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HP > SEC Filings for HP > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for HELMERICH & PAYNE INC

Form 10-Q for HELMERICH & PAYNE INC


8-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

June 30, 2014

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 2013 Annual Report on Form 10-K, as amended. 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, the loss of one or a number of our largest customers, early termination of drilling contracts and failure to realize backlog drilling revenue, 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 and other international uncertainties, loss of well control, pollution of offshore waters and reservoir damage, operational risks that are not fully insured against or covered by adequate contractual indemnities, passage of laws or regulations including those limiting hydraulic fracturing, litigation and governmental investigations, failure to comply with the terms of our plea agreement with the United States Department of Justice, failure to comply with the United States Foreign Corrupt Practices Act, foreign anti-bribery laws and other governmental laws and regulations, a sluggish global economy, changes in general economic and political conditions, adverse weather conditions including hurricanes, rapid or unexpected changes in drilling or other 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 2013 Annual Report on Form 10-K, as amended, 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. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may", "will", "expect", "intend", "estimate", "anticipate", "believe", or "continue" or the negative thereof or similar terminology. 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. Except as required by law, 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 June 30, 2014 vs. Three Months Ended June 30, 2013

We reported net income from continuing operations of $192.3 million ($1.75 per diluted share) from operating revenues of $952.1 million for the third quarter ended June 30, 2014, compared with net income from continuing operations of $251.0 million ($2.32 per diluted share) from operating revenues of $840.2 million for the third quarter of fiscal year 2013. In the third quarter of fiscal 2013, we had income from discontinued operations of $15.2 million ($0.14 per diluted share). Including discontinued operations, we recorded net income of $192.3 million ($1.75 per diluted share) for the third quarter ended June 30, 2014, compared to net income of $266.2 million ($2.46 per diluted share) for the third quarter ended June 30, 2013. Net income for the third quarter of fiscal 2014 includes approximately $14.9 million ($0.13 per diluted share) of after-tax gains from the sale of investment securities and approximately $1.4 million ($0.01 per diluted share) of after-tax gains from the sale of assets. Net income for the third quarter of fiscal 2013 includes approximately $92.4 million ($0.86 per diluted share) of after-tax gains from the sale of investment securities and approximately $2.6 million ($0.02 per diluted share) of after-tax gains from the sale of assets.

The following tables summarize operations by reportable operating segment for the three months ended June 30, 2014 and 2013. 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 11 to the Consolidated Condensed Financial Statements.


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                                                                  Three Months Ended June 30,
                                                               2014                          2013
                                                        (in thousands, except days and per day amounts)
U.S. LAND OPERATIONS
Revenues                                             $                802,279      $                695,816
Direct operating expenses                                             408,990                       348,850
General and administrative expense                                      9,548                         9,284
Depreciation                                                          112,639                       101,294
Segment operating income                             $                271,102      $                236,388

Revenue days                                                           26,062                        22,510
Average rig revenue per day                          $                 28,126      $                 28,160
Average rig expense per day                          $                 13,035      $                 12,746
Average rig margin per day                           $                 15,091      $                 15,414
Rig utilization                                                            88 %                          83 %

U.S. Land segment operating income increased to $271.1 million for the third quarter of fiscal 2014 compared to $236.4 million in the same period of fiscal 2013. Revenues were $802.3 million and $695.8 million in the third quarter of fiscal 2014 and 2013, respectively. Included in U.S. land revenues for the three months ended June 30, 2014 and 2013 are reimbursements for "out-of-pocket" expenses of $69.3 million and $61.9 million, respectively.

Segment operating income increased in the comparable quarters due to an increase in revenue days, partially offset by a decline in average margin per day. U.S. land rig utilization increased to 88 percent for the third quarter of fiscal 2014 compared to 83 percent for the third quarter of fiscal 2013. U.S. land rig revenue days for the third quarter of fiscal 2014 were 26,062 compared with 22,510 for the same period of fiscal 2013, with an average of 286.4 and 247.4 rigs working during the third quarter of fiscal 2014 and 2013, respectively.

At June 30, 2014, 289 out of 331 existing rigs in the U.S. Land segment were contracted. Of the 289 contracted rigs, 170 were under fixed term contracts and 119 were working in the spot market. At July 31, 2014, the number of existing rigs under fixed term contracts in the segment increased to 178 and the number of rigs working in the spot market decreased to 114.

