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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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Cautionary Note Regarding Forward-Looking Statements |
This Quarterly Report on Form 10‑Q (“Form 10‑Q”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts included in this Form 10-Q, including without limitation, statements regarding our future financial position, business strategy, budgets, projected costs and plans, objectives of management for future operations, contract terms, and financing and funding are forward-looking statements. In addition, forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “predict,” “project,” “target,” “continue,” or the negative thereof or similar terminology. Forward-looking statements are based upon current plans, estimates, and expectations that are subject to risks, uncertainties, and assumptions. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Actual results may vary materially from those indicated or anticipated by such forward-looking statements. The inclusion of such statements should not be regarded as a representation that such plans, estimates, or expectations will be achieved.
These forward-looking statements include, among others, information concerning our possible or assumed future results of operations and statements about the following such 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;
•contracting of our rigs and actions by current or potential customers;
•the effects of actions by, or disputes among or between, members of the Organization of Petroleum Exporting Countries (“OPEC”) and other oil producing nations (together, “OPEC+”) with respect to production levels or other matters related to the prices of oil and natural gas;
•changes in future levels of drilling activity and capital expenditures by our customers, whether as a result of global capital markets and liquidity, changes in prices of oil and natural gas or otherwise, which may cause us to idle or stack additional rigs, or increase our capital expenditures and the construction, upgrade or acquisition of rigs;
•the ongoing effect and impact of public health crises, such as the coronavirus ("COVID-19") pandemic;
•changes in worldwide rig supply and demand, competition, or technology;
•possible cancellation, suspension, renegotiation or termination (with or without cause) of our contracts as a result of general or industry-specific economic conditions, mechanical difficulties, performance or other reasons;
•expansion and growth of our business and operations;
•our belief that the final outcome of our legal proceedings will not materially affect our financial results;
•impact of federal and state legislative and regulatory actions and policies, affecting our costs and increasing operation restrictions or delay and other adverse impacts on our business;
•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;
•impact of geopolitical developments and tensions, war and uncertainty in oil-producing countries (including the invasion of Ukraine by Russia and any related political or economic responses and counter-responses or otherwise by various global actors or the general effect on the global economy);
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•global economic conditions, such as a general slowdown in the global economy, supply chain disruptions, and inflationary pressures, and their impact on the Company;
•our financial condition and liquidity;
•tax matters, including our effective tax rates, tax positions, results of audits, changes in tax laws, treaties and regulations, tax assessments and liabilities for taxes;
•the occurrence of cybersecurity incidents, attacks or other breaches to our information technology systems;
•potential impacts on our business resulting from climate change, greenhouse gas regulations, and the impact of climate change related changes in the frequency and severity of weather patterns;
•potential long-lived asset impairments; and
•our sustainability strategy, including expectations, plans, or goals related to corporate responsibility, sustainability and environmental matters, and any related reputational risks as a result of execution of this strategy.
Important factors that could cause actual results to differ materially from our expectations or results discussed in the forward‑looking statements are disclosed in our 2022 Annual Report on Form 10‑K under Part I, Item 1A— “Risk Factors” and Item 7— “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All subsequent written and oral forward‑looking 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 forward‑looking statements based on changes in internal estimates, expectations or otherwise, except as required by law.
Helmerich & Payne, Inc. (“H&P,” which, together with its subsidiaries, is identified as the “Company,” “we,” “us,” or “our,” except where stated or the context requires otherwise) through its operating subsidiaries provides performance-driven drilling solutions and technologies that are intended to make hydrocarbon recovery safer and more economical for oil and gas exploration and production companies. As of December 31, 2022, our drilling rig fleet included a total of 262 drilling rigs. Our reportable operating business segments consist of the North America Solutions segment with 235 rigs, the Offshore Gulf of Mexico segment with seven offshore platform rigs and the International Solutions segment with 20 rigs as of December 31, 2022. At the close of the first quarter of fiscal year 2023, we had 201 active contracted rigs, of which 112 were under a fixed-term contract and 89 were working well-to-well, compared to 192 contracted rigs at September 30, 2022. 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 to take advantage of future opportunities.
Our revenues are primarily derived from the capital expenditures of companies involved in the exploration, development and production of crude oil and natural gas (“E&Ps”). Generally, the level of capital expenditures is dictated by current and expected future prices of crude oil and natural gas, which are determined by various supply and demand factors. Both commodities have historically been, and we expect them to continue to be, cyclical and highly volatile.
Our drilling services operations are organized into the following reportable operating segments: North America Solutions, Offshore Gulf of Mexico, and International Solutions. With respect to North America Solutions, the resurgence of oil and natural gas production coming from the United States brought about by unconventional shale drilling for oil has significantly impacted the supply of oil and natural gas and the type of rig utilized in the U.S. land drilling industry.
The technical requirements of drilling longer lateral unconventional shale wells often necessitate the use of rigs that 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.
There is a strong customer preference for super-spec rigs not only due to the higher rig specifications that enable more technical drilling but also 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. We are the largest provider of super-spec rigs in the industry and, accordingly, we believe we are well positioned to respond to various market conditions.
