HELMERICH & PAYNE, INC. Cautionary Note Regarding Forward-Looking Statements This Quarterly Report on Form 10Q ("Form 10Q") contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts included in this Form 10-Q, including without limitation, statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe," "predict," "project," "target," "continue," or the negative thereof or similar terminology. Forward-looking statements are based upon current plans, estimates, and expectations that are subject to risks, uncertainties, and assumptions. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Actual results may vary materially from those indicated or anticipated by such forward-looking statements. The inclusion of such statements should not be regarded as a representation that such plans, estimates, or expectations will be achieved. These forward-looking statements include, among others, such things as: • our business strategy;
• the amount and nature of our future capital expenditures and how we
expect to fund our capital expenditures, and the number of rigs we
plan to construct or acquire;
• the volatility of future oil and natural gas prices;
• changes in future levels of drilling activity and capital
expenditures by our customers, whether as a result of global capital
markets and liquidity, changes in prices of oil and natural gas or
otherwise, which may cause us to idle or stack additional rigs, or
increase our capital expenditures and the construction or
acquisition of rigs;
• the effect, impact, potential duration or other implications of the
recent outbreak of a novel strain of coronavirus ("COVID-19") and
the recent oil price collapse, and any expectations we may have with
respect thereto;
• changes in worldwide rig supply and demand, competition, or technology;
• possible cancellation, suspension, renegotiation or termination
(with or without cause) of our contracts as a result of general or
industry-specific economic conditions, mechanical difficulties,
performance or other reasons;
• expansion and growth of our business and operations;
• our belief that the final outcome of our legal proceedings will not
materially affect our financial results;
• impact of federal and state legislative and regulatory actions
affecting our costs and increasing operation restrictions or delay
and other adverse impacts on our business;
• environmental or other liabilities, risks, damages or losses,
whether related to storms or hurricanes (including wreckage or
debris removal), collisions, grounding, blowouts, fires, explosions,
other accidents, terrorism or otherwise, for which insurance
coverage and contractual indemnities may be insufficient,
unenforceable or otherwise unavailable;
• our financial condition and liquidity;
• tax matters, including our effective tax rates, tax positions,
results of audits, changes in tax laws, treaties and regulations,
tax assessments and liabilities for taxes; and
• potential long-lived asset impairments.
Important factors that could cause actual results to differ materially from our expectations or results discussed in the forwardlooking statements are disclosed in this Form 10-Q under Part II, Item 1A- "Risk Factors" and in our 2019 Annual Report on Form 10-K under Item 1A- "Risk Factors," as well as in Item 7- "Management's Discussion and Analysis of Financial Condition and Results of Operations." All subsequent written and oral forwardlooking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by such cautionary statements. Because of the underlying risks and uncertainties, we caution you against placing undue reliance on these forward-looking statements. We assume no duty to update or revise these forwardlooking statements based on changes in internal estimates, expectations or otherwise, except as required by law.
