HELMERICH & PAYNE, INC.
The following discussion should be read in conjunction with Part I of this
Form 10K as well as the Consolidated Financial Statements and related notes
thereto included in Part II, Item 8- "Financial Statements and Supplementary
Data" of this Form 10K. Our future operating results may be affected by various
trends and factors which are beyond our control. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of a variety of risks and uncertainties, including those described in
this Form 10-K under "Cautionary Note regarding Forward-Looking Statements" and
Item 1A- "Risk Factors." Accordingly, past results and trends should not be used
by investors to anticipate future results or trends.
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Executive Summary
Helmerich & Payne, Inc. ("H&P," which, together with its subsidiaries, is
identified as the "Company," "we," "us," or "our," except where stated or the
context requires otherwise) through its operating subsidiaries provides
performance-driven drilling solutions and technologies that are intended to make
hydrocarbon recovery safer and more economical for oil and gas exploration and
production companies. As of September 30, 2021 , our drilling rig fleet included
a total of 273 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 30 rigs as of September 30, 2021 . At the close of fiscal year 2021,
we had 137 contracted rigs, of which 73 were under a fixed-term contract and 64
were working well-to-well, compared to 79 contracted rigs at September 30, 2020 .
Our long-term strategy remains focused on innovation, technology, safety,
operational excellence and reliability. As we move forward, we believe that our
advanced uniform rig fleet, technology offerings, financial strength, contract
backlog and strong customer and employee base position us very well to respond
to continued cyclical and often times volatile market conditions and take
advantage of future opportunities.
Market Outlook
Our revenues are derived from the capital expenditures of companies involved in
the exploration, development and production of crude oil and natural gas
("E&Ps"). Generally, the level of capital expenditures is dictated by current
and expected future prices of crude oil and natural gas, which are determined by
various supply and demand factors. Both commodities have historically been, and
we expect them to continue to be, cyclical and highly volatile.
With respect to North America Solutions, the resurgence of oil and natural gas
production coming from the United States brought about by unconventional shale
drilling for oil has significantly impacted the supply of oil and natural gas
and the type of rig utilized in the U.S. land drilling industry. The advent of
unconventional drilling for oil in the United States began in early 2009 and
continues to evolve as E&Ps drill longer lateral wells with tighter well
spacing. During this time, we designed, built and delivered to the market new
technology AC drive rigs (FlexRig®), substantially growing our fleet. The pace
of progress of unconventional drilling over the years has been cyclical and
volatile, dictated by crude oil and natural gas price fluctuations, which at
times have proven to be dramatic.
Throughout this time, the length of the lateral section of wells drilled in the
United States has continued to grow. The progression of longer lateral wells has
required many of the industry's rigs to be upgraded to certain specifications in
order to meet the technical challenges of drilling longer lateral wells. The
upgraded rigs meeting those specifications are commonly referred to in the
industry as super-spec rigs and have the following specific characteristics: AC
drive, minimum of 1,500 horsepower drawworks, minimum of 750,000 lbs. hookload
rating, 7,500 psi mud circulating system, and multiple-well pad capability.
The technical requirements of drilling longer lateral wells often necessitate
the use of super-spec rigs and even when not required for shorter lateral wells,
there is a strong customer preference for super-spec due to the drilling
efficiencies gained in utilizing a super-spec rig. As a result, there has been a
structural decline in the use of non-super-spec rigs across the industry.
However, as a result of having a large super-spec fleet, we gained market share
and became the largest provider of super-spec rigs in the industry. As such, we
believe we are well positioned to respond to various market conditions.
In early March 2020 , the increase in crude oil supply resulting from production
escalations from the Organization of the Petroleum Exporting Countries and other
oil producing nations ("OPEC+") combined with a decrease in crude oil demand
stemming from the global response and uncertainties surrounding the COVID-19
pandemic resulted in a sharp decline in crude oil prices. 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.
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We experienced much of our rig count decline during the second and third
quarters of fiscal year 2020 as our North American Solutions active rig count
declined from 195 rigs at December 31, 2019 to a low of 47 rigs in August 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. More recently, crude oil prices have continued
to increase, reaching more than $70 per barrel. That said, however, we do not
expect rig activity to move in tandem with crude oil prices to the same extent
as it has historically. This is primarily due to a large portion of our
customers having a more disciplined approach to their operations and capital
spending. We expect a majority will maintain their activity levels in accordance
with their capital budgets for 2021, which were set during a time when crude oil
prices were lower and will not adjust spending levels higher as crude oil prices
move higher. Along with stabilization of crude prices during the fourth quarter
of fiscal year 2020, our rig activity began to increase, and increased more
significantly during the first and second quarters of fiscal year 2021. Our
North America Solutions active rig count has more than doubled from 47 rigs in
August 2020 to 127 rigs at September 30, 2021 . We do anticipate further
increases in our rig count for the remainder of calendar year 2021 as customers
prepare for 2022 operations based upon the expectation that the level of capital
spending will be higher in calendar year 2022 than it was in calendar year 2021.
Utilization for our super-spec FlexRig® fleet peaked in late calendar year 2018
with 216 of 221 super-spec rigs working (98 percent utilization); however, the
subsequent decline in the demand for land rigs resulted in customers idling a
large portion of our super-spec FlexRig® fleet. At September 30, 2021 , we had
105 idle super-spec rigs out of our FlexRig® fleet of 230 super-spec rigs (54
percent utilization).
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 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. 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 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.
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 and, as such, continues to operate rigs and
technology solutions, providing 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 such measures to disinfect facilities
have not had a significant impact on service. We believe our service levels are
unchanged from pre-pandemic levels.
From a financial perspective, we believe the Company is well positioned to
continue as a going concern even through a more protracted disruption caused by
COVID-19, oil oversupply and low oil prices. 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.
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At September 30, 2021 , the Company had cash and cash equivalents and short-term
investments of $1.1 billion and availability under the 2018 Credit Facility (as
defined herein) of $750 million . On September 27, 2021 , the Company delivered a
conditional notice of optional full redemption for all of the outstanding 4.65%
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% 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. The associated make-whole
premium and accrued interest of $58.1 million and the write off of the
unamortized discount and debt issuance costs of $3.7 million will be recognized
during the first fiscal quarter of 2022 contemporaneously with the October 27,
2021 redemption. Subsequent to the redemption, our near-term liquidity was
approximately $1.3 billion . We currently do not anticipate the need to draw on
the 2018 Credit Facility. See "-Liquidity and Capital Resources-Senior
Notes-2.90% Senior Notes due 2031" below and Note 7-Debt to our Consolidated
Financial Statements for more information.
As part of the Company's normal operations, we regularly monitor the
creditworthiness of our customers and vendors, screening out those that we
believe have a high risk of failure to honor their counter-party obligations
either through payment or delivery of goods or services. We also perform routine
reviews of our accounts receivable and other amounts owed to us to assess and
quantify the ultimate collectability of those amounts. At September 30, 2021 and
September 30, 2020 , the Company had a net allowance against its accounts
receivable of $2.1 million and $1.8 million , respectively.
