What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-29 compared with 2021-02-09 · 242 added, 100 removed, 239 unchanged (59% of the section changed)

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(“H&P,” which, together with its subsidiaries, is identified as the “Company,” “we,” “us,” or “our,” except where stated or the context requires otherwise) through its operating subsidiaries provides performance-driven drilling solutions and technologies that are intended to make hydrocarbon recovery safer and more economical for oil and gas exploration and production companies.

As of December 31, 2020, our drilling rig fleet included a total of 301 drilling rigs.

Our drilling services and solutions segments consist of the North America Solutions segment with 262 rigs, the Offshore Gulf of Mexico segment with 7 offshore platform rigs and the International Solutions segment with 32 rigs as of December 31, 2020.

At the close of the first quarter of fiscal year 2021, we had 102 contracted rigs, of which 64 were under a fixed-term contract and 38 were working well-to-well, compared to 79 contracted rigs at September 30, 2020.

As of March 31, 2021, our drilling rig fleet included a total of 281 drilling rigs.

Our drilling services and solutions segments consist of the North America Solutions segment with 242 rigs, the Offshore Gulf of Mexico segment with seven offshore platform rigs and the International Solutions segment with 32 rigs as of March 31, 2021.

At the close of the second quarter of fiscal year 2021, we had 118 contracted rigs, of which 65 were under a fixed-term contract and 53 were working well-to-well, compared to 79 contracted rigs at September 30, 2020.

Our long-term strategy remains focused on innovation, technology, safety, operational excellence and reliability.

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There was a corresponding dramatic decline in the demand for land rigs, such that the overall rig count for calendar year 2020 averaged roughly 430 rigs, significantly lower than in calendar year 2019, which averaged approximately 940 rigs.

We experienced much of our rig count decline during the second and third quarters of fiscal year 2020 as our North American Solutions rig count declined from 195 rigs at December 31, 2019 to a low of 47 rigs in August of 2020.

However, during the fourth quarter of fiscal year 2020, the market experienced a stabilization of crude oil prices in the $40 per barrel range.

Along with this stabilization, our rig activity began to increase, and increased more significantly during the first quarter of fiscal year 2021.

Our active rig count, which excludes idle but contracted rigs, doubled from 47 rigs in August 2020 to 94 rigs at December 31, 2020.

Additionally, during the first quarter of fiscal year 2021, crude oil prices improved from the $40 per barrel range to almost $50 per barrel.

At such levels, we believe our customers will have more robust capital budgets entering into calendar year 2021 and we believe we will experience a higher level of rig activity in fiscal year 2021 compared to fiscal year 2020.

However, even with the improved levels of commodity prices, the lasting impacts of the global pandemic remain, which will likely keep prices and demand for crude oil at relatively low levels compared to pre-pandemic levels.

Consequently, we do not expect or anticipate customers' capital budgets will support activity levels like those experienced prior to March 2020.

We experienced much of our rig count decline during the second and third quarters of fiscal year 2020 as our North American Solutions active rig count declined from 195 rigs at December 31, 2019 to a low of 47 rigs in August of 2020.

However, during the fourth quarter of fiscal year 2020, the market experienced a stabilization of crude oil prices in the $40 per barrel range and subsequently crude oil prices moved toward $50 per barrel as our customers set their capital budgets for calendar year 2021 More recently, crude oil prices have continued to increase, reaching $60 per barrel.

That said, however, we do not expect rig activity to move in tandem with crude oil prices to the same extent as it has historically.

This is primarily due to our customers having a more disciplined approach to their operations and capital spending.

We expect a majority will maintain their activity levels in accordance with their capital budgets for 2021, which were set during a time when crude oil prices were lower and will not adjust spending levels higher as crude oil prices move higher.

Along with stabilization of crude prices during the fourth quarter of fiscal year 2020, our rig activity began to increase, and increased more significantly during the first and second quarters of fiscal year 2021.

Our North American Solutions active rig count has more than doubled from 47 rigs in August 2020 to 109 rigs at March 31, 2021.

We do expect further increases in our rig count for the remainder of fiscal year 2021 as the level of customer capital spending is higher in calendar 2021 than it was in calendar 2020.

However, we expect the rate of rig count increases to be at a much more modest pace during the last half of fiscal year 2021 compared to what we experienced during the first half of fiscal year 2021.

Utilization for our super-spec FlexRig® fleet peaked in late calendar year 2018 with 216 of 221 super-spec rigs working (98 percent utilization);

however, the subsequent decline in the demand for land rigs resulted in customers idling a large portion of our super-spec FlexRig® fleet.

At December 31, 2020, we had 142 idle super-spec rigs out of our FlexRig® fleet of 234 super-spec rigs (39 percent utilization).

Collectively, our other business segments, Offshore Gulf of Mexico and International Solutions, are exposed to the same macro environment adversely affecting our North America Solutions segment and those unfavorable factors are creating similar challenges for these business segments as well.

At March 31, 2021, we had 127 idle super-spec rigs out of our FlexRig® fleet of 234 super-spec rigs (46 percent utilization).

Collectively, our other business segments, Offshore Gulf of Mexico and International Solutions, are exposed to the same macro commodity price environment affecting our North America Solutions segment;

however, activity levels in the International Solutions segment are also subject to other various geopolitical and financial factors specific to the countries of our operations.

While we do not expect much change in our Offshore Gulf of Mexico segment, we see opportunities for improvement in our International Solutions segment, but those will likely occur on a more extended timeline compared to what we have experienced in the North America Solutions segment.

H&P recognizes the uncertainties and concerns caused by the COVID-19 pandemic;

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in some instances, policies and procedures are more stringent in our foreign operations than in our North America operations and this has resulted in a complete suspension, for a certain period of time, of all drilling operations in at least one foreign jurisdiction

As of December 31, 2020, the Company was aware that 310 out of its approximately 4,600 employees have had confirmed cases of COVID-19 since the COVID-19 outbreak began, of which we believe approximately 60 percent contracted the virus outside of their work location.