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Executive SummaryHelmerich & Payne, Inc. ("H&P," which, together with its subsidiaries, is identified as the "Company," "we," "us," or "our," except where stated or the context requires otherwise) provides performance-driven drilling solutions and technologies that are intended to make hydrocarbon recovery safer and more economical for oil and gas exploration and production companies. As ofMarch 31, 2020 , our drilling rig fleet included a total of 339 drilling rigs. Our contract drilling services segments consist of theU.S. Land segment with 299 rigs, the Offshore segment with eight offshore platform rigs and the International Land segment with 32 rigs as ofMarch 31, 2020 . At the close of the second quarter of fiscal year 2020, we had 170 contracted rigs, of which 102 were under a fixed term contract and 68 were working well-to-well, compared to 218 contracted rigs atSeptember 30, 2019 . TheU.S. land drilling industry continues to evolve, and we have led the way by upgrading and converting more rigs to the super-spec classification than any competitor in the industry. The investments in our super-spec FlexRig drilling fleet and our ability to deliver best-in-class field performance and customer satisfaction have resulted in H&P garnering the largest market share in theU.S. land drilling industry. Our long-term strategy remains focused on innovation, technology, safety, operational excellence and reliability. As we move forward, we believe that our advanced uniform rig fleet, financial strength, contract backlog and strong customer and employee base position us very well to respond to volatile market conditions and take advantage of future opportunities. Market Outlook Our revenues are derived from the capital expenditures of companies involved in the exploration, development and production of crude oil and natural gas ("E&Ps"). Generally, the level of capital expenditures is dictated by current and expected future prices of crude oil and natural gas, which are determined by various supply and demand factors. Both commodities have historically been, and we expect them to continue to be, cyclical and highly volatile. With respect toU.S. Land Drilling, the resurgence of oil and natural gas production coming fromthe United States brought about by unconventional shale drilling for oil has significantly impacted the supply of oil and natural gas and the type of rig utilized in theU.S. land drilling industry. The advent of unconventional drilling inthe United States began in early 2009 and continues to evolve as E&Ps drill longer lateral wells with tighter well spacing. During this time, we designed, built and delivered to the market new technology AC drive rigs (FlexRig®), substantially growing our fleet. The pace of progress of unconventional drilling over the years has been cyclical and volatile, dictated by crude oil and natural gas price fluctuations, which at times have proven to be dramatic. Throughout this time, the length of the lateral section of wells drilled in theU.S. has continued to grow. The progression of longer lateral wells has required many of the industry's rigs to be upgraded to certain specifications in order to meet the technical challenges of drilling longer lateral wells. The upgraded rigs meeting those specifications are commonly referred to in the industry as super-spec rigs and have the following specific characteristics: AC drive, minimum of 1,500 horsepower drawworks, minimum of 750,000 lbs. hookload rating, 7,500 psi mud circulating system, and multiple-well pad capability. The technical requirements of drilling longer lateral wells often necessitate the use of super-spec rigs and even when not required for shorter lateral wells, there is a strong customer preference for super-spec due to the drilling efficiencies gained in utilizing a super-spec rig. As a result, there has been a structural decline in the use of non-super-spec rigs across the industry. However, as a result of having a large super-spec fleet, we gained market share and became the largest provider of super-spec rigs in the industry. As such, we believe we are well positioned to respond to various market conditions. In earlyMarch 2020 , the increase in crude oil supply resulting from production escalations from theOrganization of the Petroleum Exporting Countries and other oil producing nations ("OPEC+") combined with a decrease in crude oil demand stemming from the global response and uncertainties surrounding the COVID-19 pandemic resulted in a sharp decline in crude oil strip prices. Since the beginning of the calendar year 2020, crude oil prices fell from approximately$60 per barrel to the low-to-mid-$20 per barrel range, lower in some cases, reaching record lows. Consequently, we have seen a significant decrease in customer 2020 capital budgets representing a decline of approximately 40% from calendar year 2019 levels. There has been a corresponding dramatic decline in the demand for land rigs, such that the overall rig count for calendar 2020 will average significantly less than in calendar 2019. Utilization for our super-spec FlexRig fleet peaked in late calendar year 2018 with 216 of 221 super-spec rigs working (98 percent utilization); however, the recent decline in the demand for land rigs resulted in customers idling a large portion of our super-spec FlexRig fleet. AtMarch 31, 2020 , we had 89 idle super-spec rigs out of our FlexRig fleet of 234 super-spec rigs (62 percent utilization). Based on current customer budgets and rig release notifications, we expect our rig count to further decline by a meaningful amount. Collectively, our other business segments, Offshore Drilling, International Land Drilling and H&P Technologies, are exposed to the same macro environment adversely affecting ourU.S. Land Drilling segment and those unfavorable factors are creating similar challenges for these business segments as well. 33
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H&P recognizes the uncertainties and concerns caused by the COVID-19 pandemic; however, we have managed the Company over time to be in a position of strength both financially and operationally when facing uncertainties of this magnitude. The COVID-19 pandemic has had an indirect, yet significant financial impact on the Company. The global response to coping with the pandemic has resulted in a drop in demand for crude oil, which when combined with a more than adequate supply of crude oil, has resulted in a sharp decline in crude oil prices causing our customers to have pronounced pullbacks in their operations and planned capital expenditures. The direct impact of COVID-19 on H&P's operations has created some challenges that we believe the Company is adequately addressing to ensure a robust continuation of our operations albeit at a lower activity level.
