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;
•estimates of our revenues, income, earnings per share, and market share;
•our capital structure and our ability to return cash to stockholders through
dividends or share repurchases;
•the amount and nature of our future capital expenditures and how we expect to
fund our capital expenditures;
•the volatility of future oil and natural gas prices;
•the effects of actions by, or disputes among or between, members of the
Organization of Petroleum Exporting Countries and other oil producing nations
("OPEC+") with respect to production levels or other matters related to the
prices of oil and natural gas;
•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 ongoing
outbreak of a novel strain of coronavirus ("COVID-19") and the oil price
collapse in 2020, 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, including as a
result of the change in the U.S. presidential administration, 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 our 2020 Annual Report on Form 10-K under Item 1A- "Risk Factors,"
and 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 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 December 31, 2020, our drilling rig fleet included a
total of 301 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 7 offshore platform rigs and the International Solutions
segment with 32 rigs as of December 31, 2020. At the close of the first quarter
of fiscal year 2021, we had 102 contracted rigs, of which 64 were under a
fixed-term contract and 38 were working well-to-well, compared to 79 contracted
rigs at September 30, 2020. 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 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. Specifically, during 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, which resulted in
customers decreasing their 2020 capital budgets nearly 50 percent from calendar
year 2019 levels. There was a corresponding dramatic decline in the demand for
land rigs, such that the overall rig count for calendar year 2020 averaged
roughly 430 rigs, significantly lower than in calendar year 2019, which averaged
approximately 940 rigs.
We experienced much of our rig count decline during the second and third
quarters of fiscal year 2020 as our North American Solutions rig count declined
from 195 rigs at December 31, 2019 to a low of 47 rigs in August of 2020.
However, during the fourth quarter of fiscal year 2020, the market experienced a
stabilization of crude oil prices in the $40 per barrel range. Along with this
stabilization, our rig activity began to increase, and increased more
significantly during the first quarter of fiscal year 2021. Our active rig
count, which excludes idle but contracted rigs, doubled from 47 rigs in August
2020 to 94 rigs at December 31, 2020. Additionally, during the first quarter of
fiscal year 2021, crude oil prices improved from the $40 per barrel range to
almost $50 per barrel. At such levels, we believe our customers will have more
robust capital budgets entering into calendar year 2021 and we believe we will
experience a higher level of rig activity in fiscal year 2021 compared to fiscal
year 2020. However, even with the improved levels of commodity prices, the
lasting impacts of the global pandemic remain, which will likely keep prices and
demand for crude oil at relatively low levels compared to pre-pandemic levels.
Consequently, 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
subsequent decline in the demand for land rigs resulted in customers idling a
large portion of our super-spec FlexRig® fleet. At December 31, 2020, we had 142
idle super-spec rigs out of our FlexRig® fleet of 234 super-spec rigs (39
percent utilization).
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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 a significant financial impact on the Company,
including increased costs as a result of labor shortages and logistics
constraints. 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 December 31, 2020, the Company was aware that 310 out of its approximately
4,600 employees have had confirmed cases of COVID-19 since the COVID-19 outbreak
began, of which we believe approximately 60 percent contracted the virus outside
of their work location. We have had no fatalities and 290 of 310 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 7 days with a
negative test or 10 days without a test and no symptoms. 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.
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. The actions we took
during fiscal year 2020 included a reduction to the annual dividend of
approximately $200 million, a reduction of approximately $145 million in the
fiscal year 2020 capital spend, a reduction of over $50 million in fixed
operational overhead, and a reduction of selling, general and administrative
expenses of more than $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 North
America Solutions operations as we continue to take measures to adjust our cost
structure lower based on activity levels. Additionally, we expect further cost
reductions in our International Solutions operations as we work through local
jurisdictional regulations to implement those cost savings measures. The cost
reduction measures could lead to additional restructuring charges in future
periods. At December 31, 2020, the Company had cash and cash equivalents and
short-term investments of $523.8 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
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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 December 31, 2020 and September 30, 2020,
the Company had a net allowance against its accounts receivable of $1.6 million
and $1.8 million, respectively.
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.
Subsequent to March 31, 2020, we adjusted our credit risk monitoring for
specific customers, in response to the economic events described above.
Recent Developments
Gain on Sale of Assets
During the three months ended December 31, 2020, we closed on the sale of an
offshore platform rig within our Offshore Gulf of Mexico operating segment for
total consideration of $12.0 million with an aggregate net book value of
$2.8 million, resulting in a gain of $9.2 million, which is included within Gain
on Sale of Assets on our Unaudited Condensed Consolidated Statements of
Operations.
Contract Backlog
As of December 31, 2020 and September 30, 2020, our contract drilling backlog,
being the expected future dayrate revenue from executed contracts, was $526.6
million and $658.0 million, respectively. These amounts do not include
anticipated contract renewals or expected performance bonuses. The decrease in
backlog at December 31, 2020 from September 30, 2020 is primarily due to
prevailing market conditions causing a decline in the number of longer term
drilling contracts executed and to some extent an increase in the number of
early terminations of contracts. Approximately 35.6 percent of the December 31,
2020 total backlog is reasonably expected to be fulfilled in fiscal year 2022
and thereafter.
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, beginning in
the second quarter of fiscal year 2020, certain of our customers, as well as
those of our competitors, have opted to renegotiate or early terminate existing
drilling contracts. Such renegotiations have included requests to lower the
contract dayrate in exchange for additional terms, temporary stacking of the
rig, and other proposals. During the three months ended December 31, 2020 and
2019, early termination revenue associated with term contracts was $5.8 million
and $0.1 million, respectively.
The following table sets forth the total backlog by reportable segment as of
December 31, 2020 and September 30, 2020, and the percentage of the December 31,
2020 backlog reasonably expected to be fulfilled in fiscal year 2022 and
thereafter:
                                                                                                          Percentage Reasonably
                                                                                                        Expected to be Filled in
                                                                                  September 30,             Fiscal Year 2022
(in millions)                                          December 31, 2020               2020                  and Thereafter
North America Solutions                              $            448.2          $       542.4                            34.9  %
Offshore Gulf of Mexico                                            15.5                   16.7                               -
International Solutions                                            62.9                   98.9                            51.2
                                                     $            526.6          $       658.0


