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MarketScreener Homepage  >  Equities  >  Nyse  >  Helmerich & Payne, Inc.    HP

HELMERICH & PAYNE, INC.

(HP)
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HELMERICH & PAYNE : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

11/20/2020 | 05:12pm EST
The following discussion should be read in conjunction with Part I of this
Form 10­K as well as the Consolidated Financial Statements and related notes
thereto included in Item 8- "Financial Statements and Supplementary Data" of
this Form 10­K. Our future operating results may be affected by various trends
and factors which are beyond our control. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of a variety of risks and uncertainties, including those described in
this Form 10-K under "Cautionary Note regarding Forward-Looking Statements" and
Item 1A-- "Risk Factors." Accordingly, past results and trends should not be
used by investors to anticipate future results or trends.
Executive Summary
Helmerich & 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) through its operating subsidiaries 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 of September 30, 2020, our drilling rig fleet included
a total of 302 drilling rigs. Our drilling services and solutions segments
consist of the North America Solutions segment with 262 rigs, the Offshore Gulf
of Mexico segment with eight offshore platform rigs and the International
Solutions segment with 32 rigs as of September 30, 2020. At the close of fiscal
year 2020, we had 79 contracted rigs, of which 56 were under a fixed-term
contract and 23 were working well-to-well, compared to 218 contracted rigs at
September 30, 2019. 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, technology offerings, financial
strength, contract backlog and strong customer and employee base position us
very well to respond to continued 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 to North America Solutions, the resurgence of oil and natural gas
production coming from the 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 the U.S. land drilling industry. The advent of
unconventional drilling for oil in the 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 the
United States 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 early March 2020, the increase in crude oil supply resulting from production
escalations from the Organization 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 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. Consequently, we
have seen a significant decrease in customer 2020 capital budgets representing a
decline of nearly 50% 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 year 2020 will average significantly less than in
calendar year 2019.

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During calendar year 2020, our North American Solutions rig count has declined
from 195 contracted rigs at December 31, 2019 to 69 contracted rigs at September
30, 2020. Of the 69 contracted rigs at September 30, 2020, 58 are active with 11
stacked. When contracted rigs are stacked, they remain under the terms of the
contract but typically pay a reduced rate, where the remaining term days are
generally not reduced, but our operating expenses are typically reduced. We
experienced much of our rig count decline during our second and third fiscal
quarters with the absolute level of our rigs remaining relatively stable during
the fourth fiscal quarter. Additionally, during our fourth fiscal quarter, the
market experienced a stabilization of crude oil prices in the $40 per barrel
range. At such levels, we believe our customers will have more robust capital
budgets entering into 2021 and are already seeing evidence of this in our
near-term rig count activity projections. Consequently, we believe we will
experience a higher level of rig activity in fiscal year 2021 compared to where
we stand today. However, given the current levels of commodity prices and the
lasting impacts of the global pandemic, we do not expect or anticipate
customers' capital budgets will support activity levels like those experienced
prior to March 2020.
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. At September 30, 2020, we had 167 idle
super-spec rigs out of our FlexRig® fleet of 234 super-spec rigs (29% percent
utilization).
Collectively, our other business segments, Offshore Gulf of Mexico and
International Solutions, are exposed to the same macro environment adversely
affecting our North America Solutions segment and those unfavorable factors are
creating similar challenges for these business segments as well.

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
Department of Homeland Security and the Cybersecurity and Infrastructure
Security Agency and, as such, continues to operate rigs and technology
solutions, providing valuable services to our customers in support of the global
energy infrastructure.

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


•            The Company 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 Center for Disease Control ("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


• The Company has implemented enhanced sanitization 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 North America operations and this has resulted in a complete
             suspension, for a certain period of time, of all drilling operations
             in at least one foreign jurisdiction


As of September 30, 2020, the Company was aware that 109 out of its
approximately 4,100 employees have had confirmed cases of COVID-19 since the
COVID-19 outbreak began, of which we believe approximately 52% contracted the
virus outside of their work location. We have had no fatalities and 100 of 109
employees who had confirmed cases have returned to work. Upon being notified
that an employee has tested positive, the Company follows pre-established
guidelines and places the employee on leave as appropriate.  Per CDC Guidelines,
employees testing positive are permitted to return to their worksite after 10
days.  Employees who are considered a Level 1 exposure but who have not tested
positive are required to quarantine and are permitted to return to their
worksite after 14 days. In addition, the Company applies its enhanced
sanitization procedures to the employee's work location prior to allowing
employees to re-enter the location. Since the COVID-19 outbreak began, no rigs
have been fully shut down (other than temporary shutdowns for disinfecting) and
such measures to disinfect facilities have not had a significant impact on
service. We believe our service levels are unchanged from pre-pandemic levels.


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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. Actions taken during
the second quarter of fiscal year 2020 included a reduction to the annual
dividend of approximately $200 million, a reduction in planned fiscal year 2020
capital spend of $95 million, and a reduction of over $50 million in fixed
operational overhead. During the third quarter of fiscal year 2020, the Company
took further steps to reduce its planned fiscal year 2020 capital spend by
another $40 million and its selling, general and administrative cost structures
by another $25 million on an annualized basis. The culmination of these
cost-saving initiatives resulted in a $16.0 million restructuring charge during
fiscal year 2020. We anticipate further cost reductions in our International
Solutions operations as well and are working through local jurisdictional
regulations to implement those measures. At September 30, 2020, the Company had
cash and cash equivalents and short-term investments of $577.2 million and
availability under the 2018 Credit Facility (as defined herein) of $750.0
million resulting in approximately $1.3 billion in near-term liquidity. We
currently do not anticipate the need to draw on the 2018 Credit Facility.

As part of the Company's normal operations, we regularly monitor the
creditworthiness of our customers and vendors, screening out those that we
believe have a 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 September 30, 2020,
the Company had a net allowance against its accounts receivable of $1.8 million
and incurred bad debt expense of $2.2 million during fiscal year 2020.
Subsequent to March 31, 2020, we adjusted our credit risk monitoring for
specific customers, in response to the recent economic events described above.

