10-Q 1 a11-31849_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For quarterly period ended:  December 31, 2011

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                    to                   

 

Commission File Number: 1-4221

 

HELMERICH & PAYNE, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

73-0679879

(State or other jurisdiction of

 

(I.R.S. Employer I.D. Number)

incorporation or organization)

 

 

 

1437 South Boulder Avenue, Tulsa, Oklahoma,74119

(Address of principal executive office)(Zip Code)

 

(918) 742-5531

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year,

if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

CLASS

 

OUTSTANDING AT January 31, 2012

Common Stock, $0.10 par value

 

107,386,075

 

 

 



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

 

 

Page No.

 

 

 

PART  I.

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Consolidated Condensed Balance Sheets as of December 31, 2011 and September 30, 2011

3

 

 

 

 

 

 

Consolidated Condensed Statements of Income for the Three Months Ended December 31, 2011 and 2010

4

 

 

 

 

 

 

Consolidated Condensed Statements of Cash Flows for the Three Months Ended December 31, 2011 and 2010

5

 

 

 

 

 

 

Consolidated Condensed Statement of Shareholders’ Equity for the Three Months Ended December 31, 2011

6

 

 

 

 

 

 

Notes to Consolidated Condensed Financial Statements

7-17

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18-23

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

24

 

 

 

 

 

Item 4.

Controls and Procedures

24

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

24

 

 

 

 

 

Item 1A.

Risk Factors

24-25

 

 

 

 

 

Item 6.

Exhibits

25

 

 

 

 

 

Signatures

 

26

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

(in thousands, except share and per share amounts)

 

ITEM 1. FINANCIAL STATEMENTS

 

 

 

December 31,

 

September 30,

 

 

 

2011

 

2011

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

347,859

 

$

364,246

 

Accounts receivable, less reserve of $745 at December 31, 2011 and $776 at September 30, 2011

 

495,389

 

460,540

 

Inventories

 

58,907

 

54,407

 

Deferred income taxes

 

15,789

 

19,855

 

Prepaid expenses and other

 

77,707

 

49,736

 

Current assets of discontinued operations

 

7,777

 

7,529

 

Total current assets

 

1,003,428

 

956,313

 

 

 

 

 

 

 

Investments

 

399,995

 

347,924

 

Property, plant and equipment, net

 

3,832,001

 

3,677,070

 

Other assets

 

22,463

 

22,584

 

 

 

 

 

 

 

Total assets

 

$

5,257,887

 

$

5,003,891

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

122,232

 

$

103,852

 

Accrued liabilities

 

186,446

 

192,898

 

Long-term debt due within one year

 

115,000

 

115,000

 

Current liabilities of discontinued operations

 

5,171

 

4,979

 

Total current liabilities

 

428,849

 

416,729

 

 

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

 

Long-term debt

 

235,000

 

235,000

 

Deferred income taxes

 

1,048,130

 

975,280

 

Other

 

97,494

 

104,285

 

Non-current liabilities of discontinued operations

 

2,606

 

2,550

 

Total noncurrent liabilities

 

1,383,230

 

1,317,115

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, $.10 par value, 160,000,000 shares authorized, 107,489,540 shares and 107,243,473 shares issued as of December 31, 2011 and September 30, 2011, respectively and 107,337,767 and 107,086,324 shares outstanding as of December 31, 2011 and September 30, 2011, respectively

 

10,749

 

10,724

 

Preferred stock, no par value, 1,000,000 shares authorized, no shares issued

 

 

 

Additional paid-in capital

 

218,724

 

210,909

 

Retained earnings

 

3,090,946

 

2,954,210

 

Accumulated other comprehensive income

 

131,785

 

98,908

 

Treasury stock, at cost

 

(6,396

)

(4,704

)

Total shareholders’ equity

 

3,445,808

 

3,270,047

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

5,257,887

 

$

5,003,891

 

 

The accompanying notes are an integral part of these statements.

 

3



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2011

 

2010

 

Operating revenues:

 

 

 

 

 

Drilling — U.S. Land

 

$

617,779

 

$

476,818

 

Drilling — Offshore

 

50,792

 

44,867

 

Drilling — International Land

 

60,735

 

68,954

 

Other

 

3,282

 

4,003

 

 

 

732,588

 

594,642

 

 

 

 

 

 

 

Operating costs and other:

 

 

 

 

 

Operating costs, excluding depreciation

 

391,032

 

330,046

 

Depreciation

 

86,288

 

73,180

 

General and administrative

 

26,163

 

19,889

 

Research and development

 

3,249

 

3,470

 

Income from asset sales

 

(4,683

)

(2,669

)

 

 

502,049

 

423,916

 

 

 

 

 

 

 

Operating income from continuing operations

 

230,539

 

170,726

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest and dividend income

 

336

 

314

 

Interest expense

 

(2,461

)

(4,451

)

Other

 

21

 

166

 

 

 

(2,104

)

(3,971

)

 

 

 

 

 

 

Income from continuing operations before income taxes

 

228,435

 

166,755

 

Income tax provision

 

84,138

 

62,390

 

Income from continuing operations

 

144,297

 

104,365

 

 

 

 

 

 

 

Loss from discontinued operations before income taxes

 

(11

)

(215

)

Income tax provision

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

(11

)

(215

)

 

 

 

 

 

 

NET INCOME

 

$

144,286

 

$

104,150

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

Income from continuing operations

 

$

1.34

 

$

0.98

 

Loss from discontinued operations

 

$

 

$

 

Net income

 

$

1.34

 

$

0.98

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

Income from continuing operations

 

$

1.32

 

$

0.96

 

Loss from discontinued operations

 

$

 

$

 

Net income

 

$

1.32

 

$

0.96

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

Basic

 

107,186

 

106,031

 

Diluted

 

108,788

 

107,852

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.07

 

$

0.06

 

 

The accompanying notes are an integral part of these statements.

 

4



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2011

 

2010

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

144,286

 

$

104,150

 

Adjustment for loss from discontinued operations

 

11

 

215

 

Income from continuing operations

 

144,297

 

104,365

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

86,288

 

73,180

 

Provision for bad debt

 

2

 

1

 

Stock-based compensation

 

3,922

 

3,187

 

Other

 

 

(1

)

Income from asset sales

 

(4,683

)

(2,669

)

Deferred income tax expense

 

57,585

 

42,080

 

Change in assets and liabilities-

 

 

 

 

 

Accounts receivable

 

(34,851

)

45,259

 

Inventories

 

(4,500

)

(285

)

Prepaid expenses and other

 

(24,440

)

4,910

 

Accounts payable

 

18,383

 

(24,583

)

Accrued liabilities

 

791

 

(15,072

)

Deferred income taxes

 

113

 

231

 

Other noncurrent liabilities

 

(6,258

)

8,267

 

Net cash provided by operating activities from continuing operations

 

236,649

 

238,870

 

Net cash used in operating activities from discontinued operations

 

(11

)

(215

)

Net cash provided by operating activities

 

236,638

 

238,655

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(256,943

)

(116,224

)

Proceeds from asset sales

 

10,155

 

3,028

 

Acquisition of TerraVici Drilling Solutions

 

 

(4,000

)

Net cash used in investing activities

 

(246,788

)

(117,196

)

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from line of credit

 

 

10,000

 

Payments on line of credit

 

 

(20,000

)

Dividends paid

 

(7,522

)

(6,376

)

Exercise of stock options

 

373

 

2,988

 

Tax withholdings related to net share settlements of restricted stock

 

(1,514

)

 

Excess tax benefit from stock-based compensation

 

2,426

 

2,733

 

Net cash used in financing activities

 

(6,237

)

(10,655

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(16,387

)

110,804

 

Cash and cash equivalents, beginning of period

 

364,246

 

63,020

 

Cash and cash equivalents, end of period

 

$

347,859

 

$

173,824

 

 

The accompanying notes are an integral part of these statements.