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 drilling services and solutions revenue may continue to decline and
may not be ultimately realized as fixed­term contracts and may, in certain
instances, be terminated without an early termination payment," in our 2020
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 ongoing outbreak of COVID-19, have adversely affected and
are expected to continue to adversely affect our business, financial condition
and results of operations" within our 2020 Annual Report on Form 10-K.
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Results of Operations for the Three Months Ended December 31, 2020 and 2019
Consolidated Results of Operations
Net Income (Loss) We reported a loss from continuing operations of $77.9 million
($0.73 loss per diluted share) from operating revenues of $246.4 million for the
three months ended December 31, 2020 compared to income from continuing
operations of $30.7 million ($0.27 per diluted share) from operating revenues of
$614.7 million for the three months ended December 31, 2019. Included in the net
loss for the three months ended December 31, 2020 is income of $7.5 million
($0.07 per diluted share) from discontinued operations. Including discontinued
operations, we recorded a net loss of $70.4 million ($0.66 loss per diluted
share) for the three months ended December 31, 2020 compared to net income of
$30.6 million ($0.27 per diluted share) for the three months ended December 31,
2019.
Research and Development For the three months ended December 31, 2020 and 2019,
we incurred $5.6 million and $6.9 million, respectively, of research and
development expenses.
Selling, General and Administrative Expense Selling, general and administrative
expenses decreased to $39.3 million during the three months ended December 31,
2020 compared to $49.8 million during the three months ended December 31,
2019. The $10.5 million decrease in fiscal year 2021 compared to the same period
in fiscal year 2020 is primarily due to expense reduction initiatives undertaken
primarily during the second and third quarters of fiscal year 2020.
Income Taxes We had an income tax benefit of $18.1 million for the three months
ended December 31, 2020 (which included discrete tax expense of approximately
$4.1 million related to equity compensation) compared to income tax provision of
$14.1 million (which included discrete tax expense of $2.4 million related to
equity compensation) for the three months ended December 31, 2019. Our statutory
federal income tax rate for fiscal year 2021 is 21.0 percent (before incremental
state and foreign taxes).
North America Solutions Operations Segment
                                                       Three Months Ended December 31,
(in thousands, except operating statistics)                2020              2019 (1)             % Change
Operating revenues                                     $  201,990          $ 524,681                 (61.5)
Direct operating expenses                                 157,309            332,982                 (52.8)
Segment gross margin                                       44,681            191,699                 (76.7)

