Item 1. Business
Item 1. BUSINESS
Overview
Helmerich & Payne, Inc. ("H&P," which, together with its subsidiaries, is identified as the “Company,” “we,” “us” or “our,” except where stated or the context requires otherwise) was incorporated under the laws of the State of Delaware on February 3, 1940 and is successor to a business originally organized in 1920. We provide performance-driven drilling solutions that are intended to make hydrocarbon recovery safer and more economical for oil and gas exploration and production companies. We are an important vendor for a number of oil and gas exploration and production companies, but we focus primarily on the drilling segment of the oil and gas production value chain.
Our global business is composed of three reportable business segments: North America Solutions, Offshore Gulf of Mexico, and International Solutions. During the third quarter of fiscal year 2020, as part of our restructuring efforts (see Note 19—Restructuring Charges to our Consolidated Financial Statements) and consistent with the manner in which our chief operating decision maker evaluates performance and allocates resources, we implemented organizational changes. We are moving from a product-based offering, such as a rig or separate technology package, to an integrated solution-based approach by combining proprietary rig technology, automation software, and digital expertise into our rig operations. Operations previously reported within the former U.S. Land and H&P Technologies operating and reportable segments are now managed and presented within the North America Solutions reportable segment. Our technology services focus on developing, promoting and commercializing technologies designed to improve the efficiency and accuracy of drilling operations, as well as wellbore quality and placement.
During the fiscal year ended September 30, 2020 , our North America Solutions operations were primarily located in Colorado, Ohio, Oklahoma, New Mexico, North Dakota, Pennsylvania, Texas, West Virginia and Wyoming. Our Offshore Gulf of Mexico operations were conducted in Louisiana and in U.S. federal waters in the Gulf of Mexico. Our International Solutions operations had rigs located in four international locations during fiscal year 2020 : Argentina, Bahrain, Colombia and United Arab Emirates (“U.A.E.”).
We also own, develop and operate limited commercial real estate properties. Our real estate investments, which are located exclusively within Tulsa, Oklahoma, include a shopping center containing approximately 389,000 leasable square feet and approximately 210 acres of undeveloped real estate. Our research and development endeavors include both internal development and external acquisition of developing technologies. On October 1, 2019, we elected to utilize a wholly-owned insurance captive (“Captive”) to insure the deductibles for our workers’ compensation, general liability and automobile liability insurance programs. The Company and the Captive maintain excess property and casualty reinsurance programs with third-party insurers in an effort to limit the financial impact of significant events covered under these programs. Our real estate operations, our incubator program for new research and development projects, and our wholly-owned captive insurance companies are included in "Other."
Drilling Fleet
The following map shows the number of working rigs by basin in our North America Solutions reportable segment as of September 30, 2020 :
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The following table sets forth certain information concerning our North America Solutions drilling rigs as of September 30, 2020 :
North America Solutions Fleet
Current Location
Super-Spec FlexRig ® (1)
Non Super-Spec FlexRig ® (2)
Total Fleet
Total Available
Rigs Contracted
Total Available
Rigs Contracted
Total Available
Rigs Contracted
TX
156
42
7
—
163
42
OK
26
4
2
—
28
4
NM
25
12
—
—
25
12
ND
10
4
4
—
14
4
CO
2
1
11
2
13
3
PA
3
—
4
—
7
—
OH
5
1
—
—
5
1
WY
4
—
—
—
4
—
WV
3
3
—
—
3
3
Totals
234
67
28
2
262
69
(1)
AC drive, minimum of 1,500 horsepower drawworks, minimum of 750,000 lbs. hookload rating, 7,500 psi mud circulating system, and multiple-well pad capability.
(2)
AC drive, 1,500 horsepower drawworks, 500,000 or 750,000 lbs. hookload rating, 5,000 or 7,500 psi mud circulating system, may or may not have multiple-well pad capability.
The following table sets forth certain information concerning our Offshore Gulf of Mexico drilling rigs as of September 30, 2020 :
Offshore Gulf of Mexico Fleet
Current
Location
Shallow Water (1)
Deep Water (1)
Total Fleet
Total Available
Rigs Contracted
Total Available
Rigs Contracted
Total Available
Rigs Contracted
Louisiana (2)
3
—
—
—
3
—
Gulf of Mexico
2
2
3
3
5
5
Totals
5
2
3
3
8
5
(1)
Deep water rigs operate on floating facilities and shallow water rigs operate on fixed facilities.
(2)
Rigs are idle, stacked on land and not in state waters.
The following table sets forth certain information concerning our International Solutions drilling rigs as of September 30, 2020 :
International Solutions Fleet
Current Location
AC (FlexRig ® 3) (1)
AC (FlexRig ® 4) (2)
Other AC
SCR (3)
Total Fleet
Total Available
Rigs Contracted
Total Available (1)
Rigs Contracted
Total Available (1)
Rigs Contracted
Total Available (1)
Rigs Contracted
Total Available
Rigs Contracted
Argentina
12
2
4
—
—
—
4
—
20
2
Colombia
2
—
2
—
1
—
2
—
7
—
Bahrain
—
—
3
3
—
—
—
—
3
3
U.A.E.
2
—
—
—
—
—
—
—
2
—
Totals
16
2
9
3
1
—
6
—
32
5
(1)
Other than one super–spec rig (as described above) in Argentina, the FlexRig ® 3 is equipped with an AC drive, 1,500 horsepower drawworks, and a 750,000 lb. hookload rating. It can be equipped with an optional skid or walking system, third mud pump, and 7,500 psi high pressure mud system. The other 11 rigs in Argentina are equipped with skid systems.
(2)
The FlexRig ® 4 model has a small footprint and is designed to be highly mobile. The rig is equipped with a 300,000 lb. mast, 400HP top drive and two mud pumps. Range 3 drill pipe is used without setback. The rig is capable of horizontal and vertical drilling.