 

5



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED DECEMBER 31, 2011

(Unaudited)

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

Total

 

 

 

Common Stock

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury Stock

 

Shareholders’

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income

 

Shares

 

Amount

 

Equity

 

Balance, September 30, 2011

 

107,243

 

$

10,724

 

$

210,909

 

$

2,954,210

 

$

98,908

 

157

 

$

(4,704

)

$

3,270,047

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

144,286

 

 

 

 

 

 

 

144,286

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in value on available-for-sale securities

 

 

 

 

 

 

 

 

 

32,338

 

 

 

 

 

32,338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net periodic benefit costs-net of actuarial gain

 

 

 

 

 

 

 

 

 

539

 

 

 

 

 

539

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

177,163

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends ($.07 per share)

 

 

 

 

 

 

 

(7,550

)

 

 

 

 

 

 

(7,550

)

Exercise of stock options

 

206

 

21

 

3,011

 

 

 

 

 

46

 

(2,659

)

373

 

Tax benefit of stock-based awards, including excess tax benefits of $2.7 million

 

 

 

 

 

3,367

 

 

 

 

 

 

 

 

 

3,367

 

Stock issued for vested restricted stock, net of shares withheld for employee taxes

 

41

 

4

 

(2,485

)

 

 

 

 

(51

)

967

 

(1,514

)

Stock-based compensation

 

 

 

 

 

3,922

 

 

 

 

 

 

 

 

 

3,922

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2011

 

107,490

 

$

10,749

 

$

218,724

 

$

3,090,946

 

$

131,785

 

152

 

$

(6,396

)

$

3,445,808

 

 

The accompanying notes are an integral part of these statements.

 

6



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

1.               Basis of Presentation

 

Unless the context otherwise requires, the use of the terms “the Company,” “we,” “us” and “our” in these Notes to Consolidated Condensed Financial Statements refers to Helmerich & Payne, Inc. and its consolidated subsidiaries.

 

The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “Commission”) pertaining to interim financial information.  Accordingly, these interim financial statements do not include all information or footnote disclosures required by GAAP for complete financial statements and, therefore, should be read in conjunction with the Consolidated Financial Statements and notes thereto in our 2011 Annual Report on Form 10-K and other current filings with the Commission.  In the opinion of management, all adjustments, consisting of those of a normal recurring nature, necessary to present fairly the results of the periods presented have been included.  The results of operations for the interim periods presented may not necessarily be indicative of the results to be expected for the full year.

 

A land rig in the U.S. Land segment met the held-for-sale classification criteria at December 31, 2011.  The net book value of the rig is included in prepaid expenses and other in the Consolidated Condensed Balance Sheet at December 31, 2011.

 

As more fully described in our 2011 Annual Report on Form 10-K, our contract drilling revenues are comprised of daywork drilling contracts for which the related revenues and expenses are recognized as services are performed.  For contracts that are terminated by customers prior to the expirations of their fixed term, contractual provisions customarily require early termination amounts to be paid to us. Revenues from early terminated contracts are recognized when all contractual requirements have been met.

 

2.               Discontinued Operations

 

On June 30, 2010, the Official Gazette of Venezuela published the Decree of Venezuelan President Hugo Chavez, which authorized the “forceful acquisition” of eleven rigs owned by our Venezuelan subsidiary.  The Decree also authorized the seizure of “all the personal and real property and other improvements” used by our Venezuelan subsidiary in its drilling operations.  The seizing of our assets became effective June 30, 2010 and met the criteria established for recognition as discontinued operations under accounting standards for presentation of financial statements.  Therefore, operations from the Venezuelan subsidiary, an operating segment within the International Land segment, have been classified as discontinued operations in our Consolidated Condensed Financial Statements.

 

Summarized operating results from discontinued operations are as follows:

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2011

 

2010

 

 

 

(in thousands)

 

Revenue

 

$

 

$

 

Loss before income taxes

 

(11

)

(215

)

Income tax benefit

 

 

 

Loss from discontinued operations

 

$

(11

)

$

(215

)

 

Significant categories of assets and liabilities from discontinued operations are as follows:

 

 

 

December 31,

 

September 30,

 

 

 

2011

 

2011

 

 

 

(in thousands)

 

Other current assets

 

$

7,777

 

$

7,529

 

Total assets

 

$

7,777

 

$

7,529

 

 

 

 

 

 

 

Total current liabilities

 

$

5,171

 

$

4,979

 

Total noncurrent liabilities

 

2,606

 

2,550

 

Total liabilities

 

$

7,777

 

$

7,529

 

 

7



Table of Contents

 

Other current assets consist of restricted cash to meet remaining in-country current obligations.  Liabilities consist of municipal and income taxes payable and social obligations due within the country of Venezuela.

 

3.               Earnings per Share

 

Accounting Standards Codification (“ASC”) 260, Earnings per Share, requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share.  We have granted and expect to continue to grant restricted stock grants to employees that contain non-forfeitable rights to dividends.  Such grants are considered participating securities under ASC 260.  As such, we are required to include these grants in the calculation of our basic earnings per share and calculate basic earnings per share using the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings.

 

Basic earnings per share is computed utilizing the two-class method and is calculated based on weighted-average number of common shares outstanding during the periods presented.

 

Diluted earnings per share is computed using the weighted-average number of common and common equivalent shares outstanding during the periods utilizing the two-class method for stock options and nonvested restricted stock.

 

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2011

 

2010

 

Numerator:

 

 

 

 

 

Income from continuing operations

 

$

144,297

 

$

104,365

 

Loss from discontinued operations

 

(11

)

(215

)

Net income

 

144,286

 

104,150

 

Adjustment for basic earnings per share:

 

 

 

 

 

Earnings allocated to unvested shareholders

 

(474

)

(309

)

Numerator for basic earnings per share:

 

 

 

 

 

From continuing operations

 

143,823

 

104,056

 

From discontinued operations

 

(11

)

(215

)

 

 

143,812

 

103,841

 

Adjustment for diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

Effect of reallocating undistributed earnings of unvested shareholders

 

7

 

5

 

Numerator for diluted earnings per share:

 

 

 

 

 

From continuing operations

 

143,830

 

104,061

 

From discontinued operations

 

(11

)

(215

)

 

 

$

143,819

 

$

103,846

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share - weighted-average shares

 

107,186

 

106,031

 

 

 

 

 

 

 

Effect of dilutive shares from stock options and restricted stock

 

1,602

 

1,821

 

 

 

 

 

 

 

Denominator for diluted earnings per share - adjusted weighted-average shares

 

108,788

 

107,852

 

Basic earnings per common share:

 

 

 

 

 

Income from continuing operations

 

$

1.34

 

$

0.98

 

Loss from discontinued operations

 

 

 

Net income

 

$

1.34

 

$

0.98

 

Diluted earnings per common share:

 

 

 

 

 

Income from continuing operations

 

$

1.32

 

$

0.96

 

Loss from discontinued operations

 

 

 

Net income

 

$

1.32

 

$

0.96

 

 

8



Table of Contents

 

The following shares attributable to outstanding equity awards were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2011

 

2010

 

Shares excluded from calculation of diluted earnings per share

 

761

 

324

 

Weighted-average price per share

 

$

55.06

 

$

47.94

 

 

4.               Inventories

 

Inventories consist primarily of replacement parts and supplies held for use in our drilling operations.