The Company is an 'essential critical infrastructure' company as defined by the
The health and safety of all H&P stakeholders - our employees, customers, and vendors - remain a top priority at the Company. Accordingly, H&P has implemented additional policies and procedures designed to protect the well-being of our stakeholders and to minimize the impact of COVID-19 on our ongoing operations. Some of the safeguards we have implemented include:
• The Company mobilized a global COVID-19 response team to manage the
evolving situation
• H&P moved to a global "remote work" model for office personnel
(beginning March 13, 2020 )
• The Company suspended all non-essential travel
• We are adhering to CDC guidelines for evaluating actual and
potential COVID-19 exposures
• Operational and third-party personnel are required to complete
a COVID-19 questionnaire prior to reporting to a field
location and office personnel are required to complete one
prior to returning to their respective offices in order to
evaluate actual and potential COVID-19 exposures and
individuals identified as being high risk are not allowed on
location
• The temperatures of operational personnel are taken prior to
them being allowed to enter a rig site
• Implemented enhanced sanitation and cleaning protocols
• We are complying with local governmental jurisdiction policies and
procedures where our operations reside; in some instances, policies
and procedures are more stringent in our foreign operations than in
our domestic operations and this has resulted in a complete
suspension of all drilling operations in at least one foreign
jurisdiction
As of
From a financial perspective we believe the Company is well positioned to
continue as a going concern even through a more protracted disruption caused by
COVID-19. We have taken measures to reduce costs and capital expenditures to
levels that better reflect a lower activity environment. Such reductions
represent approximately
As part of the Company's normal operations, we regularly monitor the
creditworthiness of our customers and vendors, screening out those where we
believe there is high risk of failure to honor their counter-party obligations
either through payment or delivery of goods or services. We also perform routine
reviews of our accounts receivable and other amounts owed to us to assess and
quantify the ultimate collectability of those amounts. At
The nature of the COVID-19 pandemic is inherently uncertain, and as a result, the Company is unable to reasonably estimate the duration and ultimate impacts of the pandemic, including the timing or level of any subsequent recovery. As a result, the Company cannot be certain of the degree of impact on the Company's business, results of operations and/or financial position for future periods.
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Recent Developments Liquidity InNovember 2019 , we entered into the first amendment to our 2018 Credit Facility by and among the Company, as borrower,Wells Fargo Bank, National Association , as administrative agent, and the lenders party thereto (the "2018 Credit Facility Amendment"). Among other things, the 2018 Credit Facility Amendment (i) extended the maturity date of the 2018 Credit Facility by one year toNovember 13, 2024 , (ii) deleted certain negative covenants and (iii) refreshed the number of permissible extensions of the maturity date that require only the consent of extending lenders. Business Segments During the fourth quarter of fiscal year 2019, we migrated our FlexApp offerings into our H&P Technologies segment. The activity of our FlexApps was previously included in ourU.S. Land segment. All segment disclosures have been restated, as practicable, for these segment changes.Self-Insurance OnOctober 1, 2019 , we elected to utilize a wholly owned insurance captive ("Captive") to insure the deductibles for our workers' compensation, general liability and automobile liability insurance programs. Casualty claims occurring prior toOctober 1, 2019 will remain on the operating segment books and future adjustments to these claims will continue to be reflected within the operating segments. Reserves for legacy claims occurring prior toOctober 1, 2019 , will remain as liabilities in our operating segments until they have been resolved. We also intend to continue utilizing the Captive to insure the deductibles for our assets under a property insurance program. Changes in those reserves will be reflected in segment earnings as they occur. The Company and the Captive maintain excess property and casualty reinsurance programs with third-party insurers in an effort to limit the financial impact of significant events covered under these programs. Our operating subsidiaries are paying premiums to the Captive, typically on a monthly basis, for the estimated losses based on the external actuarial analysis. These premiums are held in a restricted account, resulting in a transfer of risk from our operating subsidiaries to the Captive for the deductible self-insurance retention. The actuarial estimated underwriting expenses for the three and six months