(3)
A silicon-controlled-rectifier (“SCR”) system converts alternate current (“AC”) produced by one or more AC generator sets into direct current (“DC”). Of the six SCR rigs, one is equipped with 2,100 horsepower drawworks and the remaining five are equipped with 3,000 horsepower drawworks to drill deep conventional wells.
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Drilling Services and Solutions
General
We are the largest provider of super-spec AC drive land rigs in the Western Hemisphere. Operating principally in North and South America, we specialize in shale and unconventional resource plays, drilling challenging and complex wells in oil and gas producing basins in the United States and in international locations. In the United States, we have a diverse mix of customers consisting of large independent, major, mid-sized and small cap oil companies and private independent companies (including private equity-backed companies) that are focused on unconventional shale basins. In South America and the Middle East, our customers primarily include major international and national oil companies. We do not operate any legacy mechanical rigs.
We had revenues from individual customers, within our North America Solutions segment, that constituted 10 percent or more of our total revenues as follows:
(in thousands)
2018
EOG Resources, Inc.
$
258,194
We did not have any individual customers that represented 10% or more of our total consolidated revenues in fiscal years 2019 or 2020.
The following table presents our average active rigs per day (a measure of activity and utilization over the fiscal year) and average utilization for the fiscal years 2020 , 2019 , and 2018 :
Year Ended September 30,
North America Solutions
Offshore Gulf of Mexico
International Solutions
2020 (1)
2019 (2)
2018
2020
2019
2018
2020
2019 (3)
2018
Average active rigs per day
134.3
224.1
213.6
5.3
5.9
5.6
12.6
17.6
18.3
Average utilization (4)
47
%
67
%
61
%
66
%
74
%
70
%
40
%
55
%
49
%
(1)
At the beginning of the third quarter of fiscal year 2020, the fleet was downsized by 37 rigs. See Note 5—Property, Plant and Equipment to our Consolidated Financial Statements.
(2)
At the end of the third quarter of fiscal year 2019, the fleet was downsized by 51 rigs. See Note 5—Property, Plant and Equipment to our Consolidated Financial Statements.
(3)
At the end of the third quarter of fiscal year 2019, the fleet was downsized by two rigs. See Note 5—Property, Plant and Equipment to our Consolidated Financial Statements.
(4)
A rig is considered to be utilized when it is operating (or otherwise deployed for a customer) or being moved, assembled or dismantled pursuant to a drilling contract, or stacked under contract.
Our Segments
North America Solutions Segment
We believe we operate the largest technologically advanced AC drive drilling rig fleet in North America and have a presence in most of the U.S. shale and unconventional basins. We have a leading market share in the three most active oil basins, which include the Permian Basin, Eagle Ford Shale, and Woodford Shale. Nearly all of our active rigs are drilling horizontal or directional wells. As of September 30, 2020 , we had approximately 20 percent of the total market share in U.S. land drilling and approximately 29 percent of the super-spec market share in U.S. land drilling. In the United States, we have the industry's largest super-spec fleet with 234 rigs, of which 67 were under contract at September 30, 2020. In total, 69 of our 262 marketed rigs were under contract, 54 were under fixed‑term contracts, and 15 were working well-to-well as of September 30, 2020 .
Our drilling technology solutions within this segment enables a holistic solution-based approach that includes products, services and capabilities. This approach provides performance-driven drilling services intended to deliver greater levels of accuracy, consistency, optimization and a reduction of human error to create higher quality wellbores. This technology is intended to address our customers' unique challenges and should result in less wellbore tortuosity and reduce positional uncertainty in the directional drilling process. During fiscal year 2019, we released AutoSlide ® , which integrates the MOTIVE Bit Guidance System ® and several FlexApps to function within the FlexRig ® operating system and fully automates the control of mud motors while sliding during the vertical, the curve, and the lateral hole sections during horizontal drilling operations. Currently, our AutoSlide® application is commercially available in all U.S. oil and gas basins. Many components of our digital technology, including the MOTIVE Bit Guidance System ® technology and MagVar TM survey correction, can be used on any rig, regardless of the drilling or service provider, allowing our customers to benefit from these technologies on all rigs.
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Our North America Solutions segment contributed approximately 83.1 percent ( $1.5 billion ) of our consolidated operating revenues during fiscal year 2020 , compared to approximately 86.7 percent ( $2.4 billion ) and 84.2 percent ( $2.1 billion ) of our consolidated operating revenues during fiscal years 2019 and 2018 , respectively. In North America, our customers are primarily from the major oil companies, large independent oil companies, small cap oil companies and private independent companies (including private equity-backed companies).
Offshore Gulf of Mexico Segment
Our Offshore Gulf of Mexico segment has been in operation since 1968 and currently consists of eight platform rigs in the Gulf of Mexico. We supply the rig equipment and crews and the operator who owns the platform will typically provide production equipment or other necessary facilities. Our offshore rig fleet operates on conventional fixed leg platforms and floating platforms attached to the sea floor with mooring lines, such as Spars and Tension Leg Platforms. Additionally, we provide management contract services to customer platforms where the customer owns the drilling rig.
As of September 30, 2020 , five of the eight offshore rigs were under contract. Our Offshore Gulf of Mexico operations contributed approximately 8.1 percent ( $143.1 million ) of our consolidated operating revenues during fiscal year 2020 , compared to approximately 5.3 percent ( $147.6 million ) and 5.7 percent ( $142.5 million ) of our consolidated operating revenues during fiscal years 2019 and 2018 , respectively. Revenues from drilling services performed for our largest offshore drilling customer totaled approximately 81.1 percent ($116.1 million) of offshore revenues during fiscal year 2020 .