 

5.               Financial Instruments and Fair Value Measurement

 

The estimated fair value of our available-for-sale securities, reflected on our Consolidated Condensed Balance Sheets as Investments, is based on market quotes.  The following is a summary of available-for-sale securities, which excludes investments in limited partnerships carried at cost and assets held in a Non-qualified Supplemental Savings Plan:

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

 

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

(in thousands)

 

Equity securities December 31, 2011

 

$

129,183

 

$

255,227

 

$

 

$

384,410

 

Equity securities September 30, 2011

 

$

129,183

 

$

203,486

 

$

 

$

332,669

 

 

On an on-going basis, we evaluate the marketable equity securities to determine if any decline in fair value below original cost is other-than-temporary.  If a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis established.  We review several factors to determine whether a loss is other-than-temporary.  These factors include, but are not limited to, (i) the length of time a security is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near term prospects of the issuer and (iv) our intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. The cost of securities used in determining realized gains and losses is based on the average cost basis of the security sold.  We had no sales of marketable equity available-for-sale securities during the first quarter of fiscal 2012 and 2011.

 

Investments in limited partnerships carried at cost were approximately $9.4 million at December 31, 2011 and September 30, 2011.  The estimated fair value of the limited partnerships was $16.2 million and $15.8 million at December 31, 2011 and September 30, 2011, respectively.

 

Assets held in the Non-qualified Supplemental Savings Plan are carried at fair market value which totaled $6.2 million at December 31, 2011 and $5.9 million at September 30, 2011.

 

The majority of cash equivalents are invested in taxable and non-taxable money-market mutual funds. The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of those investments.

 

The carrying value of other assets, accrued liabilities and other liabilities approximated fair value at December 31, 2011 and September 30, 2011.

 

ASC 820 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”  We use the fair value hierarchy established in ASC 820-10 to measure fair value to prioritize the inputs:

 

·                  Level 1 — Observable inputs that reflect quoted prices in active markets for identical assets or liabilities in active markets.

 

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·                  Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

·                  Level 3 — Valuations based on inputs that are unobservable and not corroborated by market data.

 

At December 31, 2011, our financial instruments utilizing Level 1 inputs include cash equivalents, equity securities with active markets and money market funds we have elected to classify as restricted assets that are included in other current assets and other assets.  Also included is cash denominated in a foreign currency we have elected to classify as restricted that is included in current assets of discontinued operations and limited to remaining liabilities of discontinued operations.  For these items, quoted current market prices are readily available.

 

At December 31, 2011, financial instruments utilizing level 2 inputs include a bank certificate of deposit included in other current assets.

 

Currently, we do not have any financial instruments utilizing Level 3 inputs.

 

The following table summarizes our assets measured at fair value on a recurring basis presented in our Consolidated Condensed Balance Sheet as of December 31, 2011:

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

Total

 

in Active

 

Significant

 

 

 

 

 

Measure

 

Markets for

 

Other

 

Significant

 

 

 

at

 

Identical

 

Observable

 

Unobservable

 

 

 

Fair

 

Assets

 

Inputs

 

Inputs

 

 

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

347,859

 

$

347,859

 

$

 

$

 

Equity securities

 

384,410

 

384,410

 

 

 

Other current assets

 

50,461

 

50,211

 

250

 

 

Other assets

 

2,000

 

2,000

 

 

 

Total assets measured at fair value

 

$

784,730

 

$

784,480

 

$

250

 

$

 

 

The following information presents the supplemental fair value information about long-term fixed-rate debt at December 31, 2011 and September 30, 2011:

 

 

 

December 31,

 

September 30,

 

 

 

2011

 

2011

 

 

 

(in thousands)

 

Carrying value of long-term fixed-rate debt

 

$

350.0

 

$

350.0

 

Fair value of long-term fixed-rate debt

 

$

367.4

 

$

376.9

 

 

The fair value for fixed-rate debt was estimated using cash flows discounted at rates reflecting current interest rates at similar maturities plus a credit spread which was estimated using market information on debt instruments with a similar credit profile to us.  The debt was valued using a Level 2 input.

 

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6.               Comprehensive Income

 

Comprehensive income, net of related income taxes, is as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2011

 

2010

 

Net income

 

$

144,286

 

$

104,150

 

Other comprehensive income:

 

 

 

 

 

Unrealized appreciation on securities

 

51,741

 

76,539

 

Income taxes

 

(19,403

)

(28,702

)

 

 

32,338

 

47,837

 

 

 

 

 

 

 

Minimum pension liability adjustments

 

863

 

750

 

Income taxes

 

(324

)

(282

)

 

 

539

 

468

 

 

 

 

 

 

 

Total comprehensive income

 

$

177,163

 

$

152,455

 

 

The components of accumulated other comprehensive income, net of related income taxes, are as follows (in thousands):

 

 

 

December 31,

 

September 30,

 

 

 

2011

 

2011

 

Unrealized appreciation on securities

 

$

158,464

 

$

126,126

 

Unrecognized actuarial loss and prior service cost

 

(26,679

)

(27,218

)

Accumulated other comprehensive income

 

$

131,785

 

$

98,908

 

 

7.                     Cash Dividends

 

The $0.07 cash dividend declared September 7, 2011, was paid December 1, 2011.  On December 6, 2011, a cash dividend of $0.07 per share was declared for shareholders of record on February 15, 2012, payable March 1, 2012. The dividend payable is included in accounts payable in the Consolidated Condensed Balance Sheet.

 

8.               Stock-Based Compensation

 

On March 2, 2011, the 2010 Long-Term Incentive Plan (the “2010 Plan”) was approved by our stockholders.  The 2010 Plan, among other things, authorizes the Board of Directors to grant nonqualified stock options, restricted stock awards and stock appreciation rights to selected employees and to non-employee Directors.  Restricted stock may be granted for no consideration other than prior and future services.  The purchase price per share for stock options may not be less than market price of the underlying stock on the date of grant.  Stock options expire ten years after the grant date.  We have the right to satisfy option exercises from treasury shares and from authorized but unissued shares.  There were 458,838 nonqualified stock options and 243,600 shares of restricted stock awards granted in the three months ended December 31, 2011.

 

A summary of compensation cost for stock-based payment arrangements recognized in general and administrative expense is as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2011

 

2010

 

Compensation expense

 

 

 

 

 

Stock options

 

$

2,488

 

$

2,115

 

Restricted stock

 

1,434

 

1,072

 

 

 

$

3,922

 

$

3,187

 

 

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STOCK OPTIONS

 

The following summarizes the weighted-average assumptions utilized in determining the fair value of options granted during the three months ended December 31, 2011 and 2010:

 

 

 

 

2011

 

2010

 

Risk-free interest rate

 

1.0

%

1.9

%

Expected stock volatility

 

53.3

%

51.6

%

Dividend yield

 

0.4

%

0.5

%

Expected term (in years)

 

5.5

 

5.5

 

 

Risk-Free Interest Rate.  The risk-free interest rate is based on U.S. Treasury securities for the expected term of the option.

 

Expected Volatility Rate.  Expected volatility is based on the daily closing price of our stock based upon historical experience over a period which approximates the expected term of the option.

 

Dividend Yield.  The expected dividend yield is based on our current dividend yield.

 

Expected Term.  The expected term of the options granted represents the period of time that they are expected to be outstanding.  We estimate the expected term of options granted based on historical experience with grants and exercises.

