Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Part I of this Form 10‑K as well as the Consolidated Financial Statements and related notes thereto included in Part II, Item 8— Financial Statements and Supplementary Data of this Form 10‑K. Our future operating results may be affected by various trends and factors which are beyond our control. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of risks and uncertainties, including those described in this Form 10-K under “Cautionary Note regarding Forward-Looking Statements” and Item 1A—Risk Factors. Accordingly, past results and trends should not be used by investors to anticipate future results or trends.
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Executive Summary
H&P 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 September 30, 2024, our drilling rig fleet included a total of 262 drilling rigs. Our reportable operating business segments consist of the North America Solutions segment with 228 rigs, the International Solutions segment with 27 rigs, and the Offshore Gulf of Mexico segment with seven offshore platform rigs as of September 30, 2024. At the close of fiscal year 2024, we had 170 active contracted rigs, of which 100 were under a fixed-term contract and 70 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 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.
Pending KCA Deutag Acquisition
On July 25, 2024, H&P and certain of its wholly owned subsidiaries entered into the Purchase Agreement to acquire KCA Deutag for total cash consideration of approximately $2.0 billion, which consists of the $0.9 billion unadjusted share purchase price and $1.1 billion to contemporaneously repay or redeem certain of KCA Deutag's existing debt upon consummation of the Acquisition. Total consideration is subject to adjustment as set forth in the Purchase Agreement. The transaction is expected to close prior to calendar 2024 year end, subject to customary closing conditions and regulatory approvals.
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 (“E&Ps”). 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 and have historically been volatile. Furthermore, E&Ps have become more fiscally disciplined in their level of capital expenditures relative to commodity price fluctuations, which has resulted in less volatility within the oilfield service businesses, including our operations.
The capital budgets for calendar year 2025 have not yet been established by many of our customers; however, 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 level of capital spending and activity in calendar year 2025 to be similar to that experienced in calendar year 2024. 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, it is not to a level that has materially impacted pricing as it could be quickly reabsorbed into the market. This supply-demand dynamic combined with the value proposition we provide our customers through our drilling expertise, high-quality FlexRig® fleet, and automation technology remains constructive for our underlying contract economics.
With regard to our North America Solutions segment, our rig count remained relatively range-bound during fiscal 2024 despite a decline in the overall industry rig count. The rig market was pressured by continued weakness in natural gas prices as well as other non-commodity price related factors, such as customer capital budgets, drilling plans, production levels and customer consolidations. We still believe the supply and demand dynamics surrounding our North America Solutions segment remain constructive for future activity and pricing levels. As such, heading into fiscal year 2025, we expect our rig activity to remain relatively stable bound absent any significant changes to commodity prices. The Company also expects its strategy around employing a fiscally prudent approach to deploying capital and prioritizing economic margins over rig utilization to remain intact.
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. During fiscal 2025, our operational presence in certain international markets, primarily the Middle East and the offshore management contract business, is expected to increase substantially upon consummation of the pending Acquisition. Outside the pending Acquisition our activity in the Middle East region is expected to increase from a historical level of 2 to 3 rigs working in the region to approximately 9 to 11 rigs as we export rigs from the U.S. and begin operations in Saudi Arabia. The pending Acquisition and commencement of rig operations in Saudi Arabia is a continuation of the Company's strategy of international growth and diversification. Currently, activity levels in our Offshore Gulf of Mexico business segment look to remain relatively steady at current levels for the foreseeable future.
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Recent Developments
International Revenue Contracts
In February 2024, the Company finalized the contractual terms with Saudi Aramco for a seven super-spec FlexRig® tender award for work in the Kingdom of Saudi Arabia. These rigs are expected to commence operations shortly after delivery. The rigs are being sourced from our idle super-spec rigs in the U.S., converted to walking configurations, and further equipped to suit contractual specifications. During the year ended September 30, 2024, we began mobilizing five super-spec rigs to the Kingdom of Saudi Arabia. We commenced operations in the first quarter of fiscal 2025.
Pending KCA Deutag Acquisition
On July 25, 2024, H&P and certain of its wholly owned subsidiaries entered into the Purchase Agreement to acquire KCA Deutag for total cash consideration of approximately $2.0 billion, which consists of the $0.9 billion unadjusted share purchase price and $1.1 billion to contemporaneously repay or redeem certain of KCA Deutag's existing debt upon consummation of the Acquisition. Total consideration is subject to adjustment as set forth in the Purchase Agreement. The transaction is expected to close prior to calendar 2024 year end, subject to customary closing conditions and regulatory approvals.
KCA Deutag is a diverse global drilling company. The company has a significant land drilling presence in the Middle East, which represents approximately two-thirds of the company’s calendar year 2023 Operating EBITDA, with additional operations in South America, Europe and Africa. In addition to its land operations, KCA Deutag has asset-light offshore management contract operations in the North Sea, Angola, Azerbaijan and Canada, with super major customers and long-term earnings visibility through a robust backlog. KCA Deutag’s Kenera segment comprises manufacturing and engineering businesses, including Bentec, with three facilities serving the energy industry, representing a longer-term growth opportunity.
Senior Notes Issued in Fiscal Year 2024
On September 17, 2024, we completed a private offering of $1.25 billion aggregate principal amount of the Notes, comprised of the following tranches: $350.0 million aggregate principal amount of 4.65 percent senior notes due 2027 issued at a price equal to 99.958 percent of their face value, $350.0 million aggregate principal amount of 4.85 percent senior notes due 2029 issued at a price equal to 99.883 percent of their face value and $550.0 million aggregate principal amount of 5.50 percent senior notes due 2034 issued at a price equal to 99.670 percent of their face value.
The Company intends to use the net proceeds, together with the proceeds of its term loan credit facility (discussed below) and cash on hand, to finance the purchase price for the Acquisition, to repay certain of KCA Deutag’s outstanding indebtedness, and to pay related fees and expenses. For additional information regarding the Notes, refer to Note 6—Debt to the Consolidated Financial Statements.
Term Loan Credit Agreement
On August 14, 2024, the Company entered into the Term Loan Credit Agreement, dated as of August 14, 2024, among the Company, Morgan Stanley Senior Funding, Inc. (“MSSF”), as administrative agent, and the other lenders party thereto. Under the Term Loan Credit Agreement, the Company may obtain unsecured term loans in a single delayed draw in an aggregate principal amount up to $400.0 million. The Term Loan Credit Agreement matures at the two-year anniversary of the funding of the term loans unless earlier terminated pursuant to the terms of the Term Loan Credit Agreement. We expect to use the proceeds from the Term Loan Credit Agreement, together with the net proceeds from the sale of the Notes and cash on hand, to finance the purchase price for the Acquisition, to repay certain of KCA Deutag's outstanding indebtedness, and pay related fees and expenses. The funding of the term loans had not occurred as of September 30, 2024.
