Item 1. BUSINESS
Helmerich & Payne, Inc. (the "Registrant"), was incorporated under the laws of the State of Delaware on February 3, 1940, and is successor to a business originally organized in 1920. Registrant is primarily engaged in the exploration, production, and sale of crude oil and natural gas and in contract drilling of oil and gas wells for others. These activities account for the major portion of its operating revenues. The Registrant is also engaged in the ownership, development, and operation of commercial real estate.
The Registrant is organized into three separate autonomous operating divisions being contract drilling; oil & gas operations; and real estate. While there is a limited amount of intercompany activity, each division operates essentially independently of the others. Each of the divisions, except exploration and production, conducts their respective business through wholly owned subsidiaries. Operating decentralization is balanced by a centralized finance division, which handles all accounting, data processing, budgeting, insurance, cash management, and related activities.
Most of the Registrant's current exploration efforts are concentrated in Louisiana, Oklahoma, Texas, and the Hugoton Field of western Kansas. The Registrant also explores from time to time in the Rocky Mountain area, New Mexico, Alabama, Michigan, and Mississippi. Substantially all of the Registrant's gas production is sold to and resold by its marketing subsidiary. This subsidiary also purchases gas from unaffiliated third parties for resale.
The Registrant's domestic contract drilling is conducted primarily in Oklahoma, Texas, and Louisiana, and offshore from platforms in the Gulf of Mexico and offshore California. The Registrant has also operated during fiscal 1999 in six international locations: Venezuela, Ecuador, Colombia, Peru, Argentina and Bolivia. In the second quarter of fiscal 2000, the Registrant expects to operate a customer-owned offshore platform rig in Equatorial Guinea.
The Registrant's real estate investments are located in Tulsa, Oklahoma, where the Registrant has its executive offices.
CONTRACT DRILLING
The Registrant believes that it is one of the major land and offshore platform drilling contractors in the western hemisphere. Operating principally in North and South America, the Registrant specializes in deep drilling in major gas producing basins of the United States and in drilling for oil and gas in remote international areas. For its international operations, the Registrant operates certain rigs which are transportable by helicopter. In the United States, the Registrant draws its customers primarily from the major oil companies and the larger independents. The Registrant also drills for its own oil and gas division. In South America, the Registrant's current customers
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include the Venezuelan state petroleum company and major international oil companies.
In fiscal 1999, Registrant received approximately 57% of its consolidated revenues from the Registrant's ten largest contract drilling customers. BP Amoco and Shell Oil Co., including their affiliates, (respectively, "BPA" and "Shell") are the Registrant's two largest contract drilling customers. The Registrant performs drilling services for BPA and Shell on a world-wide basis. Revenues from drilling services performed for BPA and Shell in fiscal 1999 accounted for approximately 18% and 12%, respectively, of the Registrant's consolidated revenues for the same period. While the Registrant believes that its relationship with all of these customers is good, the loss of BPA or Shell or a simultaneous loss of several of its larger customers would have a material adverse effect on the drilling subsidiary and the Registrant.
The Registrant provides drilling rigs, equipment, personnel, and camps on a contract basis. These services are provided so that Registrant's customers may explore for and develop oil and gas from onshore areas and from fixed platforms in offshore areas. Each of the drilling rigs consists of engines, drawworks, a mast, pumps, blowout preventers, a drillstring, and related equipment. The intended well depth and the drilling site conditions are the principal factors that determine the size and type of rig most suitable for a particular drilling job. A land drilling rig may be moved from location to location without modification to the rig. Conversely, a platform rig is specifically designed to perform drilling operations upon a particular platform. While a platform rig may be moved from its original platform, significant expense is incurred to modify a platform rig for operation on each subsequent
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platform. In addition to traditional platform rigs, Registrant operates self- moving minimum space platform drilling rigs and drilling rigs to be used on tension leg platforms. The minimum space rig is designed to be moved without the use of expensive derrick barges. The tension leg platform rig allows drilling operations to be conducted in much deeper water than traditional fixed platforms. A helicopter rig is one that can be disassembled into component part loads of approximately 4,000-20,000 pounds and transported to remote locations by helicopter, cargo plane, or other means.
The Registrant's workover rigs are equipped with engines, drawworks, a mast, pumps, and blowout preventers. A workover rig is used to complete a new well after the hole has been drilled by a drilling rig, and to remedy various downhole problems that occur in producing wells.
The Registrant's drilling contracts are obtained through competitive bidding or as a result of negotiations with customers, and sometimes cover multi-well and multi-year projects. Each drilling rig operates under a separate drilling contract. Most of the contracts are performed on a "daywork" basis, under which the Registrant charges a fixed rate per day, with the price determined by the location, depth, and complexity of the well to be drilled, operating conditions, the duration of the contract, and the competitive forces of the market. The Registrant has previously performed contracts on a combination "footage" and "daywork" basis, under which the Registrant charged a fixed rate per foot of hole drilled to a stated depth, usually no deeper than 15,000 feet, and a fixed rate per day for the remainder of the hole. Contracts performed on a "footage" basis involve a greater element of risk to the contractor than do contracts performed on a "daywork" basis. Also, the
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Registrant has previously accepted "turnkey" contracts under which the Registrant charges a fixed sum to deliver a hole to a stated depth and agrees to furnish services such as testing, coring, and casing the hole which are not normally done on a "footage" basis. "Turnkey" contracts entail varying degrees of risk greater than the usual "footage" contract. Registrant has not accepted a "footage" or "turnkey" contract during fiscal 1999. The Registrant believes that under current market conditions "footage" and "turnkey" contract rates do not adequately compensate contractors for the added risks. The duration of the Registrant's drilling contracts are "well-to-well" or for a fixed term. "Well-to-well" contracts are cancelable at the option of either party upon the completion of drilling at any one site. Fixed-term contracts customarily provide for termination at the election of the customer, with an "early termination payment" to be paid to the contractor if a contract is terminated prior to the expiration of the fixed term.
