Helmerich & Payne, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Note Regarding Forward-Looking Statements This Quarterly Report on Form 10‑Q (“Form 10‑Q”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts included in this Form 10-Q are forward-looking statements. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “predict,” “project,” “target,” “continue,” or the negative thereof or similar terminology. Forward-looking statements are based upon current plans, estimates, and expectations that are subject to risks, uncertainties, and assumptions. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Actual results may vary materially from those indicated or anticipated by such forward-looking statements. The inclusion of such statements should not be regarded as a representation that such plans, estimates, or expectations will be achieved. These forward-looking statements include, among others, information concerning our possible or assumed future results of operations and statements about the following such as: • our business strategy and underlying assumptions; • estimates of our revenues, income, earnings per share, and market share; • our capital structure and our ability to return cash to stockholders through dividends or share repurchases; • the amount and nature of our future capital expenditures and how we expect to fund our capital expenditures; • the volatility of future oil and natural gas prices; • contracting of our rigs and actions by current or potential customers; • the effects of actions by, or disputes among or between, members of the Organization of Petroleum Exporting Countries (“OPEC”) and other oil producing nations (together, “OPEC+”) with respect to production levels or other matters related to the prices of oil and natural gas; • changes in future levels of drilling activity and capital expenditures by our customers, whether as a result of global capital markets and liquidity, changes in prices of oil and natural gas or otherwise, which may cause us to idle or stack additional rigs, or increase our capital expenditures and the construction, upgrade or acquisition of rigs; • the impact and effects of public health crises, pandemics and epidemics, such as the COVID-19 pandemic; • changes in worldwide rig supply and demand, competition, or technology; • possible cancellation, suspension, renegotiation or termination (with or without cause) of our contracts as a result of general or industry-specific economic conditions, mechanical difficulties, performance or other reasons; • expansion and growth of our business and operations; • our belief that the final outcome of our legal proceedings will not materially affect our financial results; • impact of federal and state legislative and regulatory actions and policies, affecting our costs and increasing operation restrictions or delay and other adverse impacts on our business; • environmental or other liabilities, risks, damages or losses, whether related to storms or hurricanes (including wreckage or debris removal), collisions, grounding, blowouts, fires, explosions, other accidents, terrorism or otherwise, for which insurance coverage and contractual indemnities may be insufficient, unenforceable or otherwise unavailable; • impact of geopolitical developments and tensions, war and uncertainty involving or in the geographic region of oil-producing countries (including the ongoing armed conflicts between Russia and Ukraine and Israel and Hamas, and any related political or economic responses and counter-responses or otherwise by various global actors or the general effect on the global economy); Q1FY24 FORM 10-Q | 28 Table of Contents • global economic conditions, such as a general slowdown in the global economy, supply chain disruptions, inflationary pressures, currency fluctuations, and instability of financial institutions, and their impact on the Company; • our financial condition and liquidity; • tax matters, including our effective tax rates, tax positions, results of audits, changes in tax laws, treaties and regulations, tax assessments and liabilities for taxes; • the occurrence of security incidents, including breaches of security, or other attack, destruction, alteration, corruption, or unauthorized access to our information technology systems or destruction, loss, alteration, corruption or misuse or unauthorized disclosure of or access to data ("Security Incident"); • potential impacts on our business resulting from climate change, greenhouse gas regulations, and the impact of climate change related changes in the frequency and severity of weather patterns; • potential long-lived asset impairments; and • our sustainability strategy, including expectations, plans, or goals related to corporate responsibility, sustainability and environmental matters, and any related reputational risks as a result of execution of this strategy. Important factors that could cause actual results to differ materially from our expectations or results discussed in the forward‑looking statements are disclosed in our 2023 Annual Report on Form 10‑K under Part I, Item 1A— “Risk Factors” and Item 7— “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All subsequent written and oral forward‑looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by such cautionary statements. Because of the underlying risks and uncertainties, we caution you against placing undue reliance on these forward-looking statements. We assume no duty to update or revise these forward‑looking statements based on changes in internal estimates, expectations or otherwise, except as required by law. Executive Summary Helmerich & Payne, Inc. (“H&P,” which, together with its subsidiaries, is identified as the “Company,” “we,” “us,” or “our,” except where stated or the context requires otherwise) through its operating subsidiaries provides performance-driven drilling solutions and technologies that are intended to make hydrocarbon recovery safer and more economical for oil and gas exploration and production companies. As of