Edgar Filing: HELMERICH & PAYNE INC

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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: March 31, 2010

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 April 30, 2010
Common Stock, $0.10 par value		105,731,170

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 March 31, 2010 and September 30, 2009	3

	Consolidated Condensed Statements of Income for the Three and Six Months Ended March 31, 2010 and 2009	4

	Consolidated Condensed Statements of Cash Flows for the Six Months Ended March 31, 2010 and 2009	5

	Consolidated Condensed Statement of Shareholders’ Equity for the Six Months Ended March 31, 2010	6

	Notes to Consolidated Condensed Financial Statements	7-22

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23-33

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34

Item 4.	Controls and Procedures	34

PART II.	OTHER INFORMATION

Item 1A.	Risk Factors	35

Item 6.	Exhibits	36

Signatures		37

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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

	March 31,			September 30,
	2010			2009
ASSETS
Current assets:
Cash and cash equivalents	$	125,712		$	141,486
Short-term investments	—			12,500
Accounts receivable, less reserve of $631 at March 31, 2010 and $659 at September 30, 2009	288,647			246,790
Inventories	45,904			44,723
Deferred income taxes	18,652			12,861
Assets held for sale	—			1,023
Prepaid expenses and other	71,455			63,549
Total current assets	550,370			522,932

Investments	355,654			356,404
Property, plant and equipment, net	3,285,139			3,265,907
Other assets	14,476			15,781

Total assets	$	4,205,639		$	4,161,024

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	55,994		$	70,218
Accrued liabilities	126,939			126,688
Short-term debt	—			105,000
Total current liabilities	182,933			301,906

Noncurrent liabilities:
Long-term debt	440,000			420,000
Deferred income taxes	710,671			681,542
Other	77,240			74,567
Total noncurrent liabilities	1,227,911			1,176,109

Shareholders’ equity:
Common stock, $.10 par value, 160,000,000 shares authorized,107,057,904 shares issued as of March 31, 2010 and September 30, 2009 and 105,716,278 and 105,486,218 shares outstanding as of March 31, 2010 and September 30, 2009, respectively	10,706			10,706
Preferred stock, no par value, 1,000,000 shares authorized, no shares issued	—			—
Additional paid-in capital	185,349			176,039
Retained earnings	2,514,320			2,414,942
Accumulated other comprehensive income	112,255			112,451
Treasury stock, at cost	(27,835		)	(31,129		)
Total shareholders’ equity	2,794,795			2,683,009

Total liabilities and shareholders’ equity	$	4,205,639		$	4,161,024

The accompanying notes are an integral part of these statements.

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share data)

	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2010			2009			2010			2009

Operating revenues:
Drilling — U.S. Land	$	324,439		$	414,514		$	609,508		$	889,718
Drilling — Offshore	47,765			51,331			100,055			101,819
Drilling — International Land	64,681			51,829			124,079			147,007
Other	2,840			2,626			5,926			5,510
	439,725			520,300			839,568			1,144,054
Operating costs and other:
Operating costs, excluding depreciation	271,509			263,294			484,202			594,222
Depreciation	65,795			57,113			128,598			111,885
General and administrative	20,844			16,434			41,688			31,582
Research and development	3,342			2,176			5,157			3,853
Gain from involuntary conversion of long-lived assets	—			—			—			(277		)
Income from asset sales	(1,309		)	(2,055		)	(2,007		)	(2,969		)
	360,181			336,962			657,638			738,296
Operating income	79,544			183,338			181,930			405,758
Other income (expense):
Interest and dividend income	329			2,150			768			3,936
Interest expense	(4,207		)	(2,554		)	(8,901		)	(6,254		)
Other	(432		)	(28		)	(417		)	100
	(4,310		)	(432		)	(8,550		)	(2,218		)
Income before income taxes and equity in income of affiliate	75,234			182,906			173,380			403,540

Income tax provision	28,487			83,390			63,398			164,638
Equity in income of affiliate net of income taxes	—			4,222			—			10,111

NET INCOME	$	46,747		$	103,738		$	109,982		$	249,013

Earnings per common share:
Basic	$	0.44		$	0.98		$	1.04		$	2.36
Diluted	$	0.43		$	0.98		$	1.02		$	2.34

Weighted average shares outstanding:
Basic	105,711			105,317			105,642			105,283
Diluted	107,484			106,197			107,349			106,279

Dividends declared per common share	$	0.050		$	0.050		$	0.100		$	0.100

The accompanying notes are an integral part of these statements.