While current fixed term contracts are for one to three year periods, some fixed term and well-to-well contracts are expected to be continued for longer periods than the original terms. However, the contracting parties have no legal obligation to extend the contracts. Contracts generally contain renewal or extension provisions exercisable at the option of the customer at prices mutually agreeable to the Registrant and the customer. In most instances contracts provide for additional payments for mobilization and demobilization. Contracts for work in foreign countries generally provide for payment in United States dollars, except for amounts required to meet local expenses. However, government owned petroleum companies are more frequently requesting that a
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greater proportion of these payments be made in local currencies. See Regulations and Hazards, page I-8.
Domestic Drilling
The Registrant believes it is a major land and offshore platform drilling contractor in the domestic market. At the end of September, 1999, the Registrant had 50 (40 land rigs and 10 platform rigs) of its rigs operating in the United States and had management contracts for two customer-owned rigs.
During fiscal 1999, four land rigs and one platform rig were relocated from the Registrant's operations in Venezuela to the Registrant's domestic operations. In November of 1999, Registrant returned one of such land rigs to Venezuela. In addition, one of the Registrant's older platform rigs was sold.
International Drilling
The Registrant's international drilling operations began in 1958 with the acquisition of the Sinclair Oil Company's drilling rigs in Venezuela. Helmerich & Payne de Venezuela, C.A., a wholly owned subsidiary of the Registrant, is one of the leading drilling contractors in Venezuela. Beginning in 1972, with the introduction of its first helicopter rig, the Registrant expanded into other Latin American countries.
Venezuelan operations continue to be a significant part of the Registrant's operations. At the end of fiscal 1999, the Registrant owned and operated 18 land drilling rigs in Venezuela with a utilization rate of 36% for such fiscal year. The Registrant worked for the Venezuelan State Petroleum Company during fiscal 1999, and revenues from this work accounted for approximately 6% of the Registrant's consolidated revenues during the fiscal year.
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Registrant's rig utilization rate in Venezuela has decreased from approximately 92% during the 1998 fiscal year to approximately 36% in fiscal 1999. This reduction in utilization is primarily due to curtailed production and development activities resulting from a reduction in worldwide oil prices. At this time, the Registrant is unable to predict future fluctuations in its utilization rates during fiscal 2000.
The Venezuelan government, in early 1996, permitted foreign exploration and production companies to acquire rights to explore for and produce oil and gas in Venezuela. Registrant has performed contract drilling services in Venezuela for six independent oil companies during fiscal 1999.
At the end of fiscal 1999, the Registrant owned and operated ten drilling rigs in Colombia. The Registrant's utilization rate was 71% during fiscal 1999. During fiscal 1999 the revenue generated by Colombian drilling operations contributed approximately 10.8% of the Registrant's consolidated revenues.
In addition to its operations in Venezuela and Colombia, the Registrant in fiscal 1999 owned and operated four rigs in Ecuador, five rigs in Bolivia, and two rigs in Argentina. In Ecuador, Bolivia and Argentina, the contracts are with large international oil companies.
Drilling operations ended during 1999 on a joint venture platform rig in Australia. The rig is owned 50% by the Registrant and 50% by Registrant's equity affiliate, Atwood Oceanics, Inc.
Competition
The contract drilling business is highly competitive. Competition in contract drilling involves such factors as price, rig availability, efficiency, condition of equipment, reputation, and customer relations. Competition is
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primarily on a regional basis and may vary significantly by region at any particular time. Land drilling rigs can be readily moved from one region to another in response to changes in levels of activity, and an oversupply of rigs in any region may result.
Although many contracts for drilling services are awarded based solely on price, the Registrant has been successful in establishing long-term relationships with certain customers which have allowed the Registrant to secure drilling work even though the Registrant may not have been the lowest bidder for such work. The Registrant has continued to attempt to differentiate its services based upon its engineering design expertise, operational efficiency, safety and environmental awareness.
Regulations and Hazards
The drilling operations of the Registrant are subject to the many hazards inherent in the business, including blowouts and well fires. These hazards could cause personal injury, suspend drilling operations, seriously damage or destroy the equipment involved, and cause substantial damage to producing formations and the surrounding areas.
The Registrant believes that it has adequate insurance coverage for comprehensive general liability, public liability, property damage (including insurance against loss by fire and storm, blowout, and cratering risks), workers compensation and employer's liability. No insurance is carried against loss of earnings or business interruption. The Registrant is unable to obtain significant amounts of insurance to cover risks of underground reservoir damage; however, the Registrant is generally indemnified under its drilling contracts from this risk. The Registrant's present insurance coverage has been secured
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through fiscal 2000. However, in view of conditions generally in the liability insurance industry, no assurance can be given that the Registrant's present coverage will not be cancelled during fiscal 2000 nor that insurance coverage will continue to be available at rates considered reasonable.
