue to deliver for our customers, generating average margins ahead of our peers. Due to significant shifts in the commodity market over the last 2 months, we are confident that last quarter will represent a trough for both our rig count and direct margins. As a result, we have revised our outlook for the second half of the year higher. This improving outlook is already showing up in the pace of our technology adoption.

FlexRobotics continues to perform ahead of expectations with our first rig now operating its fifth pad, maintaining its high performance straight out of the gates for a super major customer in the Permian Basin. As a result, I am pleased to share that we plan to deploy FlexRobotics on an additional 4 rigs led by customer demand. This will be a phased deployment with the first 3 to 4 systems expected to be operational this calendar year.

Our Offshore segment also delivered another quarter of robust operational performance, coming in above the midpoint of our guidance range. This was driven by the achievement of several performance-related bonuses during the quarter. We also announced an extension of a contract with BP in the Caspian Sea, which could achieve well over $1 billion of revenues if all extensions are exercised.

Alongside strong execution, we've also remained focused on enhancing our balance sheet with a major milestone on the portfolio optimization front. We were pleased to announce at the start of April, the closing of the sale of our real estate property in Tulsa. The after-tax proceeds exceeded our divestment target of $100 million and allowed us to retire the remainder of the term loan balance ahead of schedule and drive leverage lower towards our 1 turn target.

Stepping back from the quarter and looking at the broader macro environment on Slide 5. The Middle East conflict has exposed the fragility of the energy complex, and we believe has fundamentally changed the outlook for oil and gas within a matter of months. The effective closure of the Strait of Hormuz has had a seismic impact on energy flows with over 12 million to 14 million barrels per day of crude and condensate supply impacted and more than 20% of the world's LNG flows. As Wood Mackenzie puts it, this is the most serious energy supply shock ever.

In some respects, we have been surprised by the relatively sanguine response by markets and governments to the potential severity of this shock and see significant dislocation with physical markets. What has not changed is our belief that the world will require significantly more energy than it consumes today, driven by expanding populations and growing prosperity in emerging markets, along with rising power needs from AI advancements in many developed nations.

At the same time, the potential bifurcation of supply and energy security concerns caused by this shock support the view that we may now need even more energy supply. This dynamic strengthens our view that demand for oil and gas will persist and grow for many years to come and therefore, increases the need for our global drilling solutions and will now likely bring forward activity sooner than we anticipated.

Looking at the rest of the year, we have quickly moved from fears of oversupply in a soft OFS market to one that is tightening quickly, particularly in the Lower 48. Initial actions from operators have focused on accelerating the drawdown of DUC inventories. However, as I will elaborate on shortly, we anticipate this trend will be temporary.

Regarding rig reactivations, we have received several inquiries and firm commitments with most pickup so far originating from private and smaller independent operators. In line with this, the near-term outlook for North America is improving, and we now anticipate a higher full year rig count than we previously guided. The uptick in Middle East activity that was underway prior to the conflict is now less well defined. We continue to remain optimistic that more rigs could go back to work this year with several conversations being initiated after the start of the conflict. However, the situation remains dynamic with a wide variance of possible outcomes.

Offshore is another area that could benefit. Deepwater is already showing signs of strength and with elevated commodity prices, we could see several projects fast tracked, particularly in basins unaffected by the conflict. Overall, we believe the seismic change to oil and gas fundamentals in the past 2 months has significantly strengthened the tailwinds that will support our business, both in the Western and Eastern Hemispheres over the next several years.

Turning to Slide 6. On the commercial front, we saw strong momentum during the second fiscal quarter and advanced several important initiatives that enhance our competitive position and lay the groundwork for long-term growth. This progress was evident in North America Solutions, where we strengthened our backlog through multiple contract extensions from key customers and new rig pickups from our small private and independent operators.

As a result, we now have over 55% of our operating fleet on term versus spot contracts, up from just over 50% in the prior quarter. As I mentioned earlier, we plan to deploy an additional 4 FlexRobotics systems. This is a great example of our technology leadership in onshore drilling solutions and a testament to the dedication of our engineering and R&D teams. We have received several inbounds from a variety of customers and are excited by the potential to deploy FlexRobotics at scale across our super-spec rig fleet. Beyond traditional oil and gas, we are also seeing encouraging traction in new energy applications.

Interest in geothermal continues to build, providing a promising tailwind and expanding the reach of our portfolio. Taken together, these developments underscore the strength of our offering and opportunities ahead. That momentum is playing out across international markets as well. Our Latin America portfolio saw meaningful commercial progress with activity continuing to build across the region. In Argentina, operations in the Vaca Muerta accelerated, driven by both the host NOC and domestic independence. We currently have 9 rigs operating in the Vaca Muerta today and see a path to being 100% utilized with all 12 rigs in country active. Meanwhile, discussions in Venezuela remain active and represents a compelling medium-term opportunity as the environment continues to evolve.

In the Middle East, commercial momentum continued, highlighted by a 6-year contract extension covering 5 rigs in Oman, underscoring the strength of our operational performance and customer relationships. Reactivations in Saudi Arabia continue to progress with the potential for additional rigs to return to work later this year as activity builds. Elsewhere internationally, activity in Australia accelerated with a strong pipeline of work emerging as development gains pace in both the Beetaloo Basin and Taroom Trough in Queensland.

Lastly, in our Offshore Solutions segment, as previously mentioned, we secured a major win with a long-term contract renewal from BP in the Caspian Sea. The renewal carries a firm 5-year term with 3 additional 1-year extension options. We also continue to progress several prospects, including potential multiyear contract renewals, which would further strengthen the resilience of our offshore portfolio. Given the elevated performance in North America Solutions to our near- and medium-term outlook, I want to spend a bit more time here.

Turning to the next slide. I will discuss the dynamics that highlight the opportunity we have in front of us. For some time, we have seen a gradual decline in the rig count and a softening of activity levels, while production has remained stable. To hold production flat in the Lower 48, it is estimated that you need to bring around 15,000 wells online each year. This is getting harder every day as decline rates accelerate and rock quality degrades. In some ways, the efficiency and accuracy we bring to drilling the wellbore has helped largely offset these factors.

Service intensity continues to increase as wells are becoming more complex. We are drilling faster and longer than ever before. And with our digital applications automation and FlexRobotics, we are driving greater consistency and truly getting closer to manufacturing mode at scale. As we enter this higher priced environment, we anticipate activity picking up this year and continuing into 2027 and beyond. As I mentioned earlier, the first move by operators has been to draw down on their DUC inventory. But as we highlight on the slide, inventories are at historical lows and with roughly 2,000 locations remaining, it is likely they will be exhausted relatively quickly.

With that, we anticipate a steady increase in drilling activity just to hold production flat. If the call on the Lower 48 is to increase production, we could see an altogether more meaningful increase in the rig count. At the same time, spare capacity for super-spec rigs is already very tight. With around 430 super-spec rigs operating in the industry, utilization is currently above 80% and tightening fast.

In a recent industry survey, it was estimated that around 65 idle rigs could be brought to work for between $1 million to $4 million within a 6-month period. From an H&P perspective, we are uniquely positioned with unmatched scale in the Lower 48. Currently, we have 138 super-spec rigs operating, accounting for over 30% of the market. Additionally, around 60 super-spec rigs are currently idle. Of these idle rigs, we estimate that around 20 could be reactivated at maintenance CapEx levels. We are confident in our capacity to meet customer demand during this anticipated wave of increased activity.

We believe that we possess a greater number of super-spec rigs available for deployment at a lower cost to reactivate than any other competitor, which positions us extremely well to increase our market share and maintain, if not enhance, our industry-leading margins.

On that positive note, I will now hand it over to Kevin to walk you through the financials and our guidance.

Thanks, Trey. I will start by reviewing our second quarter operating results and providing details on the performance of our segments. I will then spend some time walking through our capital allocation framework and conclude by outlining our guidance for the fiscal third quarter and full year before handing it back to Trey.

Let me start with highlights for the recently completed quarter on Slide 9, where we delivered resilient financial performance in the face of a very dynamic situation in the Middle East. Alongside our continued operational performance, we were delighted to conclude the sale of Utica Square with the after-tax proceeds exceeding our divestiture target of $100 million. This, in turn, helped accelerate the full repayment of the remaining balance of our term loan well ahead of schedule.

During the quarter, the company generated revenues of $932 million. We also generated $178 million of adjusted EBITDA, coming in between the low end and the midpoint of our implied guidance range. As Trey mentioned, we prioritized speed and returns in the face of growing supply chain constraints in the Middle East, which resulted in the refurbishment of existing equipment. This decision led to the allocation of rig reactivation capital expenditures to operating expense. This had an approximately $3 million impact on International Solutions direct margins during the quarter.

On EPS, we reported a net loss of $0.59 per diluted share. These results were impacted by a noncash impairment charge of approximately $26 million. Absent those items, we generated a loss of $0.38 per share. Capital expenditures for the second quarter were $63 million, which continued to trend below anticipated spending levels. This was attributable to the reclassification of CapEx to OpEx in the Middle East, resequencing of capital expenditures from the second to the third and fourth quarters and continued improvement in capital efficiency across the portfolio.

While free cash flow came in negative during the quarter, the variance was driven by a very rare, at least for us, timing lag between the collection of some receivables versus disbursements made on payables. This was largely related to a handful of large customers where payments were made in April and will therefore normalize during our third quarter. Excluding changes to working capital, free cash flow during the quarter was $74 million.

Let me now break that down by segment, starting with North American Solutions on Slide 10. We averaged 136 contracted rigs during the second quarter, slightly above the midpoint of our activity expectations. Segment direct margin for North America Solutions was $215 million, which came in close to the midpoint of our guidance range. This was driven by the anticipated stepdown in rig count and our total direct margin tapering slightly to $17,600 per day. Day rates remained relatively stable, while operating costs increased slightly as a result of reduced absorption of overheads from operating less rigs during the quarter.

As Trey pointed out earlier, we firmly believe that this will be the quarter where a trough occurred for both the rig count and direct margin. We exited the quarter at 137 rigs and as of last week, 138 rigs were working. We are also experiencing strong contracting trends with our operating fleet as customers look to extend the duration of contracts as the capacity to add new super-spec rigs to the market remains extremely tight.

Turning to International Solutions on Slide 11. The segment ended the second quarter with 61 rigs working and generated approximately $11.5 million in direct margins, coming in around the low end of the guidance range. Again, this was largely the result of the decision to allocate rig reactivation expenditure to OpEx as we navigated supply chain constraints in the Middle East and impacted direct margin during the quarter by approximately $3 million.

Regarding the unexpected and elevated costs caused by the ensuing conflict in the Middle East, we estimate that the impact on direct margins in the quarter was approximately $3.5 million. This includes costs related to the crisis management response, supply chain cost inflation, slower-than-anticipated start of drilling activities from reactivated rigs and the suspension of a rig in Iraq. At this stage, we see most of the cost impacts incurred being discrete to the quarter, particularly regarding the elevated OpEx. We expect continued cost inflation pressures as supply chains remain constrained.

At the midpoint of our guidance range, we anticipate an approximate $6 million impact to the third quarter results, assuming the Strait of Hormuz remains effectively closed. This is also inclusive of the impact of the rigs suspended in Iraq and Bahrain.

Lastly, with our Offshore Solutions segment on Slide 12, we generated a direct margin of approximately $27 million during the quarter, which came in ahead of the midpoint of our guidance range. We had 3 active rigs and 30 management contracts in operation during the quarter. We were excited to announce the extension of our contract with BP in the Caspian Sea, and it is a great example of the types of projects we undertake in Offshore Solutions. The long duration of these contracts is a testament to the strong relationships and performance we have delivered for these operators on a consistent basis for many years.

As with our International Solutions business, we are starting to layer in elements of performance contracts to offshore. This has already started to help enhance the direct margin profile, and we continue to innovate in contracting structures to create win-win solutions for our customers. We are excited about this business and the consistent and stable results that it delivers. It requires minimal capital and generates steady cash flow and provides good diversification from the more cyclical and capital depending nature of our onshore portfolio.

