HELMERICH & PAYNE, INC.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10Q ("Form 10Q") contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities and Exchange
Act of 1934, as amended (the "Exchange Act"). All statements other than
statements of historical facts included in this Form 10-Q, including without
limitation, statements regarding our future financial position, business
strategy, budgets, projected costs and plans and objectives of management for
future operations, are forward-looking statements. In addition, forward-looking
statements generally can be identified by the use of forward-looking terminology
such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe,"
"predict," "project," "target," "continue," or the negative thereof or similar
terminology. Forward-looking statements are based upon current plans, estimates,
and expectations that are subject to risks, uncertainties, and assumptions.
Although we believe that the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance that such expectations will
prove to be correct. Actual results may vary materially from those indicated or
anticipated by such forward-looking statements. The inclusion of such statements
should not be regarded as a representation that such plans, estimates, or
expectations will be achieved.
These forward-looking statements include, among others, such things as:
• our business strategy;
• 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;
• changes in future levels of drilling activity and capital
expenditures by our customers, whether as a result of global capital
markets and liquidity, changes in prices of oil and natural gas or
otherwise, which may cause us to idle or stack additional rigs, or
increase our capital expenditures and the construction or
acquisition of rigs;
• the effect, impact, potential duration or other implications of the
recent and ongoing outbreak of a novel strain of coronavirus
("COVID-19") and the recent oil price collapse, and anyexpectations
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 ofgeneral or
industry-specific economic conditions, mechanical difficulties,
performance or other reasons;
• expansion and growth of our business and operations;
• our belief that the final outcome of our legal proceedings will not
materially affect our financial results;
• impact of federal and state legislative and regulatory actions
affecting our costs and increasing operation restrictions or delay
and other adverse impacts on our business;
• environmental or other liabilities, risks, damages or losses,
whether related to storms or hurricanes (including wreckage or
debris removal), collisions, grounding, blowouts, fires, explosions,
other accidents, terrorism or otherwise, for which insurance
coverage and contractual indemnities may be insufficient,
unenforceable or otherwise unavailable;
• our financial condition and liquidity;
• tax matters, including our effective tax rates, tax
positions,
results of audits, changes in tax laws, treaties and regulations,
tax assessments and liabilities for taxes; and
• potential long-lived asset impairments.
Important factors that could cause actual results to differ materially from our
expectations or results discussed in the forwardlooking statements are
disclosed in this Form 10-Q under Part II, Item 1A- "Risk Factors" and in our
2019 Annual Report on Form 10-K under Item 1A- "Risk Factors," 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 SummaryHelmerich & Payne, Inc. ("H&P," which, together with its subsidiaries, is identified as the "Company," "we," "us," or "our," except where stated or the context requires otherwise) 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 ofJune 30, 2020 , our drilling rig fleet included a total of 302 drilling rigs. Our contract drilling services segments consist of the North America Solutions segment with 262 rigs, the OffshoreGulf of Mexico segment with eight offshore platform rigs and the International Solutions segment with 32 rigs as ofJune 30, 2020 . At the close of the third quarter of fiscal year 2020, we had 81 contracted rigs, of which 58 were under a fixed-term contract and 23 were working well-to-well, compared to 218 contracted rigs atSeptember 30, 2019 . Our long-term strategy remains focused on innovation, technology, safety, operational excellence and reliability. As we move forward, we believe that our advanced uniform rig fleet, technology offerings, financial strength, contract backlog and strong customer and employee base position us very well to respond to continued volatile market conditions and take advantage of future opportunities. Market Outlook Our revenues are derived from the capital expenditures of companies involved in the exploration, development and production of crude oil and natural gas ("E&Ps"). Generally, the level of capital expenditures is dictated by current and expected future prices of crude oil and natural gas, which are determined by various supply and demand factors. Both commodities have historically been, and we expect them to continue to be, cyclical and highly volatile. With respect to North America Solutions, the resurgence of oil and natural gas production coming fromthe United States brought about by unconventional shale drilling for oil has significantly impacted the supply of oil and natural gas and the type of rig utilized in theU.S. land drilling industry. The advent of unconventional drilling inthe United States began in early 2009 and continues to evolve as E&Ps drill longer lateral wells with tighter well spacing. During this time, we designed, built and delivered to the market new technology AC drive rigs (FlexRig®), substantially growing our fleet. The pace of progress of unconventional drilling over the years has been cyclical and volatile, dictated by crude oil and natural gas price fluctuations, which at times have proven to be dramatic. Throughout this time, the length of the lateral section of wells drilled in theU.S. has continued to grow. The progression of longer lateral wells has required many of the industry's rigs to be upgraded to certain specifications in order to meet the technical challenges of drilling longer lateral wells. The upgraded rigs meeting those specifications are commonly referred to in the industry as super-spec rigs and have the following specific characteristics: AC drive, minimum of 1,500 horsepower drawworks, minimum of 750,000 lbs. hookload rating, 7,500 psi mud circulating system, and multiple-well pad capability. The technical requirements of drilling longer lateral wells often necessitate the use of super-spec rigs and even when not required for shorter lateral wells, there is a strong customer preference for super-spec due to the drilling efficiencies gained in utilizing a super-spec rig. As a result, there has been a structural decline in the use of non-super-spec rigs across the industry. However, as a result of having a large super-spec fleet, we gained market share and became the largest provider of super-spec rigs in the industry. As such, we believe we are well positioned to respond to various market conditions. In earlyMarch 2020 , the increase in crude oil supply resulting from production escalations from theOrganization of the Petroleum Exporting Countries and other oil producing nations ("OPEC+") combined with a decrease in crude oil demand stemming from the global response and uncertainties surrounding the COVID-19 pandemic resulted in a sharp decline in crude oil strip prices. Since the beginning of the calendar year 2020, crude oil prices fell from approximately$60 per barrel to the low-to-mid-$20 per barrel range, lower in some cases. Consequently, we have seen a significant decrease in customer 2020 capital budgets representing a decline of nearly 50% from calendar year 2019 levels. There has been a corresponding dramatic decline in the demand for land rigs, such that the overall rig count for calendar year 2020 will average significantly less than in calendar year 2019. During calendar year 2020, our North American Solutions rig count has declined from 195 contracted rigs atDecember 31, 2019 to 68 contracted rigs atJune 30, 2020 . Of the 68 contracted rigs atJune 30, 2020 , 48 are active with 14 rigs warm stacked and six cold stacked. When rigs are stacked, they remain under the terms of the contract but typically pay a reduced rate, where the term days are generally not reduced, but our operating expenses are typically reduced. We believe that we will not experience further significant declines in our rig count and that any additional declines would be much less dramatic. We do not expect our rig count to increase until customers initiate their 2021 capital budgets. Utilization for our super-spec FlexRig fleet peaked in late calendar year 2018 with 216 of 221 super-spec rigs working (98 percent utilization); however, the recent decline in the demand for land rigs resulted in customers idling a large portion of our super-spec FlexRig fleet. AtJune 30, 2020 , we had 168 idle super-spec rigs out of our FlexRig fleet of 234 super-spec rigs (28 percent utilization). Collectively, our other business segments, OffshoreGulf 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. 35
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H&P recognizes the uncertainties and concerns caused by the COVID-19 pandemic; however, we have managed the Company over time to be in a position of strength both financially and operationally when facing uncertainties of this magnitude. The COVID-19 pandemic has had an indirect, yet significant financial impact on the Company. The global response to coping with the pandemic has resulted in a drop in demand for crude oil, which, when combined with a more than adequate supply of crude oil, has resulted in a sharp decline in crude oil prices, causing our customers to have pronounced pullbacks in their operations and planned capital expenditures. The direct impact of COVID-19 on H&P's operations has created some challenges that we believe the Company is adequately addressing to ensure a robust continuation of our operations albeit at a lower activity level. The Company is an 'essential critical infrastructure' company as defined by theDepartment of Homeland Security and theCybersecurity 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 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 sanitation and cleaning protocols
• We are complying with local governmental jurisdiction
policies and
procedures where our operations reside; in some instances, policies
and procedures are more stringent in our foreign operations than in
our North America operations and this has resulted in acomplete
suspension, for a certain period of time, of all drilling operations
in at least one foreign jurisdiction
As of July 15, 2020 , we have had 45 out of approximately 4,050 H&P employees
with confirmed cases of COVID-19. Upon being notified that an employee has
tested positive, the Company follows pre-established guidelines and places the
employee on leave. Upon full recovery, the employee is required to quarantine
for 14 days prior to returning to work. The Company also follows its contact
tracing guidelines and quarantined employees who have been in contact with the
employee in the last 14 days. In addition, the Company applied its enhanced
sanitation procedures to the employee's work location prior to allowing
employees to re-enter the location.