International operations are subject to certain political, economic, and other uncertainties not encountered in domestic operations, including risks of 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 the Registrant's operations or on the ability of the Registrant to continue operations in certain areas. Because of the impact of local laws, the Registrant's future operations in certain areas may be conducted through entities in which local citizens own interests and through entities (including joint ventures) in which the Registrant holds only a minority interest, or pursuant to arrangements under which the Registrant conducts operations under contract to local entities. While the Registrant believes that neither operating through such entities nor pursuant to such arrangements would have a material adverse effect on the Registrant's operations or revenues, there can be no assurance that the Registrant will in all cases be able to structure or restructure its operations to conform to local law (or the administration thereof) on terms acceptable to the Registrant. The Registrant further attempts to minimize the potential
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impact of such risks by operating in more than one geographical area and by attempting to obtain indemnification from operators against expropriation, nationalization, and deprivation.
During fiscal 1999, approximately 32% of the Registrant's consolidated revenues were generated from the international contract drilling business. Over 95% of the international revenues were from Venezuela, Colombia, Bolivia, Ecuador and Argentina. Exposure to potential losses from currency devaluation is minimal in the above-mentioned countries except for Venezuela. In those countries, all receivables and payments are currently in U.S. dollars. Cash balances are kept at a minimum which assists in reducing exposure.
In Venezuela, approximately 60% of the Registrant's invoice billings are in U.S. dollars and the other 40% are in the local currency, the bolivar. The Registrant is exposed to risks of currency devaluation in Venezuela as a result of bolivar receivable balances and necessary bolivar cash balances. In 1994, the Venezuelan government established a fixed exchange rate in hopes of stemming economic problems caused by a high rate of inflation. During the first week of December, 1995, the government established a new exchange rate, resulting in further devaluation of the bolivar. In April of 1996, the bolivar was again devalued when the government decided to abolish its fixed rate policy and to allow a floating market exchange rate. During fiscal 1998, the Registrant experienced losses of approximately US$2,204,000 and in fiscal 1999 it experienced losses of US$712,000 as a result of the devaluation of the bolivar. Registrant is unable to predict future devaluation in Venezuela. In the event a 25% to 50% devaluation would occur, the Registrant could experience potential currency valuation losses ranging from approximately US$350,000 to US$600,000.
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During the mid-1970s, the Venezuelan government nationalized the exploration and production business. At the present time it appears the Venezuelan government will not nationalize the contract drilling business. Any such nationalization could result in Registrant's loss of all or a portion of its assets and business in Venezuela.
Many aspects of the Registrant's operations are subject to government regulation, including those relating to drilling practices and methods and the level of taxation. In addition, various countries (including the United States) have environmental regulations which affect drilling operations. Drilling contractors may be liable for damages resulting from pollution. Under United States regulations, drilling contractors must establish financial responsibility to cover potential liability for pollution of offshore waters. Generally, the Registrant is indemnified under drilling contracts from liability arising from pollution, except in certain cases of surface pollution. However, the enforceability of indemnification provisions in foreign countries may be questionable.
The Registrant believes that it is in substantial compliance with all legislation and regulations affecting its operations in the drilling of oil and gas wells and in controlling the discharge of wastes. To date, compliance has not materially affected the capital expenditures, earnings, or competitive position of the Registrant, although these measures may add to the costs of operating drilling equipment in some instances. Additional legislation or regulation may reasonably be anticipated, and the effect thereof on operations cannot be predicted.
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OIL & GAS OPERATIONS
The Registrant engages in the origination of prospects; the identification, acquisition, exploration, and development of prospective and proved oil and gas properties; the production and sale of crude oil, condensate, and natural gas; and the marketing of natural gas. The Registrant considers itself a medium-sized independent producer. All of the Registrant's oil and gas operations are conducted in the United States.
Most of the Registrant's current exploration and drilling effort is concentrated in Oklahoma, Kansas, Texas, and Louisiana. The Registrant also explores from time to time in New Mexico, Alabama, Michigan, Mississippi, and the Rocky Mountain area.
The Registrant's exploration and production division includes seven geographical exploitation teams comprised of geological, engineering, and land personnel. These personnel primarily develop in-house oil and gas prospects as well as review outside prospects and acquisitions for their respective geographical areas. The Registrant believes that this structure allows each team to gain greater expertise in its respective geographical area and reduces risk in the development of prospects.
The Registrant continued its involvement in the Mountain Front play during 1999, spending $10.2 million drilling and completing extensional and development wells in both its Rocky and Kiowa Flats fields. In 1999, Registrant drilled 13 wells, of which seven were completed as producing wells. Current producing rates from the two fields are 63 MMCFD gross and 40 MMCFD net. The Mountain Front area is located in Kiowa and Washita Counties, Oklahoma.
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During fiscal 1998 and 1999, the Registrant has focused on developing prospects using 3D seismic technology. Currently, the Registrant is involved in 3D surveys covering more than 850 square miles. Approximately 700 square miles of land covered by such surveys is located near the Texas and Louisiana onshore Gulf Coast. This is Registrant's first major exploration effort in the Gulf Coast area. The following summarizes the Registrant's activities, during fiscal 1999, on the lands covered by these 3D surveys.
During fiscal 1999, the Registrant participated in or purchased three 3D seismic surveys covering approximately 185 square miles of lands in Jefferson County, Texas. After successfully drilling four consecutive producing wells, the Company extended these seismic surveys by approximately 42 square miles. Registrant's working interests in the lands covered by this survey range from 54% to 66%. In addition, one well is currently being drilled in West Texas on lands covered by a 65 square mile 3D survey.
Four wells have been drilled in Galveston County, Texas, based upon a 94 square mile 3D survey. Two of the wells were completed as producers. This 3D survey was extended by 27 square miles during the 1999 fiscal year. Registrant's working interests in this area range from 25% to 87%.
The Registrant recently completed the purchase of a 42% working interest in a 50 square mile 3D survey in Calcasieu Parish, Louisiana. A wildcat well is in the process of being completed. The purchase of a 35% working interest in a 200 square mile 3D shoot in South Texas has also been finalized. One wildcat well is currently being drilled on these lands.