During the third quarter of fiscal 2014, two FlexRigs were transferred from the U.S. Land segment to the International Land segment. One of the rigs transferred was the first of ten FlexRigs scheduled to be transferred to the International Land segment and the remaining nine transfers will continue into fiscal 2015.

                                                                  Three Months Ended June 30,
                                                               2014                          2013
                                                        (in thousands, except days and per day amounts)
OFFSHORE OPERATIONS
Revenues                                             $                 64,554      $                 53,859
Direct operating expenses                                              42,446                        33,961
General and administrative expense                                      2,264                         2,214
Depreciation                                                            2,848                         3,562
Segment operating income                             $                 16,996      $                 14,122

Revenue days                                                              728                           728
Average rig revenue per day                          $                 64,019      $                 61,380
Average rig expense per day                          $                 39,716      $                 36,272
Average rig margin per day                           $                 24,303      $                 25,108
Rig utilization                                                            89 %                          89 %

Offshore revenues include reimbursements for "out-of-pocket" expenses of $5.4 million and $4.0 million for the three months ended June 30, 2014 and 2013, respectively.

Revenue and segment operating income increased in the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013 primarily due to our offshore management contracts.

At the end of both comparative periods, eight of our nine platform rigs were active. The ninth rig is currently under contract while undergoing upgrades with operations expected to commence by the end of the first quarter of fiscal 2015.


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                                                                  Three Months Ended June 30,
                                                               2014                          2013
                                                        (in thousands, except days and per day amounts)
INTERNATIONAL LAND OPERATIONS
Revenues                                             $                 81,267      $                 86,978
Direct operating expenses                                              63,950                        68,310
General and administrative expense                                      1,169                           976
Depreciation                                                            9,578                         9,234
Segment operating income                             $                  6,570      $                  8,458

Revenue days                                                            2,024                         2,132
Average rig revenue per day                          $                 35,454      $                 35,955
Average rig expense per day                          $                 26,130      $                 27,364
Average rig margin per day                           $                  9,324      $                  8,591
Rig utilization                                                            74 %                          80 %

International Land segment operating income for the third quarter of fiscal 2014 was $6.6 million compared to $8.5 million in the same period of fiscal 2013. Included in International land revenues for the three months ended June 30, 2014 and 2013 are reimbursements for "out-of-pocket" expenses of $9.5 million and $10.3 million, respectively.

Revenue decreased primarily due to a decrease in rig utilization. During the current quarter, an average of 22.0 rigs worked compared to an average of 23.2 rigs in the third quarter of fiscal 2013. Segment operating income decreased primarily due to an increase in foreign currency exchange losses. Included in operating expense for the three months ended June 30, 2014 and 2013 are exchange losses of $1.5 million and $0.4 million, respectively.

During the third quarter of fiscal 2014, two FlexRigs were transferred to the International Land segment from the U.S. Land segment. One of the rigs transferred was the first of ten FlexRigs to be deployed to the International Land segment from the U.S. Land segment. The ten FlexRigs will work under five-year term drilling contracts. Drilling operations are expected to begin sequentially during the first quarter of fiscal 2015, with the ten rigs reaching full utilization by the end of the second quarter of fiscal 2015. The second FlexRig transferred is expected to begin operations in the fourth quarter of fiscal 2014. A new 3,000 horsepower AC drive rig is also scheduled to begin operations in the fourth quarter of fiscal 2014.

RESEARCH AND DEVELOPMENT

For the three months ended June 30, 2014 and 2013, we incurred $3.9 million and $4.4 million, respectively, of research and development expenses related to ongoing development of a rotary steerable system.

OTHER

General and administrative expenses were $34.2 million in the third quarter of fiscal 2014 compared to $31.1 million in the third quarter of fiscal 2013. The increase is primarily due to increases in salaries, bonus and stock-based compensation along with growth in the number of employees in the comparative periods.

Income from the sale of investment securities was $23.9 million in the third quarter of fiscal 2014 compared to $153.4 million in the third quarter of fiscal 2013. In both periods, the income was attributable to the sale of available-for-sale securities.

Income tax expense decreased to $102.8 million in the third quarter of fiscal 2014 from $139.4 in the third quarter of fiscal 2013, primarily due to the gain on sale of investment securities decreasing in the comparable periods. We expect the effective tax rate for fiscal 2014 to be slightly over 35 percent.