From a financial perspective we believe the Company is well positioned to
continue as a going concern even through a more protracted disruption caused by
COVID-19. We have taken measures to reduce costs and capital expenditures to
levels that better reflect a lower activity environment. Actions taken during
the second quarter of fiscal year 2020 included a reduction to the annual
dividend of approximately $200 million , a reduction in planned fiscal year 2020
capital spend of $95 million , and a roughly $50 million reduction in fixed
operational overhead. During the third quarter of fiscal year 2020, the Company
took further steps to reduce its planned fiscal year 2020 capital spend by
another $40 million and its selling, general and administrative cost structures
by another $25 million on an annualized basis. The culmination of these
cost-saving initiatives resulted in a $15.5 million restructuring charge during
the third quarter of fiscal year 2020. We anticipate further cost reductions in
our International Solutions operations as well and are working through local
jurisdictional regulations to implement those measures. We also reduced future
quarterly dividends to $0.25 per share down from $0.71 per share, commencing
with dividends declared by our Board of Directors (the "Board") on June 3, 2020
for the third quarter of fiscal year 2020. This reduction will result in
approximately $200 million being retained by the Company on an annual basis. At
June 30, 2020 , the Company had cash and cash equivalents and short-term
investments of $492.0 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 June 30, 2020 , the
Company had a net allowance against its accounts receivable of $4.7 million and
incurred bad debt expense of $2.4 million and $4.2 million during the three and
nine months ended June 30, 2020 , respectively. For the three months ended
December 31, 2019 , we recorded a bad debt recovery of $2.0 million within our
contract drilling services operating expense on our Unaudited Condensed
Consolidated Statements of Operations. Subsequent to March 31, 2020 , we adjusted
our credit risk monitoring for specific customers, in response to the recent
economic events described above.
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The nature of the COVID-19 pandemic is inherently uncertain, and as a result, the Company is unable to reasonably estimate the duration and ultimate impacts of the pandemic, including the timing or level of any subsequent recovery. As a result, the Company cannot be certain of the degree of impact on the Company's business, results of operations and/or financial position for future periods. Recent Developments Liquidity InNovember 2019 , we entered into the first amendment to our 2018 Credit Facility by and among the Company, as borrower,Wells Fargo Bank, National Association , as administrative agent, and the lenders party thereto (the "2018 Credit Facility Amendment"). Among other things, the 2018 Credit Facility Amendment (i) extended the maturity date of the 2018 Credit Facility by one year toNovember 13, 2024 , (ii) deleted certain negative covenants and (iii) refreshed the number of permissible extensions of the maturity date that require only the consent of extending lenders. Restructuring Beginning in the third quarter of fiscal year 2020, we implemented cost controls and began evaluating further measures to respond to the combination of weakened commodity prices, uncertainties related to the COVID-19 pandemic, and the resulting market volatility. We restructured our operations to accommodate scale during an industry downturn and to re-organize our operations to align to new marketing and management strategies. We commenced a number of restructuring efforts as a result of this evaluation, which included, among other things a reduction in our capital allocation plans, changes to our organizational structure, and a reduction of staffing levels. Business Segments During the third quarter of fiscal year 2020, as part of our restructuring efforts (see Note 18-Restructuring Charges) and consistent with the manner in which our chief operating decision maker evaluates performance and allocates resources we implemented organizational changes. We are moving from a product-based offering, such as a rig or separate technology package, to an integrated solution-based approach by combining proprietary rig technology, automation software, and digital expertise into our rig operations. Operations previously reported within the H&P Technologies reportable segment are now managed and presented within the North America Solutions reportable segment. As a result, beginning with the third quarter of fiscal year 2020, our contract drilling services operations are organized into the following reportable operating business segments: North America Solutions, OffshoreGulf of Mexico and International Solutions. All segment disclosures have been recast for these segment changes. Our real estate operations, our incubator program for new research and development projects, and our wholly-owned captive insurance companies are included in "Other." Consolidated revenues and expenses reflect the elimination of intercompany transactions.Self-Insurance OnOctober 1, 2019 , we elected to utilize a wholly-owned insurance captive ("Captive") to insure the deductibles for our workers' compensation, general liability and automobile liability insurance programs. Casualty claims occurring prior toOctober 1, 2019 will remain on the operating segments books and future adjustments to these claims will continue to be reflected within the operating segments. Reserves for legacy claims occurring prior toOctober 1, 2019 , will remain as liabilities in our operating segments until they have been resolved. Changes in those reserves will be reflected in segment earnings as they occur. We will continue to utilize the Captive to finance the risk of loss to equipment and rig property assets. The Company and the Captive maintain excess property and casualty reinsurance programs with third-party insurers in an effort to limit the financial impact of significant events covered under these programs. Our operating subsidiaries are paying premiums to the Captive, typically on a monthly basis, for the estimated losses based on the external actuarial analysis. These premiums are currently held in a restricted account, resulting in a transfer of risk from our operating subsidiaries to the Captive. The actuarial estimated underwriting expenses for the three and nine months endedJune 30, 2020 was approximately$1.1 million and$15.8 million , respectively, and was recorded within contract drilling services operating expenses in our Unaudited Condensed Consolidated Statement of Operations. Intercompany premium revenues and expenses during the three and nine months endedJune 30, 2020 amounted to$10.4 million and$28.9 million , respectively, which were eliminated upon consolidation. These intercompany insurance premiums are reflected as segment operating expenses within the North America Solutions, OffshoreGulf of Mexico , and International Solutions reportable operating segments and are reflected as intersegment sales within "Other." The Company previously self-insured employee health plan exposures in excess of employee deductibles. Starting in the second quarter of fiscal year 2020, the Captive insurer issued a stop-loss program that will reimburse the Company's health plan for claims that exceed$50,000 . This program will also be reviewed at the end of each policy year by an outside actuary. One hundred percent of the stop-loss premium is being set aside by the Captive as reserves. The stop-loss program does not have a material impact on a consolidated basis. 37