The Registrant's exploration and development program has covered a range of prospects, from shallow "bread and butter" programs to deep expensive, high
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risk/high return wells. During fiscal 1999, the Registrant participated in 49 development and/or wildcat wells, which resulted in new discoveries of approximately 22.5 BCF of gas and 151,829 barrels of oil and condensate. The Registrant participated in five additional development wells, which resulted in the development of approximately 1.2 BCF of gas which was previously classified as proved undeveloped or proved developed nonproducing reserves. A total of $36,613,104 was spent in the Registrant's exploration and development program during fiscal 1999. This figure includes $8,216,501 of geophysical expense, but is exclusive of expenditures for acreage and acquisition of proved oil and gas reserves. The Registrant's total company-wide acquisition cost for acreage in fiscal 1999 was approximately $14.4 million.
The Registrant spent $88,997 for the acquisition of proved oil and gas reserves during fiscal 1999. The reserves associated with these acquisitions were 77,826 MCF.
The Registrant's fiscal 2000 exploration and production budget of approximately $80 million is 70% greater than its actual exploration and production expenditures in fiscal 1999. This increase is necessary to exploit the additional amounts of acreage acquired in fiscal years 1998 and 1999.
Market for Oil and Gas
The Registrant does not refine any of its production. The availability of a ready market for such production depends upon a number of factors, including the availability of other domestic production, price, crude oil imports, the proximity and capacity of oil and gas pipelines, and general fluctuations in supply and demand. The Registrant does not anticipate any unusual difficulty in contracting to sell its
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production of crude oil and natural gas to purchasers and end-users at prevailing market prices and under arrangements that are usual and customary in the industry. The Registrant and its subsidiary, Helmerich & Payne Energy Services, Inc., have successfully developed markets with end-users, local distribution companies, and natural gas brokers for gas produced from successful wildcat wells and development wells. The Registrant is of the opinion that the natural gas market will continue to experience high volatility. This high volatility (as evidenced by the mid-summer increase in natural gas prices, and the subsequent price reductions during early November, 1999) is a result of ever changing perceptions throughout the industry centered around supply and demand. Pricing perceptions constantly change as members of the natural gas industry weigh the impacts of decline in deliverability of domestic supply; increased use of natural gas for electrical generation; continued U.S. economic growth; increased usage and better management of natural gas storage; seasonal usage; fuel switching; usage of gas as a feed stock; and importation of gas from Canada and Mexico. Registrant presently believes that natural gas price volatility will continue for the next three to five years as the natural gas industry reacts to these factors. Long term pricing will obviously react to these short term factors, as well as other considerations affecting supply/demand.
Historically, the Registrant has had no long-term sales contracts for its crude oil and condensate production. The Registrant continues its practice of contracting for the sale of its Kansas and Oklahoma and portions of its west Texas crude oil for terms of six to twelve months in an attempt to assure itself of the best price in the area for crude oil production. During fiscal 1999, the price that Registrant received
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for the sale of its crude oil has steadily increased. Registrant's average per barrel crude oil sales price in fiscal 1999 for each of the first through fourth quarters was $11.26, $11.21, $15.77 and $19.67, respectively.
Competition
The Registrant competes with numerous other companies and individuals in the acquisition of oil and gas properties and the marketing of oil and gas. The Registrant believes that it should continue to prepare for increased exploration activity without committing to a definite drilling timetable. The Registrant also believes that competition for the acquisition of gas producing properties will continue. Considering the Registrant's conservative acquisition strategy, the Registrant believes that it may be unable to acquire significant proved developed producing reserves from third parties. The Registrant intends to continue its review of properties in areas where the Registrant has expertise. The Registrant's competitors include major oil companies, other independent oil companies, and individuals. Many of these competitors have financial resources, staffs, and facilities substantially larger than those of the Registrant. The effect of these competitive factors on the Registrant cannot be predicted.
Title to Oil and Gas Properties
The Registrant undertakes title examination and performs curative work at the time properties are acquired. The Registrant believes that title to its oil and gas properties is generally good and defensible in accordance with standards acceptable in the industry.
Oil and gas properties in general are subject to customary royalty interests contracted for in connection with the acquisitions of title,
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liens incident to operating agreements, liens for current taxes, and other burdens and minor encumbrances, easements, and restrictions. The Registrant believes that the existence of such burdens will not materially detract from the general value of its leasehold interests.
Governmental Regulation in the Oil and Gas Industry
The Registrant's domestic operations are affected from time to time in varying degrees by political developments and federal and state laws and regulations. In particular, oil and gas production operations and economics are affected by price control, tax, and other laws relating to the petroleum industry; by changes in such laws; and by constantly changing administrative regulations. Most states in which the Registrant conducts or may conduct oil and gas activities regulate the production and sale of oil and natural gas, including regulation of the size of drilling and spacing units or proration units, the density of wells which may be drilled, and the unitization or pooling of oil and gas properties. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas, and impose certain requirements regarding the ratability of production. The effect of these regulations is to limit the amounts of oil and natural gas the Registrant can produce from its wells, and to limit the number of wells or locations at which the Registrant can drill. In addition, legislation affecting the natural gas and oil industry is under constant review. Inasmuch as such laws and regulations are frequently expanded, amended, or reinterpreted, the Registrant is unable to predict the future cost or impact of complying with such regulations. The Registrant believes that compliance with existing federal, state and local laws, rules and regulations will not
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have a material adverse effect upon its capital expenditures, earnings or competitive position.