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Six Months Ended
	March 31,
	2010			2009

OPERATING ACTIVITIES:
Net income	$	109,982		$	249,013
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	128,598			111,885
Provision for bad debt	3			15
Equity in income of affiliate before income taxes	—			(16,308		)
Stock-based compensation	9,925			4,238
Other	92			—
Gain from involuntary conversion of long-lived assets	—			(277		)
Income from asset sales	(2,007		)	(2,969		)
Deferred income tax expense	23,673			115,237
Change in assets and liabilities-
Accounts receivable	(41,860		)	1,819
Inventories	(1,181		)	(8,577		)
Prepaid expenses and other	(6,636		)	5,716
Accounts payable	(5,982		)	15,008
Accrued liabilities	(11,587		)	9,552
Deferred income taxes	(198		)	6,942
Other noncurrent liabilities	3,110			(806		)
Net cash provided by operating activities	205,932			490,488

INVESTING ACTIVITIES:
Capital expenditures	(142,737		)	(525,884		)
Insurance proceeds from involuntary conversion	—			277
Proceeds from sale of short-term investments	12,516			—
Proceeds from asset sales	3,950			4,333
Purchase of short-term investments	(16		)	(12,500		)
Other	—			(16		)
Net cash used in investing activities	(126,287		)	(533,790		)

FINANCING ACTIVITIES:
Decrease in notes payable	—			(1,733		)
Proceeds from line of credit	710,000			2,030,000
Payments on line of credit	(795,000		)	(1,970,000		)
Decrease in bank overdraft	(2,038		)	—
Dividends paid	(10,587		)	(10,548		)
Proceeds from exercise of stock options	309			429
Excess tax benefit from stock-based compensation	1,897			19
Net cash provided by (used in) financing activities	(95,419		)	48,167

Net increase (decrease) in cash and cash equivalents	(15,774		)	4,865
Cash and cash equivalents, beginning of period	141,486			121,513
Cash and cash equivalents, end of period	$	125,712		$	126,378

The accompanying notes are an integral part of these statements.

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY

SIX MONTHS ENDED MARCH 31, 2010

(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, 2009	107,058	$	10,706	$	176,039		$	2,414,942		$	112,451		1,572		$	(31,129	)	$	2,683,009

Comprehensive Income:
Net income							109,982											109,982
Other comprehensive income:
Unrealized losses on available-for-sale securities										(866		)						(866		)
Amortization of net periodic benefit costs-net of actuarial gain										670								670
Total comprehensive income																		109,786

Cash dividends ($0.10 per share)							(10,604		)									(10,604		)
Exercise of stock options				(1,540		)							(160	)	1,849			309
Tax benefit of stock-based awards, including excess tax benefits of $1.9 million				2,370														2,370
Treasury stock issued for vested restricted stock				(1,445		)							(70	)	1,445			—
Stock-based compensation				9,925														9,925

Balance, March 31, 2010	107,058	$	10,706	$	185,349		$	2,514,320		$	112,255		1,342		$	(27,835	)	$	2,794,795

The accompanying notes are an integral part of these statements.

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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 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 accounting principles generally accepted in the United States for complete financial statements and, therefore should be read in conjunction with the Consolidated Financial Statements and notes thereto in our 2009 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.

The adoption of the guidance contained in Accounting Standards Codification (“ASC”) 260-10-45, Earnings per Share, discussed below in Note 2 changed the calculation of basic earnings per share requiring restricted stock grants that have previously been included in our diluted weighted-average shares to be included in basic weighted-average shares. Earnings per share for the three and six months ended March 31, 2009 has been recalculated to conform to the current year presentation.

As more fully described in our 2009 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 term, 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. Earnings per Share

Effective October 1, 2009, we adopted the guidance contained in ASC 260-10-45, Earnings per Share. ASC 260-10-45 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in ASC 260-10-45. ASC 260-10-45 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 and non-employee directors that contain non-forfeitable rights to dividend. Such grants are considered participating securities under ASC 260-10-45. As such, we are required to include these grants in the calculation of our basic earnings per share and will need to calculate basic earnings per share using the two-class method. Restricted stock grants have previously been included in our dilutive earnings per share calculation using the treasury stock 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. Since the adoption of ASC 260-10-45 is to be applied

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

retrospectively, the earnings per share for the prior period have been recalculated to conform to the current year presentation. As a result, the number of shares used to compute earnings per share changed. For the three and six months ended March 31, 2009, basic earnings per share was reduced $0.01 from previously disclosed amounts. For the three and six months ended March 31, 2009, diluted earnings per share was not impacted by the adoption.

Basic net income 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 net income 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.

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

	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2010			2009			2010			2009

Numerator:
Net income	$	46,747		$	103,738		$	109,982		$	249,013
Earnings allocated to unvested shareholders	(127		)	(174		)	(267		)	(454		)
Numerator for basic earnings per share	46,620			103,564			109,715			248,559
Effect of reallocating undistributed earnings of unvested shareholders	2			1			4			4
Numerator for diluted earnings per share	$	46,622		$	103,565		$	109,719		$	248,563

Denominator:
Denominator for basic earnings per share - weighted-average shares	105,711			105,317			105,642			105,283
Effect of dilutive shares from stock options and restricted stock	1,773			880			1,707			996
Denominator for diluted earnings per share - adjusted weighted-average shares	107,484			106,197			107,349			106,279

Earnings per common shares:
Basic	$	0.44		$	0.98		$	1.04		$	2.36
Diluted	$	0.43		$	0.98		$	1.02		$	2.34