Turning to Slide 13. I wanted 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 a relatively short time, we've made great progress reducing our post-acquisition leverage and are very pleased to have achieved our near-term goal of paying off our term loan of $400 million ahead of schedule. Our focus now shifts to our $350 million bond due at the end of 2027.

In anticipation of that repayment, we plan to build cash as well as continue to pay our base dividend. With the combination of lower debt and the anticipated expansion of EBITDA, we are confident in achieving our 1 turn leverage target. At the end of the fiscal second quarter, we had cash and short-term investments of approximately $199 million. Including the availability under our revolving credit facility, our total liquidity is approximately $1.15 billion. We will balance our near-term deleveraging goals with potential investment opportunities that may arise as drilling activity increases.

Our disciplined approach will ensure capital is directed to the highest return opportunities. At the same time, we are making steady progress on several enterprise optimization initiatives. We have reduced our SG&A expenses by more than $50 million compared to premerger stand-alone run rates, and we'll continue to identify opportunities to further streamline our cost structure and harmonize processes and systems across our Western and Eastern Hemisphere operations. These ongoing efforts will support the long-term cost-conscious culture at H&P. While we have completed the heavy lifting on portfolio optimization with the closing of the Utica Square transaction, we will continue to seek to monetize noncore and underutilized assets.

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 third quarter and full year guidance on Slide 14. Looking ahead to the second half of fiscal 2026 for North American Solutions, we expect our margins and operated rig count to show solid growth as we start to see activity ramp in the Lower 48. As a result, we expect direct margins in our third quarter to range between $230 million to $240 million based on an anticipated rig count of between 137 to 143 rigs in the third quarter. Given the strength of the pickup in activity, we are also raising our full year rig count range to 138 to 144 rigs and see a positive inflection in margin rates. As we have said, we see our second fiscal quarter as a trough for the NAS market and see continued momentum into 2027.

For International, we anticipate the rig count to average between 58 to 68 rigs in the third quarter and full year, which includes the remaining rigs being reactivated in Saudi and more rigs being activated in Argentina. This will partially be offset by rig suspensions in Iraq and Bahrain due to the Middle East conflict and the end of near-term geothermal drilling programs in Europe. We expect International Solutions to generate a direct margin between $12 million to $32 million.

As Trey mentioned, we expect to have 6 of the 7 rigs reactivated in Saudi by the end of the quarter. We also expect continued improvement in FlexRigs margins and growth in Latin America. The wider guidance range for International Solutions reflects a broad range of possible outcomes in the Middle East. At the midpoint, we are anticipating an approximate $6 million impact on direct margins due to supply chain constraints and cost inflation if the Strait of Hormuz is to remain effectively closed for the duration of the quarter.

For Offshore, we anticipate an average of 30 to 35 management contracts and operating rigs. We expect the direct margin rate in the fiscal third quarter to range between $24 million and $28 million. 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. Given the anticipated ramp-up in activity in NAS, the deployment of additional FlexRobotics systems and reactivations in Argentina, we now expect our 2026 gross capital expenditure budget to align more closely with the high end of the range of between $270 million to $310 million.

In line with this and delayed second quarter capital expenditure, we expect third quarter spending levels to be in the region of $100 million to $130 million. It is important to note that our capital guidance does not include spending in relation to additional reactivations beyond what has been announced. We are also only including spending on the 4 FlexRobotics packages that will begin deployment this year. As a result of the Utica Square sale, we now expect cash taxes to come in higher than previously anticipated and will now range between $125 million to $150 million.

With cash taxes, capital expenditures and working capital outflows all running higher than expected, our free cash flow conversion for the year will trend lower, but still represents a significant improvement from the prior year.

In summary, while there were a lot of transitory items in the quarter regarding direct margins, CapEx, OpEx dynamics and free cash flow generation, we successfully paid off our term loan and our outlook for the back half of the year and beyond has improved significantly. We are seeing a clear strengthening of tailwinds, both in the Lower 48 as well as in our international portfolio and believe we are at the start of a multiyear up cycle for the OFS sector.

On a positive note, I will now sign off as CFO for H&P. It has been an honor to play a small part in the evolution of this remarkable company. I am excited to pass the baton to Todd Scruggs, someone who I have worked with throughout my career. With Trey and Todd at the helm, you're in good hands with a leadership team full of passion, energy and dedication, ready to capture the significant opportunities that lie ahead as H&P continues its journey as the world's largest and most advanced onshore drilling solutions provider.

And with that, I'll hand it back to Trey for some closing remarks.

Thank you, Kevin. It's been an honor working with you. The stability you provided during the KCAD transaction closure as well as your substantial contributions to our financial function and balance sheet have been invaluable. Everyone at H&P sincerely appreciates your service and extends their best wishes for your retirement.

Now turning to Slide 16. I'd like to conclude by refocusing on the opportunity we have in front of us and the compelling investment thesis H&P offers. We are unrivaled in our scale, technology leadership and geographic diversity to capture rising drilling activity, both in North America and international. We have witnessed a fundamental change to the energy system over the past 2 months and believe we are at the very early stages of a multiyear up cycle in which H&P is ideally positioned.

At the same time, we continue on our 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 $350 million note ahead of schedule. Beyond that, we believe we will have financial strength and flexibility to enhance our attractive shareholder return profile and further differentiate our portfolio.

Lastly, I am proud of the performance of the team during the quarter, particularly our team members working in the Middle East. Despite all of the disruption and elevated threat level, they have been able to maintain continuity of operations in all of our core operating countries. We believe this will only strengthen the relationships we have with customers in the region and is a testament to the commitment of our teams. While we may face some ongoing timing and market dynamics in the Middle East, our commitment is unwavering, and we believe that we will see strong growth from the region over time. We also believe the Lower 48 is set to accelerate and as a result, expect North America Solutions to exceed our original full year guidance.

I want to thank all of 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 we'll now turn it back to the operator for questions.

[Operator Instructions] And your first question comes from the line of Arun Jayaram with JPMorgan.

Trey and Kevin, I was wondering if you could maybe elaborate on how you see the recovery in NAS kind of playing out over the balance of the year and into fiscal 2027 because it does appear that your guidance implies probably a rig count in the mid-140s. And perhaps you could also discuss kind of margin progression.

This is Trey. Happy to start, and then we'll turn it over to other members of the team to add some color here. Just a reminder, our position in the North America Solutions segment has been a robust one over the past really 2 decades. And if we reflect back to end of 2021, early '22, when we had the belief that we could grow share and grow margins through a different outcome-oriented delivery and more customer-centric approaches. We remain firmly committed to that approach today and are really proud of the foundation we have in North America. The second fiscal quarter, we had always knew kind of going into this fiscal year, the second fiscal quarter was going to be a trough for us.

And as Kevin and I discussed in some prepared remarks, that did manifest where the second fiscal quarter was the bottom for us for our fiscal year. And even before the conflict started, we felt and had a good belief that the market was firming up coming out of calendar '25 with crude in the 50s and the forward strip not looking as robust. That was changing even prior to the conflict as we entered into the month of February, where forward strip was looking more in the 60s and private E&P activity was starting to start to build. Now you look post conflict, that's changed even more. And obviously, you touched on some of our rig count guide and where we think we're going to be.

Largely, that's been driven by private E&P independent operator pickups. And in addition to that, we have started to see a little bit more movement in activity on the public side. Our publicly traded customers have been reporting over the past couple of weeks, and you're starting to see and feel some of that rhetoric start to manifest, which is all very additive and provide some good tailwinds for us through the second half of this fiscal year.

And on top of that, if you go back to -- in our prepared slide pack, I think it was Slide 7 in the slide pack where we referenced just the market dynamics that the U.S. Lower 48 was facing coming into this Iran conflict and DUC inventories were at historical lows. You have really, really tight super-spec market. And then this just continued need and draw on rig count and activity. We touched on 15,000 wells needed to maintain and balance production rates on an annual guide. All of it is constructive.

And then you layer on the fact that there's a statistic out there that's in the public domain that 70% of current U.S. Lower 48 production is from wells drilled within the last 2 to 3 years. All of that is a really healthy backdrop that would require what we do best. In addition to that, on the super-spec utilization front, the market is tight. We've been saying that for quarters. We've been saying that for some time. The market for rigs that have been inactive for less than a year is well over 80%. And then our position in that market is a substantial one.

In our prepared remarks, we touched on that there's 65 rigs estimated out there that could be brought back to work within the next 6 months at -- I think it was a $1 million to $4 million CapEx target. We estimate we have roughly 20 rigs that could be brought back into this market at maintenance CapEx levels. And these are rigs that are super-spec rigs that can come out, and I may actually let Mike touch on some of the operational statistics and our advantage in that growing market. But it's a real advantage for us when you think about our value proposition, what we deliver for customers and how quickly we can respond to this growing market.

Thanks, Trey. Arun, yes, thanks for the question. It's exciting quarters ahead for NAS at H&P, a structural advantage given our scale, our in-house engineering and our maintenance and overhaul capabilities. As Trey mentioned, today, we operate over 30% of the industry fleet in the Lower 48. We have more rigs operating in the Permian Basin than anyone else has in the Lower 48. We work for all customer types and leading market share in each customer segment.

As demand grows, we have 20-plus rigs available, as Trey just mentioned, to reactivate at that CapEx range of about $1 million. And as we talk about the efficiencies, it takes a lot of planning and really want to commend our customers and our employees for what it takes to bring these rigs out. We did a study using third-party information looking back over the last 3 years, specifically at the Delaware Basin. And when we bring rigs out at H&P, we plan our business. But on the first well, we're 4.6 days ahead of our competitors. And by the 10th well, we are 5.3 days ahead of our competitors. That's awesome work. And of course, it takes a lot of planning and preparation to do that. But that's adding value to our customers.

After that 20-plus mark, we hit a new tranche. That new tranche is -- it cost a little more than the maintenance CapEx to bring those out. Hopefully, we get there, but time will tell. As far as pricing, we'd expect improved pricing really as rigs are brought out just due to basic supply and demand principles. We're excited about the FlexRobotics. Trey mentioned 4 of those. That's exciting times as well as the pickup in the growth that we're seeing in the geothermal space. So I'll wrap it up with just our scale, our capacity, technology really puts us in a great position and demands continued growth in our NAS business unit. So thanks for the question.

Yes. And just to address the second part, Arun, real quick. You mentioned a higher Q4 implied rig count. I do think if you look at where we're guiding in Q3 and then you look at the full year rig count, we continue to see a sequential increase in the number of rigs we're running, both from Q2 actuals to Q3 guide to what would be implied in the Q4 guide. And then along with that, like Mike just said, we see a tightening margin environment accompanying that as you see different kinds of operators pick up rigs at different times, different ones of our competitors bringing rigs back out and then us bringing rigs out to the extent it's economically justified. And so we feel pretty good about the trajectory of both our rig count and then our margins ending this year and then importantly, into fiscal '27 as well.

Your next question comes from the line of Scott Gruber with Citigroup.

I appreciate all the color on the Middle East, certainly a lot of moving pieces these days. Your 3Q guide for international includes a $20 million spread IV low. Can you provide some more color on what kind of drives the high end versus the low end? And how should we think about the trajectory into fiscal 4Q, assuming the 3 suspended rigs go back to work and you have at least 6 out of the 7 Saudi restarts, where could International GP rise to in 4Q? And ultimately, when can we see the business kind of get back to that $45 million level of GP that you've been targeting post restart?

Scott, you're right on your comments on moving pieces. It's been a very fluid situation that we've navigated in the Middle East. To say the least, over the last 60 days, I may start and then turn it over to Kevin to provide some more specificity on the financials in the Middle East right now. I'll just start with just a highlight of thanks again to our employees in the region, we shared some of those remarks in the prepared portion of the conversation this morning. It's just a testament to our employees in the region. They've showed such great resilience and dedication and a really strong customer focus.

Our priority at the onset of the conflict, and it remains the same today, is really on our people and the safety of our people in the region. Our crisis management team and that muscle that we've been building organizationally is one that we've been very proud of and really levered through the duration of the conflict. And when we think about our operations and after Kevin gives a financial review, I may take can give some more specificity on this, but we've really been proud to have a really high level of continuity of operations in the Middle East throughout the conflict and really, really dedicated and focused to our team members that have been able to enable that. Kevin?