Regulatory Controls
Historically, the transportation and sale for resale of natural gas in interstate commerce have been regulated under the Natural Gas Act ("NGA") and the Natural Gas Policy Act of 1978 ("NGPA") and the regulations promulgated thereunder.
The Natural Gas Wellhead Decontrol Act of 1989 amended both the price and non-price decontrol provisions of the NGPA for the purpose of providing complete decontrol of first sales of natural gas by January 1, 1993. The Registrant believes that substantially all of its gas is decontrolled.
Commencing in April, 1992, the Federal Energy Regulatory Commission ("FERC") issued Order 636, Order 636-A, and Order 636-B (collectively, "Order 636") which requires interstate pipelines to provide transportation unbundled from their sales of gas. Also, such pipelines must provide open-access transportation on a basis that is equal for all gas supplies. Although Order 636 has provided the Registrant with additional market access and more fairly applied transportation service rates, it has also subjected the Registrant to more restrictive pipeline imbalance tolerances and greater penalties for violation of those tolerances. Order 636 and numerous related orders pertaining to individual pipelines have been largely upheld by the Courts. However, certain appeals remain pending, and the FERC continues to review and modify open access regulations.
In particular, the FERC recently issued new rules and policies pertaining to interstate pipeline certificates which require notification
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of landowners affected by proposed pipeline construction, and which presume incremental pricing is appropriate for new construction. The FERC also has proposed rules governing short term transportation which, among other matters, would eliminate cost-based regulation for such transportation, allow pipelines to negotiate rates and terms of service, and require the allocation of all short term pipeline capacity through a competitive auction process. In addition, the FERC has requested comments on certain issues related to its regulation of long term transportation. While any resulting FERC action would affect the Registrant only indirectly, these inquiries are intended to further enhance competition in the natural gas markets.
Under the NGA, natural gas gathering facilities are exempt from FERC jurisdiction. The Registrant believes that its gathering systems meet the traditional tests that the FERC has used to establish a pipeline's status as a gatherer. In recent years, the FERC has slightly narrowed its statutory tests for establishing gathering status. A number of states have either enacted new laws or are considering the adequacy of existing laws affecting gathering rates and/or services. For example, in May, 1997, Kansas enacted new gathering oversight legislation that, among other matters, requires reporting of gathering prices and authorizes the Kansas Corporation Commission ("KCC") to oversee open access on gathering systems to assure it is just, reasonable, and non-discriminatory. Thus, natural gas gathering may receive greater regulatory scrutiny by state agencies. In addition, the FERC has approved several transfers by interstate pipelines of gathering facilities to unregulated gathering companies, including affiliates. This could allow such companies to compete more effectively with
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independent gatherers. It is not possible at this time to predict the ultimate effect of the policy, although it could affect access to and rates charged for interstate gathering services. However, the Registrant does not presently believe the status of its facilities would be materially affected by modification to the statutory criteria.
In February, 1994, the KCC issued an order which modified allowables applicable to wells within the Hugoton Gas Field so that those proration units upon which infill wells had been drilled would be assigned a larger allowable than those units without infill wells. As a consequence of this order, the Registrant has drilled 137 infill wells and believes that it will be necessary in fiscal 2000 to drill an additional 3 infill wells at a total estimated cost of $360,000.
In September, 1997, the FERC ruled that ad valorem tax levied by the State of Kansas was not a severance tax within the meaning of Section 110 of the NGPA. Therefore, to the extent that first sellers collected revenues in excess of the maximum lawful price as a result of reimbursement of Kansas ad valorem taxes, then first sellers would be required to make refunds with interest for such excess revenues on tax bills rendered during the period October 4, 1983 through June 28, 1988. Based upon schedules provided to Registrant by certain interstate pipelines, the total reimbursement obligation of all working interest owners in Registrant-operated wells approximated $13 million as of November, 1997. During this period, Registrant estimated that its reimbursement obligation totaled approximately $6.7 million, being approximately $2.7 million of principal and $4.0 million of interest. Approximately 12.5% of such amount would be owed by Registrant's royalty owners.
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Neither the FERC nor Congress has provided the first sellers with any generic relief on this issue. However, the FERC has permitted the filing of individual adjustment proceedings by each first seller. Registrant has filed such adjustment proceedings requesting that its ad valorem tax refund obligation be reduced. The FERC has not ruled in any of Registrant's adjustment proceedings.
During the period February through July, 1998, Registrant paid, under protest, approximately $1,379,000 to four interstate pipelines as partial ad valorem tax reimbursement and escrowed approximately $6,370,000 pending the FERC's decision in Registrant's adjustment proceedings. The escrowed amount includes Registrant's share of the amount of reimbursement obligation allegedly owed by Registrant's royalty owners. The final outcome of this matter cannot be predicted at this time.
Additional proposals and proceedings that might affect the oil and gas industry are pending before the Congress, the FERC, and the courts. The Registrant cannot predict when or whether any such proposals may become effective. In the past, the natural gas industry has been very heavily regulated. There is no assurance that the current regulatory approach pursued by the FERC will continue. Notwithstanding the foregoing, it is anticipated that compliance with existing federal, state and local laws, rules and regulations will not have a material adverse effect upon the capital expenditures, earnings or competitive position of the Registrant.
Federal Income Taxation
The Registrant's oil and gas operations, and the petroleum industry in general, are affected by certain federal income tax laws. The
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Registrant has considered the effects of such federal income tax laws on its operations and does not anticipate that there will be any material impact on the capital expenditures, earnings or competitive position of the Registrant.