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

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

	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2010		2009		2010		2009

Shares excluded from calculation of diluted earnings per share	556		2,705		570		1,869
Weighted-average price per share	$	38.02	$	27.89	$	38.02	$	30.95

3. Operations and Risks in Venezuela

We continue to record revenue in Venezuela as cash is collected from Petroleos de Venezuela, S.A. (PDVSA) as more fully described in Note 14 of the Consolidated Financial Statements in our Annual Report on Form 10-K for fiscal year ended September 30, 2009. As adjusted for the January 2010 currency devaluation discussed below, the amount of revenue that has not been recognized since the end of the first quarter of fiscal 2009 and will be recognized upon collection is approximately $39.5 million. Revenue to be recognized will be offset by approximately 14 percent of associated expenses. During the second quarter of fiscal 2010, we received approximately $6.3 million (U.S. dollars and U.S. currency equivalent). Approximately 55 percent of this amount corresponded to accounts receivable at the end of the first quarter of fiscal 2009 and the remainder to invoices issued for work performed after the first quarter of fiscal 2009. At March 31, 2010, the Consolidated Condensed Balance Sheet includes accounts receivable from PDVSA of $8.4 million adjusted for the January 2010 currency devaluation discussed below. We do not have enough information to conclude that this remaining receivable balance is not probable of collection. However, there continues to be uncertainty regarding the timing of the collection due to the current political, economic and social instability in Venezuela, the dependence by Venezuela on oil to largely support its economy and the failure of PDVSA to pay many service companies working in Venezuela. We proactively continue efforts to collect unpaid invoice amounts. Subsequent to the quarter ended March 31, 2010, payments from PDVSA reduced the accounts receivable balance by approximately $3.1 million (U.S. currency equivalent) and resulted in approximately $1.2 million revenue which will be recognized during the third quarter of fiscal 2010.

At March 31, 2010, all eleven rigs that formerly worked for PDVSA in Venezuela were idle. We continue to pursue future drilling opportunities for these eleven rigs but we do not expect to commit to new contracts until additional progress is made on pending receivable collections and on conversion of local currency to U.S. dollars. At March 31, 2010, the net book value of long-lived assets in Venezuela was $67.4 million.

In addition to the outstanding accounts receivable above, PDVSA has unilaterally paid U.S. dollar invoices in bolivar fuerte (Bsf) which increases our exposure to foreign currency devaluation. We have provided all supporting documentation to PDVSA and await approval from them to exchange those payments to U.S. dollars. The approval and subsequent payment would result in reducing the foreign currency exposure. We are unable to determine when payment will be received.

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

On January 8, 2010, the Venezuelan government devalued its currency and established a two-tier exchange structure. The official exchange rate has been devalued from 2.15 Bsf to each U.S. dollar to 4.30 for non-essential goods and services and to 2.60 for essential goods. Our drilling services fall into the non-essential classification. As a result of the devaluation, we recorded an exchange loss of approximately $19.7 million in operating costs during the second quarter of fiscal 2010.

We have, since July 22, 2008, had an outstanding application with the Venezuelan government requesting approval to convert Bsf cash balances to U.S. dollars. When and if we receive approval from the Venezuelan government, our Venezuelan subsidiary will remit approximately $14.2 million, adjusted for the January 2010 currency devaluation, as a dividend to its U.S. based parent as cash balances permit. While we have been successful in the past in obtaining government approval for conversion of Bsf to U.S. dollars, there is no guarantee that future conversion to U.S. dollars will be permitted. In the event that conversion to U.S. dollars would be prohibited, then Bsf cash balances could increase and we would be exposed to increased risk of devaluation.

Readers should refer to Note 15 of these Consolidated Condensed Financial Statements for additional information related to risk factors in international operations.

4. Inventories

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

5. Financial Instruments and Fair Value Measurement

The estimated fair value of our available-for-sale securities is primarily 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 03/31/10	$	129,183	$	209,255	$	—	$	338,438
Equity securities 09/30/09	$	129,183	$	210,640	$	—	$	339,823

On an on-going basis, we evaluate the marketable equity securities to determine if a decline in fair market 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 six months of fiscal 2010 and 2009.

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Investments in limited partnerships carried at cost were approximately $12.4 million at March 31, 2010 and September 30, 2009. The estimated fair value of the limited partnerships was $20.7 million and $19.7 million at March 31, 2010 and September 30, 2009, respectively. The estimated fair value exceeded the cost of investments at March 31, 2010 and September 30, 2009 and, as such, the investments were not impaired.

Assets held in the Non-qualified Supplemental Savings Plan are carried at fair market value which totaled $4.8 million at March 31, 2010 and $4.2 million at September 30, 2009, respectively.

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.

During the second quarter of fiscal 2010, a $12.5 million bank certificate of deposit with an original maturity greater than three months matured. Interest earned is included in interest and dividend income on the Consolidated Condensed Statement of Income.