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Historically there has been a strong correlation between crude oil and natural gas prices and the demand for drilling rigs with the rig count increasing and decreasing with the up and down movements in the commodity prices. However, beginning in 2021, rig activity has not moved in tandem with crude oil prices to the same extent it had historically as a large portion of our customers instituted a more disciplined approach to their operations and capital spending in order to enhance their own financial returns. Those customers established capital budgets based upon commodity price assumptions for the upcoming year and adhered to them, not adjusting activity plans as commodity prices moved.
The capital budgets for calendar year 2023 have not yet been established by many of our customers; however, based upon the crude oil and natural gas pricing environment and many of our customers' desire to at least maintain their current production levels, we expect the level of capital spending and activity in calendar year 2023 to be modestly higher than that experienced in calendar year 2022. In recent years the U.S. demand for super-spec rigs has strengthened. Despite this increased demand for super-spec rigs there is still idle super-spec rig capacity in the market; however, much of that idle capacity represents rigs that have not been active for almost three years and in some cases even longer. Consequently, there have been additional costs incurred to bring those long-idled rigs back into working condition, which contributed to upward pricing for super-spec rigs. This supply-demand dynamic combined with the value proposition we provide our customers through our drilling expertise, high-quality FlexRig® fleet, and automation technology resulted in an improvement in our underlying contract economics.
Our North America Solutions active rig count has more than tripled from lows related to the COVID pandemic of 47 rigs in August 2020 to 184 rigs at December 31, 2022. Given the current market dynamics, our disciplined approach to deploying capital, and our fiscal year 2023 capital budget of $425 to $475 million, we project that our active rig count could reach up to 191 rigs during fiscal 2023. Included in our fiscal year 2023 capital budget were plans to activate a maximum of 16 rigs subject to customer demand. Through December 31, 2022, we reactivated and deployed nine additional rigs, while another active rig was damaged and removed from service resulting in a net addition of eight rigs during the quarter. The remaining seven potential rig reactivations will be subject to market conditions and customer demand. While H&P stands ready to respond to the future demand for its super-spec rigs, we will do so by applying the same disciplined approach, focusing on financial returns. That said, the market for our rigs and others like them in the industry will likely remain relatively tight from a supply perspective as supply-chain challenges and labor constraints experienced across the energy industry may inhibit the industry’s ability overall to supply a significant quantity of super-specs rigs. As the largest provider of super-spec rigs in the U.S., H&P is not immune from supply-chain challenges, potential labor constraints, or inflationary pressures that can arise as a result of these matters. However, we believe we are well positioned to address these challenges and do not believe they are a limiting factor relative to our activity plans for fiscal 2023 nor believe they will have a significant adverse impact on our financial results. From the demand perspective we expect incremental rig demand to moderate relative to what we have seen during the past two years, but the overall demand to remain at a relatively robust level. We believe the confluence of these supply and demand dynamics to remain constructive for contract pricing during fiscal 2023.
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. We do not foresee much activity or margin change in our Offshore Gulf of Mexico segment during the second fiscal quarter. However, there is potential that one currently active offshore rigs mobilizes to the yard during the fourth fiscal quarter after completing its current contract. Regarding our International Solutions segment, we see opportunities for improvement in activity and the related corresponding margin improvement, but those will likely occur on a more extended timeline compared to what we have experienced in the North America Solutions segment.
Investment in Tamboran
In October 2022, we purchased a $14.1 million equity investment, representing 106 million common shares (approximately 7.5 percent ownership stake), in Tamboran Resources Limited ("Tamboran"), a publicly traded company on the Australian Securities Exchange Ltd under the ticker "TBN." Tamboran is focused on playing a constructive role in the global energy transition towards a lower carbon future, by developing a significantly low CO2 gas resource within Australia's Beetaloo Sub-basin. Concurrent with the investment agreement, we entered into a fixed-term drilling services agreement with the same investee for which mobilization is expected to commence later this fiscal year. Approximately $30.3 million in revenue is expected to be earned over the term of the contract, and, as such, this amount is included within our contract backlog as of December 31, 2022.
During the three months ended December 31, 2022, we recognized a gain of $3.1 million recorded within Gain (Loss) on Investment Securities on our Unaudited Condensed Consolidated Statements of Operations, as a result of the change in fair value of the investment during the period.
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Significant Lease Not Yet Commenced
During the three months ended December 31, 2022, we entered into a new lease agreement for our new Tulsa corporate office. This lease is expected to commence sometime during the first half of calendar year 2024. The initial lease term is approximately 12 years with two unpriced five-year extension options.The aggregate future non-cancelable lease payments are estimated to be approximately $15.1 million.
As of December 31, 2022 and September 30, 2022, our contract drilling backlog, being the expected future dayrate revenue from executed contracts, was $1.4 billion and $1.2 billion, respectively. These amounts do not include anticipated contract renewals or expected performance bonuses. The increase in backlog at December 31, 2022 from September 30, 2022 is primarily due to the increase in contract pricing for fixed term drilling contracts executed during the period. Approximately 29.6 percent of the December 31, 2022 total backlog is reasonably expected to be fulfilled in fiscal year 2024 and thereafter.