International Solutions Segment
Our International Solutions segment operates primarily in Argentina, Colombia, Bahrain and U.A.E. During the fourth quarter of fiscal year 2018, we ceased operations in Ecuador. As of September 30, 2020 , we had 5 land rigs contracted for work in locations outside of the United States. Our International Solutions operations contributed approximately 8.1 percent ( $144.2 million ) of our consolidated operating revenues during fiscal year 2020 , compared to approximately 7.6 percent ( $211.7 million ) and 9.6 percent ( $238.4 million ) of our consolidated operating revenues during fiscal years 2019 and 2018 , respectively.
Argentina As of September 30, 2020 , we had 20 rigs in Argentina. Revenues generated by Argentine drilling operations contributed approximately 4.8 percent ( $84.4 million ) of our consolidated operating revenues during fiscal year 2020 compared to approximately 5.9 percent ( $165.7 million ) and 7.6 percent ( $190.0 million ) of our consolidated operating revenues during fiscal years 2019 and 2018 , respectively. Revenues from drilling services performed for our two largest customers in Argentina totaled approximately 3.6 percent of our consolidated operating revenues and approximately 43.9 percent of our international operating revenues during fiscal year 2020 . The Argentine drilling contracts are primarily with large international or national oil companies.
Colombia As of September 30, 2020 , we had seven rigs in Colombia. Revenues generated by Colombian drilling operations contributed approximately 0.4 percent ( $6.4 million ) of our consolidated operating revenues in fiscal year 2020 , compared to approximately 1.1 percent ( $29.8 million ) and 1.6 percent ( $38.8 million ) of our consolidated operating revenues during fiscal years 2019 and 2018 , respectively. Revenues from drilling services performed for our two largest customers in Colombia totaled approximately 0.4 percent of our consolidated operating revenues and approximately 4.4 percent of our international operating revenues during fiscal year 2020 . The Colombian drilling contracts are primarily with large international or national oil companies.
Bahrain As of September 30, 2020 , we had three rigs in Bahrain. Revenues generated by Bahrain drilling operations contributed approximately 1.6 percent ( $28.7 million ) of our consolidated operating revenues in fiscal year 2020 , compared to approximately 0.4 percent ( $11.5 million ) and 0.4 percent ( $9.5 million ) of our consolidated operating revenues during fiscal years 2019 and 2018 , respectively. All of our revenues in Bahrain are from a partner of the local national oil company.
United Arab Emirates As of September 30, 2020 , we had two rigs in the U.A.E. Revenues generated by U.A.E. drilling operations contributed approximately 1.4 percent ( $24.7 million ) of our consolidated operating revenues in fiscal year 2020 , compared to approximately 0.2 percent ( $4.7 million ) in fiscal year 2019 and nominal amounts in fiscal year 2018 .
Other Operations
Other Operations include additional non-reportable operating segments. We own, develop and operate limited commercial real estate properties. Our real estate investments, which are located exclusively within Tulsa, Oklahoma, include a shopping center and undeveloped real estate.
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On October 1, 2019, we elected to utilize the Captive to insure the deductibles for our workers’ compensation, general liability and automobile liability insurance programs. Casualty claims occurring prior to October 1, 2019 will remain recorded within each of the operating segments and future adjustments to these claims will continue to be reflected within the operating segments. Reserves for legacy claims occurring prior to October 1, 2019, will remain as liabilities in our operating segments until they have been resolved. Changes in those reserves will be reflected in segment earnings as they occur. We will continue to utilize the Captive to finance the risk of loss to equipment and rig property assets. The Company and the Captive maintain excess property and casualty reinsurance programs with third-party insurers in an effort to limit the financial impact of significant events covered under these programs. Our operating subsidiaries are paying premiums to the Captive, typically on a monthly basis, for the estimated losses based on the external actuarial analysis. The Company is also utilizing the Captive to provide stop-loss coverage over its self-insured employee health plan, which covers insured claims in excess of employee deductibles. The Company did not previously purchase any stop-loss coverage.
During the third quarter of fiscal year 2019, the Company established an incubator program for new research and development projects, the results of which have been included in "Other" within our segment disclosures.
Rigs, Equipment, R&D, and Facilities
During the late 1990’s, we undertook a strategic initiative to develop a new generation drilling rig that would be the safest, fastest-moving and highest performing rig in the land drilling market. Our first FlexRig ® drilling rig entered the market in 1998. The original 18 rigs were designated as FlexRig ® 1 and FlexRig ® 2 rigs and were designed to drill wells with a depth of between 8,000 and 18,000 feet. From 2002 to 2004, we designed, built and delivered 32 of the next generation, AC drive rigs, known as “FlexRig ® 3 rigs,” which incorporated new drilling technology and improved the safety and environmental design. The FlexRig ® 3 rigs found immediate success by delivering higher value wells to the customer and marked the beginning of the AC land rig revolution. We also changed our pricing and contracting strategy, and beginning in 2005, predominantly all new FlexRig ® drilling rigs were built supported by a firm contract and attractive returns. To date, we have built over 200 FlexRig ® 3 rigs that align with this strategy. An important part of our strategy was to design a rig that could support continuous improvement through upgrade capability of the hardware and software on the rigs to take advantage of technology improvements and lengthening the industry rig replacement cycle. These upgrades included, but were not limited to, enhanced drilling control systems and software, skid and walking systems for drilling multiple well pads, 7,500 psi mud systems, set back capacity to accommodate the pipe that the longer laterals demanded, and additional mud system capacity.
H&P has a strategic advantage due to our ability to utilize our AC rig design and operational and engineering expertise to exploit different well depths and designs that customers demand. In 2006, we introduced the FlexRig ® 4 drilling rig, which was designed to efficiently drill shallower wells on multi-well pads. The FlexRig ® 4 design offers two options that include trailerized or multi-well pad drilling capability, both of which incorporate additional environmental and safety by design improvements. While the trailerized FlexRig ® 4 design provides for more efficient moves between individual well pads, the multi-well pad design uses a skidding capability that allows for drilling multiple wells from a single pad, which results in significantly reduced environmental impact and increased production from a smaller footprint.