The nature of the COVID-19 pandemic is inherently uncertain, and as a result,
the Company is unable to reasonably estimate the duration and ultimate impacts
of the pandemic, including the timing or level of any subsequent recovery. As a
result, the Company cannot be certain of the degree of impact on the Company's
business, results of operations and/or financial position for future periods.
Recent Developments
Treasury and Investments
Senior Notes Offering and Redemption of 4.65% Senior Notes due 2025
On September 29, 2021 , we completed our offering of $550.0 million aggregate
principal amount of the 2031 Notes. We received net proceeds from the offering
of the 2031 Notes of approximately $545.1 million , after deducting the initial
purchasers' discounts and commissions and offering expenses. In October 2021 ,
the net proceeds from the offering were principally used to redeem all $487.1
million aggregate principal amount of our outstanding 2025 Notes. See
"-Liquidity and Capital Resources-Senior Notes-2.90% Senior Notes due 2031"
below and Note 7-Debt to our Consolidated Financial Statements for more
information.
On September 27, 2021 , the Company delivered a conditional notice of optional
full redemption for all of the outstanding 4.65% 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% 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. The associated make-whole premium and accrued interest
of $58.1 million and the write off of the unamortized discount and debt issuance
costs of $3.7 million will be recognized during the first fiscal quarter of 2022
contemporaneously with the October 27, 2021 redemption. See "-Liquidity and
Capital Resources-Senior Notes-4.65% Senior Notes due 2025" below and Note
7-Debt to our Consolidated Financial Statements for more information.
Credit Facility Maturity Extension
On April 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 from November 13, 2024 to November 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 on
November 13, 2024 , unless extended by the applicable lender before such date.
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ADNOC and Helmerich & Payne Strategic Alliance
During September 2021 , the Abu Dhabi National Oil Company ("ADNOC") and its
subsidiary ADNOC Drilling Company P.J.S.C ("ADNOC Drilling") and the Company
jointly announced a strategic alliance, through which ADNOC Drilling acquired
eight of our FlexRig® land rigs for $86.5 million . Following this transaction,
H&P made a $100.0 million cornerstone investment in ADNOC Drilling's initial
public offering subject to a three-year lock up period. Our investment is
classified within Investments in our Consolidated Balance Sheets as of September
30, 2021 . ADNOC Drilling's IPO completed on October 3, 2021 and our
$100.0 million investment represents 159.7 million shares of ADNOC Drilling,
equivalent to a one percent ownership stake.
We will account for our investment in ADNOC Drilling prospectively, after the
IPO date of October 3, 2021 , as a marketable equity security with a readily
determinable fair value. Fair value will be measured using a market approach on
a recurring basis and is categorized using the fair value hierarchy. Any changes
in such values will be reflected in net income. The availability of inputs
observable in the market depends on a variety of factors, including the type of
instrument, whether the instrument is actively traded and other characteristics
particular to the transaction, which includes the effect of the lock-up period.
This alliance is intended to further drive ADNOC Drilling's growth and expansion
as well as enhance their rig-based operational performance by providing them
access to our world-class FlexRig® fleet and leveraging our expertise and
technologies. Additionally, this alliance facilitates our goal of allocating
capital international, particularly in the Middle East and North Africa region,
by accelerating our access to the attractive and fast-growing Abu Dhabi market
as a key platform for further regional expansion.
The eight rigs had an aggregate net book value of $55.6 million and were
recorded as assets held-for-sale in our Consolidated Balance Sheets as of
September 30, 2021 . The rigs' fair value less estimated cost to sell of
$29.0 million , including approximately $24.0 million of cash costs to be
incurred, approximated their net book values at September 30, 2021 . Two of the
eight rigs were already located in the U.A.E where ADNOC Drilling is domiciled
with the remaining six rigs to be shipped from the United States . As part of the
sales agreement, the rigs will be delivered and commissioned in stages over a
twelve-month period subject to acceptance upon successful completion of final
inspection on customary terms and conditions. No rigs have been delivered to
ADNOC Drilling as of September 30, 2021 .
Property, Plant and Equipment
Sale of Offshore Rig
During the first quarter of fiscal year 2021, we closed on the sale of an
offshore platform rig within our Offshore Gulf of Mexico operating segment for
total consideration of $12.0 million with an aggregate net book value of $2.8
million , resulting in a gain of $9.2 million , which is included within (gain)
loss on sale of assets on our Consolidated Statements of Operations during the
fiscal year ended September 30, 2021 .
Assets Held-for-Sale
In March 2021 , the Company's leadership continued the execution of the current
strategy, which was initially introduced in 2019, focusing on operating various
types of highly capable upgraded rigs and phasing out the older, less capable
fleet. As a result, the Company has undertaken a plan to sell 71 Domestic
non-super-spec rigs, all within our North America Solutions segment, the
majority of which were previously decommissioned, written down and/or held as
capital spares. The book values of those assets were written down to $13.5
million , which represents the fair value less estimated cost to sell, and were
reclassified as held-for-sale in the second and third quarter of fiscal year
2021. As a result, we recognized a non-cash impairment charge of $56.4 million ,
during the fiscal year ended September 30, 2021 , in the Consolidated Statement
of Operations. During the year ended September 30, 2021 , we completed the sale
of a portion of the assets with a net book value of $6.5 million that were
originally classified as held-for-sale during the second and third quarter of
fiscal year 2021.
During the fiscal year ended September 30, 2021 , we formalized a plan to sell
assets related to two of our lower margin service offerings, trucking and casing
running services, which contributed approximately 2.8 percent to our
consolidated revenue during fiscal year 2021, all within our North America
Solutions segment. The combined net book values of these assets of $23.2 million
were written down to their combined fair value less estimated cost to sell of
$8.8 million , and were reclassified as held-for-sale in the Consolidated Balance
Sheets as of September 30, 2021 . As a result, we recognized a non-cash
impairment charge of $14.4 million in the Consolidated Statement of Operations
during the year ended September 30, 2021 .
Subsequent to September 30, 2021 , we closed on the sale of these assets in two
separate transactions. The sale of our trucking services was completed on
November 3, 2021 while the sale of our casing running services was completed on
November 15, 2021 for combined cash consideration less costs to sell of
$5.8 million in addition to the possibility of future earnout revenue.
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Restructuring
During the second quarter of fiscal year 2021, we reorganized our IT operations
and moved select IT functions to a managed service provider. Costs incurred as
of September 30, 2021 in connection with the restructuring are primarily
comprised of one-time severance benefits to employees who were involuntarily
terminated. The termination date of some of the employees extend beyond
September 30, 2021 , and such employees are required to render service through
their respective termination date in order to receive the one-time severance
benefit. During the third quarter of fiscal year 2021, we commenced a voluntary
separation program at our local office in Argentina for which we incurred
one-time severance charges for employees who were voluntarily terminated. Total
costs incurred related to our IT reorganization and our Argentina separation
program were $1.5 million for the fiscal year ended September 30, 2021 .