The following table sets forth the total backlog by reportable segment as of December 31, 2022 and September 30, 2022, and the percentage of the December 31, 2022 backlog reasonably expected to be fulfilled in fiscal year 2024 and thereafter:
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(in billions) | December 31, 2022 | | September 30, 2022 | | Percentage Reasonably Expected to be Fulfilled in Fiscal Year 2024 and Thereafter |
North America Solutions | $ | 1.1 | | | $ | 0.9 | | | 24.0 | % |
Offshore Gulf of Mexico | — | | | — | | | — | |
International Solutions | 0.3 | | | 0.3 | | | 52.3 | |
| $ | 1.4 | | | $ | 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 drilling services and solutions revenue may decline and may not be ultimately realized as fixed‑term contracts and may, in certain instances, be terminated without an early termination payment” within our 2022 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”), regarding fixed term contract risk. Additionally, see Item 1A—"Risk Factors—The impact and effects of public health crises, pandemics and epidemics, such as the COVID-19 pandemic, could have a material adverse effect on our business, financial condition and results of operations" within our 2022 Annual Report on Form 10-K.
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Results of Operations for the Three Months Ended December 31, 2022 and 2021 |
Consolidated Results of Operations
Net Income (Loss) We reported income from continuing operations of $96.4 million ($0.90 per diluted share) from operating revenues of $719.6 million for the three months ended December 31, 2022 compared to a loss from continuing operations of $58.9 million ($0.48 loss per diluted share) from operating revenues of $409.8 million for the three months ended December 31, 2021. Included in net income for the three months ended December 31, 2022 is income of $0.7 million ($0.01 per diluted share) from discontinued operations. Including discontinued operations, we recorded net income of $97.1 million ($0.91 per diluted share) for the three months ended December 31, 2022 compared to a net loss of $51.4 million ($0.48 loss per diluted share) for the three months ended December 31, 2021.
Operating Revenue Consolidated operating revenues were $719.6 million for the three months ended December 31, 2022 and $409.8 million for the three months ended December 31, 2021. The increase is primarily driven by an increase in average rig pricing and activity levels in our North America Solutions segment and increased activity levels in our International Solutions segment. Refer to segment results below for further details.
Direct Operating Expenses, Excluding Depreciation and Amortization Direct operating expenses for the three months ended December 31, 2022 were $429.4 million, compared to $300.8 million for the three months ended December 31, 2021. The increase was primarily attributable to the aforementioned higher activity levels.
Selling, General and Administrative Expense Selling, general and administrative expenses increased to $48.5 million during the three months ended December 31, 2022 compared to $43.7 million during the three months ended December 31, 2021. The increase is primarily due to a $3.6 million increase in professional fees.
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Asset Impairment Charges During the three months ended December 31, 2022, we recorded $12.1 million in asset impairment charges as the Company initiated a plan to decommission, scrap and/or sell certain assets including four international FlexRig® drilling rigs, four international conventional drilling rigs, and additional equipment. The aggregate net book value of these assets of $13.2 million was written down to their estimated scrap value of $1.1 million. Comparatively, we had an impairment charge of $4.4 million for the three months ended December 31, 2021 as two Domestic partial rig substructures and two international FlexRig® drilling rigs were reclassified as assets held-for sale and the book values of these rigs were written down to their estimated scrap value of $0.1 million and fair value less estimated cost to sell of $0.9 million respectively.
Gain (Loss) on Investment Securities During the three months ended December 31, 2022, we recognized an aggregate loss of $15.1 million on investment securities compared to a gain of $47.9 million during the three months ended December 31, 2021. This loss was comprised of a $3.1 million gain on our equity investment in Tamboran as a result of the change in fair value of the investment during the period. This gain is offset by a $18.2 million loss on our equity investment in ADNOC Drilling caused by a decrease in the fair market value of the stock, compared to a gain of $47.7 million during the three months ended December 31, 2021.
Income Taxes We had income tax expense of $32.4 million for the three months ended December 31, 2022 (which includes discrete tax expense of $0.2 million related to equity compensation) compared to an income tax benefit of $7.6 million for the three months ended December 31, 2021 (which included discrete tax expense of $3.5 million related to equity compensation). Our statutory federal income tax rate for fiscal year 2023 is 21.0 percent (before incremental state and foreign taxes).