On October 1, 2009, we implemented the previously deferred provisions of ASC 820, Fair Value Measurements and Disclosures, for nonfinancial assets and liabilities recorded at fair value, as required. Additionally, we adopted Accounting Standards Update No. 2009-05, Measuring Liabilities at Fair Value (ASU 2009-05), which provided amendments to ASC 820 for the fair value measurements of liabilities when a quoted price in an active market is not available. On December 15, 2009, we adopted the disclosure requirements in ASU 2009-06, Fair Value Measurements and Disclosures (Topic 820)-Improving Disclosures about Fair Value Measurements, requiring that information be provided about movements of assets among Levels 1 and 2 of the three-tier fair value hierarchy discussed below. The adoption of these pronouncements had no impact on these Consolidated Condensed Financial Statements.

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.

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

At March 31, 2010, 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. For these items, quoted current market prices are readily available.

At March 31, 2010, financial instruments utilizing level 2 inputs include bank certificates of deposit included in other current assets.

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

The following table summarizes our assets measured at fair value on a recurring basis presented in our Consolidated Condensed Balance Sheet as of March 31, 2010:

			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	$	125,712	$	125,712	$	—	$	—
Equity securities	338,438		338,438		—		—
Other current assets	11,495		11,245		250		—
Other assets	2,000		2,000		—		—
Total assets measured at fair value	$	477,645	$	477,395	$	250	$	—

The following information presents the supplemental fair value information about long-term fixed-rate debt at March 31, 2010 and September 30, 2009:

	March 31,		September 30,
	2010		2009
	(in thousands)

Carrying value of long-term fixed-rate debt	$	350.0	$	350.0
Fair value of long-term fixed-rate debt	$	375.0	$	380.9

The fair value for fixed-rate debt was estimated using discounted cash flows and interest rates currently being offered on credits with similar maturities and credit profiles. The outstanding line of credit and short-term debt bear interest at market rates and the cost of borrowings, if any, would approximate fair value.

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

6. Comprehensive Income

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

	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2010			2009			2010			2009
Net Income	$	46,747		$	103,738		$	109,982		$	249,013
Other comprehensive income:
Unrealized depreciation on securities	(11,337		)	(1,654		)	(1,385		)	(36,252		)
Income taxes	4,251			628			519			13,775
	(7,086		)	(1,026		)	(866		)	(22,477		)
Minimum pension liability adjustments	536			—			1,072			—
Income taxes	(200		)	—			(402		)	—
	336			—			670			—
Total comprehensive income	$	39,997		$	102,712		$	109,786		$	226,536

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

	March 31,			September 30,
	2010			2009
Unrealized appreciation on securities	$	129,731		$	130,597
Unrecognized actuarial loss and prior service cost	(17,476		)	(18,146		)
Accumulated other comprehensive income	$	112,255		$	112,451

7. Derivative Financial Instruments

We are exposed to market risk in the normal course of business operations due to ongoing investing and financing activities. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. ASC 815, Derivatives and Hedging, requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. We have not historically entered into derivative financial instruments for trading purposes or for speculation. For further information regarding our disclosures of an interest rate swap that expired in January 2010, refer to Note 10, Debt of these Consolidated Condensed Financial Statements.

8. Cash Dividends

The $0.05 cash dividend declared December 1, 2009, was paid March 1, 2010. On March 3, 2010, a cash dividend of $0.05 per share was declared for shareholders of record on May 14, 2010, payable June 1, 2010. The dividend payable is included in accounts payable in the Consolidated Condensed Balance Sheet.

9. Stock-Based Compensation

We have one plan providing for common-stock based awards to employees and to non-employee Directors. The plan permits the granting of various types of awards including stock options and restricted stock. 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 the market price of the underlying stock on the date of grant. Stock options expire ten years after the grant date.

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Vesting requirements are determined by the Human Resources Committee of our Board of Directors. Readers should refer to Note 5 of the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009 for additional information related to stock-based compensation.

We use the Black-Scholes formula to estimate the value of stock options granted. The fair value of the options is amortized to compensation expense on a straight-line basis over the requisite service periods of the stock awards, which are generally the vesting periods. We have the right to satisfy option exercises from treasury shares and from authorized but unissued shares.

On December 1, 2009, the plan was amended to provide for continued vesting (and accelerated vesting upon death) of restricted stock and stock options effective upon a participant becoming retirement eligible. A participant meets the definition of retirement eligible if the participant attains age 55 and has 15 or more years of continuous service as a full-time employee. The plan amendments apply retroactively. As a result of the continued vesting provisions, we incurred additional compensation cost of approximately $4.9 million for the six months ended March 31, 2010.

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

	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2010		2009		2010		2009
Compensation expense
Stock options	$	1,912	$	1,677	$	7,588	$	3,514
Restricted stock	1,005		361		2,337		724
	$	2,917	$	2,038	$	9,925	$	4,238

STOCK OPTIONS

The following summarizes the weighted-average assumptions utilized in determining the fair value of options granted during the six months ended March 31, 2010 and 2009:

	2010		2009
Risk-free interest rate	2.3	%	1.7	%
Expected stock volatility	49.9	%	43.4	%
Dividend yield	.5	%	.9	%
Expected term (in years)	5.8		5.8

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.