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Fiscal Year 2020 Dispositions InDecember 2019 , we closed on the sale of a wholly-owned subsidiary ofHelmerich & Payne International Drilling Co. ("HPIDC"),TerraVici Drilling Solutions, Inc. ("TerraVici"). As a result of the sale, 100% of TerraVici's outstanding capital stock was transferred to the purchaser in exchange for approximately$15.1 million , resulting in a total gain on the sale of TerraVici of approximately$15.0 million . Prior to the sale, TerraVici was a component of the H&P Technologies reportable segment, which transitioned to theNorth America Solutions operating segment. This transaction does not represent a strategic shift in our operations and will not have a significant effect on our operations and financial results going forward. Impairments During the second quarter of fiscal year 2020, several significant economic events took place that severely impacted the current demand on drilling services, including the significant drop in crude oil prices caused by OPEC+'s price war coupled with the decrease in the demand due to the COVID-19 pandemic. Property, Plant and Equipment and Inventory To maintain a competitive edge in a challenging market, the Company's management introduced a new strategy focused on operating various types of highly capable upgraded rigs and phasing out the older, less capable fleet. This resulted in grouping the super-spec rigs of our legacy Domestic FlexRig3 asset group and our FlexRig5 asset group creating a new "Domestic super-spec FlexRig" asset group, while combining the legacy Domestic conventional asset group, FlexRig4 asset group and FlexRig3 non-super-spec rigs into one asset group (Domestic non-super-spec asset group). Given the current and projected low utilization for our Domestic non-super-spec asset group and all International asset groups, we considered these economic factors to be indicators that these asset groups may be impaired. As a result of these indicators, we performed impairment testing as ofMarch 31, 2020 on each of our Domestic non-super-spec and International conventional, FlexRig3, and FlexRig4 asset groups which had an aggregate net book value of$605.8 million . We concluded that the net book value of each asset group is not recoverable through estimated undiscounted cash flows and recorded a non-cash impairment charge of$441.4 million in the Unaudited Condensed Consolidated Statement of Operations during the nine months endedJune 30, 2020 . Of the$441.4 million total impairment charge recorded,$292.4 million and$149.0 million was recorded in the North America Solutions and International Solutions segment, respectively. No further impairments were recognized in the third quarter of fiscal year 2020. Impairment was measured as the amount by which the net book value of each asset group exceeds its fair value. The most significant assumptions used in our undiscounted cash flow model include timing on awards of future drilling contracts, drilling rig utilization, estimated remaining useful life, and net proceeds received upon future sale/disposition. These assumptions are classified as Level 3 inputs by ASC Topic 820 Fair Value Measurement and Disclosures as they are based upon unobservable inputs and primarily rely on management assumptions and forecasts. In determining the fair value of each asset group, we utilized a combination of income and market approaches. The significant assumptions in the valuation are based on those of a market participant and are classified as Level 2 and Level 3 inputs by ASC Topic 820 Fair Value Measurement and Disclosures. As ofMarch 31, 2020 , the Company also recorded an additional non-cash impairment charge related to in-progress drilling equipment and rotational inventory of$44.9 million and$38.6 million , respectively, which had aggregate book values of$68.4 million and$38.6 million , respectively, in the Unaudited Condensed Consolidated Statement of Operations during the nine months endedJune 30, 2020 . Of the$83.5 million total impairment charge recorded for in-progress drilling equipment and rotational inventory,$75.8 million and$7.7 million was recorded in the North America Solutions and International Solutions segments, respectively. Goodwill Consistent with our policy, we test goodwill annually for impairment in the fourth quarter of our fiscal year, or more frequently if there are indicators that goodwill might be impaired. Due to the market conditions described in Note 5-Property, Plant and Equipment, during the second quarter of fiscal year 2020, we concluded that goodwill and intangible assets might be impaired and tested the H&P Technologies reporting unit, where the goodwill balance is allocated and the intangible assets are recorded, for recoverability. This resulted in a goodwill only non-cash impairment charge of$38.3 million recorded in Asset Impairment Charge on the Unaudited Condensed Consolidated Statement of Operations during the three months endedMarch 31, 2020 . The recoverable amount of the H&P Technologies reporting unit is determined based on a fair value calculation which uses cash flow projections based on the Company's financial projections presented to the board of directors covering a five-year period, and a discount rate of 14 percent. Cash flows beyond that five-year period have been extrapolated using the fifth-year data with no implied growth factor. The reporting unit level is defined as an operating segment or one level below an operating segment. The recoverable amount of the intangible assets tested for impairment within the H&P Technologies reporting unit is determined based on undiscounted cash flow projections using the Company's financial projections presented to the board of directors covering a five-year period, and extrapolated for the remaining weighted average useful lives of the intangible assets. 38
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The most significant assumptions used in our cash flow model include timing on awards of future contracts, commercial pricing terms, utilization, discount rate, and the terminal value. These assumptions are classified as Level 3 inputs by ASC Topic 820 Fair Value Measurement and Disclosures as they are based upon unobservable inputs and primarily rely on management assumptions and forecasts. Although we believe the assumptions used in our analysis and the probability-weighted average of expected future cash flows are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and our resulting conclusion. Contract Backlog As ofJune 30, 2020 , andSeptember 30, 2019 , our contract drilling backlog, being the expected future dayrate revenue from executed contracts, was$0.6 billion and$1.2 billion , respectively. The decrease in backlog atJune 30, 2020 fromSeptember 30, 2019 is primarily due to prevailing market conditions causing a decline in the number of drilling contracts executed and to some extent an increase in the number of early terminations of contracts. Approximately 73.4 percent of theJune 30, 2020 total backlog is reasonably expected to be fulfilled in fiscal year 2021 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. We have received early termination notices for rigs that were under contract atJune 30, 2020 . During the three months endedJune 30, 2020 and 2019, early termination revenue associated with term contracts was$49.5 million and$0.8 million , respectively, and$57.8 million and$9.1 million for the nine months endedJune 30, 2020 and 2019, respectively. In response to the current market conditions, several operators have opted to place their rigs in an idle-but-contracted state as an alternative to early termination. This includes "warm stacking" and "cold stacking." Warm stacking occurs when a rig remains on-site while pausing drilling activity, while cold stacking occurs when a rig is demobilized and returned to the yard temporarily until next steps are determined. When rigs are stacked, they remain under the terms of the contract but typically pay a reduced rate, where the term days are generally not reduced, but our operating expenses reduced. In many instances for stacked rigs, for the total days stacked there are proportional days added to the original contract length at the original contracted rate. As ofJune 30, 2020 , there are 14 rigs that are warm stacked and six rigs that are cold stacked within North America Solutions. There are two rigs within OffshoreGulf of Mexico that are cold stacked, and six rigs within International Solutions that are warm stacked. The following table sets forth the total backlog by reportable segment as ofJune 30, 2020 andSeptember 30, 2019 , and the percentage of theJune 30, 2020 backlog reasonably expected to be fulfilled in fiscal year 2021 and thereafter: Percentage Reasonably Expected to be Filled in Fiscal Year 2021 (in billions) June 30, 2020 September 30, 2019 and Thereafter North America Solutions $ 0.5 $ 1.0 73.1 % Offshore Gulf of Mexico - - - International Solutions 0.1 0.2 87.2 $ 0.6 $ 1.2 The early termination of a contract may result in a rig being idle for an extended period of time, which could adversely affect our financial condition, results of operations and cash flows. In some limited circumstances, such as sustained unacceptable performance by us, no early termination payment would be paid to us. Early terminations could cause the actual amount of revenue earned to vary from the backlog reported. See "Item 1A. Risk Factors - Our current backlog of contract drilling revenue may continue to decline and may not be ultimately realized as fixedterm contracts may in certain instances be terminated without an early termination payment," in our 2019 Annual Report on Form 10-K filed with theSecurities and Exchange Commission ("SEC"), regarding fixed term contract risk. Additionally, see "Item 1A. Risk Factors - The impact and effects of public health crises, pandemics and epidemics, such as the recent and 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 this Form 10-Q. 39