Thanks, Trey. No, Scott, I think to start, we do still firmly -- if you think about -- firmly believe in the $45 million quarterly run rate, if you think about prior to the conflict, we had a pretty clear line of sight in terms of how we were going to get to that $45 million quarterly run rate by our fiscal fourth quarter of this year. And with the activity and what's happened over the last 60 days, the winds picked up and it got a little dust in the air, and we're trying to figure out, okay, we still see the $45 million run rate. It's just -- the air isn't nearly as clear as it was 75 days ago going into the conflict. So we still see it though.

It's just now at this point, the cost that we saw during the second quarter, again, in my prepared remarks, we estimated it was roughly about $6.5 million when you consider the supply chain constraints, what we did in terms of how we were reactivating rigs and having to reallocate from an accounting perspective, some of the ways we were doing it generated hits the margin and not necessarily just capital costs being incurred. And again, the cash flows themselves weren't really changing. It was more just a reallocation of those costs from an accounting perspective. But we pivoted quickly in order to get those rigs back to working as fast as we could and the most economically advantageous way that we could.

As we look toward our third quarter guidance, yes, it's a wide range, and I think it's just representative of kind of the dirt and the dust that's in the air as these winds have picked up in our Middle Eastern operations. But again, we're learning how to manage it. I mean, just like everybody else is. And so we got ahead of it as much as we could by just really trying to stock up on some of the kind of the basics that were needed on the rigs in order to us to continue to operate. But as the Strait of Hormuz became shutdown, we started to look at other alternative ways to get things to the rigs, to get supplies to the rigs, and it's just added additional cost -- the way it added additional costs really across the industry.

If you look at our guidance for the third quarter, it's a wide range, as I mentioned earlier. And included in that $22 million midpoint of margin, we've got roughly about $6 million of further kind of supply chain constraint costs built into that. So we feel confident about that number. But if things get better, then I think you can see that go up. If it gets worse and the Strait of Hormuz were to continue to be shut down effectively longer than what we're implying in our third quarter guidance, which is basically through the end of our third quarter, so end of June 30, that $45 million run rate might take another quarter to hit. Again, it's just -- at this point, as Trey mentioned, it's a fluid situation, and we're managing it the best that we can. And the $45 million, we still firmly -- we still feel pretty firmly solid in that guidance. It's just whether or not it's the fourth quarter of this year or the first quarter of next year as things kind of clear up over there.

[indiscernible].

Yes, go head.

Yes, Scott. No, you're right. I mean the challenge is there, and I just want to just reinforce the continuity, the operational continuity in the region and provide a little bit more specificity on Saudi Arabia specifically, right? So we talked about rig reactivations. And I know you all know the math, but we had 17 rigs active prior to announcing the 7 reactivations. Today, we have 23 rigs that we would classify as operating. And that number comes from the fact that we have 20 rigs turning to the right today, 2 rigs sitting over well center that are ready to go as soon as we have some last boxes checked and then another rig that's rigging up on its first location today.

And so in the face of all the conflict and all the good Western Oklahoma and dust in the air that Kevin was referencing, we've been able to continue to progress on rig reactivations and really want to highlight that the seventh rig is actually being worked in our yard as we speak today. Outside of Saudi, we've had good maintaining of operations in Oman and Kuwait. Those have been really good positives for us. The only places where we've seen rig suspensions, as we've previously noted, is the 1 rig in Iraq. And then we have the 2 rigs in Bahrain that are on an up to 90-day suspension.

And then lastly, I just want to reinforce our commitment to the region, right? I mean, we went into the KCA-Deutag acquisition with the thesis and belief that we were going to be a more balanced portfolio going forward. We still fundamentally and really firmly believe that the Middle East is core and critical to H&P's future. And so we're going to remain long-term oriented. And I would highlight that the near-term dynamics that we're seeing in the region are largely being offset by growth nodes in North America and Latin America.

And so I really just want to stress the power of this global portfolio that we have at H&P and our ability to withstand some of these headwinds that we're seeing in the Middle East, offset them with growth nodes outside of the Middle East. And really, as you think about the macro and this bifurcation that we discussed on energy security and supply going forward, I mean it's really going to really play well into where we're geographically positioned. Our rigs, equipment, people, expertise is global today, whether it's onshore or offshore, we have the right people, right equipment, right expertise in the right regions to meet the needs of a growing market.

Your next question comes from the line of Derek Podhaizer with Piper Sandler.

I just wanted to ask about the different puts and takes on the guide here when we think about triangulating the fiscal 3Q guide with full year. How should we think about sequencing both NAS, which appears to have some upside and then international with the different moving pieces that's behind it? Just some help around sequencing would be great.

Yes. Thanks, Derek. I may start and then turn it over to our new incoming CFO, Todd Scruggs, to take the remaining part of the question. But really, as we've discussed a few times, I mean, we see the year improving. The second half definitely looks more bullish. We have some tailwinds and some good wins at our back. I think we're well positioned to deliver strong EBITDA in the back half. Todd?

Yes. No, thanks, Derek, for the question. And yes, I agree with Trey. I definitely think that there's going to be sequential improvement coming as we look throughout the year. I mean let's kind of start and look at Q2. If you think about our results, our direct margins in our operating segments were really relatively in line with what we expected outside of the impact of what was going on in the Middle East and the way we wanted to handle some of our recommissioning costs.

And so next quarter in the Middle East and for the international business, you see a nice sequential improvement. We have left the guidance range relatively wide just because of the macroeconomic uncertainty, but we see continuing improvement into that $45 million run rate coming, whether the $45 million is sort of by the end of this fiscal year or early in the next fiscal year, we see that coming. Offshore continues to be steady and consistent. And then we've already covered NAS, where we see a sequential increase in both margins and rig count.

And so when you add all that up and think about where we could see margin shaking out, it's really pretty consistent with, I think, where consensus probably is for our fiscal Q3, somewhere in the $215 million range. And then when you fast forward into the balance of the year, we see continuing improvement in both international and NAS. International, I think the aggregate direct margin, we continue to see ramping up into the $45 million level.

And then we see NAS with the rig count continuing to strengthen. I think on the last quarterly call, we were relatively bullish on where North America could be this year, and we feel even more strongly about it than we did before. So overall, we're really excited about the trajectory of the year. We're really excited about how EBITDA is going to look going forward. And so we think like has been said before, Q2 was really kind of the low point for us in fiscal '26.

Your next question comes from the line of Saurabh Pant with Bank of America.

Trey, you noted in your slide deck, you were talking about that in your prepared remarks, right, about how drilling and completion efficiencies have been largely offset in rock quality, right? So just on that theme and technology adoption. How are you at H&P working to continue to improve efficiencies going forward because we have come a long way already, right? So the question that gets asked is how much more there is on the efficiencies front. And then specifically on FlexRobotics, Trey, can you walk us through the cost benefit of the system from both an H&P perspective and an operator perspective? And then ultimately, how big can this get? How many rigs do you think can ultimately end up using FlexRobotics? And then lastly, just what commercial model you plan to use? Is it going to be a day rate plus model or anything else along performance-based lines that you're thinking?

Yes. Thank you for the question. And I'll start on the efficiency narrative here and let Mike Lennox weigh in as well. The journey of drilling efficiencies has been just an incredible one here in the U.S. Lower 48. And we're not going to sit here on the call today and say there's not more meat on that bone. We're going to continue to drive drilling efficiencies. Do we think that the rate of change is the same that we've seen over the last decade? No. But at the same time, you're seeing well complexity, lateral lengths, et cetera, continue to extend, and therefore, you need the right partners, the right rig equipment and the right technology offering to complement those programs. So we see, obviously, more efficiencies still coming.

I think what we're seeing on the digital and app and automation side, that's happening. And then I'll let Mike talk about some of the FlexRobotics and other technologies, but we're seeing a lot of opportunity, that robotic offering for us working for our customer in the Permian is delivering some fantastic wells.

Yes. Thanks, Trey. So I'll start with current operations. As we've talked about in the previous call, we have 1 rig that's operating out in the Permian Basin, and it's doing fantastic. It's #2 in the fleet for the customer that it's working for. As you also may recall, when we brought the rig out, our goal was to be at P50. We're exceeding that -- which P50 is average wells out in the Permian Basin, and we're exceeding that. So as a result of that, we've seen quite a bit of demand. We announced 4 more. So we'll have a total of 5 rigs that are robotic by early 2027.

The deployment cycle on that, we'll have our second one -- besides the one that's already out, we have our second one out this summer. We'll have 2 more deliver in the fall. And then like I said, the last one would be early 2027. As far as how big is this, I'll start with 1/3 of our rigs today are running what I call Level 1 automation. That's our hex grips and slip lifters, and it's really the benefit in that is removing people from the floor, the exposures that are there on the floor. So that's 1/3 of our fleet.

So over 40-plus rigs are running that. I think the opportunity for robotics could get to that 1/3 of the fleet. That's not what we're announcing today. We do think in relatively short order, it could probably get to double digits as far as rig count. On the commercial arrangements, the first 4 that we're talking about here, it's a large lump sum. There is a day rate associated with it over a time period as well as you also have to remember that these rigs that we're talking about, this customer want a performance base. So there's upside by the better -- the better we perform, we have the opportunity to win in that as well and get paid additional. So a good structure there.

I mentioned the benefits on our end. The other thing to note besides the safety aspect, our wells continue to get longer and deeper and faster. We used to drill 30-day wells that were 1-mile laterals. We're drilling 10-day wells that are 4-mile laterals today. So something has to give. And so when you throw in the automation, it allows for our people to plan and do preventive maintenance and prepare, which obviously keeps NPT time up on our end.

From a customer's perspective, obviously, the safety component, they care about safety as well. But for them, it's just the consistency and the automation and what it brings, the repeatability, the predictability. So when we bring a rig out, it's at P50 or better on well #1 and going forward. So it's just -- it takes out that variability for them and provides consistency.

Your next question comes from the line of Eddie Kim with Barclays.

I wanted to ask about free cash flow expectations for the full year. You mentioned free cash flow conversion is now less than what you had anticipated previously due to higher CapEx, some working capital headwinds and higher taxes after the Tulsa sale. But taking all that together, is there a range of free cash flow conversion we should expect to be modeling for this year? And then looking ahead, just in terms of use of free cash flow going forward, based on your commentary, it does sound like your main priority is still debt pay down, specifically the bond that matures at the end of next year. So is it fair to assume that any potential increase in shareholder returns over and above your base dividend is probably more of a 2028 event at this point? I know there was a couple of questions in there, but any thoughts around that would be great.

Eddie, this is Todd. Let me take a couple of those, and then Kevin will chime in as well. But yes, I mean, big picture, we definitely see our overall free cash flow picture improving as we ramp throughout the year. I think Kevin will get into a little bit of what went on in the last quarter. But we remain pretty committed. We remain firmly committed to our onetime debt-to-EBITDA target.

We see as that free cash flow balance increases over somewhat in our fiscal Q3, but especially in our Q4 and then into '27, we really like to go to work on our next maturity, which is late 2027. And we want to balance that debt maturity with what we are optimistic about on some growth investment opportunities coming into late this year and into early next year. But big picture, that 1x debt-to-EBITDA target is still there.

I do think it's probably 2028 until we really start seriously considering incremental return of capital back to our shareholders. Clearly, that's a high priority for us. I think we've paid our dividend for multiple decades in a row, and I don't see that changing anytime soon. The leverage reduction is the #1 goal for us with our free cash flow at this time. Kevin, anything else?

No. And I would just kind of add on to that, that as Mike and Trey have mentioned, we see a lot of -- you're right, we see a lot of growth opportunities that will require some additional capital that will be kind of a draw on the free cash flow over the next, call it, several quarters. But as Todd mentioned, having a goalpost or a post that we can tether to in terms of the balance sheet of a turn of leverage, that's getting there by not only paying down the debt that -- the first bond maturity that Todd mentioned that we've got coming at the end of 2027, but it's -- we're going to see some EBITDA growth. We're planning on EBITDA growth.