Research and development                                    5,466              6,749                 (19.0)
Selling, general and administrative expense                11,680             16,746                 (30.3)
Depreciation                                              100,324            116,065                 (13.6)

Restructuring charges                                         139                  -                     -
Segment operating income (loss)                        $  (72,928)         $  52,139                (239.9)
Operating Statistics (2):
Average active rigs                                            81                192                 (57.8)
Number of active rigs at the end of period                     94                195                 (51.8)
Number of available rigs at the end of period                 262                299                 (12.4)
Reimbursements of "out-of-pocket" expenses             $   18,789          $  59,568                 (68.5)


(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 activity, utilization and other key
results. Management uses these metrics to analyze historical segment financial
results and as the key inputs for forecasting and budgeting segment financial
results. Beginning in the first quarter of fiscal year 2021, these operating
metrics replaced previously used per day metrics. As a result, prior year
comparative information is also provided above.
Segment Gross Margin The North America Solutions segment gross margin was $44.7
million for the three months ended December 31, 2020 compared to $191.7 million
in the same period of fiscal year 2020. The decrease was primarily driven by
lower activity levels. Revenues were $202.0 million and $524.7 million in the
three months ended December 31, 2020 and 2019, respectively. Included in
revenues for the three months ended December 31, 2020 is early termination
revenue of $5.8 million compared to $0.1 million during the same period of
fiscal year 2020. 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 unsatisfactory performance by us).
Revenue We experienced a 61.5 percent decrease in operating revenue when
comparing the three months ended December 31, 2020 to the three months ended
December 31, 2019. The decline in operating revenue is primarily due to lower
activity levels during the three months ended December 31, 2020.
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Direct Operating Expenses Direct operating expenses decreased to $157.3 million
during the three months ended December 31, 2020 as compared to $333.0 million
during the three months ended December 31, 2019. The decrease was due to the
factors mentioned above.
Depreciation Depreciation decreased to $100.3 million during the three months
ended December 31, 2020 as compared to $116.1 million during the three months
ended December 31, 2019. The decrease was primarily attributable to the lower
carrying cost of our impaired assets.
Offshore Gulf of Mexico Operations Segment
                                                             Three Months Ended December 31,
(in thousands, except operating statistics)                      2020                2019               % Change
Operating revenues                                           $   32,273          $  40,255                (19.8)
Direct operating expenses                                        26,256             30,045                (12.6)
Segment gross margin                                              6,017             10,210                (41.1)

Selling, general and administrative expense                         669              1,137                (41.2)
Depreciation                                                      2,606              2,745                 (5.1)

Segment operating income                                     $    2,742          $   6,328                (56.7)
Operating Statistics (1):
Average active rigs                                                   5                  6                (16.7)
Number of active rigs at the end of period                            4                  6                (33.3)
Number of available rigs at the end of period                         7                  8                (12.5)
Reimbursements of "out-of-pocket" expenses                   $    7,868          $   9,901                (20.5)


(1)These operating metrics allow investors to analyze the various components of
segment financial results in terms of activity, utilization and other key
results. Management uses these metrics to analyze historical segment financial
results and as the key inputs for forecasting and budgeting segment financial
results. Beginning in the first quarter of fiscal year 2021, these operating
metrics replaced previously used per day metrics. As a result, prior year
comparative information is also provided above.
Segment Gross Margin During the three months ended December 31, 2020, the
Offshore Gulf of Mexico segment gross margin was $6.0 million compared to a
gross margin of $10.2 million for the three months ended December 31, 2019. This
decrease is primarily attributable to decreased activity and pricing during the
three months ended December 31, 2020.
Revenue We experienced a 19.8 percent decrease in operating revenue when
comparing the three months ended December 31, 2020 to the three months ended
December 31, 2019. The decline in operating revenue is primarily due to the
factors described above.
Direct Operating Expenses Direct operating expenses decreased to $26.3 million
during the three months ended December 31, 2020 as compared to $30.0 million
during the three months ended December 31, 2019. The decrease was primarily
driven by lower activity, partially offset by unfavorable variances in
self-insurance accruals.
International Solutions Operations Segment
                                                       Three Months Ended December 31,
(in thousands, except operating statistics)                2020                2019               % Change
Operating revenues                                     $   10,518          $  46,462                 (77.4)
Direct operating expenses                                  17,523             34,075                 (48.6)
Segment gross margin                                       (7,005)            12,387                (156.6)