In 2011, we announced the introduction of the FlexRig ® 5 drilling rig. The FlexRig ® 5 drilling rig was designed for deeper wells than the FlexRig ® 4 drilling rig and long lateral drilling of multiple wells from a single location and is designed for drilling horizontally in unconventional shale reservoirs. The new design preserves the key performance features of the FlexRig ® 3 rig design but adds a bi-directional skidding system and equipment capacities suitable for wells in excess of 25,000 feet of measured depth.
In 2016, we saw the progression of longer lateral wells and the technical challenges involved in drilling longer lateral wells. At that time, we began delivering rigs to the market that were equipped and capable of drilling the longer lateral wells. The industry would later refer to these rigs as super-spec rigs, which have the following specific characteristics: AC drive, minimum 1,500 horsepower drawworks, minimum of 750,000 lbs. hookload rating, 7,500 psi mud circulating system, and multiple-well pad capability. Additionally, our competency in design and construction as well as our financial strength enabled us to efficiently upgrade our other existing rigs to super-spec, resulting in what we believe to be the largest fleet of super-spec rigs in the world. As of September 30, 2020 , we held approximately 29 percent of the super-spec market share in the U.S. land drilling market with 234 super-spec rigs. In 2017, we introduced our first walking rig by reconfiguring our skid designed FlexRig ® 3 drilling rigs. Since then, we have reconfigured, converted, and upgraded a total of 44 FlexRig ® drilling rigs to super-spec walking rigs.
Years of designing and building our fleet of AC drive FlexRig ® drilling rigs has given us many competitive benefits. One key advantage is fleet uniformity. We have overseen the design and assembly of all of our AC FlexRig ® drilling rigs, and our different rig classes share many common components. We co-designed the control systems for our rigs and have the right to make any changes or modifications to those systems that we desire. A uniform fleet creates an adaptive environment to reach maximum efficiency for employees, equipment and technology and is critical to our ability to provide consistent, safe and reliable operations in increasingly complex basins. In addition, our fleet has greater scale than any other competitor, which enables us to upgrade our existing FlexRig ® drilling rigs to super-spec in a capital efficient way. High levels of uniformity in crew training and rotation and our ability to control and remove safety exposures across a more standard fleet allow us to deliver higher performance in a safer and more reliable manner for the customer. Further, our fleet is supported by a cost-effective Company-owned supply chain that provides standardized materials directly to the rigs from our regional warehouses.
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A long-standing challenge in our industry is providing high quality and consistent results. In addressing the challenge of providing safe, high quality and consistent results, we utilize process excellence techniques that are developed internally. We provide experienced drilling and maintenance support for our operations, which provides value by reducing nonproductive time in our operations and improving drilling performance through our Rig Systems Monitoring and Support Center (“RSMS”) and Remote Operations Centers ("ROCs"). Our RSMS and ROCs are manned 24 hours a day, seven days a week, with the ability to monitor and detect trends in drilling and drilling services performance onboard our rigs. Our monitoring group within the RSMS provides real-time help and feedback to our wellsite employees, as well as our customers, to fully optimize our operational performance. Additionally, our RSMS and ROCs have staffs of engineers and industry experts that work with our customers to enhance wellbore positioning, drilling program execution and overall drilling performance. The monitoring group and our performance engineers capture our drilling work steps to help provide high quality and reliable results for our customers.
We currently have two facilities that provide vertically integrated solutions for drilling rig manufacturing, upgrades, retrofits and modifications, as well as overhauling, recertification, and repairs as it relates to our rigs and equipment. These facilities utilize lean manufacturing processes to enhance quality and efficiency as well as provide important insights in the maintenance and wear of equipment on our rigs. Our assembly facility is located near Houston, Texas. Our facility near Tulsa, Oklahoma is utilized for overhauling, recertification, and repairs.
During fiscal year 2020, we continued to see adoption and growth with our technologies and automation focused solutions. Our FlexApp solutions, which layer on top of our FlexRig ® drilling control system, continue to add value for our customers. Our AutoSlide ® service, which is powered by our Motive Bit Guidance System ® technology, continued to grow in commercial feet steered, new customer adoption and the number of deployments. Our MagVar TM , Drillscan ® and Motive Bit Guidance System ® solutions continue to be available on both H&P and third - party rigs. These solutions continue to provide differentiated value for our customers in the areas of drilling engineering, wellbore placement, and wellbore quality. Our path to autonomous drilling continues to evolve with several solutions in Alpha and Beta testing. All of our automation focused solutions and applications are enabled by our uniform digital fleet and are designed to provide additional value to our customers' well programs by providing a platform for machine-human collaboration during the drilling process to improve efficiency. All of our technologies play an important role in developing our strategy as we head towards autonomous drilling.
The technologies that are currently in use include the following:
Application Name
Description
FlexTorque™
Hardware and software designed to decrease downhole drilling vibration and "slip-stick" during drilling. This helps with drilling efficiency and is intended to help extend bit and downhole tool life to help reduce costly nonproductive time.
Flex-Oscillator 2.0™
Rig control software that automates drill string rotation during directional "slide" operations, which helps reduce downhole drag and the potential for stuck pipe. It also helps support more effective directional drilling.
FlexB2D™
Software to engage and disengage the bit during connections in an established controlled and consistent manner that is intended to help extend bit and downhole tool life, better drilling parameters and less costly bit trips out of the hole.
FlexDrill 1.0™
Software licensed from ExxonMobil to help maximize the bit's rate of penetration, which we have automated, that is intended to allow the drilling control system to achieve the ideal mechanical specific energy at the bit.