Again, despite the pickup in the winds and the dust that we're seeing in the Middle East, we -- if you get past the third and fourth quarter of this year, talking about that $45 million run rate, we're not going to stop there. And so that will be a little bit of a draw for a few quarters. But at the same time, the amount of free cash flow that I think the portfolio is going to generate by the end of 2027 going into 2028 is this going to give us a whole lot more flexibility to be able to pivot to some shareholder return mechanisms that we had at H&P prior to the acquisition and the growth that we're seeing in that's going to help contribute to that as well.

In terms for the quarter, again, it was just -- I talked about it in my prepared remarks, we had some delay in the payment on some receivables. That's clearing up or has cleared up in the third quarter. Our property -- it's always a good thing when your taxes are going up because that means that you're making more money. And so just -- again, the sale of Utica Square helped us take a big step forward in our deleveraging efforts. But yes, it created another $20 million, $25 million of additional taxes that we've got to tack on to the money that we're making.

So anyway, again, I think longer term, I think probably we're targeting around 40% conversion rate on free cash flow. It will be a little bit of a step change to get there. I think for the full year, we're probably in that 30% free cash flow conversion rate. As we look into '27, '28, we see that number going up to 40%, 45%.

And the final question comes from Keith MacKey with RBC.

Just wanted to turn to Latin America for a little bit, specifically Argentina. Where would you say you fit in within the competitive landscape there in terms of relative scale, spec and customer scope? And what are you seeing in terms of demand trends that underpin your comments about getting from 9 to 12 rigs in the near term? And then maybe just finally on Venezuela. You know it's a medium-term opportunity. Are there any active bids there you're participating in or any other updates you can provide us at this time?

Keith, this is Mike. I'll take this one. I appreciate you asking about Latin America. Specifically Argentina, it's been great for us. We've been in that country for about 30 years. More recently, just due to the political environment, it's been the best that it's been for us. We do see some long-term potential down there as growth and demand continues to pick up. Our current operations down there, we're running 9 rigs. We have line of sight to be at 12 rigs, which would put us at full utilization.

We are in discussions with our customers down there, plan to make a trip here in the next few weeks to talk about even potentially looking at how we'd get more rigs in country. So a lot of good opportunities down there. When it comes to margins, our margins are strong. They're not too far off what you see here domestically. We are upgrading the rigs that we have in country. They're all Flex3s, we're upgrading them to be able to run our full suite of technology, which we should be able to see some additional income as a result of that.

As far as Venezuela, again, it's something that we have been studying and exploring. And interestingly, as far as demand, we have seen some. We -- actually, in a few weeks here in short order, we're going to take a trip down there. One of our customers asked us to jointly visit with them, take a trip down there. And so we're doing that. We have several inbounds, and we're exploring our options down there is how I'd frame that up.

And I will now hand the call back over to Trey Adams for closing remarks.

Yes. I just want to say thank you for the time this morning, and thank you for your interest in H&P. I also want to share a big thank you to Kevin Vann. He's had an incredible impact on H&P and has had an incredible impact on the energy sector as a whole. His career started in the audit space, and then he's had just a really diverse career with spending from midstream to energy trading, E&P and now he's ending his career at the most exciting part of the value chain with a big smile on my face on the services and drilling side. But really thankful for Kevin and all that he's done at H&P. And with that, I will close the call.

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

Good day, everyone, and welcome to the Helmerich & Payne's Fiscal First Quarter Earnings Call. [Operator Instructions] Please note, this call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mr. 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.

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 and he 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, Flex Robotics. Kevin will then walk through our financial results and provide guidance for the second quarter and full fiscal year.

To wrap up, trade 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 have reached 143 rigs working in 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, Flex robotics, 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 at 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 would build with patients, 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 your 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.

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 for 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's 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 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 these concerns over an imminent fall in oil prices at the year's offset, 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 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 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 phase reactivation of the suspended rigs in Saudi Arabia that we've been notified will return to service. We now have raised the mask 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 cycle 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 longer-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. Flex Robotics. 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.

Flex robotics is all about the automation of routine tasks so that crews can concentrate more on performance and safety. Flex Robotics fully automates drilling, drilling connections and tripping rig floor activities. This, in turn, helps improve safety and operational performance by helping move our recruits out of the rig floor red zone. We started our journey with Flex Robotics testing in 2024 on our R&D FlexRig 918 in Tulsa to help validate the system. But now Flex Robotics is successfully deployed and operational in the Permian Basin.

The Flex Robotics 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 Flex robotic 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.

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, include by outlining our guidance for the fiscal second quarter before handing it back 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 [indiscernible] 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 noncash impairment charge and some unusual noncash 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 duration 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 [indiscernible] 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 risks 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 generate 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 premerger 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 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 noncore 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.

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 Instructions] We'll take our first question from Scott Gruber with Citigroup.

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.

Great. Thank you very much, Scott. I appreciate it.

Yes, indeed. -- and trade, congrats on the promo to you as well.

Thank you very much.

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 Q2? 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 is pretty stable or is there still some contractual 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.

Yes. Thank you for the question. This is Trey. I'll start, and then Kevin and Mike may fill in some additional color as we go through this question. We definitely saw some lumpiness between Q1 and Q2, and we'll discuss the 3 primary drivers of the lumpiness between the quarters here in just a second. I will firmly commit and say that we feel good on the forward guide. We feel good about our guided activity range in North America, as Kevin stated in his prepared remarks, we feel good about the international Solutions outlook.

As it relates to reactivation costs in Saudi, those costs we anticipated occurring in the first fiscal quarter now have moved into the second fiscal quarter. We will see some of those costs continue to move forward into the third quarter, but the vast majority of those will occur in the second fiscal quarter and within our guide. We did also the other kind of key driver was in our North American Solutions segment. As you guys are aware, on, we do expect fewer rigs in North America. This was largely driven by the end of the calendar year 2025 crude pricing. Some of the churn rates and some of the private activity that we have traditionally seen as much more moderated. As we exited the calendar year 2025 and entered into our second fiscal quarter.

Mike can get into some color later on the call about how we see that outlook as we progress through the year, but we feel like that's much more robust. Private E&Ps compared to a couple of years ago, definitely didn't load to the wagon in the fourth quarter and into the first quarter like they had been over the past couple of years. Our public E&P customers remain very fiscally disciplined -- their capital returns programs remain very much firm and in place. So we feel pretty robust on that guide as we go forward. But it just all kind of occurred as we started this new year is a little bit light or a guide than we had initially anticipated in North America.

The last kind of component of some of the lumpiness was this offshore seasonality that Kevin referred to in some of his prepared remarks. We definitely had some rigs that moved from a drilling to a more maintenance mode. We had 1 rig that stopped working in soft activity in Africa. That is pretty seasonal, though. We expect those rigs to go back to drilling and off of maintenance mode. And so it just provided a little bit of lump in our quarter through the offshore segment. What we are, though, is very optimistic on the full year guide. The Saudi reactivations are putting a lot of wind in our sales. We feel like those are largely behind us and the start-up expenses are behind us.

We feel good about our forward guide on those as well as our FlexRig margins throughout the rest of this FY '26 year. Our FlexRig margins continue to trend well and are moving in the right direction. In North American Solutions, the current expectations of activity improvement are being felt and seen. And so we still feel very good about our overall activity guide in North American solutions. And then lastly, I'll just touch on before I turn it over to Kevin for some additional color. I'll just touch on the optimization of costs and expenses throughout the company and portfolio will be a key focus area throughout the rest of FY '26. Kevin referenced in his prepared remarks and can add some additional color on our CapEx guide. We feel comfortable about that. So overall, I think we're feeling good about the second half of FY '26 and believe that this second quarter bumpiness will abate and resolve itself.

Turning to you, Kevin?

Yes. Scott, yes. And if you think about second quarter international guidance of $12 million to $22 million. We've got all of the additional start-up reactivation costs that are hitting margin. We've got them plugged into that quarter. We're pretty confident they'll all hit next quarter. But what you're going to see, without giving you third quarter guidance, you're going to see a material step-up in gross margin coming out of our International Solutions segment from the second to third quarter. So again, from an international solutions port perspective, it's really just kind of sliding some costs between quarters, but we still anticipate when you think about those reactivation or those reactivated rigs in Saudi.

We're anticipating a little over $5 million of EBITDA per year contribution out of those rigs. And then on top of that, with our FlexRig performance continuing to get better in Saudi. I think what we've talked about historically has been between $20 million and $25 million for that fleet, those rigs to contribute to annualized EBITDA. So again, second quarter, kind of a lull -- some of that's activity driven, some of them, that's just getting ready to really ramp up our International Solutions segment.

So -- and as Trey mentioned on cost, using all that as the opportunity from a capital perspective really to take a long hard in the mirror and make sure that we've got capital allocated to the best projects and the ones that are going to return the most value, the quickest. And so we're lowering our capital guidance a slight touch. But again, I think that's demonstrated just us keeping our eye on the ball.

We'll take our next question from Arun Jayaram with JPMorgan.

Yes. Good morning, gentlemen. Trey, I wanted to start -- to see if we could start with your vision for H&P. You talked about this being a new chapter for the company. as you take over for John next month. But I was wondering if you could talk about your vision for the company, including what you see as some of the opportunities internationally, particularly as we see growth in unconventionals and [indiscernible] Geotherm? .

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 sitting here and his vision has been manifested in 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 and the true from 2 of H&P today versus where we were then, we're a truly different company in business today than we were 14 months ago. We're the global leader in onshore drilling. We have a great base of operations in offshore, the leader in platform, operations and maintenance services globally and having an incredible customer base to be levered and build upon 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 kind of key notes and nodes, if you will, right? And the first one being international growth and expansion that you referenced. We are very, very 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 then 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 American solutions and maintaining and continuing our leadership position in North America will be a key focus for us. Over the last decade, 1.5 decades, we've continued to accrete and grow our share position in North America. We've done that through our great people, processes, equipment, technology portfolio. Continuing to build and expand on that will be a big focus and we'll be right in our front window as we look forward through '26 and beyond.

And today, and we've talked about in some of our prepared remarks, some of our technology innovations, continuing its leadership position in the digital and automation space, flex robotics and continuing that progression in the North American show market will be very critical for us to maintain that leadership position and continue to grow share over time here in North America. 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, very durable business. We look to expand and grow in '26 and beyond. [indiscernible] really is what Kevin was talking about in his prepared remarks, and we'll continue to discuss that's 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 very good stewards of capital.

We're committed to shareholder returns, and we're committed to getting balance of 1 turn of leverage, and that will be a focus for us for 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 and you think about the transference of the H&P business system, the transference of 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 and being able to see that through everything we do, everywhere we work, driving safety excellence every single day, everywhere we work 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 across the globe. On the back office, we're committed to being a very lean and efficient organization. We're committed to being a very cost-conscious culture, as Kevin mentioned, and now leveraging our global scale and capabilities, there's ways to continue to optimize our customer delivery and everything we do as we're looking forward. Moving to international excitement. Yes, go ahead.

No, no, go ahead. Go ahead. .

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, excited about that opportunity. In addition to that, we saw a little bit of activity moderation going from 1Q to 2Q in Argentina. We expect that activity to pick back up through the second half of the year.

And what we're taking advantage of through that activity moderation period is we're investing in technology in Argentina. And so our digital applications and fleet we'll be able to be levered by our customers down there that's going to create exponential value for us as we look forward in Argentina. Today, as we stand here on the call, we're rolling out technology and our digital solutions in Oman as well for some key IOC clients. We're excited about that progression.

And so as we stated in prepared remarks, we believe we're in the early innings of a really long game year and a long great growth story in the international market. Outside of some of the rig reactivations in Saudi, there's continuing ongoing discussions with IOCs and NOCs in North Africa and in the Middle East. Those are great conversations. We look forward to providing more material updates as the quarters move through the year. But it's really, 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 then Europe, geothermal, we're proud to be over 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.

Great. John, I wanted to wish you the best. John, I want to wish you the best as you joined Hans and George dots in retirement?

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. .

We'll take next question from Saurabh Pant with Bank of America.

Good morning. Thank you. And John, I'll echo Arun, and Spotcongrats on your retirement. It's been a pleasure to hear your patient and reassuring voice overall year on -- thank you.