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Revolving Credit Facility
On August 14, 2024, the Company entered into the Amended Credit Facility with the lenders party thereto (the “Revolving Credit Agreement Lenders”), the issuing lenders party thereto and Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent, swing line lender and issuing lender, which amended and restated the Credit Agreement, dated as of November 13, 2018 (as amended through Amendment No. 2 to Credit Agreement dated as of March 8, 2022, the “Existing Credit Agreement”), among the Company, the lenders party thereto and Wells Fargo, as administrative agent, swing line lender and issuing lender.
Under the terms of the Amended Credit Facility, the Company may obtain unsecured revolving loans in an aggregate principal amount not to exceed $950 million outstanding at any time. $775 million of the revolving commitments under the Amended Credit Facility expire on November 12, 2028 and $175 million of the revolving commitments mature on November 10, 2027 (the “Stated Maturity Date”), but the Company may request two one-year extensions of the Stated Maturity Date, subject to satisfaction of certain conditions. Commitments under the Amended Credit Facility may be increased by up to $100 million, subject to the agreement of the Company and new or existing Revolving Credit Agreement Lenders.
The proceeds of the loans made under the Amended Credit Facility may be used by the Company for (i) working capital and other general corporate purposes, (ii) for the payment of fees and expenses related to the entering into of the Amended Credit Facility and the other credit documents and (iii) for the refinancing of the extensions of credit under the Existing Credit Agreement.
Contract Backlog
Drilling contract backlog is the expected future dayrate revenue from executed contracts. We calculate backlog as the total expected revenue from fixed-term contracts and do not include any anticipated contract renewals or expected performance bonuses as part of its calculation. Additionally, contracts that currently contain month-to-month terms are represented in our backlog as one month of unsatisfied performance obligations. In addition to depicting the total expected revenue from fixed-term contracts, backlog is indicative of expected future cash flow that the Company expects to receive regardless of whether a customer honors the fixed-term contract to expiration of a contract or decides to terminate the contract early and pay an early termination payment. In the event of an early termination payment, the timing of the recognition of backlog and the total amount of revenue may differ; however, the overall associated gross margin is preserved. As such, management finds backlog a useful metric for future planning and budgeting, whereas investors consider it useful in estimating future revenue and cash flows of the Company. As of September 30, 2024 and 2023, our contract drilling backlog was $1.5 billion and $1.4 billion, respectively. The increase in backlog at September 30, 2024 compared to 2023 is primarily due to the Company finalizing contractual terms with Saudi Aramco for a seven super-spec FlexRig® tender award for work in the Kingdom of Saudi Arabia. Approximately 53.3 percent of the September 30, 2024 total backlog is reasonably expected to be fulfilled in fiscal year 2025.
The following table sets forth the total backlog by reportable segment as of September 30, 2024 and 2023, and the percentage of the September 30, 2024 backlog reasonably expected to be fulfilled in fiscal year 2025:
(in billions) September 30, 2024 September 30, 2023 Percentage Reasonably
Expected to be Fulfilled in Fiscal Year 2025
North America Solutions $ 0.7 $ 1.1 82.8 %
International Solutions 0.8 0.3 25.9
Offshore Gulf of Mexico — — —
$ 1.5 $ 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 this Form 10-K regarding fixed term contract risk. Additionally, see Item 1A—Risk Factors—" The impact and effects of public health crises, pandemics and epidemics, such as the COVID-19 pandemic, could have a material adverse effect on our business, financial condition and results of operations." within this Form 10-K.
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Results of Operations for the Fiscal Years Ended September 30, 2024 and 2023
Consolidated Results of Operations
Net Income We recorded income of $344.2 million ($3.43 per diluted share) for the fiscal year ended September 30, 2024 compared to income of $434.1 million ($4.16 per diluted share) for the fiscal year ended September 30, 2023.
Operating Revenue Consolidated operating revenues were $2.8 billion and $2.9 billion during fiscal years 2024 and 2023, respectively. The $0.1 billion decrease was primarily driven by lower activity levels.
Direct Operating Expenses, Excluding Depreciation and Amortization Direct operating expenses in fiscal year 2024 were $1.6 billion, compared to direct operating expenses of $1.7 billion in fiscal year 2023. The decrease was primarily attributable to the aforementioned lower activity levels. Additionally, we recognized $6.7 million in direct operating expenses associated with the fair value adjustments of contingent consideration related to earnout payments associated with our business acquisition in fiscal year 2019, partially offset by a gain on involuntary conversion of a rig of approximately $5.5 million.
Depreciation and Amortization Depreciation and amortization expense was $397.3 million in fiscal year 2024 and $382.3 million in fiscal year 2023. The increase was primarily driven by $12.7 million of accelerated depreciation for components on rigs that were scheduled for conversion in fiscal year 2024 compared to $2.4 million for fiscal year 2023. Depreciation and amortization includes amortization of intangible assets of $6.4 million and $6.6 million and abandonments of equipment of $6.5 million and $3.3 million in fiscal years 2024 and 2023, respectively.
Research and Development Expense Research and development expense was $41.0 million and $30.0 million in fiscal years 2024 and 2023, respectively. The increase was primarily driven by an associated asset acquisition during the fiscal year ended September 30, 2024, as well as costs related to expanded project scopes.
Selling, General and Administrative Expense Selling, general and administrative expenses increased to $244.9 million in the fiscal year ended September 30, 2024 compared to $206.7 million in the fiscal year ended September 30, 2023. The $38.2 million increase in fiscal year 2024 is primarily due to a $19.6 million increase in labor and labor-related expenses; and a $8.9 million increase in IT related and professional service expenses.
Asset Impairment Charges During the fiscal year ended September 30, 2023, 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, resulting in non-cash impairment charges of $12.1 million for the fiscal year ended September 30, 2023, of which $8.1 million of the charge is recorded within the International Solutions segment. The remaining $4.0 million is recorded within the North America Solutions segment. The impairment charge was recorded in the Consolidated Statement of Operations for the fiscal year ended September 30, 2023.
Acquisition Transaction Costs During the fiscal year ended September 30, 2024, we recognized approximately $15.0 million in acquisition transaction costs associated with the acquisition of KCA Deutag. These non-recurring costs are primarily related to third-party legal and advisory services. See Note 11—Acquisition Transaction Costs for additional details related to the Acquisition.