December 31, 2023, our drilling rig fleet included a total of 262 drilling rigs. Our reportable operating business segments consist of the North America Solutions segment with 233 rigs, the Offshore Gulf of Mexico segment with seven offshore platform rigs and the International Solutions segment with 22 rigs as of December 31, 2023. At the close of the first quarter of fiscal year 2024, we had 166 active contracted rigs, of which 95 were under a fixed-term contract and 71 were working well-to-well, compared to 164 contracted rigs at September 30, 2023. Our long-term strategy remains focused on innovation, technology, safety, operational excellence and reliability. As we move forward, we believe that our advanced uniform rig fleet, technology offerings, financial strength, contract backlog and strong customer and employee base position us very well to respond to continued cyclical and often times, volatile market conditions and to take advantage of future opportunities. Market Outlook Our revenues are primarily derived from the capital expenditures of companies involved in the exploration, development and production of crude oil and natural gas. Generally, the level of capital expenditures is dictated by capital budgets set to achieve respective production targets in relation to current and expected future prices of crude oil and natural gas, which are determined by various supply and demand factors. Both commodities have historically been, and we expect them to continue to be, cyclical and highly volatile. Our drilling services operations are organized into the following reportable operating segments: North America Solutions, Offshore Gulf of Mexico, and International Solutions. With respect to North America Solutions, the resurgence of oil and natural gas production coming from the United States brought about by unconventional shale drilling for oil has significantly impacted the supply of oil and natural gas and the type of rig utilized in the U.S. land drilling industry. The technical requirements of drilling longer lateral unconventional shale wells often necessitate the use of rigs that are commonly referred to in the industry as super-spec rigs and have the following specific characteristics: AC drive, minimum of 1,500 horsepower drawworks, minimum of 750,000 lbs. hookload rating, 7,500 psi mud circulating system, and multiple-well pad capability. Q1FY24 FORM 10-Q | 29 Table of Contents There is a strong customer preference for super-spec rigs not only due to the higher rig specifications that enable more technical drilling but also due to the drilling efficiencies gained in utilizing a super-spec rig. As a result, there has been a structural decline in the use of non-super-spec rigs across the industry. We are the largest provider of super-spec rigs in the industry and, accordingly, we believe we are well positioned to respond to various market conditions. Historically there has been a strong correlation between crude oil and natural gas prices and the demand for drilling rigs with the rig count increasing and decreasing with the up and down movements in the commodity prices. While that correlation remains for a segment of the market, beginning in 2021, a portion of rig activity has not moved in tandem with crude oil prices to the same extent as a large portion of our customers instituted a more disciplined approach to their operations and capital spending in order to enhance their own financial returns. Those customers established capital budgets based upon commodity price assumptions for the upcoming year and adhered to them, not adjusting activity plans as commodity prices moved. Based upon the crude oil and natural gas pricing environment and many of our customers' desire to at least maintain their current production levels, we expect the average level of capital spending by our customers in calendar year 2024 to remain flat to down by approximately 5% relative to calendar year 2023. As such, we do not expect much change in activity levels in calendar 2024 from where they are currently; we exited December 31, 2023 with 151 active rigs in our North America Solutions segment. The overall demand for super-spec rigs in the U.S. remains relatively strong and while some readily available idle super-spec capacity exists in the market, we do not believe it is to a level that would have a material negative impact on rig pricing. We expect this supply-demand dynamic combined with the value proposition we provide our customers through our drilling expertise, high-quality FlexRig® fleet, and automation technology to result in our ability to maintain and possibly improve upon current contract economics. With regards to our North America Solutions segment, volatility in natural gas prices and the related reduced rig demand contributed to an increased level of rig releases in the market during the first half of calendar year 2023. During the second half of calendar year 2023, other non-commodity price related factors, such as customer capital budgets, drilling plans, productions levels and customer consolidations, also led some customers to release rigs as well. For our fiscal year 2024, we believe our rig activity will increase modestly during the first half of the fiscal year as customers reset their capital budgets for 2024. We experienced an increase of just four rigs during the first fiscal quarter of 2024 and expect another 3 to 8 incremental adds during the second fiscal quarter of 2024. From there we believe our rig count will likely remain at a relatively stable level during the second half of the fiscal year. This is similar to the rig activity patterns we have experienced during the last few years as well. During fiscal year 2023, the Company employed a fiscally prudent approach to deploying capital and prioritizing economic margins over rig utilization, and we plan to maintain this approach in fiscal year 2024. Furthermore, we still believe the supply and demand dynamics surrounding our North America Solutions segment remain constructive for future