endedMarch 31, 2020 was approximately$6.0 million and$14.7 million , respectively, and was recorded within Contract drilling services operating expenses in our Unaudited Condensed Consolidated Statement of Operations. Intercompany premium revenues and expenses during the three and six months endedMarch 31, 2020 amounted to$10.5 million and$18.2 million , respectively, which were eliminated upon consolidation. These intercompany insurance premiums are reflected as segment operating expenses within theU.S. Land, Offshore, and International Land reportable operating segments and are reflected as intersegment sales within "Other". The Company previously self-insured employee health plan exposures in excess of employee deductibles. Starting in the second quarter of fiscal year 2020, the Captive insurer issued a stop-loss program that will pay for health plan claims that exceed$50,000 . One hundred percent of the stop-loss premium is being set aside by the Captive as reserves. The stop-loss program does not have a material impact on a consolidated basis. Fiscal Year 2020 Dispositions InDecember 2019 , we closed on the sale of a wholly owned subsidiary ofHelmerich & Payne International Drilling Co. ("HPIDC"),TerraVici Drilling Solutions, Inc. ("TerraVici"). As a result of the sale, 100% of TerraVici's outstanding capital stock was transferred to the purchaser in exchange for approximately$15.1 million , resulting in a total gain on the sale of TerraVici of approximately$15.0 million . Prior to the sale, TerraVici was a component of the H&P Technologies reportable segment. This transaction does not represent a strategic shift in our operations and will not have a significant effect on our operations and financial results going forward. Impairments During the three months endedMarch 31, 2020 , several significant economic events took place that severely impacted the current demand on drilling services, including the significant drop in the crude oil prices caused by OPEC+'s price war coupled with the decrease in the demand due to the COVID-19 pandemic.
Property, Plant and Equipment and Inventory To maintain a competitive edge in a challenging market, the Company's management introduced a new strategy focused on operating various types of highly capable upgraded rigs and phasing out the older, less capable fleet. This resulted in grouping the super-spec rigs of our legacy Domestic FlexRig3 asset group with our FlexRig5 asset group creating a new "Domestic super-spec FlexRig" asset group, while combining the legacy Domestic conventional asset group, FlexRig4 asset group and FlexRig3 non-super-spec rigs into one asset group (Domestic non-super-spec asset group). Given the current and projected low utilization for our Domestic non-super-spec asset group and all International asset groups, we considered these economic factors to be indicators that these asset groups may be impaired.
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AtMarch 31, 2020 , we performed impairment testing on our Domestic non-super-spec and International conventional, FlexRig3, and FlexRig4 asset groups which had an aggregate net book value of$605.8 million . We concluded that the net book value of each asset group is not recoverable through estimated undiscounted cash flows and recorded a non-cash impairment charge of$441.4 million in the Unaudited Condensed Consolidated Statement of Operations during the three and six months endedMarch 31, 2020 . Of the$441.4 million total impairment charge recorded,$292.4 million and$149.0 million was recorded in theU.S. Land and International Land segment, respectively. Impairment was measured as the amount by which the net book value of each asset group exceeds its fair value. The most significant assumptions used in our undiscounted cash flow model include timing on awards of future drilling contracts, drilling rig utilization, estimated remaining useful life, and net proceeds received upon future sale/disposition. These assumptions are classified as Level 3 inputs by ASC Topic 820 Fair Value measurement and Disclosures as they are based upon unobservable inputs and primarily rely on management assumptions and forecasts. In determining the fair value of each asset group, we utilized a combination of income and market approaches. The significant assumptions in the valuation are based on those of a market participant and are classified as Level 2 and Level 3 inputs by ASC Topic 820 Fair Value Measurement and Disclosures. The Company also recorded an additional non-cash impairment charge related to in-progress drilling equipment and rotational inventory of$44.9 million and$38.6 million , respectively, which had aggregate book values of$68.4 million and$38.6 million , respectively, in the Unaudited Condensed Consolidated Statement of Operations during the three and six months endedMarch 31, 2020 . Of the$83.5 million total impairment charge recorded for in-progress drilling equipment and rotational inventory,$75.8 million and$7.7 million was recorded in theU.S. Land and International Land segment, respectively.Goodwill and Intangible