Nine Months Ended June 30, 2014 vs. Nine Months Ended June 30, 2013

We reported net income from continuing operations of $540.1 million ($4.92 per diluted share) from operating revenues of $2.7 billion for the nine months ended June 30, 2014, compared with net income from continuing operations of $561.7 million ($5.19 per diluted share) from operating revenues of $2.5 billion for the first nine months of fiscal year 2013. For the first nine months of fiscal 2013, we had net income from discontinued operations of $15.2 million ($0.14 per diluted share). Including discontinued operations, we recorded net income of $540.0 million ($4.92 per diluted share) for the nine months ended June 30, 2014, compared to net income of $576.8 million ($5.33 per diluted share) for the nine months ended June 30, 2013. Net income for the first nine months of fiscal 2014 includes approximately $27.8 million ($0.25 per diluted share) of after-tax gains from the sale of investment securities and


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approximately $7.7 million ($0.07 per diluted share) of after-tax gains from the sale of assets. Net income for the first nine months of fiscal 2013 includes approximately $97.9 million ($0.91 per diluted share) of after-tax gains from the sale of investment securities and approximately $9.4 million ($0.08 per diluted share) of after-tax gains from the sale of assets.

The following tables summarize operations by reportable operating segment for the nine months ended June 30, 2014 and 2013. 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 11 to the Consolidated Condensed Financial Statements.

                                                                  Nine Months Ended June 30,
                                                                2014                          2013
                                                        (in thousands, except days and per day amounts)
U.S. LAND OPERATIONS
Revenues                                             $                 2,275,744      $          2,077,556
Direct operating expenses                                              1,154,523                 1,064,088
General and administrative expense                                        30,161                    27,662
Depreciation                                                             323,944                   289,032
Segment operating income                             $                   767,116      $            696,774

Revenue days                                                              73,826                    66,100
Average rig revenue per day                          $                    28,205      $             28,152
Average rig expense per day                          $                    13,018      $             12,821
Average rig margin per day                           $                    15,187      $             15,331
Rig utilization                                                               86 %                      82 %

U.S. Land segment operating income increased to $767.1 million for the first nine months of fiscal 2014 compared to $696.8 million in the same period of fiscal 2013. Revenues were $2.3 billion and $2.1 billion for the first nine months of fiscal 2014 and 2013, respectively. Included in U.S. land revenues for the nine months ended June 30, 2014 and 2013 are reimbursements for "out-of-pocket" expenses of $193.5 million and $216.7 million, respectively. Also included in revenue for the nine months ended June 30, 2014 and 2013 are early termination fees of $10.4 million and $2.4 million, respectively. U.S. land rig revenue days for the first nine months of fiscal 2014 were 73,826 compared with 66,100 for the same period of fiscal 2013, with an average of 270.4 and 242.1 rigs working during the first nine months of fiscal 2014 and 2013, respectively.

Revenue and segment operating income increased in the comparable quarters primarily due to an increase in revenue days. U.S. land rig utilization increased to 86 percent for the first nine months of fiscal 2014 compared to 82 percent for the first nine months of fiscal 2013.

At June 30, 2014, 289 out of 331 existing rigs in the U.S. Land segment were contracted. Of the 289 contracted rigs, 170 were under fixed term contracts and 119 were working in the spot market. At July 31, 2014, the number of existing rigs under fixed term contracts in the segment increased to 178 and the number of rigs working in the spot market decreased to 114.

                                                                   Nine Months Ended June 30,
                                                               2014                          2013
                                                        (in thousands, except days and per day amounts)
OFFSHORE OPERATIONS
Revenues                                             $                186,884      $                167,182
Direct operating expenses                                             115,801                       107,274
General and administrative expense                                      7,122                         6,608
Depreciation                                                            9,124                        10,522
Segment operating income                             $                 54,837      $                 42,778

Revenue days                                                            2,184                         2,184
Average rig revenue per day                          $                 63,515      $                 61,289
Average rig expense per day                          $                 37,044      $                 36,043
Average rig margin per day                           $                 26,471      $                 25,246
Rig utilization                                                            89 %                          89 %

Offshore revenues include reimbursements for "out-of-pocket" expenses of $13.1 million and $16.4 million for the nine months ended June 30, 2014 and 2013, respectively.