 

A summary of stock option activity under the Plan for the three months ended December 31, 2011 is presented in the following table:

 

 

 

 

 

Three Months Ended December 31, 2011

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted-

 

Average

 

Aggregate

 

 

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

 

Shares

 

Exercise

 

Contractual Term

 

Value

 

Options

 

(in thousands)

 

Price

 

(in years)

 

(in millions)

 

Outstanding at October 1, 2011

 

4,589

 

$

25.84

 

 

 

 

 

Granted

 

459

 

59.76

 

 

 

 

 

Exercised

 

(205

)

14.79

 

 

 

 

 

Forfeited/Expired

 

(23

)

36.10

 

 

 

 

 

Outstanding at December 31, 2011

 

4,820

 

$

29.49

 

5.6

 

$

139.8

 

Vested and expected to vest at December 31, 2011

 

4,762

 

$

29.39

 

5.5

 

$

138.6

 

 

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2011

 

3,688

 

$

24.62

 

4.6

 

$

124.4

 

 

The weighted-average fair value of options granted in the first quarter of fiscal 2012 was $27.75.

 

The total intrinsic value of options exercised during the three months ended December 31, 2011 was $8.1 million.

 

As of December 31, 2011, the unrecognized compensation cost related to the stock options was $19.5 million.  That cost is expected to be recognized over a weighted-average period of 3.2 years.

 

RESTRICTED STOCK

 

Restricted stock awards consist of our common stock and are time vested over three to six years.  We recognize compensation expense on a straight-line basis over the vesting period.  The fair value of restricted stock awards under the 2010 Plan is determined based on the closing price of our shares on the grant date.  As of December 31, 2011, there was $20.4 million of total unrecognized compensation cost related to unvested restricted stock awards.  That cost is expected to be recognized over a weighted-average period of 3.3 years.

 

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A summary of the status of our restricted stock awards as of December 31, 2011 and changes in restricted stock outstanding during the three months then ended is presented below:

 

 

 

Three Months Ended

 

 

 

December 31, 2011

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Shares

 

Grant-Date

 

Restricted Stock Awards

 

(in thousands)

 

Fair Value

 

 

 

 

 

 

 

Unvested at October 1, 2011

 

323

 

$

42.38

 

Granted

 

244

 

59.76

 

Vested (1)

 

(119

)

40.21

 

Forfeited

 

(7

)

41.93

 

Unvested at December 31, 2011

 

441

 

$

52.59

 

 


(1)          The number of restricted stock awards vested includes shares that we withheld on behalf of our employees to satisfy the statutory tax withholding requirements.

 

9.               Debt

 

At December 31, 2011 and September 30, 2011, we had the following unsecured long-term debt outstanding (in thousands):

 

 

 

December 31,

 

September 30,

 

 

 

2011

 

2011

 

Unsecured intermediate debt issued August 15, 2002:

 

 

 

 

 

Series C, due August 15, 2012, 6.46%

 

$

75,000

 

$

75,000

 

Series D, due August 15, 2014, 6.56%

 

75,000

 

75,000

 

Unsecured senior notes issued July 21, 2009:

 

 

 

 

 

Due July 21, 2012, 6.10%

 

40,000

 

40,000

 

Due July 21, 2013, 6.10%

 

40,000

 

40,000

 

Due July 21, 2014, 6.10%

 

40,000

 

40,000

 

Due July 21, 2015, 6.10%

 

40,000

 

40,000

 

Due July 21, 2016, 6.10%

 

40,000

 

40,000

 

 

 

$

350,000

 

$

350,000

 

Less long-term debt due within one year

 

115,000

 

115,000

 

Long-term debt

 

$

235,000

 

$

235,000

 

 

The intermediate unsecured debt outstanding at December 31, 2011 matures over a period from August 2012 to August 2014 and carries a weighted-average interest rate of 6.53 percent, which is paid semi-annually.  The terms require that we maintain a minimum ratio of debt to total capitalization of less than 55 percent.  The debt is held by various entities, including $3 million held by a company affiliated with one of our Board members.

 

We have $200 million senior unsecured fixed-rate notes that mature over a period from July 2012 to July 2016.  Interest on the notes is paid semi-annually based on an annual rate of 6.10 percent.  We will make five equal annual principal repayments of $40.0 million starting on July 21, 2012.  Financial covenants require us to maintain a funded leverage ratio of less than 55 percent and an interest coverage ratio (as defined) of not less than 2.50 to 1.00.

 

Our $400 million senior unsecured credit facility matured in December 2011 and was allowed to expire.  During the first fiscal quarter of 2012, we funded two collateral trusts totaling $25.0 million and terminated two letters of credit.  The two collateral trusts are classified as restricted cash and are included in prepaid expense and other in the Consolidated Condensed Balance Sheet at December 31, 2011.

 

10.   Income Taxes

 

Our effective tax rate for the three months ended December 31, 2011 and 2010 was 36.8 percent and 37.4 percent, respectively.  The effective rate differs from the U.S. federal statutory rate of 35.0 percent primarily due to state and foreign taxes.

 

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It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain unrecognized tax positions will increase or decrease during the next 12 months; however, we do not expect the change to have a material effect on results of operations or financial position.

 

11.   Commitments and Contingencies

 

In conjunction with our current drilling rig construction program, purchase commitments for equipment, parts and supplies of approximately $474.6 million are outstanding at December 31, 2011.

 

Various legal actions, the majority of which arise in the ordinary course of business, are pending.  We maintain insurance against certain business risks subject to certain deductibles.  None of these legal actions are expected to have a material adverse effect on our financial condition, cash flows or results of operations.

 

We are contingently liable to sureties in respect of bonds issued by the sureties in connection with certain commitments entered into by us in the normal course of business.  We have agreed to indemnify the sureties for any payments made by them in respect of such bonds.

 

During the ordinary course of our business, contingencies arise resulting from an existing condition, situation, or set of circumstances involving an uncertainty as to the realization of a possible gain contingency.  We account for gain contingencies in accordance with the provisions of ASC 450, Contingencies, and, therefore, we do not record gain contingencies and recognize income until realized.  As discussed in Note 2, Discontinued Operations, property and equipment of our Venezuelan subsidiary was seized by the Venezuelan government on June 30, 2010.  Our wholly-owned subsidiaries, Helmerich & Payne International Drilling Co. and Helmerich & Payne de Venezuela, C.A., filed a lawsuit in the United States District Court for the District of Columbia on September 23, 2011 against the Bolivarian Republic of Venezuela, Petroleos de Venezuela, S.A. and PDVSA Petroleo, S.A.  Our subsidiaries seek damages for the taking of their Venezuelan drilling business in violation of international law and for breach of contract.  Additionally, we are participating in two arbitrations against third parties not affiliated with the Venezuelan government, Petroleo or PDVSA in an attempt to collect an aggregate $75 million relating to the seizure of our property in Venezuela.  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.  No gain contingencies are recognized in our Consolidated Financial Statements.

 

12.         Segment Information

 

We operate principally in the contract drilling industry. Our contract drilling business includes the following reportable operating segments: U.S. Land, Offshore, and International Land.  The contract drilling operations consist mainly of contracting Company-owned drilling equipment primarily to large oil and gas exploration companies.  Our primary international areas of operation include Colombia, Ecuador, Argentina, Tunisia, Bahrain and other South American countries. The International Land operations have similar services, have similar types of customers, operate in a consistent manner and have similar economic and regulatory characteristics.  Therefore, we have aggregated our international operations into a single reportable segment.  Each reportable segment is a strategic business unit which is managed separately. Other includes non-reportable operating segments.  Revenues included in Other consist primarily of rental income.  Consolidated revenues and expenses reflect the elimination of all material intercompany transactions.

 

We evaluate segment performance based on income or loss from operations (segment operating income) before income taxes which includes:

 

·                  revenues from external and internal customers

·                  direct operating costs

·                  depreciation and

·                  allocated general and administrative costs

 

but excludes corporate costs for other depreciation, income from asset sales and other corporate income and expense.

 

Certain general and administrative costs are allocated to the segments based primarily on specific identification and, to the extent that such identification is not practical, on other methods which we believe to be a reasonable reflection of the utilization of services provided.