Gain on Investment Securities During the fiscal year ended September 30, 2024, we recognized an aggregate gain of $14.0 million on investment securities. This gain consisted primarily of $30.9 million and $1.6 million gains on our equity investments in ADNOC Drilling and Tamboran Corp.; both of which were a result of increases in the fair market values of the stocks. The gains on our equity investments in ADNOC Drilling and Tamboran Corp. during the fiscal year ended September 30, 2024 were offset by $10.2 million and $1.4 million of losses on our investments in Galileo and a geothermal equity security, respectively, due to changes in the fair values of the investments, and a $7.1 million loss as a result of a Blue Chip Swap transaction. See Note 2—Summary of Significant Accounting Policies, Related Risks and Uncertainties—International Solutions Drilling Risks for additional details related to the Blue Chip Swap. During the fiscal year ended September 30, 2023, we recognized an aggregate gain of $11.3 million on investment securities. This gain was mainly comprised of a $27.4 million gain on our equity investment in ADNOC Drilling, partially offset against a $4.2 million loss on our investment in Tamboran Corp.; both of which were a result of fluctuations in the fair market value of the stocks. Additionally, the aggregate gain was offset by a $12.2 million loss on investment recognized during the fiscal year ended September 30, 2023 as a result of a Blue Chip Swap transaction that occurred during the period.
Interest and Dividend Income Interest and dividend income was $41.2 million and $28.4 million in fiscal years 2024 and 2023, respectively. The increase was primarily due to $11.1 million in dividends received from ADNOC Drilling compared to $3.4 million in fiscal year 2023.
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Interest Expense Interest expense totaled $29.1 million in fiscal year 2024 and $17.3 million in fiscal year 2023. The increase was primarily attributable to approximately $9.2 million of commitment fees recognized during the twelve months ended September 30, 2024 related to a bridge loan facility the Company entered into during the period. For additional information regarding commitment fees, refer to Note 6—Debt to the Consolidated Financial Statements.
Income Taxes We had an income tax expense of $136.9 million in fiscal year 2024 compared to an income tax expense of $159.3 million in fiscal year 2023. The effective income tax rate was 28.5 percent in fiscal year 2024 compared to 26.8 percent in fiscal year 2023. The effective rates differ from the U.S. federal statutory rate (21.0 percent for the fiscal years 2024 and 2023) primarily due to non-deductible permanent items and state and foreign income taxes.
Deferred income taxes are provided for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. Recoverability of any tax assets are evaluated and necessary allowances are provided. The carrying values of the net deferred tax assets are based on management’s judgments using certain estimates and assumptions that we will be able to generate sufficient future taxable income in certain tax jurisdictions to realize the benefits of such assets. If these estimates and related assumptions change in the future, additional valuation allowances may be recorded against the deferred tax assets resulting in additional income tax expense in the future. See Note 7—Income Taxes to our Consolidated Financial Statements for additional income tax disclosures.
North America Solutions
The following table presents certain information with respect to our North America Solutions reportable segment:
(in thousands, except operating statistics) 2024 2023 % Change
Operating revenues $ 2,445,946 $ 2,519,743 (2.9) %
Direct operating expenses 1,366,414 1,447,528 (5.6)
Depreciation and amortization 366,446 353,976 3.5
Research and development 41,305 30,457 35.6
Selling, general and administrative expense 61,107 58,367 4.7
Asset impairment charges — 3,948 (100.0)
Segment operating income $ 610,674 $ 625,467 (2.4)
Financial Data and Other Operating Statistics 1 :
Direct margin (Non-GAAP) 2
$ 1,079,532 $ 1,072,215 0.7
Revenue days 3
55,387 61,814 (10.4)
Average active rigs 4
151 169 (10.4)
Number of active rigs at the end of period 5
151 147 2.7
Number of available rigs at the end of period 228 233 (2.1)
Reimbursements of "out-of-pocket" expenses $ 294,375 $ 304,870 (3.4)
(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., 366 days).
(5) Defined as the number of rigs generating revenue at the applicable end date of the time period.
Operating Revenues Operating revenues were $2.4 billion and $2.5 billion in fiscal year 2024 and 2023, respectively. The $73.8 million decrease in operating revenues was primarily due to a 10.4 percent decrease in activity levels partially offset by higher average pricing levels.
Direct Operating Expenses Direct operating expenses decreased by $81.1 million during fiscal year ended September 30, 2024. The decrease was primarily driven by lower activity levels, partially offset by an increase in per revenue day labor and materials and supplies expense.
Depreciation and Amortization Depreciation and amortization expense increased to $366.4 million during the fiscal year ended September 30, 2024 as compared to $354.0 million during the fiscal year ended September 30, 2023. The increase was primarily driven by $12.7 million of accelerated depreciation for components on rigs that were scheduled for conversion in fiscal year 2024 compared to $2.4 million in fiscal year 2023.
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Research and Development Expense Research and development expense increased to $41.3 million during the fiscal year ended September 30, 2024 as compared to $30.5 million during the fiscal year ended September 30, 2023. The increase was driven by an associated asset acquisition during the fiscal year ended September 30, 2024, as well as costs related to expanded project scopes.
Selling, General and Administrative Expenses Selling, general and administrative expenses increased to $61.1 million during the fiscal year ended September 30, 2024 as compared to $58.4 million during the fiscal year ended September 30, 2023. This increase was primarily driven by a $5.2 million increase in labor and labor-related expenses partially offset by a $3.0 million decrease in professional service expenses.
Asset Impairment Charges During the fiscal year ended September 30, 2023, 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 fiscal year ended September 30, 2023. During the same period, we also identified additional equipment that met the asset held-for-sale criteria and were reclassified as Assets held-for-sale on our 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 fiscal year ended September 30, 2023.
International Solutions
The following table presents certain information with respect to our International Solutions reportable segment:
(in thousands, except operating statistics) 2024 2023 % Change
Operating revenues $ 193,975 $ 212,566 (8.7) %
Direct operating expenses 174,634 187,292 (6.8)
Depreciation 10,863 7,615 42.7
Selling, general and administrative expense 9,427 10,401 (9.4)
Asset impairment charges — 8,149 (100.0)
Segment operating loss
$ (949) $ (891) (6.5)
Financial Data and Other Operating Statistics 1 :
Direct margin (Non-GAAP) 2
$ 19,341 $ 25,274 (23.5)
Revenue days 3
4,614 4,788 (3.6)
Average active rigs 4
13 13 (3.6)
Number of active rigs at the end of period 5
16 13 23.1
Number of available rigs at the end of period 27 22 22.7
Reimbursements of "out-of-pocket" expenses $ 8,482 $ 10,227 (17.1)
(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., 366 days).