activity and pricing levels. Collectively, our other business segments, Offshore Gulf of Mexico and International Solutions, are exposed to the same macro commodity price environment affecting our North America Solutions segment; however, activity levels in the International Solutions segment are also subject to other various geopolitical and financial factors specific to the countries of our operations. We are currently pursuing an international expansion strategy with the aim to provide growth and diversification for the Company with the understanding that such a strategy will take time and capital to execute. During fiscal year 2024, we plan to continue to devote capital to our international expansion strategy and, in particular, to a recent preliminary notification of an award for seven super-spec rigs in the Middle East. We had contemplated the capital spending necessary to prepare these rigs for export as part of our fiscal year 2024 capital expenditure budget. A majority of these rigs are currently scheduled for delivery during our first half of fiscal year 2025 and thus will have no revenue impact on fiscal year 2024 results. Currently, activity levels in the International Solutions and Offshore Gulf of Mexico business segments look to remain relatively steady at current levels for the remainder of fiscal year 2024. Over the past two years, the Company has experienced inflationary pressures related to labor and consumable inventory and more recently as a result of cost-acceleration related to running our rig fleet harder to achieve the well designs, lateral lengths and drilling efficiencies our customers demand. The inflationary forces have abated, and the financial impacts were partially mitigated by pass-through mechanisms in our contracts. However, the performance and efficiency gains we achieve require us to continue to push the service intensity of our rigs and equipment. Accordingly, we expect operational expenses to remain at elevated levels compared to recent years. Additionally, we are also experiencing inflationary pressures in our non-operational expenses particularly around labor and third-party services. As a consequence of these pressures, we continue to project an increase in our selling, general and administrative expenses during fiscal year 2024. Q1FY24 FORM 10-Q | 30 Table of Contents Recent Developments International Revenue Contracts Subsequent to December 31, 2023, the Company received preliminary notice, subject to finalization of contractural agreements, that it has been awarded seven super-spec FlexRig®'s for work in the Middle East. These rigs are expected to commence operations shortly after delivery, which is currently scheduled for the first half of fiscal year 2025. These rigs will be sourced from our idle super-spec rigs in the U.S., converted to walking configurations, and further equipped to suit contractual specifications. Additionally, in the Middle East we have been successful in contracting one additional super-spec rig in Bahrain. The rig to be utilized for this work is already located in the region as part of our Middle East hub and is expected to commence operations during the second half of fiscal year 2024. Contract Backlog As of December 31, 2023 and September 30, 2023, our contract drilling backlog, being the expected future dayrate revenue from executed contracts, was $1.3 billion and $1.4 billion, respectively. These amounts do not include anticipated contract renewals or expected performance bonuses. Approximately 42.8 percent of the December 31, 2023 total backlog is reasonably expected to be fulfilled in fiscal year 2025 and thereafter. The following table sets forth the total backlog by reportable segment as of December 31, 2023 and September 30, 2023, and the percentage of the December 31, 2023 backlog reasonably expected to be fulfilled in fiscal year 2025 and thereafter: (in billions) December 31, 2023 September 30, 2023 Percentage Reasonably Expected to be Fulfilled in Fiscal Year 2025 and Thereafter North America Solutions $ 1.1 $ 1.1 38.6 % Offshore Gulf of Mexico — — — International Solutions 0.2 0.3 62.2 $ 1.3 $ 1.4 The early termination of a contract may result in a rig being idle for an extended period of time, which could adversely affect our financial condition, results of operations and cash flows. In some limited circumstances, such as sustained unacceptable performance by us, no early termination payment would be paid to us. Early terminations could cause the actual amount of revenue earned to vary from the backlog reported. See Item 1A—"Risk Factors— Our current backlog of drilling services and solutions revenue may decline and may not be ultimately realized as fixed‑term contracts and may, in certain instances, be terminated without an early termination payment ” within our 2023 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”), regarding fixed term contract risk. Results of Operations for the Three Months Ended December 31, 2023 and 2022 Consolidated Results of Operations Net Income We reported income of $95.2 million ($0.94 per diluted share) for the three months ended December 31, 2023 compared to income of $97.1 million ($0.91 per diluted share) for the three months ended December 31, 2022. Operating Revenue Consolidated operating revenues were $677.1 million and $719.6 million for the three months ended December 31, 2023 and 2022, respectively. The decrease is primarily driven by lower activity levels in our North America Solutions and Offshore Gulf of Mexico segments. Refer to segment results below for further details. Direct Operating Expenses, Excluding Depreciation and Amortization Direct operating expenses were $404.4 million and $429.4 million for the three months ended December 31, 2023 and 2022, respectively. The decrease was primarily attributable to the aforementioned lower activity levels. Selling, General and Administrative Expense Selling, general and administrative expenses increased to $56.6 million during the three months ended December 31, 2023 compared