 

Segment operating income is a non-GAAP financial measure of our performance, as it excludes general and administrative expenses, corporate depreciation, income from asset sales and other corporate income and expense.  We consider segment operating income to be an important supplemental measure of operating performance by presenting trends in our core businesses.  We use this measure to facilitate period-to-period comparisons in operating performance of our reportable segments in the aggregate by eliminating items that affect comparability between periods.  We believe that segment operating income is useful to

 

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investors because it provides a means to evaluate the operating performance of the segments on an ongoing basis using criteria that are used by our internal decision makers.  Additionally, it highlights operating trends and aids analytical comparisons.  However, segment operating income has limitations and should not be used as an alternative to operating income or loss, a performance measure determined in accordance with GAAP, as it excludes certain costs that may affect our operating performance in future periods.

 

Summarized financial information of our reportable segments for the three months ended December 31, 2011, and 2010, is shown in the following tables:

 

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income (Loss)

 

December 31, 2011

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

617,779

 

$

 

$

617,779

 

$

224,706

 

Offshore

 

50,792

 

 

50,792

 

12,204

 

International Land

 

60,735

 

 

60,735

 

7,939

 

 

 

729,306

 

 

729,306

 

244,849

 

Other

 

3,282

 

210

 

3,492

 

(1,788

)

 

 

732,588

 

210

 

732,798

 

243,061

 

Eliminations

 

 

(210

)

(210

)

 

Total

 

$

732,588

 

$

 

$

732,588

 

$

243,061

 

 

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income (Loss)

 

December 31, 2010

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

476,818

 

$

 

$

476,818

 

$

158,361

 

Offshore

 

44,867

 

 

44,867

 

9,000

 

International Land

 

68,954

 

 

68,954

 

14,367

 

 

 

590,639

 

 

590,639

 

181,728

 

Other

 

4,003

 

210

 

4,213

 

(1,151

)

 

 

594,642

 

210

 

594,852

 

180,577

 

Eliminations

 

 

(210

)

(210

)

 

Total

 

$

594,642

 

$

 

$

594,642

 

$

180,577

 

 

The following table reconciles segment operating income per the table above to income from continuing operations before income taxes as reported on the Consolidated Condensed Statements of Operations.

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2011

 

2010

 

 

 

(in thousands)

 

Segment operating income

 

$

243,061

 

$

180,577

 

Income from asset sales

 

4,683

 

2,669

 

Corporate general and administrative costs and corporate depreciation

 

(17,205

)

(12,520

)

Operating income

 

230,539

 

170,726

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest and dividend income

 

336

 

314

 

Interest expense

 

(2,461

)

(4,451

)

Other

 

21

 

166

 

Total other income (expense)

 

(2,104

)

(3,971

)

 

 

 

 

 

 

Income from continuing operations before income taxes

 

$

228,435

 

$

166,755

 

 

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The following table presents total assets by reportable segment.

 

 

 

December 31,

 

September 30,

 

 

 

2011

 

2011

 

 

 

(in thousands)

 

Total assets

 

 

 

 

 

U.S. Land

 

$

3,869,204

 

$

3,719,387

 

Offshore

 

146,244

 

151,656

 

International Land

 

362,775

 

333,142

 

Other

 

34,952

 

35,076

 

 

 

4,413,175

 

4,239,261

 

Investments and corporate operations

 

836,935

 

757,101

 

Total assets from continued operations

 

5,250,110

 

4,996,362

 

Discontinued operations

 

7,777

 

7,529

 

 

 

$

5,257,887

 

$

5,003,891

 

 

The following table presents revenues from external customers by country based on the location of service provided.

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2011

 

2010

 

 

 

(in thousands)

 

Operating revenues

 

 

 

 

 

United States

 

$

662,351

 

$

519,040

 

Colombia

 

19,665

 

18,817

 

Ecuador

 

12,636

 

12,025

 

Argentina

 

12,407

 

13,009

 

Other foreign

 

25,529

 

31,751

 

Total

 

$

732,588

 

$

594,642

 

 

13.         Pensions and Other Post-retirement Benefits

 

The following provides information at December 31, 2011 and 2010 related to the Company-sponsored domestic defined benefit pension plan.

 

Components of Net Periodic Benefit Cost

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2011

 

2010

 

 

 

(in thousands)

 

Interest cost

 

$

1,103

 

$

1,116

 

Expected return on plan assets

 

(1,293

)

(1,185

)

Recognized net actuarial loss

 

862

 

750

 

Net pension expense

 

$

672

 

$

681

 

 

Employer Contributions

 

We did not make any contributions to the Pension Plan during the three months ended December 31, 2011.  We estimate contributing at least $1.0 million in fiscal 2012 to meet the minimum contribution required by law and we may contribute additional amounts of up to $5.0 million.

 

14.   Risk Factors

 

International operations are subject to certain political, economic and other uncertainties not encountered in U.S. operations, including increased risks of terrorism, kidnapping of employees, expropriation of equipment as well as expropriation of a particular oil company operator’s property and drilling rights, taxation policies, foreign exchange restrictions, currency rate fluctuations and general hazards associated with foreign sovereignty over certain areas in which operations are conducted. There can be no assurance that there will not be changes in local laws, regulations and administrative requirements or the interpretation

 

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thereof which could have a material adverse effect on the profitability of our operations or on our ability to continue operations in certain areas.

 

15.   Recently Issued Accounting Standards

 

On October 1, 2011, we adopted the provisions of Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements requiring a reconciliation of purchases, sales, issuance, and settlements of financial instruments valued with a Level 3 method, which is used to price the hardest to value instruments.  The adoption had no impact on the Consolidated Financial Statements.

 

On May 12, 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  ASU No. 2011-04 is intended to create consistency between U.S. GAAP and International Financial Reporting Standards (“IFRS”) on the definition of fair value and on the guidance on how to measure fair value and on what to disclose about fair value measurements.  ASU No. 2011-04 will be effective for financial statements issued for fiscal periods beginning after December 15, 2011, with early adoption prohibited for public entities.  We do not expect the adoption of these provisions to have a material impact on the Consolidated Financial Statements.

 

On June 16, 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income.  ASU No. 2011-05 was issued to increase the prominence of other comprehensive income (“OCI”) in financial statements.  The guidance provides two options for presenting OCI.  An OCI statement can be included with the net income statement, which together will make a statement of total comprehensive income.  Alternatively, an OCI statement can be separate from a net income statement but the two statements will have to appear consecutively within a financial report.  ASU No. 2011-05 will be applied retrospectively and is effective for fiscal periods beginning after December 15, 2011 with early adoption permitted.  We are currently evaluating the method of presentation and the timing of adoption but the adoption will have no impact on the Consolidated Financial Statements.

 

16.   Subsequent Events 

 

We have evaluated events and transactions occurring after the balance sheet date through the date these Consolidated Condensed Financial Statements were issued, and have determined we have no recognized subsequent events.

 

Subsequent to December 31, 2011, we sold a conventional rig from our U.S. Land segment.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

December 31, 2011

 

RISK FACTORS AND FORWARD-LOOKING STATEMENTS

 

The following discussion should be read in conjunction with the Consolidated Condensed Financial Statements and related notes included elsewhere herein and the Consolidated Financial Statements and  notes thereto included in our 2011 Annual Report on Form 10-K.  Our future operating results may be affected by various trends and factors which are beyond our control. These include, among other factors, fluctuations in natural gas and crude oil prices, early termination of drilling contracts, forfeiture of early termination payments under fixed term contracts due to sustained unacceptable performance, unsuccessful collection of receivables, inability to procure key rig components, failure to timely deliver rigs within applicable grace periods, disruption to or cessation of the business of our limited source vendors or fabricators, currency exchange losses, expropriation of assets, a sluggish global economy, changes in general economic and political conditions, adverse weather conditions including hurricanes, rapid or unexpected changes in technologies and uncertain business conditions that affect our businesses. Accordingly, past results and trends should not be used by investors to anticipate future results or trends.  Our risk factors are more fully described in our 2011 Annual Report on Form 10-K and elsewhere in this Form 10-Q.