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.
Recent Developments
Restructuring
Beginning in the third quarter of fiscal year 2020, we implemented cost controls
and began evaluating further measures to respond to the combination of weakened
commodity prices, uncertainties related to the COVID-19 pandemic, and the
resulting market volatility. We restructured our operations to accommodate scale
during an industry downturn and to re-organize our operations to align to new
marketing and management strategies. We commenced a number of restructuring
efforts as a result of this evaluation, which included, among other things a
reduction in our capital allocation plans, changes to our organizational
structure, and a reduction of staffing levels. Refer to Note 19-Restructuring
Charges to our Consolidated Financial Statements.
Business Segments
During the third quarter of fiscal year 2020, as part of our restructuring
efforts (see Note 19-Restructuring Charges to our Consolidated Financial
Statements) and consistent with the manner in which our chief operating decision
maker evaluates performance and allocates resources, we implemented
organizational changes. We are moving from a product-based offering, such as a
rig or separate technology package, to an integrated solution-based approach by
combining proprietary rig technology, automation software, and digital expertise
into our rig operations. Operations previously reported within the former U.S.
Land and H&P Technologies operating and reportable segments are now managed and
presented within the North America Solutions reportable segment. As a result,
beginning with the third quarter of fiscal year 2020, our drilling services
operations are organized into the following reportable operating business
segments: North America Solutions, Offshore Gulf of Mexico and International
Solutions. All prior period segment disclosures have been recast for these
segment changes. Our real estate operations, our incubator program for new
research and development projects, and our wholly-owned captive insurance
companies are included in "Other." Consolidated revenues and expenses reflect
the elimination of intercompany transactions.

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Self-Insurance

On October 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 to October 1, 2019 will remain recorded within each of the operating
segments' and future adjustments to these claims will continue to be reflected
within the operating segments. Reserves for legacy claims occurring prior to
October 1, 2019, will remain as liabilities in our operating segments until they
have been resolved. Changes in those reserves will be reflected in segment
earnings as they occur. We will continue to utilize the Captive to finance the
risk of loss to equipment and rig property assets. 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 an
external actuarial analysis. These premiums are currently held in a restricted
account, resulting in a transfer of risk from our operating subsidiaries to the
Captive. The actuarial estimated underwriting expenses for the fiscal year ended
September 30, 2020 were approximately $16.4 million and were recorded within
drilling services operating expenses in our Consolidated Statement of
Operations. Intercompany premium revenues and expenses during the fiscal year
ended September 30, 2020 amounted to $36.9 million, which were eliminated upon
consolidation. These intercompany insurance premiums are reflected as segment
operating expenses within the North America Solutions, Offshore Gulf of Mexico,
and International Solutions reportable operating segments and are reflected as
intersegment sales within "Other." The Company self-insures 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
reimburse the Company's health plan for claims that exceed $50,000. This program
will also be reviewed at the end of each policy year by an outside actuary. 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.
Dispositions
During the fiscal year ended September 30, 2020, we closed on the sale of a
portion of our real estate investment portfolio, including six industrial sites,
for total consideration, net of selling related expenses, of $40.7 million and
an aggregate net book value of $13.5 million, resulting in a gain of $27.2
million, which is included within Gain on Sale of Assets on our Consolidated
Statement of Operations.
In December 2019, we closed on the sale of a wholly-owned subsidiary of
Helmerich & 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 North America Solutions operating 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 second quarter of fiscal year 2020, several significant economic
events took place that severely impacted the current demand on drilling
services, including the significant drop in 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 During the second quarter of fiscal
year 2020, 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 FlexRig® 3 asset
group and our FlexRig® 5 asset group creating a new "Domestic super-spec
FlexRig®" asset group, while combining the legacy Domestic conventional asset
group, FlexRig® 4 asset group and FlexRig® 3 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.
As a result of these indicators, we performed impairment testing at March 31,
2020 on each of our Domestic non-super-spec and International conventional,
FlexRig® 3, and FlexRig® 4 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 Consolidated Statement of Operations
for the fiscal year ended September 30, 2020. Of the $441.4 million total
impairment charge recorded, $292.4 million and $149.0 million was recorded in
the North America Solutions and International Solutions segments, respectively.
Impairment was measured as the amount by which the net book value of each asset
group exceeds its fair value. No further impairments were recognized in fiscal
year 2020.
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
Accounting Standards Codification ("ASC") Topic 820 Fair Value Measurement and
Disclosures as they are based upon unobservable inputs and primarily rely on
management assumptions and forecasts.

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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.
As of March 31, 2020, 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
Consolidated Statement of Operations for the fiscal year ended September 30,
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 the North America Solutions and International Solutions segments,
respectively.
Goodwill 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 above, during the second quarter of fiscal year 2020, 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 Consolidated Statement of Operations during the fiscal year ended
September 30, 2020.
The recoverable amount of the H&P Technologies reporting unit was determined
based on a fair value calculation which uses cash flow projections based on the
Company's financial projections presented to the Board covering a five-year
period, and a discount rate of 14 percent. Cash flows beyond that five-year
period were extrapolated using the fifth-year data with no implied growth
factor. The reporting unit level is defined as an operating segment or one level
below an operating segment.
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 projections presented to the Board
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.
Results of Operations for the Fiscal Years Ended September 30, 2020 and 2019
Consolidated Results of Operations
All per share amounts included in the Results of Operations discussion are
stated on a diluted basis. Except as specifically discussed, the following
results of operations pertain only to our continuing operations.
Net Loss We reported a loss from continuing operations of $496.4 million ($4.62
loss per diluted share) from operating revenues of $1.8 billion for the fiscal
year ended September 30, 2020 compared to a loss from continuing operations of
$32.5 million ($0.33 loss per diluted share) from operating revenues of $2.8
billion for the fiscal year ended September 30, 2019. Included in the net loss
for the fiscal year ended September 30, 2020 is income of $1.9 million ($0.02
impact per diluted share) from discontinued operations. Including discontinued
operations, we recorded a net loss of $494.5 million ($4.60 loss per diluted
share) for the fiscal year ended September 30, 2020 compared to a net loss of
$33.7 million ($0.34 loss per diluted share) for the fiscal year ended
September 30, 2019.
Revenue Consolidated operating revenues were $1.8 billion in fiscal year 2020
and $2.8 billion in fiscal year 2019, including early termination revenue of
$73.4 million and $11.3 million in each respective fiscal year. Excluding early
termination revenue, operating revenue decreased $1.1 billion in fiscal year
2020 compared to fiscal year 2019. The decrease in fiscal year 2020 from fiscal
year 2019 was driven by lower activity and pricing as a result of the collapse
in oil prices that occurred in March 2020, which drove our customers to quickly
reduce rig activity beginning in the second half of March 2020 and continuing
throughout the remainder of fiscal year 2020.
Direct Operating Expenses, Excluding Depreciation and Amortization Direct
operating expenses in fiscal year 2020 were $1.2 billion, compared with $1.8
billion in fiscal year 2019. The decrease in fiscal year 2020 from fiscal year
2019 was primarily attributable to the previously-mentioned lower activity
levels.
Depreciation and Amortization Depreciation and amortization expense was $481.9
million in fiscal year 2020 and $562.8 million in fiscal year 2019. The decrease
in depreciation and amortization during fiscal year ended September 30, 2020
compared to fiscal year ended September 30, 2019 was primarily attributable to
the lower carrying cost of our impaired assets. Depreciation and amortization
includes amortization of intangible assets of $7.2 million and $5.8 million in
fiscal years 2020 and 2019, respectively, and abandonments of equipment of $4.0
million and $11.4 million in fiscal years 2020 and 2019, respectively.