Environmental Laws
The Registrant's activities are subject to existing federal and state laws and regulations governing environmental quality and pollution control. Such laws and regulations may substantially increase the costs of exploring, developing, or producing oil and gas and may prevent or delay the commencement or continuation of a given operation. In the opinion of the Registrant's management, its operations substantially comply with applicable environmental legislation and regulations. The Registrant believes that compliance with existing federal, state, and local laws, rules, and regulations regulating the discharge of materials into the environment or otherwise relating to the protection of the environment will not have any material effect upon the capital expenditures, earnings, or competitive position of the Registrant.
Natural Gas Marketing
Helmerich & Payne Energy Services, Inc., ("HPESI") continues into its tenth year of business with emphasis on the purchase and marketing of the Registrant's natural gas production. In addition, HPESI purchases third-party gas for resale and provides compression, gathering services and processing for a fee. During fiscal year 1999, HPESI's sales of third-party gas constituted approximately 10% of the Registrant's consolidated revenues.
HPESI sells natural gas to markets in the Midwest and Rocky Mountain areas. Term gas sales contracts are for varied periods ranging from
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three months to seven years. However, recent contracts have tended toward shorter terms. The remainder of the Registrant's gas is sold under spot market contracts having a duration of 30 days or less. For fiscal 2000, HPESI's term gas sales contracts provide for the sale of approximately 16 BCF of gas at prices which are indexed to market prices. HPESI presently intends to fulfill such term sales contracts with a portion of the gas reserves purchased from the Registrant as well as from its purchases of third-party gas. See pages I-14 through I-22 regarding the market, competition, and regulation of natural gas.
REAL ESTATE OPERATIONS
The Registrant's real estate operations are conducted exclusively within the metropolitan area of Tulsa, Oklahoma. Its major holding is Utica Square Shopping Center, consisting of fifteen separate buildings, with parking and other common facilities covering an area of approximately 30 acres. Fourteen of these buildings provide approximately 405,709 square feet of net leasable retail sales and storage space (93% of which is currently leased) and approximately 18,590 square feet of net leasable general office space (99% of which is currently leased). Approximately 24% of the general office space is occupied by the Registrant's real estate operations. The fifteenth building is an eight-story medical office building which provides approximately 76,379 square feet of net leasable medical office space (64% of which is currently leased). The Registrant has a two-level parking garage located in the southwest corner of Utica Square that can accommodate approximately 250 cars.
Registrant has completed two phases of a three-phase renovation for major existing tenants in Utica Square Shopping Center. This renovation
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has resulted in a temporary occupancy reduction of approximately 4%. During fiscal 2000, occupancy is expected to reach approximately 97%.
At the end of the 1999 fiscal year the Registrant owned 12 of a total of 73 units in The Yorktown, a 16-story luxury residential condominium with approximately 150,940 square feet of living area located on a six-acre tract adjacent to Utica Square Shopping Center. Three condominium units were sold during fiscal 1999. Twelve of the Registrant's units are currently leased.
The Registrant owns an eight-story office building located diagonally across the street from Utica Square Shopping Center, containing approximately 87,000 square feet of net leasable general office and retail space. This building houses the Registrant's principal executive offices. Approximately 11% of this building was leased to third parties during fiscal 1999. Registrant has leased approximately 29,000 square feet of office space in Tulsa and relocated Registrant's oil and gas division from Registrant's office building to such leased office space. The vacated space within Registrant's office building has been used to accommodate the growth of the remaining segments of its businesses.
The Registrant is also engaged in the business of leasing multi-tenant warehouse space. Three warehouses known as Space Center, each containing approximately 165,000 square feet of net leasable space, are situated in the southeast part of Tulsa at the intersection of two major limited-access highways. Present occupancy is 100%. The Registrant also owns approximately 1.5 acres of undeveloped land lying adjacent to such warehouses.
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Registrant owns approximately 253.5 acres in Southpark consisting of approximately 240.5 acres of undeveloped real estate and approximately 13 acres of multi-tenant warehouse area. The warehouse area is known as Space Center East and consists of two warehouses, one containing approximately 90,000 square feet and the other containing approximately 112,500 square feet. Occupancy has decreased from 100% to 96% due to the loss of one tenant. The Registrant believes that a high quality office park, with peripheral commercial, office/warehouse, and hotel sites, is the best development use for the remaining land. However, no development plans are currently pending.
The Registrant also owns a five-building complex called Tandem Business Park. The project is located adjacent to and east of the Space Center East facility and contains approximately six acres, with approximately 88,084 square feet of office/warehouse space. Occupancy has decreased from 96% to 93% during fiscal 1999 due primarily to the loss of one tenant. The Registrant also owns a twelve-building complex, consisting of approximately 204,600 square feet of office/warehouse space, called Tulsa Business Park. The project is located south of the Space Center facility, separated by a city street, and contains approximately 12 acres. During fiscal 1999, occupancy has remained at 96%.
The Registrant also owns two service center properties located adjacent to arterial streets in south central Tulsa. The first, called Maxim Center, consists of one office/warehouse building containing approximately 40,800 square feet and located on approximately 2.5 acres. During fiscal 1999, occupancy has remained at 100%. The second, called Maxim Place, consists of one office/warehouse building containing
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approximately 33,750 square feet and located on approximately 2.25 acres. During fiscal 1999, occupancy has remained at 100%.
Registrant believes that the recent increase in demand for multi-tenant warehouse space in the Tulsa market will continue. Registrant is unable to determine how long this increase in demand will continue.
Competition.
The Registrant has numerous competitors in the multi-tenant leasing business. The size and financial capacity of these competitors range from one property sole proprietors to large international corporations. The primary competitive factors include price, location and configuration of space. Registrant's competitive position is enhanced by the location of its properties, its financial capability and the long-term ownership of its properties. However, many competitors have financial resources greater than Registrant and have more contemporary facilities.