As of March 31, 2020, the Company was aware that 565 out of its approximately 4,600 employees have had confirmed cases of COVID-19 since the COVID-19 outbreak began, of which we believe approximately 60 percent contracted the virus outside of their work location.

We have had no fatalities and 545 of 565 employees who had confirmed cases have returned to work.

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Per CDC guidelines, employees testing positive are permitted to return to their worksite after 10 days.

Employees who are considered a Level 1 exposure but who have not tested positive are required to quarantine and are permitted to return to their worksite after 7 days with a negative test or 10 days without a test and no symptoms.

Employees who are considered a Level 1 exposure, but who have been vaccinated are permitted to remain at work.

Employees who have not been vaccinated and are considered a Level 1 exposure, but who have not tested positive are required to quarantine and are permitted to return to their worksite after 7 days with a negative test or 10 days without a test and no symptoms.

In addition, the Company applies its enhanced sanitization procedures to the employee’s work location prior to allowing employees to re-enter the location.

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The cost reduction measures could lead to additional restructuring charges in future periods.

At December 31, 2020, the Company had cash and cash equivalents and short-term investments of $523.8 million and availability under the 2018 Credit Facility (as defined herein) of $750.0 million resulting in approximately $1.3 billion in near-term liquidity.

At March 31, 2021, the Company had cash and cash equivalents and short-term investments of $561.7 million and availability under the 2018 Credit Facility (as defined herein) of $750.0 million resulting in approximately $1.3 billion in near-term liquidity.

We currently do not anticipate the need to draw on the 2018 Credit Facility.

As part of the Company's normal operations, we regularly monitor the creditworthiness of our customers and vendors, screening out those that we believe have a high risk of failure to honor their counter-party obligations either through payment or

delivery of goods or services.

We also perform routine reviews of our accounts receivable and other amounts owed to us to assess and quantify the ultimate collectability of those amounts.

At December 31, 2020 and September 30, 2020, the Company had a net allowance against its accounts receivable of $1.6 million and $1.8 million, respectively.

At March 31, 2021 and September 30, 2020, the Company had a net allowance against its accounts receivable of $1.8 million for both periods.

The nature of the COVID-19 pandemic is inherently uncertain, and as a result, the Company is unable to reasonably estimate the duration and ultimate impacts of the pandemic, including the timing or level of any subsequent recovery.

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Recent Developments

Gain on Sale of Assets

During the three months ended December 31, 2020, we closed on the sale of an offshore platform rig within our Offshore Gulf of Mexico operating segment for total consideration of $12.0 million with an aggregate net book value of $2.8 million, resulting in a gain of $9.2 million, which is included within Gain on Sale of Assets on our Unaudited Condensed Consolidated Statements of Operations.

Assets Held-for-Sale

In March 2021, the Company's leadership executed the current strategy, which was initially introduced in 2019, focusing on operating various types of highly capable upgraded rigs and phasing out the older, less capable fleet.

As a result, the Company has undertaken a plan to sell 68 Domestic non-super-spec rigs, all within our North America Solutions segment, the majority of which were previously decommissioned, written down and/or held as capital spares.

The book values of those assets were written down to their net realizable value of $13.1 million, and were reclassified as held-for-sale on our Unaudited Condensed Consolidated Balance Sheets as of March 31, 2021.

As a result, we recognized a non-cash impairment charge of $54.3 million, during the three months ended March 31, 2021, in the Unaudited Condensed Consolidated Statement of Operations.

The significant assumptions utilized in the valuation were based on our intended method of disposal, historical sales of similar assets, and market quotes and are classified as Level 2 and Level 3 inputs by ASC Topic 820, Fair Value Measurement and Disclosures.

Although we believe the assumptions used in our analysis are reasonable and appropriate, different assumptions and estimates could materially impact the analysis and our resulting conclusion.

Sale of Offshore Rig

During the first quarter of fiscal year 2021, we closed on the sale of an offshore platform rig within our Offshore Gulf of Mexico operating segment for total consideration of $12.0 million with an aggregate net book value of $2.8 million, resulting in a gain of $9.2 million, which is included within (gain) loss on sale of assets on our Unaudited Condensed Consolidated Statements of Operations during the six months ended March 31, 2021.

Additional Restructuring Charges

During the second quarter of fiscal 2021, we reorganized our IT operations and moved select IT functions to a managed service provider.

Cost incurred, as of March 31, 2021, in connection with the restructuring are comprised of one-time severance benefits to employees who were involuntarily terminated.

The termination date of some of the employees extend beyond March 31, 2021, and such employees are required to render service through their respective termination date in order to receive the one-time severance benefit.

This together with additional restructuring activities that could result from our in process cost management review could result in additional restructuring charges throughout the year.

Contract Backlog

As of December 31, 2020 and September 30, 2020, our contract drilling backlog, being the expected future dayrate revenue from executed contracts, was $526.6 million and $658.0 million, respectively.

As of March 31, 2021 and September 30, 2020, our contract drilling backlog, being the expected future dayrate revenue from executed contracts, was $435.3 million and $658.0 million, respectively.

These amounts do not include anticipated contract renewals or expected performance bonuses.

The decrease in backlog at December 31, 2020 from September 30, 2020 is primarily due to prevailing market conditions causing a decline in the number of longer term drilling contracts executed and to some extent an increase in the number of early terminations of contracts.

Approximately 35.6 percent of the December 31, 2020 total backlog is reasonably expected to be fulfilled in fiscal year 2022 and thereafter.

The decrease in backlog at March 31, 2021 from September 30, 2020 is primarily due to prevailing market conditions causing a decline in the number of longer term drilling contracts executed and to some extent an increase in the number of early terminations of contracts.

Approximately 50.0 percent of the March 31, 2021 total backlog is reasonably expected to be fulfilled 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.

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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 three months ended December 31, 2020 and 2019, early termination revenue associated with term contracts was $5.8 million and $0.1 million, respectively.