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Research and Development For the fiscal years ended September 30, 2020 and 2019,
we incurred $21.6 million and $27.5 million, respectively, of research and
development expenses. The decrease in expense was primarily due to reduced
spending related to the development of rotary steerable system tools given the
December 2019 sale of TerraVici.
Selling, General and Administrative Expense Selling, general and administrative
expenses decreased to $167.5 million in the fiscal year ended September 30, 2020
compared to $194.4 million in the fiscal year ended September 30, 2019. The
$26.9 million decrease in fiscal year 2020 compared to fiscal year 2019 is
primarily due to lower accrued variable compensation expense and a reduction of
staffing levels that was implemented in third quarter of fiscal year 2020.
Asset Impairment During the fiscal year ended September 30, 2020, we impaired
several assets, including inventory, property, plant and equipment, and
goodwill, which resulted in a non-cash impairment charge of $563.2 million
($437.5 million, net of tax, or $5.21 per diluted share), which is included in
Asset Impairment Charge on the Consolidated Statement of Operations.
Comparatively, during the fiscal year ended September 30, 2019, mainly driven by
the downsizing of our fleet of FlexRig® 4 drilling rigs, we wrote down excess
capital spares and drilling support equipment, which had an aggregate net book
value of $235.3 million, and as a result, an asset impairment charge of $224.3
million ($195.0 million, net of tax, or $1.78 per diluted share) was recorded in
our Consolidated Statements of Operations.
Restructuring Charges Beginning in the third quarter of fiscal year 2020, we
implemented cost controls and began evaluating further measures to respond to
the combination of weakened commodity prices, uncertainties related to the
COVID-19 pandemic, and the resulting market volatility. We commenced a number of
restructuring efforts as a result of this evaluation, which included, among
other things, a reduction in our capital allocation plans, changes to our
organizational structure, and a reduction of staffing levels. For the fiscal
year ended September 30, 2020, we incurred $16.0 million in restructuring
charges.
Interest and Dividend Income Interest and dividend income was $7.3 million and
$9.5 million in fiscal years 2020 and 2019, respectively. The decrease in
interest and dividend income in fiscal year 2020 was primarily due to lower
interest rates.
Interest Expense Interest expense totaled $24.5 million in fiscal year 2020 and
$25.2 million in fiscal year 2019. Interest expense is primarily attributable to
fixed­rate debt outstanding.
Income Taxes We had an income tax benefit of $140.1 million in fiscal year 2020
compared to an income tax benefit of $18.7 million in fiscal year 2019. The
effective income tax rate was 22.0 percent in fiscal year 2020 compared to
36.5 percent in fiscal year 2019. The effective rates differ from the U.S.
federal statutory rate (21.0 percent for fiscal years 2020 and 2019) due to
non-deductible permanent items, state and foreign income taxes, and adjustments
to the deferred state income tax rate.
Deferred income taxes are provided for temporary differences between the
financial reporting basis and the tax basis of our assets and liabilities.
Recoverability of any tax assets are evaluated, and necessary allowances are
provided. The carrying values of the net deferred tax assets are based on
management's judgments using certain estimates and assumptions that we will be
able to generate sufficient future taxable income in certain tax jurisdictions
to realize the benefits of such assets. If these estimates and related
assumptions change in the future, additional valuation allowances may be
recorded against the deferred tax assets resulting in additional income tax
expense in the future. See Note 9-Income Taxes to our Consolidated Financial
Statements for additional income tax disclosures.
Discontinued Operations Expenses incurred within the country of Venezuela are
reported as discontinued operations. Our wholly-owned subsidiaries, HPIDC and
Helmerich & Payne de Venezuela, C.A., filed a lawsuit in the United States
District Court for the District of Columbia on September 23, 2011 against the
Bolivarian Republic of Venezuela, Petroleos de Venezuela, S.A. and PDVSA
Petroleo, S.A. We are seeking damages for the taking of our Venezuelan drilling
business in violation of international law and for breach of contract. While
there exists the possibility of realizing a recovery, we are currently unable to
determine the timing or amounts we may receive, if any, or the likelihood of
recovery. In March 2016, the Venezuelan government implemented the previously
announced plans for a new foreign currency exchange system. Activity within
discontinued operations for both fiscal years 2020 and 2019 is primarily a
result of the impact of exchange rate fluctuations due to the remeasurement of
uncertain tax liabilities.

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North America Solutions
The following table presents certain information with respect to our North
America Solutions reportable segment:
(in thousands, except operating statistics)     2020           2019 (1)      % Change
Operating revenues                          $ 1,474,380$ 2,426,191      (39.2 )%
Direct operating expenses                       942,277        1,532,576      (38.5 )
Depreciation                                    438,039          504,466      (13.2 )
Research and development                         20,699           25,164      (17.7 )
Selling, general and administrative expense      53,714           66,179      (18.8 )
Asset impairment charge                         406,548          216,908       87.4
Restructuring charges                             7,005                -          -
Segment operating income (loss)             $  (393,902 )$    80,898     (586.9 )
Operating Statistics (2):
Revenue days                                     49,003           81,805      (40.1 )
Average rig revenue per day (3)             $    26,589$    26,167

1.6

Average rig expense per day (3)                  15,730           15,243    

3.2

Average rig margin per day (3)              $    10,859$    10,924       (0.6 )
Number of rigs at the end of period                 262              299      (12.4 )
Rig utilization                                      47 %             67 %    (29.9 )

(1) Operations previously reported within the H&P Technologies reportable segment

are now managed and presented within the North America Solutions reportable

segment.

(2) These operating metrics allow investors to analyze the various components of

segment financial results in terms of volume, revenue per unit, cost per unit

and margin per unit. Management uses these metrics to analyze historical

segment financial results and as the key inputs for forecasting and budgeting

segment financial results.

(3) Operating statistics for per day revenue, expense and margin do not include

reimbursements of "out­of­pocket" expenses of $171.5 million and $285.6

million for fiscal years 2020 and 2019, respectively.