Assets Consistent with our policy, we test goodwill annually for impairment in the fourth quarter of our fiscal year, or more frequently if there are indicators that goodwill might be impaired. Due to the market conditions described in Note 5-Property, Plant and Equipment, we concluded that goodwill and intangible assets might be impaired and tested the H&P Technologies reporting unit, where the goodwill balance is allocated and the intangible assets are recorded, for recoverability. This resulted in a goodwill only non-cash impairment charge of$38.3 million recorded in Asset Impairment Charge on the Unaudited Condensed Consolidated Statement of Operations during the three and six months endedMarch 31, 2020 . The recoverable amount of the H&P Technologies segment as a reporting unit is determined based on a fair value calculation which uses cash flow projections based on the Company's financial budgets approved by the board of directors covering a five-year period, and a discount rate of 14 percent. Cash flows beyond that five-year period have been extrapolated using the fifth-year data with no implied growth factor. The recoverable amount of the intangible assets tested for impairment within the H&P Technologies reporting unit is determined based on undiscounted cash flow projections using the Company's financial budgets approved by the board of directors covering a five-year period, and extrapolated for the remaining weighted average useful lives of the intangible assets. The most significant assumptions used in our cash flow model include timing on awards of future contracts, commercial pricing terms, utilization, discount rate, and the terminal value. These assumptions are classified as Level 3 inputs by ASC Topic 820 Fair Value Measurement and Disclosures as they are based upon unobservable inputs and primarily rely on management assumptions and forecasts. Although we believe the assumptions used in our analysis and the probability-weighted average of expected future cash flows are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and our resulting conclusion. Contract Backlog As ofMarch 31, 2020 , andSeptember 30, 2019 , our contract drilling backlog, being the expected future dayrate revenue from executed contracts, was$0.8 billion and$1.2 billion , respectively. The decrease in backlog atMarch 31, 2020 fromSeptember 30, 2019 is primarily due to prevailing market conditions causing a decline in the number of drilling contracts executed and to some extent an increase in the number of early terminations of contracts. Approximately 50.7 percent of theMarch 31, 2020 total backlog is reasonably expected to be fulfilled in fiscal year 2021 and thereafter. We do not have material long-term contracts related to our H&P Technologies segment. Fixed-term contracts customarily provide for termination at the election of the customer, with an early termination payment to be paid to us if a contract is terminated prior to the expiration of the fixed term. As a result of the depressed market conditions and negative outlook for the near term, certain of our customers, as well as those of our competitors, have opted to renegotiate or early terminate existing drilling contracts. Such renegotiations include requests to lower the contract dayrate in exchange for additional terms, temporary stacking of the rig, and other possibilities. We have received early termination notices for rigs that were under contract atMarch 31, 2020 . During the three months endedMarch 31, 2020 and 2019, early termination revenue associated with term contracts was approximately$8.2 million and$1.2 million , respectively, and$8.3 million for both the six months endedMarch 31, 2020 and 2019. 36
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The following table sets forth the total backlog by reportable segment as of
Percentage Reasonably
Expected to be Filled in
Fiscal Year 2021
(in billions) March 31, 2020 September 30, 2019 and Thereafter
U.S. Land $ 0.7 $ 1.0 47.7 %
Offshore - - -
International Land 0.1 0.2 73.8
$ 0.8 $ 1.2
The early termination of a contract may result in a rig being idle for an
extended period of time, which could adversely affect our financial condition,
results of operations and cash flows. In some limited circumstances, such as
sustained unacceptable performance by us, no early termination payment would be
paid to us. Early terminations could cause the actual amount of revenue earned
to vary from the backlog reported. See "Item 1A. Risk Factors - Our current
backlog of contract drilling revenue may continue to decline and may not be
ultimately realized as fixedterm contracts may in certain instances be
terminated without an early termination payment," in our 2019 Annual Report on
Form 10-K filed with the Securities and Exchange Commission ("SEC"), regarding
fixed term contract risk. Additionally, see "Item 1A. Risk Factors - The impact
and effects of public health crises, pandemics and epidemics, such as the recent
outbreak of COVID-19, could adversely affect our business, financial condition
and results of operations" within this Form 10-Q.