The following table sets forth the total backlog by reportable segment as of December 31, 2020 and September 30, 2020, and the percentage of the December 31, 2020 backlog reasonably expected to be fulfilled in fiscal year 2022 and thereafter:

(in millions) December 31, 2020 September 30, 2020 Percentage Reasonably

During the three and six months ended March 31, 2021 and 2020, early termination revenue associated with term contracts was $1.9 million and $7.7 million, respectively, and $8.2 million and $8.3 million, respectively.

The following table sets forth the total backlog by reportable segment as of March 31, 2021 and September 30, 2020, and the percentage of the March 31, 2021 backlog reasonably expected to be fulfilled in fiscal year 2022 and thereafter:

(in millions) March 31, 2021 September 30, 2020 Percentage Reasonably

Expected to be Filled in

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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 our 2020 Annual Report on Form 10-K.

Results of Operations for the Three Months Ended December 31, 2020 and 2019

Results of Operations for the Three Months Ended March 31, 2021 and 2020

Consolidated Results of Operations

Net Income (Loss) We reported a loss from continuing operations of $77.9 million ($0.73 loss per diluted share) from operating revenues of $246.4 million for the three months ended December 31, 2020 compared to income from continuing operations of $30.7 million ($0.27 per diluted share) from operating revenues of $614.7 million for the three months ended December 31, 2019.

Included in the net loss for the three months ended December 31, 2020 is income of $7.5 million ($0.07 per diluted share) from discontinued operations.

Including discontinued operations, we recorded a net loss of $70.4 million ($0.66 loss per diluted share) for the three months ended December 31, 2020 compared to net income of $30.6 million ($0.27 per diluted share) for the three months ended December 31, 2019.

Research and Development For the three months ended December 31, 2020 and 2019, we incurred $5.6 million and $6.9 million, respectively, of research and development expenses.

Selling, General and Administrative Expense Selling, general and administrative expenses decreased to $39.3 million during the three months ended December 31, 2020 compared to $49.8 million during the three months ended December 31, 2019.

The $10.5 million decrease in fiscal year 2021 compared to the same period in fiscal year 2020 is primarily due to expense reduction initiatives undertaken primarily during the second and third quarters of fiscal year 2020.

Income Taxes We had an income tax benefit of $18.1 million for the three months ended December 31, 2020 (which included discrete tax expense of approximately $4.1 million related to equity compensation) compared to income tax provision of $14.1 million (which included discrete tax expense of $2.4 million related to equity compensation) for the three months ended December 31, 2019.

Net Loss We reported a loss from continuing operations of $123.3 million ($1.15 loss per diluted share) from operating revenues of $296.2 million for the three months ended March 31, 2021 compared to a loss from continuing operations of $420.5 million ($3.88 loss per diluted share) from operating revenues of $633.6 million for the three months ended March 31, 2020.

Included in the net loss for the three months ended March 31, 2021 is income of $2.3 million ($0.02 per diluted share) from discontinued operations.

Including discontinued operations, we recorded a net loss of $121.0 million ($1.13 loss per diluted share) for the three months ended March 31, 2021 compared to a net loss of $420.5 million ($3.88 loss per diluted share) for the three months ended March 31, 2020.

Research and Development For the three months ended March 31, 2021 and 2020, we incurred $5.3 million and $6.2 million, respectively, of research and development expenses.

Selling, General and Administrative Expense Selling, general and administrative expenses decreased to $39.3 million during the three months ended March 31, 2021 compared to $42.0 million during the three months ended March 31, 2020.

The $2.7 million decrease in fiscal year 2021 compared to the same period in fiscal year 2020 is primarily due to a lower number of personnel, partially offset by higher accrued variable compensation expense.

Asset Impairment Charge In March 2021, we have undertaken a plan to sell 68 Domestic non-super-spec rigs, all within our North America Solutions segment, the majority of which were previously decommissioned, written down and/or held as capital spares.

The book values of those assets were written down to their net realizable value of $13.1 million and were reclassified as held-for-sale on the Unaudited Condensed Consolidated Balance Sheets as of March 31, 2021.

This resulted in an impairment charge of $54.3 million ($42.0 million, net of tax, or $0.39 per diluted share), which is included in asset impairment charge on the Unaudited Condensed Consolidated Statement of Operations for the three months ended March 31, 2021, compared to an impairment charge of $563.2 million ($437.5 million net of tax, or $5.21 per diluted share) for the three months ended March 31, 2020.

Restructuring Charges We incurred $1.6 million in restructuring expenses during the three months ended March 31, 2021.

These expenses were comprised of one-time severance benefits to IT employees who were involuntarily terminated and one-time moving related expenses due to the downsizing and relocation of our Houston assembly facility.

Income Taxes We had an income tax benefit of $36.6 million for the three months ended March 31, 2021 compared to an income tax benefit of $113.4 million for the three months ended March 31, 2020.

Our statutory federal income tax rate for fiscal year 2021 is 21.0 percent (before incremental state and foreign taxes).

North America Solutions Operations Segment

Three Months Ended December 31,

Three Months Ended March 31,

(in thousands, except operating statistics) 2021 2020 (1)

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Segment gross margin 64,098 199,397 (67.9)

Depreciation 99,917 117,334 (14.8)

Research and development 5,329 5,663 (5.9)

Selling, general and administrative expense 12,960 12,519 3.5

Depreciation 100,324 116,065 (13.6)

Asset impairment charge 54,284 406,548 (86.6)

Restructuring charges 1,442 — —

Segment operating loss $ (109,834) $ (342,667) (67.9)

Operating Statistics (2) :

Average active rigs 105 190 (44.7)

Number of active rigs at the end of period 109 150 (27.3)

Number of available rigs at the end of period 242 299 (19.1)

Reimbursements of "out-of-pocket" expenses $ 27,290 $ 77,166 (64.6)

(1) Operations previously reported within the H&P Technologies reportable segment are now managed and presented within the North America Solutions reportable segment.

(2) These operating metrics allow investors to analyze the various components of segment financial results in terms of activity, utilization and other key results.