You're welcome. Thank you very much. It's been a great journey. .

Yes. Sure you're looking forward to slowing down a little bit. But Trey, you will face a tougher questions now. So -- maybe I'll throw 1 at you. Maybe I want to dig in a little bit on the international outlook, Trey or Kevin, if you don't mind. I know you alluded to this a little bit in your prepared remarks and in response to Scott's question, but how should we think about profitability when all these 8 Flex rigs are done fully ramping up and the 7 rigs we are reactivating in Saudi. I know activity moves up, right, but keeping everything else steady. How should we think about where margins can go, I think, let's say, perhaps by the fourth fiscal quarter of this year. Just some idea of where things might land.

Yes. And I'll start and then turn it over to Kevin for additional color on anything I miss. So we're excited today as we sit here on the call, we have 2 masks in the air of the planned reactivations and a third mass that's ready to be raised imminently. So we're making good progress on our rig reactivations, working closely with our customer there in the Kingdom to make sure that those startups move seamlessly and go really, really well.

Overall, we expect 6 of those 7 reactivations to resume prior to the first half of calendar year 2026. The seventh rig, we're still working on timing for rig #7, as it relates to some of the financials around those reactivations, our CapEx for those reactivations has been built into our CapEx side. So there's no additional CapEx that is being planned or will come out. It's based into our FY '26 assumptions as we sit here today. Beyond that in Saudi Arabia, that being a really core and key area for us on Eastern Hemisphere growth.

We're continuing to have ongoing conversations with our primary NOC customer there in the Kingdom and I really think that there's plenty of opportunity as we look through '26 and '27 nothing that we can comment on materially today, but a lot of encouraging conversations. It's all underpinned by safety and performance. So we have great safe start-ups and our FlexRig performance has been moving in a direction that's providing a lot of tailwinds for us for incremental activity. That operations team continues to drill very safe and efficient wells. The more we do that, the more opportunities will be right there in front of us.

As the rigs come out of suspension, the 7 reactivations, we anticipate annualized EBITDA of roughly $5 million per rig. And as you alluded to, we expect that to get there into full run rate by Q4 of our fiscal year. In addition to that, we referenced on some commentary earlier that our FlexRig margins continue to improve, and we expect those rigs to get to full annualized run rate numbers by the end of FY '26 as well. So it provides a pretty robust and well-founded business for us there in Saudi through this fiscal year. I will just hit more broadly on the international segment direct margin before turning it to Kevin to see if there's anything I missed here is once everything is reactivated in Saudi, and it's still -- obviously, there's still a lot more to happen and more opportunity in front of us, but these reactivations come online. We expect our International Solutions segment, to be right around a direct margin rate exceeding $45 million per quarter. And so it's just a good testament to getting these reactivations behind us and we can get to a very stabilized run rate as we're looking beyond FY '26.

No, this is Kevin. I don't really have much to add other than as Trey mentioned, getting gross margin above $45 million or hopefully relatively soon when I think about the big step-up that I mentioned earlier between the second and third quarter. But even more important to that, Trey mentioned all the potential new business and growth that we're going to see out of the Eastern Hemisphere. The acquisition of CCAD basically enabled us to be in this position where now we have that footprint to continue to grow from it. And so $45 million is a good start, but I'm anticipating for years to come now that number to continue to grow.

We'll move next to [indiscernible] Kim with Barclays.

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.

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. And so 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 of picking up -- most of those players that were obviously sensitive are your smaller E&Ps, your independents, as far as pricing, we're still saying true.

We're not wavering from 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.

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? .

Yes, kind of more short term, I'd call it flat. Yes, we're holding trying to hold on to that 18 roughly a day. The back half is kind of let's -- we'll see. We do think -- like I said, there's some opportunity there. And of course, that's on the revenue side. And then on the expense side, we're obviously working that. Just from a Trey mentioned just leveraging our scale -- we had some great opportunity there, and we continue to work on our expenses as well.

We take our next question from Derek Podhaizer with Piper Sandler.

I just wanted to discuss the opportunity for Flex robotics. I mean could you please explain the details around how much capital is required to retrofit an active rig? How many rigs you see being upgraded to Flixrobotics? Will this be customer-funded? -- how should we think about the payback? And how meaningful could this be for your earnings over the near to medium term? .

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 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 already deployed for a super major in the Permian. We work very closely with them to establish goals. We weren't just going to do robotics for robotics just for fun. it was going to have to at least perform at P50 level. So the average level for that operator in the Permian Basin.

And after 10 wells, we've drilled and completed. 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, 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. So very optimistic. The demand, the pipeline, the discussion around it. Yes, we think it's very optimistic and look forward to progressing that.

Yes. This is Trey. I'll just share that on your question around pricing and commercial constructs, right, we intend to make these investments with appropriate returns. Obviously, we're focused on improving safety out at the edge. And then the performance related to robotics is going to be another step change in uplift for us and for our customers. So creative commercial constructs that we've levered throughout the rest of our business will be looked at and levered here as well. And we're not going to make this investment without an appropriate returns profile. But it's still early days. The conversations are moving with customers. There's great customer interest in entry in the Flex robotic system and look forward to providing additional color as we move forward.

We'll move next to Keith MacKey with RBC Capital Markets.

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?

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, obviously, the dividend is still of primary importance to us.

And so we'll continue to obviously pay that. But then when you think about just the capital guidance that we're giving this quarter, obviously, a slight reduction, but or -- 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 or clarity around some portfolio optimization that we're doing coming out of the acquisition. Feel very strongly about our ability to execute and get those deals pulled across the line by the end of the year.

And we'll move next to Ati Modak with Goldman Sachs.

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 market to reduce capacity?

Yes. This is Kevin. I'll begin just in terms of rig rationalization and the impairments that we took for the quarter. It's very difficult. Accounting rules will drive a lot of those impairment decisions and impairment accruals that we have to take. But I'll let Mike touch a little bit on just kind of what those stem from in terms of the rigs that we've had on the sidelines for a while. And if you look at the amount of capital that he was going to to be necessary in order to put those rigs back to work versus the rigs that, obviously, we're just continually trying to churn and get those back into our operating system. .

We just -- from an accounting perspective, we looked at that as too much of a hurdle. And so as a result of it, again, these impairments happen from time to time. But I'll let Mike touch on kind of the specific rigs.

Yes, Ati, more on the details. So we're talking about 30 rigs. Most of them had already been decommissioned. We had been pulling a componentry reusing that across our fleet. These rigs had not worked since COVID prior to COVID. So they had been idle for quite some time. And some of the components that we're talking about, for example, on 42 of our rigs today, we have what I'd call Level 1 automation. So it's a rig floor automation that's removing people from the red zones on the floor.

So 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 -- we're 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. So 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.

And congratulations, John.

Thank you. I appreciate it.

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.

I just want to thank everyone for joining us on the call today. It has truly been honored 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 we'll be forever thankful. I truly believe Trey and 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.

Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at this time.

Hello, and welcome, everyone joining Helmerich & Payne's Fiscal Fourth Quarter and Full Year Earnings Call. [Operator Instructions] Please note this call is being recorded. [Operator Instructions] It is now my pleasure to turn the meeting over to Mr. Kevin Vann, CFO. Please go ahead.

Thank you, and welcome, everyone, to Helmerich & Payne's Conference Call and Webcast for the Fourth Quarter and Fiscal Full Year 2025. Before we get started, I first wanted to extend a warm welcome to Kris Nicol, who has joined the company as Vice President of Investor Relations.

Thank you, Kevin. Kevin will be joined on the call today by John Lindsay, CEO; Trey Adams, President; and Mike Lennox, Executive Vice President of the Western Hemisphere. 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. With that, I'll turn the call over to John.

Thank you, Kris. Hello, everyone, and thank you for joining us. We appreciate your interest in H&P. Fiscal 2025 was a pivotal year for H&P. We overcame several challenges, and I am immensely proud of how our global team closed the year with strong fourth quarter results, setting the stage for continued success in fiscal 2026. While the oil and gas industry is inherently cyclical, we are increasingly encouraged by the resilience of our business and the positive long-term prospects. We have long held the view that the upstream sector will need to invest for decades to come in order to sustain, if not grow production from current levels.

We are pleased to see increasing alignment with this view. The recent update from IEA now projects robust demand growth for oil over the next quarter century under the current policy scenario with energy security and affordability remaining critical global concerns. On the gas side, the rise of AI and the surging power needs for data centers is rapidly creating a new source of demand. Coupled with the build-out of significant LNG capacity on the Gulf Coast, we see strong activity in the gas-rich basins over the next several years. Ultimately, technology-driven drilling as demand continues to grow and basins become more geologically complex will be essential for decades and is a key differentiator for H&P.

Operationally and financially, our North America Solutions segment has positioned H&P as the leading driller in the U.S. land market. Customers are increasingly demanding efficiency and devising more complex well designs with longer laterals to maximize returns. Our success in delivering value, safety and performance is rooted in the strong partnerships we built with both large and small customers. As acreage quality becomes more challenging in unconventional shale plays, deploying the most capable rigs and cutting-edge technology is crucial for success. This past year was particularly historic for our International Land segment.

After years of effort to develop a larger and more diverse international footprint, we exported 8 FlexRigs to Saudi Arabia and completed the KCAD acquisition, making H&P the largest active land driller globally. We're also very pleased to announce that 7 suspended rigs will be reactivated in the coming months in Saudi Arabia. This exciting development will call for intensifying our efforts to execute strategic priorities, deliver customer value and meet our financial objectives. The KCAD acquisition also brought us a global offshore labor contract business that complemented our existing offshore Gulf of America operations. We now operate in 6 countries, have a blue-chip customer base supported by strong contractual coverage and a global geographic palette of growth for this business going forward.

Despite the challenges faced by the oilfield services sector, we remain optimistic that the market is stabilizing, and our expanded footprint will offer new opportunities. We anticipate the first half of 2026 will mirror 2025 with oil prices range bound between the upper 50s and mid-60s and rig activity aligning with these trends. Through the cycles, OFS companies must be able to make a return for our shareholders. I'm confident in our team's ability to continue refining and executing the H&P way, demonstrating leadership in international markets as we have in North America Solutions.

Alongside legacy KCAD, our team has forged robust global partnerships in the Middle East and other strategic regions, enabling us to enhance our unique capabilities and strengthen customer collaborations. We're committed to nurturing leadership and promoting talent within our organization to prepare for the future. In line with this commitment, I was very pleased to announce earlier in the quarter the promotions of several key members of the management team, reflecting their strong contribution to H&P. Most notably, Mike Lennox became EVP of Western Hemisphere. John Bell became EVP of Eastern Hemisphere. And lastly, Trey Adams has been promoted to President as we position for the next phase of growth at H&P. And with that, I will turn the call over to Trey to provide more details of Q4 performance and the 2026 outlook for our 3 segments.

Thank you, John. I will start by walking through North America Solutions. We had solid fourth quarter results driven by our ability to work safely and to deliver outsized drilling efficiencies for our customers. Our operations and sales teams continue to do an excellent job managing rig churn and creating customer value. On the operational front, average lateral lengths increased 5%, while our average drilled footage per day grew at the same rate. Encouragingly, the use of our advanced digital solutions and applications increased 20% over the year. The combination of the right rigs, right people and right solutions continue to drive efficiencies for our customers over the fiscal year.

In the Permian Basin, the total rig count declined throughout the year as several E&Ps reduced drilling activity in the face of softening oil price fundamentals. Despite these rig drops, our rig fleet showed great resilience. We actually expanded our share position in the Permian throughout the year. At the same time, natural gas-oriented activity picked up through the year. Our footprint and outcome-oriented approach will position us well for continued natural gas activity expansion. An important point to highlight is that the industry utilization of super-spec rigs is tighter than it's peers. Utilization rates of rigs that have been idled less than 12 months remains strong at more than 80%.

In addition to the relative tightness of the market, lateral lengths continue to expand. Over 40% of our wells today are over 3-mile laterals and technology and drilling efficiencies continue to be a primary focus for customers. We believe that this combination provides a strong platform for North America Solutions in fiscal year 2026. Safety and customer value will continue to be our focus looking forward, and both will be underpinned by our great rig crews and continued commercial and technological innovation.