to $48.5 million during the three months ended December 31, 2022. The increase is primarily due to a $7.1 million increase in labor and labor-related expenses. Asset Impairment Charges During the three months ended December 31, 2022, we recorded $12.1 million in asset impairment charges as the Company initiated a plan to decommission, scrap and/or sell certain assets including four international FlexRig® drilling rigs, four international conventional drilling rigs, and additional equipment. The aggregate net book value of these assets of $13.2 million was written down to their estimated scrap value of $1.1 million. Q1FY24 FORM 10-Q | 31 Table of Contents Loss on Investment Securities During the three months ended December 31, 2023, we recognized an aggregate loss of $4.0 million on investment securities. The loss was mainly comprised of a $10.4 million loss on our equity investment in ADNOC Drilling, partially offset against a $6.3 million gain on our investment in Tamboran Corp.; both of which were a result of fluctuations in the fair market value of the stocks. During the three months ended December 31, 2022, we recognized an aggregate loss of $15.1 million on investment securities. The loss was mainly comprised of a $18.2 million loss on our equity investment in ADNOC Drilling, partially offset against a $3.1 million gain on our investment in Tamboran Corp.; both of which were a result of fluctuations in the fair market value of the stocks. Income Taxes We had income tax expense of $30.1 million for the three months ended December 31, 2023 (which includes a discrete tax benefit of $0.9 million related to equity compensation) compared to income tax expense of $32.4 million (which includes a discrete tax expense of $0.2 million related to equity compensation) for the three months ended December 31, 2022. Our statutory federal income tax rate for fiscal year 2024 is 21.0 percent (before incremental state and foreign taxes). North America Solutions Three Months Ended December 31, (in thousands, except operating statistics) 2023 2022 % Change Operating revenues $ 594,282 $ 627,163 (5.2) % Direct operating expenses 338,208 366,855 (7.8) Depreciation and amortization 87,019 89,814 (3.1) Research and development 8,689 7,059 23.1 Selling, general and administrative expense 15,876 14,190 11.9 Asset impairment charges — 3,948 (100.0) Segment operating income $ 144,490 $ 145,297 (0.6) Financial Data and Other Operating Statistics 1 : Direct margin (Non-GAAP) 2 $ 256,074 $ 260,308 (1.6) Revenue days 3 13,711 16,578 (17.3) Average active rigs 4 149 180 (17.3) Number of active rigs at the end of period 5 151 184 (17.9) Number of available rigs at the end of period 233 235 (0.9) Reimbursements of "out-of-pocket" expenses $ 69,728 $ 79,159 (11.9) (1) These operating metrics and financial data, including average active rigs, are provided to allow investors to analyze the various components of segment financial results in terms of activity, utilization and other key results. Management uses these metrics to analyze historical segment financial results and as the key inputs for forecasting and budgeting segment financial results. (2) Direct margin, which is considered a non-GAAP metric, is defined as operating revenues less direct operating expenses and is included as a supplemental disclosure because we believe it is useful in assessing and understanding our current operational performance, especially in making comparisons over time. See — Non-GAAP Measurements below for a reconciliation of segment operating income (loss) to direct margin. (3) Defined as the number of contractual days we recognized revenue for during the period. (4) Active rigs generate revenue for the Company; accordingly, 'average active rigs' represents the average number of rigs generating revenue during the applicable time period. This metric is calculated by dividing revenue days by total days in the applicable period (i.e., 92 days). (5) Defined as the number of rigs generating revenue at the applicable end date of the time period. Operating Revenues Operating revenues were $594.3 million and $627.2 million in the three months ended December 31, 2023 and 2022, respectively. The $32.9 million decrease in operating revenue is primarily due to a 17.3 percent decrease in activity levels partially offset by higher average pricing levels. Direct Operating Expenses Direct operating expenses decreased to $338.2 million during the three months ended December 31, 2023 as compared to $366.9 million during the three months ended December 31, 2022. This decrease was primarily driven by lower activity levels, partially offset by an increase in per revenue day labor and materials and supplies expense. Selling, General and Administrative Expense Selling, general and administrative expense increased to $15.9 million during the three months ended December 31, 2023 as compared to $14.2 million during the three months ended December 31, 2022. The slight increase was driven by a $1.9 million increase in in labor expenses. Asset Impairment Charges During the three months ended December 31, 2022, assets that were previously classified as Assets held-for-sale were either sold or written down to scrap value. The aggregate net book value of these remaining assets was $3.0 million, which exceeded the estimated scrap value of $0.3 million, resulting in a non-cash impairment charge of $2.7 million during the three months ended December 31, 2022. During the same period, we also identified additional equipment that met the asset held-for-sale criteria and was reclassified as Assets held-for-sale on our Unaudited Condensed Consolidated Balance Sheets. The aggregate net book value of the equipment of $1.4 million was written down to its estimated scrap value of $0.1 million, resulting in a non-cash impairment charge of $1.3 million during the three months ended December 31, 2022. Q1FY24 FORM 10-Q | 32 Table of Contents Offshore Gulf of Mexico Three Months Ended December 31, (in thousands, except operating statistics) 2023 