Results of Operations for the Three Months Ended March 31, 2020 and 2019
Consolidated Results of Operations
Net Income (Loss) We reported loss from continuing operations of $420.5 million
($3.88 loss per diluted share) from operating revenues of $633.6 million for the
three months ended March 31, 2020 compared to income from continuing operations
of $71.9 million ($0.65 per diluted share) from operating revenues of $720.9
million for the three months ended March 31, 2019 . Included in the net loss for
the three months ended March 31, 2020 is a loss of $0.1 million (no impact per
diluted share) from discontinued operations. Including discontinued operations,
we recorded net loss of $420.5 million ($3.88 loss per diluted share) for the
three months ended March 31, 2020 compared to net income of $60.9 million ($0.55
per diluted share) for the three months ended March 31, 2019 .
Research and Development For the three months ended March 31, 2020 and 2019, we
incurred $6.2 million and $7.3 million , respectively, of research and
development expenses.
Selling, General and Administrative Expense Selling, general and administrative
expenses decreased to $42.0 million during the three months ended March 31, 2020
compared to $43.5 million in the three months ended March 31, 2019 . The $1.5
million decrease in fiscal year 2020 compared to the same period in fiscal year
2019 is primarily due to lower accrued variable compensation expense.
Asset Impairment Charge During the three months ended March 31, 2020 , we
impaired several assets including inventory, property, plant and equipment, and
goodwill which resulted in an impairment charge of $563.2 million ($437.5
million , net of tax, or $5.19 per diluted share), which is included in Asset
Impairment Charge on the Consolidated Statement of Operations for the three
months ended March 31, 2020 .
Income Taxes We had an income tax benefit of $113.4 million for the three months
ended March 31, 2020 compared to an income tax provision of $25.1 million for
the three months ended March 31, 2019 . Our statutory federal income tax rate for
fiscal year 2020 is 21.0 percent (before incremental state and foreign taxes).
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Three Months Ended March 31,
(in thousands, except operating statistics) 2020 2019 % Change
Operating revenues $ 530,664 $ 617,533 (14.1 )
Direct operating expenses 347,241 377,430 (8.0 )
Research and development 860 134 541.8
Selling, general and administrative expense 8,514 11,169 (23.8 )
Depreciation 114,927 126,785 (9.4 )
Asset impairment charge 368,215 - -
Segment operating income (loss) $ (309,093 ) $ 102,015 (403.0 )
Operating Statistics (1):
Revenue days 17,273 21,262 (18.8 )
Average rig revenue per day $ 26,256 $ 25,462 3.1
Average rig expense per day 15,497 14,169 9.4
Average rig margin per day $ 10,759 $ 11,293 (4.7 )
Rig utilization 63 % 67 % (6.0 )
(1) Operating statistics for per day revenue, expense and margin do not include
reimbursements of "outofpocket" expenses of $77.1 million and $76.2 million
during the three months ended March 31, 2020 and 2019, respectively. Average
expense per day excludes intercompany expense activity related to FlexApps of
$2.4 million for the three months ended March 31, 2020 .
Operating Income (Loss) The U.S. Land segment had an operating loss of $309.1
million for the three months ended March 31, 2020 compared to operating income
of $102.0 million in the same period of fiscal year 2019. The decrease was
primarily driven by the recording of an asset impairment loss during the three
months ended March 31, 2020 . Revenues were $530.7 million and $617.5 million in
the three months ended March 31, 2020 and 2019, respectively. Included in U.S.
land revenues for the three months ended March 31, 2020 is early termination
revenue of $8.2 million compared to $1.2 million during the same period of
fiscal year 2019. Fixedterm contracts customarily provide for termination at
the election of the customer, with an early termination payment to be paid to us
if a contract is terminated prior to the expiration of the fixed term (except in
limited circumstances including sustained unacceptable performance by us).