Management uses these metrics to analyze historical segment financial results and as the key inputs for forecasting and budgeting segment financial results.

Beginning in the first quarter of fiscal year 2021, these operating metrics replaced previously used per day metrics.

As a result, prior year comparative information is also provided above.

Segment Gross Margin The North America Solutions segment gross margin was $64.1 million for the three months ended March 31, 2021 compared to $199.4 million in the same period of fiscal year 2020.

The decrease was primarily driven by lower activity levels.

Revenues were $249.9 million and $546.0 million in the three months ended March 31, 2021 and 2020, respectively.

The decline in operating revenue is primarily due to lower activity levels, lower early termination revenue and lower average rig operating rates.

For the three months ended March 31, 2021 we reported no early termination revenue compared to $8.2 million during the same period of fiscal year 2020.

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 (except in limited circumstances including sustained unsatisfactory performance by us).

Direct operating expenses decreased to $185.8 million during the three months ended March 31, 2021 as compared to $346.6 million during the three months ended March 31, 2020.

The decrease was due to lower activity levels, partially offset by higher idle rig expense and rig recommissioning expense driven by sequential activity increases.

Depreciation Depreciation decreased to $99.9 million during the three months ended March 31, 2021 as compared to $117.3 million during the three months ended March 31, 2020.

The decrease was primarily attributable to rig impairments during fiscal year 2020 and ongoing low levels of capital expenditures.

Asset Impairment Charge In March 2021, we have undertaken a plan to sell 68 Domestic non-super-spec rigs, the majority of which were previously decommissioned, written down and/or held as capital spares.

The book values of those assets were written down to their net realizable value of $13.1 million, and were reclassified as held-for-sale..

This resulted in an impairment charge of $54.3 million ($42.0 million, net of tax, or $0.39 per diluted share), for the three months ended March 31, 2021, compared to an impairment charge of $406.5 million ($313.7 million net of tax, or $3.76 per diluted share) for the three months ended March 31, 2020.

Restructuring Charges For the three months ended March 31, 2021, we incurred $1.4 million in restructuring charges.

Offshore Gulf of Mexico Operations Segment

Three Months Ended March 31,

(in thousands, except operating statistics) 2021 2020 % Change

Operating revenues $ 29,274 $ 33,079 (11.5)

Direct operating expenses 23,069 32,648 (29.3)

Segment gross margin 6,205 431 1,339.7

Depreciation 2,593 2,842 (8.8)

Selling, general and administrative expense 634 908 (30.2)

Segment operating income (loss) $ 2,978 $ (3,319) (189.7)

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Reimbursements of "out-of-pocket" expenses $ 5,193 $ 6,763 (23.2)

(1) These operating metrics allow investors to analyze the various components of segment financial results in terms of activity, utilization and other key results.

Management uses these metrics to analyze historical segment financial results and as the key inputs for forecasting and budgeting segment financial results.

Beginning in the first quarter of fiscal year 2021, these operating metrics replaced previously used per day metrics.

As a result, prior year comparative information is also provided above.

Segment Gross Margin During the three months ended March 31, 2021, the Offshore Gulf of Mexico segment gross margin was $6.2 million compared to a gross margin of $0.4 million for the three months ended March 31, 2020.

This increase was driven by the absence of $3.7 million of bad debt expense that was incurred during the three months ending March 31, 2020 and due to a rig that was mobilizing to the customer platform and generating losses during the three months ended March 31, 2020.

We recorded an 11.5 percent decrease in operating revenue during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The decline in operating revenue is primarily due to lower activity levels partially offset by the mix of rigs working as compared to being on standby or mobilization rates.

Direct operating expenses decreased to $23.1 million during the three months ended March 31, 2021 as compared to $32.6 million during the three months ended March 31, 2020.

The decrease was primarily driven by the factors described above.

International Solutions Operations Segment

Three Months Ended March 31,

(in thousands, except operating statistics) 2021 2020 % Change

Operating revenues $ 14,813 $ 51,250 (71.1)

Direct operating expenses 16,718 37,964 (56.0)

Segment gross margin (1,905) 13,286 (114.3)

Depreciation 415 7,821 (94.7)

Selling, general and administrative expense 1,138 1,248 (8.8)

Asset impairment charge — 156,686 (100.0)

Segment operating loss $ (3,458) $ (152,469) (97.7)

Operating Statistics (1) :

Average active rigs 4 17 (76.5)

Number of active rigs at the end of period 5 15 (66.7)

Number of available rigs at the end of period 32 32 —

Reimbursements of "out-of-pocket" expenses $ 1,613 $ 2,209 (27.0)

(1) These operating metrics allow investors to analyze the various components of segment financial results in terms of activity, utilization and other key results.

Management uses these metrics to analyze historical segment financial results and as the key inputs for forecasting and budgeting segment financial results.

Beginning in the first quarter of fiscal year 2021, these operating metrics replaced previously used per day metrics.

As a result, prior year comparative information is also provided above.

Segment Gross Margin The International Solutions segment gross margin was $(1.9) million for the three months ended March 31, 2021 compared to a gross margin of $13.3 million for the three months ended March 31, 2020.

The change was primarily driven by lower activity coupled with fixed minimum levels of country overhead during the three months ended March 31, 2021.

We recorded a 71.1 percent decrease in operating revenue during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The decline in operating revenue is primarily due to lower activity levels.

Direct operating expenses decreased to $16.7 million during the three months ended March 31, 2021 as compared to $38.0 million during the three months ended March 31, 2020.

The decrease was driven by the factors described above.

Asset Impairment Charge During the three months ended March 31, 2021, we recorded no impairment charges, compared to an impairment charge of $156.7 million ($123.8 million net of tax, or $1.45 per diluted share) for the three months ended March 31, 2020.