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

A summary of stock option activity under the Plan for the three and six months ended March 31, 2010 is presented in the following tables:

	Three Months Ended March 31, 2010
Options	Shares (in thousands)		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value (in millions)

Outstanding at January 1, 2010	5,788		$	22.56
Granted	—		—
Exercised	(43	)	21.73
Forfeited/Expired	—		—
Outstanding at March 31, 2010	5,745		$	22.56	5.7	$	89.1
Vested and expected to vest at March 31, 2010	5,677		$	22.45	5.6	$	88.7

Exercisable at March 31, 2010	4,059		$	19.44	4.5	$	75.7

	Six Months Ended March 31, 2010
Options	Shares (in thousands)		Weighted- Average Exercise Price

Outstanding at October 1, 2009	5,401		$	20.55
Granted	570		38.02
Exercised	(226	)	13.42
Forfeited/Expired	—		—
Outstanding at March 31, 2010	5,745		$	22.56

The weighted-average fair value of options granted in the first quarter of fiscal 2010 was $17.64. No options were granted in the second quarter of fiscal 2010.

The total intrinsic value of options exercised during the three and six months ended March 31, 2010 was $1.0 million and $6.5 million, respectively.

As of March 31, 2010, the unrecognized compensation cost related to the stock options was $13.8 million. That cost is expected to be recognized over a weighted-average period of 3.0 years.

RESTRICTED STOCK

Restricted stock grants consist of our common stock and are time vested over three to five years. Compensation expense is recognized on a straight-line basis over the vesting period. The fair value of restricted stock awards is determined based on the closing trading price of our shares on the grant date.

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

A summary of the status of the Company’s restricted stock awards as of March 31, 2010 and changes during the six months then ended is presented below:

	Six Months Ended March 31, 2010
Restricted Stock Awards	Shares (in thousands)		Weighted- Average Grant-Date Fair Value

Unvested at October 1,	177		$	30.06
Granted	182		38.02
Vested	(70	)	29.36
Forfeited	—		—
Unvested at March 31,	289		$	35.23

As of March 31, 2010, there was $6.8 million of total unrecognized compensation cost related to restricted stock granted under the Plan. That cost is expected to be recognized over a weighted-average period of 2.2 years.

10. Debt

At March 31, 2010 and September 30, 2009, we had the following unsecured long-term debt outstanding (in thousands):

	March 31, 2010		September 30, 2009

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
Unsecured senior credit facility due December 18, 2011, .58%-.59%	90,000		70,000
	$	440,000	$	420,000
Less long-term debt due within one year	—		—
Long-term debt	$	440,000	$	420,000

The terms of the fixed rate debt obligations require that we maintain a minimum ratio of debt to total capitalization.

We have $200 million senior unsecured fixed-rate notes that mature over a period from July 2012 to July 2016. Interest on the notes will be paid semi-annually based on an annual rate of 6.10 percent. We will make five equal annual principal repayments of $40 million starting on the third anniversary of the closing date. Financial covenants 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. The note purchase agreement also contains 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.

We have an agreement with a multi-bank syndicate for a $400 million senior unsecured credit facility maturing December 2011. While we have the option to borrow at the prime rate for maturities of less than 30 days, we anticipate that

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

the majority of all of the borrowings over the life of the facility will accrue interest at a spread over the London Interbank Bank Offered Rate (LIBOR). We pay a commitment fee based on the unused balance of the facility. The spread over LIBOR as well as the commitment fee is determined according to a scale based on a ratio of our total debt to total capitalization. The LIBOR spread ranges from .30 percent to ..45 percent over LIBOR depending on the ratios. At March 31, 2010, the LIBOR spread on borrowings was .35 percent and the commitment fee was .075 percent per annum. At March 31, 2010, we had two letters of credit totaling $21.9 million under the facility and had $90 million borrowed against the facility with $288.1 million available to borrow. The advances bore interest at an average rate of 0.59 percent at March 31, 2010. On January 19, 2010, we borrowed $75 million that was used to pay the $105 million unsecured line discussed below. Subsequent to March 31, 2010, we repaid $30 million and currently have $318.1 million available to borrow.

Financial covenants in the facility require we 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 facility contains 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 March 31, 2010, we were in compliance with all debt covenants.

In January 2010, a $105 million unsecured line of credit that matured was paid in full using operating cash flow and borrowings under the $400 million facility. At the same time, an interest rate swap with the same maturity and a notional amount of $105 million expired.

11. Income Taxes

Our effective tax rate for the first six months of fiscal 2010 and 2009 was 36.6 percent and 40.8 percent, respectively. The Company’s effective tax rate for the three months ended March 31, 2010 and 2009 was 37.9 percent and 45.6 percent, respectively. The effective rate differs from the U.S. federal statutory rate of 35.0 percent primarily due to state and foreign taxes.

It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain unrecognized tax positions will increase or decrease during the next 12 months; however, we do not expect the change to have a material effect on results of operations or financial position.

12. Contingent Liabilities and Commitments

In conjunction with our current drilling rig construction program, purchase commitments for equipment, parts and supplies of approximately $25.0 million are outstanding at March 31, 2010.