AutoSlide ®
Powered by Motive’s Bit Guidance System ® technology and utilizes machine learning and automation to help interface with FlexRig ® control systems to allow for automatic slide drilling via computer control.
MagVar TM
Solution intended to help improve surveying accuracy and contribute to increased horizontal well economics while reducing collision risk.
DrillScan ®
Industry leader in physics-based modeling software to help select bottom hole assemblies and help provide real-time drilling dynamics evaluation.
MOTIVE Bit Guidance System ®
Automated directional drilling guidance system that helps improve wellbore quality with a scalable, repeatable data driven platform approach to help increase horizontal well economics and help reduce risk.
We have historically offered ancillary services, which are now referred to as FlexServices ® . These services include trucking, surface equipment, casing running services and pipe rental.
Markets and Competition
Our business largely depends on the level of capital spending by oil and gas companies for exploration and production activities. The level of capital spending is correlated to oil and gas prices. Oil and gas prices can be volatile at times depending upon both near and long-term supply and demand factors. Sustained increases or decreases in the prices of oil and natural gas generally have a material impact on the exploration and production activities of our customers. As such, significant declines in the prices of oil and natural gas may have a material adverse effect on our business, financial condition and results of operations. As of September 30, 2020 , we had 79 rigs under contract, compared to 218 and 259 rigs under contract as of September 30, 2019 and 2018 , respectively. For further information concerning risks associated with our business, including volatility surrounding oil and natural gas prices and the impact of low oil prices on our business, see Item 1A— “Risk Factors” and Item 7— “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Form 10‑K.
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Our industry is highly competitive, and we strive to differentiate our services based upon the quality of our FlexRig ® drilling rigs and our engineering design expertise, operational efficiency, software technologies, safety and environmental awareness. The number of available rigs generally exceeds demand in many of our markets, resulting in significant price competition. We compete against many drilling companies, some of whom are present in more than one of our operating regions. In the United States, we compete with Nabors Industries Ltd., Patterson-UTI Energy, Inc. and many other competitors with regional operations. Internationally, we compete directly with various contractors at each location where we operate. In the Gulf of Mexico platform rig market, we primarily compete with Nabors Industries Ltd. and Blake International Rigs, LLC.
Drilling Contracts
Our drilling contracts are obtained through competitive bidding or as a result of direct negotiations with customers. Our contracts vary in their terms and rates depending on the nature of the operations to be performed, the duration of the work, the amount and type of equipment and services provided, the geographic areas involved, market conditions and other variables. In many instances, our contracts cover multi‑well and multi‑year projects. Except for a limited number of rigs operated under master agreements, each drilling rig operates under a separate drilling contract.
During fiscal year 2020 , a majority of our drilling services were performed on a “daywork” contract basis, under which we charged a rate per day, with the price determined by the location, depth and complexity of the well to be drilled, operating conditions, the duration of the contract, and the competitive forces of the market. We may also enter into contracts where we charge a fixed rate per foot of hole drilled to a stated depth, with a fixed rate per day for the remainder of the hole. Contracts performed on a “footage” basis generally involve a greater element of risk to H&P compared to contracts performed on a “daywork” basis. Also, we may enter into “lump-sum” contracts under which we charge a fixed sum to deliver a hole to a stated depth and agree to furnish services such as testing, coring and casing the hole which are not normally done on a “footage” basis. “Lump-sum” contracts entail varying degrees of risk greater than the usual “footage” contract. We also actively pursue “performance daywork” contracts, pursuant to which we are compensated based upon our performance against a mutually agreed upon set of predetermined targets. These contracts typically have a lower base dayrate but give us the opportunity to receive additional compensation by meeting or exceeding certain performance targets. The risks associated with these contracts relate to the failure to reach the agreed upon performance targets. If we do not meet these targets, we will not receive additional compensation beyond the base dayrate and will recognize less overall drilling services revenue than we would by utilizing other types of contracts. We are seeing a growing adoption of performance contracts by our customers and we expect this trend to continue.
The duration of our drilling contracts are generally either “well‑to‑well” or for a fixed term. “Well‑to‑well” contracts can be terminated at the option of either party upon the completion of drilling of any one well. Fixed-term contracts generally have a minimum term of at least six months up to multiple years. These contracts customarily provide for termination at the election of the customer but may include an “early termination payment” to be paid to us if the 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.
Contracts generally contain renewal or extension provisions exercisable at the option of the customer at prices mutually agreeable to us and the customer. In most instances, contracts provide for additional payments for mobilization and demobilization of the rig.
Contract Backlog
Drilling contract backlog is the expected future dayrate revenue from executed contracts. We calculate backlog as the total expected revenue from fixed-term contracts and do not include any anticipated contract renewals as part of its calculation. Additionally, contracts that currently contain month-to-month terms are represented in our backlog as one month of unsatisfied performance obligations. In addition to depicting the total expected revenue from fixed-term contracts, backlog is indicative of expected future cash flow that the Company expects to receive regardless of whether a customer honors the fixed-term contract to expiration of a contract or decides to terminate the contract early and pay an early termination payment. In the event of an early termination payment, the timing of the recognition of backlog and the total amount of revenue may differ; however, the overall associated cash flow is preserved. As such, management finds backlog a useful metric for future planning and budgeting, whereas investors consider it in estimating future revenue and cash flows of the Company. As of September 30, 2020 , and 2019 , our drilling contract backlog was $0.7 billion and $1.2 billion , respectively. The decrease in backlog at September 30, 2020 from September 30, 2019 is primarily due to prevailing market conditions causing a decline in the number of drilling contracts executed and to some extent an increase in the number of early terminations of contracts. Approximately 33.3 percent of the total September 30, 2020 backlog is reasonably expected to be filled in fiscal year 2022 and thereafter.