Operating Income (Loss) The North America Solutions segment had an operating
loss of $393.9 million for the fiscal year ended September 30, 2020 compared to
operating income of $80.9 million for the fiscal year ended September 30,
2019. The decrease was primarily driven by increased asset impairment charges
and reduced rig activity in fiscal year 2020. Revenues were $1.5 billion and
$2.4 billion in fiscal year 2020 and 2019, respectively. Included in revenues
for fiscal year 2020 is early termination revenue of $68.8 million compared to
$6.4 million during 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 per day revenue of $1,404 and $78 for fiscal
years 2020 and 2019, respectively, average rig revenue per day decreased by $904
to $25,185 primarily due to a portion of our contracted rigs operating in an
idle-but-contracted state during the third and fourth quarters of fiscal year
2020, with lower average daily revenue and average daily expense and lower
pricing for rigs working in the spot market. Compared to fiscal year 2019, our
revenue days declined by 40.1 percent. This decline was initially driven by the
collapse in oil prices that occurred in March of 2020, which led our customers
to quickly reduce rig activity beginning in the second half of March 2020 and
continuing throughout fiscal year 2020. Our level of contracted rigs hit a low
of 62 rigs in August of 2020 before modestly recovery to 69 rigs at fiscal year
end.
Direct Operating Expenses Average rig expense per day increased $487 to $15,730
during the fiscal year ended September 30, 2020 compared to the fiscal year
ended September 30, 2019. The increase is due to higher self-insurance expenses
and idle rig expenses, partially offset by the previously mentioned effect of
idle-but-contracted rigs.
Depreciation Depreciation expense decreased to $438.0 million during the fiscal
year ended September 30, 2020 compared to the fiscal year ended September 30,
2019. The decrease in depreciation during fiscal year ended September 30, 2020
compared to fiscal year ended September 30, 2019 was primarily attributable to
the lower carrying cost of our impaired assets. Depreciation includes charges
for abandoned equipment of $2.5 million and $10.6 million for the fiscal years
ended September 30, 2020 and 2019, respectively. In the fiscal year ended
September 30, 2020, depreciation expense included $1.5 million of accelerated
depreciation for components on rigs that are scheduled for conversion in fiscal
year 2021 as compared to $4.7 million of accelerated depreciation for fiscal
year ended September 30, 2019.

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Asset Impairment Charge During the fiscal year ended September 30, 2020, we
impaired our Domestic non-super-spec asset group, in addition to in-progress
drilling equipment and rotational inventory. This resulted in an aggregate
non-cash impairment charge of $368.2 million ($284.1 million, net of tax, or
$3.41 per diluted share) for the fiscal year ended September 30, 2020. During
the fiscal year ended September 30, 2020, we also recorded a goodwill impairment
loss of $38.3 million ($29.6 million, net of tax, or $0.35 per diluted share).
Comparatively, during the fiscal year ended September 30, 2019, we recorded an
asset impairment charge of $216.9 million ($188.6 million, net of tax, or $1.72
per diluted share), mainly driven by the downsizing of our fleet of FlexRig® 4
drilling rigs. These non-cash impairment charges are included in Asset
Impairment Charge on the Consolidated Statements of Operations for the fiscal
years ended September 30, 2020 and 2019.
Restructuring Charges For the fiscal year ended September 30, 2020, we incurred
$7.0 million in restructuring charges primarily comprised of one-time severance
benefits to employees as a result of headcount reductions that occurred during
the third fiscal quarter of 2020.
Utilization Rig utilization decreased to 47 percent for the fiscal year ended
September 30, 2020 compared to 67 percent during the fiscal year ended
September 30, 2019. In addition to the previously mentioned reduction in revenue
days, we decommissioned two rigs and 35 rigs from our legacy Domestic
Conventional asset group and FlexRig® 3 asset group, respectively effective as
of April 30, 2020. At September 30, 2020, 69 out of 262 existing rigs in the
North America Solutions segment were contracted. Of the 69 contracted rigs, 54
were under fixed-term contracts and 15 were working in the spot market.
Offshore Gulf of Mexico
The following table presents certain information with respect to our Offshore
Gulf of Mexico reportable segment:
(in thousands, except operating statistics)    2020           2019        % Change
Operating revenues                          $ 143,149$ 147,635        (3.0 )%
Direct operating expenses                     119,371        114,306         4.4
Depreciation                                   11,681         10,010        16.7
Selling, general and administrative expense     3,365          3,725        (9.7 )
Restructuring charges                           1,254              -           -
Segment operating income                    $   7,478$  19,594       (61.8 )
Operating Statistics (1):
Revenue days                                    1,922          2,163       (11.1 )
Average rig revenue per day (2)             $  45,145$  37,478

20.5

Average rig expense per day (2)                37,410         28,663        

30.5

Average rig margin per day (2)              $   7,735$   8,815       (12.3 )
Number of rigs at the end of period                 8              8           -
Rig utilization                                    66 %           74 %     (10.8 )

(1) These operating metrics allow investors to analyze the various components of

segment financial results in terms of volume, revenue per unit, cost per unit

and margin per unit. Management uses these metrics to analyze historical

segment financial results and as the key inputs for forecasting and budgeting

segment financial results.

(2) Operating statistics for per day revenue, expense and margin do not include

reimbursements of "out­of­pocket" expenses of $30.4 million and $26.4 million

for fiscal years 2020 and 2019, respectively. The operating statistics only

include rigs that we own and exclude offshore platform management and

contract labor service revenues of $26.0 million and $40.1 million, offshore

platform management and contract labor service expenses of $17.0 million and

$25.9 million, and currency revaluation expense of $30.1 thousand and $1.0

thousand for fiscal years 2020 and 2019, respectively.



Operating Income During the fiscal year ended September 30, 2020, the Offshore
Gulf of Mexico segment had operating income of $7.5 million compared to
operating income of $19.6 million for the fiscal year ended September 30, 2019.
This decrease is primarily attributable to 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 commenced
drilling operations during the third quarter of fiscal year 2020. Additionally,
we incurred $4.2 million of bad debt expense during fiscal year 2020.
Revenue Average rig revenue per day increased 20.5 percent to $45,145 in fiscal
year 2020 compared to fiscal year 2019. This was primarily due to 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 per day increased to $37,410
during fiscal year 2020 from $28,663 during fiscal year 2019, primarily due to
factors mentioned above.
Restructuring Charges For the fiscal year ended September 30, 2020, we incurred
$1.3 million in restructuring charges primarily comprised of one-time severance
benefits to employees as a result of headcount reductions that occurred during
the third fiscal quarter of 2020.
Utilization As of September 30, 2020, five of our eight available platform rigs
were under contract, compared to six of our eight available platform rigs as of
September 30, 2019.