Other Operations

Results of our other operations, excluding corporate restructuring charges, corporate selling, general and administrative costs and corporate depreciation, are as follows:

Three Months Ended March 31,

(in thousands) 2021 2020 % Change

Operating revenues $ 10,825 $ 13,998 (22.7)

Direct operating expenses 11,222 12,531 (10.4)

Gross margin (397) 1,467 (127.1)

Depreciation 359 294 22.1

Research and development 5 551 (99.1)

Selling, general and administrative expense 311 246 26.4

Operating income (loss) $ (1,072) $ 376 (385.1)

Gross Margin On October 1, 2019, we elected to utilize the Captive to insure the deductibles for our workers’ compensation, general liability and automobile liability claims programs.

Direct operating costs consisted primarily of adjustments to accruals for estimated losses of $2.3 million and $6.0 million allocated to the Captive during the three months ended March 31, 2021 and 2020, respectively.

The decrease in accruals for estimated losses is primarily due to actuarial valuation adjustments by our third-party actuary as well as lower activity levels during the three months ended March 31, 2021.

Intercompany premium revenues recorded by the Captive during the three months ended March 31, 2021 and 2020 amounted to $8.7 million and $10.5 million, respectively, which were eliminated upon consolidation.

Results of Operations for the Six Months Ended March 31, 2021 and 2020

Consolidated Results of Operations

Net Loss We reported a loss from continuing operations of $201.2 million ($1.87 loss per diluted share) from operating revenues of $542.5 million for the six months ended March 31, 2021 compared to a loss from continuing operations of $389.7 million ($3.61 loss per diluted share) from operating revenues of $1.2 billion for the six months ended March 31, 2020.

Included in the net loss for the six months ended March 31, 2021 is income of $9.8 million ($0.09 per diluted share) from discontinued operations.

Including discontinued operations, we recorded a net loss of $191.4 million ($1.78 loss per diluted share) for the six months ended March 31, 2021 compared to a net loss of $389.9 million ($3.61 loss per diluted share) for the six months ended March 31, 2020.

Research and Development For the six months ended March 31, 2021 and 2020, we incurred $10.9 million and $13.1 million, respectively, of research and development expenses.

Selling, General and Administrative Expense Selling, general and administrative expenses decreased to $78.7 million during the six months ended March 31, 2021 compared to $91.8 million during the six months ended March 31, 2020.

The $13.1 million decrease in fiscal year 2021 compared to the same period in fiscal year 2020 is primarily due to a lower number of personnel, partially offset by higher accrued variable compensation expense.

The book values of those assets were written down to their net realizable value of $13.1 million, and were reclassified as held-for-sale on the Unaudited Condensed Consolidated Balance Sheets as of March 31, 2021.

This resulted in an impairment charge of $54.3 million ($42.0 million, net of tax, or $0.39 per diluted share), which is included in asset impairment charge on the Unaudited Condensed Consolidated Statement of Operations for the six months ended March 31, 2021, compared to an impairment charge of $563.2 million ($437.5 million net of tax, or $5.21 per diluted share) for the six months ended March 31, 2020.

Restructuring Charges We incurred $1.7 million in restructuring expenses during the six months ended March 31, 2021.

These expenses were primarily comprised of one-time severance benefits to IT employees who were involuntarily terminated and one-time moving related expenses due to the downsizing and relocation of our Houston assembly facility.

Income Taxes We had an income tax benefit of $54.7 million for the six months ended March 31, 2021 (which includes discrete tax expense of approximately $4.1 million related to equity compensation) compared to income tax benefit of $99.3 million (which included discrete tax expense of approximately $2.4 million related to equity compensation) for the six months ended March 31, 2020.

Our statutory federal income tax rate for fiscal year 2021 is 21.0 percent (before incremental state and foreign taxes).

North America Solutions Operations Segment

Six Months Ended March 31,

(in thousands, except operating statistics) 2021 2020 (1)

Operating revenues $ 451,929 $ 1,070,642 (57.8)

Direct operating expenses 343,150 679,546 (49.5)

Segment gross margin 108,779 391,096 (72.2)

Depreciation 200,241 233,399 (14.2)

Research and development 10,795 12,412 (13.0)

Selling, general and administrative expense 24,640 29,265 (15.8)

Asset impairment charge 54,284 406,548 (86.6)

Restructuring charges 1,581 — —

Segment operating loss $ (182,762) $ (290,528) (37.1)

Operating Statistics (2) :

Average active rigs 93 191 (51.3)

Number of active rigs at the end of period 109 150 (27.3)

Number of available rigs at the end of period 242 299 (19.1)

Reimbursements of "out-of-pocket" expenses $ 46,079 $ 136,734 (66.3)

(1) Operations previously reported within the H&P Technologies reportable segment are now managed and presented within the North America Solutions reportable segment.

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As a result, prior year comparative information is also provided above.

Segment Gross Margin The North America Solutions segment gross margin was $44.7 million for the three months ended December 31, 2020 compared to $191.7 million in the same period of fiscal year 2020.

Segment Gross Margin The North America Solutions segment gross margin was $108.8 million for the six months ended March 31, 2021 compared to $391.1 million in the same period of fiscal year 2020.

The decrease was primarily driven by lower activity levels.

Revenues were $202.0 million and $524.7 million in the three months ended December 31, 2020 and 2019, respectively.

Included in revenues for the three months ended December 31, 2020 is early termination revenue of $5.8 million compared to $0.1 million during the same period of fiscal year 2020.

Revenues were $451.9 million and $1.1 billion in the six months ended March 31, 2021 and 2020, respectively.

The decline in operating revenue is primarily due to lower activity levels.

Included in revenues for the six months ended March 31, 2021 is early termination revenue of $5.8 million compared to $8.3 million during the same period of fiscal year 2020.

Revenue We experienced a 61.5 percent decrease in operating revenue when comparing the three months ended December 31, 2020 to the three months ended December 31, 2019.

The decline in operating revenue is primarily due to lower activity levels during the three months ended December 31, 2020.

Direct Operating Expenses Direct operating expenses decreased to $157.3 million during the three months ended December 31, 2020 as compared to $333.0 million during the three months ended December 31, 2019.