2022 % Change Operating revenues $ 25,531 $ 35,164 (27.4) % Direct operating expenses 19,579 25,691 (23.8) Depreciation 2,068 1,894 9.2 Selling, general and administrative expense 832 833 (0.1) Segment operating income $ 3,052 $ 6,746 (54.8) Financial Data and Other Operating Statistics 1 : Direct margin (Non-GAAP) 2 $ 5,952 $ 9,473 (37.2) Revenue days 3 289 368 (21.5) Average active rigs 4 3 4 (21.5) Number of active rigs at the end of period 5 3 4 (25.0) Number of available rigs at the end of period 7 7 — Reimbursements of "out-of-pocket" expenses $ 7,827 $ 7,189 8.9 (1) These operating metrics and financial data, including average active rigs, are provided to allow investors to analyze the various components of segment financial results in terms of activity, utilization and other key results. Management uses these metrics to analyze historical segment financial results and as the key inputs for forecasting and budgeting segment financial results. (2) Direct margin, which is considered a non-GAAP metric, is defined as operating revenues less direct operating expenses and is included as a supplemental disclosure because we believe it is useful in assessing and understanding our current operational performance, especially in making comparisons over time. See — Non-GAAP Measurements below for a reconciliation of segment operating income (loss) to direct margin. (3) Defined as the number of contractual days we recognized revenue for during the period. (4) Active rigs generate revenue for the Company; accordingly, 'average active rigs' represents the average number of rigs generating revenue during the applicable time period. This metric is calculated by dividing revenue days by total days in the applicable period (i.e., 92 days). (5) Defined as the number of rigs generating revenue at the applicable end date of the time period. Operating Revenues Operating revenues were $25.5 million and $35.2 million in the three months ended December 31, 2023 and 2022, respectively. The $9.7 million decrease in operating revenue is primarily due to a 21.5 percent decrease in activity levels and the mix of rigs being on lower standby rates as opposed to working at full rates during the three months ended December 31, 2023. Direct Operating Expenses Direct operating expenses decreased to $19.6 million during the three months ended December 31, 2023 as compared to $25.7 million during the three months ended December 31, 2022. This decrease is primarily driven by a decrease in activity levels as described above. Q1FY24 FORM 10-Q | 33 Table of Contents International Solutions Three Months Ended December 31, (in thousands, except operating statistics) 2023 2022 % Change Operating revenues $ 54,752 $ 54,801 (0.1) % Direct operating expenses 44,519 40,977 8.6 Depreciation 2,334 1,392 67.7 Selling, general and administrative expense 2,476 2,709 (8.6) Asset impairment charges — 8,149 (100.0) Segment operating income $ 5,423 $ 1,574 244.5 Financial Data and Other Operating Statistics 1 : Direct margin (Non-GAAP) 2 $ 10,233 $ 13,824 (26.0) Revenue days 3 1,173 1,140 2.9 Average active rigs 4 13 12 2.9 Number of active rigs at the end of period 5 12 13 (7.7) Number of available rigs at the end of period 22 20 10.0 Reimbursements of "out-of-pocket" expenses $ 3,384 $ 2,856 18.5 (1) These operating metrics and financial data, including average active rigs, are provided to allow investors to analyze the various components of segment financial results in terms of activity, utilization and other key results. Management uses these metrics to analyze historical segment financial results and as the key inputs for forecasting and budgeting segment financial results. (2) Direct margin, which is considered a non-GAAP metric, is defined as operating revenues less direct operating expenses and is included as a supplemental disclosure because we believe it is useful in assessing and understanding our current operational performance, especially in making comparisons over time. See — Non-GAAP Measurements below for a reconciliation of segment operating income (loss) to direct margin. (3) Defined as the number of contractual days we recognized revenue for during the period. (4) Active rigs generate revenue for the Company; accordingly, 'average active rigs' represents the average number of rigs generating revenue during the applicable time period. This metric is calculated by dividing revenue days by total days in the applicable period (i.e., 92 days). (5) Defined as the number of rigs generating revenue at the applicable end date of the time period. Operating Revenues Operating revenues were $54.8 million during both the three months ended December 31, 2023 and 2022. Revenue remained flat due to increased activity, offset by the mix of rigs working. Direct Operating Expenses Direct operating expenses increased to $44.5 million during the three months ended December 31, 2023 as compared to $41.0 million during the three months ended December 31, 2022. This increase was primarily driven by a 2.9 percent increase in activity levels as well as higher per revenue day labor and labor-related expenses. Asset Impairment Charges During the three months ended December 31, 2022, the Company initiated a plan to decommission and scrap four international FlexRig ® drilling rigs and four conventional drilling rigs located in Argentina that are not suitable for unconventional drilling. As a result, these rigs were reclassified to Assets held-for-sale on our Unaudited Condensed Consolidated Balance Sheets as of December 31, 2022. The rigs’ aggregate net book value of $8.8 million was written down to the estimated scrap value of $0.7 million, which resulted in a non-cash impairment charge of $8.1 million during the three months ended December 31, 2022. Other Operations Results of our other operations, excluding corporate selling, general and administrative costs, and corporate depreciation, are as follows: Three Months Ended December 31, (in thousands) 2023 2022 % Change Operating revenues $ 17,808 $ 18,911 (5.8) % Direct