FINANCIAL
Information relating to Revenue and Operating Profit by Business Segments may be found on pages 9 and 30 through 31 of the Registrant's Annual Report to Shareholders for fiscal 1999, which is incorporated herein by reference.
EMPLOYEES
The Registrant had 2,162 employees within the United States (16 of which were part-time employees) and 1,278 employees in international operations as of September 30, 1999.
Item 2.
Item 2. PROPERTIES
CONTRACT DRILLING
The following table sets forth certain information concerning the Registrant's domestic drilling rigs as of September 30, 1999:
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The following table sets forth information with respect to the utilization of the Registrant's domestic drilling rigs for the periods indicated:
(1) A rig is considered to be utilized when it is operated or being moved, assembled, or dismantled under contract.
The following table sets forth certain information concerning the Registrant's international drilling rigs as of September 30, 1999:
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The following table sets forth information with respect to the utilization of the Registrant's international drilling rigs for the periods indicated:
(1) A rig is considered to be utilized when it is operated or being moved, assembled, or dismantled under contract.
OIL AND GAS DIVISION
All of the Registrant's oil and gas operations and holdings are located within the continental United States.
Crude Oil Sales
The Registrant's net sales of crude oil and condensate for the fiscal years 1997 through 1999 are shown below:
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Natural Gas Sales
The Registrant's net sales of natural and casinghead gas for the three fiscal years 1997 through 1999 are as follows:
Following is a summary of the net wells drilled by the Registrant for the fiscal years ended September 30, 1997, 1998, and 1999:
On September 30, 1999, the Registrant was in the process of drilling or completing three gross or 2.868 net wells.
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Acreage Holdings
The Registrant's holdings of acreage under oil and gas leases, as of September 30, 1999, were as follows:
Acreage is held under leases which expire in the absence of production at the end of a prescribed primary term, and is, therefore, subject to fluctuation from year to year as new leases are acquired, old leases expire, and other leases are allowed to terminate by failure to pay annual delay rentals. As shown in the above table, the Registrant has a significant portion of its undeveloped acreage in Texas, with five major prospects accounting for 39,700 net acres. The average minimum remaining term of leases in these five prospects is approximately 30 months.
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Productive Wells
The Registrant's total gross and net productive wells as of September 30, 1999, were as follows:
Additional information required by this item with respect to the Registrant's oil and gas operations may be found on pages I-12 through I-23 of Item 1. BUSINESS, and pages 23 through 34 of the Registrant's Annual Report to Shareholders for fiscal 1999, "Notes to Consolidated Financial Statements" and "Note 14 Supplementary Financial Information for Oil and Gas Producing Activities."
Estimates of oil and gas reserves, future net revenues, and present value of future net revenues were audited by Lee Keeling and Associates, Inc., 15 East 5th Street, Suite 3500, Tulsa, Oklahoma 74103. Total oil and gas reserve estimates do not differ by more than 5% from the total reserve estimates filed with any other federal authority or agency.
REAL ESTATE OPERATIONS
See Item 1. BUSINESS, pages I-23 through I-26.
STOCK
As of December 15, 1999:
The Registrant owned 312,546 shares of the common stock of SUNOCO, Inc. and 184,500 shares of Kerr McGee Corporation which the Registrant received in a stock merger for Registrant's 500,000 shares of Oryx Energy Company, Inc.
The Registrant owned 3,000,000 shares of the common stock of Atwood Oceanics, Inc., a Houston, Texas based company engaged in offshore contract drilling. The Registrant owns approximately 22% of Atwood.
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The Registrant owned 1,480,000 shares of the common stock of Schlumberger, Ltd.
The Registrant owned 240,000 shares of the common stock of Phillips Petroleum Company, Inc.
The Registrant owned 1,000,000 shares of the common stock of Occidental Petroleum Corporation, Inc.
The Registrant owned 175,000 shares of the common stock of Banc One Corporation.
The Registrant owned 225,000 shares of the common stock of ONEOK Inc.
The Registrant owned 150,000 shares of the common stock of Citrix Systems, Inc.
The Registrant owned 190,000 shares of the common stock of Legato Systems, Inc.
The Registrant also owned lesser holdings in several other publicly traded corporations.
Item 3.
Item 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Registrant.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of the Registrant's executive officers, together with all positions and offices held with the Registrant by such executive officers. Officers are elected to serve until the meeting of the Board of Directors following the next Annual Meeting of Stockholders and until their successors have been elected and have qualified or until their earlier resignation or removal.
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I - 34 PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The principal market on which the Registrant's common stock is traded is the New York Stock Exchange. The high and low sale prices per share for the common stock for each quarterly period during the past two fiscal years as reported in the NYSE Composite Transaction quotations follow:
The Registrant paid quarterly cash dividends during the past two years as shown in the following table:
The Registrant paid a cash dividend of $0.07 per share on December 1, 1999, to shareholders of record on November 15, 1999. Payment of future dividends will depend on earnings and other factors.
As of December 15, 1999, there were 1,306 record holders of the Registrant's common stock as listed by the transfer agent's records.
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Item 6.
Item 6. SELECTED FINANCIAL DATA
The Five-year Summary of Selected Financial Data described below excludes results of Natural Gas Odorizing, Inc. ("NGO") operations. Registrant, on August 30, 1996, sold its wholly-owned subsidiary, NGO, to Occidental Petroleum Corporation.