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Results of Operations for the Three Months EndedJune 30, 2020 and 2019 Consolidated Results of Operations Net Loss We reported a loss from continuing operations of$46.0 million ($0.43 loss per diluted share) from operating revenues of$317.4 million for the three months endedJune 30, 2020 compared to a loss from continuing operations of$154.6 million ($1.42 loss per diluted share) from operating revenues of$688.0 million for the three months endedJune 30, 2019 . Included in the net loss for the three months endedJune 30, 2020 is income of$0.4 million (no impact per diluted share) from discontinued operations. Including discontinued operations, we recorded a net loss of$45.6 million ($0.43 loss per diluted share) for the three months endedJune 30, 2020 compared to a net loss of$154.7 million ($1.42 loss per diluted share) for the three months endedJune 30, 2019 . Research and Development For the three months endedJune 30, 2020 and 2019, we incurred$3.6 million and$7.1 million , respectively, of research and development expenses. Selling, General and Administrative Expense Selling, general and administrative expenses decreased to$43.1 million during the three months endedJune 30, 2020 compared to$46.6 million in the three months endedJune 30, 2019 . The$3.5 million decrease in fiscal year 2020 compared to the same period in fiscal year 2019 is primarily due to lower accrued variable compensation expense. Asset Impairment Charge During the three months endedJune 30, 2020 , no triggering event was identified that would lead to an asset impairment charge. During the three months endedJune 30, 2019 , mainly driven by the downsizing of our fleet of FlexRig4 drilling rigs, we wrote down excess capital spares and drilling support equipment, which had an aggregate net book value of$235.3 million , and as a result, an impairment charge of$224.3 million was recorded in our Unaudited Condensed Consolidated Statements of Operations. Restructuring Charges Beginning in the third quarter of fiscal year 2020, we implemented cost controls and began evaluating further measures to respond to the combination of weakened commodity prices, uncertainties related to the COVID-19 pandemic, and the resulting market volatility. We commenced a number of restructuring efforts as a result of this evaluation, which included, among other things a reduction in our capital allocation plans, changes to our organizational structure, and a reduction of staffing levels. For the three months endedJune 30, 2020 , we incurred$15.5 million in restructuring charges. Income Taxes We had an income tax benefit of$17.6 million for the three months endedJune 30, 2020 (which includes discrete tax benefits of approximately$5.9 million primarily related to a decrease in our deferred state income tax rate and return to provision adjustments) compared to an income tax benefit of$32.0 million for the three months endedJune 30, 2019 (which includes discrete tax benefits of approximately$6.8 million primarily related to a decrease in our deferred state income tax rate). Our statutory federal income tax rate for fiscal year 2020 is 21.0 percent (before incremental state and foreign taxes). North America Solutions Operations Segment Three Months Ended June 30, (in thousands, except operating statistics) 2020 2019 (2) % Change Operating revenues$ 254,434 $ 600,831 (57.7 ) Direct operating expenses 152,663 380,454 (59.9 ) Research and development 3,459 4,966 (30.3 ) Selling, general and administrative expense 13,533 16,654 (18.7 ) Depreciation 102,699 128,864 (20.3 ) Asset impairment charge - 216,908 - Restructuring charges 7,237 - - Segment operating loss$ (25,157 ) $ (147,015 ) (82.9 ) Operating Statistics (1): Revenue days 8,101 19,846 (59.2 ) Average rig revenue per day$ 27,975 $ 26,627 5.1 Average rig expense per day 15,412 15,523 (0.7 ) Average rig margin per day$ 12,563 $ 11,104 13.1 Rig utilization 32 % 62 % (48.4 )
(1) Operating statistics for per day revenue, expense and margin do not include
reimbursements of "outofpocket" expenses of
during the three months ended
(2) Prior period information has been restated to reflect the transition of the
H&P Technologies reportable segment to the North America Solutions reportable
segment.
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Operating Loss The North America Solutions segment had an operating loss of$25.2 million for the three months endedJune 30, 2020 compared to an operating loss of$147.0 million in the same period of fiscal year 2019. The decrease was primarily driven by the asset impairment charge that was recorded during the three months endedJune 30, 2019 and was partially offset by lower activity and restructuring charges during the three months endedJune 30, 2020 . Revenues were$254.4 million and$600.8 million in the three months endedJune 30, 2020 and 2019, respectively. Included in revenues for the three months endedJune 30, 2020 is early termination revenue of$48.8 million compared to$0.7 million during the same period of fiscal year 2019. Fixedterm contracts customarily provide for termination at the election of the customer, with an early termination payment to be paid to us if a contract is terminated prior to the expiration of the fixed term (except in limited circumstances including sustained unacceptable performance by us). Revenue Excluding early termination revenue per day of$6,024 and$33 for the three months endedJune 30, 2020 and 2019, respectively, average rig revenue per day decreased by$4,643 to$21,951 due to a portion of our contracted rigs operating in an idle-but-contracted state during the third quarter of fiscal year 2020 with lower average daily revenue and average daily expense. Compared to the three months endedJune 30, 2019 , our revenue days declined by 59 percent. This decline was driven by the collapse of oil prices that occurred inMarch 2020 , which drove our customers to quickly lower rig activity beginning in the second half ofMarch 2020 and continuing throughout the third quarter of fiscal year 2020. Direct Operating Expenses Average expense per day decreased$111 to$15,412 during the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . The decrease is due to the previously-mentioned effect of idle-but-contracted rigs partially offset by one-time expenses associated with idling rigs and higher self-insurance expenses. Depreciation Depreciation includes charges for abandoned equipment of$0.1 million and$1.2 million for the three months endedJune 30, 2020 and 2019, respectively. In the three months endedJune 30, 2020 , depreciation expense included$0.4 million of accelerated depreciation for components on rigs that are scheduled for conversion in fiscal year 2020 as compared to$1.0 million of accelerated depreciation for the three months endedJune 30, 2019 . Asset Impairment Charge During the three months endedJune 30, 2020 , no triggering event was identified that would lead to an asset impairment charge. During the three months endedJune 30, 2019 , we recorded an asset impairment charge of$216.9 million , mainly driven by the downsizing of our fleet of FlexRig4 drilling rigs. Restructuring Charges For the three months endedJune 30, 2020 , we incurred$7.2 million in restructuring charges. Utilization Rig utilization decreased to 32 percent for the three months endedJune 30, 2020 compared to 62 percent during the three months endedJune 30, 2019 . AtJune 30, 2020 , 68 out of 262 existing rigs in theNorth America Solutions segment were contracted. Of the 68 contracted rigs, 54 were under fixed-term contracts and 14 were working in the spot market. Of the 54 rigs under fixed-term contracts, 19 were idle-but-contracted. Of the 14 rigs working in the spot market, one was idle-but-contracted. Offshore Gulf of Mexico Operations Segment Three Months Ended June 30, (in thousands, except operating statistics) 2020 2019 % Change Operating revenues$ 37,494 $ 37,674 (0.5 ) Direct operating expenses 28,967 28,869 0.3 Selling, general and administrative expense 1,248 1,145 9.0 Depreciation 3,004 2,582 16.3 Restructuring charges 1,262 - - Segment operating income$ 3,013 $ 5,078 (40.7 ) Operating Statistics (1): Revenue days 455 546 (16.7 ) Average rig revenue per day$ 49,654 $ 39,643 25.3 Average rig expense per day 34,702 27,222 27.5 Average rig margin per day$ 14,952 $ 12,421 20.4 Rig utilization 63 % 75 % (16.0 )
(1) Operating statistics for per day revenue, expense and margin do not include
reimbursements of "outofpocket" expenses of
for the three months ended
operating statistics only include rigs that we own and exclude offshore
platform management and contract labor service revenues of
expenses of
of
and 2019, respectively.
