HELMERICH & PAYNE, INC. Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10Q ("Form 10Q") contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities and Exchange
Act of 1934, as amended (the "Exchange Act"). All statements other than
statements of historical facts included in this Form 10-Q, including without
limitation, statements regarding our future financial position, business
strategy, budgets, projected costs and plans, objectives of management for
future operations, contract terms, financing and funding, and the ongoing effect
of the COVID-19 pandemic and actions we or others may take in response to the
COVID-19 pandemic are forward-looking statements. In addition, forward-looking
statements include all statements that are not historical facts and 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, information concerning
our possible or assumed future results of operations and statements about the
following subjects 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 ("OPEC") and other oil producing
nations (together, "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 ongoing effect, impact, potential duration or other implications of the
novel strain of coronavirus ("COVID-19") pandemic, including any variants of the
virus, and the effectiveness of vaccines and distribution of vaccines to treat
the virus, any reinstatement of governmental-imposed restrictions, and the pace
of the economic recovery 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 and policies
affecting our costs and increasing operation restrictions or delay and other
adverse impacts on our business;
•impact of geopolitical developments and tensions, war and uncertainty in
oil-producing countries;
•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;
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•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;
•the occurrence of cybersecurity incidents, attacks or other breaches to our
information technology systems;
•potential impacts on our business resulting from climate change, greenhouse gas
regulations, and the impact of climate change-related changes in the frequency
and severity of weather patterns;
•potential long-lived asset impairments; and
•our sustainability strategy, including expectations, plans, or goals related to
corporate responsibility, sustainability and environmental matters, and related
reputational risks as a result of execution of this strategy.
Important factors that could cause actual results to differ materially from our
expectations or results discussed in the forwardlooking statements are
disclosed in our 2021 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.
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, 2021 , our drilling rig fleet included a
total of 271 drilling rigs. Our reportable operating business segments consist
of the North America Solutions segment with 236 rigs, the Offshore Gulf of
Mexico segment with seven offshore platform rigs and the International Solutions
segment with 28 rigs as of December 31, 2021 . At the close of the first quarter
of fiscal year 2022, we had 166 contracted rigs, of which 88 were under a
fixed-term contract and 78 were working well-to-well, compared to 137 contracted
rigs at September 30, 2021 . 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 cyclical and often times
volatile market conditions and take advantage of future opportunities.
Market Outlook
Our revenues are primarily 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 improving supply and demand factors. Both commodities have
historically been, and we expect them to continue to be, cyclical and highly
volatile.
Our drilling services operations are organized into the following reportable
operating segments: North America Solutions, Offshore Gulf of Mexico , and
International Solutions. 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.
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, because we have a large super-spec fleet, we gained market share and
became the largest provider of super-spec rigs in the industry. Accordingly, we
believe we are well positioned to respond to various market conditions.
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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. 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 America Solutions active 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 and
subsequently crude oil prices moved toward $50 per barrel as our customers set
their capital budgets for calendar year 2021. During calendar 2021 crude oil
prices continued to increase, reaching more than $70 per barrel. However, as
expected, rig activity did not move in tandem with crude oil prices to the same
extent it had historically as a large portion of our customers have a more
disciplined approach to their operations and capital spending in order to
enhance their own financial returns.
As our customers establish their capital budgets for calendar year 2022, they
are doing so in a higher crude oil price environment compared to a year ago,
which suggests a higher level of capital spending in calendar year 2022 compared
to calendar year 2021. Additionally, higher commodity prices have allowed
customers to repair strengthen their balance sheets following the 2020 downturn
freeing up additional funds for investment. Consequently, we anticipate a higher
rig activity in fiscal 2022 relative to fiscal 2021. Our North America Solutions
active rigs count has more than tripled from 47 rigs in August 2020 to 154 rigs
at December 31, 2021 . The initial sizable increase in our rig count of 25 rigs
occurred during our first fiscal quarter of 2021 as customers set their 2021
capital spending budgets followed by another 15 rig increase during the second
fiscal quarter of 2021. More recently the other sizable increase occurred during
our first fiscal quarter of 2022 with an addition of another 27 rigs to our
active rig count. To date, our fiscal 2022 rig count increases appear to mirror
those of 2021 as we expect to add somewhere between 11 and 21 rigs during the
second fiscal quarter of 2022.