A lawsuit has been filed against us by a former customer for whom we performed drilling services with five rigs under term drilling contracts. The suit alleges, among other things, that we failed to perform drilling operations in accordance with good oilfield practice, breached express performance warranties, and made certain fraudulent representations regarding drilling performance. As a consequence, Plantiff has prayed for actual and punitive damages.

We have and will continue to vigorously defend this lawsuit, but the outcome remains uncertain. If we are unsuccessful in this litigation, then the amount of damages awarded could have a material adverse effect on our financial condition and results of operations.

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Various other 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.

13. 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, Mexico, Venezuela, Tunisia 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 Land operations into one reportable segment. Each reportable segment is a strategic business unit which is managed separately. Other includes non-reportable operating segments.

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.

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.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Summarized financial information of our reportable segments for the six months ended March 31, 2010, and 2009, is shown in the following tables:

(in thousands)	External Sales		Inter- Segment			Total Sales			Segment Operating Income (Loss)
March 31, 2010
Contract Drilling:
U.S. Land	$	609,508	$	—		$	609,508		$	182,246
Offshore	100,055		—			100,055			28,731
International Land	124,079		—			124,079			(2,320		)
	833,642		—			833,642			208,657
Other	5,926		410			6,336			(3,217		)
	839,568		410			839,978			205,440
Eliminations	—		(410		)	(410		)	—
Total	$	839,568	$	—		$	839,568		$	205,440

(in thousands)	External Sales		Inter- Segment			Total Sales			Segment Operating Income (Loss)
March 31, 2009
Contract Drilling:
U.S. Land	$	889,718	$	—		$	889,718		$	386,978
Offshore	101,819		—			101,819			30,547
International Land	147,007		—			147,007			7,346
	1,138,544		—			1,138,544			424,871
Other	5,510		441			5,951			(2,352		)
	1,144,054		441			1,144,495			422,519
Eliminations	—		(441		)	(441		)	—
Total	$	1,144,054	$	—		$	1,144,054		$	422,519

Summarized financial information of our reportable segments for the three months ended March 31, 2010, and 2009, is shown in the following tables:

(in thousands)	External Sales		Inter- Segment			Total Sales			Segment Operating Income (Loss)
March 31, 2010
Contract Drilling:
U.S. Land	$	324,439	$	—		$	324,439		$	90,723
Offshore	47,765		—			47,765			13,625
International Land	64,681		—			64,681			(10,723		)
	436,885		—			436,885			93,625
Other	2,840		205			3,045			(2,423		)
	439,725		205			439,930			91,202
Eliminations	—		(205		)	(205		)	—
Total	$	439,725	$	—		$	439,725		$	91,202

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(in thousands)	External Sales		Inter- Segment			Total Sales			Segment Operating Income (Loss)
March 31, 2009
Contract Drilling:
U.S. Land	$	414,514	$	—		$	414,514		$	192,930
Offshore	51,331		—			51,331			15,837
International Land	51,829		—			51,829			(15,282		)
	517,674		—			517,674			193,485
Other	2,626		218			2,844			(1,491		)
	520,300		218			520,518			191,994
Eliminations	—		(218		)	(218		)	—
Total	$	520,300	$	—		$	520,300		$	191,994

The following table reconciles segment operating income per the table above to income before income taxes and equity in income of affiliate as reported on the Consolidated Condensed Statements of Income.

	Three Months Ended March 31,						Six Months Ended March 31,
	2010			2009			2010			2009
	(in thousands)

Segment operating income	$	91,202		$	191,994		$	205,440		$	422,519
Gain from involuntary conversion of long-lived assets	—			—			—			277
Income from asset sales	1,309			2,055			2,007			2,969
Corporate general and administrative costs and corporate depreciation	(12,967		)	(10,711		)	(25,517		)	(20,007		)
Operating income	79,544			183,338			181,930			405,758
Other income (expense):
Interest and dividend income	329			2,150			768			3,936
Interest expense	(4,207		)	(2,554		)	(8,901		)	(6,254		)
Other	(432		)	(28		)	(417		)	100
Total other income (expense)	(4,310		)	(432		)	(8,550		)	(2,218		)
Income before income taxes and equity in income of affiliate	$	75,234		$	182,906		$	173,380		$	403,540

	March 31, 2010		September 30, 2009
	(in thousands)
Total Assets
U.S. Land	$	3,010,448	$	2,962,062
Offshore	154,368		129,465
International Land	489,565		491,807
Other	30,983		31,585
	3,685,364		3,614,919
Investments and Corporate Operations	520,275		546,105
Total	$	4,205,639	$	4,161,024

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

The following table presents revenues from external customers by country based on the location of service provided.