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Revenue and segment operating income increased in the first nine months of fiscal 2014 compared to the same period of fiscal 2013 primarily due to an increase from our offshore management contracts.

At the end of both comparative periods, eight of our nine platform rigs were active. The ninth rig is currently under contract while undergoing upgrades with operations expected to commence early in fiscal 2015.

                                                                   Nine Months Ended June 30,
                                                               2014                          2013
                                                        (in thousands, except days and per day amounts)
INTERNATIONAL LAND OPERATIONS
Revenues                                             $                262,141      $                268,337
Direct operating expenses                                             199,568                       208,641
General and administrative expense                                      3,133                         2,925
Depreciation                                                           28,951                        26,033
Segment operating income                             $                 30,489      $                 30,738

Revenue days                                                            6,212                         6,392
Average rig revenue per day                          $                 37,025      $                 37,294
Average rig expense per day                          $                 26,826      $                 27,991
Average rig margin per day                           $                 10,199      $                  9,303
Rig utilization                                                            78 %                          81 %

International Land segment operating income for the first nine months of fiscal 2014 was $30.5 million compared to $30.7 million in the same period of fiscal 2013. Included in International land revenues for the nine months ended June 30, 2014 and 2013 are reimbursements for "out-of-pocket" expenses of $32.1 million and $30.0 million, respectively. Also included in International land revenues for the nine months ended June 30, 2013 is approximately $5.3 million related to early termination fees.

Excluding the $5.3 million early termination fee in fiscal 2013, segment operating income increased primarily due to increases in average rig margins in locations where rig activity remained relatively constant during the two comparative periods. During the first nine months of fiscal 2014, an average of 22.8 rigs worked compared to an average of 23.4 rigs in the first nine months of fiscal 2013.

RESEARCH AND DEVELOPMENT

For the nine months ended June 30, 2014 and 2013, we incurred $11.7 million and $11.4 million, respectively, of research and development expenses related to ongoing development of a rotary steerable system.

OTHER

General and administrative expenses increased to $100.9 million in the first nine months of fiscal 2014 from $96.3 million in the first nine months of fiscal 2013. The increase is primarily due to increases in salaries, bonus and stock-based compensation along with growth in the number of employees in the comparative periods.

Income from the sale of investment securities was $45.2 million in the first nine months of fiscal 2014 which was attributable to the sale of available-for-sale securities. Income from the sale of investment securities was $162.1 million in the first nine months of fiscal 2013 which was attributable to the sale of available-for-sale securities and the sale of our share in three limited partnerships that were primarily invested in international equities.

Income tax expense decreased to $293.4 million for the first nine months of fiscal 2014 from $307.2 in the first nine months of fiscal 2013, primarily due to the gain on sale of investment securities decreasing in the comparable periods.


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LIQUIDITY AND CAPITAL RESOURCES



Liquidity



Cash and cash equivalents increased to $549.9 million at June 30, 2014 from
$447.9 million at September 30, 2013. The following table provides a summary of
cash flows:



                                          Nine Months Ended
                                              June 30,
                                          2014        2013
                                           (in thousands)
Net cash provided (used) by:

Operating activities                    $ 797,895   $ 761,643
Investing activities                     (551,338 )  (349,600 )
Financing activities                     (144,497 )   (27,658 )
Increase in cash and cash equivalents   $ 102,060   $ 384,385

Operating activities

Cash flows from operating activities were approximately $797.9 million for the nine months ended June 30, 2014 compared to approximately $761.6 million for the same period ended June 30, 2013. Multiple items contributed to the change, including the effect of adjusting for non-cash items, for the comparative nine months.

Investing activities

Capital expenditures during the nine months ended June 30, 2014 were $622.0 million compared to $618.6 million during the nine months ended June 30, 2013. Proceeds from the sale of investment securities were $49.2 million and $232.2 million for the nine months ended June 30, 2014 and 2013, respectively. The sales proceeds were from the sale of marketable equity available-for-sale securities in both years and the sale of three limited partnerships in fiscal 2013.

Financing activities

On June 5, 2013, we announced a dividend increase to $0.50 per share of common stock. On December 3, 2013, we announced a dividend increase to $0.625 per share of common stock. The increases resulted in dividends paid of $1.75 per share of common stock or $189.5 million during the nine months ended June 30, 2014 compared to $0.37 per share of common stock or $39.5 million paid during . . .

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