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: June 30, 2012

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

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HELMERICH & PAYNE, INC. AND SUBSIDIARIES

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		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

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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

	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.

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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.

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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.

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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.

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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 (“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.

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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.

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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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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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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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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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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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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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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.

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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	—		(209		)	(209		)	—
Total	$	819,785	$	—		$	819,785		$	247,518

	External		Inter-			Total			Segment Operating
(in thousands)	Sales		Segment			Sales			Income (Loss)
June 30, 2011
Contract Drilling:
U.S. Land	$	539,372	$	—		$	539,372		$	176,832
Offshore	54,569		—			54,569			12,944
International Land	46,051		—			46,051			(624		)
	639,992		—			639,992			189,152
Other	4,103		208			4,311			(2,078		)
	644,095		208			644,303			187,074
Eliminations	—		(208		)	(208		)	—
Total	$	644,095	$	—		$	644,095		$	187,074

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The following table reconciles segment operating income per the table above to income from continuing operations before income taxes as reported on the Consolidated Condensed Statements of Income.

	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
	(in thousands)						(in thousands)

Segment operating income	$	247,518		$	187,074		$	707,549		$	544,044
Income from asset sales	1,862			3,488			14,365			10,262
Corporate general and administrative costs and corporate depreciation	(16,725		)	(16,144		)	(51,695		)	(44,897		)
Operating income	232,655			174,418			670,219			509,409