Operating Income During the three months endedJune 30, 2020 , the OffshoreGulf of Mexico segment had operating income of$3.0 million compared to operating income of$5.1 million for the three months endedJune 30, 2019 . This decrease is primarily attributable to$1.3 million of restructuring charges incurred during the three months endedJune 30, 2020 . 41
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Revenue Average rig revenue per day increased 25 percent in the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 due to one of our customers shifting its activity from a customer-owned rig managed by H&P to a rig owned by H&P. Direct Operating Expenses Average rig expense increased to$34,702 per day during the three months endedJune 30, 2020 from$27,222 per day, primarily due to one of our customers shifting its activity from a customer-owned rig managed by H&P to a rig owned by H&P. Restructuring Charges For the three months endedJune 30, 2020 , we incurred$1.3 million in restructuring charges. Utilization As ofJune 30, 2020 , five of our eight available platform rigs were under contract, compared to six of our eight available platform rigs as ofJune 30, 2019 . International Solutions Operations Segment Three Months Ended June 30, (in thousands, except operating statistics) 2020 2019 % Change Operating revenues$ 22,477 $ 46,283 (51.4 ) Direct operating expenses 27,595 34,146 (19.2 ) Selling, general and administrative expense 1,129 1,150 (1.8 ) Depreciation 996 8,591 (88.4 ) Asset impairment charge - 7,419 - Restructuring charges 2,297 - - Segment operating loss$ (9,540 ) $ (5,023 ) 89.9 Operating Statistics (1): Revenue days 988 1,510 (34.6 ) Average rig revenue per day$ 19,642 $ 29,669 (33.8 ) Average rig expense per day 21,589 21,650 (0.3 ) Average rig margin per day$ (1,947 ) $ 8,019 (124.3 ) Rig utilization 34 % 51 % (33.3 )
(1) Operating statistics for per day revenue, expense and margin do not include
reimbursements of "outofpocket" expenses of
for the three months ended
excluded are the effects of currency revaluation expense of
income of
respectively.
Operating Loss The International Solutions segment had an operating loss of$9.5 million for the three months endedJune 30, 2020 compared to an operating loss of$5.0 million for the three months endedJune 30, 2019 . The change was primarily driven by lower activity and restructuring charges during the three months endedJune 30, 2020 , partially offset by the recording of an asset impairment charge during the three months endedJune 30, 2019 . Revenue We experienced a 35 percent decrease in revenue days when comparing the three months endedJune 30, 2020 to the three months endedJune 30, 2019 as customers reacted to lower commodity prices. The average number of active rigs was 10.9 during the three months endedJune 30, 2020 compared to 16.6 during the same period in fiscal year 2019. Average rig revenue per day declined due to both the mix of rigs operating as well as actions by customers to put several rigs on a lower standby rate. Direct Operating Expenses Average rig expense per day decreased to$21,589 per day during the three months endedJune 30, 2020 as compared to$21,650 per day during the three months endedJune 30, 2019 . The decrease was driven by lower activity during the three months endedJune 30, 2020 and was partially offset by an increase of currency revaluation expense. Asset Impairment Charge During the three months endedJune 30, 2020 , no triggering event was identified that would lead to an asset impairment charge. During the three months endedJune 30, 2019 , mainly driven by the downsizing of our fleet of FlexRig4 drilling rigs, we wrote down excess capital spares and drilling support equipment and as a result, an asset impairment charge of$7.4 million was recorded in our Unaudited Condensed Consolidated Statements of Operations. Restructuring Charges For the three months endedJune 30, 2020 , we incurred$2.3 million in restructuring charges. Utilization Our utilization decreased during the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . AtJune 30, 2020 , eight out of 32 existing rigs in the International Solutions segment were contracted. Of the eight contracted rigs, three were under fixed-term contracts and five were working in the spot market. 42
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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 June 30,
(in thousands) 2020 2019 % Change
Operating revenues $ 13,343 $ 3,186 318.8
Direct operating expenses 7,906 1,414 459.1
Research and development 179 2,100 (91.5 )
Selling, general and administrative expense 309 - -
Depreciation 293 403 (27.3 )
Restructuring charges 267 - -
Operating income (loss) $ 4,389 $ (731 ) (700.4 )
Operating Income On October 1, 2019 , we elected to utilize the Captive to insure
the deductibles for our workers' compensation, general liability and automobile
liability claims programs. Direct operating costs include accruals for estimated
losses of approximately $1.1 million allocated to the Captive during the three
months ended June 30, 2020 . Intercompany premium revenues recorded by the
Captive during the three months ended June 30, 2020 amounted to $10.4 million ,
which were eliminated upon consolidation.
Results of Operations for the Nine Months Ended June 30, 2020 and 2019
Consolidated Results of Operations
Net Loss We reported a loss from continuing operations of $435.7 million ($4.05
loss per diluted share) from operating revenues of $1.6 billion for the nine
months ended June 30, 2020 compared to a loss from continuing operations of
$74.4 million ($0.71 loss per diluted share) from operating revenues of $2.1
billion for the nine months ended June 30, 2019 . Included in the net loss for
the nine months ended June 30, 2020 is income of $0.2 million (no impact per
diluted share) from discontinued operations. Including discontinued operations,
we recorded a net loss of $435.5 million ($4.05 loss per diluted share) for the
nine months ended June 30, 2020 compared to a net loss of $74.8 million ($0.71
loss per diluted share) for the nine months ended June 30, 2019 .
Research and Development For the nine months ended June 30, 2020 and 2019, we
incurred $16.7 million and $21.3 million , respectively, of research and
development expenses.
Selling, General and Administrative Expense Selling, general and administrative
expenses decreased to $134.9 million during the nine months ended June 30, 2020
compared to $144.6 million in the nine months ended June 30, 2019 . The $9.7
million decrease in fiscal year 2020 compared to the same period in fiscal year
2019 is primarily due to lower accrued variable compensation expense.
Asset Impairment Charge During the nine months ended June 30, 2020 , we impaired
several assets including inventory, property, plant and equipment, and goodwill
which resulted in an impairment charge of $563.2 million ($438.6 million , net of
tax, or $5.21 per diluted share), which is included in Asset Impairment Charge
on the Consolidated Statement of Operations for the nine months ended June 30,
2020 . Comparatively, during the nine months ended June 30, 2019 , mainly driven
by the downsizing of our fleet of FlexRig4 drilling rigs, we wrote down excess
capital spares and drilling support equipment, which had an aggregate net book
value of $235.3 million , and as a result, an asset impairment charge of $224.3
million was recorded in our Unaudited Condensed Consolidated Statements of
Operations.