operating expenses 17,089 13,589 25.8 Depreciation 472 457 3.3 Selling, general and administrative expense 314 188 67.0 Operating income (loss) $ (67) $ 4,677 (101.4) Q1FY24 FORM 10-Q | 34 Table of Contents Operating Revenues We continue to use our Captive insurance companies to insure the deductibles for our domestic workers’ compensation, general liability, automobile liability claims programs, and medical stop-loss program and to insure the deductibles from the Company's international casualty and rig property programs. Operating revenues of $17.8 million and $18.9 million during the three months ended December 31, 2023 and 2022, respectively, primarily consisted of $15.2 million and $16.4 million, respectively, in intercompany premium revenues recorded by the Captives. These revenues were eliminated upon consolidation. Direct Operating Expenses Direct operating expenses of $17.1 million and $13.6 million during the three months ended December 31, 2023 and 2022, respectively, primarily consisted of $3.5 million and $2.9 million, respectively, in adjustments to accruals for estimated losses allocated to the Captives, rig and casualty insurance premiums of $9.1 million and $10.0 million, respectively, and medical stop loss expenses of $4.1 million and $2.8 million, respectively. The change to accruals for estimated losses is primarily due to actuarial valuation adjustments by our third-party actuary. Liquidity and Capital Resources Sources of Liquidity Our sources of available liquidity include existing cash balances on hand, cash flows from operations, and availability under the 2018 Credit Facility. Our liquidity requirements include meeting ongoing working capital needs, funding our capital expenditure projects, paying dividends declared, and repaying our outstanding indebtedness. Historically, we have financed operations primarily through internally generated cash flows. During periods when internally generated cash flows are not sufficient to meet liquidity needs, we may utilize cash on hand, borrow from available credit sources, access capital markets or sell our investments. Likewise, if we are generating excess cash flows or have cash balances on hand beyond our near-term needs, we may return cash to shareholders through dividends or share repurchases, or we may invest in highly rated short‑term money market and debt securities. These investments can include U.S. Treasury securities, U.S. Agency issued debt securities, highly rated corporate bonds and commercial paper, certificates of deposit and money market funds. However, in some international locations we may make short-term investments that are less conservative, as equivalent highly rated investments are unavailable. See—Note 2—Summary of Significant Accounting Policies, Related Risks and Uncertainties—International Solutions Drilling Risks. We may seek to access the debt and equity capital markets from time to time to raise additional capital, increase liquidity as necessary, fund our additional purchases, exchange or redeem senior notes, or repay any amounts under the 2018 Credit Facility. Our ability to access the debt and equity capital markets depends on a number of factors, including our credit rating, market and industry conditions and market perceptions of our industry, general economic conditions, our revenue backlog and our capital expenditure commitments. Cash Flows Our cash flows fluctuate depending on a number of factors, including, among others, the number of our drilling rigs under contract, the revenue we receive under those contracts, the efficiency with which we operate our drilling rigs, the timing of collections on outstanding accounts receivable, the timing of payments to our vendors for operating costs, and capital expenditures. As our revenues increase, operating net working capital is typically a use of capital, while conversely, as our revenues decrease, operating net working capital is typically a source of capital. To date, general inflationary trends have not had a material effect on our operating margins or cash flows as we have been able to offset these cumulative cost trends with rate increases. As of December 31, 2023, we had cash and cash equivalents of $214.1 million, restricted cash of $65.1 million and short-term investments of $84.1 million. Our cash flows for the three months ended December 31, 2023, and 2022 are presented below: Three Months Ended December 31, (in thousands) 2023 2022 Net cash provided by (used in): Operating activities $ 174,798 $ 185,375 Investing activities (113,067) (82,169) Financing activities (98,728) (100,557) Net increase (decrease) in cash and cash equivalents and restricted cash $ (36,997) $ 2,649 Q1FY24 FORM 10-Q | 35 Table of Contents Operating Activities Our operating net working capital (non-GAAP) as of December 31, 2023 and September 30, 2023 is presented below: December 31, September 30, (in thousands) 2023 2023 Total current assets $ 988,680 $ 1,006,625 Less: Cash and cash equivalents 214,104 257,174 Short-term investments 84,121 93,600 Assets held-for-sale — 645 Prepayments - nonrecurring 23,483 21,821 666,972 633,385 Total current liabilities 468,986 418,931 Less: Dividends payable 41,993 25,194 $ 426,993 $ 393,737 Operating net working capital (non-GAAP) $ 239,979 $ 239,648 Cash flows provided by operating activities were approximately $174.8 million and $185.4 million for the three months ended December 31, 2023 and 2022, respectively. The change in cash provided by operating activities is primarily driven by lower activity levels partially offset by higher average pricing levels. 