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The following Five-year Summary of Selected Financial Data includes only the results of NGO operations.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Information required by this item may be found on pages 10 through 17, Management's Discussion & Analysis of Results of Operations and Financial Condition, in the Registrant's Annual Report to Shareholders for fiscal 1999, which is incorporated herein by reference.
Item 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item may be found on the following pages of Management's Discussion & Analysis of Results of Operations and Financial Condition, in the Registrant's Annual Report to Shareholders for fiscal 1999, which is incorporated herein by reference:
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Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item may be found on pages 18 through 34 in the Registrant's Annual Report to Shareholders for fiscal 1999, which is incorporated herein by reference.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required under this item with respect to Directors and with respect to delinquent filers pursuant to Item 405 of Regulation S-K is incorporated by reference from the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held March 1, 2000, to be filed with the Commission not later than 120 days after September 30, 1999. See pages I-33 and I-34 for information covering the Registrant's Executive Officers.
Item 11.
Item 11. EXECUTIVE COMPENSATION
This information is incorporated by reference from the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held March 1, 2000, to be filed with the Commission not later than 120 days after September 30, 1999.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference from the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held March 1, 2000, to be filed with the Commission not later than 120 days after September 30, 1999.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference from the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held March 1, 2000, to be filed with the Commission not later than 120 days after September 30, 1999.
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Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Document List
1. The financial statements called for by Item 8 are incorporated herein by reference from the Registrant's Annual Report to Shareholders for fiscal 1999.
2. Exhibits required by Item 601 of Regulation S-K:
Exhibit Number:
3.1 Restated Certificate of Incorporation and Amendment to Restated Certificate of Incorporation of the Registrant are incorporated herein by reference to Registrant's Annual Report on Form 10-K to the Securities and Exchange Commission for fiscal 1996.
3.2 By-Laws of the Registrant are incorporated herein by reference to Registrant's Annual Report on Form 10-K to the Securities and Exchange Commission for fiscal 1996.
4.1 Rights Agreement dated as of January 8, 1996, between the Registrant and The Liberty National Bank and Trust Company of Oklahoma City, N.A. is incorporated herein by reference to the Registrant's Form 8- A, dated January 17, 1996.
* 10.1 Incentive Stock Option Plan is incorporated herein by reference to Exhibit 4.2 to the Registrant's Registration Statement No. 33-16771 on Form S-8.
* 10.2 Form of Incentive Stock Option Plan Stock Option Contract for the Incentive Stock Option Plan is incorporated herein by reference to Registrant's Annual Report on Form 10-K to the Securities and Exchange Commission for fiscal 1996.
* 10.3 Consulting Services Agreement between W. H. Helmerich, III, and the Registrant effective January 1, 1990, as amended is incorporated herein by reference to Registrant's Annual Report on Form 10-K to the Securities and Exchange Commission for fiscal 1996.
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* Compensatory Plan or Arrangement.
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* 10.4 Restricted Stock Plan for Senior Executives of Helmerich & Payne, Inc. is incorporated herein by reference to Registrant's Annual Report on Form 10-K to the Securities and Exchange Commission for fiscal 1996.
* 10.5 Form of Restricted Stock Award Agreement for the Restricted Stock Plan for Senior Executives of Helmerich & Payne, Inc., together with all amendments thereto is incorporated herein by reference to Registrant's Annual Report on Form 10-K to the Securities and Exchange Commission for fiscal 1996.
* 10.6 Supplemental Retirement Income Plan for Salaried Employees of Helmerich & Payne, Inc. is incorporated herein by reference to Registrant's Annual Report on Form 10-K to the Securities and Exchange Commission for fiscal 1996.
* 10.7 Helmerich & Payne, Inc. 1990 Stock Option Plan is incorporated herein by reference to Registrant's Annual Report on Form 10-K to the Securities and Exchange Commission for fiscal 1996.
* 10.8 Form of Nonqualified Stock Option Agreement for the 1990 Stock Option Plan is incorporated by reference to Exhibit 99.2 to the Registrant's Registration Statement No. 33-55239 on Form S-8, dated August 24, 1994.
* 10.9 Supplemental Savings Plan for Salaried Employees of Helmerich and Payne, Inc.
* 10.10 Helmerich & Payne, Inc. 1996 Stock Incentive Plan is incorporated herein by reference to Registrant's Registration Statement No. 333-34939 on Form S-8 dated September 4, 1997.
* 10.11 Form of Nonqualified Stock Option Agreement for Helmerich & Payne, Inc. 1996 Stock Incentive Plan is incorporated by reference to Exhibit 99.2 to Registrant's Registration Statement on Form S-8 dated September 4, 1997.
* 10.12 Form of Restricted Stock Agreement for Helmerich & Payne, Inc. 1996 Stock Incentive Plan is incorporated by reference from Registrant's Annual Report on Form 10-K to the Securities and Exchange Commission for fiscal 1997.
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* Compensatory Plan or Arrangement.
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* 10.13 Helmerich & Payne, Inc. Non-Employee Directors Stock Compensation Plan is hereby incorporated by reference to Exhibit "B" of Registrant's Proxy Statement dated January 27, 1997.
13. The Registrant's Annual Report to Shareholders for fiscal 1999.
22. Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors.
27. Financial Data Schedule.
(b) Report on Form 8-K
None.
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* Compensatory Plan or Arrangement.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized:
HELMERICH & PAYNE, INC.
By /s/ Hans Helmerich ------------------------------ Hans Helmerich, President (Chief Executive Officer) Date: December 17, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
EXHIBIT INDEX
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* Compensatory Plan or Arrangement.
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* Compensatory Plan or Arrangement.
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* Compensatory Plan or Arrangement.