Selling, general and administrative expense                   979              1,455                 (32.7)
Depreciation                                                  373              7,817                 (95.2)

Segment operating income (loss)                        $   (8,357)         $   3,115                (368.3)
Operating Statistics (1):
Average active rigs                                             4                 18                 (77.8)
Number of active rigs at the end of period                      4                 18                 (77.8)
Number of available rigs at the end of period                  32                 31                   3.2
Reimbursements of "out-of-pocket" expenses             $    2,559          $   1,587                  61.2


(1)These operating metrics allow investors to analyze the various components of
segment financial results in terms of activity, utilization and other key
results. Management uses these metrics to analyze historical segment financial
results and as the key inputs for forecasting and budgeting segment financial
results. Beginning in the first quarter of fiscal year 2021, these operating
metrics replaced previously used per day metrics. As a result, prior year
comparative information is also provided above.
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Segment Gross Margin The International Solutions segment gross margin was $(7.0)
million for the three months ended December 31, 2020 compared to a gross margin
of $12.4 million for the three months ended December 31, 2019. The change was
primarily driven by lower activity coupled with fixed minimum levels of country
overhead during the three months ended December 31, 2020.
Revenue We experienced a 77.4 percent decrease in operating revenue when
comparing the three months ended December 31, 2020 to the three months ended
December 31, 2019. The decline in operating revenue is primarily due to lower
activity during the three months ended December 31, 2020.
Direct Operating Expenses Direct operating expenses decreased to $17.5 million
during the three months ended December 31, 2020 as compared to $34.1 million
during the three months ended December 31, 2019. The decrease was driven by the
factors described above.
Other Operations
Results of our other operations, excluding corporate restructuring charges,
corporate selling, general and administrative costs and corporate depreciation,
are as follows:
                                                         Three Months Ended December 31,
(in thousands)                                               2020                   2019               % Change
Operating revenues                                    $          8,718          $  10,999                 (20.7)
Direct operating expenses                                        3,750             11,545                 (67.5)
Gross margin                                                     4,968               (546)              1,009.9

Research and development                                           117                129                  (9.3)
Selling, general and administrative expense                        381                241                  58.1
Depreciation                                                       359                321                  11.8

Operating income (loss)                               $          4,111          $  (1,237)                432.3


Gross Margin 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 consisted primarily of
adjustments to accruals for estimated losses of approximately $0.5 million and
$8.5 million allocated to the Captive during the three months ended December 31,
2020 and 2019, respectively. The decrease in accruals for estimated losses is
primarily due to actuarial valuation adjustments by our third-party actuary as
well as lower activity levels during the three months ended December 31, 2020.
Intercompany premium revenues recorded by the Captive during the three months
ended December 31, 2020 and 2019 amounted to $7.1 million and $7.7 million,
respectively, which were eliminated upon consolidation.
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
or have cash balances on hand beyond our near-term needs, 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
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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, operating net working capital is typically a use of
capital, while conversely, as our revenues decrease, operating net working
capital is typically a source of capital. To date, general inflationary trends
have not had a material effect on our operating margins.
As of December 31, 2020, we had $374.0 million of cash on hand and $149.8
million of short-term investments. Our cash flows for the three months ended
December 31, 2020 and 2019 are presented below:
                                                                       Three Months Ended December 31,
(in thousands)                                                             2020                2019
Net cash provided by (used in):
Operating activities                                                  $   (19,604)         $  111,781
Investing activities                                                      (65,203)            (23,035)
Financing activities                                                      (29,287)            (77,402)
Net increase (decrease) in cash and cash equivalents and restricted
cash                                                                  $  (114,094)         $   11,344