Additionally, we continue to take measures to lower our cost structure based on
activity levels. During fiscal year 2021, we incurred $4.5 million in one-time
moving related expenses primarily due to the downsizing and relocation of our
Houston assembly facility and various storage yards used for idle rigs. This
together with additional restructuring activities that could result from our
in-process cost management review could result in additional restructuring
charges throughout the year.
Contract Backlog
Drilling contract backlog is the expected future dayrate revenue from executed
contracts. We calculate backlog as the total expected revenue from fixed-term
contracts and do not include any anticipated contract renewals or expected
performance bonuses as part of its calculation. Additionally, contracts that
currently contain month-to-month terms are represented in our backlog as one
month of unsatisfied performance obligations. In addition to depicting the total
expected revenue from fixed-term contracts, backlog is indicative of expected
future cash flow that the Company expects to receive regardless of whether a
customer honors the fixed-term contract to expiration of a contract or decides
to terminate the contract early and pay an early termination payment. In the
event of an early termination payment, the timing of the recognition of backlog
and the total amount of revenue may differ; however, the overall associated cash
flow is preserved. As such, management finds backlog a useful metric for future
planning and budgeting, whereas investors consider it useful in estimating
future revenue and cash flows of the Company. As of September 30, 2021 and 2020,
our contract drilling backlog was $572.0 million and $658.0 million ,
respectively. These amounts do not include any anticipated contract renewals or
expected performance bonuses. The decrease in backlog at September 30, 2021 from
September 30, 2020 is primarily due to prevailing market conditions causing a
decline in the number of longer term drilling contracts executed. Approximately
22.9 percent of the September 30, 2021 total backlog is reasonably expected to
be fulfilled in fiscal year 2023 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, opted to renegotiate or early terminate existing
drilling contracts. Such renegotiations included requests to lower the contract
dayrate in exchange for additional terms, temporary stacking of the rig, and
other proposals. We recognized $7.7 million and $73.4 million in early
termination revenue associated with term contracts for the fiscal years ended
September 30, 2021 and 2020, respectively.
The following table sets forth the total backlog by reportable segment as of
September 30, 2021 and 2020, and the percentage of the September 30, 2021
backlog reasonably expected to be fulfilled in fiscal year 2023 and thereafter:
Percentage Reasonably
Expected to be Fulfilled
September 30, September 30, in Fiscal Year 2023
(in millions) 2021 2020 and ThereafterNorth America Solutions$ 429.6 $ 542.4 17.4 % Offshore Gulf of Mexico 17.2 16.7 - International Solutions 125.2 98.9 45.1$ 572.0 $ 658.0 The early termination of a contract may result in a rig being idle for an extended period of time, which could adversely affect our financial condition, results of operations and cash flows. In some limited circumstances, such as sustained unacceptable performance by us, no early termination payment would be paid to us. Early terminations could cause the actual amount of revenue earned to vary from the backlog reported. See Item 1A-"Risk Factors-Our current backlog of drilling services and solutions revenue may continue to decline and may not be ultimately realized as fixedterm contracts and may, in certain instances, be terminated without an early termination payment" within this Form 10-K 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 this Form 10-K. [[Image Removed: hp-20210930_g1.jpg]] 2021 FORM 10-K | 43 --------------------------------------------------------------------------------
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Results of Operations for the Fiscal Years Ended
Consolidated Results of Operations All per share amounts included in the Results of Operations discussion are stated on a diluted basis. Except as specifically discussed, the following results of operations pertain only to our continuing operations. Net Loss We reported a loss from continuing operations of$337.5 million ($3.14 loss per diluted share) from operating revenues of$1.2 billion for the fiscal year endedSeptember 30, 2021 compared to a loss from continuing operations of$496.4 million ($4.62 loss per diluted share) from operating revenues of$1.8 billion for the fiscal year endedSeptember 30, 2020 . Included in the net loss for the fiscal year endedSeptember 30, 2021 is income of$11.3 million ($0.10 per diluted share) from discontinued operations. Including discontinued operations, we recorded a net loss of$326.2 million ($3.04 loss per diluted share) for the fiscal year endedSeptember 30, 2021 compared to a net loss of$494.5 million ($4.60 loss per diluted share) for the fiscal year endedSeptember 30, 2020 . Revenue Consolidated operating revenues were$1.2 billion in fiscal year 2021 and$1.8 billion in fiscal year 2020, including early termination revenue of$7.7 million and$73.4 million in each respective fiscal year. Excluding early termination revenue, operating revenue decreased$0.5 billion in fiscal year 2021 compared to fiscal year 2020. The decrease in fiscal year 2021 from fiscal year 2020 was driven by lower activity, lower early termination revenue, and lower average rig pricing. Direct Operating Expenses, Excluding Depreciation and Amortization Direct operating expenses in fiscal year 2021 were$1.0 billion , compared with$1.2 billion in fiscal year 2020. The decrease in fiscal year 2021 from fiscal year 2020 was primarily attributable to the previously mentioned lower activity levels, partially offset by fixed overhead costs and higher rig recommissioning expenses, as we reactivated rigs across fiscal year 2021. Depreciation and Amortization Depreciation and amortization expense was$419.7 million in fiscal year 2021 and$481.9 million in fiscal year 2020. The decrease in depreciation and amortization during fiscal year endedSeptember 30, 2021 compared to fiscal year endedSeptember 30, 2020 was primarily attributable to the lower carrying cost of our impaired assets as well as ongoing low levels of capital expenditures. Depreciation and amortization includes amortization of intangible assets of$7.2 million in fiscal years 2021 and 2020, and abandonments of equipment of$2.0 million and$4.0 million in fiscal years 2021 and 2020, respectively. Research and Development For the fiscal years endedSeptember 30, 2021 and 2020, we incurred$21.7 million and$21.6 million , respectively, of research and development expenses. Selling, General and Administrative Expense Selling, general and administrative expenses increased to$172.2 million in the fiscal year endedSeptember 30, 2021 compared to$167.5 million in the fiscal year endedSeptember 30, 2020 . The$4.7 million increase in fiscal year 2021 compared to fiscal year 2020 is primarily due to higher accrued variable compensation expense and professional service fees. Asset Impairment During the fiscal year endedSeptember 30, 2021 , we undertook a plan to sell 71 Domestic non-super-spec rigs, all within ourNorth America Solutions segment, the majority of which were previously decommissioned, written down and/or held as capital spares. This resulted in an impairment charge of$56.4 million ($43.3 million , net of tax, or$0.40 per diluted share. During the fiscal year endedSeptember 30, 2021 , we formalized a plan to sell assets related to two of our lower margin service offerings, trucking and casing running services, all within our