Revenue Excluding early termination revenue per day of $475 and $57 for the
three months ended March 31, 2020 and 2019, respectively, average rig revenue
per day increased by $376 to $25,781 due to higher demobilization revenue
associated with rig releases offset by lower dayrate pricing. Compared to the
three months ended March 31, 2019 , our revenue days declined by 18.8 percent.
This decline was driven by a focus on free cash flow generation and budget
discipline by many of our publicly traded E&P customers which commenced during
fiscal year 2019. Additionally, recent declines in hydrocarbon prices caused
many of our customers to lower rig activity during the last half of the second
quarter of fiscal year 2020. This trend accelerated in the second half of March
2020 as oil prices collapsed.
Direct Operating Expenses Average expense per day increased $1,328 to $15,497
during the three months ended March 31, 2020 compared to the three months ended
March 31, 2019 . The increase is primarily due to higher self-insurance expense
and one-time expenses associated with idling rigs in the second half of March
2020 .
Depreciation Depreciation includes charges for abandoned equipment of $0.9
million and $4.2 million for the three months ended March 31, 2020 and 2019,
respectively. In the three months ended March 31, 2020 , depreciation expense
included $0.5 million of accelerated depreciation for components on rigs that
are scheduled for conversion in fiscal year 2020 as compared to $1.1 million of
accelerated depreciation for the three months ended March 31, 2019 .
Asset Impairment Charge During the three months ended March 31, 2020 , we
impaired our Domestic Conventional, FlexRig3, and FlexRig4 asset groups, in
addition to in-progress drilling equipment and rotational inventory. This
resulted in an aggregate impairment charge of $368.2 million ($284.1 million ,
net of tax, or $3.39 per diluted share), which is included in Asset Impairment
Charge on the Consolidated Statement of Operations for the three months ended
March 31, 2020 .
Utilization U.S. land rig utilization decreased to 63 percent for the three
months ended March 31, 2020 compared to 67 percent during the three months ended
March 31, 2019 . At March 31, 2020 , 150 out of 299 existing rigs in the U.S. Land
segment were contracted. Of the 150 contracted rigs, 96 were under fixed term
contracts and 54 were working in the spot market.
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Offshore Operations Segment
Three Months Ended March 31,
(in thousands, except operating statistics) 2020 2019 % Change
Operating revenues $ 33,079 $ 34,583 (4.3 )%
Direct operating expenses 32,648 26,984 21.0
Selling, general and administrative expense 908 805 12.8
Depreciation 2,842 2,263 25.6
Segment operating income (loss) $ (3,319 ) $ 4,531 (173.3 )
Operating Statistics (1):
Revenue days 457 540 (15.4 )%
Average rig revenue per day $ 42,098 $ 31,361 34.2
Average rig expense per day 48,117 25,941 85.5
Average rig margin per day $ (6,019 ) $ 5,420 (211.1 )
Rig utilization 63 % 75 % (16.0 )
(1) Operating statistics for per day revenue, expense and margin do not include
reimbursements of "outofpocket" expenses of $6.8 million and $5.5 million
for the three months ended March 31, 2020 and 2019, respectively. The
operating statistics only include rigs that we own and exclude offshore
platform management and contract labor service revenues of $7.1 million and
$12.1 million , offshore platform management and contract labor service
expenses of $3.9 million and $7.5 million , and currency revaluation expense
of $5.9 thousand and currency revaluation income of $2.7 thousand for the
three months ended March 31, 2020 and 2019, respectively.
Operating Income (Loss) During the three months ended March 31, 2020 , the
Offshore segment had an operating loss of $3.3 million compared to operating
income of $4.5 million for the three months ended March 31, 2019 . This decrease
is primarily attributable to $3.7 million of bad debt expense incurred during
the three months ended March 31, 2020 and lower contribution from two rigs that
demobilized back to shore during the first quarter of fiscal year 2020. One of
the two rigs began mobilizing to a new platform during March 2020 and recently
commenced drilling operations.
Revenue Average rig revenue per day increased in the three months ended March
31, 2020 compared to the three months ended March 31, 2019 due to rate increases
during the first quarter of fiscal year 2020 and one of our customers shifting
its activity from a customer-owned rig managed by H&P to a rig owned by H&P.