	Three Months Ended March 31,				Six Months Ended March 31,
	2010		2009		2010		2009
	(in thousands)
Operating revenues
United States	$	361,094	$	458,319	$	687,757	$	975,671
Venezuela	3,146		—		6,747		42,949
Colombia	13,463		23,596		29,951		43,054
Ecuador	13,444		13,781		25,986		26,773
Argentina	15,380		10,353		26,720		25,794
Other Foreign	33,198		14,251		62,407		29,813
Total	$	439,725	$	520,300	$	839,568	$	1,144,054

14. Pensions and Other Post-retirement Benefits

The following provides information at March 31, 2010 and 2009 related to the Company-sponsored domestic defined benefit pension plan.

Components of Net Periodic Benefit Cost

	Three Months Ended March 31,						Six Months Ended March 31,
	2010			2009			2010			2009
	(in thousands)

Interest Cost	$	1,194		$	1,217		$	2,388		$	2,434
Expected return on plan assets	(1,107		)	(1,147		)	(2,214		)	(2,294		)
Recognized net actuarial loss	536			—			1,072			—
Net pension expense	$	623		$	70		$	1,246		$	140

Employer Contributions

We contributed $1.5 million to the Pension Plan during the six months ended March 31, 2010 to fund distributions. We estimate contributing at least $3.0 million in fiscal 2010 to meet the minimum contribution required by law and expect to make additional contributions to continue funding distributions.

Foreign Plan

We maintain an unfunded pension plan in one of the international subsidiaries. Pension expense was approximately $122,000 and $90,000 for the three months ended March 31, 2010 and 2009, respectively. Pension expense was approximately $267,000 and $180,000 for the six months ended March 31, 2010 and 2009, respectively.

15. Risk Factors

International operations are subject to certain political, economic and other uncertainties not encountered in U.S. operations, including increased risks of terrorism, kidnapping of employees, expropriation of equipment as well as expropriation of a particular oil company operator’s property and drilling rights, taxation policies, foreign exchange restrictions, currency rate fluctuations and general hazards associated with foreign sovereignty over certain areas in which operations are conducted. There can be no assurance that there will not be changes in local laws, regulations and administrative requirements or the interpretation thereof which could have a material adverse effect on the profitability of our operations or on our ability to continue operations in certain areas. For additional information regarding risks in Venezuela, refer to Note 3 of these Consolidated Condensed Financial Statements.

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Effective January 1, 2010, Venezuela was designated hyper-inflationary, which is defined as cumulative inflation rates exceeding 100 percent in the most recent three-year period. All of our foreign subsidiaries use the U.S. dollar as the functional currency and local currency monetary assets are remeasured into U.S. dollars with gains and losses resulting from foreign currency transactions included in current results of operations. As such, the designation of Venezuela as hyper-inflationary will have no impact on our Consolidated Financial Statements.

16. Recently Issued Accounting Standards

ASC 715-20-65, Transition related to SFAS 132R-1, Employers’ Disclosures about Postretirement Benefit Plan Assets, was issued by the Financial Accounting Standards Board (“FASB”) in December 2008. The new guidance requires employers of public and nonpublic companies to disclose more information about how investment allocation decisions are made, more information about major categories of assets, including concentration of risk and fair-value measurements, and the fair-value techniques and inputs used to measure plan assets. The disclosure requirements are effective for annual financial statements for years ending after December 15, 2009. The disclosure requirements will be adopted for our annual financial statements for the year ended September 30, 2010, on a prospective basis. We do not expect the adoption to have a material impact on the Consolidated Financial Statements.

On January 21, 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements. Effective December 15, 2009, we adopted the disclosure requirements requiring reporting entities to provide information about movements of assets among Levels 1 and 2 of the three-tier fair value hierarchy established by ASC 820, Fair Value Measurements. The adoption had no impact on these Consolidated Condensed Financial Statements. Effective for fiscal years beginning after December 15, 2010, a reconciliation of purchases, sales, issuance, and settlements of financial instruments valued with a Level 3 method, which is used to price the hardest to value instruments, will be required. We currently believe the adoption related to Level 3 financial instruments will have no impact on the Consolidated Financial Statements.

In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events (Topic 855) — Amendments to Certain Recognition and Disclosure Requirements (“ASU 2010-09”). ASU 2010-09 reiterates that an SEC filer is required to evaluate subsequent events through the date that the financial statements are issued and removes the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated. The updated guidance was effective upon issuance and was adopted by us in the second quarter of fiscal 2010.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

March 31, 2010

RISK FACTORS AND FORWARD-LOOKING STATEMENTS

The following discussion should be read in conjunction with the Consolidated Condensed Financial Statements and related notes included elsewhere herein and the Consolidated Financial Statements and notes thereto included in our 2009 Annual Report on Form 10-K. Our future operating results may be affected by various trends and factors which are beyond our control. These include, among other factors, fluctuations in natural gas and crude oil prices, early termination of drilling contracts, forfeiture of early termination payments under fixed term contracts due to sustained unacceptable performance, unsuccessful collection of receivables (including Venezuelan receivables), inability to procure key rig components, failure to timely deliver rigs within applicable grace periods, disruption to or cessation of the business of our limited source vendors or fabricators, currency exchange losses, deterioration of credit markets, changes in general economic and political conditions, adverse weather conditions including hurricanes, rapid or unexpected changes in technologies, and uncertain business conditions that affect our businesses. Accordingly, past results and trends should not be used by investors to anticipate future results or trends. Our risk factors are more fully described in our 2009 Annual Report on Form 10-K and elsewhere in this Form 10-Q.