North America Solutions segment. The combined book values of these assets were written down to$8.8 million , which represents their combined fair value less cost to sell, and were reclassified as held-for-sale in the Consolidated Balance Sheets as ofSeptember 30, 2021 . As a result, we recognized a non-cash impairment charge of$14.4 million ($10.9 million , net of tax, or$0.10 per diluted share). Comparatively, during the fiscal year endedSeptember 30, 2020 , we recorded an asset impairment charge of$563.2 million ($437.5 million , net of tax, or$5.21 per diluted share) resulting from impairment of several assets including rotational inventory, property, plant and equipment, and goodwill. Restructuring Charges During the fiscal years endedSeptember 30, 2021 and 2020, we incurred$5.9 million and$16.0 million , respectively, in restructuring charges. The charges incurred during the fiscal year endedSeptember 30, 2021 included$1.5 million in one-time severance benefits paid to employees who were voluntarily or involuntarily terminated primarily as a result of the reorganization of our IT operations coupled with charges of$4.5 million primarily related to the relocation of ourHouston assembly facility and the downsizing of our storage yards used for idle rigs. The charges incurred during the fiscal year endedSeptember 30, 2020 were primarily comprised of$19.5 million in one-time severance benefits to employees who were voluntarily or involuntarily terminated, offset by a benefit of$3.5 million related to forfeitures and modifications of stock-based compensation awards. [[Image Removed: hp-20210930_g1.jpg]] 2021 FORM 10-K | 44 -------------------------------------------------------------------------------- Table of Contents Interest and Dividend Income Interest and dividend income was$10.3 million and$7.3 million in fiscal years 2021 and 2020, respectively. The increase in interest and dividend income in fiscal year 2021 was primarily due to$3.2 million of interest income received from theU.S. Department of the Treasury related to a tax refund, partially offset by lower interest rates. Interest Expense Interest expense totaled$24.0 million in fiscal year 2021 and$24.5 million in fiscal year 2020. Interest expense is primarily attributable to fixedrate debt outstanding. Income Taxes We had an income tax benefit of$103.7 million in fiscal year 2021 compared to an income tax benefit of$140.1 million in fiscal year 2020. The effective income tax rate was 23.5 percent in fiscal year 2021 compared to 22.0 percent in fiscal year 2020. The effective rates differ from theU.S. federal statutory rate (21.0 percent for fiscal years 2021 and 2020) due to non-deductible permanent items, state and foreign income taxes, and adjustments to the deferred state income tax rate. Deferred income taxes are provided for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. Recoverability of any tax assets are evaluated, and necessary allowances are provided. The carrying values of the net deferred tax assets are based on management's judgments using certain estimates and assumptions that we will be able to generate sufficient future taxable income in certain tax jurisdictions to realize the benefits of such assets. If these estimates and related assumptions change in the future, additional valuation allowances may be recorded against the deferred tax assets resulting in additional income tax expense in the future. See Note 8-Income Taxes to our Consolidated Financial Statements for additional income tax disclosures. Discontinued Operations Expenses incurred within the country ofVenezuela are reported as discontinued operations. Our wholly-owned subsidiaries,Helmerich & Payne International Drilling Co. ("HPIDC") andHelmerich & Payne deVenezuela , C.A., filed a lawsuit in theUnited States District Court for the District of Columbia onSeptember 23, 2011 against theBolivarian Republic of Venezuela,Petroleos de Venezuela, S.A. andPDVSA Petroleo, S.A. We are seeking damages for the taking of our Venezuelan drilling business in violation of international law and for breach of contract. While there exists the possibility of realizing a recovery, we are currently unable to determine the timing or amounts we may receive, if any, or the likelihood of recovery. InMarch 2016 , the Venezuelan government implemented the previously announced plans for a new foreign currency exchange system. Activity within discontinued operations for both fiscal years 2021 and 2020 is primarily a result of the impact of exchange rate fluctuations due to the remeasurement of an uncertain tax liability. North America Solutions
The following table presents certain information with respect to our North America Solutions reportable segment: (in thousands, except operating statistics) 2021
2020 % Change
Operating revenues $ 1,026,364 $ 1,474,380 (30.4) %
Direct operating expenses 773,507 942,277 (17.9)
Segment gross margin 252,857 532,103 (52.5)
Depreciation and amortization 392,415 438,039 (10.4)
Research and development 21,811 20,699 5.4
Selling, general and administrative expense 51,089 53,714 (4.9)
Asset impairment charge 70,850 406,548 (82.6)
Restructuring charges 3,868 7,005 (44.8)
Segment operating loss $ (287,176) $ (393,902) (27.1)
Operating Statistics1:
Average active rigs 107 134 (20.1)
Number of active rigs at the end of period 127 69 84.1
Number of available rigs at the end of period 236
262 (9.9)
Reimbursements of "out-of-pocket" expenses
(1)These operating metrics allow investors to analyze the various components of segment financial results in terms of activity, utilization and other key results. Management uses these metrics to analyze historical segment financial results and as the key inputs for forecasting and budgeting segment financial results. Beginning in the first quarter of fiscal year 2021, these operating metrics replaced previously used per day metrics. As a result, prior year comparative information is also provided above. Segment Gross Margin The North America Solutions segment gross margin was$252.9 million for the fiscal year endedSeptember 30, 2021 compared to$532.1 million for the fiscal year endedSeptember 30, 2020 . The decrease was primarily driven by lower activity levels, lower early termination revenue, lower average rig pricing, and higher rig recommissioning expenses. Revenues were$1.0 billion and$1.5 billion in fiscal year 2021 and 2020, respectively. The decrease in operating revenue is primarily due to the factors mentioned above. Included in revenues for fiscal year 2021 is early termination revenue of$5.8 million [[Image Removed: hp-20210930_g1.jpg]] 2021 FORM 10-K | 45 -------------------------------------------------------------------------------- Table of Contents compared to$68.8 million during fiscal year 2020. Fixedterm contracts customarily provide for termination at the election of the customer, with an early termination payment to be paid to us if a contract is terminated prior to the expiration of the fixed term (except in limited circumstances including sustained unacceptable performance by us). Direct operating expenses decreased to$773.5 million during the fiscal year endedSeptember 30, 2021 as compared to$942.3 million during the fiscal year endedSeptember 30, 2020 primarily due to the factors mentioned above. Depreciation Depreciation expense decreased to$392.4 million during the fiscal year endedSeptember 30, 2021 as compared to$438.0 million during the fiscal year endedSeptember 30, 2020 . The decrease is primarily attributable to the absence of depreciation on the 71 rigs that were reclassified as held-for-sale during the second and third quarters of fiscal year 2021 and rig impairments during fiscal year 2020, in addition to ongoing low levels of capital expenditures. Asset Impairment Charge During the fiscal year endedSeptember 30, 2021 , we undertook a plan