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International Solutions
The following table presents certain information with respect to our
International Solutions reportable segment:
(in thousands, except operating statistics)     2020           2019         % Change
Operating revenues                          $  144,185$ 211,731         (31.9 )%
Direct operating expenses                      124,791        157,856         (20.9 )
Depreciation                                    17,531         35,466         (50.6 )
Selling, general and administrative expense      4,565          5,624         (18.8 )
Asset impairment charge                        156,686          7,419       2,012.0
Restructuring charges                            2,980              -             -
Segment operating income (loss)             $ (162,368 )$   5,366      (3,125.9 )
Operating Statistics (1):
Revenue days                                     4,605          6,426         (28.3 )
Average rig revenue per day (2)             $   29,116$  31,269          (6.9 )
Average rig expense per day (2)                 23,066         21,626       

6.7

Average rig margin per day (2)              $    6,050$   9,643         (37.3 )
Number of rigs at the end of period                 32             31           3.2
Rig utilization                                     40 %           55 %       (27.3 )

(1) These operating metrics allow investors to analyze the various components of

segment financial results in terms of volume, revenue per unit, cost per unit

and margin per unit. Management uses these metrics to analyze historical

segment financial results and as the key inputs for forecasting and budgeting

segment financial results.

(2) Operating statistics for per day revenue, expense and margin do not include

reimbursements of "out­of­pocket" expenses of $10.1 million and $10.8 million

for fiscal years 2020 and 2019, respectively. Also excluded are the effects

of currency revaluation expense of $8.5 million and $8.1 million for fiscal

years 2020 and 2019, respectively.



Operating Income (Loss) The International Solutions segment had an operating
loss of $162.4 million for fiscal year 2020 compared to operating income of $5.4
million for fiscal year 2019. The decrease was primarily driven by asset
impairment charges during fiscal year 2020.
Revenue We experienced a 28.3 percent decrease in revenue days when comparing
fiscal year 2020 to fiscal year 2019. The average number of active rigs was 12.6
during fiscal year 2020 compared to 17.6 during fiscal year 2019. Average rig
revenue per day decreased by 6.9 percent primarily due to a shifting rig mix.
Direct Operating Expenses Average rig expense per day increased to $23,066
during fiscal year 2020 as compared to $21,626 during fiscal year 2019. The
increase was driven by lower activity coupled with fixed minimum levels of
country overhead.
Depreciation Depreciation expense decreased to $17.5 million during the fiscal
year ended September 30, 2020 compared to the fiscal year ended September 30,
2019. The decrease in depreciation during fiscal year ended September 30, 2020
compared to fiscal year ended September 30, 2019 was primarily attributable to
the lower carrying cost of our impaired assets.
Asset Impairment Charge During the fiscal year ended September 30, 2020, we
impaired our International Conventional, FlexRig® 3, and FlexRig® 4 asset
groups, in addition to rotational inventory. This resulted in an aggregate
non-cash impairment charge of $156.7 million ($123.8 million, net of tax, or
$1.45 per diluted share), which is included in Asset Impairment Charge on the
Consolidated Statements of Operations for the fiscal year ended September 30,
2020. Comparatively, during the fiscal year ended September 30, 2019, mainly
driven by the downsizing of our fleet of FlexRig® 4 drilling rigs, we wrote down
capital spares and drilling support equipment and, as a result, we recorded an
asset impairment charge of $7.4 million, in our Consolidated Statements of
Operations for the fiscal year ended September 30, 2019.
Restructuring Charges For the fiscal year ended September 30, 2020, we incurred
$3.0 million in restructuring charges primarily comprised of one-time severance
benefits to employees as a result of headcount reductions that occurred during
the third fiscal quarter of 2020.
Utilization Our utilization decreased during fiscal year 2020 compared to fiscal
year 2019. At September 30, 2020, five out of 32 existing rigs in the
International Solutions segment were contracted. Of the five contracted rigs,
two were under fixed-term contracts and three were working in the spot market.

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Other Operations
Results of our other operations, excluding corporate selling, general and
administrative costs, corporate restructuring, and corporate depreciation, are
as follows:
(in thousands)                                2020         2019       % Change
Operating revenues                          $ 49,114$ 12,933      279.8  %
Direct operating expenses                     41,027        5,382      662.3
Depreciation and amortization                  1,241        1,523      (18.5 )
Research and development                         946        2,303      (58.9 )
Selling, general and administrative expense    1,237          350      253.4
Restructuring charges                            260            -          -
Operating income                            $  4,403$  3,375       30.5


Operating Income On October 1, 2019, we elected to utilize the Captive to insure
the deductibles for our workers' compensation, general liability and automobile
liability claims programs. Direct operating costs include accruals for estimated
losses of approximately $16.4 million allocated to the Captive during the fiscal
year ended September 30, 2020. Intercompany premium revenues recorded by the
Captive during the fiscal year ended September 30, 2020 amounted to $36.9
million, which were eliminated upon consolidation.
Results of Operations for the Fiscal Years Ended September 30, 2019 and 2018
A discussion of our results of operations for the fiscal year ended
September 30, 2019 compared to the fiscal year ended September 30, 2018 is
included in Part II, Item 7- "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of our   Annual Report on Form 10-K for the
fiscal year ended September 30, 2019, filed with the SEC on November 15, 2019  ,
and is incorporated by reference into this Form 10-K.
Liquidity and Capital Resources
Sources of Liquidity
Our sources of available liquidity include existing cash balances on hand, cash
flows from operations, and availability under the 2018 Credit Facility. Our
liquidity requirements include meeting ongoing working capital needs, funding
our capital expenditure projects, paying dividends declared, and repaying our
outstanding indebtedness. Historically, we have financed operations primarily
through internally generated cash flows. During periods when internally
generated cash flows are not sufficient to meet liquidity needs, we may utilize
cash on hand, borrow from available credit sources, access capital markets or
sell our marketable securities. Likewise, if we are generating excess cash
flows, we may invest in highly rated short­term money market and debt
securities. These investments can include U.S.Treasury securities, U.S. Agency
issued debt securities, corporate bonds and commercial paper, certificates of
deposit and money market funds. Our marketable securities are recorded at fair
value.
We may seek to access the debt and equity capital markets from time to time to
raise additional capital, increase liquidity as necessary, fund our additional
purchases, exchange or redeem senior notes, or repay any amounts under the 2018
Credit Facility. Our ability to access the debt and equity capital markets
depends on a number of factors, including our credit rating, market and industry
conditions and market perceptions of our industry, general economic conditions,
our revenue backlog and our capital expenditure commitments.
The effects of the COVID-19 outbreak and the oil price collapse in 2020 have had
significant adverse consequences for general economic, financial and business
conditions, as well as for our business and financial position and the business
and financial position of our customers, suppliers and vendors and may, among
other things, impact our ability to generate cash flows from operations, access
the capital markets on acceptable terms or at all and affect our future need or
ability to borrow under the 2018 Credit Facility. In addition to our potential
sources of funding, the effects of such global events may impact our liquidity
or need to alter our allocation or sources of capital, implement additional cost
reduction measures and further change our financial strategy. Although the
COVID-19 outbreak and the oil price collapse could have a broad range of effects
on our sources and uses of liquidity, the ultimate effect thereon, if any, will
depend on future developments, which cannot be predicted at this time.
Cash Flows
Our cash flows fluctuate depending on a number of factors, including, among
others, the number of our drilling rigs under contract, the dayrates we receive
under those contracts, the efficiency with which we operate our drilling units,
the timing of collections on outstanding accounts receivable, the timing of
payments to our vendors for operating costs, and capital expenditures, all of
which was impacted by the COVID-19 outbreak and the oil price collapse in 2020.
As our revenues increase, net working capital is typically a use of capital,
while conversely, as our revenues decrease, net working capital is typically a
source of capital. To date, general inflationary trends have not had a material
effect on our operating margins.