Operating Activities
For the purpose of understanding the impact on our cash flows from operating
activities, operating 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.
Operating net working capital was $228.0 million as of December 31, 2020
compared to $194.2 million as of September 30, 2020. The sequential increase in
net working capital was primarily driven by an increase in receivables caused by
increased activity as well as payment of ad valorem taxes in various
jurisdictions during the three months ended December 31, 2020. Included in
accounts receivable as of December 31, 2020 were $5.0 million of early
termination fees and $45.2 million of income tax receivables, of which $32.1
million of the income tax receivable was received subsequent to December 31,
2020. Cash flows used in operating activities were approximately $19.6 million
for the three months ended December 31, 2020. Cash flows provided by operating
activities were approximately $111.8 million for the three months ended December
31, 2019. The decrease in cash provided by operating activities is primarily
driven by lower operating activity.
Investing Activities
Capital Expenditures Our capital expenditures during the three months ended
December 31, 2020 were $14.0 million compared to $46.0 million during the three
months ended December 31, 2019. The decrease is driven by lower maintenance
capital expenditures as a result of lower activity.
Purchase of Investments Our net purchases of investments during the three months
ended December 31, 2020 were $58.1 million compared to $3.9 million during the
three months ended December 31, 2019. The increase is attributable to our
strategy to optimize our returns on investment.
Sale of Subsidiary In December 2019, we closed on the sale of a wholly-owned
subsidiary of Helmerich & Payne International Drilling Co., 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.
Marketable Securities As of December 31, 2020, our marketable securities
primarily consist of common shares in Schlumberger, Ltd. that, at the close of
the first quarter of fiscal year 2021, had a fair value of $10.2 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.
Financing Activities
Dividends We paid dividends of $0.25 and $0.71 per share during the three months
ended December 31, 2020 and 2019, respectively. Total dividends paid were $26.9
million and $77.6 million during the three months ended December 31, 2020 and
2019, respectively. A cash dividend of $0.25 per share was declared on December
11, 2020 for shareholders of record on February 12, 2021, payable on March 1,
2021. The declaration and amount of future dividends is at the discretion of the
Board of Directors (the "Board") and subject to our financial condition, results
of operations, cash flows, and other factors the Board deems relevant.
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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 (as amended, 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. As of December 31, 2020, there
were no borrowings or letters of credit outstanding, leaving $750.0 million
available to borrow under the 2018 Credit Facility. For a full description of
the 2018 Credit Facility, see Note 6-Debt to the consolidated financial
statements in our 2020 Annual Report on Form 10-K.
As of December 31, 2020, we had three outstanding letters of credit with banks,
in the amounts of $24.8 million, $0.5 million and $2.1 million, respectively. As
of December 31, 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,
$1.8 million of financial guarantees were outstanding as of December 31, 2020.
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. At
December 31, 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.
Senior Notes
On December 20, 2018, we issued approximately $487.1 million in aggregate
principal amount of 4.65 percent unsecured senior notes due 2025 (the "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.
Repurchase of Common Shares
We have an evergreen authorization from the Board for the repurchase of up to
four million common shares in any calendar year. The repurchases may be made
using our cash and cash equivalents or other available sources. We had no
purchases of common shares during the three months ended December 31, 2020 and
2019.
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.  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
December 31, 2020 and matures on March 19, 2025.
As of December 31, 2020, we had a $635.4 million deferred tax liability on our
Unaudited Condensed 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 long-term debt to total capitalization ratio was 13.1 percent and 12.8
percent at December 31, 2020 and September 30, 2020, respectively. For
additional information regarding debt agreements, refer to Note 6-Debt to the
Unaudited Condensed Consolidated Financial Statements.
There were no other significant changes in our financial position since
September 30, 2020.
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 2- "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Contract Backlog".
Material Commitments
Material commitments as reported in our 2020 Annual Report on Form 10-K have not
changed significantly at December 31, 2020, other than those disclosed in Note
14-Commitments and Contingencies to the Unaudited Condensed Consolidated
Financial Statements.
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Critical Accounting Policies and Estimates
Our accounting policies and estimates that are critical or the most important to
understand our financial condition and results of operations, and that require
management to make the most difficult judgments, are described in our 2020
Annual Report on Form 10-K. There have been no material changes in these
critical accounting policies and estimates.
Recently Issued Accounting Standards
See Note 2-Summary of Significant Accounting Policies, Risks and Uncertainties
to the Unaudited Condensed Consolidated Financial Statements for recently
adopted accounting standards and new accounting standards not yet adopted.

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