(5) Defined as the number of rigs generating revenue at the applicable end date of the time period.
Operating Revenues Operating revenues were $194.0 million and $212.6 million in the fiscal years ended September 30, 2024 and 2023, respectively. The $18.6 million decrease in operating revenue was primarily driven by a 3.6 percent decrease in activity levels and decreases in per revenue day pricing, partially offset by higher ancillary services revenue.
Operating Expenses Direct operating expenses decreased to $174.6 million during the fiscal year ended September 30, 2024 as compared to $187.3 million during the fiscal year ended September 30, 2023. This decrease was primarily driven by a 3.6 percent decrease in activity levels and decreases in per revenue day materials and supplies expense.
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Asset Impairment Charges During the fiscal year ended September 30, 2023, 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 Consolidated Balance Sheets. 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 recorded in Asset impairment charges within our Consolidated Statement of Operations during the fiscal year ended September 30, 2023.
Offshore Gulf of Mexico
The following table presents certain information with respect to our Offshore Gulf of Mexico reportable segment:
(in thousands, except operating statistics) 2024 2023 % Change
Operating revenues $ 106,207 $ 130,244 (18.5) %
Direct operating expenses 82,668 96,781 (14.6)
Depreciation 7,530 7,622 (1.2)
Selling, general and administrative expense 3,594 3,035 18.4
Segment operating income $ 12,415 $ 22,806 (45.6)
Financial Data and Other Operating Statistics 1 :
Direct margin (Non-GAAP) 2
$ 23,539 $ 33,463 (29.7)
Revenue days 3
1,111 1,460 (23.9)
Average active rigs 4
3 4 (23.9)
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 $ 31,717 $ 30,445 4.2
(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., 366 days).
(5) Defined as the number of rigs generating revenue at the applicable end date of the time period.
Operating Revenues Operating revenues were $106.2 million and $130.2 million in the fiscal year ended September 30, 2024 and 2023, respectively. The 18.5 percent decrease in operating revenue was primarily due to a 23.9 percent decrease in activity levels, partially offset by higher per revenue day reimbursable revenue.
Direct Operating Expenses Direct operating expenses decreased to $82.7 million during the fiscal year ended September 30, 2024 as compared to $96.8 million during the fiscal year ended September 30, 2023. The decrease was primarily driven by a decrease in activity levels as described above, partially offset by an increase in per revenue day materials and supplies expense.
Other Operations
Results of our other operations, excluding corporate selling, general and administrative costs, and corporate depreciation, are as follows:
(in thousands) 2024 2023 % Change
Operating revenues $ 71,630 $ 77,296 (7.3) %
Direct operating expenses 69,756 57,944 20.4
Depreciation 1,627 2,014 (19.2)
Selling, general and administrative expense 1,606 1,462 9.8
Operating income (loss)
$ (1,359) $ 15,876 (108.6)
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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 $71.6 million and $77.3 million during the fiscal years ended September 30, 2024 and 2023, respectively, primarily consisted of $61.2 million and $67.4 million, respectively, in intercompany premium revenues recorded by the Captives. These revenues were eliminated upon consolidation.
Direct Operating Expenses Direct operating expenses of $69.8 million and $57.9 million during the fiscal years ended September 30, 2024 and 2023, respectively, primarily consisted of $11.4 million and $12.5 million, respectively, in adjustments to accruals for estimated losses allocated to the Captives, rig and casualty insurance premiums of $37.6 million and $39.7 million, respectively, and medical stop loss expenses of $15.5 million and $10.6 million, respectively. The change to accruals for estimated losses is primarily due to actuarial valuation adjustments by our third-party actuary.
Results of Operations for the Fiscal Years Ended September 30, 2023 and 2022
A discussion of our results of operations for the fiscal year ended September 30, 2023 compared to the fiscal year ended September 30, 2022 is included in Part II, Item 7— "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, filed with the SEC on November 8, 2023 .
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 Amended Credit Facility. Our liquidity requirements include meeting ongoing working capital needs, funding our capital expenditure projects, paying dividends declared, repaying our outstanding indebtedness, and funding the pending acquisition of KCA Deutag. 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 Amended 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.
As of September 30, 2024 and 2023, we had cash and cash equivalents of $217.3 million and $257.2 million and short-term investments of $292.9 million and $93.6 million, respectively. Our cash flows for the fiscal years ended September 30, 2024, 2023 and 2022 are presented below:
Year Ended September 30,
(in thousands) 2024 2023 2022
Net cash provided by (used in):
Operating activities $ 684,663 $ 833,682 $ 233,913
Investing activities (458,748) (322,584) (167,315)
Financing activities 986,507 (463,869) (734,305)
Net increase (decrease) in cash and cash equivalents and restricted cash $ 1,212,422 $ 47,229 $ (667,707)
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Operating Activities
Our operating net working capital (non-GAAP) as of September 30, 2024, 2023, and 2022 is presented below:
Year Ended September 30,
(in thousands) 2024 2023 2022
Total current assets $ 1,192,069 $ 1,006,625 $ 1,002,944
Less:
Cash and cash equivalents 217,341 257,174 232,131
Short-term investments 292,919 93,600 117,101
Assets held-for-sale — 645 4,333
Prepaid property, plant and equipment 23,249 21,821 10,091
$ 658,560 $ 633,385 $ 639,288
Total current liabilities 446,949 418,931 394,810
Less:
Dividends payable 25,024 25,194 26,693
Advance payment for sale of property, plant and equipment — — 600
$ 421,925 $ 393,737 $ 367,517
Operating net working capital (non-GAAP) $ 236,635 $ 239,648 $ 271,771
Cash flows provided by operating activities were approximately $684.7 million, $833.7 million, and $233.9 million for the fiscal year ended September 30, 2024, 2023, and 2022 respectively. The change in cash provided by operating activities between fiscal years 2024 and 2023 is primarily driven by lower activity levels partially offset by higher average pricing levels. The increase in cash provided by operating activities between fiscal years 2023 and 2022 was primarily driven by higher activity and pricing. 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 prepaid property, plant and equipment, less current liabilities, excluding dividends payable, short-term debt and advance payments for sale of property, plant and equipment.
Operating net working capital was $236.6 million, $239.6 million and $271.8 million as of September 30, 2024, 2023 and 2022, 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 were $495.1 million, $395.5 million and $250.9 million in fiscal years 2024, 2023 and 2022, respectively. The increase in capital expenditures is driven by the timing of procurement associated with equipment overhauls and certain long-term projects including the procurement of long lead items for international expansion projects. Our fiscal year 2025 capital spending is currently estimated to be between $290 million and $325 million. This estimate includes normal capital maintenance requirements, planned rig-related equipment upgrades, and skidding to walking conversions for up to six rigs.
Net Sales of Short-Term Investments Our net sales of short-term investments during fiscal year 2024 were $3.5 million compared to net sales of $14.3 million and $79.6 million in fiscal years 2023 and 2022, respectively. The change in activity is driven by our ongoing liquidity management. Additionally, the Central Bank of Argentina maintains currency controls that limit our ability to access U.S. dollars in Argentina and remit cash from our Argentine operations. The execution of certain trades known as Blue Chip Swaps effectively results in a parallel U.S. dollar exchange rate. During the fiscal year ended 2024 and 2023, we entered into a Blue Chip Swap transaction, which resulted in a $7.1 million and $12.2 million loss on investment recorded in Gain on investment securities within our Consolidated Statements of Operations, respectively. As a result of the Blue Chip Swap transactions, $13.8 million and $9.8 million of net cash was repatriated to the U.S. during 2024 and 2023, respectively.
Net Purchases of Long-Term Investments Our net purchases of long-term investments were $9.1 million, $20.7 million and $29.2 million in fiscal years 2024, 2023 and 2022, respectively. Our activity during the fiscal year ended September 30, 2024, was driven by $9.1 million of investments in various debt and equity securities. Our activity during the fiscal year ended September 30, 2023, was driven by a $14.1 million equity investment in Tamboran Resources Corporation, $4.1 million in debt and equity security investments in various geothermal energy companies, and $2.5 million investments in other equity securities. Our activity during the fiscal year ended September 30, 2022, was driven by a $33.0 million cornerstone investment in Galileo Holdco 2 Limited Technologies and the purchase of $18.2 million in various geothermal investments, offset by $22.0 million of proceeds received from the liquidation of our remaining equity securities in Schlumberger, Ltd.
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Insurance Proceeds from Involuntary Conversion In November 2022, a fire at a wellsite caused substantial damage to one of our super-spec rigs within our North America Solutions segment. The major components were destroyed beyond repair and considered a total loss, and, as a result, these assets were written off and the rig was removed from our available rig count. At the time of the loss, the rig was fully insured under replacement cost insurance. During the fiscal year ended September 30, 2024, we collected $5.5 million of the total expected insurance proceeds. The total insurance proceeds received during the period exceeds the recognized loss and therefore was recognized as a gain within operating income during the fiscal year ended September 30, 2024. During the fiscal year ended September 30, 2023, we collected $9.2 million of the total expected insurance proceeds.
Sale of Assets Our proceeds from asset sales totaled $46.4 million, $70.1 million and $62.3 million in fiscal year 2024, 2023 and 2022, respectively. 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 $1.68 per share, comprised of a base cash dividend of $1.00 and a supplemental cash dividend of $0.68 during the fiscal year 2024. Comparatively, we paid dividends of $1.94 and $1.00 per share in 2023 and 2022. Total dividends paid were $168.5 million, $201.5 million and $107.4 million in fiscal years 2024, 2023 and 2022, respectively.
Debt Issuance Proceeds and Costs On September 17, 2024, we issued $1.2 billion net aggregate principal amount of senior notes. Debt issuance costs paid in fiscal year 2024 were $22.9 million, of which $9.6 million relates to the senior notes issued in the current year and $13.3 million relates to other financing arrangements. For additional information regarding debt issuance and related costs, refer to Note 6—Debt to the Consolidated Financial Statements.
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. The repurchases may be made using our cash and cash equivalents or other available sources. During the fiscal year ended September 30, 2024, we repurchased 1.4 million common shares at an aggregate cost of $51.6 million, including accrued excise tax of $0.3 million, resulting in a net cash outflow of $51.3 million. During the fiscal year ended September 30, 2023, we repurchased 6.5 million common shares at an aggregate cost of $249.0 million, including excise tax of $1.8 million, resulting in a net cash outflow $247.2 million. During the fiscal year ended September 30, 2022, we repurchased 3.2 million common shares at an aggregate cost of $77.0 million.
Senior Notes Issued in Fiscal Year 2024
On September 17, 2024, we completed a private offering of $1.25 billion aggregate principal amount of the Notes, comprised of the following tranches: $350.0 million aggregate principal amount of 4.65 percent senior notes due 2027 issued at a price equal to 99.958 percent of their face value, $350.0 million aggregate principal amount of 4.85 percent senior notes due 2029 issued at a price equal to 99.883 percent of their face value and $550.0 million aggregate principal amount of 5.50 percent senior notes due 2034 issued at a price equal to 99.670 percent of their face value.
The Company intends to use the net proceeds, together with the proceeds of its term loan credit facility (discussed below) and cash on hand, to finance the purchase price for the Acquisition, to repay certain of KCA Deutag’s outstanding indebtedness, and to pay related fees and expenses.
The Notes are subject to a “special mandatory redemption,” which would require the Company to redeem the Notes at a special mandatory redemption price equal to 101.0 percent of the principal amount of the Notes to be redeemed plus accrued and unpaid interest thereon in the event that (i) the consummation of the Acquisition does not occur on or before October 25, 2025, (or such later date as the Company may agree to extend the "Long Stop Date" under the Purchase Agreement), (ii) the Purchase Agreement is terminated without the consummation of the Acquisition or (iii) if the Company otherwise notifies the trustee of the Notes that it will not pursue the consummation of the Acquisition.
In connection with the issuance of the Notes, the Company also entered into a registration rights agreement, dated as of September 17, 2024 (the “Registration Rights Agreement”), with the initial purchasers of the Notes named therein. Under the Registration Rights Agreement, the Company agreed, among other things, to: (i) file a registration statement (the “Exchange Offer Registration Statement”) with the SEC to register an offer to exchange each series of the Notes for freely tradable notes having terms identical in all material respects to each such series of Notes (the “Registered Exchange Offer”); (ii) use commercially reasonable efforts to cause the Exchange Offer Registration Statement to become effective under the Securities Act not later than the later of (x) the 30th day following the Company’s filing of a Current Report on Form 8-K or an amendment thereto including the financial statements of KCA Deutag and pro forma financial information related to the Company’s acquisition of KCA Deutag required by Items 9.01(a) and 9.01(b) of Form 8-K (the “KCA Deutag Financials Form 8-K”) and (y) June 16, 2025; and (iii) use commercially reasonable efforts to cause the Registered Exchange Offer to be completed not later than the later of (x) the 60th day following the Company’s filing of the KCA Deutag Financials Form 8-K and (y) July 14, 2025 (the “Exchange Offer Closing Deadline”), subject to certain limitations.
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If, among other events, the Registered Exchange Offer is not completed by the Exchange Offer Closing Deadline, then special additional interest will accrue in an amount equal to 0.25 percent per annum of the principal amount of the Notes, from and including the date on which such default shall occur to but excluding the date on which such default is cured.
The indenture governing the Notes contains certain covenants that, among other things, 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 Notes also contains customary events of default with respect to the Notes.
Senior Notes Extinguished in Fiscal Year 2022
On December 20, 2018, we issued approximately $487.1 million in aggregate principal amount of the 4.65 percent senior notes due 2025 (the "2025 Notes"). On September 27, 2021, the Company delivered a conditional notice of optional full redemption for all of the outstanding 2025 Notes at a redemption price calculated in accordance with the indenture governing the 2025 Notes, plus accrued and unpaid interest on the 2025 Notes to be redeemed. The Company financed the redemption of the 2025 Notes with the net proceeds from the offering of the 2031 Notes (discussed below), together with cash on hand. The Company’s obligation to redeem the 2025 Notes was conditioned upon the prior consummation of the issuance of the 2031 Notes, which was satisfied on September 29, 2021.
On October 27, 2021, we redeemed all of the outstanding 2025 Notes. As a result, the associated make-whole premium of $56.4 million and the write off of the unamortized discount and debt issuance costs of $3.7 million were recognized during the first fiscal quarter of 2022 contemporaneously with the October 27, 2021 debt extinguishment and recorded in Loss on extinguishment of debt on our Consolidated Statements of Operations during the fiscal year ended September 30, 2022.
Senior Notes Issued in Fiscal Year 2021
On September 29, 2021, we issued $550.0 million aggregate principal amount of the 2.90 percent senior notes due 2031 (the "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 and to certain non-U.S. persons in transactions outside the United States pursuant to Regulation S under the Securities Act. 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 “2022 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 2022 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.
Term Loan Credit Agreement
On August 14, 2024, the Company entered into the Term Loan Credit Agreement, dated as of August 14, 2024, among the Company, MSSF as administrative agent, and the other lenders party thereto. Under the Term Loan Credit Agreement, the Company may obtain unsecured term loans in a single delayed draw in an aggregate principal amount up to $400.0 million. The Term Loan Credit Agreement matures at the two-year anniversary of the funding of the term loans unless earlier terminated pursuant to the terms of the Term Loan Credit Agreement. We expect to use the proceeds from the Term Loan Credit Agreement, together with the net proceeds from the sale of Notes and cash on hand, to finance the purchase price for the Acquisition, to repay certain of KCA Deutag's outstanding indebtedness, and to pay related fees and expenses.
The benchmark rate is the Secured Overnight Financing Rate ("SOFR"). We can elect to borrow at either an adjusted SOFR rate or an adjusted base rate, plus an applicable margin. The adjusted SOFR rate is the forward-looking term rate based on SOFR for the applicable tenor of one, three, or six months, plus 0.10 percent per annum. The adjusted base rate is a fluctuating rate per annum equal to the highest of (i) the administrative agent's prime rate, (ii) the federal funds effective rate plus 0.50 percent , or (iii) the one-month adjusted SOFR rate plus 1.0 percent. We also pay a commitment fee on the unused balance of the facility. Borrowing spreads as well as commitment fees are determined based on the debt rating for senior unsecured debt of the Company, as determined by Moody’s and Standard & Poor’s. The applicable margin for SOFR borrowings and adjusted base rate borrowings ranges from 1.0 percent to 1.625 percent per annum and zero to 0.625 percent per annum, respectively. Commitment fees for both rates range from 0.10 percent to 0.250 percent per annum. Based on the unsecured debt rating of the Company on September 30, 2024, the spread over SOFR would have been 1.375 percent had borrowings been outstanding under the Term Loan Credit Agreement and commitment fees would have been 0.175 percent.
The funding of the term loans had not occurred as of September 30, 2024.
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Bridge Loan Facility
In connection with, and concurrently with the entry into, the Purchase Agreement, the Company entered into a debt commitment letter dated July 25, 2024 with MSSF, pursuant to which MSSF has committed, subject to satisfaction of standard conditions, to provide the Company with an unsecured 364-day bridge loan facility in an aggregate principal amount of approximately $2.0 billion (the “Bridge Loan Facility”) the proceeds of which, if drawn, would have been used to fund the Acquisition. On October 15, 2024, the remaining commitments under the Bridge Loan Facility were reduced such that there were no remaining commitments available, and the Bridge Loan Facility was automatically terminated in accordance with its terms. For additional information regarding the Bridge Loan Facility, refer to Note 6—Debt to the Consolidated Financial Statements.
Revolving Credit Facility
On August 14, 2024, the Company entered into the Amended Credit Facility with the Revolving Credit Agreement Lenders, the issuing lenders party thereto and Wells Fargo, as administrative agent, swing line lender and issuing lender, which amended and restated the Credit Agreement, dated as of November 13, 2018 (as amended through Amendment No. 2 to the Credit Agreement dated as of March 8, 2022, the “Existing Credit Agreement”), among the Company, the lenders party thereto and Wells Fargo, as administrative agent, swing line lender and issuing lender.
Under the terms of the Amended Credit Facility, the Company may obtain unsecured revolving loans in an aggregate principal amount not to exceed $950.0 million outstanding at any time (the “Revolving Credit Facility”). $775.0 million of the revolving commitments under the Amended Credit Facility expire on November 12, 2028 and $175.0 million of the revolving commitments mature on November 10, 2027 (the “Stated Maturity Date”), but the Company may request two one-year extensions of the Stated Maturity Date, subject to satisfaction of certain conditions. Commitments under the Amended Credit Facility may be increased by up to $100.0 million, subject to the agreement of the Company and new or existing Revolving Credit Agreement Lenders.
The proceeds of the loans made under the Amended Credit Facility may be used by the Company for (i) working capital and other general corporate purposes, (ii) for the payment of fees and expenses related to the entering into of the Amended Credit Facility and the other credit documents and (iii) for the refinancing of the extensions of credit under the Existing Credit Agreement.
The benchmark rate is the SOFR. We can elect to borrow at either an adjusted SOFR rate or an adjusted base rate, plus an applicable margin. The adjusted SOFR rate is the forward-looking term rate based on SOFR for the applicable tenor of one, three, or six months, plus 0.10 percent per annum. The adjusted base rate is a fluctuating rate per annum equal to the highest of (i) the administrative agent's prime rate, (ii) the federal funds effective rate plus 0.50 percent, or (iii) the one-month adjusted SOFR rate plus 1.0 percent. We also pay a commitment fee on the unused balance of the facility. Borrowing spreads as well as commitment fees are determined based on the debt rating for senior unsecured debt of the Company, as determined by Moody’s and Standard & Poor’s. The applicable margin for SOFR borrowings and adjusted base rate borrowings ranges from 0.875 percent to 1.500 percent per annum and zero to 0.50 percent per annum, respectively. Commitment fees for both rates range from 0.075 percent to 0.200 percent per annum. Based on the unsecured debt rating of the Company on September 30, 2024, the spread over SOFR would have been 1.250 percent had borrowings been outstanding under the Amended Credit Facility and commitment fees would have been 0.150 percent. There is a financial covenant in the Amended Credit Facility that requires us to maintain a total funded debt to total capitalization ratio of less than or equal to 55.0 percent. The Amended Credit Facility contains additional terms, conditions, restrictions and covenants that we believe are usual and customary in unsecured debt arrangements for companies of similar size and credit quality, including a limitation that priority debt (as defined in the credit agreement) may not exceed 17.5 percent of the net worth of the Company. As of September 30, 2024, there were no borrowings or letters of credit outstanding, leaving $950.0 million available to borrow under the Amended Credit Facility.
As of September 30, 2024, we had $160.0 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 $160.0 million, $39.7 million was outstanding as of September 30, 2024. Separately, we had $5.0 million in standby letters of credit and bank guarantees outstanding. In total, we had $44.7 million outstanding as of September 30, 2024.
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 September 30, 2024, we were in compliance with all debt covenants.
Future Cash Requirements
Our operating cash requirements, scheduled debt repayments, interest payments, any declared dividends, and estimated capital expenditures for fiscal year 2025 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 $950.0 million Amended Credit Facility. Our indebtedness under our unsecured senior notes totaled $1.8 billion at September 30, 2024 and comprised with the following maturities: $350.0 million due December 2027, $350.0 million due December 2029, $550.0 million due September 2031, and $550.0 million due December 2034.
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On July 25, 2024, H&P and certain of its wholly owned subsidiaries entered into the Purchase Agreement to acquire KCA Deutag for total cash consideration of approximately $2.0 billion, which consists of the $0.9 billion unadjusted share purchase price and $1.1 billion to contemporaneously repay or redeem certain of KCA Deutag's existing debt upon consummation of the Acquisition. Total consideration is subject to adjustment as set forth in the Purchase Agreement. The transaction is expected to close prior to calendar 2024 year end, subject to customary closing conditions and regulatory approvals. We expect to use the proceeds from the Term Loan Credit Agreement, together with the net proceeds from the sale of the Notes and cash on hand, to finance the purchase price for the Acquisition, to repay certain of KCA Deutag's outstanding indebtedness, and to pay related fees and expenses.
As of September 30, 2024, we had a $495.5 million deferred tax liability on our 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.
At September 30, 2024, we have recorded approximately $0.8 million of unrecognized tax benefits, interest, and penalties. We cannot predict with certainty if we will achieve ultimate resolution of any additional uncertain tax positions associated with our U.S. and international operations resulting in any additional material increases or decreases of our unrecognized tax benefits for the next twelve months.
The long‑term debt to total capitalization ratio was 38.2 percent and 16.6 percent as of September 30, 2024 and 2023. For additional information regarding debt agreements, refer to Note 6—Debt to the Consolidated Financial Statements.
There were no other significant changes in our financial position since September 30, 2023.
Material Commitments
Our contractual obligations as of September 30, 2024 are summarized in the table below:
Obligations due by fiscal year
(in thousands) Total 2025 2026 2027 2028 2029 Thereafter
Long-term debt 1,800,000 — — — 350,000 — 1,450,000
Interest 1
558,389 79,450 79,450 79,450 65,888 63,175 190,976
Operating leases 2
73,032 9,443 8,126 7,646 7,045 6,862 33,910
Purchase obligations 3
116,327 116,327 — — — — —
Total contractual obligations $ 2,547,748 $ 205,220 $ 87,576 $ 87,096 $ 422,933 $ 70,037 $ 1,674,886
(1) Interest on fixed-rate unsecured senior notes was estimated based on principal maturities. See Note 6—Debt to our Consolidated Financial Statements.
(2) See Note 4—Leases to our Consolidated Financial Statements.
(3) See Note 16—Commitments and Contingencies to our Consolidated Financial Statements.
Critical Accounting Policies and Estimates
Accounting policies that we consider significant are summarized in Note 2—Summary of Significant Accounting Policies, Related Risks and Uncertainties to our Consolidated Financial Statements included in Part II, Item 8—"Financial Statements and Supplementary Data" of this Form 10-K. The preparation of our financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. Estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates and assumptions are evaluated on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. The following is a discussion of the critical accounting policies and estimates used in our financial statements.
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Property, Plant and Equipment
Property, plant and equipment, including renewals and betterments, are capitalized at cost, while maintenance and repairs are expensed as incurred. We account for the depreciation of property, plant and equipment using the straight‑line method over the estimated useful lives of the assets considering the estimated salvage value of the property, plant and equipment. Both the estimated useful lives and salvage values require the use of management estimates. Assets held-for-sale are reported at the lower of the carrying amount or fair value less estimated costs to sell. Our estimate of fair value represents our best estimate based on industry trends and reference to market transactions and is subject to variability. Certain events, such as unforeseen changes in operations, technology or market conditions, could materially affect our estimates and assumptions related to depreciation or result in abandonments. For the fiscal years presented in this Form 10-K, no significant changes were made to the determinations of useful lives or salvage values. Upon retirement or other disposal of fixed assets, the cost and related accumulated depreciation are removed from the respective accounts and any gains or losses are recorded in the results of operations.
Impairment of Long‑lived Assets, Goodwill and Other Intangible Assets
Management assesses the potential impairment of our long‑lived assets and finite-lived intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Changes that could prompt such an assessment may include equipment obsolescence, changes in the market demand, periods of relatively low rig utilization, declining revenue per day, declining cash margin per day, completion of specific contracts, change in technology and/or overall changes in general market conditions. If a review of the long‑lived assets and finite-lived intangibles indicates that the carrying value of certain of these assets or asset groups is more than the estimated undiscounted future cash flows, an impairment charge is made, as required, to adjust the carrying value to the estimated fair value. Cash flows are estimated by management considering factors such as prospective market demand, recent changes in rig technology and its effect on each rig’s marketability, any cash investment required to make a rig marketable, suitability of rig size and makeup to existing platforms, and competitive dynamics including utilization. The fair value of drilling rigs is determined based upon either an income approach using estimated discounted future cash flows, a market approach considering factors such as recent market sales of rigs of other companies and our own sales of rigs, appraisals and other factors, a cost approach utilizing new reproduction costs adjusted for the asset age and condition, and/or a combination of multiple approaches. The use of different assumptions could increase or decrease the estimated fair value of assets and could therefore affect any impairment measurement.
We review goodwill for impairment annually in the fourth fiscal quarter or more frequently if events or changes in circumstances indicate it is more likely than not that the carrying amount of the reporting unit holding such goodwill may exceed its fair value. We initially assess goodwill for impairment based on qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of one of our reporting units is greater than its carrying amount.
If further testing is necessary or a quantitative test is elected, we quantitatively compare the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount exceeds the fair value, an impairment charge will be recognized in an amount equal to the excess; however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting unit.
See Note 5—Goodwill and Intangible Assets for additional discussion of goodwill and intangible assets.
Self‑Insurance Accruals
We insure working land rigs and related equipment at values that approximate the current replacement costs on the inception date of the policies. However, we self-insure large deductibles under these policies. We also carry insurance with varying deductibles and coverage limits with respect to stacked rigs, offshore platform rigs, and “named wind storm” risk in the Gulf of Mexico. We self‑insure a number of other risks, including loss of earnings and business interruption.
We self‑insure a significant portion of expected losses relating to workers’ compensation, general liability, employer’s liability, auto liability, and certain other insurance coverages. Generally, deductibles range from $1 million to $10 million per occurrence depending on the coverage and whether a claim occurs outside or inside of the United States. Insurance is purchased over deductibles to reduce our exposure to catastrophic events but there can be no assurance that such coverage will apply or be adequate in all circumstances. Estimates are recorded for incurred outstanding liabilities for workers’ compensation and other casualty claims. Retained losses under worker's compensation, general, automobile, and employer's liability policies are estimated and accrued based upon our estimates of the aggregate liability for claims incurred. These estimates are based on adjusters’ estimates, our historical loss experience and statistical methods commonly used within the insurance industry that we believe are reliable.
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We also engage a third-party actuary to perform a periodic review of our casualty losses. Nonetheless, insurance estimates include certain assumptions and management judgments regarding the frequency and severity of claims, claim development and settlement practices. Unanticipated changes in these factors may produce materially different amounts of expense that would be reported under these programs. Our wholly‑owned captive insurance companies finance a significant portion of the physical damage risk on company‑owned drilling rigs as well as casualty deductibles and other risk retentions. An actuary reviews the loss reserves retained by the Company and the Captives on an annual basis.
Revenue Recognition
Drilling services revenues are primarily comprised of daywork drilling contracts for which the related revenues and expenses are recognized as services are performed and collection is reasonably assured. With most drilling contracts, we receive payments contractually designated for the mobilization and demobilization of drilling rigs and other equipment to and from the client’s drill site. Revenue associated with the mobilization and demobilization of our drilling rigs to and from the client’s drill site do not relate to a distinct good or service. These revenues are deferred and recognized ratably over the related contract term that drilling services are provided. The amount of demobilization revenue that we ultimately collect is dependent upon the specific contractual terms, most of which include provisions for reduced or no payment for demobilization when, among other things, the contract is renewed or extended with the same client, or when the rig is subsequently contracted with another client prior to the termination of the current contract. Since revenues associated with demobilization activity are typically variable, at each period end, they are estimated at the most likely amount, and constrained when the likelihood of a significant reversal is probable. Direct costs incurred for the mobilization, are deferred and recognized on a straight-line basis as the drilling service is provided. While costs incurred to relocate rigs and other drilling equipment to areas in which a contract has not been secured are expensed as incurred.
We also act as a principal for certain reimbursable services and auxiliary equipment provided by us to our clients, for which we incur costs and earn revenues. Many of these costs are variable, or dependent upon the activity that is performed each day under the related contract. Accordingly, reimbursements that we receive for out-of-pocket expenses are recorded as revenues and the out-of-pocket expenses for which they relate are recorded as operating costs during the period to which they relate within the series of distinct time increments. For contracts that are terminated prior to the specified term, early termination payments received by us are recognized as revenues when all contractual requirements are met.
Income Taxes
Deferred income taxes are accounted for under the liability method, which takes into account the differences between the basis of the assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. Our net deferred tax liability balance at year-end reflects the application of our income tax accounting policies and is based on management’s estimates, judgments and assumptions. Included in our net deferred tax liability balance are deferred tax assets that are assessed for realizability. If it is more likely than not that a portion of the deferred tax assets will not be realized in a future period, the deferred tax assets will be reduced by a valuation allowance based on management’s estimates.
In addition, we operate in several countries throughout the world and our tax returns filed in those jurisdictions are subject to review and examination by tax authorities within those jurisdictions. We recognize uncertain tax positions we believe have a greater than 50 percent likelihood of being sustained. We cannot predict or provide assurance as to the ultimate outcome of any existing or future assessments.
New Accounting Standards
See Note 2—Summary of Significant Accounting Policies, Related Risks and Uncertainties to our Consolidated Financial Statements for recently adopted accounting standards and 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.
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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.
Year Ended September 30, 2024
(in thousands) North America Solutions International Solutions Offshore Gulf of Mexico
Segment operating income (loss)
$ 610,674 $ (949) $ 12,415
Add back:
Depreciation and amortization 366,446 10,863 7,530
Research and development 41,305 — —
Selling, general and administrative expense 61,107 9,427 3,594
Direct margin (Non-GAAP) $ 1,079,532 $ 19,341 $ 23,539
Year Ended September 30, 2023
(in thousands) North America Solutions International Solutions Offshore Gulf of Mexico
Segment operating income (loss) $ 625,467 $ (891) $ 22,806
Add back:
Depreciation and amortization 353,976 7,615 7,622
Research and development 30,457 — —
Selling, general and administrative expense 58,367 10,401 3,035
Asset impairment charges 3,948 8,149 —
Direct margin (Non-GAAP) $ 1,072,215 $ 25,274 $ 33,463