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As of September 30, 2020, we had $487.9 million of cash and cash equivalents on
hand and $89.3 million of short-term investments. Our cash flows for the fiscal
years ended September 30, 2020, 2019 and 2018 are presented below:
                                                            Year Ended September 30,
(in thousands)                                         2020           2019           2018
Net cash provided (used) by:
Operating activities                                $ 538,881$ 855,751$  557,852
Investing activities                                  (87,885 )     (422,636 )     (472,362 )
Financing activities                                 (297,220 )     (376,329 )     (319,814 )
Net increase (decrease) in cash and cash
equivalents and restricted cash                     $ 153,776      $  

56,786 $ (234,324 )



Operating Activities
For the purpose of understanding the impact on our Cash Flow from Operations,
net working capital is calculated as current assets, excluding cash and
short-term investments, less current liabilities, excluding dividends payable,
short-term debt and the current portion of long-term debt. Net working capital
was $194.2 million as of September 30, 2020 compared to $381.7 million as of
September 30, 2019. Included in accounts receivable as of September 30, 2020
were $5.2 million of early termination fees and $42.4 million of income tax
receivables. Cash flows provided by operating activities was $538.9 million in
fiscal year 2020 compared to $855.8 million fiscal year 2019. The decrease in
cash provided by operating activities is primarily driven by lower operating
activity and a favorable variance in the use of working capital. Cash flows
provided by operating activities in fiscal year 2018 was $557.9 million. The
$297.9 million increase compared to fiscal year 2019 was primarily due to a
decrease in working capital.
Investing Activities
Capital Expenditures Our investing activities are primarily related to capital
expenditures for our fleet. Our capital expenditures were $140.8 million, $458.4
million and $466.6 million in fiscal years 2020, 2019 and 2018, respectively.
The year-over-year decrease in capital expenditures is driven by a decrease in
super-spec upgrades and lower maintenance capital expenditure levels as a result
of lower activity. Our fiscal year 2021 capital spending is currently estimated
to be between $85 and $105 million. This estimate includes normal capital
maintenance requirements, information technology spending and a limited number
of upgrades primarily related to augmenting the capabilities of our existing rig
fleet.
Acquisition of Business We paid $16.2 million and $47.9 million, net of cash
acquired, during the 2019 and 2018 fiscal year, respectively, for the
acquisition of drilling technology companies.
Sale of Assets Our proceeds from asset sales totaled $78.4 million, $50.8
million and $44.4 million in fiscal year 2020, 2019 and 2018, respectively. The
current year increase is primarily driven by the sale of a portion of our real
estate investment portfolio. During the fiscal year ended September 30, 2020, we
closed on the sale of a portion of our real estate investment portfolio,
including six industrial sites, for total consideration, net of selling related
expenses, of $40.7 million.
Sale of Subsidiary In December 2019, we closed on the sale of a wholly-owned
subsidiary of HPIDC, 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.
Marketable Securities In September 2019, we sold our remaining 1.6 million
shares in Valaris, previously known as Ensco Rowan plc, for total proceeds of
approximately $12.0 million. As of September 30, 2020, our marketable securities
consist primarily of common shares in Schlumberger, Ltd. that, at the close of
fiscal year 2020, had a fair value of $7.3 million. The value of our securities
are subject to fluctuation in the market and may vary considerably over time.
Our marketable securities are recorded at fair value on our balance sheet.
Our equity investment in Schlumberger Ltd. held as of September 30, 2020 is
presented below:
(in thousands, except for share amounts)    Number of Shares     Cost Basis       Market Value
Schlumberger, Ltd.                                  467,500           3,713             7,274


Financing Activities
Repurchase of Shares During fiscal year 2020, we repurchased 1.5 million shares
for $28.5 million compared to one million shares for $42.8 million during fiscal
year 2019.