 

With the exception of historical information, the matters discussed in Management’s Discussion & Analysis of Financial Condition and Results of Operations include forward-looking statements.  These forward-looking statements are based on various assumptions.  We caution that, while we believe such assumptions to be reasonable and make them in good faith, assumptions about future events and conditions almost always vary from actual results.  The differences between assumed facts and actual results can be material.  We are including this cautionary statement to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by us or persons acting on our behalf.  The factors identified in this cautionary statement are important factors (but not necessarily all important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us or persons acting on our behalf.  We undertake no duty to update or revise our forward-looking statements based on changes of internal estimates on expectations or otherwise.

 

RESULTS OF OPERATIONS

 

Three Months Ended December 31, 2011 vs. Three Months Ended December 31, 2010

 

We reported income from continuing operations of $144.3 million ($1.32 per diluted share) from operating revenues of $732.6 million for the first quarter ended December 31, 2011, compared with income from continuing operations of $104.4 million ($0.96 per diluted share) from operating revenues of $594.6 million for the first quarter of fiscal year 2011.  In the first quarter of fiscal year 2011, we had a net loss from discontinued operations of $0.2 million with no effect on a per diluted share basis.  Including discontinued operations, we recorded net income of $144.3 million ($1.32 per diluted share) for the first quarter ended December 31, 2011,  compared to net income of $104.2 million ($0.96 per diluted share) for the first quarter ended December 31, 2010.  Income from continued operations for the first quarter of fiscal 2012 includes approximately $3.0 million ($0.03 per diluted share) of after-tax gains from the sale of assets. Income from continued operations for the first quarter of fiscal 2011 includes approximately $1.7 million ($0.02 per diluted share) of after-tax gains from the sale of assets.

 

On June 30, 2010, the Official Gazette of Venezuela published the Decree of Venezuelan President Hugo Chavez, which authorized the “forceful acquisition” of eleven rigs owned by our Venezuelan subsidiary.  The Decree also authorized the seizure of “all the personal and real property and other improvements” used by our Venezuelan subsidiary in its drilling operations. The seizing of our assets became effective June 30, 2010 and met the criteria established for recognition as discontinued operations under accounting standards for presentation of financial statements.  Therefore, operations from the Venezuelan subsidiary, an operating segment within the International Land segment, have been classified as discontinued operations in our Consolidated Condensed Financial Statements.

 

Our wholly-owned subsidiaries, Helmerich & Payne International Drilling Co. and Helmerich & Payne de Venezuela, C.A., filed a lawsuit in the United States District Court for the District of Columbia on September 23, 2011 against the Bolivarian Republic of Venezuela, Petroleos de Venezuela, S.A. and PDVSA Petroleo, S.A.  Our subsidiaries seek damages for the taking of their Venezuelan drilling business in violation of international law and for breach of contract.  Additionally, we are participating in two arbitrations against third parties not affiliated with the Venezuelan government, Petroleo or PDVSA in an attempt to collect an aggregate $75 million relating to the seizure of our property in Venezuela.  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.  No gain contingencies are recognized in our Consolidated Financial Statements.

 

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Summarized operating results from discontinued operations are as follows:

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2011

 

2010

 

Revenue

 

$

 

$

 

Loss before income taxes

 

(11

)

(215

)

Income tax benefit

 

 

 

Loss from discontinued operations

 

$

(11

)

$

(215

)

 

Significant categories of assets and liabilities from discontinued operations are as follows:

 

 

 

December 31,

 

September 30,

 

 

 

2011

 

2011

 

Other current assets

 

$

7,777

 

$

7,529

 

Total assets

 

$

7,777

 

$

7,529

 

 

 

 

 

 

 

Total current liabilities

 

$

5,171

 

$

4,979

 

Total noncurrent liabilities

 

2,606

 

2,550

 

Total liabilities

 

$

7,777

 

$

7,529

 

 

Other current assets consist of restricted cash to meet remaining in-country current obligations.  Liabilities consist of municipal and income taxes payable and social obligations due within the country of Venezuela.

 

The following tables summarize operations by reportable operating segment for the three months ended December 31, 2011 and 2010. Operating statistics in the tables exclude the effects of offshore platform and international management contracts, and do not include reimbursements of “out-of-pocket” expenses in revenue, expense and margin per day calculations. Per day calculations for international operations also exclude gains and losses from translation of foreign currency transactions. Segment operating income is described in detail in Note 12 to the Consolidated Condensed Financial Statements.

 

 

 

Three Months Ended December 31,

 

 

 

2011

 

2010

 

 

 

(in thousands, except days and per day amounts)

 

U.S. LAND OPERATIONS

 

 

 

 

 

Revenues

 

$

617,779

 

$

476,818

 

Direct operating expenses

 

312,306

 

252,238

 

General and administrative expense

 

7,298

 

5,855

 

Depreciation

 

73,469

 

60,364

 

Segment operating income

 

$

224,706

 

$

158,361

 

 

 

 

 

 

 

Revenue days

 

20,968

 

17,249

 

Average rig revenue per day

 

$

26,861

 

$

24,952

 

Average rig expense per day

 

$

12,292

 

$

11,932

 

Average rig margin per day

 

$

14,569

 

$

13,020

 

Rig utilization

 

91

%

84

%

 

U.S. Land segment operating income increased to $224.7 million for the first quarter of fiscal 2012 compared to $158.4 million in the same period of fiscal 2011.  Revenues were $617.8 million and $476.8 million in the first quarter of fiscal 2012 and 2011, respectively.  Included in U.S. land revenues for the three months ended December 31, 2011 and 2010 are reimbursements for “out-of-pocket” expenses of $54.6 million and $46.4 million, respectively.

 

Segment operating income and average rig margin increased in the comparable quarters as rig utilization and average dayrates increased.  U.S. land rig utilization increased to 91 percent for the first quarter of fiscal 2012 compared to 84 percent for the first quarter of fiscal 2011.  U.S. land rig revenue days for the first quarter of fiscal 2012 were 20,968 compared with 17,249 for the same period of fiscal 2011, with an average of 227.9 and 187.5 rigs working during the first quarter of fiscal 2012 and 2011, respectively.

 

During the three months ended December 31, 2011, two FlexRigs were transferred from the U.S. Land segment to the International Land segment and two idle conventional rigs were sold.

 

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At December 31, 2011, 234 out of 255 existing rigs in the U.S. Land segment were generating revenue. Of the 234 rigs generating revenue, 150 were under fixed term contracts and 84 were working in the spot market. At January 31, 2012, the number of existing rigs under fixed term contracts in the segment increased to 152 and the number of rigs working in the spot market remained at 84.

 

 

 

Three Months Ended December 31,

 

 

 

2011

 

2010

 

 

 

(in thousands, except days and per day amounts)

 

OFFSHORE OPERATIONS

 

 

 

 

 

Revenues

 

$

50,792

 

$

44,867

 

Direct operating expenses

 

33,201

 

30,927

 

General and administrative expense

 

1,732

 

1,410

 

Depreciation

 

3,655

 

3,530

 

Segment operating income

 

$

12,204

 

$

9,000

 

 

 

 

 

 

 

Revenue days

 

697

 

587

 

Average rig revenue per day

 

$

53,644

 

$

45,350

 

Average rig expense per day

 

$

31,473

 

$

27,285

 

Average rig margin per day

 

$

22,171

 

$

18,065

 

Rig utilization

 

84

%

71

%

 

Offshore revenues include reimbursements for “out-of-pocket” expenses of $5.8 million and $7.3 million for the three months ended December 31, 2011 and 2010, respectively.

 

At December 31, 2011, seven of our nine platform rigs were active.

 

 

 

Three Months Ended December 31,

 

 

 

2011

 

2010

 

 

 

(in thousands, except days and per day amounts)

 

INTERNATIONAL LAND OPERATIONS

 

 

 

 

 

Revenues

 

$

60,735

 

$

68,954

 

Direct operating expenses

 

45,164

 

46,535

 

General and administrative expense

 

778

 

868

 

Depreciation

 

6,854

 

7,184

 

Segment operating income

 

$

7,939

 

$

14,367

 

 

 

 

 

 

 

Revenue days

 

1,729

 

1,923

 

Average rig revenue per day

 

$

31,072

 

$

33,789

 

Average rig expense per day

 

$

22,057

 

$

22,164

 

Average rig margin per day

 

$

9,015

 

$

11,625

 

Rig utilization

 

78

%

76

%

 

International Land segment operating income for the first quarter of fiscal 2012 was $7.9 million, compared to operating income of $14.4 million in the same period of fiscal 2011.  Included in International land revenues for the three months ended December 31, 2011 and 2010 are reimbursements for “out-of-pocket” expenses of $7.0 million and $4.0 million, respectively.

 

Revenues in the first quarter of fiscal 2012 decreased by $8.2 million compared to the first quarter of fiscal 2011 with utilization increasing from 76 percent to 78 percent.  During the current quarter, an average of 19.0 rigs worked compared to an average of 21.1 rigs in the first quarter of fiscal 2011.

 

Segment operating income and average rig margin per day decreased in the first quarter of fiscal 2012 compared to the first quarter of fiscal 2011 primarily due to early termination revenue earned in the first quarter of fiscal 2011.

 

During the first quarter of fiscal 2012, two FlexRigs were transferred to the International Land segment from the U.S. Land segment.  Both of the rigs will commence operations in the second quarter of fiscal 2012.

 

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RESEARCH AND DEVELOPMENT

 

For the three months ended December 31, 2011 and 2010, we incurred $3.2 million and $3.5 million, respectively, of research and development expenses related to ongoing development of a rotary steerable system.

 

OTHER

 

General and administrative expenses increased to $26.2 million in the first quarter of fiscal 2012 from $19.9 million in the first quarter of fiscal 2011.  The increase is primarily due to increases in salaries, bonuses and stock-based compensation of approximately $4.4 million associated with growth in the number of employees and increases in wages in the comparative quarters.  The remaining increase is primarily due to higher professional services and other corporate overhead associated with supporting continued growth of our drilling business.

 

Income tax expense increased to $84.1 million in the first quarter of fiscal 2012 from $62.4 million in the first quarter of fiscal 2011, primarily due to an increase in operating income.  The effective tax rate from continuing operations decreased to 36.8 percent from 37.4 percent for the two comparable quarters.

 

Interest expense was $2.5 million and $4.5 million in the first quarter of fiscal 2012 and 2011, respectively. Capitalized interest, all attributable to our rig construction, was $3.3 million and $1.7 million for the comparable quarters.  Interest expense before capitalized interest decreased $0.4 million during the first quarter of fiscal 2012 compared to the first quarter of fiscal 2011 primarily due to reduced borrowings in fiscal 2012.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity

 

Cash and cash equivalents decreased to $347.9 million at December 31, 2011 from $364.2 million at September 30, 2011. The following table provides a summary of cash flows for the three-month period ended December 31, (in thousands):

 

Net cash provided (used) by:

 

 

 

2011

 

2010

 

Operating activities

 

$

236,638

 

$

238,655

 

Investing activities

 

(246,788

)

(117,196

)

Financing activities

 

(6,237

)

(10,655

)

Increase (decrease) in cash and cash equivalents

 

$

(16,387

)

$

110,804

 

 

Operating activities

 

Cash flows from operating activities were approximately $236.6 million for the three months ended December 31, 2011 compared to approximately $238.7 million for the same period ended December 31, 2010.  The decrease in cash provided from operating activities is primarily due to an increase in net income and changes during the comparable three month periods in accounts receivable and current liabilities.  For the three months ended December 31, 2011, accounts receivable and current liabilities increased as we placed more rigs in service.  Additionally, during the three months ended December 31, 2011, we funded two collateral trusts totaling $25.0 million in connection with our primary casualty insurance program.  The two collateral trusts are included in prepaid expense and other in the Consolidated Condensed Statements of Cash Flows.

 

Investing activities

 

Capital expenditures increased $140.7 million primarily attributable to the increased building of new FlexRigs.

 

Financing activities

 

During the three months ended December 31, 2010, we reduced our outstanding debt by $10 million compared with no change to debt during the three months ended December 31, 2011.

 

Other Liquidity

 

Funds generated by operating activities and available cash and cash equivalents continue to be our significant sources of liquidity.  Given current market conditions and general expectations, we believe these sources of liquidity will be sufficient to sustain operations and finance estimated capital expenditures, including rig construction, for fiscal 2012.  There can be no assurance that we will continue to generate cash flows at current levels or obtain additional financing.  Our indebtedness totaled $350 million at December 31, 2011. For additional information regarding debt agreements, refer to Note 9 of the Consolidated Condensed Financial Statements.

 

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Backlog

 

Our contract drilling backlog, being the expected future revenue from executed contracts with original terms in excess of one year, as of December 31, 2011 and September 30, 2011 was $4.2 billion and $3.8 billion, respectively.  The increase in backlog at December 31, 2011 from September 30, 2011 is primarily due to the expected revenue on 17 multi-year contracts announced in November 2011.  Approximately 72.9 percent of the December 31, 2011 backlog is not reasonably expected to be filled in fiscal 2012. 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.  However, under certain limited circumstances, such as destruction of a drilling rig, bankruptcy, sustained unacceptable performance by us, or delivery of a rig beyond certain grace and/or liquidated damage periods, no early termination payment would be paid to us.  In addition, a portion of the backlog represents term contracts for new rigs that will be constructed in the future.  We obtain certain key rig components from a single or limited number of vendors or fabricators. Certain of these vendors or fabricators are thinly capitalized independent companies located on the Texas Gulf Coast.  Therefore, disruptions in rig component deliveries may occur.  Accordingly, the actual amount of revenue earned may vary from the backlog reported.  See the risk factors under “Item 1A. Risk Factors” of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on November 23, 2011, regarding fixed term contract risk, operational risks, including weather, and vendors that are limited in number and thinly capitalized.

 

The following table sets forth the total backlog by reportable segment as of December 31, 2011 and September 30, 2011, and the percentage of the December 31, 2011 backlog not reasonably expected to be filled in fiscal 2012:

 

 

 

Three Months Ended

 

 

 

 

 

December 31,

 

September 30,

 

Percentage Not Reasonably

 

Reportable Segment

 

2011

 

2011

 

Expected to be Filled in Fiscal 2012

 

 

 

(in billions)

 

 

 

U.S. Land

 

$

3.7

 

$

3.3

 

72.8

%

Offshore

 

.1

 

.1

 

63.6

%

International Land

 

.4

 

.4

 

75.9

%

 

 

$

4.2

 

$

3.8

 

 

 

 

Capital Resources

 

During the first quarter of fiscal 2012, we announced agreements to build and operate 17 new FlexRigs under multi-year contracts.  In January 2012, we announced agreements to build and operate an additional three new FlexRigs.  During the three months ended December 31, 2011, we completed 11 FlexRigs that are under fixed term contracts.  An additional four FlexRigs under fixed term contracts were completed by the end of January 2012.  We currently expect to deliver a total of 45 new FlexRigs during fiscal 2012. Like those completed in prior fiscal periods, each of these new FlexRigs is committed to work for an exploration and production company under a fixed term contract, performing drilling services on a daywork contract basis.

 

Our capital spending estimate for fiscal 2012 is $1.1 billion but the actual spending level may vary depending primarily on the timing of procurement related to our ongoing construction of new FlexRigs.  Capital expenditures were $256.9 million and $116.2 million for the first three months of fiscal 2012 and 2011, respectively.  Capital expenditures increased from 2011 primarily due to the additional new rigs completed during the comparable three month periods ended December 31.

 

There were no other significant changes in our financial position since September 30, 2011.

 

MATERIAL COMMITMENTS

 

In December 2011, we extended our current lease for office space near downtown Tulsa, Oklahoma for an additional five years and added approximately 31,000 square feet.  The extension and expansion increases the material commitments reported in our 2011 Annual Report on Form 10-K by approximately $15.0 million.

 

CRITICAL ACCOUNTING POLICIES

 

Our accounting policies 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 2011 Annual Report on Form 10-K.  There have been no material changes in these critical accounting policies.

 

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RECENTLY ISSUED ACCOUNTING STANDARDS

 

On October 1, 2011, we adopted the provisions of ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements requiring a reconciliation of purchases, sales, issuance, and settlements of financial instruments valued with a Level 3 method, which is used to price the hardest to value instruments.  The adoption had no impact on the Consolidated Financial Statements.

 

On May 12, 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  ASU No. 2011-04 is intended to create consistency between U.S. GAAP and IFRS on the definition of fair value and on the guidance on how to measure fair value and on what to disclose about fair value measurements.  ASU No. 2011-04 will be effective for financial statements issued for fiscal periods beginning after December 15, 2011, with early adoption prohibited for public entities.  We do not expect the adoption of these provisions to have a material impact on the Consolidated Financial Statements.

 

On June 16, 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income.  ASU No. 2011-05 was issued to increase the prominence of OCI in financial statements.  The guidance provides two options for presenting OCI.  An OCI statement can be included with the net income statement, which together will make a statement of total comprehensive income.  Alternatively, an OCI statement can be separate from a net income statement but the two statements will have to appear consecutively within a financial report.  ASU No. 2011-05 will be applied retrospectively and is effective for fiscal periods beginning after December 15, 2011 with early adoption permitted.  We are currently evaluating the method of presentation and the timing of adoption but the adoption will have no impact on the Consolidated Financial Statements.

 

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Table of Contents

 

PART I.  FINANCIAL INFORMATION

December 31, 2011

 

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

For a description of our market risks, see

 

·                  Note 5 to the Consolidated Condensed Financial Statements contained in Item 1 of Part I hereof with regard to equity price risk is incorporated herein by reference;

·                  “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 23, 2011;

·                  Note 9 to the Consolidated Condensed Financial Statements contained in Item 1 of Part I hereof with regard to interest rate risk is incorporated herein by reference; and

·                  Note 14 to the Consolidated Condensed Financial Statements contained in Item 1 of Part I hereof with regard to foreign currency exchange rate risk is incorporated herein by reference.

 

ITEM 4.   CONTROLS AND PROCEDURES

 

As of the end of the period covered by this report, an evaluation was performed with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of December 31, 2011, at ensuring that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  There have been no changes in our internal controls over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

PART II.   OTHER INFORMATION

 

ITEM 1.   LEGAL PROCEEDINGS

 

There have been no material developments with respect to the information previously reported under Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2011.

 

ITEM 1A.  RISK FACTORS

 

International uncertainties and local laws could adversely affect our business.

 

International operations are subject to certain political, economic and other uncertainties not encountered in U.S. operations, including increased risks of terrorism, kidnapping of employees, expropriation of land and equipment as well as expropriation of a particular oil company’s property and drilling rights, taxation policies, foreign exchange restrictions, currency rate fluctuations and general hazards associated with foreign sovereignty over certain areas in which operations are conducted.  There can be no assurance that there will not be changes in local laws, regulations and administrative requirements or the interpretation thereof which could have a material adverse effect on the profitability of our operations or on our ability to continue operations in certain areas.

 

Because of the impact of local laws, our future operations in certain areas may be conducted through entities in which local citizens own interests and through entities (including joint ventures) in which we hold only a minority interest or pursuant to arrangements under which we conduct operations under contract to local entities.  While we believe that neither operating through such entities nor pursuant to such arrangements would have a material adverse effect on our operations or revenues, there can be no assurance that we will in all cases be able to structure or restructure our operations to conform to local law (or the administration thereof) on terms acceptable to us.

 

Although we attempt to minimize the potential impact of such risks by operating in more than one geographical area, during the three months ended December 31, 2011, approximately 8 percent of our consolidated operating revenues were generated from the international contract drilling business.  During the three months ended December 31, 2011, approximately 74 percent of the international operating revenues were from operations in South America.

 

New legislation and regulatory initiatives relating to hydraulic fracturing could delay or limit the drilling services we provide to customers whose drilling programs could be impacted by such laws.

 

Members of the U.S Congress and the U.S. Environmental Protection Agency, or the EPA, are reviewing more stringent regulation of hydraulic fracturing, a technology which involves the injection of water, sand and chemicals under pressure into rock formations to stimulate oil and natural gas production.  Both the U.S. Congress and the EPA are studying whether there is any link between hydraulic fracturing and soil or ground water contamination or any impact on public health.  Legislation has been introduced before Congress to provide for federal regulation of hydraulic fracturing and to require disclosure of the chemicals used in the fracturing process.  In addition, some states have and others are considering adopting regulations that could restrict hydraulic fracturing in certain circumstances.  We do not engage in any hydraulic fracturing activities.  However, any new laws, regulation or permitting requirements regarding hydraulic fracturing could delay or limit the drilling services we provide to customers whose drilling programs could be impacted by new legal requirements.

 

Reference is made to the risk factors pertaining to interest rate risk and the Company’s securities portfolio in Item 1A of Part 1 of the Company’s Form 10-K for the year ended September 30, 2011.  In order to update these risk factors for developments that have occurred during the first three months of fiscal 2012, the risk factors are hereby amended and updated by reference to, and incorporation herein of, Notes 5 and 9 to the Consolidated Condensed Financial Statements contained in Item 1 of Part I hereof.

 

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Except as discussed above, there have been no material changes to the risk factors disclosed in Item 1A of Part 1 in our Form 10-K for the year ended September 30, 2011.

 

ITEM 6.   EXHIBITS

 

The following documents are included as exhibits to this Form 10-Q.  Those exhibits below incorporated by reference herein are indicated as such by the information supplied in the parenthetical thereafter.  If no parenthetical appears after an exhibit, such exhibit is filed or furnished herewith.

 

Exhibit

 

 

Number

 

Description

 

 

 

10.1

 

Second Amendment to Office Lease between ASP, Inc. and Helmerich & Payne, Inc. dated December 13, 2011 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on December 14, 2011, SEC File No. 001-04221).

31.1

 

Certification of Chief Executive Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certification of Chief Financial Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

 

Financial statements from the quarterly report on Form 10-Q of Helmerich & Payne, Inc. for the quarter ended December 31, 2011, filed on February 7, 2012, formatted in Extensive Business Reporting Language (XBRL): (i) the Consolidated Condensed Statements of Operations, (ii) the Consolidated Condensed Balance Sheets, (iii) the Consolidated Condensed Statements of Stockholders’ Equity, (iv) the Consolidated Condensed Statements of Cash Flows and (v) the Notes to Consolidated Condensed Financial Statements.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

HELMERICH & PAYNE, INC.

 

 

(Registrant)