The decrease was due to the factors mentioned above.

Depreciation Depreciation decreased to $100.3 million during the three months ended December 31, 2020 as compared to $116.1 million during the three months ended December 31, 2019.

Direct operating expenses decreased to $343.2 million during the six months ended March 31, 2021 as compared to $679.5 million during the six months ended March 31, 2020 primarily due to lower activity levels.

Depreciation Depreciation decreased to $200.2 million during the six months ended March 31, 2021 as compared to $233.4 million during the six months ended March 31, 2020.

The decrease was primarily attributable to the lower carrying cost of our impaired assets.

The book values of those assets were written down to their net realizable value of $13.1 million, and were reclassified as held-for-sale..

This resulted in an impairment charge of $54.3 million ($42.0 million, net of tax, or $0.39 per diluted share), for the six months ended March 31, 2021, compared to an impairment charge of $406.5 million ($313.7 million net of tax, or $3.76 per diluted share) for the six months ended March 31, 2020.

Restructuring Charges For the six months ended March 31, 2021, we incurred $1.6 million in restructuring charges.

Offshore Gulf of Mexico Operations Segment

Three Months Ended December 31,

Six Months Ended March 31,

(in thousands, except operating statistics) 2021 2020 % Change

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Segment gross margin 12,222 10,641 14.9

Selling, general and administrative expense 669 1,137 (41.2)

Depreciation 5,199 5,587 (6.9)

Selling, general and administrative expense 1,303 2,045 (36.3)

Segment operating income $ 5,720 $ 3,009 90.1

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As a result, prior year comparative information is also provided above.

Segment Gross Margin During the three months ended December 31, 2020, the Offshore Gulf of Mexico segment gross margin was $6.0 million compared to a gross margin of $10.2 million for the three months ended December 31, 2019.

This decrease is primarily attributable to decreased activity and pricing during the three months ended December 31, 2020.

Revenue We experienced a 19.8 percent decrease in operating revenue when comparing the three months ended December 31, 2020 to the three months ended December 31, 2019.

The decline in operating revenue is primarily due to the factors described above.

Direct Operating Expenses Direct operating expenses decreased to $26.3 million during the three months ended December 31, 2020 as compared to $30.0 million during the three months ended December 31, 2019.

The decrease was primarily driven by lower activity, partially offset by unfavorable variances in self-insurance accruals.

Segment Gross Margin During the six months ended March 31, 2021, the Offshore Gulf of Mexico segment gross margin was $12.2 million compared to a gross margin of $10.6 million for the six months ended March 31, 2020.

This increase was driven by the absence of $3.7 million of bad debt expense that was incurred during the six months ending March 31, 2020 and due to a rig that was mobilizing to the customer platform and generating losses during the six months ended March 31, 2020.

We recorded a 16.1 percent decrease in operating revenue during the six months ended March 31, 2021 compared to the six months ended March 31, 2020.

The decline in operating revenue is primarily due to lower activity levels partially offset by the mix of rigs working as compared to being on standby or mobilization rates.

Direct operating expenses decreased to $49.3 million during the six months ended March 31, 2021 as compared to $62.7 million during the six months ended March 31, 2020 and was primarily driven by the factors described above.

International Solutions Operations Segment

Three Months Ended December 31,

Six Months Ended March 31,

(in thousands, except operating statistics) 2021 2020 % Change

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Segment gross margin (8,910) 25,673 (134.7)

Selling, general and administrative expense 979 1,455 (32.7)

Depreciation 788 15,638 (95.0)

Segment operating income (loss) $ (8,357) $ 3,115 (368.3)

Selling, general and administrative expense 2,117 2,703 (21.7)

Asset impairment charge — 156,686 (100.0)

Segment operating loss $ (11,815) $ (149,354) (92.1)

Operating Statistics (1) :

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As a result, prior year comparative information is also provided above.

Segment Gross Margin The International Solutions segment gross margin was $(7.0) million for the three months ended December 31, 2020 compared to a gross margin of $12.4 million for the three months ended December 31, 2019.

The change was primarily driven by lower activity coupled with fixed minimum levels of country overhead during the three months ended December 31, 2020.

Revenue We experienced a 77.4 percent decrease in operating revenue when comparing the three months ended December 31, 2020 to the three months ended December 31, 2019.

The decline in operating revenue is primarily due to lower activity during the three months ended December 31, 2020.

Direct Operating Expenses Direct operating expenses decreased to $17.5 million during the three months ended December 31, 2020 as compared to $34.1 million during the three months ended December 31, 2019.

The decrease was driven by the factors described above.

Segment Gross Margin The International Solutions segment gross margin was $(8.9) million for the six months ended March 31, 2021 compared to a gross margin of $25.7 million for the six months ended March 31, 2020.

The change was primarily driven by lower activity levels coupled with fixed minimum levels of country overhead during the six months ended March 31, 2021.

We recorded a 74.1 percent decrease in operating revenue during the six months ended March 31, 2021 compared to the six months ended March 31, 2020.

The decline in operating revenue is primarily due to lower activity levels.

Direct operating expenses decreased to $34.2 million during the six months ended March 31, 2021 as compared to $72.0 million during the six months ended March 31, 2020 and was driven by the factors described above.

Asset Impairment Charge During the six months ended March 31, 2021, we recorded no impairment charges, compared to an impairment charge of $156.7 million ($123.8 million net of tax, or $1.45 per diluted share) for the six months ended March 31, 2020.

Other Operations

Results of our other operations, excluding corporate restructuring charges, corporate selling, general and administrative costs and corporate depreciation, are as follows:

Three Months Ended December 31,

Six Months Ended March 31,

(in thousands) 2021 2020 % Change

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Gross margin 4,571 1,077 324.4

Depreciation 718 615 16.7

Research and development 122 680 (82.1)

Selling, general and administrative expense 692 487 42.1

Depreciation 359 321 11.8

Operating income (loss) $ 3,039 $ (705) 531.1

Gross Margin On October 1, 2019, we elected to utilize the Captive to insure the deductibles for our workers’ compensation, general liability and automobile liability claims programs.