to sell 71 Domestic non-super-spec rigs, all within our North America Solutions segment, the majority of which were previously decommissioned, written down and/or held as capital spares. This resulted in an impairment charge of$56.4 million ($43.3 million , net of tax, or$0.40 per diluted share. During the fiscal year endedSeptember 30, 2021 , we formalized a plan to sell assets related to two of our lower margin service offerings, trucking and casing running services, all within our North America Solutions segment. The combined net book values of these assets were written down to$8.8 million , which represents their combined fair value less cost to sell, and were reclassified as held-for-sale in the Consolidated Balance Sheets as ofSeptember 30, 2021 . As a result, we recognized a non-cash impairment charge of$14.4 million ($10.9 million , net of tax, or$0.10 per diluted share). Comparatively, during the fiscal year endedSeptember 30, 2020 , we recorded an impairment charge of$406.5 million ($313.7 million , net of tax, or$3.76 per diluted share) resulting from our impairment of our Domestic Conventional, FlexRig3, and FlexRig4 asset groups, in addition to our in-progress drilling equipment, rotational inventory and goodwill. Restructuring Charges For the fiscal years endedSeptember 30, 2021 and 2020, we incurred$3.9 million and$7.0 million , respectively, in restructuring charges. The charges incurred during the fiscal year endedSeptember 30, 2021 primarily included charges of$3.8 million related to the relocation of theHouston assembly facility and the downsizing of storage yards used for idle rigs. The charges incurred during the fiscal year endedSeptember 30, 2020 were primarily comprised of$10.0 million in one-time severance benefits to employees who were voluntarily or involuntarily terminated, offset by a benefit of$3.0 million related to forfeitures and modifications of stock-based compensation awards. OffshoreGulf of Mexico The following table presents certain information with respect to our OffshoreGulf of Mexico reportable segment: (in thousands, except operating statistics) 2021 2020 % Change Operating revenues$ 126,399 $ 143,149 (11.7) % Direct operating expenses 97,249 119,371 (18.5) Segment gross margin 29,150 23,778 22.6 Depreciation 10,557 11,681 (9.6) Selling, general and administrative expense 2,624 3,365 (22.0) Restructuring charges - 1,254 (100.0) Segment operating income$ 15,969 $ 7,478 113.5 Operating Statistics1: Average active rigs 4 5 (20.0) Number of active rigs at the end of period 4 5
(20.0)
Number of available rigs at the end of period 7 8
(12.5)
Reimbursements of "out-of-pocket" expenses
(10.0)
(1)These operating metrics allow investors to analyze the various components of segment financial results in terms of activity, utilization and other key results. Management uses these metrics to analyze historical segment financial results and as the key inputs for forecasting and budgeting segment financial results. Beginning in the first quarter of fiscal year 2021, these operating metrics replaced previously used per day metrics. As a result, prior year comparative information is also provided above. Segment Gross Margin During the fiscal year endedSeptember 30, 2021 , the OffshoreGulf of Mexico segment gross margin was$29.2 million compared to a gross margin of$23.8 million for the fiscal year endedSeptember 30, 2020 . This increase was driven by the absence of$4.2 million of bad debt expense that was incurred during the fiscal year endedSeptember 30, 2020 . We had an 11.7 percent decrease in operating revenue during the fiscal year endedSeptember 30, 2021 compared to the fiscal year endedSeptember 30, 2020 . The decrease in operating revenue is primarily due to lower activity levels partially offset by the mix of rigs working as compared to being on standby or mobilization rates. Direct operating expenses decreased to$97.2 million during the fiscal year endedSeptember 30, 2021 as compared to$119.4 million during the fiscal year endedSeptember 30, 2020 . The decrease was primarily driven by the factors described above. [[Image Removed: hp-20210930_g1.jpg]] 2021 FORM 10-K | 46 -------------------------------------------------------------------------------- Table of Contents Restructuring Charges We did not incur any restructuring charges during the fiscal year endedSeptember 30, 2021 . During the fiscal year endedSeptember 30, 2020 , we incurred$1.3 million in restructuring charges. Charges incurred during the fiscal year endedSeptember 30, 2020 primarily consisted of employee termination benefits that resulted from our reduction in staffing levels. International Solutions
The following table presents certain information with respect to our International Solutions reportable segment: (in thousands, except operating statistics) 2021
2020 % Change
Operating revenues $ 57,917 $ 144,185 (59.8) %
Direct operating expenses 68,672 124,791 (45.0)
Segment gross margin (10,755) 19,394 (155.5)
Depreciation 2,013 17,531 (88.5)
Selling, general and administrative expense 8,028 4,565 75.9
Asset impairment charge - 156,686 (100.0)
Restructuring charges 207 2,980 (93.1)
Segment operating loss $ (21,003) $ (162,368) (87.1)
Operating Statistics1:
Average active rigs 5 13 (61.5)
Number of active rigs at the end of period 6 5 20.0
Number of available rigs at the end of period 30 32
(6.3)
Reimbursements of "out-of-pocket" expenses
(33.7)
(1)These operating metrics allow investors to analyze the various components of segment financial results in terms of activity, utilization and other key results. Management uses these metrics to analyze historical segment financial results and as the key inputs for forecasting and budgeting segment financial results. Beginning in the first quarter of fiscal year 2021, these operating metrics replaced previously used per day metrics. As a result, prior year comparative information is also provided above. Segment Gross Margin The International Solutions segment gross margin was$(10.8) million for the fiscal year endedSeptember 30, 2021 compared to a gross margin of$19.4 million for the fiscal year endedSeptember 30, 2020 . The change was primarily driven by lower activity levels coupled with fixed minimum levels of country overhead during the fiscal year endedSeptember 30, 2021 . We had a 59.8 percent decrease in operating revenue during the fiscal year endedSeptember 30, 2021 compared to the fiscal year endedSeptember 30, 2020 . The decrease in operating revenue is primarily due to lower activity levels. Direct operating expenses decreased to$68.7 million during the fiscal year endedSeptember 30, 2021 as compared to$124.8 million during the fiscal year endedSeptember 30, 2020 and was driven by the factors described above. Asset Impairment Charge During the fiscal year endedSeptember 30, 2021 , we recorded no impairment charges. Comparatively, during the fiscal year endedSeptember 30, 2020 , we recorded an impairment charge of$156.7 million ($123.8 million , net of tax, or$1.45 per diluted share) resulting from our impairment of our International Conventional, FlexRig®3, and FlexRig®4 asset groups, in addition to rotational inventory. Restructuring Charges For the fiscal years endedSeptember 30, 2021 and 2020, we incurred$0.2 million and$3.0 million in restructuring charges, respectively. During the fiscal year endedSeptember 30, 2021 , we commenced a voluntary separation program at our local office inArgentina for which we incurred one-time severance charges for employees who were voluntarily terminated. Charges incurred during the fiscal year endedSeptember 30, 2020 primarily consisted of employee termination benefits that resulted from our reduction in staffing levels. [[Image Removed: hp-20210930_g1.jpg]] 2021 FORM 10-K | 47 -------------------------------------------------------------------------------- Table of Contents Other Operations Results of our other operations, excluding corporate selling, general and administrative costs, corporate restructuring, and corporate depreciation, are as follows: (in thousands) 2021 2020 % Change Operating revenues$ 43,304 $ 49,114 (11.8) % Direct operating expenses 50,064 41,027 22.0 Gross margin (6,760) 8,087 (183.6) Depreciation 1,426 1,241 14.9 Research and development 127 946 (86.6) Selling, general and administrative expense 1,205 1,237 (2.6) Restructuring charges 186 260 (28.5) Operating income (loss)$ (9,704) $ 4,403 (320.4) Gross Margin OnOctober 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 expenses consisted primarily of adjustments to accruals for estimated losses of$12.6 million and$16.4 million allocated to the Captive and rig and casualty insurance premiums of$21.9 million and$6.7 million during the fiscal years endedSeptember 30, 2021 and 2020, respectively. The decrease in estimated losses is primarily due to actuarial valuation adjustments by our third-party actuary as well as lower activity levels. Intercompany premium revenues recorded by the Captive during the fiscal years endedSeptember 30, 2021 and 2020 amounted to$35.4 million and$36.9 million , respectively, which were eliminated upon consolidation. Results of Operations for the Fiscal Years EndedSeptember 30, 2020 and 2019 A discussion of our results of operations for the fiscal year endedSeptember 30, 2020 compared to the fiscal year endedSeptember 30, 2019 is included in Part II, Item 7- "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2020 , filed with theSecurities and Exchange Commission ("SEC") onNovember 20, 2020 , and is incorporated by reference into this Form 10-K. Liquidity and Capital Resources Sources of Liquidity Our sources of available liquidity include existing cash balances on hand, cash flows from operations, and availability under the 2018 Credit Facility. Our liquidity requirements include meeting ongoing working capital needs, funding our capital expenditure projects, paying dividends declared, and repaying our outstanding indebtedness. Historically, we have financed operations primarily through internally generated cash flows. During periods when internally generated cash flows are not sufficient to meet liquidity needs, we may utilize cash on hand, borrow from available credit sources, access capital markets or sell our 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 includeU.S. Treasury securities,U.S. Agency issued debt securities, corporate bonds and commercial paper, certificates of deposit and money market funds. 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 pandemic and the oil price collapse in 2020 have had significant adverse consequences for general economic, financial and business conditions, as well as for our business and financial position and the business and financial position of our customers, suppliers and vendors and may, among other things, impact our ability to generate cash flows from operations, access the capital markets on acceptable terms or at all and affect our future need or ability to borrow under the 2018 Credit Facility. In addition to our potential sources of funding, the effects of such global events may impact our liquidity or need to alter our allocation or sources of capital, implement additional cost reduction measures and further change our financial strategy. Although the COVID-19 pandemic and the oil price collapse could have a broad range of effects on our sources and uses of liquidity, the ultimate effect thereon, if any, will depend on future developments, which cannot be predicted at this time. [[Image Removed: hp-20210930_g1.jpg]] 2021 FORM 10-K | 48 -------------------------------------------------------------------------------- Table of Contents 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 ofSeptember 30, 2021 , we had$917.5 million of cash and cash equivalents on hand and$198.7 million of short-term investments. Our cash flows for the fiscal years endedSeptember 30, 2021 , 2020 and 2019 are presented below: Year Ended September 30, (in thousands) 2021 2020 2019 Net cash provided by (used in): Operating activities$ 136,440 $ 538,881 $ 855,751 Investing activities (161,994) (87,885) (422,636) Financing activities 425,523 (297,220) (376,329) Net increase in cash and cash equivalents and restricted cash$ 399,969
Operating Activities For the purpose of understanding the impact on our cash flows from operating activities, operating net working capital is calculated as current assets, excluding cash and cash equivalents, short-term investments, and assets held-for-sale, less current liabilities, excluding dividends payable and the current portion of long-term debt. Operating net working capital was$43.4 million ,$194.2 million and$381.7 million as ofSeptember 30, 2021 , 2020 and 2019, respectively. The sequential decrease in net working capital was primarily driven by the receipt of the$86.5 million in cash consideration from ADNOC Drilling in advance of delivering the eight purchased rigs. The total cash proceeds were recorded within Accrued Liabilities within our Consolidated Balance Sheets as ofSeptember 30, 2021 . This was partially offset by activity-driven increases in other components of our operating net working capital. Included in accounts receivable as ofSeptember 30, 2021 was$24.5 million of income tax receivables. Cash flows provided by operating activities were$136.4 million ,$538.9 million and$855.8 million in fiscal years 2021, 2020 and 2019, respectively. The decrease in cash provided by operating activities is primarily driven by lower operating activity and lower pricing. Investing Activities Capital Expenditures Our capital expenditures were$82.1 million ,$140.8 million and$458.4 million in fiscal years 2021, 2020 and 2019, respectively. The year-over-year decrease in capital expenditures is driven by lower maintenance capital expenditures as a result of lower activity. Our fiscal year 2022 capital spending is currently estimated to be between$250 million and$270 million . This estimate includes normal capital maintenance requirements, information technology spending and skidding to walking conversions for a limited number of rigs. Purchase of Investments Our net (purchases) sales of investments were$(209.9) million ,$(40.0) million and$1.1 million in fiscal years 2021, 2020 and 2019, respectively. The increase in purchases is attributable to our strategy to optimize our returns on investment, including our purchase of our cornerstone investment of$100.0 million in ADNOC Drilling. Acquisition of Business We paid$16.2 million , net of cash acquired, during fiscal year 2019, for the acquisition of drilling technology companies. Sale of Assets Our proceeds from asset sales totaled$43.5 million ,$78.4 million and$50.8 million in fiscal year 2021, 2020 and 2019, respectively. During the fiscal year endedSeptember 30, 2020 , we closed on the sale of a portion of our real estate investment portfolio, including six industrial sites, for total consideration, net of selling related expenses, of$40.7 million . Sale of Subsidiary InDecember 2019 , we closed on the sale of a wholly-owned subsidiary of 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 . Equity Securities As ofSeptember 30, 2021 , our equity securities primarily consist of common shares in Schlumberger, Ltd. that, at the close of fiscal year 2021, had a fair value of$13.9 million . The value of our securities is subject to fluctuation in the market and may vary considerably over time. This investment is recorded at fair value on our Consolidated Balance Sheets. Refer to Note 13-Fair Value Measurement of Financial Instruments to our Consolidated Financial Statements. InSeptember 2019 , we sold our remaining 1.6 million shares in Valaris, previously known asEnsco Rowan plc , for total proceeds of approximately$12.0 million . [[Image Removed: hp-20210930_g1.jpg]] 2021 FORM 10-K | 49 -------------------------------------------------------------------------------- Table of Contents Advance payment for sale of property, plant and equipment DuringSeptember 2021 , the Company agreed to sell eight FlexRig land rigs with an aggregate net book value of$55.6 million to ADNOC Drilling for$86.5 million . Two of the eight rigs were already located in theU.A.E where ADNOC Drilling is domiciled with the remaining six rigs to be shipped fromthe United States . We received the$86.5 million in cash consideration in advance of delivering the rigs. As part of the sales agreement, the rigs will be delivered and commissioned in stages over a twelve-month period subject to acceptance upon successful completion of final inspection on customary terms and conditions. No rigs have been delivered to ADNOC Drilling as ofSeptember 30, 2021 and, therefore, the total cash proceeds of$86.5 million is recorded in Accrued Liabilities within our Consolidated Balance Sheets as ofSeptember 30, 2021 . Financing Activities 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. We repurchased 1.5 million shares for$28.5 million during fiscal year 2020 and one million shares for$42.8 million during fiscal year 2019. There were no purchases of common shares in fiscal year 2021. Dividends We paid dividends of$1.00 ,$2.38 , and$2.84 per share during fiscal years 2021, 2020 and 2019, respectively. Total dividends paid were$109.1 million ,$260.3 million and$313.4 million in fiscal years 2021, 2020 and 2019, 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. Debt Issuance Proceeds and Costs OnSeptember 29, 2021 , we issued$548.7 million aggregate principal amount of the 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"). Debt issuance fees paid as ofSeptember 30, 2021 were$3.9 million . OnOctober 27, 2021 , we redeemed all of the outstanding 2025 Notes. 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. Additional details are fully discussed in Note 7-Debt. 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. 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 an adjusted base rate (as defined in the credit agreement). 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. Based on the unsecured debt rating of the Company onSeptember 30, 2021 , the spread over LIBOR would have been 1.125 percent had borrowings been outstanding under the 2018 Credit Facility and commitment fees are 0.125 percent. There is a financial covenant in the 2018 Credit Facility that requires us to maintain a total funded 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 ofSeptember 30, 2021 , there were no borrowings or letters of credit outstanding, leaving$750.0 million available to borrow under the 2018 Credit Facility. As ofSeptember 30, 2021 , we had 3 separate outstanding letters of credit with banks, in the amounts of$24.8 million ,$3.0 million and$2.1 million , respectively. As ofSeptember 30, 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 ,$7.6 million of financial guarantees were outstanding as ofSeptember 30, 2021 . [[Image Removed: hp-20210930_g1.jpg]] 2021 FORM 10-K | 50 -------------------------------------------------------------------------------- Table of Contents 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. AtSeptember 30, 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 annum. Prior toJune 29, 2031 , the Company may redeem the 2031 Notes at its option, in whole or in part, at any time or from time to time at a redemption price equal to the greater of: (i) 100% of the principal amount of the 2031 Notes to be redeemed or (ii) the sum of the present values, as calculated by the Independent Investment Banker (as defined in the 2031 Notes Indenture (as defined herein)), of the remaining scheduled payments of principal and interest thereon (exclusive of the interest accrued to the redemption date) computed by discounting such payments to the redemption date on a semi-annual basis, assuming a 360-day year consisting of twelve 30-day months, at a rate equal to the sum of theTreasury Rate (as defined in the 2031 Notes Indenture) for such 2031 Notes plus 25 basis points, plus, in either case, accrued and unpaid interest, if any, to, but excluding, the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date). On or afterJune 29, 2031 , the Company may redeem the 2031 Notes at its option, in whole or in part, at any time or from time to time at a redemption price equal to 100% of the principal amount of the 2031 Notes to be redeemed, plus accrued and unpaid interest thereon to, but excluding, the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date). The 2031 Notes were issued pursuant to an Indenture, dated as ofDecember 20, 2018 (the "Base Indenture"), as supplemented by the Second Supplemental Indenture thereto, dated as ofSeptember 29, 2021 (together with the Base Indenture, the "2031 Notes Indenture"), in each case by and between the Company andWells Fargo Bank, National Association , as trustee. The 2031 Notes Indenture 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 2031 Notes Indenture 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 is payable semi-annually onMarch 15 andSeptember 15 of each year, commencing onMarch 15, 2019 . The debt issuance costs are being amortized straight-line over the stated life of the obligation, which approximated the effective interest method. 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. The associated make-whole premium and accrued interest of$58.1 million and the write off of the unamortized discount and debt issuance costs of$3.7 million will be recognized during the first fiscal quarter of 2022 contemporaneously with theOctober 27, 2021 redemption. [[Image Removed: hp-20210930_g1.jpg]] 2021 FORM 10-K | 51 -------------------------------------------------------------------------------- Table of Contents 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 long-term unsecured senior notes totaled$550.0 million atSeptember 30, 2021 and matures onSeptember 29, 2031 . As ofSeptember 30, 2021 , we had a$563.4 million deferred tax liability on our Consolidated Balance Sheets, primarily related to temporary differences between the financial and income tax basis of property, plant and equipment. Our 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. AtSeptember 30, 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 longterm debt to total capitalization ratio was 15.9 percent atSeptember 30, 2021 compared to 12.8 percent atSeptember 30, 2020 . For additional information regarding debt agreements, refer to Note 7-Debt to our Consolidated Financial Statements. Material Commitments
Our contractual obligations as of
Payments due by year
(in thousands) Total 2022 2023 2024 2025 2026 Thereafter
Debt1 1,037,148 487,148 - - - - 550,000
Interest2 162,915 16,239 16,289 16,159 16,251 16,253 81,724
Make-whole premium and
accrued interest3 59,064 59,064 - - - - -
Operating leases4 39,863 10,596 8,660 7,391 4,332 1,876 7,008
Purchase obligations5 48,100 48,100 - - - - -
Total contractual
obligations $ 1,347,090 $ 621,147 $ 24,949 $ 23,550 $ 20,583 $ 18,129 $ 638,732
(1)On October 27, 2021 , we redeemed the $487.1 million outstanding 2025 Notes.
See Note 7-Debt to our Consolidated Financial Statements.
(2)Interest on fixed-rate 2031 Notes was estimated based on principal
maturities. See Note 7-Debt to our Consolidated Financial Statements.
(3)On October 27, 2021 , we redeemed all of the outstanding 2025 Notes, which
resulted in the payment of a make-whole premium and accrued interest on the 2025
Notes. See Note 7-Debt to our Consolidated Financial Statements.
(4)See Note 5-Leases to our Consolidated Financial Statements.
(5)See Note 16-Commitments and Contingencies to our Consolidated Financial
Statements.
Critical Accounting Policies and Estimates
Accounting policies that we consider significant are summarized in Note
2-Summary of Significant Accounting Policies, Risks and Uncertainties to our
Consolidated Financial Statements included in Part II, Item 8-"Financial
Statements and Supplementary Data" of this Form 10-K. The preparation of our
financial statements in conformity with U.S. GAAP requires management to make
certain estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosures of contingent assets and liabilities. Estimates are based on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. These estimates and assumptions are
evaluated on an ongoing basis. Actual results may differ from these estimates
under different assumptions or conditions. The following is a discussion of the
critical accounting policies and estimates used in our financial statements.
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Property, Plant and Equipment
Property, plant and equipment, including renewals and betterments, are
capitalized at cost, while maintenance and repairs are expensed as incurred. The
interest expense applicable to the construction of qualifying assets is
capitalized as a component of the cost of such assets. We account for the
depreciation of property, plant and equipment using the straightline method
over the estimated useful lives of the assets considering the estimated salvage
value of the property, plant and equipment. Both the estimated useful lives and
salvage values require the use of management estimates. Assets held-for-sale are
reported at the lower of the carrying amount or fair value less estimated costs
to sell. Our estimate of fair value represents our best estimate based on
industry trends and reference to market transactions and is subject to
variability. Certain events, such as unforeseen changes in operations,
technology or market conditions, could materially affect our estimates and
assumptions related to depreciation or result in abandonments. For the fiscal
years presented in this Form 10-K, no significant changes were made to the
determinations of useful lives or salvage values. Upon retirement or other
disposal of fixed assets, the cost and related accumulated depreciation are
removed from the respective accounts and any gains or losses are recorded in the
results of operations.
Impairment of Longlived Assets, Goodwill and Other Intangible Assets
Management assesses the potential impairment of our longlived assets and
finite-lived intangibles whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Changes that could prompt such
an assessment may include equipment obsolescence, changes in the market demand,
periods of relatively low rig utilization, declining revenue per day, declining
cash margin per day, completion of specific contracts, change in technology
and/or overall changes in general market conditions. If a review of the
longlived assets and finite-lived intangibles indicates that the carrying value
of certain of these assets or asset groups is more than the estimated
undiscounted future cash flows, an impairment charge is made, as required, to
adjust the carrying value to the estimated fair value. Cash flows are estimated
by management considering factors such as prospective market demand, recent
changes in rig technology and its effect on each rig's marketability, any cash
investment required to make a rig marketable, suitability of rig size and makeup
to existing platforms, and competitive dynamics including utilization. The fair
value of drilling rigs is determined based upon either an income approach using
estimated discounted future cash flows, a market approach considering factors
such as recent market sales of rigs of other companies and our own sales of
rigs, appraisals and other factors, a cost approach utilizing reproduction costs
new as adjusted for the asset age and condition, and/or a combination of
multiple approaches. The use of different assumptions could increase or decrease
the estimated fair value of assets and could therefore affect any impairment
measurement.
We review goodwill for impairment annually in the fourth fiscal quarter or more
frequently if events or changes in circumstances indicate it is more likely than
not that the carrying amount of the reporting unit holding such goodwill may
exceed its fair value. We initially assess goodwill for impairment based on
qualitative factors to determine whether the existence of events or
circumstances leads to a determination that it is more likely than not that the
fair value of one of our reporting units is greater than its carrying amount.
If further testing is necessary or a quantitative test is elected, we
quantitatively compare the fair value of a reporting unit with its carrying
amount, including goodwill. If the carrying amount exceeds the fair value, an
impairment charge will be recognized in an amount equal to the excess; however,
the loss recognized would not exceed the total amount of goodwill allocated to
that reporting unit.
SelfInsurance Accruals
We insure working land rigs and related equipment at values that approximate the
current replacement costs on the inception date of the policies. However, we
self-insure large deductibles under these policies. We also carry insurance with
varying deductibles and coverage limits with respect to stacked rigs, offshore
platform rigs, and "named wind storm" risk in the Gulf of Mexico . We selfinsure
a number of other risks, including loss of earnings and business interruption.
We selfinsure a significant portion of expected losses relating to workers'
compensation, general liability, employer's liability and automobile liability.
Generally, deductibles range from $1 million to $10 million per occurrence
depending on the coverage and whether a claim occurs outside or inside of the
United States . Insurance is purchased over deductibles to reduce our exposure to
catastrophic events but there can be no assurance that such coverage will apply
or be adequate in all circumstances. Estimates are recorded for incurred
outstanding liabilities for workers' compensation and other casualty claims.
Retained losses are estimated and accrued based upon our estimates of the
aggregate liability for claims incurred. Estimates for liabilities and retained
losses are based on adjusters' estimates, our historical loss experience and
statistical methods commonly used within the insurance industry that we believe
are reliable.
We also engage a third-party actuary to perform a periodic review of our
casualty losses. Nonetheless, insurance estimates include certain assumptions
and management judgments regarding the frequency and severity of claims, claim
development and settlement practices. Unanticipated changes in these factors may
produce materially different amounts of expense that would be reported under
these programs. Our whollyowned captive insurance companies finance a
significant portion of the physical damage risk on companyowned drilling rigs
as well as casualty deductibles. An actuary reviews the loss reserves retained
by the Company and the captives on an annual basis.
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Revenue Recognition
Drilling services and solutions revenues are comprised of daywork drilling
contracts for which the related revenues and expenses are recognized as services
are performed and collection is reasonably assured. For certain contracts, we
receive payments contractually designated for the mobilization of rigs and other
drilling equipment. Mobilization payments received, and direct costs incurred
for the mobilization, are deferred and recognized on a straight-line basis as
the drilling service is provided. Costs incurred to relocate rigs and other
drilling equipment to areas in which a contract has not been secured are
expensed as incurred. Reimbursements received for outofpocket expenses are
recorded as revenue. For contracts that are terminated prior to the specified
term, early termination payments received by us are recognized as revenues when
all contractual requirements are met.
Income Taxes
Deferred income taxes are accounted for under the liability method, which
takes into account the differences between the basis of the assets and
liabilities for financial reporting purposes and amounts recognized for income
tax purposes. Our net deferred tax liability balance at year-end reflects the
application of our income tax accounting policies and is based on management's
estimates, judgments and assumptions. Included in our net deferred tax liability
balance are deferred tax assets that are assessed for realizability. If it is
more likely than not that a portion of the deferred tax assets will not be
realized in a future period, the deferred tax assets will be reduced by a
valuation allowance based on management's estimates.
In addition, we operate in several countries throughout the world and our tax
returns filed in those jurisdictions are subject to review and examination by
tax authorities within those jurisdictions. We recognize uncertain tax positions
we believe have a greater than 50 percent likelihood of being sustained. We
cannot predict or provide assurance as to the ultimate outcome of any existing
or future assessments.
New Accounting Standards
See Note 2-Summary of Significant Accounting Policies, Risks and Uncertainties to our Consolidated Financial Statements for recently adopted accounting standards and new accounting standards not yet adopted.
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