Fixed-term contracts customarily provide for termination at the election of the customer, with an early termination payment to be paid to us if a contract is terminated prior to the expiration of the fixed term. As a result of the depressed market conditions and negative outlook for the near term, beginning in the second quarter of fiscal year 2020, certain of our customers, as well as those of our competitors, have opted to renegotiate or early terminate existing drilling contracts. Such renegotiations have included requests to lower the contract dayrate in exchange for additional terms, temporary stacking of the rig, and other proposals. During the fiscal years ended September 30, 2020 and 2019 , early termination revenue associated with term contracts was $73.4 million and $11.3 million , respectively.
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In response to the current market conditions, several operators included in our North America Solutions operating segment have opted to place their rigs in an idle-but-contracted state as an alternative to early termination. This includes "warm stacking" and "cold stacking." Warm stacking occurs when a rig remains on-site while pausing drilling activity, while cold stacking occurs when a rig is demobilized and returned to the yard temporarily until next steps are determined. When rigs are stacked, they remain under the terms of the contract but typically pay a reduced rate, where the remaining term days are generally not reduced, but our operating expenses are reduced. In many instances for stacked rigs, for the total days stacked there are proportional days added to the original contract length at the original contracted rate. As of September 30, 2020 , there are five rigs that are warm stacked, five rigs that are cold stacked within the North America Solutions segment.
The following table sets forth the total backlog by reportable segment as of September 30, 2020 and 2019 , and the percentage of the September 30, 2020 backlog reasonably expected to be filled in fiscal year 2022 and thereafter:
Total Backlog Revenue
Percentage Reasonably Expected to be Filled in Fiscal Year 2022 and Thereafter
(in billions)
September 30, 2020
September 30, 2019
North America Solutions
$
0.6
$
1.0
33.3
%
Offshore Gulf of Mexico
—
—
—
International Solutions
0.1
0.2
39.3
$
0.7
$
1.2
The early termination of a contract may result in a rig being idle for an extended period of time, which could adversely affect our financial condition, results of operations and cash flows. In some limited circumstances, such as sustained unacceptable performance by us, no early termination payment would be paid to us. Early terminations could cause the actual amount of revenue earned to vary from the backlog reported. See Item 1A— “Risk Factors — Our current backlog of drilling services and solutions revenue may continue to decline and may not be ultimately realized as fixed‑term contracts and may, in certain instances, be terminated without an early termination payment " within this Form 10-K regarding fixed-term contract risk. Additionally, see Item 1A— “Risk Factors — The impact and effects of public health crises, pandemics and epidemics, such as the ongoing outbreak of COVID-19, have adversely affected and are expected to continue to adversely affect our business, financial condition and results of operations " within this Form 10-K.
Employees
As of September 30, 2020 , we had 3,634 employees within the United States and 504 employees in our international operations. The number of employees fluctuates depending on the current and expected demand for our services. We consider our employee relations to be robust. None of our U.S. employees are represented by a union. However, some of our international employees are unionized.
Human Capital Objectives and Programs
We strive to create a culture and work environment that enables us to attract, train, promote, and retain a diverse group of talented employees who together can help us gain a competitive advantage.
Recruiting
Our recruiting practices and decisions on whom to hire are among our most important activities. In a downturn year such as fiscal year 2020, we maintain relationships with former employees and prioritize recalling our most experienced people for field positions. In addition, we utilize social media, local job fairs and educational organizations across the United States to find diverse, motivated and responsible employees.
Core Values and Culture
Fostering and maintaining a strong, healthy culture is a key strategic focus. Our core values reflect who we are and the way our employees interact with one another, our customers, partners and shareholders. Our core value of Actively C.A.R.E. means that we treat one another with respect. We care about each other, and from a safety perspective, our employees are committed to Controlling and Removing Exposures for themselves and others. Our core value of Service Attitude means that we do our part and more for those around us. We consider the needs of others and provide solutions to meet their needs. Our core value of Innovative Spirit means that we constantly work to improve and are willing to try new approaches. We make decisions with the long-term view in mind. Our core value of teamwork means that we listen to one another and work across teams toward a common goal. We collaborate to achieve results and focus on success for our customers and shareholders. Finally, we do the right thing. That means we are honest and transparent. We tackle tough situations, make decisions, and speak up when needed.
To further encourage living out our core values, during fiscal year 2020, an average of 10 organizational health sessions per month were conducted with employee teams.
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Education and Training
We are dedicated to the continual training and development of our employees, especially of those in field operations, to ensure we can develop future managers and leaders from within our organization. Our training starts right at the beginning with on-boarding procedures that focus on safety, responsibility, ethical conduct and inclusive teamwork.
In addition to on–boarding training, we provide extensive ongoing training and career development focused on:
•
compliance with our Code of Business Conduct and Ethics and laws applicable to our business
•
skills and competencies directly related to employees' positions; and
•
responsibility for personal safety and the safety of fellow employees, others on location and the environment.
Safety Training and Serious Injury and/or Fatality ("SIF") Reduction Program
Over the last three years, 94% of our Rig Managers and 91% of Drillers received in-field coaching from a Safety Leadership Coach and employees received, on average, 26 hours of training.
One of our most critical responsibilities is the safety of our employees and the employees of our customers. Traditional approaches to safety focused on lagging indicators that centered on reacting to injuries after they occurred. However, we believe the best approach is to focus on exposures (leading indicators) and controlling and removing them, thus helping prevent injuries before they occur. Accordingly, we have moved to tracking potential SIFs with annual goals targeted at reducing SIFs. In calendar year 2019, we focused on reducing the number of SIF incidents by improving pre-job planning tools as a means for reducing incidents with SIF potential, year-over-year reduction in incidents related to handling of tubulars and year-over-year increase in seatbelt usage among employees based on self-reported seatbelt use.