Collectively, our other business segments, Offshore Gulf of Mexico and
International Solutions, are exposed to the same macro commodity price
environment affecting our North America Solutions segment; however, activity
levels in the International Solutions segment are also subject to other various
geopolitical and financial factors specific to the countries of our operations.
While we do not expect much change in our Offshore Gulf of Mexico segment, we
see opportunities for improvement in our International Solutions segment, but
those will likely occur on a more extended timeline compared to what we have
experienced in the North America Solutions segment.
H&P recognizes the uncertainties and concerns caused by the ongoing 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 resulted in a drop
in demand for crude oil, which, when combined with a more than adequate supply
of crude oil, resulted in a sharp decline in crude oil prices, causing our
customers to have pronounced pullbacks in their operations and planned capital
expenditures. Despite the beginning of a recovery during 2021, 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.
The health and safety of all H&P stakeholders - our employees, customers, and
vendors - remains 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. We are adhering to Center for Disease Control guidelines for
evaluating actual and potential COVID-19 exposures and 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 resulted in a
complete suspension, for a certain period of time, of all drilling operations in
at least one foreign jurisdiction.
In the United States , the Company is an 'essential critical infrastructure'
company as defined by the Department of Homeland Security and the Cybersecurity
and Infrastructure Security Agency . As such, in the event that there are further
government-imposed stay at home orders, we will continue to operate rigs and
technology solutions, and provide valuable services to our customers in support
of the global energy infrastructure.
Since the COVID-19 outbreak began, no rigs have been fully shut down (other than
temporary shutdowns for disinfecting and the suspension for a certain period of
time on one of our international rigs) and these temporary shutdowns have not
had a significant impact on service. We believe our service levels are unchanged
from pre-pandemic levels. The nature of the COVID-19 pandemic is inherently
uncertain, and as a result, the Company is unable to reasonably estimate the
duration and ultimate impacts of the pandemic, including the timing or level of
any subsequent recovery. As a result, the Company cannot be certain of the
degree of impact on the Company's business, results of operations and/or
financial position for future periods.
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From a financial perspective, we believe the Company is well positioned to
continue to manage through a more protracted disruption caused by COVID-19 and
the resulting oil price volatility. 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 million
restructuring charge during fiscal year 2020. Further, we took additional steps
in fiscal year 2021 to reduce our cost structure. These measures will result in
an estimated annualized savings of more than $10 million with the full benefit
expected to be realized in calendar year 2022. We anticipate further cost
reductions going forward; however, implementation of future cost initiatives
will be incremental and are anticipated to be realized over the next few
quarters. These cost reduction measures could lead to additional restructuring
charges in future periods.
On September 27, 2021 , the Company delivered a conditional notice of optional
full redemption for all of the outstanding 4.65 percent unsecured senior notes
due 2025 (the "2025 Notes") at a redemption price calculated in accordance with
the indenture governing the 2025 Notes, plus accrued and unpaid interest on the
2025 Notes to be redeemed. On September 29, 2021 , we issued $550.0 million
aggregate principal amount of our 2.90 percent unsecured senior notes due 2031
(the "2031 Notes"). The Company's obligation to redeem the 2025 Notes was
conditioned upon the prior consummation of the issuance of the 2031 Notes, which
was satisfied on September 29, 2021 . The proceeds from the offering of the 2031
Notes were used to redeem the 2025 Notes. On October 27, 2021 , we redeemed all
of the outstanding 2025 Notes. As a result, the associated make-whole premium of
$56.4 million and the write off of the unamortized discount and debt issuance
costs of $3.7 million were recognized during the first fiscal quarter of 2022
contemporaneously with the October 27, 2021 debt extinguishment and recorded in
Loss on Extinguishment of Debt on our Unaudited Condensed Consolidated
Statements of Operations.. See "-Liquidity and Capital Resources-Senior
Notes-2.90% Senior Notes due 2031" below and Note 6-Debt to our Consolidated
Financial Statements for more information.
At December 31, 2021 , the Company had cash and cash equivalents and short-term
investments of $441.3 million and availability under the 2018 Credit Facility
(as defined herein) of $750.0 million resulting in approximately $1.2 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 December 31, 2021 and
September 30, 2021 , the Company had a net allowance against its accounts
receivable of $1.7 million and $2.1 million , respectively.
Recent Developments
Investments in Geothermal
During the three months ended December 31, 2021 , we purchased an additional
$9.0 million in geothermal investments consisting of both debt and equity
securities. Investments were made in two separate companies that are pursuing
technological concepts to make unconventional geothermal energy a viable
economic renewable energy source. One company's focus is centered on an enhanced
geothermal system concept that utilizes horizontal drilling and fiber-optic
sensing. The other company's focus is on a closed-loop concept that uses
horizontal multilateral wellbores and proprietary working fluid. Both concepts
are designed to harvest geothermal heat to create carbon-free, baseload energy.
Our aggregate balance of investments in geothermal companies was $11.8 million
at December 31, 2021 .
Investment in ADNOC Drilling
During September 2021 , the Company made a $100.0 million cornerstone investment
in ADNOC Drilling in advance of its announced IPO, representing 159.7 million
shares of ADNOC Drilling, equivalent to a one percent ownership stake and
subject to a three-year lockup period. ADNOC Drilling's IPO was completed on
October 3, 2021 and its shares are listed and traded on the Abu Dhabi Securities
Exchange (ADX). Our investment is classified as a long-term equity investment
within Investments in our Unaudited Condensed Consolidated Balance Sheets. We
have applied the guidance in Topic 820, Fair Value Measurement, in the initial
accounting of the transaction and the subsequent revaluation of the investment
balance, concluding that a contractual restriction on the sale of an equity
security that is publicly traded is not considered in measuring fair value.
During the three months ended December 31, 2021 , we recognized a gain of $47.7
million in our Unaudited Condensed Consolidated Statement of Operations. As of
December 31, 2021 , this investment is classified as a Level 1 investment and
based on the quoted stock price on the Abu Dhabi Securities Exchange, without
applying a discount factor.
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Contract Backlog
As of December 31, 2021 and September 30, 2021 , our contract drilling backlog,
being the expected future dayrate revenue from executed contracts, was $723.5
million and $572.0 million , respectively. These amounts do not include
anticipated contract renewals or expected performance bonuses. The increase in
backlog at December 31, 2021 from September 30, 2021 is primarily due to an
increase in the number of longer term drilling contracts executed. Approximately
33.7 percent of the December 31, 2021 total backlog is reasonably expected to be
fulfilled in fiscal year 2023 and thereafter.
The following table sets forth the total backlog by reportable segment as of
December 31, 2021 and September 30, 2021 , and the percentage of the December 31,
2021 backlog reasonably expected to be fulfilled in fiscal year 2023 and
thereafter:
Percentage Reasonably
Expected to be Filled
in Fiscal Year 2023 and
(in millions) December 31, 2021 September 30, 2021 Thereafter
North America Solutions $ 492.5 $ 429.6 20.9 %
Offshore Gulf of Mexico 13.0 17.2 -
International Solutions1 218.0 125.2 64.5
$ 723.5 $ 572.0
(1)Subsequent to December 31, 2021 , we received notice from an International
Solutions customer of their intent to early terminate a fixed-term drilling
services contract. Due to the notification being received subsequent to December
31, 2021 , the backlog as of December 31, 2021 includes approximately $22.0
million of future dayrate revenue related to this contract.
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 2021
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 COVID-19 pandemic, have adversely affected and are
expected to continue to adversely affect our business, financial condition and
results of operations" within our 2021 Annual Report on Form 10-K.
Results of Operations for the Three Months Ended December 31, 2021 and 2020
Consolidated Results of Operations
Net Loss We reported a loss from continuing operations of $58.9 million ($0.48
loss per diluted share) on operating revenues of $409.8 million for the three
months ended December 31, 2021 compared to a loss from continuing operations of
$77.9 million ($0.73 loss per diluted share) on operating revenues of $246.4
million for the three months ended December 31, 2020 . Included in the net loss
for the three months ended December 31, 2021 is a loss of $31.0 thousand (with
no impact on a per diluted share basis) from discontinued operations. Including
discontinued operations, we recorded a net loss of $51.4 million ($0.48 loss per
diluted share) for the three months ended December 31, 2021 compared to a net
loss of $70.4 million ($0.66 loss per diluted share) for the three months ended
December 31, 2020 .
Selling, General and Administrative Expense Selling, general and administrative
expenses increased to $43.7 million during the three months ended December 31,
2021 compared to $39.3 million during the three months ended December 31,
2020 . The $4.4 million increase in fiscal year 2022 compared to the same period
in fiscal year 2021 is primarily due to higher professional services fees.
Asset Impairment Charge During the three months ended December 31, 2021 , we
identified two partial rig substructures and two international FlexRig® drilling
rigs that met the asset held-for-sale criteria and were reclassified as assets
held-for-sale on our Unaudited Condensed Consolidated Balance Sheets. The
combined net book value of the rig substructures of $2.0 million were written
down to their estimated scrap value of $0.1 million , resulting in a non-cash
impairment charge of $1.9 million within our North America Solutions segment
during the three months ended December 31, 2021 in the Unaudited Condensed
Consolidated Statement of Operations. In conjunction with establishing a plan to
sell the two international FlexRig® drilling rigs, we recognized a non-cash
impairment charge of $2.5 million within our International Solutions segment
during the three months ended December 31, 2021 in the Unaudited Condensed
Consolidated Statement of Operations, as the rigs aggregate net book value of
$3.4 million exceeded the fair value of the rigs less estimated cost to sell of
$0.9 million .
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Gain on Investment Securities In September 2021 H&P purchased a cornerstone
equity investment consisting of 159.7 million shares for $100.0 million as part
of ADNOC Drilling's initial public offering. This investment is subject to a
three-year lock-up period. During the three months ended December 31, 2021 we
recognized a gain of $47.7 million due to an increase in the fair market value
of the stock.
Loss on Extinguishment of Debt On October 27, 2021 , we redeemed all of the
outstanding 2025 Notes. As a result, the associated make-whole premium of
$56.4 million and the write off of the unamortized discount and debt issuance
costs of $3.7 million were recognized during the first fiscal quarter of 2022
contemporaneously with the October 27, 2021 debt extinguishment and recorded in
Loss on Extinguishment of Debt on our Unaudited Condensed Consolidated
Statements of Operations.
Income Taxes We had an income tax benefit of $7.6 million for the three months
ended December 31, 2021 (which includes Argentina income tax related to the
drilling contract settlement with YPF and discrete tax expense of $3.5 million
related to equity compensation) compared to an income tax benefit of $18.1
million (which includes discrete tax expense of approximately $4.1 million
related to equity compensation) for the three months ended December 31, 2020 .
Our statutory federal income tax rate for fiscal year 2022 is 21.0 percent
(before incremental state and foreign taxes).
North America Solutions
Three Months Ended December 31,
(in thousands, except operating statistics) 2021 2020 % Change
Operating revenues $ 341,034 $ 201,990 68.8
Direct operating expenses 256,568 157,309 63.1
Segment gross margin 84,466 44,681 89.0
Depreciation and amortization 93,621 100,324 (6.7)
Research and development 6,568 5,466 20.2
Selling, general and administrative expense 10,829 11,680 (7.3)
Asset impairment charge 1,868 - -
Restructuring charges 473 139 240.3
Segment operating loss $ (28,893) $ (72,928) (60.4)
Operating Statistics (1):
Average active rigs 141 81 74.1
Number of active rigs at the end of period 154 94 63.8
Number of available rigs at the end of period 236 262 (9.9)
Reimbursements of "out-of-pocket" expenses $ 43,129 $ 18,789 129.5
(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.
Segment Gross Margin The North America Solutions segment gross margin was $84.5
million for the three months ended December 31, 2021 compared to $44.7 million
in the same period of fiscal year 2021. The increase was primarily driven by a
higher average active rig count. Revenues were $341.0 million and $202.0 million
in the three months ended December 31, 2021 and 2020, respectively. The increase
in operating revenue is primarily due to higher activity levels, partially
offset by a decrease in early termination revenue. For the three months ended
December 31, 2021 , we reported no early termination revenue associated with term
contracts compared to $5.8 million during the same period of fiscal year 2021.
Direct operating expenses increased to $256.6 million during the three months
ended December 31, 2021 as compared to $157.3 million during the three months
ended December 31, 2020 . The increase in direct operating expense was due to
higher activity levels and higher rig recommissioning expenses.
Depreciation and Amortization Depreciation and amortization decreased to $93.6
million during the three months ended December 31, 2021 as compared to $100.3
million during the three months ended December 31, 2020 . The decrease was
primarily attributable to the termination of depreciation on the six US rigs
included in the ADNOC sale in fiscal year 2021 and ongoing low levels of capital
expenditures.
Asset Impairment Charge During the three months ended December 31, 2021 , we
identified two partial rig substructures that met the asset held-for-sale
criteria and were reclassified as assets held-for-sale on our Unaudited
Condensed Consolidated Balance Sheets. The combined net book value of these
assets of $2.0 million were written down to their estimated scrap value of
$0.1 million , resulting in a non-cash impairment charge of $1.9 million during
the three months ended December 31, 2021 in the Unaudited Condensed Consolidated
Statement of Operations.
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Offshore Gulf of Mexico
Three Months Ended December 31,
(in thousands, except operating statistics) 2021 2020 % Change
Operating revenues $ 29,314 $ 32,273 (9.2)
Direct operating expenses 20,711 26,256 (21.1)
Segment gross margin 8,603 6,017 43.0
Depreciation 2,380 2,606 (8.7)
Selling, general and administrative expense 757 669 13.2
Segment operating income $ 5,466 $ 2,742 99.3
Operating Statistics (1):
Average active rigs 4 5 (20.0)
Number of active rigs at the end of period 4 4 -
Number of available rigs at the end of period 7 7 -
Reimbursements of "out-of-pocket" expenses $ 6,075 $ 7,868 (22.8)
(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.
Segment Gross Margin During the three months ended December 31, 2021 , the
Offshore Gulf of Mexico segment gross margin was $8.6 million compared to a
gross margin of $6.0 million for the three months ended December 31, 2020 . This
increase was primarily driven by a favorable adjustment in self-insurance
liabilities related to prior period claims and the mix of rigs working as
compared to being on standby, or mobilization rates. We had a 9.2 percent
decrease in operating revenue during the three months ended December 31, 2021
compared to the three months ended December 31, 2020 . Direct operating expenses
decreased to $20.7 million during the three months ended December 31, 2021 as
compared to $26.3 million during the three months ended December 31, 2020 . The
decrease in operating revenue and expenses was primarily driven by the factors
described above.
International Solutions
Three Months Ended December 31,
(in thousands, except operating statistics) 2021 2020 % Change
Operating revenues $ 37,159 $ 10,518 253.3
Direct operating expenses 24,131 17,523 37.7
Segment gross margin 13,028 (7,005) (286.0)
Depreciation 755 373 102.4
Selling, general and administrative expense 1,729 979 76.6
Asset impairment charge 2,495 - -
Segment operating income (loss) $ 8,049 $ (8,357) (196.3)
Operating Statistics (1):
Average active rigs 7 4 75.0
Number of active rigs at the end of period 8 4 100.0
Number of available rigs at the end of period 28 32 (12.5)
Reimbursements of "out-of-pocket" expenses $ 1,443 $ 2,559 (43.6)
(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.
Segment Gross Margin The International Solutions segment gross margin was $13.0
million for the three months ended December 31, 2021 compared to a gross margin
of $(7.0) million for the three months ended December 31, 2020 . The change was
primarily driven by the settlement of a contractual dispute that was recognized
in operating revenues. Refer to Note 9-Revenue from Contracts with Customers for
additional details. Operating revenues increased to $37.2 million during the
three months ended December 31, 2021 as compared to $10.5 million during the
three months ended December 31, 2020 . Direct operating expenses increased to
$24.1 million during the three months ended December 31, 2021 as compared to
$17.5 million during the three months ended December 31, 2020 . This increase in
both operating revenue and expense was primarily driven by higher activity
levels and the settlement of a contractual dispute mentioned above.
Selling, General and Administrative Expense We recognized a $0.8 million
increase in selling, general and administrative costs during the three months
ended December 31, 2021 compared to the three months ended December 31, 2020 .
This increase was primarily driven by higher accrued variable compensation
expense.
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Asset Impairment Charge During the three months ended December 31, 2021 , we
identified two international FlexRig® drilling rigs that met the asset
held-for-sale criteria and were reclassified as assets held-for-sale on our
Unaudited Condensed Consolidated Balance Sheets. In conjunction with
establishing a plan to sell these rigs we recognized a non-cash impairment
charge of $2.5 million during the three months ended December 31, 2021 in the
Unaudited Condensed Consolidated Statement of Operations, as the aggregate net
book value of $3.4 million exceeded the fair value less estimated cost to sell
of $0.9 million .
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) 2021 2020 % Change
Operating revenues $ 15,923 $ 8,718 82.6
Direct operating expenses 11,320 3,750 201.9
Gross margin 4,603 4,968 (7.3)
Depreciation 345 359 (3.9)
Research and development - 117 (100.0)
Selling, general and administrative expense 329 381 (13.6)
Operating income $ 3,929 $ 4,111 (4.4)
Gross Margin On October 1, 2019 , we elected to capitalize a new Captive
insurance company to insure the deductibles for our domestic workers'
compensation, general liability and automobile liability claims programs, and to
continue the practice of insuring deductibles from the Company's international
casualty and rig property programs. Direct operating costs consisted primarily
$(2.2) million and $0.5 million in adjustments to accruals for estimated losses
allocated to the Captives and rig casualty insurance premiums of $8.8 million
and $2.5 million during the three months ended December 31, 2021 and 2020,
respectively, and were recorded within drilling services operating expenses in
our Unaudited Condensed Statement of Operations. The decrease in estimated
losses is primarily due to actuarial valuation adjustments by our third-party
actuary. Intercompany premium revenues recorded by the Captives during the three
months ended December 31, 2021 and 2020 amounted to $13.6 million and $7.1
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 investments. 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.
Likewise, if we are generating excess cash flows or have cash balances on hand
beyond our near-term needs, we generally 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. However, in some
international locations we may make short-term investments that are less
conservative, as equivalent highly rated investments are unavailable. See-Note
2-Summary of Significant Accounting Policies, Risks and
Uncertainties-International Solutions Drilling Risks.
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.
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The ongoing effects of the COVID-19 pandemic and the oil price collapse in 2020
have had significant ongoing 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 pandemic and the oil price liquidity 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 revenue 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 pandemic 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, 2021 , we had $234.2 million of cash and cash equivalents on
hand and $207.1 million of short-term investments. Our cash flows for the three
months ended December 31, 2021 and 2020 are presented below:
Three Months Ended December 31,
(in thousands) 2021 2020
Net cash used in:
Operating activities $ (3,718) $ (19,604)
Investing activities (44,729) (65,203)
Financing activities (635,610) (29,287)
Net decrease in cash and cash equivalents and restricted cash
Operating Activities Management believes that operating net working capital is important for the purpose of understanding the impact of our operating activities on our cash flows. Operating net working capital is calculated as current assets, excluding cash and cash equivalents, short-term investments, and assets held-for-sale, less current liabilities, excluding dividends payable and short-term debt. Operating net working capital was$78.5 million as ofDecember 31, 2021 compared to$43.4 million as ofSeptember 30, 2021 . The sequential increase in net working capital was primarily driven by higher rig activity and seasonal payments of annual incentive compensation and ad valorem taxes. Included in accounts receivable as ofDecember 31, 2021 was$24.4 million of income tax receivables. Cash flows used in operating activities were approximately$3.7 million and$19.6 million for the three months endedDecember 31, 2021 and 2020, respectively. The change in cash used in operating activities is primarily driven by higher operating activity. Investing Activities Capital Expenditures Our capital expenditures during the three months endedDecember 31, 2021 were$44.0 million compared to$14.0 million during the three months endedDecember 31, 2020 . The increase is driven by higher activity and spending on walking rig conversions. Purchase (Sales) of Short-Term Investments Our net purchases of short-term investments during the three months endedDecember 31, 2021 were$9.3 million compared to net purchases of$57.1 million during the three months endedDecember 31, 2020 . The decrease in net purchases is driven by our ongoing liquidity management. Purchase of Long-Term Investments Our purchases of long-term investments during the three months endedDecember 31, 2021 were$9.0 million compared to$1.0 million during the three months endedDecember 31, 2020 . The increase is driven by additional purchases of geothermal investments made during the quarter. Sale of Assets Our proceeds from asset sales during the three months endedDecember 31, 2021 were$21.5 million compared to proceeds of$6.8 million during the three months endedDecember 31, 2020 . The increase in proceeds is driven by the sale of our casing running and trucking assets and higher rig activity which drives higher reimbursement from customers for lost or damaged drill pipe. 35 -------------------------------------------------------------------------------- Table of Contents Financing Activities Dividends We paid dividends of$0.25 per share during the three months endedDecember 31, 2021 and 2020. Total dividends paid were$27.3 million and$26.9 million during the three months endedDecember 31, 2021 and 2020, respectively. A cash dividend of$0.25 per share was declared onSeptember 1, 2021 for shareholders of record onNovember 23, 2021 , payable onDecember 1, 2021 . 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. Redemption of 4.65% Senior Notes due 2025 OnOctober 27, 2021 , we redeemed all of the outstanding 2025 Notes, resulting in a cash outflow of$487.1 million . As a result, the associated make-whole premium of$56.4 million was paid during the first fiscal quarter of 2022 contemporaneously with theOctober 27, 2021 debt extinguishment. Repurchase of Shares We have an evergreen authorization from the Board of Directors (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. During the three months endedDecember 31, 2021 , we repurchased 2.5 million common shares at an aggregate cost of$60.4 million , which are held as treasury shares. Credit Facilities OnNovember 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 onNovember 13, 2019 , providing for an unsecured revolving credit facility (as amended, the "2018 Credit Facility"), that was set to mature onNovember 13, 2024 . OnApril 16, 2021 , lenders with$680.0 million of commitments under the 2018 Credit Facility exercised their option to extend the maturity of the 2018 Credit Facility fromNovember 13, 2024 toNovember 12, 2025 . No other terms of the 2018 Credit Facility were amended in connection with this extension. The remaining$70.0 million of commitments under the 2018 Credit Facility will expire onNovember 13, 2024 , unless extended by the applicable lender before such date. 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 ofDecember 31, 2021 , 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 7-Debt to the consolidated financial statements in our 2021 Annual Report on Form 10-K. As ofDecember 31, 2021 , we had five separate bi-lateral credit facilities with banks with an aggregate outstanding balance of$30.4 million . As ofDecember 31, 2021 , 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 ,$5.8 million of financial guarantees were outstanding as ofDecember 31, 2021 . 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. AtDecember 31, 2021 , 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 2022. Senior Notes 2.90% Senior Notes due 2031 OnSeptember 29, 2021 , we issued$550.0 million aggregate principal amount of the 2.90 percent 2031 Notes in an offering to persons reasonably believed to be qualified institutional buyers inthe United States pursuant to Rule 144A under the Securities Act ("Rule 144A") and to certain non-U.S. persons in transactions outsidethe United States pursuant to Regulation S under the Securities Act ("Regulation S"). Interest on the 2031 Notes is payable semi-annually onMarch 29 andSeptember 29 of each year, commencing onMarch 29, 2022 . The 2031 Notes will mature onSeptember 29, 2031 and bear interest at a rate of 2.90 percent per annum. The indenture governing the 2031 Notes contains certain covenants that, among other things and subject to certain exceptions, limit the ability of the Company and its subsidiaries to incur certain liens; engage in sale and lease-back transactions; and consolidate, merge or transfer all or substantially all of the assets of the Company. The indenture governing the 2031 Notes also contains customary events of default with respect to the 2031 Notes. 4.65% Senior Notes due 2025 OnDecember 20, 2018 , we issued approximately$487.1 million in aggregate principal amount of the 2025 Notes. Interest on the 2025 Notes was payable semi-annually onMarch 15 andSeptember 15 of each year, commencing onMarch 15, 2019 . The debt issuance cost was being amortized straight-line over the stated life of the obligation, which approximated the effective interest method. 36 -------------------------------------------------------------------------------- Table of Contents OnSeptember 27, 2021 , the Company delivered a conditional notice of optional full redemption for all of the outstanding 2025 Notes at a redemption price calculated in accordance with the indenture governing the 2025 Notes, plus accrued and unpaid interest on the 2025 Notes to be redeemed. The Company financed the redemption of the 2025 Notes with the net proceeds from the offering of the 2031 Notes, together with cash on hand. The Company's obligation to redeem the 2025 Notes was conditioned upon the prior consummation of the issuance of the 2031 Notes, which was satisfied onSeptember 29, 2021 . OnOctober 27, 2021 , we redeemed all of the outstanding 2025 Notes. As a result, the associated make-whole premium of$56.4 million and the write off of the unamortized discount and debt issuance costs of$3.7 million were recognized during the first fiscal quarter of 2022 contemporaneously with theOctober 27, 2021 debt extinguishment and recorded in Loss on Extinguishment of Debt on our Unaudited Condensed Consolidated Statements of Operations. Future Cash Requirements Our operating cash requirements, scheduled debt repayments, interest payments, any declared dividends, and estimated capital expenditures for fiscal year 2022 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. We currently do not anticipate the need to draw on the 2018 Credit Facility. Our indebtedness under our unsecured senior notes totaled$550.0 million atDecember 31, 2021 and matures onSeptember 29, 2031 . As ofDecember 31, 2021 , we had a$545.9 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 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. AtDecember 31, 2021 , we had$4.6 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. The long-term debt to total capitalization ratio was 16.5 percent and 15.9 percent atDecember 31, 2021 andSeptember 30, 2021 , 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 sinceSeptember 30, 2021 . Material Commitments Material commitments as reported in our 2021 Annual Report on Form 10-K have not changed significantly atDecember 31, 2021 , other than those disclosed in Note 6-Debt and Note 13-Commitments and Contingencies to the Unaudited Condensed Consolidated Financial Statements. 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 2021 Annual Report on Form 10-K. There have been no material changes in these critical accounting policies and estimates. Recently Issued Accounting Policies
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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