Direct Operating Expenses Average rig expense increased to $48,117 per day
during the three months ended March 31, 2020 from $25,941 per day. Included in
average rig expense per day is $8,084 of bad debt expense. Excluding the bad
debt expense, average rig expense increased by $14,092 due to the factors
mentioned above.
Utilization As of March 31, 2020 and 2019, five of our eight available platform
rigs were under contract.
International Land Operations Segment
Three Months Ended March 31,
(in thousands, except operating statistics) 2020 2019 % Change
Operating revenues $ 51,250 $ 50,808 0.9
Direct operating expenses 37,964 33,051 14.9
Selling, general and administrative expense 1,248 794 57.2
Depreciation 7,821 8,995 (13.1 )
Asset impairment charge 156,686 - -
Segment operating income (loss) $ (152,469 ) $ 7,968 (2,013.5 )
Operating Statistics (1):
Revenue days 1,547 1,559 (0.8 )
Average rig revenue per day $ 31,706 $ 31,130 1.9
Average rig expense per day 20,922 19,269 8.6
Average rig margin per day $ 10,784 $ 11,861 (9.1 )
Rig utilization 53 % 54 % (1.9 )
(1) Operating statistics for per day revenue, expense and margin do not include
reimbursements of "outofpocket" expenses of $2.2 million and $2.3 million
for the three months ended March 31, 2020 and 2019, respectively. Also
excluded are the effects of currency revaluation expense of $3.4 million and
$0.7 million for the three months ended March 31, 2020 and 2019,
respectively.
Operating Income (Loss) The International Land segment had an operating loss of
39
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Table of Contents
Revenue We experienced a one percent decrease in revenue days when comparing the three months endedMarch 31, 2020 to the three months endedMarch 31, 2019 . The average number of active rigs was 17.0 during the three months endedMarch 31, 2020 compared to 17.3 during the same period in fiscal year 2019. Direct Operating Expenses Average rig expense increased to$20,922 per day during the three months endedMarch 31, 2020 as compared to$19,269 per day during the three months endedMarch 31, 2019 . The increase was primarily attributable to additional start-up costs. Asset Impairment Charge During the three months endedMarch 31, 2020 , we impaired our International Conventional, FlexRig3, and FlexRig4 asset groups, in addition to rotational inventory. This resulted in an aggregate impairment charge of$156.7 million ($123.8 million , net of tax, or$1.44 per diluted share), which is included in Asset Impairment Charge on the Consolidated Statement of Operations for the three months endedMarch 31, 2020 . Utilization Our utilization decreased during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . AtMarch 31, 2020 , 15 out of 32 existing rigs in the International Land segment were contracted. Of the 15 contracted rigs, five were under fixed-term contracts and ten were working in the spot market. H&P Technologies Operations Segment Three Months Ended March 31, (in thousands) 2020 2019 % Change Operating revenues$ 17,709 $ 14,729 20.2 Direct operating expenses 1,735 4,683 (63.0 ) Research and development 4,803 7,128 (32.6 ) Selling, general and administrative expense 4,005 4,783 (16.3 ) Depreciation and amortization 2,407 1,943 23.9 Asset impairment charge 38,333 - - Segment operating loss$ (33,574 ) $ (3,808 ) 781.7 Operating Loss H&P Technologies had an operating loss of$33.6 million in the three months endedMarch 31, 2020 compared to an operating loss of$3.8 million in the three months endedMarch 31, 2019 . The change was primarily driven by the recording of a goodwill impairment loss during the three months endedMarch 31, 2020 . Excluding the impairment loss, the change was primarily driven by revenue growth, partially offset by additional direct operating expenses. Asset Impairment Charge During the three months endedMarch 31, 2020 , we recorded a goodwill impairment loss of$38.3 million ($29.6 million , net of tax, or$0.35 per diluted share). This non-cash impairment charge is included in Asset Impairment Charge on the Condensed Consolidated Statements of Operations for the three months endedMarch 31, 2020 . Other Operations Results of our other operations, excluding corporate selling, general and administrative costs and corporate depreciation, are as follows:
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