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, assets held-for-sale, and nonrecurring prepayments, less current liabilities, excluding dividends payable. Operating net working capital was $240.0 million and $239.6 million as of December 31, 2023 and September 30, 2023, respectively. This metric is considered a non-GAAP measure of the Company's liquidity. The Company considers operating net working capital to be a supplemental measure for presenting and analyzing trends in our cash flows from operations over time. Likewise, the Company believes that operating net working capital is useful to investors because it provides a means to evaluate the operating performance of the business using criteria that are used by our internal decision makers. Investing Activities Capital Expenditures Our capital expenditures during the three months ended December 31, 2023 were $136.4 million compared to $96.0 million during the three months ended December 31, 2022. The increase in capital expenditures is driven by the timing of procurement associated with equipment overhauls and certain long-term projects. Net Purchases & Sales of Short-Term Investments Our net sales of short-term investments during the three months ended December 31, 2023 were $11.7 million compared to net purchases of $0.9 million during the three months ended December 31, 2022. The change in activity is driven by our ongoing liquidity management. Purchases of Long-Term Investments Our purchases of long-term investments during the three months ended December 31, 2023 were $0.3 million compared to $16.2 million during the three months ended December 31, 2022. During the three months ended December 31, 2023, our activity was driven by $0.3 million in purchases of various equity securities. The activity during the three months ended December 31, 2022 was driven by our $14.1 million equity investment in Tamboran Corp. Sale of Assets Our proceeds from asset sales during the three months ended December 31, 2023 were $11.9 million compared to proceeds of $31.0 million during the three months ended December 31, 2022. The decrease in proceeds is mainly driven by lower rig activity which drives lower reimbursement from customers for lost or damaged drill pipe and other used drilling equipment. Financing Activities Dividends We paid dividends of $0.42 per share, comprised of a base cash dividend of $0.25 and a supplemental cash dividend of $0.17, during the three months ended December 31, 2023. Comparatively, during the three months ended December 31, 2022, we paid dividends of $0.485 per share, comprising of a base cash dividend of $0.25 and a supplemental cash dividend of $0.235. Total dividends paid were $42.3 million and $51.8 million during the three months ended December 31, 2023 and 2022, respectively. Q1FY24 FORM 10-Q | 36 Table of Contents Repurchase of Shares The Company has an evergreen authorization from the Board of Directors for the repurchase of up to four million common shares in any calendar year. In December 2022, the Board of Directors increased the maximum number of shares authorized to be repurchased in calendar year 2023 to five million common shares and again on June 7, 2023, to seven million shares. The repurchases are made using our cash and cash equivalents or other available sources and are held as treasury shares on our Unaudited Condensed Consolidated Balance Sheets. We repurchased 1.3 million common shares at an aggregate cost of $47.7 million, including excise tax of $0.3 million, during the three months ended December 31, 2023, compared to 0.8 million common shares at an aggregate cost of $39.1 million during the three months ended December 31, 2022. During calendar year 2023 we repurchased substantially all of the seven million total shares authorized for repurchase. Senior Notes 2.90% Senior Notes due 2031 On September 29, 2021, we issued $550.0 million aggregate principal amount of the 2.90 percent 2031 Notes in an offering to persons reasonably believed to be qualified institutional buyers in the United States pursuant to Rule 144A under the Securities Act (“Rule 144A”) and to certain non-U.S. persons in transactions outside the United States pursuant to Regulation S under the Securities Act (“Regulation S”). Interest on the 2031 Notes is payable semi-annually on March 29 and September 29 of each year, commencing on March 29, 2022. In June 2022, we settled a registered exchange offer (the “Registered Exchange Offer”) to exchange the 2031 Notes for new, SEC-registered notes that are substantially identical to the terms of the 2031 Notes, except that the offer and issuance of the new notes have been registered under the Securities Act and certain transfer restrictions, registration rights and additional interest provisions relating to the 2031 Notes do not apply to the new notes. All of the 2031 Notes were exchanged in the Registered Exchange Offer. The indenture governing the 2031 Notes contains certain covenants that, among other things and subject to certain exceptions, limit the ability of the Company and its subsidiaries to incur certain liens; engage in sale and lease-back transactions; and consolidate, merge or transfer all or substantially all of the assets of the Company. The indenture governing the 2031 Notes also contains customary events of default with respect to the 2031 Notes. Credit Facility On November 13, 2018, we entered into a credit agreement by and among the Company, as borrower, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto, which was amended on November 13, 2019, providing for an unsecured revolving credit facility (as amended, the “2018 Credit Facility”), that was set to mature on November 13, 2024. On April 16, 2021, lenders with $680.0 million of commitments under the 2018 Credit Facility exercised their option to extend the maturity of the 2018 Credit Facility from November 13, 2024 to November 12, 2025. No other terms of the 2018 Credit Facility were amended in connection with this extension. On March 8, 2022, we entered into the second amendment to the 2018 Credit Facility, which, among other things, raised the number of potential future extensions of the maturity date applicable to extending lenders from one to two such potential extensions and replaced provisions in respect of interest rate determinations that were based on the London Interbank Offered Rate with provisions based on the Secured Overnight Financing Rate. Additionally, 