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Dividends We paid dividends of $2.38, $2.84, and $2.82 per share during fiscal
years 2020, 2019 and 2018, respectively. Total dividends paid were $260.3
million, $313.4 million and $308.4 million in fiscal years 2020, 2019 and 2018,
respectively. On June 3, 2020, we reduced our quarterly cash dividend to $0.25
per share and on September 9, 2020, declared a cash dividend in that amount for
shareholders of record on November 13, 2020, payable on December 1, 2020. The
declaration and amount of future dividends is at the discretion of the Board and
subject to our financial condition, results of operations, cash flows, and other
factors the Board deems relevant.
Credit Facilities
On November 13, 2018, we entered into a credit agreement by and among the
Company, as borrower, Wells Fargo Bank, National Association, as administrative
agent, and the lenders party thereto, which was amended on November 13, 2019,
providing for an unsecured revolving credit facility (the "2018 Credit
Facility") that is set to mature on November 13, 2024. The 2018 Credit Facility
has $750.0 million in aggregate availability with a maximum of $75.0 million
available for use as letters of credit. The 2018 Credit Facility also permits
aggregate commitments under the facility to be increased by $300.0 million,
subject to the satisfaction of certain conditions and the procurement of
additional commitments from new or existing lenders. The borrowings under the
2018 Credit Facility accrue interest at a spread over either the London
Interbank Offered Rate ("LIBOR") or the Base Rate. We also pay a commitment fee
on the unused balance of the facility. Borrowing spreads as well as commitment
fees are determined based on the debt rating for senior unsecured debt of the
Company, as determined by Moody's and Standard & Poor's. The spread over LIBOR
ranges from 0.875 percent to 1.500 percent per annum and commitment fees range
from 0.075 percent to 0.200 percent per annum. Based on the unsecured debt
rating of the Company on September 30, 2020, the spread over LIBOR would have
been 1.125 percent had borrowings been outstanding under the 2018 Credit
Facility and commitment fees are 0.125 percent. There is a financial covenant in
the 2018 Credit Facility that requires us to maintain a total debt to total
capitalization ratio of less than or equal to 50 percent. The 2018 Credit
Facility contains additional terms, conditions, restrictions and covenants that
we believe are usual and customary in unsecured debt arrangements for companies
of similar size and credit quality, including a limitation that priority debt
(as defined in the credit agreement) may not exceed 17.5 percent of the net
worth of the Company. At September 30, 2020, we were in compliance with all debt
covenants, and we anticipate that we will continue to be in compliance during
the next quarter of fiscal year 2021. As of September 30, 2020, there were no
borrowings or letters of credit outstanding, leaving $750.0 million available to
borrow under the 2018 Credit Facility.
As of September 30, 2020, we had two separate outstanding letters of credit with
banks, in the amounts of $24.8 million and $2.1 million, respectively.
As of September 30, 2020, we also had a $20.0 million unsecured standalone line
of credit facility, for the purpose of obtaining the issuance of international
letters of credit, bank guarantees, and performance bonds. Of the $20.0 million,
$4.3 million of financial guarantees were outstanding as of September 30, 2020.
Subsequent to September 30, 2020, $2.6 million in financial guarantees have
expired.
The applicable agreements for all unsecured debt contain additional terms,
conditions and restrictions that we believe are usual and customary in unsecured
debt arrangements for companies that are similar in size and credit quality.
Senior Notes
Exchange Offer, Consent Solicitation and Redemption
On December 20, 2018, we settled an offer to exchange (the "Exchange Offer") any
and all outstanding 4.65 percent unsecured senior notes due 2025 of HPIDC (the
"HPIDC 2025 Notes") for (i) up to $500.0 million aggregate principal amount of
new 4.65 percent unsecured senior notes due 2025 of the Company (the "Company
2025 Notes"), with registration rights, and (ii) cash, pursuant to which we
issued approximately $487.1 million in aggregate principal amount of Company
2025 Notes. Interest on the Company 2025 Notes is payable semi-annually on March
15 and September 15 of each year, commencing March 15, 2019. The debt issuance
costs are being amortized straight-line over the stated life of the obligation,
which approximates the effective interest method.
Following the consummation of the Exchange Offer, HPIDC had outstanding
approximately $12.9 million in aggregate principal amount of HPIDC 2025 Notes.
On December 20, 2018, HPIDC, the Company and Wells Fargo Bank, National
Association, as trustee, entered into a supplemental indenture to the indenture
governing the HPIDC 2025 Notes to adopt certain proposed amendments pursuant to
a consent solicitation conducted concurrently with the Exchange Offer.
On September 27, 2019, we redeemed the remaining approximately $12.9 million in
aggregate principal amount of HPIDC 2025 Notes for approximately $14.6 million,
including accrued interest and a prepayment premium. Simultaneously with the
redemption of the HPIDC 2025 Notes, HPIDC was released as a guarantor under the
Company 2025 Notes and the 2018 Credit Facility. As a result of such release,
H&P is the only obligor under the Company 2025 Notes and the 2018 Credit
Facility.

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Repurchase of Common Shares
We have an evergreen authorization from the Board for the purchase of up to four
million common shares in any calendar year. During the fiscal year ended
September 30, 2020, we purchased 1.5 million common shares at an aggregate cost
of $28.5 million, which are held as treasury shares. We purchased 1.0 million
common shares at an aggregate cost of $42.8 million, which are held as treasury
shares, during the fiscal year ended September 30, 2019. We had no purchases of
common shares during the fiscal year ended September 30, 2018.
Future Cash Requirements
Our operating cash requirements, scheduled debt repayments, interest payments,
any declared dividends, and estimated capital expenditures for fiscal year 2021
are expected to be funded through current cash and cash to be provided from
operating activities. However, there can be no assurance that we will continue
to generate cash flows at current levels. On June 3, 2020, we reduced our
quarterly cash dividend to $0.25 per share. If needed, we may decide to obtain
additional funding from our $750.0 million 2018 Credit Facility. Our
indebtedness under our unsecured senior notes totaled $487.1 million at
September 30, 2020 and matures on March 19, 2025.
As of September 30, 2020, we had a $650.7 million deferred tax liability on our
Consolidated Balance Sheets, primarily related to temporary differences between
the financial and income tax basis of property, plant and equipment. Our
increased levels of capital expenditures over the last several years have been
subject to accelerated depreciation methods (including bonus depreciation)
available under the Internal Revenue Code of 1986, as amended, enabling us to
defer a portion of cash tax payments to future years. Future levels of capital
expenditures and results of operations will determine the timing and amount of
future cash tax payments. We expect to be able to meet any such obligations
utilizing cash and investments on hand, as well as cash generated from ongoing
operations.
The long­term debt to total capitalization ratio was 12.8 percent at
September 30, 2020 compared to 10.8 percent at September 30, 2019. For
additional information regarding debt agreements, refer to Note 8-Debt to our
Consolidated Financial Statements.
Off-balance Sheet Arrangements
We have no off-balance sheet arrangements as that term is defined in Item
303(a)(4)(ii) of Regulation S-K. For information regarding our drilling contract
backlog, see Item 1- "Business - Contract Backlog".
Material Commitments
Our contractual obligations as of September 30, 2020 are summarized in the table
below:
                                                                      Payments due by year
(in thousands)                   Total          2021          2022          2023          2024          2025          Thereafter
Long-term debt                $ 487,148      $      -      $      -      $      -      $      -      $ 487,148      $          -
Interest (1)                    101,934        22,652        22,652        22,652        22,652         11,326                 -
Operating leases (2)             38,166        11,680         8,133         7,466         7,018          3,231               638
Purchase obligations (3)          2,692         2,692             -             -             -              -                 -

Total contractual obligations $ 629,940$ 37,024$ 30,785$ 30,118$ 29,670$ 501,705$ 638

(1) Interest on fixed­rate debt was estimated based on principal maturities. See

Note 8-Debt to our Consolidated Financial Statements.

(2) See Note 6-Leases to our Consolidated Financial Statements.

(3) See Note 17-Commitments and Contingencies to our Consolidated Financial

Statements.



The above table does not include obligations for our pension plan or amounts
recorded for uncertain tax positions. In fiscal years 2020 and 2019, we did not
make any contributions to the pension plan. Contributions may be made in fiscal
year 2021 to fund unexpected distributions in lieu of liquidating pension
assets. Future contributions beyond fiscal year 2021 are difficult to estimate
due to multiple variables involved.
At September 30, 2020, we had $16.3 million recorded for uncertain tax positions
and related interest and penalties. However, the timing of such payments to the
respective taxing authorities cannot be estimated at this time. Income taxes are
more fully described in Note 9-Income Taxes to our Consolidated Financial
Statements.

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Critical Accounting Policies and Estimates
Accounting policies that we consider significant are summarized in Note
2-Summary of Significant Accounting Policies, Risks and Uncertainties to our
Consolidated Financial Statements included in Part II, Item 8- "Financial
Statements and Supplementary Data" of this Form 10-K. The preparation of our
financial statements in conformity with U.S. GAAP requires management to make
certain estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosures of contingent assets and liabilities. Estimates are based on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. These estimates and assumptions are
evaluated on an on­going basis. Actual results may differ from these estimates
under different assumptions or conditions. The following is a discussion of the
critical accounting policies and estimates used in our financial statements.
Property, Plant and Equipment
Property, plant and equipment, including renewals and betterments, are
capitalized at cost, while maintenance and repairs are expensed as incurred. The
interest expense applicable to the construction of qualifying assets is
capitalized as a component of the cost of such assets. We account for the
depreciation of property, plant and equipment using the straight­line method
over the estimated useful lives of the assets considering the estimated salvage
value of the property, plant and equipment. Both the estimated useful lives and
salvage values require the use of management estimates. Certain events, such as
unforeseen changes in operations, technology or market conditions, could
materially affect our estimates and assumptions related to depreciation or
result in abandonments. For the fiscal years presented in this Form 10-K, no
significant changes were made to the determinations of useful lives or salvage
values. Upon retirement or other disposal of fixed assets, the cost and related
accumulated depreciation are removed from the respective accounts and any gains
or losses are recorded in the results of operations.
Impairment of Long­lived Assets, Goodwill and Other Intangible Assets
Management assesses the potential impairment of our long­lived assets and
finite-lived intangibles whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Changes that could prompt such
an assessment may include equipment obsolescence, changes in the market demand,
periods of relatively low rig utilization, declining revenue per day, declining
cash margin per day, completion of specific contracts, change in technology
and/or overall changes in general market conditions. If a review of the
long­lived assets and finite-lived intangibles indicates that the carrying value
of certain of these assets or asset groups is more than the estimated
undiscounted future cash flows, an impairment charge is made, as required, to
adjust the carrying value to the estimated fair value. Cash flows are estimated
by management considering factors such as prospective market demand, recent
changes in rig technology and its effect on each rig's marketability, any cash
investment required to make a rig marketable, suitability of rig size and makeup
to existing platforms, and competitive dynamics including utilization. The fair
value of drilling rigs is determined based upon either an income approach using
estimated discounted future cash flows, a market approach considering factors
such as recent market sales of rigs of other companies and our own sales of
rigs, appraisals and other factors, a cost approach utilizing reproduction costs
new as adjusted for the asset age and condition, and/or a combination of
multiple approaches. The use of different assumptions could increase or decrease
the estimated fair value of assets and could therefore affect any impairment
measurement.
We review goodwill for impairment annually in the fourth fiscal quarter or more
frequently if events or changes in circumstances indicate it is more likely than
not that the carrying amount of the reporting unit holding such goodwill may
exceed its fair value. We initially assess goodwill for impairment based on
qualitative factors to determine whether the existence of events or
circumstances leads to a determination that it is more likely than not that the
fair value of one of our reporting units is greater than its carrying amount.
If further testing is necessary or a quantitative test is elected, we
quantitatively compare the fair value of a reporting unit with its carrying
amount, including goodwill. If the carrying amount exceeds the fair value, an
impairment charge will be recognized in an amount equal to the excess; however,
the loss recognized would not exceed the total amount of goodwill allocated to
that reporting unit.
Self­Insurance Accruals
We self­insure a significant portion of expected losses relating to workers'
compensation, general liability, employer's liability and automobile liability.
Generally, deductibles range from $1 million to $10 million per occurrence
depending on the coverage and whether a claim occurs outside or inside of the
United States. Insurance is purchased over deductibles to reduce our exposure to
catastrophic events but there can be no assurance that such coverage will apply
or be adequate in all circumstances. Estimates are recorded for incurred
outstanding liabilities for workers' compensation and other casualty claims.
Retained losses are estimated and accrued based upon our estimates of the
aggregate liability for claims incurred. Estimates for liabilities and retained
losses are based on adjusters' estimates, our historical loss experience and
statistical methods commonly used within the insurance industry that we believe
are reliable. We also engage a third-party actuary to perform a periodic review
of our domestic casualty losses. Nonetheless, insurance estimates include
certain assumptions and management judgments regarding the frequency and
severity of claims, claim development and settlement practices. Unanticipated
changes in these factors may produce materially different amounts of expense
that would be reported under these programs.

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Table of Contents


Our wholly­owned captive insurance company finances a significant portion of the
physical damage risk on company­owned drilling rigs as well as international
casualty deductibles. An actuary reviews our captive losses on an annual basis.
We insure working land rigs and related equipment at values that approximate the
current replacement costs on the inception date of the policies. However, we
self-insure large deductibles under these policies. We also carry insurance with
varying deductibles and coverage limits with respect to stacked rigs, offshore
platform rigs, and "named wind storm" risk in the Gulf of Mexico. We self­insure
a number of other risks, including loss of earnings and business interruption,
and most cyber risks.
Revenue Recognition
Drilling services and solutions revenues are comprised of daywork drilling
contracts for which the related revenues and expenses are recognized as services
are performed and collection is reasonably assured. For certain contracts, we
receive payments contractually designated for the mobilization of rigs and other
drilling equipment. Mobilization payments received, and direct costs incurred
for the mobilization, are deferred and recognized on a straight-line basis as
the drilling service is provided. Costs incurred to relocate rigs and other
drilling equipment to areas in which a contract has not been secured are
expensed as incurred. Reimbursements received for out­of­pocket expenses are
recorded as revenue. For contracts that are terminated prior to the specified
term, early termination payments received by us are recognized as revenues when
all contractual requirements are met.
Income Taxes
Deferred income taxes are accounted for under the liability method, which takes
into account the differences between the basis of the assets and liabilities for
financial reporting purposes and amounts recognized for income tax purposes. Our
net deferred tax liability balance at year-end reflects the application of our
income tax accounting policies and is based on management's estimates, judgments
and assumptions. Included in our net deferred tax liability balance are deferred
tax assets that are assessed for realizability. If it is more likely than not
that a portion of the deferred tax assets will not be realized in a future
period, the deferred tax assets will be reduced by a valuation allowance based
on management's estimates.
In addition, we operate in several countries throughout the world and our tax
returns filed in those jurisdictions are subject to review and examination by
tax authorities within those jurisdictions. We recognize uncertain tax positions
we believe have a greater than 50 percent likelihood of being sustained. We
cannot predict or provide assurance as to the ultimate outcome of any existing
or future assessments.
New Accounting Standards
See Note 2-Summary of Significant Accounting Policies, Risks and
Uncertainties to our Consolidated Financial Statements for recently adopted
accounting standards and new accounting standards not yet adopted.

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