With the exception of historical information, the matters discussed in Management’s Discussion & Analysis of Financial Condition and Results of Operations include forward-looking statements. These forward-looking statements are based on various assumptions. We caution that, while we believe such assumptions to be reasonable and make them in good faith, assumptions about future events and conditions almost always vary from actual results. The differences between assumed facts and actual results can be material. We are including this cautionary statement to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by us or persons acting on our behalf. The factors identified in this cautionary statement are important factors (but not necessarily all important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us or persons acting on our behalf. We undertake no duty to update or revise our forward-looking statements based on changes of internal estimates on expectations or otherwise.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2010 vs. Three Months Ended March 31, 2009

We reported net income of $46.7 million ($0.43 per diluted share) from operating revenues of $439.7 million for the second quarter ended March 31, 2010, compared with net income of $103.7 million ($0.98 per diluted share) from operating revenues of $520.3 million for the second quarter of fiscal year 2009. Net income for the second quarter of fiscal 2010 includes approximately $0.8 million ($0.01 per diluted share) of after-tax gains from the sale of assets. Net income for the second quarter of fiscal 2009 includes approximately $1.2 million ($0.01 per diluted share) of after-tax gains from the sale of assets.

The following tables summarize operations by business segment for the three months ended March 31, 2010 and 2009. Operating statistics in the tables exclude the effects of offshore platform and international management contracts, and do not include reimbursements of “out-of-pocket” expenses in revenue, expense and margin per day calculations. Per day calculations for international operations also exclude gains and losses from translation of foreign currency transactions. Segment operating income is described in detail in Note 13 to the Consolidated Condensed Financial Statements.

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	Three Months Ended March 31,
	2010			2009
	(in thousands, except days and per day amounts)
U.S. LAND OPERATIONS
Revenues	$	324,439		$	414,514
Direct operating expenses	176,424			172,033
General and administrative expense	6,074			4,274
Depreciation	51,218			45,277
Segment operating income	$	90,723		$	192,930

Revenue days	13,114			12,529
Average rig revenue per day	$	23,382		$	31,384
Average rig expense per day	$	12,095		$	12,030
Average rig margin per day	$	11,287		$	19,354
Rig utilization	70		%	72		%

U.S. LAND segment operating income decreased to $90.7 million for the second quarter of fiscal 2010 compared to $192.9 million in the same period of fiscal 2009. Revenues were $324.4 million and $414.5 million in the second quarter of fiscal 2010 and 2009, respectively. Included in U.S. land revenues for the three months ended March 31, 2010 and 2009 are reimbursements for “out-of-pocket” expenses of $17.8 million and $21.3 million, respectively. Also included in U.S. land revenues for the second quarter of fiscal 2010 and 2009 is approximately $10.4 million and $81.5 million, respectively, attributable to early termination related revenue and customer requested delivery delay revenue for new FlexRigs® (hereinafter “FlexRig”).

The average revenue per day for the second quarter of fiscal 2010 compared to the second quarter of fiscal 2009 decreased $8,002 of which $5,712 is from a decrease in early termination related revenue in the comparable quarters. The remaining decrease of $2,290 is a result of lower average dayrates in the second quarter of fiscal 2010 compared to the second quarter of fiscal 2009.

U.S. land rig utilization decreased to 70 percent for the second quarter of fiscal 2010 compared to 72 percent for the second quarter of fiscal 2009. U.S. land rig activity days for the second quarter of fiscal 2010 were 13,114 compared with 12,529 for the same period of fiscal 2009, with an average of 145.7 and 139.2 rigs working during the second quarter of fiscal 2010 and 2009, respectively. The increase in rig days and average rigs working is attributable to the U.S. Land experiencing some recovery in the second quarter of fiscal 2010 compared to rigs becoming idle in the second quarter of fiscal 2009.

During fiscal 2009, the economic recession, including the decrease in oil and gas prices and deterioration in the credit markets, had an effect on customer spending. As a result, the industry’s active land drilling rig count in the U.S. land market declined by over fifty percent from the fall of 2008 to the summer of 2009. Since June 2009, the industry’s U.S. land rig count has been experiencing a steady recovery, but the rig count still remains about 30 percent below the peak level reported during the fall of 2008. At March 31, 2010, 154 out of 212 existing rigs in the U.S. Land segment were generating revenue. Of the 154 rigs generating revenue, 104 were under fixed term contracts, and 50 were working in the spot market. At April 29, 2010, the number of existing rigs under fixed term contracts in the segment increased to 109, and the number of rigs working in the spot market increased to 51.

Table of Contents

	Three Months Ended March 31,
	2010		2009
	(in thousands, except days and per day amounts)
OFFSHORE OPERATIONS
Revenues	$	47,765	$	51,331
Direct operating expenses	29,696		31,403
General and administrative expense	1,478		1,064
Depreciation