Direct operating costs consisted primarily of adjustments to accruals for estimated losses of approximately $0.5 million and $8.5 million allocated to the Captive during the three months ended December 31, 2020 and 2019, respectively.

Intercompany premium revenues recorded by the Captive during the three months ended December 31, 2020 and 2019 amounted to $7.1 million and $7.7 million, respectively, which were eliminated upon consolidation.

Direct operating costs consisted primarily of adjustments to accruals for estimated losses of $2.8 million and $14.7 million allocated to the Captive during the six months ended March 31, 2021 and 2020, respectively.

The decrease in accruals for estimated losses is primarily due to actuarial valuation adjustments by our third-party actuary as well as lower activity levels during the six months ended March 31, 2021.

Intercompany premium revenues recorded by the Captive during the six months ended March 31, 2021 and 2020 amounted to $15.8 million and $18.2 million, respectively, which were eliminated upon consolidation.

Liquidity and Capital Resources

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The effects of the COVID-19 outbreak and the oil price collapse in 2020 have had significant adverse consequences for general economic, financial and business conditions, as well as for our business and financial position and the business and financial position of our customers, suppliers and vendors and may, among other things, impact our ability to generate cash flows from operations, access the capital markets on acceptable terms or at all and affect our future need or ability to borrow under the 2018 Credit Facility.

In addition to our potential sources of funding, the effects of such global events may impact our liquidity or need to alter our allocation or sources of capital, implement additional cost reduction measures and further change our financial

Although the COVID-19 outbreak and the oil price collapse could have a broad range of effects on our sources and uses of liquidity, the ultimate effect thereon, if any, will depend on future developments, which cannot be predicted at this time.

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To date, general inflationary trends have not had a material effect on our operating margins.

As of December 31, 2020, we had $374.0 million of cash on hand and $149.8 million of short-term investments.

Our cash flows for the three months ended December 31, 2020 and 2019 are presented below:

Three Months Ended December 31,

As of March 31, 2021, we had $427.2 million of cash and cash equivalents on hand and $134.5 million of short-term investments.

Our cash flows for the six months ended March 31, 2021 and 2020 are presented below:

Six Months Ended March 31,

(in thousands) 2021 2020

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Financing activities (56,599) (188,444)

Net increase (decrease) in cash and cash equivalents and restricted cash $ (114,094) $ 11,344

Net decrease in cash and cash equivalents and restricted cash $ (58,112) $ (2,752)

Operating Activities

For the purpose of understanding the impact on our cash flows from operating activities, operating net working capital is calculated as current assets, excluding cash and short-term investments, less current liabilities, excluding dividends payable, short-term debt and the current portion of long-term debt.

Operating net working capital was $228.0 million as of December 31, 2020 compared to $194.2 million as of September 30, 2020.

The sequential increase in net working capital was primarily driven by an increase in receivables caused by increased activity as well as payment of ad valorem taxes in various jurisdictions during the three months ended December 31, 2020.

Included in accounts receivable as of December 31, 2020 were $5.0 million of early termination fees and $45.2 million of income tax receivables, of which $32.1 million of the income tax receivable was received subsequent to December 31, 2020.

Cash flows used in operating activities were approximately $19.6 million for the three months ended December 31, 2020.

Cash flows provided by operating activities were approximately $111.8 million for the three months ended December 31, 2019.

For the purpose of understanding the impact on our cash flows from operating activities, operating net working capital is calculated as current assets, excluding cash and cash equivalents, short-term investments, and assets held-for-sale, less current liabilities, excluding dividends payable, short-term debt and the current portion of long-term debt.

Operating net working capital was $179.5 million as of March 31, 2021 compared to $194.2 million as of September 30, 2020.

The sequential decrease in net working capital was primarily driven by the collection of a $32.1 million income tax receivable during the three months ended March 31, 2021, partially offset by activity-driven increases in other components of our operating net working capital.

Included in accounts receivable as of March 31, 2021 was $18.9 million of income tax receivables.

Cash flows provided by operating activities were approximately $58.8 million and $232.6 million for the six months ended March 31, 2021 and 2020, respectively.

The decrease in cash provided by operating activities is primarily driven by lower operating activity.

Investing Activities

Capital Expenditures Our capital expenditures during the three months ended December 31, 2020 were $14.0 million compared to $46.0 million during the three months ended December 31, 2019.

Capital Expenditures Our capital expenditures during the six months ended March 31, 2021 were $30.7 million compared to $94.3 million during the six months ended March 31, 2020.

The decrease is driven by lower maintenance capital expenditures as a result of lower activity.

Purchase of Investments Our net purchases of investments during the three months ended December 31, 2020 were $58.1 million compared to $3.9 million during the three months ended December 31, 2019.

The increase is attributable to our strategy to optimize our returns on investment.

Purchase of Investments Our net purchases of investments during the six months ended March 31, 2021 were $43.0 million compared to net sales of $7.6 million during the six months ended March 31, 2020.

The increase in purchases is attributable to our strategy to optimize our returns on investment.

Sale of Subsidiary In December 2019, we closed on the sale of a wholly-owned subsidiary of Helmerich & Payne International Drilling Co., TerraVici Drilling Solutions, Inc.

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As a result of the sale, 100% of TerraVici's outstanding capital stock was transferred to the purchaser in exchange for approximately $15.1 million, resulting in a total gain on the sale of TerraVici of approximately $15.0 million.

Marketable Securities As of December 31, 2020, our marketable securities primarily consist of common shares in Schlumberger, Ltd.

that, at the close of the first quarter of fiscal year 2021, had a fair value of $10.2 million.

Marketable Securities As of March 31, 2021, our marketable securities primarily consist of common shares in Schlumberger, Ltd.

that, at the close of the second quarter of fiscal year 2021, had a fair value of $12.7 million.

The value of our securities are subject to fluctuation in the market and may vary considerably over time.