Moving to our international operations. Our new footprint is exciting and energizing. We now have meaningful positions in Saudi Arabia, Kuwait, Oman, Argentina, Europe, along with other countries poised for growth. As John mentioned, in Saudi Arabia, we will be resuming operations on 7 previously idled rigs in fiscal year '26, with operations resuming in the second fiscal quarter and continuing into the third fiscal quarter. With these 7 reactivated rigs, we will go from 17 active rigs to 24. As you know, we encountered several challenges in fiscal 2025, particularly in the Eastern Hemisphere. However, through every challenge, there is an opportunity. We have taken advantage of the past year to reorganize, retool and get our forward strategies aligned.

Our 8 FlexRigs in Saudi Arabia continue to improve on all fronts with a focus on safety and performance. We also continue to see margin health improve across those 8 rigs and intend to realize our expected run rate margins by the end of the fiscal year 2026. The addition of 7 rigs in Saudi Arabia adds scale. And as those rigs are resumptions, we expect the learning curve to be expeditious and to hit the ground running in the second and third fiscal periods. Our business in Oman continues to be a particular bright spot with strong NOC and IOC relationships, providing a constructive long-term backdrop. Our combined organization enables further expansion across the MENA region. We now have a foundation that enables more realistic and long-term oriented discussions with IOC and NOC customers across the globe.

Our Offshore Segment continues to provide stable long-horizon revenues for our consolidated business. We are active today in the Gulf of America, Caspian Sea, Norway and U.K. North Sea, Africa and Canada and have roughly 30% share of the global platform operations and maintenance business. Our expanded geographic exposure strategically positions us to benefit from the anticipated strong offshore investment cycle. In addition to our geographical positioning, the integration of our operating models and safety execution between our land and offshore businesses will continue to be additive for us in the near and long term. Many of our offshore customers have robust land activity. The transference of models, approaches, technology and relationships uniquely positions us to deliver differentiated value for customers across our global operations. With that, I will turn the call over to Kevin to walk through the financial results.

Thanks, Trey. Today, I will review our fiscal fourth quarter and full year 2025 operating results and provide operational guidance for the first fiscal quarter of 2026. Additionally, I will spend some time outlining our annual fiscal 2026 projections, our financial position and provide an update on where we stand with our deleveraging efforts and cost reduction goals. Let me start with highlights for the recently completed fourth quarter and fiscal year ended September 30, 2025 where we exceeded our direct margin guidance in all operating regions despite the challenging market environment. Alongside our continued commercial success, we also made strong progress on the deleveraging front as we have currently paid off $210 million on our term loan, and we're significantly ahead of the debt reduction goals we laid out earlier this year.

During the quarter, the company generated quarterly revenues of a little over $1 billion, which is the third consecutive quarter over that $1 billion mark. Correspondingly, total direct operating costs were $715 million for the fourth quarter versus $735 million for the previous quarter. General and administrative expenses totaled $78 million for the fourth quarter and $287 million for fiscal 2025. These results include a $10 million write-off related to one of our investment securities. Normalizing for that, we were in line with our full year guidance. Also included in the fourth quarter results was an approximate $40 million write-off of the investment in that same company for which we held the note receivable.

To summarize fourth quarter's results, we are operating -- we are reporting a net loss of $0.58 per diluted share versus a net loss of $1.64 in the previous quarter. Earnings per share for the full year were a net loss of $1.66 per share. The quarterly results were negatively impacted by some unusual and noncash items and absent those items would have been a loss of $0.01 per share. Capital expenditures for the fourth quarter were $64 million, with full year 2025 totaling $426 million. This outcome was primarily driven by accelerated CapEx investment in the Eastern Hemisphere and increased investment in harmonizing our ERP footprint. Currently, we operate in 3 distinct ERP platforms, and our ultimate goal is to get to one platform for the company. We are continuing to invest now to capture additional synergies and cost savings in the future.

Looking ahead to 2026, we expect significantly reduced capital investment levels even with the announced rig reactivations. This reflects current fleet conditions with maintenance capital expenditures approaching historically low figures and an ongoing emphasis on capital discipline. H&P generated $207 million in operating cash flow in the fourth quarter and a total of $543 million during the full year. Our cash flow generation helped fund $100 million in base dividends in addition to the significant progress on paying down our term loan. As we have stated, we are now on track to pay this completely down by June of 2026.

Now turning to our 3 segments, beginning with North American Solutions. We averaged 141 contracted rigs during the fourth quarter, which was down from the third quarter, but consistent with industry activity and our expectations. We exited the fourth quarter with 144 rigs running. Segment direct margin for North America Solutions was $242 million, which was above the midpoint of our guidance range. Overall, margins were slightly down from the third quarter, but again consistent with our expectations and guidance. Looking ahead to the first quarter of fiscal 2026 for North American Solutions, we are anticipating our margins to stay in the same ZIP code of our industry-leading fourth quarter numbers, and we also expect our operated rig count to stay relatively flat with fiscal fourth quarter results.

Our North American Solutions team continues to deliver. Despite some moderate headwinds we saw during 2025, they brought there A-game to the table, helping our customers and us to win-win outcomes. We are extremely grateful to the folks out in the field on the rigs and our great sales and marketing teams that help our customers find the solutions they need. This outcome is also evidence of our commitment to our customers and shareholders. For 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.

As of today, approximately 50% of the U.S. active fleet is on a term contract. Additionally, as our performance contracts continue to drive alignment with our customers, we currently have roughly 50% of our rigs on them. In the North American Solutions segment, we expect direct margins in our first quarter to range between $225 million to $250 million as we don't see a material change in expected margins based on our current contractual structure, expectations around operating costs and anticipated rig count. Our International Solutions segment ended the fourth quarter with 61 rigs working and generated approximately $30 million in direct margins, above the midpoint of our expectations. This result is slightly down from the third quarter, but was toward the top end of our guidance.

As a reminder, we had fewer rigs working during this past quarter as many of the final Saudi rig suspensions received during the third quarter had a full negative effect during the period. As we already stated, we are ready to get back to work and are very pleased about the announced rig reactivations. For the first quarter, we are anticipating between $13 million and $23 million of direct margin for the International segment. This is reflective of the reactivation costs anticipated in the first quarter that are not capitalized. This trend will persist through the first half of 2026 with direct margin expected to step up materially thereafter. Further, we expect the average first quarter operating rig count to be approximately 57 to 63 rigs.

For the first time, we are laying out expectations for the full year international rig count to provide greater visibility on our outlook. For fiscal 2026, we believe the rig count will average between 56 to 68 rigs, which includes the rigs being reactivated in Saudi. Please note that the rig count includes only partial years for those reactivated rigs and includes the expectation for some lower rig counts in non-core countries where the current EBITDA contribution is minimal. Finally, with our Offshore Solutions segment, we generated a direct margin of approximately $35 million during the quarter, which was above our guidance range as well.

Again, we are excited about this business and the consistent and stable results that it continues to deliver. As John and Trey said, it requires minimal capital and generate steady cash flow from a set of blue-chip customers. As we look toward the first quarter of fiscal 2026 for this segment, we expect that it will generate between $27 million and $33 million in direct margin with 30 to 35 management contracts and operated rigs on average. Now I want to transition to the first quarter and full year 2026 for certain consolidated and corporate items.

In 2026, our strategy begins with optimizing our financial position to continue to pay down the term loan and generate free cash flow that will help us get closer to our goal of returning the balance sheet strength that has always been a priority at H&P. Fiscal 2026 gross capital expenditures are expected to be approximately $280 million to $320 million. Maintenance, fleet upgrades and reactivation capital across the global fleet of operating drilling rigs is expected to be approximately $230 million and $250 million and includes all of the estimated capital for the 7 rigs being reactivated in Saudi Arabia. Also included in our capital program is $40 million to $60 million of investments in our North American solution operations related to customer demand and funds the necessary upgrades to maintain our technology-leading position across the market.

Depreciation for fiscal 2026 is expected to be approximately $690 million. Our sales, general and administrative expenses for the full fiscal '26 year are expected to be between $265 million and $285 million, which includes $50 million in savings from our original pro forma run rate. We, as a company, are culturally more focused on managing costs than ever. We have our eyes set on generating further savings as we evaluate systems alignment across both our Eastern and Western Hemisphere operating models. Our investment in research and development remains largely focused on solutions for our customers, such as drilling automation, wellbore quality and power management. We anticipate R&D expenditures to be roughly $25 million in 2026.

Based upon our estimated fiscal '26 operating results and CapEx, we are projecting a consolidated cash tax range of $95 million to $145 million. And lastly, we are expecting interest expense of $100 million during 2026. Now looking at our financial position. We had cash and short-term investments of approximately $218 million on September 30, 2025, including the availability under our revolving credit facility, our total liquidity is approximately $1.2 billion. As I mentioned earlier, as part of our deleveraging efforts, we are pleased with the progress we have made on paying down the $400 million term loan with only $190 million currently outstanding and a clear line of sight to have it paid off by June of next year.

Regarding cash returns to shareholders, we plan to maintain our long-standing base dividend of approximately $100 million in 2026. Longer term, as we delever, we will have additional flexibility to direct free cash flow to both enhance shareholder returns and invest for growth. And that concludes our prepared comments for the quarter, and we'll now turn it back to the operator for questions.

[Operator Instructions] Our first question comes from Saurabh Pant with Bank of America.

John, Kevin, I don't know who wants to address this, but I want to start on the international side of things, if you don't mind. And then really, I'm thinking about 2 things. First is the rig count. Of course, it's great to see the 7 Saudi rigs coming back. But maybe just help us think about the potential for more Saudi rigs to come back as we move through fiscal '26 and then maybe like you said, the pluses and minuses in any of the other regions. And then the other thing that I'm thinking about is international margins. Like you said, Kevin, I think it's being weighed down by reactivation cost and a bunch of short-term-ish things. How should we think about normalized margins once all of that is settled?

Saurabh, thanks for the question. It is very, very positive, and we're very pleased about the reactivations. And as you can imagine, we're laser-focused on execution. We think this is going to be a phased approach to the reactivations. We think we'll be finished with mid-2026, working really closely with the customer. I'm going to let Trey. Trey has been over there recently and have him give a little feedback on what they're seeing.

Yes, happy to. As John pointed out, we're thrilled about the 7 reactivations in Saudi Arabia. As it relates to longer-term growth in Saudi right now, we're focused on these 7 resumptions and focused on our core business there and getting those rig fleets back and aligned. But obviously, having a number of conversations more broadly across the region, myself and the teams are very active and very engaged in the Middle East today. We're encouraged by some IOC entry into the region. Obviously, there's been some long-standing IOCs in the MENA region, but continued interest from some new players. It positions us well through '26 and then really sets a good table for 2027.

And then as some of those discrete rigs that Kevin mentioned in his prepared remarks, many of those rigs that you saw have fallen off of our international count have come in really low scale single rig, single string countries. And as we've kind of reorganized and continue to refocus our efforts around Saudi Arabia and core Middle Eastern countries, we're going to continue to see further growth and enhancements there. On our margins, you can expect, right, that the first half of fiscal '26 with the reactivations and continued to getting our FlexRig fleet aligned that we're going to have some new and increased costs, and Kevin talked about that, both on the OpEx and CapEx side of the fence. But we expect that to abate mid-'26 and really expect to see some full run rate margins towards the end of the fiscal year.

Yes. Just to further elaborate on that. I think what we had mentioned on the last call was we felt like the fourth quarter was kind of a bottoming out of margins as the FlexRigs kind of caught their stride, and we expected to see further improvement, and we do -- continue to expect to see further improvement in those margins throughout fiscal year 2026. So absent the rig reactivation charges that are going to hit over the next couple of quarters, you're going to continue to see just further margin improvement across the region.

We'll now move on to Doug Becker with Capital One.

I wanted to touch base on North America. Revenue per day has been very resilient despite some industry headwinds. Guidance does imply daily margin declining a few hundred dollars in fiscal first quarter. Just wanted to get a little sense for how you see daily revenue and daily operating expenses going forward because there was a pretty sizable bump in OpEx per day. And then if you look in your crystal ball, just when might daily margins trough based on a relatively stable rig count outlook from today?