Educational Assistance Plan
We offer an Educational Assistance Plan for eligible employees pursuing an undergraduate degree and, in some cases, post-graduate degrees.
Health and Welfare
We support our employees’ and their families’ health by offering full medical, dental, and vision insurance for employees and their families, life insurance and long-term disability plans, and health and dependent care flexible spending accounts. We foster teamwork and a sense of community amongst our employees through our H&P Way Fund that provides assistance to employees and their families experiencing emergencies.
Retirement
We provide a variety of resources and services to help our employees for Retirement. H&P offers a comprehensive retiree medical plan for those who meet eligibility requirements. In addition, we provide a 401(k) plan with a company match.
Insurance and Risk Management
Our operations are subject to a number of operational risks, including personal injury and death, environmental, and weather risks, which could expose us to significant losses and damage claims. We are not fully insured against all of these risks and our contractual indemnity provisions may not fully protect us. Furthermore, if a significant accident or other event occurs and is not fully covered by insurance or an enforceable or recoverable indemnity from a customer, it could have a material adverse effect on our business, financial condition and results of operations.
We have indemnification agreements with many of our customers and we also maintain liability and other forms of insurance. In general, our drilling contracts contain provisions requiring our customers to indemnify us for, among other things, pollution and reservoir damage. However, our contractual rights to indemnification may be unenforceable or limited due to negligent or willful acts by us, or subcontractors and/or suppliers or by reason of state anti-indemnity laws. Our customers and other third parties may also dispute these indemnification provisions, or we may be unable to transfer these risks to our drilling customers or other third parties by contract or indemnification agreements.
We insure working land rigs and related equipment at values that approximate the current replacement costs on the inception date of the policies. However, we self-insure large deductibles under these policies. We also carry insurance with varying deductibles and coverage limits with respect to stacked rigs, offshore platform rigs, and “named wind storm” risk in the Gulf of Mexico.
We have insurance coverage for comprehensive general liability, automobile liability, workers’ compensation and employer’s liability, and certain other specific risks. Insurance is purchased over deductibles to reduce our exposure to catastrophic events. We retain a significant portion of our expected losses under our workers’ compensation, general liability and automobile liability programs. We self-insure a number of other risks including loss of earnings and business interruption. We are unable to obtain significant amounts of insurance to cover risks of underground reservoir damage.
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Our insurance may not in all situations provide sufficient funds to protect us from all liabilities that could result from our operations. Our coverage includes aggregate policy limits. As a result, we retain the risk for any loss in excess of these limits. No assurance can be given that all or a portion of our coverage will not be canceled, that insurance coverage will continue to be available at rates considered reasonable or that our coverage will respond to a specific loss. Further, we may experience difficulties in collecting from our insurers or our insurers may deny all or a portion of our claims for insurance coverage.
Government Regulations
Our operations are affected from time to time and in varying degrees by foreign and domestic political developments and a variety of federal, state, foreign, regional and local laws, rules and regulations, including those relating to:
• drilling of oil and natural gas wells;
• directional drilling services;
• protection of the environment;
• workplace health and safety;
• labor and employment;
• data privacy;
• taxation;
• exportation or importation of equipment, technology and software; and
• currency conversion and repatriation.
Environmental laws and regulations that apply to our operations include the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”), the Resource Conservation and Recovery Act (each, as amended) and similar laws that provide for responses to, and liability for, air emissions, water discharges or releases of oil or hazardous substances into the environment, including damages to natural resources. Applicable environmental laws and regulations also include similar foreign, state or local counterparts to the above-mentioned federal laws, which regulate air emissions, water discharges and hazardous substances and waste. Environmental laws can have a material adverse effect on the drilling industry, including our operations, and compliance with such laws may require us to make significant capital expenditures, such as the installation of costly equipment or operational changes, and may affect the resale values or useful lives of our drilling rigs.
The Occupational Safety and Health Act (“OSHA”) and other similar laws and regulations govern the protection of the health and safety of employees. The OSHA hazard communication standard, the Environmental Protection Agency community right-to-know regulations under Title III of CERCLA, the Emergency Planning and Community Right-to-Know Act and similar state statutes and local regulations require that information be maintained about hazardous materials used in our operations and that this information be provided to employees, state and local governments, emergency responders and citizens.
A number of countries actively regulate and control the importation and/or exportation of oil and gas and other aspects of the oil and gas industries in their countries. In addition, government actions and initiatives by OPEC+ may continue to contribute to oil price volatility. In some areas of the world, government activity has adversely affected the amount of exploration and development work done by oil and gas companies and influenced their need for drilling services, and likely will continue to do so.
In addition, we are subject to a variety of other U.S. and foreign laws and regulations, including, but not limited to, the U.S. Foreign Corrupt Practices Act and other anti-bribery and anti-corruption laws. The U.S. Foreign Corrupt Practices Act and similar anti-bribery and anti-corruption laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Failure to comply with applicable laws or regulations or acts of misconduct could subject us to fines, penalties or other sanctions. For more information, see Item 1A— “Risk Factors — Failure to comply with the U.S. Foreign Corrupt Practices Act or foreign anti‑bribery legislation could adversely affect our business . ”
We are also subject to the jurisdiction of the U.S. Treasury Department’s Office of Foreign Assets Control, the U.S. Commerce Department’s Bureau of Industry and Security, the U.S. Customs and Border Protection and other U.S. and non-U.S. laws and regulations governing the international trade of goods, services and technology. Such regulations regarding exports and imports of covered goods or dealings with sanctioned countries, persons or entities include licensing, recordkeeping and reporting requirements. Failure to comply with applicable laws and regulations relating to customs, tariffs, sanctions and export controls may subject us to criminal sanctions or civil remedies, including fines, denial of export privileges, injunctions or seizures of assets. For more information, see Item 1A— “Risk Factors — Government policies, mandates, and regulations specifically affecting the energy sector and related industries, regulatory policies or matters that affect a variety of businesses, taxation polices, and political instability could adversely affect our financial condition and results of operations . ”
We are also subject to regulation by numerous other regulatory agencies, including, but not limited to, the U.S. Department of Labor, which sets employment practice standards for workers. In addition, we are subject to certain requirements to contribute to retirement funds or other benefit plans, and laws in some jurisdictions restrict our ability to dismiss employees.