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Financing Activities

Dividends We paid dividends of $0.25 and $0.71 per share during the three months ended December 31, 2020 and 2019, respectively.

Total dividends paid were $26.9 million and $77.6 million during the three months ended December 31, 2020 and 2019, respectively.

A cash dividend of $0.25 per share was declared on December 11, 2020 for shareholders of record on February 12, 2021, payable on March 1, 2021.

The declaration and amount of future dividends is at the discretion of the Board of Directors (the "Board") and subject to our financial condition, results of operations, cash flows, and other factors the Board deems relevant.

Repurchase of Shares We have an evergreen authorization from the Board of Directors (the "Board") for the repurchase of up to four million common shares in any calendar year.

The repurchases may be made using our cash and cash equivalents or other available sources.

We had no purchases of common shares during the six months ended March 31, 2021.

We had $28.5 million cash outflow for repurchases of common shares during the six months ended March 31, 2020.

Dividends We paid dividends of $0.50 and $1.42 per share during the six months ended March 31, 2021 and 2020, respectively.

Total dividends paid were $54.2 million and $155.9 million during the six months ended March 31, 2021 and 2020, respectively.

A cash dividend of $0.25 per share was declared on March 3, 2021 for shareholders of record on May 17, 2021, payable on June 1, 2021.

The declaration and amount of future dividends is at the discretion of the Board and subject to our financial condition, results of operations, cash flows, and other factors the Board deems relevant.

Credit Facilities

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The 2018 Credit Facility has $750.0 million in aggregate availability with a maximum of $75.0 million available for use as letters of credit.

As of December 31, 2020, there were no borrowings or letters of credit outstanding, leaving $750.0 million available to borrow under the 2018 Credit Facility.

As of March 31, 2021, there were no borrowings or letters of credit outstanding, leaving $750.0 million available to borrow under the 2018 Credit Facility.

For a full description of the 2018 Credit Facility, see Note 6—Debt to the consolidated financial statements in our 2020 Annual Report on Form 10-K.

As of December 31, 2020, we had three outstanding letters of credit with banks, in the amounts of $24.8 million, $0.5 million and $2.1 million, respectively.

As of December 31, 2020, we also had a $20.0 million unsecured standalone line of credit facility, for the purpose of obtaining the issuance of international letters of credit, bank guarantees, and performance bonds.

Of the $20.0 million, $1.8 million of financial guarantees were outstanding as of December 31, 2020.

As of March 31, 2021, we had 2 outstanding letters of credit with banks, in the amounts of $24.8 million and $2.1 million, respectively.

As of March 31, 2021, we also had a $20.0 million unsecured standalone line of credit facility, for the purpose of obtaining the issuance of international letters of credit, bank guarantees, and performance bonds.

Of the $20.0 million, $1.8 million of financial guarantees were outstanding as of March 31, 2021.

The applicable agreements for all unsecured debt contain additional terms, conditions and restrictions that we believe are usual and customary in unsecured debt arrangements for companies that are similar in size and credit quality.

At December 31, 2020, we were in compliance with all debt covenants, and we anticipate that we will continue to be in compliance during the next quarter of fiscal year 2021.

At March 31, 2021, we were in compliance with all debt covenants, and we anticipate that we will continue to be in compliance during the next quarter of fiscal year 2021.

On April 16, 2021, lenders with $680.0 million of commitments under the 2018 Credit Facility exercised their option to extend the maturity of the 2018 Credit Facility from November 13, 2024 to November 12, 2025.

See Note 17—Subsequent Events.

On December 20, 2018, we issued approximately $487.1 million in aggregate principal amount of 4.65 percent unsecured senior notes due 2025 (the "Company 2025 Notes").

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The debt issuance costs are being amortized straight-line over the stated life of the obligation, which approximates the effective interest method.

Repurchase of Common Shares

We have an evergreen authorization from the Board for the repurchase of up to four million common shares in any calendar year.

The repurchases may be made using our cash and cash equivalents or other available sources.

We had no purchases of common shares during the three months ended December 31, 2020 and 2019.

Future Cash Requirements

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If needed, we may decide to obtain additional funding from our $750.0 million 2018 Credit Facility.

Our indebtedness under our unsecured senior notes totaled $487.1 million at December 31, 2020 and matures on March 19, 2025.

As of December 31, 2020, we had a $635.4 million deferred tax liability on our Unaudited Condensed Consolidated Balance Sheets, primarily related to temporary differences between the financial and income tax basis of property, plant and equipment.

Our indebtedness under our unsecured senior notes totaled $487.1 million at March 31, 2021 and matures on March 19, 2025.

As of March 31, 2021, we had a $604.5 million deferred tax liability on our Unaudited Condensed Consolidated Balance Sheets, primarily related to temporary differences between the financial and income tax basis of property, plant and equipment.

Our increased levels of capital expenditures over the last several years have been subject to accelerated depreciation methods (including bonus depreciation) available under the Internal Revenue Code of 1986, as amended, enabling us to defer a portion of cash tax payments to future years.

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We expect to be able to meet any such obligations utilizing cash and investments on hand, as well as cash generated from ongoing operations.

The long-term debt to total capitalization ratio was 13.1 percent and 12.8 percent at December 31, 2020 and September 30, 2020, respectively.

The long-term debt to total capitalization ratio was 13.6 percent and 12.8 percent at March 31, 2021 and September 30, 2020, respectively.

For additional information regarding debt agreements, refer to Note 6—Debt to the Unaudited Condensed Consolidated Financial Statements.

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Material Commitments

Material commitments as reported in our 2020 Annual Report on Form 10-K have not changed significantly at December 31, 2020, other than those disclosed in Note 14—Commitments and Contingencies to the Unaudited Condensed Consolidated Financial Statements.

Material commitments as reported in our 2020 Annual Report on Form 10-K have not changed significantly at March 31, 2021, other than those disclosed in Note 14—Commitments and Contingencies to the Unaudited Condensed Consolidated Financial Statements.

Critical Accounting Policies and Estimates

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis