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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For quarterly period ended:  June 30, 2012

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                          to                        

 

Commission File Number: 1-4221

 

HELMERICH & PAYNE, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

73-0679879

(State or other jurisdiction of

 

(I.R.S. Employer I.D. Number)

incorporation or organization)

 

 

 

1437 South Boulder Avenue, Tulsa, Oklahoma,74119

(Address of principal executive office)(Zip Code)

 

(918) 742-5531

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year,

if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

CLASS

 

OUTSTANDING AT July 31, 2012

Common Stock, $0.10 par value

 

105,692,693

 

 

 



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

 

 

Page No.

 

 

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Condensed Balance Sheets as of June 30, 2012 and September 30, 2011

3

 

 

 

 

Consolidated Condensed Statements of Income for the Three and Nine Months Ended June 30, 2012 and 2011

4

 

 

 

 

Consolidated Condensed Statements of Cash Flows for the Nine Months Ended June 30, 2012 and 2011

5

 

 

 

 

Consolidated Condensed Statement of Shareholders’ Equity for the Nine Months Ended June 30, 2012

6

 

 

 

 

Notes to Consolidated Condensed Financial Statements

7-20

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21-29

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

30

 

 

 

Item 4.

Controls and Procedures

30

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

30

 

 

 

Item 1A.

Risk Factors

31

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

 

Item 6.

Exhibits

33

 

 

 

Signatures

 

34

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

(in thousands, except share and per share amounts)

 

ITEM 1. FINANCIAL STATEMENTS

 

 

 

June 30,

 

September 30,

 

 

 

2012

 

2011

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

148,866

 

$

364,246

 

Accounts receivable, less reserve of $747 at June 30, 2012 and $776 at September 30, 2011

 

604,347

 

460,540

 

Inventories

 

70,419

 

54,407

 

Deferred income taxes

 

20,686

 

19,855

 

Prepaid expenses and other

 

90,681

 

49,736

 

Current assets of discontinued operations

 

7,578

 

7,529

 

Total current assets

 

942,577

 

956,313

 

 

 

 

 

 

 

Investments

 

382,527

 

347,924

 

Property, plant and equipment, net

 

4,170,303

 

3,677,070

 

Other assets

 

22,894

 

22,584

 

 

 

 

 

 

 

Total assets

 

$

5,518,301

 

$

5,003,891

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

88,855

 

$

103,852

 

Accrued liabilities

 

204,578

 

192,898

 

Long-term debt due within one year

 

115,000

 

115,000

 

Current liabilities of discontinued operations

 

5,156

 

4,979

 

Total current liabilities

 

413,589

 

416,729

 

 

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

 

Long-term debt

 

235,000

 

235,000

 

Deferred income taxes

 

1,133,306

 

975,280

 

Other

 

99,394

 

104,285

 

Noncurrent liabilities of discontinued operations

 

2,422

 

2,550

 

Total noncurrent liabilities

 

1,470,122

 

1,317,115

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, $.10 par value, 160,000,000 shares authorized, 107,587,139 shares and 107,243,473 shares issued as of June 30, 2012 and September 30, 2011, respectively and 105,685,943 and 107,086,324 shares outstanding as of June 30, 2012 and September 30, 2011, respectively

 

10,759

 

10,724

 

Preferred stock, no par value, 1,000,000 shares authorized, no shares issued

 

 

 

Additional paid-in capital

 

231,044

 

210,909

 

Retained earnings

 

3,355,603

 

2,954,210

 

Accumulated other comprehensive income

 

121,288

 

98,908

 

Treasury stock, at cost

 

(84,104

)

(4,704

)

Total shareholders’ equity

 

3,634,590

 

3,270,047

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

5,518,301

 

$

5,003,891

 

 

The accompanying notes are an integral part of these statements.

 

3



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Operating revenues:

 

 

 

 

 

 

 

 

 

Drilling — U.S. Land

 

$

706,786

 

$

539,372

 

$

1,983,369

 

$

1,511,649

 

Drilling — Offshore

 

41,617

 

54,569

 

135,830

 

150,022

 

Drilling — International Land

 

67,482

 

46,051

 

192,305

 

169,689

 

Other

 

3,900

 

4,103

 

10,851

 

11,783

 

 

 

819,785

 

644,095

 

2,322,355

 

1,843,143

 

 

 

 

 

 

 

 

 

 

 

Operating costs and other:

 

 

 

 

 

 

 

 

 

Operating costs, excluding depreciation

 

463,935

 

365,586

 

1,303,175

 

1,035,671

 

Depreciation

 

95,182

 

79,109

 

272,404

 

228,450

 

General and administrative

 

25,576

 

24,071

 

79,544

 

68,366

 

Research and development

 

4,299

 

4,399

 

11,378

 

11,509

 

Income from asset sales

 

(1,862

)

(3,488

)

(14,365

)

(10,262

)

 

 

587,130

 

469,677

 

1,652,136

 

1,333,734

 

 

 

 

 

 

 

 

 

 

 

Operating income from continuing operations

 

232,655

 

174,418

 

670,219

 

509,409

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

329

 

903

 

1,021

 

1,573

 

Interest expense

 

(2,411

)

(3,221

)

(7,293

)

(13,185

)

Gain on sale of investment securities

 

 

913

 

 

913

 

Other

 

309

 

(190

)

288

 

208

 

 

 

(1,773

)

(1,595

)

(5,984

)

(10,491

)

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

230,882

 

172,823

 

664,235

 

498,918

 

Income tax provision

 

80,939

 

62,995

 

240,232

 

185,764

 

Income from continuing operations

 

149,943

 

109,828

 

424,003

 

313,154

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations before income taxes

 

(18

)

(2

)

(154

)

(393

)

Income tax provision

 

 

 

(81

)

(5

)

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

(18

)

(2

)

(73

)

(388

)

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

149,925

 

$

109,826

 

$

423,930

 

$

312,766

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.40

 

$

1.02

 

$

3.94

 

$

2.93

 

Loss from discontinued operations

 

$

 

$

 

$

 

$

 

Net income

 

$

1.40

 

$

1.02

 

$

3.94

 

$

2.93

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.38

 

$

1.01

 

$

3.88

 

$

2.87

 

Loss from discontinued operations

 

$

 

$

 

$

 

$

 

Net income

 

$

1.38

 

$

1.01

 

$

3.88

 

$

2.87

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

107,016

 

106,962

 

107,196

 

106,501

 

Diluted

 

108,425

 

108,784

 

108,798

 

108,550

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.07

 

$

0.07

 

$

0.21

 

$

0.19

 

 

The accompanying notes are an integral part of these statements.

 

4



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

Nine Months Ended

 

 

 

June 30,

 

 

 

2012

 

2011

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

423,930

 

$

312,766

 

Adjustment for loss from discontinued operations

 

73

 

388

 

Income from continuing operations

 

424,003

 

313,154

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

272,404

 

228,450

 

Provision for bad debt

 

2

 

3

 

Stock-based compensation

 

13,300

 

9,114

 

Other

 

134

 

3

 

Gain on sale of investment securities

 

 

(913

)

Income from asset sales

 

(14,365

)

(10,262

)

Deferred income tax expense

 

144,729

 

155,630

 

Change in assets and liabilities-

 

 

 

 

 

Accounts receivable

 

(143,809

)

13,442

 

Inventories

 

(16,012

)

(6,204

)

Prepaid expenses and other

 

(41,287

)

(7,040

)

Accounts payable

 

(13,899

)

(14,379

)

Accrued liabilities

 

(7,768

)

15,247

 

Deferred income taxes

 

(326

)

209

 

Other noncurrent liabilities

 

(4,055

)

377

 

Net cash provided by operating activities from continuing operations

 

613,051

 

696,831

 

Net cash used in operating activities from discontinued operations

 

(73

)

(388

)

Net cash provided by operating activities

 

612,978

 

696,443

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(774,243

)

(493,776

)

Proceeds from sale of investment securities

 

 

3,932

 

Proceeds from asset sales

 

31,838

 

21,738

 

Acquisition of TerraVici Drilling Solutions

 

 

(4,000

)

Net cash used in investing activities

 

(742,405

)

(472,106

)

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from line of credit

 

 

10,000

 

Payments on line of credit

 

 

(20,000

)

Repurchase of common stock

 

(71,404

)

 

Increase in bank overdraft

 

3,955

 

4,844

 

Dividends paid

 

(22,620

)

(19,222

)

Exercise of stock options

 

2,374

 

13,734

 

Tax withholdings related to net share settlements of restricted stock

 

(1,514

)

 

Excess tax benefit from stock-based compensation

 

3,256

 

11,352

 

Net cash used in financing activities

 

(85,953

)

708

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(215,380

)

225,045

 

Cash and cash equivalents, beginning of period

 

364,246

 

63,020

 

Cash and cash equivalents, end of period

 

$

148,866

 

$

288,065

 

 

The accompanying notes are an integral part of these statements.

 

5



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY

NINE MONTHS ENDED JUNE 30, 2012

(Unaudited)

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

Total

 

 

 

Common Stock

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury Stock

 

Shareholders’

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income

 

Shares

 

Amount

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2011

 

107,243

 

$

10,724

 

$

210,909

 

$

2,954,210

 

$

98,908

 

157

 

$

(4,704

)

$

3,270,047

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

423,930

 

 

 

 

 

 

 

423,930

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in value on available-for-sale securities

 

 

 

 

 

 

 

 

 

20,745

 

 

 

 

 

20,745

 

Amortization of net periodic benefit costs-net of actuarial gain

 

 

 

 

 

 

 

 

 

1,635

 

 

 

 

 

1,635

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

446,310

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends ($0.21 per share)

 

 

 

 

 

 

 

(22,537

)

 

 

 

 

 

 

(22,537

)

Exercise of stock options

 

303

 

31

 

5,100

 

 

 

 

 

47

 

(2,757

)

2,374

 

Tax benefit of stock-based awards, including excess tax benefits of $3,526

 

 

 

 

 

4,220

 

 

 

 

 

 

 

 

 

4,220

 

Stock issued for vested restricted stock, net of shares withheld for employee taxes

 

41

 

4

 

(2,485

)

 

 

 

 

(51

)

967

 

(1,514

)

Repurchase of common stock

 

 

 

 

 

 

 

 

 

 

 

1,748

 

(77,610

)

(77,610

)

Stock-based compensation

 

 

 

 

 

13,300

 

 

 

 

 

 

 

 

 

13,300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2012

 

107,587

 

$

10,759

 

$

231,044

 

$

3,355,603

 

$

121,288

 

1,901

 

$

(84,104

)

$

3,634,590

 

 

The accompanying notes are an integral part of these statements.

 

6



Table of Contents

 

HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

1.              Basis of Presentation

 

Unless the context otherwise requires, the use of the terms “the Company”, “we”, “us” and “our” in these Notes to Consolidated Condensed Financial Statements refers to Helmerich & Payne, Inc. and its consolidated subsidiaries.

 

The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “Commission”) pertaining to interim financial information.  Accordingly, these interim financial statements do not include all information or footnote disclosures required by GAAP for complete financial statements and, therefore, should be read in conjunction with the Consolidated Financial Statements and notes thereto in our 2011 Annual Report on Form 10-K and other current filings with the Commission.  In the opinion of management, all adjustments, consisting of those of a normal recurring nature, necessary to present fairly the results of the periods presented have been included.  The results of operations for the interim periods presented may not necessarily be indicative of the results to be expected for the full year.

 

As more fully described in our 2011 Annual Report on Form 10-K, our contract drilling revenues are comprised of daywork drilling contracts for which the related revenues and expenses are recognized as services are performed.  For contracts that are terminated by customers prior to the expirations of their fixed terms, contractual provisions customarily require early termination amounts to be paid to us. Revenues from early terminated contracts are recognized when all contractual requirements have been met.

 

2.              Discontinued Operations

 

On June 30, 2010, the Official Gazette of Venezuela published the Decree of Venezuelan President Hugo Chavez, which authorized the “forceful acquisition” of eleven rigs owned by our Venezuelan subsidiary.  The Decree also authorized the seizure of “all the personal and real property and other improvements” used by our Venezuelan subsidiary in its drilling operations.  The seizing of our assets became effective June 30, 2010 and met the criteria established for recognition as discontinued operations under accounting standards for presentation of financial statements.  Therefore, operations from the Venezuelan subsidiary, an operating segment within the International Land segment, have been classified as discontinued operations in our Consolidated Condensed Financial Statements.

 

Summarized operating results from discontinued operations are as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in thousands)

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

 

$

 

$

 

$

 

Loss before income taxes

 

(18

)

(2

)

(154

)

(393

)

Income tax provision

 

 

 

(81

)

(5

)

Loss from discontinued operations

 

$

(18

)

$

(2

)

$

(73

)

$

(388

)

 

Significant categories of assets and liabilities from discontinued operations are as follows:

 

 

 

June 30,

 

September 30,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

 

 

 

 

 

 

Other current assets

 

$

7,578

 

$

7,529

 

Total assets

 

$

7,578

 

$

7,529

 

 

 

 

 

 

 

Current liabilities

 

$

5,156

 

$

4,979

 

Noncurrent liabilities

 

2,422

 

2,550

 

Total liabilities

 

$

7,578

 

$

7,529

 

 

Other current assets consist of restricted cash to meet remaining in-country current obligations.  Liabilities consist of municipal and income taxes payable and social obligations due within the country of Venezuela.

 

7



Table of Contents

 

3.     Earnings per Share

 

Accounting Standards Codification (“ASC”) 260, Earnings per Share, requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share.  We have granted and expect to continue to grant restricted stock grants to employees that contain non-forfeitable rights to dividends.  Such grants are considered participating securities under ASC 260.  As such, we are required to include these grants in the calculation of our basic earnings per share and calculate basic earnings per share using the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings.

 

Basic earnings per share is computed utilizing the two-class method and is calculated based on weighted-average number of common shares outstanding during the periods presented.

 

Diluted earnings per share is computed using the weighted-average number of common and common equivalent shares outstanding during the periods utilizing the two-class method for stock options and nonvested restricted stock.

 

8



Table of Contents

 

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Numerator:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

149,943

 

$

109,828

 

$

424,003

 

$

313,154

 

Loss from discontinued operations

 

(18

)

(2

)

(73

)

(388

)

Net income

 

149,925

 

109,826

 

423,930

 

312,766

 

Adjustment for basic earnings per share:

 

 

 

 

 

 

 

 

 

Earnings allocated to unvested shareholders

 

(606

)

(332

)

(1,612

)

(931

)

Numerator for basic earnings per share:

 

 

 

 

 

 

 

 

 

From continuing operations

 

149,337

 

109,496

 

422,391

 

312,223

 

From discontinued operations

 

(18

)

(2

)

(73

)

(388

)

 

 

149,319

 

109,494

 

422,318

 

311,835

 

Adjustment for diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of reallocating undistributed earnings of unvested shareholders

 

7

 

5

 

22

 

17

 

Numerator for diluted earnings per share:

 

 

 

 

 

 

 

 

 

From continuing operations

 

149,344

 

109,501

 

422,413

 

312,240

 

From discontinued operations

 

(18

)

(2

)

(73

)

(388

)

 

 

$

149,326

 

$

109,499

 

$

422,340

 

$

311,852

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share - weighted-average shares

 

107,016

 

106,962

 

107,196

 

106,501

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive shares from stock options and restricted stock

 

1,409

 

1,822

 

1,602

 

2,049

 

 

 

 

 

 

 

 

 

 

 

Denominator for diluted earnings per share - adjusted weighted-average shares

 

108,425

 

108,784

 

108,798

 

108,550

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.40

 

$

1.02

 

$

3.94

 

$

2.93

 

Loss from discontinued operations

 

 

 

 

 

Net income

 

$

1.40

 

$

1.02

 

$

3.94

 

$

2.93

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.38

 

$

1.01

 

$

3.88

 

$

2.87

 

Loss from discontinued operations

 

 

 

 

 

Net income

 

$

1.38

 

$

1.01

 

$

3.88

 

$

2.87

 

 

The following shares attributable to outstanding equity awards were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Shares excluded from calculation of diluted earnings per share

 

755

 

 

446

 

323

 

Weighted-average price per share

 

$

54.86

 

$

 

$

59.68

 

$

47.94

 

 

4.              Inventories

 

Inventories consist primarily of replacement parts and supplies held for use in our drilling operations.

 

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5.              Financial Instruments and Fair Value Measurement

 

The estimated fair value of our available-for-sale securities, reflected on our Consolidated Condensed Balance Sheets as Investments, is based on market quotes.  The following is a summary of available-for-sale securities, which excludes investments in limited partnerships carried at cost and assets held in a Non-qualified Supplemental Savings Plan:

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

 

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Equity securities June 30, 2012

 

$

129,183

 

$

236,337

 

$

 

$

365,520

 

Equity securities September 30, 2011

 

$

129,183

 

$

203,486

 

$

 

$

332,669

 

 

On an on-going basis, we evaluate the marketable equity securities to determine if any decline in fair value below original cost is other-than-temporary.  If a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis established.  We review several factors to determine whether a loss is other-than-temporary.  These factors include, but are not limited to, (i) the length of time a security is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near term prospects of the issuer and (iv) our intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. The cost of securities used in determining realized gains and losses is based on the average cost basis of the security sold.  We had no sales of marketable equity available-for-sale securities during the first nine months of fiscal 2012 and 2011.

 

Investments in limited partnerships carried at cost were approximately $9.4 million at June 30, 2012 and September 30, 2011.  The estimated fair value of the limited partnerships was $16.9 million and $15.8 million at June 30, 2012 and September 30, 2011, respectively.  During the third quarter ended June 30, 2011, we sold our investment in a limited partnership realizing a gain of $0.9 million that is included in gain on sale of investment securities in the Consolidated Condensed Statements of Income.

 

Assets held in the Non-qualified Supplemental Savings Plan are carried at fair market value which totaled $7.7 million at June 30, 2012 and $5.9 million at September 30, 2011.

 

The majority of cash equivalents are invested in taxable and non-taxable money-market mutual funds. The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of those investments.

 

ASC 820 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”.  We use the fair value hierarchy established in ASC 820-10 to measure fair value to prioritize the inputs:

 

·                  Level 1 — Observable inputs that reflect quoted prices in active markets for identical assets or liabilities in active markets.

 

·                  Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

·                  Level 3 — Valuations based on inputs that are unobservable and not corroborated by market data.

 

At June 30, 2012, our financial instruments utilizing Level 1 inputs include cash equivalents, equity securities with active markets and money market funds we have elected to classify as restricted assets that are included in other current assets and other assets.  Also included is cash denominated in a foreign currency we have elected to classify as restricted that is included in current assets of discontinued operations and limited to remaining liabilities of discontinued operations.  For these items, quoted current market prices are readily available.

 

At June 30, 2012, financial instruments utilizing level 2 inputs include a bank certificate of deposit included in other current assets.

 

Currently, we do not have any financial instruments utilizing Level 3 inputs.

 

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Table of Contents

 

The following table summarizes our assets measured at fair value on a recurring basis presented in our Consolidated Condensed Balance Sheet as of June 30, 2012:

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

Total

 

in Active

 

Significant

 

 

 

 

 

Measure

 

Markets for

 

Other

 

Significant

 

 

 

at

 

Identical

 

Observable

 

Unobservable

 

 

 

Fair

 

Assets

 

Inputs

 

Inputs

 

 

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

148,866

 

$

148,866

 

$

 

$

 

Equity securities

 

365,520

 

365,520

 

 

 

Other current assets

 

48,909

 

48,659

 

250

 

 

Other assets

 

2,000

 

2,000

 

 

 

Total assets measured at fair value

 

$

565,295

 

$

565,045

 

$

250

 

$

 

 

The following information presents the supplemental fair value information about fixed-rate debt at June 30, 2012 and September 30, 2011:

 

 

 

June 30,

 

September 30,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

 

 

 

 

 

 

Carrying value of fixed-rate debt

 

$

350.0

 

$

350.0

 

Fair value of fixed-rate debt

 

$

365.9

 

$

376.9

 

 

The fair value for fixed-rate debt was estimated using cash flows discounted at rates reflecting current interest rates at similar maturities plus a credit spread which was estimated using market information on debt instruments with a similar credit profile to us.  The debt was valued using a Level 2 input.

 

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Table of Contents

 

6.              Comprehensive Income

 

Comprehensive income, net of related income taxes, is as follows (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

149,925

 

$

109,826

 

$

423,930

 

$

312,766

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Unrealized appreciation (depreciation) on securities

 

(61,257

)

(25,037

)

32,851

 

133,424

 

Income taxes

 

23,185

 

9,389

 

(12,106

)

(50,033

)

 

 

(38,072

)

(15,648

)

20,745

 

83,391

 

 

 

 

 

 

 

 

 

 

 

Minimum pension liability adjustments

 

862

 

751

 

2,588

 

2,251

 

Income taxes

 

(306

)

(282

)

(953

)

(845

)

 

 

556

 

469

 

1,635

 

1,406

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

112,409

 

$

94,647

 

$

446,310

 

$

397,563

 

 

The components of accumulated other comprehensive income, net of related income taxes, are as follows (in thousands):

 

 

 

June 30,

 

September 30,

 

 

 

2012

 

2011

 

Unrealized appreciation on securities

 

$

146,871

 

$

126,126

 

Unrecognized actuarial loss and prior service cost

 

(25,583

)

(27,218

)

Accumulated other comprehensive income

 

$

121,288

 

$

98,908

 

 

7.              Cash Dividends

 

The $0.07 cash dividend declared March 7, 2012, was paid June 1, 2012.  On June 6, 2012, a cash dividend of $0.07 per share was declared for shareholders of record on August 15, 2012, payable August 31, 2012. The dividend payable is included in accounts payable in the Consolidated Condensed Balance Sheet.

 

8.              Stock-Based Compensation

 

On March 2, 2011, the 2010 Long-Term Incentive Plan (the “2010 Plan”) was approved by our stockholders.  The 2010 Plan, among other things, authorizes the Board of Directors to grant nonqualified stock options, restricted stock awards and stock appreciation rights to selected employees and to non-employee Directors.  Restricted stock may be granted for no consideration other than prior and future services.  The purchase price per share for stock options may not be less than market price of the underlying stock on the date of grant.  Stock options expire ten years after the grant date.  There were 455,900 nonqualified stock options and 243,600 shares of restricted stock awards granted in the nine months ended June 30, 2012.  We have the right to satisfy option exercises from treasury shares and from authorized but unissued shares.

 

A summary of compensation cost for stock-based payment arrangements recognized in general and administrative expense is as follows (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Compensation expense

 

 

 

 

 

 

 

 

 

Stock options

 

$

2,314

 

$

1,696

 

$

7,345

 

$

5,509

 

Restricted stock

 

2,228

 

1,274

 

5,955

 

3,605

 

 

 

$

4,542

 

$

2,970

 

$

13,300

 

$

9,114

 

 

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Table of Contents

 

STOCK OPTIONS

 

The following summarizes the weighted-average assumptions utilized in determining the fair value of options granted during the nine months ended June 30, 2012 and 2011:

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Risk-free interest rate

 

1.0

%

1.9

%

Expected stock volatility

 

53.3

%

51.6

%

Dividend yield

 

0.4

%

0.5

%

Expected term (in years)

 

5.5

 

5.5

 

 

Risk-Free Interest Rate.  The risk-free interest rate is based on U.S. Treasury securities for the expected term of the option.

 

Expected Volatility Rate.  Expected volatility is based on the daily closing price of our stock based upon historical experience over a period which approximates the expected term of the option.

 

Dividend Yield.  The expected dividend yield is based on our current dividend yield.

 

Expected Term.  The expected term of the options granted represents the period of time that they are expected to be outstanding.  We estimate the expected term of options granted based on historical experience with grants and exercises.

 

A summary of stock option activity under the Plan for the three and nine months ended June 30, 2012 is presented in the following table:

 

 

 

Three Months Ended June 30, 2012

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted-

 

Average

 

Aggregate

 

 

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

 

Shares

 

Exercise

 

Contractual Term

 

Value

 

Options

 

(in thousands)

 

Price

 

(in years)

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at April 1, 2012

 

4,739

 

$

29.58

 

 

 

 

 

Granted

 

3

 

47.29

 

 

 

 

 

Exercised

 

(22

)

21.26

 

 

 

 

 

Forfeited/Expired

 

(19

)

49.30

 

 

 

 

 

Outstanding at June 30, 2012

 

4,701

 

$

29.55

 

5.1

 

$

74.1

 

Vested and expected to vest at June 30, 2012

 

4,661

 

$

29.53

 

5.1

 

$

73.6

 

 

 

 

 

 

 

 

 

 

 

Exercisable at June 30, 2012

 

3,587

 

$

24.67

 

4.1

 

$

68.2

 

 

 

 

Nine Months Ended
June 30, 2012

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Shares

 

Exercise

 

Options

 

(in thousands)

 

Price

 

 

 

 

 

 

 

Outstanding at October 1, 2011

 

4,589

 

$

25.84

 

Granted

 

456

 

59.68

 

Exercised

 

(303

)

16.96

 

Forfeited/Expired

 

(41

)

42.04

 

Outstanding at June 30, 2012

 

4,701

 

$

29.55

 

 

The weighted-average fair value of options granted in the first quarter of fiscal 2012 was $27.75.  The weighted-average fair value of options granted in the third quarter of fiscal 2012 was $20.69.  No options were granted in the second quarter of fiscal 2012.

 

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Table of Contents

 

The total intrinsic value of options exercised during the three and nine months ended June 30, 2012 was $0.6 million and $11.8 million, respectively.

 

As of June 30, 2012, the unrecognized compensation cost related to stock options was $14.6 million which is expected to be recognized over a weighted-average period of 2.8 years.

 

RESTRICTED STOCK

 

Restricted stock awards consist of our common stock and are time vested over three to six years.  We recognize compensation expense on a straight-line basis over the vesting period.  The fair value of restricted stock awards under the 2010 Plan is determined based on the closing price of our shares on the grant date.  As of June 30, 2012, there was $15.6 million of total unrecognized compensation cost related to unvested restricted stock awards which is expected to be recognized over a weighted-average period of 2.8 years.

 

A summary of the status of our restricted stock awards as of June 30, 2012 and changes in restricted stock outstanding during the nine months then ended is presented below:

 

 

 

Nine Months Ended

 

 

 

June 30, 2012

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Shares

 

Grant-Date

 

Restricted Stock Awards

 

(in thousands)

 

Fair Value

 

 

 

 

 

 

 

Unvested at October 1, 2011

 

323

 

$

42.38

 

Granted

 

244

 

59.76

 

Vested (1)

 

(119

)

40.21

 

Forfeited

 

(18

)

49.47

 

Unvested at June 30, 2012

 

430

 

$

52.53

 

 


(1)         The number of restricted stock awards vested includes shares that we withheld on behalf of our employees to satisfy the statutory tax withholding requirements.

 

9.              Debt

 

At June 30, 2012 and September 30, 2011, we had the following unsecured long-term debt outstanding (in thousands):

 

 

 

June 30,

 

September 30,

 

 

 

2012

 

2011

 

Unsecured intermediate debt issued August 15, 2002:

 

 

 

 

 

Series C, due August 15, 2012, 6.46%

 

$

75,000

 

$

75,000

 

Series D, due August 15, 2014, 6.56%

 

75,000

 

75,000

 

Unsecured senior notes issued July 21, 2009:

 

 

 

 

 

Due July 21, 2012, 6.10%

 

40,000

 

40,000

 

Due July 21, 2013, 6.10%

 

40,000

 

40,000

 

Due July 21, 2014, 6.10%

 

40,000

 

40,000

 

Due July 21, 2015, 6.10%

 

40,000

 

40,000

 

Due July 21, 2016, 6.10%

 

40,000

 

40,000

 

 

 

$

350,000

 

$

350,000

 

Less long-term debt due within one year

 

115,000

 

115,000

 

Long-term debt

 

$

235,000

 

$

235,000

 

 

The intermediate unsecured debt outstanding at June 30, 2012 matures over a period from August 2012 to August 2014 and carries a weighted-average interest rate of 6.53 percent, which is paid semi-annually.  The terms require that we maintain a minimum ratio of debt to total capitalization of less than 55 percent.  The debt is held by various entities, including $3 million held by a company affiliated with one of our Board members.

 

We have $200 million senior unsecured fixed-rate notes that mature over a period from July 2012 to July 2016.  Interest on the notes is paid semi-annually based on an annual rate of 6.10 percent.  We will make five equal annual principal repayments of $40 million, the first of which was made July 20, 2012.  We have complied with our financial covenants which require us to maintain a funded leverage ratio of less than 55 percent and an interest coverage ratio (as defined) of not less than 2.50 to 1.00.

 

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Table of Contents

 

During the second quarter of fiscal 2012, five stand-by letters of credit totaling $3.0 million were issued by a bank on behalf of the Company to support customs and transportation guaranties that were required to move a rig between two international locations.  At June 30, 2012, two of these stand-by letters of credit, totaling $0.6 million remained outstanding.  During the third quarter of fiscal 2012, a bank issued a $0.2 million letter of credit on behalf of the Company to guarantee payment of certain expenses incurred by an international transportation vendor.  The $0.2 million was also outstanding at June 30, 2012.

 

On May 25, 2012, we entered into an agreement with a multi-bank syndicate for a $300 million unsecured revolving credit facility that will mature May 2017.  We anticipate that the majority of any borrowings under the facility will accrue interest at a spread over the London Interbank Offered Rate (LIBOR).  We will also pay a commitment fee based on the unused balance of the facility.  Borrowing spreads as well as commitment fees are determined according to a scale based on a ratio of our total debt to total capitalization.  The LIBOR spread ranges from 1.125 percent to 1.75 percent per annum and commitment fees range from .15 percent to .35 percent per annum.  Based on our debt to total capitalization on June 30, 2012, the LIBOR spread and commitment fees would be 1.125 percent and .15 percent, respectively.  Financial covenants in the facility require us to maintain a funded leverage ratio (as defined) of less than 50 percent and an interest coverage ratio (as defined) of not less than 3.00 to 1.00.  The 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.  As of June 30, 2012, there were no borrowings or letters of credit outstanding.

 

Our $400 million senior unsecured credit facility matured in December 2011 and was allowed to expire.  During the first fiscal quarter of 2012, we funded two collateral trusts totaling $26.1 million and terminated two letters of credit.  The two collateral trusts are classified as restricted cash and are included in prepaid expense and other in the Consolidated Condensed Balance Sheet at June 30, 2012.

 

10.  Income Taxes

 

Our effective tax rate for the first nine months of fiscal 2012 and 2011 was 36.2 percent and 37.2 percent, respectively.  Our effective tax rate for the three months ended June 30, 2012 and 2011 was 35.1 percent and 36.5 percent, respectively.  The effective rate differs from the U.S. federal statutory rate of 35.0 percent primarily due to state and foreign taxes.

 

For the next 12 months, we cannot predict with certainty whether we will achieve ultimate resolution of any uncertain tax position associated with our international operations that could result in increases or decreases of our unrecognized tax benefits.  However, we believe it is reasonably possible that the reserve for uncertain tax positions may increase by approximately $7.0 million to $9.0 million during the next 12 months due to an international matter.

 

11.  Commitments and Contingencies

 

In conjunction with our current drilling rig construction program, purchase commitments for equipment, parts and supplies of approximately $271.3 million are outstanding at June 30, 2012.

 

Various legal actions, the majority of which arise in the ordinary course of business, are pending.  We maintain insurance against certain business risks subject to certain deductibles.  None of these legal actions are expected to have a material adverse effect on our financial condition, cash flows or results of operations.

 

We are contingently liable to sureties in respect of bonds issued by the sureties in connection with certain commitments entered into by us in the normal course of business.  We have agreed to indemnify the sureties for any payments made by them in respect of such bonds.

 

During the ordinary course of our business, contingencies arise resulting from an existing condition, situation, or set of circumstances involving an uncertainty as to the realization of a possible gain contingency.  We account for gain contingencies in accordance with the provisions of ASC 450, Contingencies, and, therefore, we do not record gain contingencies and recognize income until realized.  As discussed in Note 2, Discontinued Operations, property and equipment of our Venezuelan subsidiary was seized by the Venezuelan government on June 30, 2010.  Our wholly-owned subsidiaries, Helmerich & Payne International Drilling Co. and Helmerich & Payne de Venezuela, C.A., filed a lawsuit in the United States District Court for the District of Columbia on September 23, 2011 against the Bolivarian Republic of Venezuela, Petroleos de Venezuela, S.A. (“Petroleo”) and PDVSA Petroleo, S.A. (“PDVSA”). Our subsidiaries seek damages for the taking of their Venezuelan drilling business in violation of international law and for breach of contract.  Additionally, we are participating in an arbitration against a third party not affiliated with the Venezuelan government, Petroleo or PDVSA in an attempt to collect an aggregate $50 million relating to the seizure of our property in Venezuela.  While there exists the possibility of realizing a recovery, we are currently unable to determine the timing or amounts we may receive, if any, or the likelihood of recovery.  No gain contingencies are recognized in our Consolidated Financial Statements.

 

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Table of Contents

 

Subsequent to June 30, 2012, we signed an agreement to settle an arbitration dispute with an additional third party not affiliated with the Venezuelan government, Petroleo or PDVSA related to the seizure of our property in Venezuela.  Proceeds of $7.5 million were received subsequent to June 30, 2012 and will be recorded as discontinued operations in the Consolidated Statement of Income in the fourth quarter of fiscal 2012.

 

12.       Segment Information

 

We operate principally in the contract drilling industry. Our contract drilling business includes the following reportable operating segments: U.S. Land, Offshore, and International Land.  The contract drilling operations consist mainly of contracting Company-owned drilling equipment primarily to large oil and gas exploration companies.  Our primary international areas of operation include Colombia, Ecuador, Argentina, Tunisia, Bahrain and other South American countries. The International Land operations have similar services, have similar types of customers, operate in a consistent manner and have similar economic and regulatory characteristics.  Therefore, we have aggregated our international operations into a single reportable segment.  Each reportable segment is a strategic business unit which is managed separately. Other includes non-reportable operating segments.  Revenues included in Other consist primarily of rental income.  Consolidated revenues and expenses reflect the elimination of all material intercompany transactions.

 

We evaluate segment performance based on income or loss from operations (segment operating income) before income taxes which includes:

·                  revenues from external and internal customers

·                  direct operating costs

·                  depreciation and

·                  allocated general and administrative costs

but excludes corporate costs for other depreciation, income from asset sales and other corporate income and expense.

 

Certain general and administrative costs are allocated to the segments based primarily on specific identification and, to the extent that such identification is not practical, on other methods which we believe to be a reasonable reflection of the utilization of services provided.

 

Segment operating income is a non-GAAP financial measure of our performance, as it excludes general and administrative expenses, corporate depreciation, income from asset sales and other corporate income and expense.  We consider segment operating income to be an important supplemental measure of operating performance by presenting trends in our core businesses.  We use this measure to facilitate period-to-period comparisons in operating performance of our reportable segments in the aggregate by eliminating items that affect comparability between periods.  We believe that segment operating income is useful to investors because it provides a means to evaluate the operating performance of the segments on an ongoing basis using criteria that are used by our internal decision makers.  Additionally, it highlights operating trends and aids analytical comparisons.  However, segment operating income has limitations and should not be used as an alternative to operating income or loss, a performance measure determined in accordance with GAAP, as it excludes certain costs that may affect our operating performance in future periods.

 

16



Table of Contents

 

Summarized financial information of our reportable segments for the nine months ended June 30, 2012, and 2011, is shown in the following tables:

 

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income (Loss)

 

June 30, 2012

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

1,983,369

 

$

 

$

1,983,369

 

$

670,349

 

Offshore

 

135,830

 

 

135,830

 

29,742

 

International Land

 

192,305

 

 

192,305

 

13,240

 

 

 

2,311,504

 

 

2,311,504

 

713,331

 

Other

 

10,851

 

629

 

11,480

 

(5,782

)

 

 

2,322,355

 

629

 

2,322,984

 

707,549

 

Eliminations

 

 

(629

)

(629

)

 

Total

 

$

2,322,355

 

$

 

$

2,322,355

 

$

707,549

 

 

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income (Loss)

 

June 30, 2011

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

1,511,649

 

$

 

$

1,511,649

 

$

499,482

 

Offshore

 

150,022

 

 

150,022

 

33,420

 

International Land

 

169,689

 

 

169,689

 

16,186

 

 

 

1,831,360

 

 

1,831,360

 

549,088

 

Other

 

11,783

 

627

 

12,410

 

(5,044

)

 

 

1,843,143

 

627

 

1,843,770

 

544,044

 

Eliminations

 

 

(627

)

(627

)

 

Total

 

$

1,843,143

 

$

 

$

1,843,143

 

$

544,044

 

 

Summarized financial information of our reportable segments for the three months ended June 30, 2012, and 2011, is shown in the following tables:

 

 

 

 

 

 

 

 

 

Segment

 

 

 

External

 

Inter-

 

Total

 

Operating

 

(in thousands)

 

Sales

 

Segment

 

Sales

 

Income (Loss)

 

June 30, 2012

 

 

 

 

 

 

 

 

 

Contract Drilling:

 

 

 

 

 

 

 

 

 

U.S. Land

 

$

706,786

 

$

 

$

706,786

 

$

235,684

 

Offshore

 

41,617

 

 

41,617

 

7,720

 

International Land

 

67,482

 

 

67,482

 

6,275

 

 

 

815,885

 

 

815,885

 

249,679

 

Other

 

3,900

 

209

 

4,109

 

(2,161

)

 

 

819,785

 

209

 

819,994

 

247,518

 

Eliminations