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We monitor our compliance with applicable governmental rules and regulations in each country of operation. We have made and will continue to make the required expenditures to comply with current and future regulatory requirements. We do not anticipate that compliance with currently applicable rules and regulations and required controls will significantly change our competitive position, capital spending or earnings during 2021 . We believe we are in material compliance with applicable rules and regulations and, to date, the cost of such compliance has not been material to our business or financial condition. However, future events such as additional laws and regulations, changes in existing laws and regulations or their interpretation or more vigorous enforcement policies of regulatory agencies, may require additional expenditures by us, which may be material. Specifically, the expansion of the scope of laws or regulations protecting the environment has accelerated in recent years, particularly outside the United States, and we expect this trend to continue. Accordingly, there can be no assurance that we will not incur significant compliance costs in the future. See Item 1A— “Risk Factors — Failure to comply with or changes to governmental and environmental laws could adversely affect our business. ”
Sustainability
We marked our 100 year anniversary in 2020 in a cyclical industry that at times has proven to be highly volatile. Much planning and work goes into our Company by all its employees, both past and present, to ensure our sustainability. The Company continues to refine its comprehensive sustainability strategy rooted in our core value to "do the right thing," as discussed under "— Human Capital Objectives and Programs — Core Values and Culture." This strategy uses data to better understand our impacts in areas like emissions, diversity, and safety so we can make any necessary improvements.
Improving Lives Through Affordable and Responsible Energy
We believe affordable and responsible energy improves lives globally. With a focus on leading-edge technology, we strive to deliver industry-leading efficiency, safety, and value while continuing to reduce the environmental impact of our solutions.
Energy has been essential to human life, but the forms of energy that have been relied on have evolved over time. People have relied upon and harnessed energy from resources like fire, water, wind, horsepower, fossil fuels, nuclear, solar, and more, with each having its own unique societal benefits and costs.
At a certain point, the continued growth of the world’s population highlighted a need to capture more concentrated forms of energy, making a reliance on fossil fuels increasingly central. Over the last several decades, those responsible for producing fossil fuels gained more expertise and became more specialized. A “service sector” developed to supply the most scientific and technologically specialized needs of the oil and gas sector. We provide highly specialized services in this narrow segment of the very broad and constantly evolving energy sector. We continue to innovate in an effort to increase efficiency for our customers and provide continued societal benefits with less impact to the environment.
Focused on Safer and More Efficient Drilling
We design, build and operate rigs that make drilling for oil and gas safer and more efficient. Focused on the drilling segment of the oil and gas production value chain, we provide the expertise, technology and equipment to drill oil and gas wells for our customers - the exploration and production ("E&P") companies. Our E&P customers then determine if and when to extract those resources from the ground, following completion of the well.
H&P and the Fossil Fuel Value Chain
While we do play an important role in helping our customers make overall production as safe and efficient as possible, our most critical responsibility is ensuring the safety of our employees and the employees of our customers. Although many of the environmental and safety risks associated with the oil and gas sector fall outside of our operations, we remain committed to utilizing our expertise and advancing our technologies to aid our customers in minimizing personal and environmental risks and maximizing industry sustainability efforts.
Below is a description of the roles that H&P plays, in the oil and gas value chain, as a drilling solutions provider in comparison to the roles that participants in other sectors of the oil and gas industry play.
H&P:
•
makes drilling for oil safer and more efficient;
•
build and renovates drilling rigs at two industrial facilities in Texas and Oklahoma;
•
oversees drilling operations on its rigs on customer sites;
•
drills predominantly on-shore in the United States (88 percent of available rigs are on onshore);
•
makes significant and impactful investments in research and development and new technologies;
•
employs over 4,100 people; and
•
provides robust benefit plans to protect the physical and financial health of its valued employees.
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Other Sectors of the Oil and Gas Industry:
•
buy, lease, prepare, manage or restore land or are responsible for the protection of wildlife on or biodiversity of property;
•
engage in hydraulic fracturing;
•
pump oil or gas from the ground;
•
procure, transport or pump water underground, or treat or remove wastewater from the site, or arrange for its disposal;
•
assume responsibility for the prevention of fugitive releases or emissions associated with the oil and gas production process;
•
engage in oil and gas transport, refining or storage; and
•
engage in downstream operations.
Human Capital
For a description of our recruiting practices, education and training for employees, and employee benefits, see "— Human Capital Programs and Objectives" above.
Available Information
Our website is located at www.hpinc.com. Annual reports on Form 10‑K, quarterly reports on Form 10‑Q, current reports on Form 8‑K, and amendments to those reports, earnings releases, and financial statements are made available free of charge on the investor relations section of our website as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission ("SEC"). The information contained on our website, or accessible from our website, is not incorporated into, and should not be considered part of, this Form 10‑K or any other documents we file with, or furnish to, the SEC. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. Annual reports, quarterly reports, current reports, amendments to those reports, earnings releases, financial statements and our various corporate governance documents are also available free of charge upon written request.
Investors and others should note that we announce material financial information to our investors using our investor relations website (https://helmerichandpayneinc.gcs-web.com/), SEC filings, press releases, public conference calls and webcasts. We use these channels as well as social media to communicate with our stockholders and the public about our company, our services and other issues. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the social media channels listed on our investor relations website.
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