Doug, I'll take it. This is Mike. I appreciate the question. We see the NAS market is going to remain consistent as long as commodity prices and demand are intact. We do continue to expect rigs to churn. Our publics, they've gone down year after year by about 9 rigs. Our privates actually churn at about 4x of what the publics do, but that's given us a good opportunity to work for new customers. In the last year, we worked for 19 new customers. And so a lot of great hard work and effort by our sales team, really proud of what they do, keeping these rigs working. We expect demand for longer wells, more complex wells, as John mentioned in his opening remarks, and that positions H&P very, very well.

We've made investments in our rig fleet for the past few years. We'll continue to do that this next year, allowing for 1 million pound setbacks, high torque top drives. We've also continued to deploy and invest in technology. Trey mentioned in his remarks of a 20% improvement on apps per rig. We've also -- on 1/3 of our fleet now, we've got rig floor automation, which includes HexGrips and slip lifters that provides a lot of consistency and reliability for our customers as they're going to continue to drill longer and longer wells. And then we've continued to invest in our people. I think that's something we're very proud of. We bring our drillers in, continue to invest in them and train them.

As far as the oil and gas basins, we've seen an uptick in the Haynesville and in the Northeast. We went from 3 rigs earlier in the year to 8. We expect that demand to continue to be there. And then on the oil side, in the Permian, I think Trey mentioned it in his remarks, we went from 33% market share to 37% market share. So we've seen growth in that, even though rig count has been slightly down. We've seen growth in our market share. And then on the performance contracts, that's a lever or a tool that we're going to continue to use to -- you asked the question on revenue. We have the leading over our peers in revenue. OpEx we lead on that. We're the lowest and there's a lot of work that goes into keeping that OpEx in check, and we fully expect to keep it in check. And so I just really want to applaud our people, all the hard work that they're doing to keep all that in line.

And just any -- would you expect daily operating expenses to decline this quarter from fiscal fourth...

Yes, we've seen some, what I call seasonal rigs churn, we see some costs that go up, potentially -- it's welding costs, tubular costs, trucking costs. It comes and goes. And so we expect it to come down. There's some onetime costs that are in there this last quarter. We do expect it to come down. But again, as long as those rigs are churning, we fully expect there to be some costs in there.

And the rigs just continue to work at a much higher and higher level quarter-over-quarter. And so that drives costs higher as well, as Mike had mentioned.

We'll now move on to Scott Gruber with Citi.

I may have missed it, but did you guys quantify the reactivation expense that's reflected in your fiscal first quarter international income?

No. Scott, this is Kevin. No, we did not. And I think what I mentioned was if you go back and you look at the margins that we were able to achieve during this last -- during the fourth quarter for international, we kind of felt like what we had stated previously was that was a good kind of trough for bottoming out of the margins that we expected. And that absent those items, you would have probably continued to at least achieve the mark that we saw during the fourth quarter from a margin perspective and then with some anticipated improvement from there.

Okay. Okay. And then it looks like cash taxes will step down in fiscal '26. Curious, is there a benefit from the recent tax law changes in the U.S. I'm just trying to think through if there's a benefit in fiscal '26 that then lapse and doesn't recur in '27? Or are you guys able to kind of chop that down over time? How sustainable is cash tax rate?

It is somewhat -- yes, there are some benefit -- there is some benefit in that cash tax number that we're projecting for 2026 because of the one big beautiful bill. But going forward, the benefit will always be contingent upon the amount of capital that we're spending as well because there's certain portions of the bill that allow you to accelerate some capital investment that wasn't previously being allowed to be written off for tax purposes during the current year. But we have -- I guess, yes, it's in there. And then going forward, it's all going to be based upon capital expenditures.

Yes. I imagine international activity levels.

We'll now move on to Eddie Kim with Barclays.

Sorry if this was asked already, maybe even in the previous question, but just wondering if you could dig down deeper in the full year CapEx guidance. So you highlighted $230 million to $250 million of CapEx reflects both maintenance and reactivation-related CapEx. Are you able to let us know how much is just the reactivation-related CapEx specifically? And then tied to that, the reactivation-related OpEx, is that going to be a similar amount to the CapEx? If you could just provide some more color there, that would be great.

Yes. No, the $230 million to $250 million, yes, does include all of the rig reactivation costs. And it's difficult to give an exact number per rig because it all depends upon which rigs are going to be -- the rigs being reactivated. So it's not a homogenous number across all the rigs. So I hate to give you -- if we got more rig reactivations, you could expect another x amount per rig. But the $230 million to $250 million includes all of the maintenance and rig reactivation cost. And the question, yes, in terms of the margin, it's not one for one.

There's more CapEx than there is costs that are hitting operating costs. There's more capital cost than what's hitting the margins themselves. And most of the margin stuff is, again, going to be cleared out hopefully during the first quarter fiscal quarter, but there'll be some of that will bleed over into the second quarter as well. But again, if you look at what our fourth quarter performance was from a margin perspective internationally, we felt like that was kind of a low point for us, and we expected improvement from there. Absent the additional cost that's hitting the margins, our international margins from the rig reactivations, you would have -- we would have anticipated a little bit more improvement.

[Operator Instructions] We'll now move on to Dan Kutz with Morgan Stanley.

So sorry to belabor this, but maybe just kind of coming at the CapEx guide question from a different angle. Anything you can share in terms of maintenance CapEx for a U.S. versus international rig or by segment? Yes, anything you could share in terms of what's contemplated for the maintenance component of that number would be really helpful.

Yes. I think -- this is Kevin again, and I'll let Mike and Trey contribute. The -- what we've publicly said historically is that the maintenance CapEx on a domestic rig is somewhere around $1 million per rig. That number is coming in slightly lower than that now, but roughly $1 million per rig. And then on the international front, call it, $1.3 million to $1.5 million per rig for the maintenance CapEx. And that's generally, again, depending upon the rig and what needed to be done to it in 2026, that's generally kind of where we are.

Yes. And I can give some color on NAS, just it's come down post COVID. It spiked up coming out of that, and then it's been down year after year. And again, we've been making investments, like I mentioned earlier, to drill these longer laterals. So that's the setback upgrades, the high torque top drives, the rig floor automation. Again, that removes people from the exposures of on the rig floor, but also helps as we drill the longer laterals, make up and break out of tubulars. And we expect and will continue to do some of those in 2026. So that's what most of the CapEx is made up of for NAS.

Awesome. That's really helpful. And then maybe -- sorry if I missed this or if you guys have talked about it, but just kind of you guys have made a ton of progress kind of penetrating the U.S. market with the legacy H&P technology portfolio, seeing and hearing a little bit more interest internationally in the Middle East, in particular, of operators kind of adopting and appreciating some of the efficiency benefits and productivity benefits of leveraging technology like you guys offer. So just was hoping for an update or any plans or any conversations around your -- leveraging your technology profile outside of the U.S.

Yes. This is Trey. I'll answer that one. And what I'll share is that the answer is absolutely yes. So it's a big focus for us today. Conversations with customers across the Eastern Hemisphere, everyone is very interested in the technology evolution and advancements we've had in the U.S. unconventional space. And they're all wanting to get more active in that arena. And so our -- one of our focuses in '25 and going into '26 will continue to be, as Kevin pointed out in his prepared remarks, this drilling automation trend that we're continuing to progress. We believe that there's a lot of efficiencies and value to be created in the Western and Eastern hemispheres.

And then if you couple that with a lot of the technology that Mike was describing with rig floor automation and other advancements we continue to make, there's just a tremendous amount of opportunity on the safety and performance fronts in front of us and a lot of customer value to be created. So the answer in short is yes. That evolution and transformation, obviously, will be taking shape in earnest, primarily in the Middle East, but other markets will continue to adopt and accelerate technology. We see a lot of interest in Argentina and Australia, Europe, name it. So really excited about that evolution.

We'll now move on to Don Crist with Johnson Rice.

I wanted to kind of expand on the last answer you just gave. On the international side, I'm just kind of curious about timing in places outside of the traditional Middle East like Libya or Turkey and Australia, kind of timing on conversations for unconventional drilling there and when you think that rig count could kind of start to pick up over the next couple of years or so?

This is Trey. I think it depends on where you're talking, but I'll start in Australia. Obviously, we've been in the Beetaloo for some time, continue to see future growth opportunities there and in other parts in Australia as well. We're delivering. We have a second FlexRig in country that arrived about a month ago that will be going to work for a long string of customers and stay working in Australia for some time. And then flipping over to North Africa, obviously, there's a ton of energy around Algeria and Libya. We're involved in all those conversations. We're having deep and involved technology conversations with NOCs in both regions. We're actively engaged with IOCs, and you know who those are that have signed long-term agreements in Algeria.

We think the future is bright, and we think that the transference of U.S. unconventional and shale expertise into those regions is going to be critical for growth. As it relates to timing, it all manifests over long horizons. Mike talked about private E&P churn in the Lower 48. We're not talking about a 30-day window. These programs take a while to get formed up. But we hope over the next couple of quarters that we can update you all on our progression. And then obviously, some of the E&Ps as they progress in their drilling programs and build up their plans for '26 and '27, that will be notable as well. But we're very bullish on our positioning in both of those areas.

I appreciate that color. And one just last one for me. Any progress on the sale of Utica Square? I know there was a comp here in Oklahoma City. Just any kind of update there?

This is John. Really, the update is the process is going on. It's going well. We have multiple parties that are interested. We're hopeful that we'll have more news by the end of the year to the first half of 2026 is what we're hoping for. So it looks positive, but that's about all we have. Process is going well.

We'll now move on to Tom Curran with Seaport Research Partners.

Trey, you just referenced the second rig that will be going to work in Australia's Beetaloo Basin where you have invested in and partnered with Tamboran Resources, which I think of as sort of like a best of U.S. shale PayPal story with the Sheffield and Liberty Energy also involved. But beyond Australia, has H&P put any rigs to work or contracted to deploy any rigs for any of the existing or planned drilling campaigns in foreign shale plays by leading U.S. E&Ps? And here, I'm asking specifically about E&Ps, not the major. So Continental push into Turkey and Argentina's Vaca Muerta or EOGs moving to Bahrain, maybe other such cases that haven't been publicized yet. Could you just expound on where H&P is at within that story and maybe your strategy more broadly beyond Australia?

Yes. No, that's a great comment. And I'd point you to we have a long history of putting rigs to work, and I've done this multiple times, not working on a super major portfolio, but working with IOCs in Argentina. Across the rest of Eastern Hemisphere, the conversations are very active. Obviously, you know our positioning with those companies that you just referenced here in the Lower 48. We have a long history of a lot of value creation. And so we've been in a lot of conversations recently and I mean, very active even at ADIPEC a couple of weeks ago with key IOCs, obviously, and super majors alike. Everyone wants to transfer this U.S. shale unconventional expertise into these geographies.

And so we look forward to talking about how these programs get to scale and more into a firm footing. Many of them today are still in exploration phases. But as those programs mature, they're going to need a partner like H&P, and we're well positioned to deliver value for them.

So it's safe for us to assume that you're right on the nexus of those conversations like you should be.

Absolutely. We're not missing a conversation these days.

We'll now move on to John Daniels with Daniel Energy Partners.

Just a quick question on the fiscal year '26 guidance for activity. I know you say in the release, it's based on current market trends. Just trying to make sure there's no embedded assumptions about either potential customer M&A and implications or upside from new E&P start-ups? And then does the guidance try to take into consideration any future drilling efficiency gains?

Yes. I'll take that one, John, and just start and say that, obviously, you know the history of the organization. And as Mike pointed out, our share increase in the Permian Basin, even in the face of rig count declines, we're anticipating a pretty range-bound rig count in the U.S. Lower 48 as we look forward. Obviously, we've been impacted by customer consolidation, just like everyone has, but we believe that our impact and our rig count range binding has been able to really hold us up. It's an interesting one, but you mentioned new E&P formations. I think this last year and for almost 106-year-old company like H&P, we worked for 19 new E&Ps that we hadn't worked for in the last 5 years, just in the last year.

As we sit here, and I think Mike referenced this, we sit in a great share position, top share position with super majors, with large caps, with small and mid-caps. We have more private E&P activity than anyone. So I feel like we're going to be in a good position to be pretty durable with rig counts even in the face of additional consolidation headwinds.

Okay. Got it. And if you said this on the call, I completely missed it, but did you say where you're -- what you are in terms of working count contracted today?

Yes. John, this is Mike. It's 144 today.

At this time, there are no further questions in queue. I will now turn the meeting back to John Lindsay.

Thank you, everyone, for participating in today's call. I just want to leave you with some brief closing thoughts. Fiscal year 2025 was pivotal for H&P. And while we faced several challenges, the construct as we look forward is increasingly positive. We now have a platform where H&P can drive profitable growth across diversed global markets. Our forward-thinking commercial strategies and advanced technologies set H&P apart from the competition, and our financial strength underpins growth, dividend stability and disciplined deleveraging. Our differentiation is clear, and H&P's positioning continues to deliver strong results for our customers and our shareholders. So thank you all. And operator, you may now close the call.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.

Good day, everyone, and welcome to today's Helmerich & Payne's fiscal third quarter earnings call. [Operator Instructions] Please note, this call may be recorded. [Operator Instructions]

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 2 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 the 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 was 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 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 3/4 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 American 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 generate 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 American 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 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.

[Operator Instructions] 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 had made reference to Mike Lennox and Trey Adams being here. Many of you have met them, but just to be clear, they're members of my team. They're in the -- really in the trenches every day dealing with -- Mike's got responsibility for North America Solutions and South America. Trey's got everything commercially globally. They've been on the road a couple of times with Kevin and I, but -- so many of you have met them but not everybody has. So I just wanted to put that context.

As far as growth in Saudi there continues to be opportunities. There's a tender that will be coming out. I guess it may be actually out now. There's other opportunities for growth in Saudi. I think all of that is going to be a 2026 type timing. I don't see anything necessarily going back in 2025, but I do think there's great opportunities for 2026. And I think when you consider with our prepared remarks talking about the value proposition that we provide and that desire from NOCs around the world and IOCs around the world for a different operating model and being able to perform at a different level. Trey, do you have anything you want 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 in the from too 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.

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 year?

Doug, what I continue to hear is that the worst is behind us. There's -- we just don't know what the timing is. And I think it's really more of a budgeting issue than anything at this point. And so we don't have anything additional to share again. I think the easiest thing for us, to just get our lines wrapped around, is that it's a 2026 time frame is what we would be looking at is probably the best way to approach it. And again, hopefully, there are some opportunities along the way. We've got people on the ground and a lot of good things going on. But until we -- I think we're just going to need a little bit more time to pass.

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. So on the performance contracts, really, it's all types. And so you get your small privates, your mids and then your large majors. And we're participating with them and always -- but really, it starts with getting in understanding what outcomes are looking to achieve and then aligning on those. And so we've had great success doing that and continue to see that as a tool that we'll use going 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 of that outcome. There's the other vast majority of those that were coming in and were creating differentiated value in 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 type 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 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, 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 think the -- this is John. I think there's also just obviously a global trend towards natural gas, and there's a lot of opportunities in the Middle East. And so I think being able to leverage our experience, whether it's performance, whether it's leveraging our technologies, there's huge opportunities for us as more gases being drilled 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 -- I mean, I'd say we're going to -- it fluctuates down. We expect to bring some out as potential high-grading opportunities arise, which we do expect that to to play out.

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 I need to see some private E&P pull back. 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 of that towards 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 are you 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 KCA -- legacy KCA rigs that are working in Jafurah. And we think there's additional opportunities there. Just in general, the rigs that more than likely that will be going back to work are going to be gas focused. I mentioned that earlier. And so whether it's in Jafurah or whether it's in more conventional gas basins, we've got a great fleet to approach those opportunities with. But I don't see any at this stage necessarily being FlexRig. It will all be 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 the customers with this oil versus gas, on 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 in previous years investments 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 they're staying power within those margins for North American 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. The additional term loan extinguishment that we're expecting by the end of the year, raising that from $175 million to $200 million, that's just coming from organic operational cash flows. No asset sales in there. That's just our base business generating, as Mike mentioned, as we focus not only on the revenue side but we're focused on the cost side, we're going to be able to generate a little higher cash flows that we're going to -- obviously, as we stated before, our primary objective at this point is to not only create customer value, but it's to get the balance sheet back down to about 1x of leverage.

When you think about -- again, we're not giving guidance for 2026. But when you think about where we're going to end this year, we've got a clear line of sight of paying off the additional $200 million on that term loan, call it, by the third calendar year of next year. And then we've got another -- our first tranche of bonds will be due in December of 2027. We won't sit around long. We've already got that in sight. And so again, the long-term goal is to get our overall leverage down to about 1x.

And so one of the drivers -- and I said it in my prepared remarks, but one of the drivers is just our CapEx spend coming down. Without giving clear articulation into what 2026 is going to look like from a capital spend, I know from the maintenance side, we came down this year. We're getting down to levels that I think were kind of the pre-COVID levels, and I could let Mike elaborate a little bit more on this. But just the overall kind of necessary capital spend and the level rig activity that we're anticipating for next year. Our overall capital spend is going to moderate quite a bit next year.

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. Anything there 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. On the churn front, I mean, we're seeing it really from all but I would primarily categorize it as with the private. But the good thing is we've been able to find those homes -- a lot of those rigs homes with either privates or others that are looking to high grades?

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 up over the last 10, 20 years. There's a lot of new companies and -- 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.

Jumping around a little bit between calls, so apologies if this has been answered. But the guidance of up to 144 rigs for fiscal Q4 obviously implies that you could potentially add some rigs on average. So would this -- if this were to be the case, would that be more a result of better churn management? Or do you think you'd actually be 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. And if you look at and you filter in active rigs, inactive super-specs for the last year, super-spec utilization rates still above 80%. And if you go basin to basin, that super spec utilization rate even climb further from there. In addition to that, 70% of those inactive rigs are in the hands of 4 primary drilling providers in the U.S. Lower 48. So 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. So 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.

So look, a lot of good color. I appreciate that. A lot of good detailed questions have been asked. So maybe I'll just, here in the back of the queue, maybe I'll just ask you guys kind of a bigger picture question and specifically on crude and when we talked about natural gas and things, people feeling better there both domestically and internationally.

I was hoping maybe you could just rip a little bit on customer mindset on the crude side, kind of moving parts and volatility over the last kind of quarter or so. I was just hoping you could share, do you feel like folks are generally more comfortable with kind of oil outlook back half of this year into next year than they were, say, a quarter ago? Just anything you could share on customer conversations and how they're thinking about crude.

Yes, I'll start and then others can lean in. I think it differs from conversation with customer to customer, right? And you have many of our large customers that are looking through cycles and planning through cycles, identifying the right partners who they know we'll 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. So 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 3 months ago when we had our second quarter earnings call, I mean, 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 we did, I think, 3 months ago when we were sub-60.

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? And there's some prediction that the production begins to decline. So a lot of variables out there.

Our next question comes from Marc Bianchi with TD Cowen.

I was curious about the North America margin performance. It's been really good versus your guidance the last couple of quarters. And you talked about some execution and some performance contracts driving that, I think. But maybe you could talk to us a little bit about kind of how you put the outlook together. Is there sort of a base case assumption and then it's been a lot of performance -- surprising performance contract stuff? Or do you just take a more conservative view on performance? And if you can beat that, that's great. Just maybe help us understand kind of the base case going into fiscal 4Q and the variables that could cause it to be above or below.

I'll start and then hand it over. But really, I want to start with thanking our employees. We have -- they have been executing. We set goals and they have far exceeded those goals. And so really proud of our teams that are out there. And I mentioned some cost efficiency efforts. We continue to see some of those will hang around and some of them won't. Maybe they're on a timing -- seasonal timing is the way I'd maybe describe that. But really proud of how they're executing. And so I'll turn it over to somebody else and maybe get more in the details on how we form it up.

Yes. I think the key there is we do start from a bottoms-up approach. We have firm contracts. We've been into conversations with our customers. As Trey mentioned, we're sitting on the same side of the table as they are trying to figure out what the desired outcomes are. And so when you think about the overall market sentiment, obviously, as we were just talking about, it's improved since the last quarter.

I mean there's still some headwinds that we're facing. And so the slight guide down is a reflection of the overall value proposition that we're providing, and some of that may have shifted from a day rate to a performance bonus incentive and some -- when we're estimating those performance bonus incentives, we can't count on achieving the top end of that bonus range every single time. And so again, we think that if you were to do the math and look at the average kind of margin, what we're anticipating for the fourth quarter, we think it's reasonable.

But any time you throw a target out to Mike and his team, they seem to always find a way to beat it. But we can't always count on that. But quarter after quarter after quarter, his team continues to deliver.

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. And 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 and some of our other focused areas and markets, right? We have some activity increases planned in South America.

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. But what I'll reinforce is that the difference of H&P today 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.

And so we're going to continue to see movement in wins in some geographies that may not hit the headline like U.S. or the Middle East, but we're continuing to chase and find ways to accrete activity.

Yes. And I think if you think about the number of rigs that we're operating during the third quarter, it was -- it didn't include the additional 9 rigs that we announced that were suspended back in early June. Those went off work in July -- call it, July 1. And to Trey's point, the guidance isn't a complete one-for-one down as a result of those suspensions. We're actually seeing some really positive kind of work and wins coming out of all the various countries that Trey just mentioned. Some really good stuff going down in Argentina. Mike and his team are leading those efforts. And I think the conversations are really good with customers down there.

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. And I'd say we're early innings down there as we -- as they're adopting technology and continue to start using that down there, I think we'll have some good win behind ourselves.

Okay. That's great. Maybe just to follow on to that real quick. On the margin side, so there's a lot of moving pieces with, 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 was some start-up costs, and it seems like that's maybe gone 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 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. And I do think -- I wouldn't -- I hate to call it a low point, but I definitely feel like we're at an inflection point in terms of just the amount of gross margin that can be generated out of that international business, obviously, with the rig suspensions and all the work that Trey mentioned earlier that we're currently chasing across the whole Middle East but really chasing across the globe. We do have -- we do see a line of sight in improving the margins that we're realizing on our FlexRig business in Saudi.

And so there's just -- it seems like there's a lot of positive momentum outside of just absolute number of rigs working over there, but there's just the work that we're doing and improving. As we continue to integrate all the operations in Saudi, we're seeing a lot of pretty good improvement. It might take a few more quarters to get it up to like the full -- what's the expected ongoing run rate that those teams across the historical legacy KCAD employees and then the FlexRig start-up employees that we had been working on getting those margins going, getting that business started. It just continues to improve quarter after 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. We were -- the CapEx for 2025 was heavily, heavily weighted to the first 2 or 3 quarters. We won't be spending much in terms of CapEx really on the North American side during the fourth quarter. And what rolls through the fourth quarter will primarily be related to some stuff that we've got going on in international. It's not dollar-for-dollar commensurate decline as these rigs have been -- in terms of level and rig activity, there is some money that was being spent that's still coming through associated with the rig activity that we had prior to these suspensions. But it's coming to a pretty quick halt and decline during the fourth quarter. So no, you're not missing anything. But it is -- 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. The fiscal Q3 performance, obviously, we had some severance costs and other costs that we recorded as restructuring costs. And so you'll see those separate in another line item on the income statement. But that run rate of $66 million is obviously a reflection of not only some of the reductions that we've already had, the synergies that we've already captured. But it also, I think, speaks to what the possibility is for 2026 which, again, we've clearly identified $50 million of run rate savings in -- that we will implement and have effectively executed all the decisions that we need in order to start 10/1 with a $50 million run rate.

There's still more meat on that bone. We still have some more work to do, some more analysis to do. I think that will be a combination of synergies and just overall cost reductions as we think about what's the right necessary corporate structure to support the business going forward. But I can't -- I'm claiming victory on the $50 million. I don't want to claim victory on anything above $75 million, but I think somewhere in between $50 million and $75 million is pretty achievable as what we're -- given what we're thinking now.

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.