North America Solutions
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| Three Months Ended December 31, | | |
(in thousands, except operating statistics) | 2022 | | 2021 | | % Change |
Operating revenues | $ | 627,163 | | | $ | 341,034 | | | 83.9 | % |
Direct operating expenses | 366,855 | | | 256,568 | | | 43.0 | |
Depreciation and amortization | 89,814 | | | 93,621 | | | (4.1) | |
Research and development | 7,059 | | | 6,568 | | | 7.5 | |
Selling, general and administrative expense | 14,190 | | | 10,829 | | | 31.0 | |
Asset impairment charges | 3,948 | | | 1,868 | | | 111.3 | |
Restructuring charges | — | | | 473 | | | (100.0) | |
Segment operating income (loss) | $ | 145,297 | | | $ | (28,893) | | | (602.9) | |
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Financial Data and Other Operating Statistics1: | | | | | |
Direct margin (Non-GAAP)2 | $ | 260,308 | | | $ | 84,466 | | | 208.2 | |
Revenue days3 | 16,578 | | | 12,946 | | | 28.1 | |
Average active rigs4 | 180.2 | | | 140.7 | | | 28.1 | |
Number of active rigs at the end of period5 | 184 | | | 154 | | | 19.5 | |
Number of available rigs at the end of period | 235 | | | 236 | | | (0.4) | |
Reimbursements of "out-of-pocket" expenses | $ | 79,159 | | | $ | 43,129 | | | 83.5 | |
(1)These operating metrics and financial data, including average active rigs, are provided to 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.
(2)Direct margin, which is considered a non-GAAP metric, is defined as operating revenues less direct operating expenses and is included as a supplemental disclosure because we believe it is useful in assessing and understanding our current operational performance, especially in making comparisons over time. See — Non-GAAP Measurements below for a reconciliation of segment operating income (loss) to direct margin.
(3)Defined as the number of contractual days we recognized revenue for during the period.
(4)Active rigs generate revenue for the Company; accordingly, 'average active rigs' represents the average number of rigs generating revenue during the applicable time period. This metric is calculated by dividing revenue days by total days in the applicable period (i.e., 92 days).
(5)Defined as the number of rigs generating revenue at the applicable end date of the time period.
Operating Revenues Operating revenues were $627.2 million and $341.0 million in the three months ended December 31, 2022 and 2021, respectively. The $286.2 million increase in operating revenue is primarily due to a 28.1 percent increase in activity levels and higher pricing levels.
Direct Operating Expenses Direct operating expenses increased to $366.9 million during the three months ended December 31, 2022 as compared to $256.6 million during the three months ended December 31, 2021. This increase was primarily due to an increase of $57.5 million in labor expense and an increase of $16.1 million in materials and supplies driven by higher activity levels and increased field wages beginning in early December 2021 and late September 2022.
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Depreciation and Amortization Depreciation expense decreased to $89.8 million during the three months ended December 31, 2022 as compared to $93.6 million during the three months ended December 31, 2021. The decrease was primarily attributable to the relatively low levels of capital expenditures during the last twelve months.
Selling, General and Administrative Expense Selling, general and administrative expense increased to $14.2 million during the three months ended December 31, 2022 as compared to $10.8 million during the three months ended December 31, 2021. The increase was largely driven by the $2.7 million increase in professional fees.
Asset Impairment Charges During the three months ended December 31, 2022, our North America Solutions assets that were previously classified as Assets Held-for-Sale at September 30, 2022 were either sold or written down to scrap value. The aggregate net book value of these remaining assets was $3.0 million, which exceeded the estimated scrap value of $0.3 million, resulting in a non-cash impairment charge of $2.7 million during the three months ended December 31, 2022. During the three months ended December 31, 2022, we also identified additional equipment that met the asset held-for-sale criteria and was reclassified as Assets Held-for-Sale on our Unaudited Condensed Consolidated Balance Sheets. The aggregate net book value of the equipment of $1.4 million was written down to its estimated scrap value of $0.1 million, resulting in a non-cash impairment charge of $1.3 million during the three months ended December 31, 2022. These impairment charges are recorded within our North America Solutions segment in our Unaudited Condensed Consolidation Statement of Operations. This is compared to an impairment charge of $1.9 million for the three months ended December 31, 2021 as two partial rig substructures were reclassified as assets held-for sale and the book values of these rigs were written down to their estimated scrap value of $0.1 million.
Offshore Gulf of Mexico
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| Three Months Ended December 31, | | |
(in thousands, except operating statistics) | 2022 | | 2021 | | % Change |
Operating revenues | $ | 35,164 | | | $ | 29,314 | | | 20.0 | % |
Direct operating expenses | 25,691 | | | 20,711 | | | 24.0 | |
Depreciation | 1,894 | | | 2,380 | | | (20.4) | |
Selling, general and administrative expense | 833 | | | 757 | | | 10.0 | |
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Segment operating income | $ | 6,746 | | | $ | 5,466 | | | 23.4 | |
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Financial Data and Other Operating Statistics1: | | | | | |
Direct margin (Non-GAAP)2 | $ | 9,473 | | | $ | 8,603 | | | 10.1 | |
Revenue days3 | 368 | | | 368 | | | — | |
Average active rigs4 | 4.0 | | | 4.0 | | | — | |
Number of active rigs at the end of period5 | 4 | | | 4 | | | — | |
Number of available rigs at the end of period | 7 | | | 7 | | | — | |
Reimbursements of "out-of-pocket" expenses | $ | 7,189 | | | $ | 6,075 | | | 18.3 | |
(1)These operating metrics and financial data, including average active rigs, are provided to 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.
(2)Direct margin, which is considered a non-GAAP metric, is defined as operating revenues less direct operating expenses and is included as a supplemental disclosure because we believe it is useful in assessing and understanding our current operational performance, especially in making comparisons over time. See — Non-GAAP Measurements below for a reconciliation of segment operating income (loss) to direct margin.
(3)Defined as the number of contractual days we recognized revenue for during the period.
(4)Active rigs generate revenue for the Company; accordingly, 'average active rigs' represents the average number of rigs generating revenue during the applicable time period. This metric is calculated by dividing revenue days by total days in the applicable period (i.e., 92 days).
(5)Defined as the number of rigs generating revenue at the applicable end date of the time period.
Operating Revenues Operating revenues were $35.2 million and $29.3 million in the three months ended December 31, 2022 and 2021, respectively. The 20.0 percent increase in operating revenue is primarily driven by pricing increases and wage increase pass-throughs which occurred in the latter portion of fiscal year 2022.
Direct Operating Expenses Direct operating expenses increased to $25.7 million during the three months ended December 31, 2022 as compared to $20.7 million during the three months ended December 31, 2021. The increase was primarily driven by a $3.2 million increase in self-insurance liabilities related to prior period claims coupled with the mix of rigs working at full utilization as opposed to mobilizing or being on standby, in addition to the factors described above.
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International Solutions
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| Three Months Ended December 31, | | |
(in thousands, except operating statistics) | 2022 | | 2021 | | % Change |
Operating revenues | $ | 54,801 | | | $ | 37,159 | | | 47.5 | % |
Direct operating expenses | 40,977 | | | 24,131 | | | 69.8 | |
Depreciation | 1,392 | | | 755 | | | 84.4 | |
Selling, general and administrative expense | 2,709 | | | 1,729 | | | 56.7 | |
Asset impairment charges | 8,149 | | | 2,495 | | | 226.6 | |
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Segment operating income | $ | 1,574 | | | $ | 8,049 | | | (80.4) | |
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Financial Data and Other Operating Statistics1: | | | | | |
Direct margin (Non-GAAP)2 | $ | 13,824 | | | $ | 13,028 | | | 6.1 | |
Revenue days3 | 1,140 | | | 647 | | | 76.2 | |
Average active rigs4 | 12.3 | | | 7.0 | | | 76.2 | |
Number of active rigs at the end of period5 | 13 | | | 8 | | | 62.5 | |
Number of available rigs at the end of period | 20 | | | 28 | | | (28.6) | |
Reimbursements of "out-of-pocket" expenses | $ | 2,856 | | | $ | 1,443 | | | 97.9 | |
(1)These operating metrics and financial data, including average active rigs, are provided to 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.
(2)Direct margin, which is considered a non-GAAP metric, is defined as operating revenues less direct operating expenses and is included as a supplemental disclosure because we believe it is useful in assessing and understanding our current operational performance, especially in making comparisons over time. See — Non-GAAP Measurements below for a reconciliation of segment operating income (loss) to direct margin.
(3)Defined as the number of contractual days we recognized revenue for during the period.
(4)Active rigs generate revenue for the Company; accordingly, 'average active rigs' represents the average number of rigs generating revenue during the applicable time period. This metric is calculated by dividing revenue days by total days in the applicable period (i.e., 92 days).
(5)Defined as the number of rigs generating revenue at the applicable end date of the time period.
Operating Revenues Operating revenues increased to $54.8 million during the three months ended December 31, 2022 compared to $37.2 million during the three months ended December 31, 2021. This increase is primarily driven by a 76.2 percent increase in activity levels. Additionally, during the three months ended December 31, 2021, we recognized $16.4 million in revenue related to the settlement of a contract drilling dispute related to drilling services provided from fiscal years 2016 through 2019 with YPF S.A. Refer to Note 8—Revenue from Contracts with Customers for additional details.
Direct Operating Expenses Direct operating expenses increased to $41.0 million during the three months ended December 31, 2022 as compared to $24.1 million during the three months ended December 31, 2021. This increase was primarily driven by an increase of $7.3 million in labor expense and an increase of $5.2 million in materials and supplies given higher activity levels.
Asset Impairment Charges During the three months ended December 31, 2022, the Company initiated a plan to decommission and scrap four international FlexRig® drilling rigs and four conventional drilling rigs located in Argentina that are not suitable for unconventional drilling. As a result, these rigs were reclassified to Assets Held-for-Sale on our Unaudited Condensed Consolidated Balance Sheets as of December 31, 2022. The rigs’ aggregate net book value of $8.8 million was written down to the estimated scrap value of $0.7 million, which resulted in a non-cash impairment charge of $8.1 million within our International Solutions segment and recorded in our Unaudited Condensed Consolidated Statement of Operations during the three months ended December 31, 2022. During the three months ended December 31, 2021, we recorded $2.5 million in asset impairment charges as two international FlexRig® drilling rigs were reclassified as assets held-for sale and the book values of these rigs were written down to their fair value less estimated cost to sell of $0.9 million.
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Other Operations
Results of our other operations, excluding corporate selling, general and administrative costs, corporate restructuring, and corporate depreciation, are as follows:
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| Three Months Ended December 31, | | |
(in thousands) | 2022 | | 2021 | | % Change |
Operating revenues | $ | 18,911 | | | $ | 15,923 | | | 18.8 | % |
Direct operating expenses | 13,589 | | | 11,320 | | | 20.0 | |
Depreciation | 457 | | | 345 | | | 32.5 | |
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Selling, general and administrative expense | 188 | | | 329 | | | (42.9) | |
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Operating income | $ | 4,677 | | | $ | 3,929 | | | 19.0 | |
Operating Revenues We continue to use our Captive insurance companies to insure the deductibles for our domestic workers’ compensation, general liability, automobile liability claims programs, and medical stop-loss program and to insure the deductibles from the Company's international casualty and rig property programs. Intercompany premium revenues recorded by the Captives during the three months ended December 31, 2022 and 2021 amounted to $16.4 million and $13.6 million, respectively, which were eliminated upon consolidation.
Direct Operating Expenses Direct operating expenses consisted primarily of $2.9 million and $(2.2) million in adjustments to accruals for estimated losses allocated to the Captives and rig and casualty insurance premiums of $10.0 million and $8.8 million during the three months ended December 31, 2022 and 2021, respectively. The change to accruals for estimated losses is primarily due to actuarial valuation adjustments by our third-party actuary.
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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 return cash to shareholders through dividends or share repurchases, or we may invest in highly rated short‑term money market and debt securities. These investments can include U.S. Treasury securities, U.S. Agency issued debt securities, highly rated corporate bonds and commercial paper, certificates of deposit and money market funds. However, in some international locations we may make short-term investments that are less conservative, as equivalent highly rated investments are unavailable. See—Note 2—Summary of Significant Accounting Policies, Risks and Uncertainties—International Solutions Drilling Risks.
We may seek to access the debt and equity capital markets from time to time to raise additional capital, increase liquidity as necessary, fund our additional purchases, exchange or redeem senior notes, or repay any amounts under the 2018 Credit Facility. Our ability to access the debt and equity capital markets depends on a number of factors, including our credit rating, market and industry conditions and market perceptions of our industry, general economic conditions, our revenue backlog and our capital expenditure commitments.
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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 rigs, the timing of collections on outstanding accounts receivable, the timing of payments to our vendors for operating costs, and capital expenditures. 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 or cash flows as we have been able to more than offset these cumulative cost trends with rate increases.
As of December 31, 2022, we had cash and cash equivalents of $229.2 million and short-term investments of $118.5 million. Our cash flows for the fiscal years ended December 31, 2022, and 2021 are presented below:
| | | | | | | | | | | |
| Three Months Ended December 31, |
(in thousands) | 2022 | | 2021 |
Net cash provided by (used in): | | | |
Operating activities | $ | 185,375 | | | $ | (3,718) | |
Investing activities | (82,169) | | | (44,729) | |
Financing activities | (100,557) | | | (635,610) | |
Net increase (decrease) in cash and cash equivalents and restricted cash | $ | 2,649 | | | $ | (684,057) | |
Operating Activities
Our operating net working capital (non-GAAP) as of December 31, 2022 and September 30, 2022 is presented below:
| | | | | | | | | | | |
| December 31, | | September 30, |
(in thousands) | 2022 | | 2022 |
Total current assets | $ | 1,078,614 | | | $ | 1,002,944 | |
Less: | | | |
Cash and cash equivalents | 229,186 | | | 232,131 | |
Short-term investments | 118,457 | | | 117,101 | |
Assets held-for-sale | 1,551 | | | 4,333 | |
| 729,420 | | | 649,379 | |
| | | |
Total current liabilities | 469,571 | | | 394,810 | |
Less: | | | |
Dividends payable | 51,540 | | | 26,693 | |
Advance payment for sale of property, plant and equipment | — | | | 600 | |
| $ | 418,031 | | | $ | 367,517 | |
| | | |
Operating net working capital (non-GAAP) | $ | 311,389 | | | $ | 281,862 | |
Cash flows provided by (used in) operating activities were approximately $185.4 million and $(3.7) million for the three months ended December 31, 2022 and 2021, respectively. The change in cash provided by operating activities is primarily driven by higher activity and rates, partially offset by changes in working capital. 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 advance payments for sale of property, plant and equipment. Operating net working capital was $311.4 million and $281.9 million as of December 31, 2022 and September 30, 2022, respectively. This metric is considered a non-GAAP measure of the Company's liquidity. The Company considers operating net working capital to be a supplemental measure for presenting and analyzing trends in our cash flows from operations over time. Likewise, the Company believes that operating net working capital is useful to investors because it provides a means to evaluate the operating performance of the business using criteria that are used by our internal decision makers. The increase in operating net working capital was primarily driven by higher rig activity and rates.
Investing Activities
Capital Expenditures Our capital expenditures during the three months ended December 31, 2022 were $96.0 million compared to $44.0 million during the three months ended December 31, 2021. The increase in capital expenditures is driven by higher activity and increased costs associated with rig upgrades and reactivations.
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Purchases & Sales of Short-Term Investments Our net purchases of short-term investments during the three months ended December 31, 2022 were $0.9 million compared to $9.3 million during the three months ended December 31, 2021. The change is driven by our ongoing liquidity management.
Purchases of Long-Term Investments Our net purchases of long-term investments during the three months ended December 31, 2022 were $16.2 million compared to $9.0 million during the three months ended December 31, 2021. The increase is primarily driven by our purchase of $14.1 million equity investment in Tamboran Resources Limited.
Sale of Assets Our proceeds from asset sales during the three months ended December 31, 2022 were $31.0 million compared to proceeds of $21.5 million during the three months ended December 31, 2021. The increase in proceeds is mainly driven by higher rig activity which drives higher reimbursement from customers for lost or damaged drill pipe and other used drilling equipment.
Financing Activities
Dividends We paid dividends of $0.485 per share, comprised of a base cash dividend of $0.25 and a supplemental cash dividend of $0.235, during the three months ended December 31, 2022. We paid dividends of $0.25 per share during the three months ended December 31, 2021. Total dividends paid were $51.8 million and $27.3 million during the three months ended December 31, 2022 and 2021, respectively. A base cash dividend of $0.25 per share was declared on December 9, 2022 and a quarterly supplemental cash dividend of $0.235 per share for shareholders of record on February 14, 2023, payable on February 28, 2023. The declaration and amount of future dividends is at the discretion of the Board and subject to our financial condition, results of operations, cash flows, and other factors the Board deems relevant.
Redemption of 4.65% Senior Notes due 2025 On October 27, 2021, we redeemed all of the outstanding 2025 Notes, resulting in a cash outflow of $487.1 million. As a result, the associated make-whole premium of $56.4 million was paid during the first fiscal quarter of 2022 contemporaneously with the October 27, 2021 debt extinguishment. 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 5—Debt.
Repurchase of Shares The Company has an evergreen authorization from the Board of Directors for the repurchase of up to four million common shares in any calendar year. In December 2022, the Board of Directors increased the maximum number of shares authorized to be repurchased in calendar year 2023 to five million common shares, effective on January 1, 2023. The repurchases may be made using our cash and cash equivalents or other available sources. During the three months ended December 31, 2022 and 2021, we repurchased 0.8 million common shares at an aggregate cost of $39.1 million and 2.5 million common shares at an aggregate cost of $60.4 million, respectively, which are held as treasury shares.
Credit Facilities
On November 13, 2018, we entered into a credit agreement by and among the Company, as borrower, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto, which was amended on November 13, 2019, providing for an unsecured revolving credit facility (as amended, the “2018 Credit Facility”), that was set to mature on November 13, 2024. 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. Additionally, on March 8, 2022, we entered into the second amendment to the 2018 Credit Facility, which, among other things, raised the number of potential future extensions of the maturity date applicable to extending lenders from one to two such potential extensions and replaced provisions in respect of interest rate determinations that were based on the London Interbank Offered Rate with provisions based on the Secured Overnight Financing Rate. Lenders with $680.0 million of commitments under the 2018 Credit Facility also exercised their option to extend the maturity of the 2018 Credit Facility from November 12, 2025 to November 11, 2026. 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.
The 2018 Credit Facility has $750.0 million in aggregate availability with a maximum of $75.0 million available for use as letters of credit. As of December 31, 2022, there were no borrowings or letters of credit outstanding, leaving $750.0 million available to borrow under the 2018 Credit Facility. For a full description of the 2018 Credit Facility, see Note 7—Debt to the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K.
As of December 31, 2022, we had $95.0 million in uncommitted bilateral credit facilities, for the purpose of obtaining the issuance of international letters of credit, bank guarantees, and performance bonds. Of the $95.0 million, $40.0 million was outstanding as of December 31, 2022. Separately, we had $2.1 million in standby letters of credit and bank guarantees outstanding. In total, we had $42.1 million outstanding as of December 31, 2022.
The applicable agreements for all unsecured debt contain additional terms, conditions and restrictions that we believe are usual and customary in unsecured debt arrangements for companies that are similar in size and credit quality. At December 31, 2022, we were in compliance with all debt covenants.
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Senior Notes
2.90% Senior Notes due 2031 On September 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 in the United States pursuant to Rule 144A under the Securities Act (“Rule 144A”) and to certain non-U.S. persons in transactions outside the United States pursuant to Regulation S under the Securities Act (“Regulation S”). Interest on the 2031 Notes is payable semi-annually on March 29 and September 29 of each year, commencing on March 29, 2022. The 2031 Notes will mature on September 29, 2031 and bear interest at a rate of 2.90 percent annum. In June 2022, we settled a registered exchange offer (the “Registered Exchange Offer”) to exchange the 2031 Notes for new, SEC-registered notes that are substantially identical to the terms of the 2031 Notes, except that the offer and issuance of the new notes have been registered under the Securities Act and certain transfer restrictions, registration rights and additional interest provisions relating to the 2031 Notes do not apply to the new notes. One hundred percent of the 2031 Notes were exchanged in the Registered Exchange Offer.
The indenture governing the 2031 Notes contains certain covenants that, among other things and subject to certain exceptions, limit the ability of the Company and its subsidiaries to incur certain liens; engage in sale and lease-back transactions; and consolidate, merge or transfer all or substantially all of the assets of the Company. The indenture governing the 2031 Notes also contains customary events of default with respect to the 2031 Notes.
4.65% Senior Notes due 2025 On December 20, 2018, we issued approximately $487.1 million in aggregate principal amount of the 2025 Notes. The debt issuance cost was being amortized straight-line over the stated life of the obligation, which approximated the effective interest method.
On September 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 on September 29, 2021.
On October 27, 2021, we redeemed all of the outstanding 2025 Notes. As a result, the associated make-whole premium of $56.4 million and the write off of the unamortized discount and debt issuance costs of $3.7 million were recognized during the first fiscal quarter of 2022 contemporaneously with the October 27, 2021 debt extinguishment and recorded in Loss on Extinguishment of Debt on our Unaudited Condensed Consolidated Statements of Operations during the three months ended December 31, 2021.
Future Cash Requirements
Our operating cash requirements, scheduled debt repayments, interest payments, any declared dividends, and estimated capital expenditures for fiscal year 2023 are expected to be funded through current cash and cash to be provided from operating activities. However, there can be no assurance that we will continue to generate cash flows at current levels. If needed, we may decide to obtain additional funding from our $750.0 million 2018 Credit Facility. We currently do not anticipate the need to draw on the 2018 Credit Facility. Our indebtedness under our unsecured senior notes totaled $550.0 million at December 31, 2022 and matures on September 29, 2031.
As of December 31, 2022, we had a $537.3 million deferred tax liability on our Unaudited Condensed Consolidated Balance Sheets, primarily related to temporary differences between the financial and income tax basis of property, plant and equipment. Our levels of capital expenditures over the last several years have been subject to accelerated depreciation methods (including bonus depreciation) available under the Internal Revenue Code of 1986, as amended, enabling us to defer a portion of cash tax payments to future years. Future levels of capital expenditures and results of operations will determine the timing and amount of future cash tax payments. We expect to be able to meet any such obligations utilizing cash and investments on hand, as well as cash generated from ongoing operations.
At December 31, 2022, we had $3.2 million recorded for uncertain tax positions and related interest and penalties. However, the timing of such payments to the respective taxing authorities cannot be estimated at this time.
The long‑term debt to total capitalization ratio was 16.7 percent at December 31, 2022 and 16.6 percent at September 30, 2022. For additional information regarding debt agreements, refer to Note 5—Debt to the Unaudited Condensed Consolidated Financial Statements.
There were no other significant changes in our financial position since September 30, 2022.
Material commitments as reported in our 2022 Annual Report on Form 10-K have not changed significantly at December 31, 2022, other than those disclosed in Note 12—Commitments and Contingencies to the Unaudited Condensed Consolidated Financial Statements.
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Critical Accounting Policies and Estimates |
Our accounting policies and estimates that are critical or the most important to understand our financial condition and results of operations, and that require management to make the most difficult judgments, are described in our 2022 Annual Report on Form 10-K. There have been no material changes in these critical accounting policies and estimates.
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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.
Direct Margin
Direct margin is considered a non-GAAP metric. We define "Direct margin" as operating revenues less direct operating expenses. Direct margin is included as a supplemental disclosure because we believe it is useful in assessing and understanding our current operational performance, especially in making comparisons over time. Direct margin is not a substitute for financial measures prepared in accordance with GAAP and should therefore be considered only as supplemental to such GAAP financial measures.
The following table reconciles direct margin to segment operating income (loss), which we believe is the financial measure calculated and presented in accordance with GAAP that is most directly comparable to direct margin.
| | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2022 |
(in thousands) | North America Solutions | | Offshore Gulf of Mexico | | International Solutions |
Segment operating income | $ | 145,297 | | | $ | 6,746 | | | $ | 1,574 | |
Add back: | | | | | |
Depreciation and amortization | 89,814 | | | 1,894 | | | 1,392 | |
Research and development | 7,059 | | | — | | | — | |
Selling, general and administrative expense | 14,190 | | | 833 | | | 2,709 | |
Asset impairment charges | 3,948 | | | — | | | 8,149 | |
| | | | | |
Direct margin (Non-GAAP) | $ | 260,308 | | | $ | 9,473 | | | $ | 13,824 | |
| | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2021 |
(in thousands) | North America Solutions | | Offshore Gulf of Mexico | | International Solutions |
Segment operating income (loss) | $ | (28,893) | | | $ | 5,466 | | | $ | 8,049 | |
Add back: | | | | | |
Depreciation and amortization | 93,621 | | | 2,380 | | | 755 | |
Research and development | 6,568 | | | — | | | — | |
Selling, general and administrative expense | 10,829 | | | 757 | | | 1,729 | |
Asset impairment charges | 1,868 | | | — | | | 2,495 | |
Restructuring charges | 473 | | | — | | | — | |
Direct margin (Non-GAAP) | $ | 84,466 | | | $ | 8,603 | | | $ | 13,028 | |
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