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 12, 2025 to November 11, 2026. On February 10, 2023, 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 11, 2026 to November 12, 2027. The remaining $70.0 million of commitments under the 2018 Credit Facility will expire on November 13, 2024, unless extended by the applicable lender before such date. The 2018 Credit Facility has $750.0 million in aggregate availability with a maximum of $75.0 million available for use as letters of credit. As of December 31, 2023, 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 2023 Annual Report on Form 10-K. As of December 31, 2023, we had $102.0 million in uncommitted bilateral credit facilities, for the purpose of obtaining the issuance of international letters of credit, bank guarantees, and performance bonds. Of the $102.0 million, $40.0 million was outstanding as of December 31, 2023. Separately, we had $2.1 million in standby letters of credit and bank guarantees outstanding. In total, we had $42.1 million outstanding as of December 31, 2023. 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, 2023, we were in compliance with all debt covenants. Q1FY24 FORM 10-Q | 37 Table of Contents Future Cash Requirements Our operating cash requirements, scheduled debt repayments, interest payments, any declared dividends, and estimated capital expenditures for fiscal year 2024 are expected to be funded through current cash and cash to be provided from operating activities. However, there can be no assurance that we will continue to generate cash flows at current levels. If needed, we may decide to obtain additional funding from our $750.0 million 2018 Credit Facility. We currently do not anticipate the need to draw on the 2018 Credit Facility. Our indebtedness under our unsecured senior notes totaled $550.0 million at December 31, 2023 and matures on September 29, 2031. As of December 31, 2023, we had a $510.0 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 capital expenditures over the last several years have been subject to accelerated depreciation methods (including bonus depreciation) available under the Internal Revenue Code of 1986, as amended, enabling us to defer a portion of cash tax payments to future years. Future levels of capital expenditures and results of operations will determine the timing and amount of future cash tax payments. We expect to be able to meet any such obligations utilizing cash and investments on hand, as well as cash generated from ongoing operations. As of December 31, 2023, we have recorded approximately $3.4 million of unrecognized tax benefits, interest, and penalties. We believe it is reasonably possible that up to $2.8 million of the unrecognized tax benefits, interest, and penalties will be recognized as of June 30, 2024 as a result of a lapse of the statute of limitations. Any further reversals or payments of the liability cannot be estimated at this time. A base cash dividend of $0.25 per share and a quarterly supplemental cash dividend of $0.17 per share were declared in December 2023 and is payable in February 2024, resulting in a Dividend payable of $42.0 million on our Unaudited Condensed Consolidated Balance Sheets as of December 31, 2023. The long‑term debt to total capitalization ratio was 16.6 percent at December 31, 2023 and September 30, 2023. For additional information regarding debt agreements, refer to Note 5—Debt to the Unaudited Condensed Consolidated Financial Statements. There were no other significant changes in our financial position since September 30, 2023. Material Commitments Material commitments as reported in our 2023 Annual Report on Form 10-K have not changed significantly as of December 31, 2023, other than those disclosed in Note 12—Commitments and Contingencies to the Unaudited Condensed Consolidated Financial Statements. Critical Accounting Policies and Estimates Our accounting policies and estimates that are critical or the most important to understand our financial condition and results of operations, and that require management to make the most difficult judgments, are described in our 2023 Annual Report on Form 10-K. There have been no material changes in these critical accounting policies and estimates. Recently Issued Accounting Standards See Note 2—Summary of Significant Accounting Policies, Related Risks and Uncertainties to the Unaudited Condensed Consolidated Financial Statements for new accounting standards not yet adopted. Non-GAAP Measurements Direct Margin Direct margin is considered a non-GAAP metric. We define "Direct margin" as operating revenues less direct operating expenses. Direct margin is included as a supplemental disclosure because we believe it is useful in assessing and understanding our current operational performance, especially in making comparisons over time. Direct margin is not a substitute for financial measures prepared in accordance with GAAP and should therefore be considered only as supplemental to such GAAP financial measures. Q1FY24 FORM 10-Q | 38 Table of Contents The following table reconciles direct margin to segment operating income, which we believe is the financial measure calculated and presented in accordance with GAAP that is most directly comparable to direct margin. Three Months Ended December 31, 2023 (in thousands) North America Solutions Offshore Gulf of Mexico International Solutions Segment operating income $ 144,490 $ 3,052 $ 5,423 Add back: Depreciation and amortization 87,019 2,068 2,334 Research and development 8,689 — — Selling, general and administrative expense 15,876 832 2,476 Direct margin (Non-GAAP) $ 256,074 $ 5,952 $ 10,233 Three Months Ended December 31, 2022 (in thousands) North America Solutions Offshore Gulf of Mexico International Solutions Segment operating income $ 145,297 $ 6,746 $ 1,574 Add back: Depreciation and amortization 89,814 1,894 1,392 Research and development 7,059 — — Selling, general and administrative expense 14,190 833 2,709 Asset impairment charges 3,948 — 8,149 Direct margin (Non-GAAP) $ 260,308 $ 9,473 $ 13,824