Restructuring Charges Beginning in the third quarter of fiscal year 2020, we
implemented cost controls and began evaluating further measures to respond to
the combination of weakened commodity prices, uncertainties related to the
COVID-19 pandemic, and the resulting market volatility. We commenced a number of
restructuring efforts as a result of this evaluation, which included, among
other things a reduction in our capital allocation plans, changes to our
organizational structure, and a reduction of staffing levels. For the three
months ended June 30, 2020 , we incurred $15.5 million in restructuring charges.
Income Taxes We had an income tax benefit of $116.9 million for the nine months
ended June 30, 2020 (which included a discrete tax benefit of approximately $3.5
million primarily related to a decrease in our deferred state income tax rate,
return to provision adjustments, equity compensation and the reversal of an
uncertain tax liability, as the statute of limitation expired) compared to an
income tax benefit of $5.6 million (which included a discrete tax benefit of
approximately $8.2 million related to a decrease in our deferred state income
tax rate, return to provision adjustments, and the reversal of an uncertain tax
liability, as the statute of limitations expired) for the nine months ended June
30, 2019 . Our statutory federal income tax rate for fiscal year 2020 is 21.0
percent (before incremental state and foreign taxes).
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North America Solutions Operations Segment
Nine Months Ended June 30,
(in thousands, except operating statistics) 2020 2019 (2) % Change
Operating revenues $ 1,325,076 $ 1,867,253 (29.0 )
Direct operating expenses 832,229 1,176,746 (29.3 )
Research and development 15,871 19,247 (17.5 )
Selling, general and administrative expense 42,798 50,361 (15.0 )
Depreciation 336,098 383,477 (12.4 )
Asset impairment charge 406,548 216,908 87.4
Restructuring charges 7,237 - -
Segment operating income (loss) $ (315,705 ) $ 20,514 (1,639.0 )
Operating Statistics (1):
Revenue days 43,058 63,040 (31.7 )
Average rig revenue per day $ 26,953 $ 26,152 3.1
Average rig expense per day 15,507 15,198 2.0
Average rig margin per day $ 11,446 $ 10,954 4.5
Rig utilization 54 % 66 % (18.2 )
(1) Operating statistics for per day revenue, expense and margin do not include
reimbursements of "outofpocket" expenses of
million during the nine months ended
(2) Prior period information has been restated to reflect the transition of the
H&P Technologies reportable segment to the North America Solutions reportable
segment.
Operating Income (Loss) The North America Solutions segment had an operating loss of$315.7 million for the nine months endedJune 30, 2020 compared to operating income of$20.5 million in the same period of fiscal year 2019. The decrease was primarily driven by the recording of a larger asset impairment loss and lower activity during the nine months endedJune 30, 2020 . Revenues were$1.3 billion and$1.9 billion in the nine months endedJune 30, 2020 and 2019, respectively. Included in North America Solutions revenues for the nine months endedJune 30, 2020 is early termination revenue of$57.1 million compared to$4.3 million during the same period of fiscal year 2019. Fixedterm contracts customarily provide for termination at the election of the customer, with an early termination payment to be paid to us if a contract is terminated prior to the expiration of the fixed term (except in limited circumstances including sustained unacceptable performance by us). Included in North America Solutions operating expenses for the nine months endedJune 30, 2019 are costs of$18.0 million associated with a settled lawsuit. Revenue Excluding early termination per day revenue of$1,326 and$67 for the nine months endedJune 30, 2020 and 2019, respectively, average rig revenue per day decreased by$458 to$25,627 due to a portion of our contracted rigs operating in an idle-but-contracted state during the third quarter of fiscal year 2020 with lower average daily revenue and average daily expense. Compared to the nine months endedJune 30, 2019 , our revenue days declined by 32 percent. This decline was initially driven by a focus on free cash flow generation and budget discipline by many of our publicly-traded E&P customers which commenced during fiscal year 2019. Additionally, the collapse of oil prices that occurred inMarch 2020 drove our customers to quickly lower rig activity beginning in the second half ofMarch 2020 and continuing throughout the third quarter of fiscal year 2020. Direct Operating Expenses Average expense per day increased$309 to$15,507 during the nine months endedJune 30, 2020 compared to the nine months endedJune 30, 2019 . The increase is due to one-time expenses associated with idling rigs and higher self-insurance expense, partially offset by the previously-mentioned effect of idle-but-contracted rigs. Depreciation Depreciation includes charges for abandoned equipment of$1.7 million and$6.1 million for the nine months endedJune 30, 2020 and 2019, respectively. In the nine months endedJune 30, 2020 , depreciation expense included$1.4 million of accelerated depreciation for components on rigs that are scheduled for conversion in fiscal year 2020 as compared to$4.6 million of accelerated depreciation for the nine months endedJune 30, 2019 . Asset Impairment Charge During the nine months endedJune 30, 2020 , we impaired our Domestic Conventional, FlexRig3, and FlexRig4 asset groups, in addition to in-progress drilling equipment and rotational inventory. This resulted in an aggregate impairment charge of$368.2 million ($285.2 million , net of tax, or$3.40 per diluted share) for the nine months endedJune 30, 2020 . Comparatively, during the nine months endedJune 30, 2019 , we recorded an asset impairment charge of$216.9 million mainly driven by the downsizing of our fleet of FlexRig4 drilling rigs. During the nine months endedJune 30, 2020 , we also recorded a goodwill impairment loss of$38.3 million ($29.7 million , net of tax, or$0.36 per diluted share). These non-cash impairment charges are included in Asset Impairment Charge on the Condensed Consolidated Statements of Operations for the nine months endedJune 30, 2020 . Restructuring Charges For the three months endedJune 30, 2020 , we incurred$7.2 million in restructuring charges. 44
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Utilization North America Solutions rig utilization decreased to 54 percent for the nine months endedJune 30, 2020 compared to 66 percent during the nine months endedJune 30, 2019 . AtJune 30, 2020 , 68 out of 262 existing rigs in the North America Solutions segment were contracted. Of the 68 contracted rigs, 54 were under fixed-term contracts and 14 were working in the spot market. Of the 54 rigs under fixed-term contracts, 19 were idle-but-contracted. Of the 14 rigs working in the spot market, one was idle-but-contracted. Offshore Gulf of Mexico Operations Segment Nine Months Ended June 30, (in thousands, except operating statistics) 2020 2019 % Change Operating revenues$ 110,828 $ 109,167 1.5 Direct operating expenses 91,660 82,158 11.6 Selling, general and administrative expense 3,293 2,719 21.1 Depreciation 8,591 7,512 14.4 Restructuring charges 1,262 - - Segment operating income$ 6,022 $ 16,778 (64.1 ) Operating Statistics (1): Revenue days 1,462 1,611 (9.2 ) Average rig revenue per day$ 45,105 $ 35,561 26.8 Average rig expense per day 37,348 26,276 42.1 Average rig margin per day$ 7,757 $ 9,285 (16.5 ) Rig utilization 67 % 74 % (9.5 )
(1) Operating statistics for per day revenue, expense and margin do not include
reimbursements of "outofpocket" expenses of
for the nine months ended
statistics only include rigs that we own and exclude offshore platform
management and contract labor service revenues of
million, offshore platform management and contract labor service expenses of
thousand and
respectively.
Operating Income During the nine months endedJune 30, 2020 , the OffshoreGulf of Mexico segment had operating income of$6.0 million compared to operating income of$16.8 million for the nine months endedJune 30, 2019 . This decrease is primarily attributable to lower contribution from two rigs that demobilized back to shore during the first quarter of fiscal year 2020. One of the two rigs began mobilizing to a new platform duringMarch 2020 and commenced drilling operations during the third quarter of fiscal year 2020. Additionally, we incurred$3.7 million of bad debt expense during the nine months endedJune 30, 2020 . Revenue Average rig revenue per day increased 27 percent in the nine months endedJune 30 , compared to the nine months endedJune 30, 2019 due to one of our customers shifting its activity from a customer-owned rig managed by H&P to a rig owned by H&P. Direct Operating Expenses Average rig expense increased to$37,348 per day during the nine months endedJune 30, 2020 from$26,276 per day due to the factors mentioned above. Restructuring Charges For the three months endedJune 30, 2020 , we incurred$1.3 million in restructuring charges. Utilization As ofJune 30, 2020 , five of our eight available platform rigs were under contract, compared to six of our eight available platform rigs as ofJune 30, 2019 . 45
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International Solutions Operations Segment
Nine Months Ended June 30,
(in thousands, except operating statistics) 2020 2019 % Change
Operating revenues $ 120,189 $ 163,378 (26.4 )
Direct operating expenses 99,634 114,736 (13.2 )
Selling, general and administrative expense 3,832 4,225 (9.3 )
Depreciation 16,634 27,423 (39.3 )
Asset impairment charge 156,686 7,419 2,012.0
Restructuring charges 2,297 - -
Segment operating income (loss) $ (158,894 ) $ 9,575 (1,759.5 )
Operating Statistics (1):
Revenue days 4,154 4,828 (14.0 )
Average rig revenue per day $ 27,281 $ 32,285 (15.5 )
Average rig expense per day 20,919 21,261 (1.6 )
Average rig margin per day $ 6,362 $ 11,024 (42.3 )
Rig utilization 48 % 55 % (12.7 )
(1) Operating statistics for per day revenue, expense and margin do not include
reimbursements of "outofpocket" expenses of
for the nine months ended
are the effects of currency revaluation expense of
million for the nine months ended
Operating Income (Loss) The International Solutions segment had an operating loss of$158.9 million for the nine months endedJune 30, 2020 compared to operating income of$9.6 million for the nine months endedJune 30, 2019 . The decrease was primarily driven by the recording of an asset impairment loss during the nine months endedJune 30, 2020 , as well as lower activity and restructuring charges during the nine months endedJune 30, 2020 . Revenue We experienced a 14 percent decrease in revenue days when comparing the nine months endedJune 30, 2020 to the same period in fiscal year 2019. The average number of active rigs was 15.2 during the nine months endedJune 30, 2020 compared to 17.7 during the same period in fiscal year 2019. Average rig revenue per day decreased by 16 percent primarily due to the devaluation of the Argentine peso, which decreased our average daily revenue as a result of being translated from local currency to theU.S. dollar, as well as actions by customers to put several rigs on a lower standby rate. Direct Operating Expenses Average rig expense decreased to$20,919 per day during the nine months endedJune 30, 2020 as compared to$21,261 per day during the nine months endedJune 30, 2019 . The decrease was driven by lower activity during the nine months endedJune 30, 2020 . Asset Impairment Charge During the nine months endedJune 30, 2020 , we impaired our International Conventional, FlexRig3, and FlexRig4 asset groups, in addition to rotational inventory. This resulted in an aggregate impairment charge of$156.7 million ($123.8 million , net of tax, or$1.45 per diluted share), which is included in Asset Impairment Charge on the Unaudited Condensed Consolidated Statements of Operations for the nine months endedJune 30, 2020 . Comparatively, during the nine months endedJune 30, 2019 , mainly driven by the downsizing of our fleet of FlexRig4 drilling rigs, we wrote down capital spares and drilling support equipment and, as a result, we recorded an asset impairment charge of$7.4 million , in our Unaudited Condensed Consolidated Statements of Operations. Restructuring Charges For the three months endedJune 30, 2020 , we incurred$2.3 million in restructuring charges. Utilization Our utilization decreased during the nine months endedJune 30, 2020 compared to the same period in fiscal year 2019. AtJune 30, 2020 , eight out of 32 existing rigs in the International Solutions segment were contracted. Of the eight contracted rigs, three were under fixed-term contracts and five were working in the spot market. 46
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Other Operations
Results of our other operations, excluding corporate restructuring charges,
corporate selling, general and administrative costs and corporate depreciation,
are as follows:
Nine Months Ended June 30,
(in thousands) 2020 2019 % Change
Operating revenues $ 38,494 $ 9,642 299.2
Direct operating expenses 31,960 4,308 641.9
Research and development 859 2,100 (59.1 )
Selling, general and administrative expense 796 - -
Depreciation 908 1,246 (27.1 )
Restructuring charges 267 - -
Operating income $ 3,704 $ 1,988 86.3
Operating Income On October 1, 2019 , we elected to utilize the Captive to insure
the deductibles for our workers' compensation, general liability and automobile
liability claims programs. Direct operating costs include accruals for estimated
losses of approximately $15.8 million allocated to the Captive during the nine
months ended June 30, 2020 . Intercompany premium revenues recorded by the
Captive during the nine months ended June 30, 2020 amounted to $28.9 million ,
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, 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 recent oil price collapse have had
significant adverse consequences for general economic, financial and business
conditions, as well as for our business and financial position and the business
and financial position of our customers, suppliers and vendors and may, among
other things, impact our ability to generate cash flows from operations, access
the capital markets on acceptable terms or at all and affect our future need or
ability to borrow under the 2018 Credit Facility. In addition to our potential
sources of funding, the effects of such global events may impact our liquidity
or need to alter our allocation or sources of capital, implement additional cost
reduction measures and further change our financial strategy. Although the
COVID-19 outbreak and the recent 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 recent oil price collapse.
As our revenues increase, net working capital is typically a use of capital,
while conversely, as our revenues decrease, net working capital is typically a
source of capital. To date, general inflationary trends have not had a material
effect on our operating margins.
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As ofJune 30, 2020 , we had$426.2 million of cash on hand and$65.8 million of short-term investments. Our cash flows for the nine months endedJune 30, 2020 and 2019 are presented below: Nine Months EndedJune 30 , (in thousands) 2020
2019
Net cash provided (used) by: Operating activities$ 446,253 $ 659,371 Investing activities (87,024 ) (373,961 ) Financing activities (265,976 ) (242,489 ) Net increase in cash and cash equivalents and restricted cash$ 93,253
Operating Activities Net working capital excluding cash and short-term investments was$256.3 million as ofJune 30, 2020 compared to$303.9 million as ofSeptember 30, 2019 . Included in accounts receivable as ofJune 30, 2020 were$42.3 million of early termination fees and$51.0 million of income tax receivables. Cash flows provided by operating activities were approximately$446.3 million for the nine months endedJune 30, 2020 compared to approximately$659.4 million for the nine months endedJune 30, 2019 . The decrease was primarily driven by less activity and an unfavorable variance in the use of working capital. Investing Activities Capital Expenditures Our investing activities are primarily related to capital expenditures for our fleet. Our capital expenditures during the nine months endedJune 30, 2020 were$121.0 million compared to$403.6 million during the nine months endedJune 30, 2019 . The year-over-year decrease in capital expenditures is driven by a decrease in super-spec upgrades and lower maintenance capital expenditure levels as a result of lower activity. Sale of Assets Our proceeds from asset sales totaled$31.2 million during the nine months endedJune 30, 2020 and$36.2 million during the nine months endedJune 30, 2019 . These sales were primarily related to reimbursement for drill pipe damaged or lost in drilling operations. Sale of Subsidiary InDecember 2019 , we closed on the sale of a wholly-owned subsidiary of HPIDC, TerraVici. As a result of the sale, 100% of TerraVici's outstanding capital stock was transferred to the purchaser, in exchange for approximately$15.1 million , resulting in a total gain on the sale of TerraVici of approximately$15.0 million . Stock Portfolio Held We manage marketable securities consisting of common shares of Schlumberger, Ltd. that, at the end of the third quarter of fiscal year 2020, had a fair value of$8.6 million . The value of the portfolio is subject to fluctuation in the market and may vary considerably over time. Our marketable securities are recorded at fair value on our balance sheet. Our marketable securities held as ofJune 30, 2020 are presented below: (in thousands, except share amounts) Number of Shares Cost Basis Market Value Schlumberger, Ltd. 467,500 3,713$ 8,597 Financing Activities Repurchase of Shares The increase of$23.5 million in net cash used by financing activities during the nine months endedJune 30, 2020 from the same period in fiscal year 2019 was primarily due to a$28.5 million cash outflow for the repurchase of shares during the second quarter of fiscal year 2020. Dividends We paid dividends of$2.13 per share during both the nine months endedJune 30, 2020 and 2019. Total dividends paid were$233.1 million and$235.1 million during the nine months endedJune 30, 2020 and 2019, respectively. OnMarch 31, 2020 , we reaffirmed our commitment to paying the previously announced$0.71 per share quarterly dividend onJune 1, 2020 , to stockholders of record at the close of business onMay 11, 2020 , and, as part of our capital allocation update, announced our intention to reduce future quarterly cash dividends to$0.25 per share. A cash dividend of$0.25 per share was declared onJune 3, 2020 for shareholders of record onAugust 17, 2020 , payable onAugust 31, 2020 . The declaration and amount of future dividends is at the discretion of the Board and subject to our financial condition, results of operations, cash flows, and other factors the Board deems relevant. 48
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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, providing for an unsecured revolving credit facility (as amended, the "2018 Credit Facility"), which is set to mature onNovember 13, 2024 . The 2018 Credit Facility has$750.0 million in aggregate availability with a maximum of$75.0 million available for use as letters of credit. The 2018 Credit Facility also permits aggregate commitments under the facility to be increased by$300.0 million , subject to the satisfaction of certain conditions and the procurement of additional commitments from new or existing lenders. The borrowings under the 2018 Credit Facility accrue interest at a spread over either the London Interbank Offered Rate ("LIBOR") or the Base Rate. We also pay a commitment fee on the unused balance of the facility. Borrowing spreads as well as commitment fees are determined based on the debt rating for senior unsecured debt of the Company, as determined by Moody's andStandard & Poor's . The spread over LIBOR ranges from 0.875 percent to 1.500 percent per annum and commitment fees range from 0.075 percent to 0.200 percent per annum. There is a financial covenant in the 2018 Credit Facility that requires us to maintain a total debt to total capitalization ratio of less than or equal to 50 percent. The 2018 Credit Facility contains additional terms, conditions, restrictions and covenants that we believe are usual and customary in unsecured debt arrangements for companies of similar size and credit quality, including a limitation that priority debt (as defined in the credit agreement) may not exceed 17.5 percent of the net worth of the Company. As ofJune 30, 2020 , there were no borrowings or letters of credit outstanding, leaving$750.0 million available to borrow under the 2018 Credit Facility. As ofJune 30, 2020 , we had two outstanding letters of credit with banks, in the amounts of$24.8 million and$2.1 million , respectively. As ofJune 30, 2020 , we also had a$20.0 million unsecured standalone line of credit facility, for the purpose of obtaining the issuance of international letters of credit, bank guarantees, and performance bonds. Of the$20.0 million ,$14.3 million of financial guarantees were outstanding as ofJune 30, 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. AtJune 30, 2020 , we were in compliance with all debt covenants, and we anticipate that we will continue to be in compliance during the next quarter of fiscal year 2020. Senior Notes Exchange Offer, Consent Solicitation and Redemption OnDecember 20, 2018 , we settled an offer to exchange (the "Exchange Offer") any and all outstanding 4.65 percent unsecured senior notes due 2025 of HPIDC (the "HPIDC 2025 Notes") for (i) up to$500.0 million aggregate principal amount of new 4.65 percent unsecured senior notes due 2025 of the Company (the "Company 2025 Notes"), with registration rights, and (ii) cash, pursuant to which we issued approximately$487.1 million in aggregate principal amount of Company 2025 Notes. Interest on the Company 2025 Notes is payable semi-annually onMarch 15 andSeptember 15 of each year, commencingMarch 15, 2019 . The debt issuance costs are being amortized straight-line over the stated life of the obligation, which approximates the effective interest method. Following the consummation of the Exchange Offer, HPIDC had outstanding approximately$12.9 million in aggregate principal amount of HPIDC 2025 Notes. OnDecember 20, 2018 , HPIDC, the Company andWells Fargo Bank, National Association , as trustee, entered into a supplemental indenture to the indenture governing the HPIDC 2025 Notes to adopt certain proposed amendments pursuant to a consent solicitation conducted concurrently with the Exchange Offer. OnSeptember 27, 2019 , we redeemed the remaining approximately$12.9 million in aggregate principal amount of HPIDC 2025 Notes for approximately$14.6 million , including accrued interest and a prepayment premium. Simultaneously with the redemption of the HPIDC 2025 Notes, HPIDC was released as a guarantor under the Company 2025 Notes and the 2018 Credit Facility. As a result of such release, H&P is the only obligor under the Company 2025 Notes and the 2018 Credit Facility. Future Cash Requirements Our operating cash requirements, scheduled debt repayments, interest payments, any declared dividends, and estimated capital expenditures for fiscal year 2020, are expected to be funded through current cash and cash to be provided from operating activities. OnMarch 31, 2020 , as part of our capital allocation update, we announced our intention to reduce future quarterly cash dividends to$0.25 per share. 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$480.3 million atJune 30, 2020 and matures onMarch 19, 2025 . The long-term debt to total capitalization ratio was 12.5 percent and 10.9 percent atJune 30, 2020 and 2019, respectively. For additional information regarding debt agreements, refer to Note 8-Debt to the Unaudited Condensed Consolidated Financial Statements. There were no other significant changes in our financial position sinceSeptember 30, 2019 . 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. 49
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Material Commitments Material commitments as reported in our 2019 Annual Report on Form 10-K have not changed significantly atJune 30, 2020 , other than those disclosed in Note 16-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 2019 Annual Report on Form 10-K. There have been no material changes in these critical accounting policies and estimates, with the exception of lease accounting. We adopted ASC 842 - Leases onOctober 1, 2019 . For further discussion of the changes to our leases policy, as a result of adopting ASC 842, see Note 6-Leases to the Unaudited Condensed Consolidated Financial Statements. 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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