Helmerich & Payne, Inc. Annual Report for 1996 Revenue Breakdown for 1996 Financial Highlights Years Ended September 30, 1996 1995 Revenues $ 393,255,000 $ 306,721,000 Income from Continuing Operations $ 45,426,000 $ 5,788,000 Income per Share from Continuing Operations Net Income Earnings Per Share Dividends Paid Per Share Capital Expenditures Total Assets $ 1.84 $ .24 $ 72,566,000 $ 9,751,000 $ 2.94 $ .505 $ .40 $ .50 $ 109,747,000 $ 111,776,000 $ 821,914,000 $ 707,061,000 President’s Letter To the Co-owners of Helmerich & Payne, Inc. The character issue was supposed to play a deciding role in the 1996 presidential election. Yet while nearly two-thirds of the electorate expressed deep concerns over character flaws and the lack of truthfulness, Bill Clinton was returned to the White House. With a strong economy at home and relative peace abroad, our Faustian bargain seemed somewhat offset by the counterforce of a Republican Congress. But an uneasy feeling lingers as we wonder if we did the right thing. Stretching for a positive spin, The New York Times said, “Scandals present an opportunity in the second term for Bill Clinton to get back in touch with integrity and honesty.” If only it were that easy. Those virtues are foundational build- ing blocks of strong character, not last minute add-ons. It is sad that we have come to expect so little from our political leadership. Neither party was able to win the trust of the voter, and the widespread cynicism produced the lowest turnout since 1928. In the real world, character is important. We make careful judgment calls on a person’s character because it is the pri- mary predictor of future performance. Our own future performance as a Company is invariably linked to the measure of our character. As we focus on growing the Company, we must continue to win and retain customers by diligently earning their confidence and trust. That means mak- ing sure we match our words with our actions on a daily basis. If mistakes are made, they are faced up to and made right, not endlessly rationalized away. Doing our best to correct problems, working hard to exceed expectations, and dealing with people honestly wins customer loyalty. 2 New technology and better solutions are transforming the oil patch. The best companies look hard for innovative ideas and productive alliances. They know finding a trustworthy partner that can complement their own team’s effort provides the best opportunity to create value. Delivering on that value requires that we continue to excel at building the right team. From the very beginning, we interview potential employees know- ing how much character matters. Once on the team, they will play a role in winning our customers’ trust, so first they must win ours. Of course, that works both ways. Before we can hope to build relationships based on trust with customers, trust must be shared within the Company. That happens on a daily basis, one brick at a time. Like building the house on the rock, we still believe holding one another to high personal standards of character is the right thing to do. Sincerely, December 15, 1996 Hans Helmerich President 3 Drilling H E L M E R I C H & PAY N E I N T E R N AT I O N A L D R I L L I N G C O. SUMMARY Helmerich & Payne International Drilling Co., a wholly-owned subsidiary of Helmerich & Payne, Inc., owns and operates a drilling rig fleet consisting of 66 land rigs located in the United States and South America, and 11 offshore platform rigs located in the Gulf of Mexico and offshore California. Revenues and operating profit increased 19 and 46 percent respectively in 1996, and earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 29 percent. Over the past decade, the Company has put over $400 million back into its contract drilling business, main- taining a modern and technologically advanced fleet of drilling rigs in each of its key markets. The Company also continues to have a leadership position in the U.S. offshore platform rig market and has established a dominant and expanding presence in the active South American land drilling markets of Venezuela and Colombia. OFFSHORE OPERATIONS At the close of the year, the Company had 11 offshore platform rigs, eight in the Gulf of Mexico and three offshore California. Utilization averaged 70 percent in 1996, compared with 66 percent in 1995. In addi- tion, the Company has labor contracts on three Exxon-owned platform rigs offshore California and, with Atwood Oceanics, Inc., is half owner of a newly constructed and highly automated platform rig scheduled to begin operations in 1997 for Esso in the Bass Straits offshore Australia. Rig 201, the Company’s first rig to be deployed on a tension leg platform (TLP), began work in May on Shell Offshore Inc.’s (SOI) Mars TLP in 2,933 feet of water. TLP technology utilizes a hull structure which floats on the surface of the water and is tied with flexible steel tendons to a foundation which has been piled into the sea floor. TLP technology opens up several oil and gas prospects around the world which were previously thought to be undevelopable because of water depth. The Company is in the design and construction process for two additional platform 4 rigs for SOI TLPs in the Gulf of Mexico. The Ram/Powell TLP (rig 202) will begin work in 1997 in 3,200 feet of water, and the Ursa TLP (rig 204) is scheduled to begin operations in 1998 in approximately 4,000 feet of water. Each of the new TLP rigs will be outfitted with the leading drilling technology including top-drives and automated tubular handling systems. Additionally, the Company received a third contract in 1996 to design, build, and operate a minimum area, self-moving rig for an SOI fixed platform which will be located in the Garden Banks block in the Gulf of Mexico. Rig 203 is scheduled to deploy in early 1997 and will be used to develop SOI’s subsalt discovery called Enchilada. UNITED STATES LAND OPERATIONS The U.S. land mar- ket remains the largest single drilling market in the world with over 700 active land rigs. Consequently this market is very competitive, and while margins are significantly better today than they were ten years ago, most of the active rigs continue to earn at levels insufficient to replenish the dwindling asset base. Recent census figures show that the number of operable land rigs in the U.S. is less than half that of a decade ago. Equipment wear and tear and migration toward more profitable international markets will continue to reduce the number of land rigs in the U.S., but because the market is large and has few barriers to entry, a quick and sustainable return to high levels of profitability is unlikely. An average of 24 of the Company’s land rigs worked continu- ously throughout 1996, and in the last month of the year 27 rigs out of the fleet of 30 were working. The Company’s rig fleet ranks among the newest and most modern in the United States, and although the market is difficult in terms of profitability, several operators are demanding the kinds of premium services provided by Helmerich & Payne International Drilling Co. 5 INTERNATIONAL OPERATIONS The proliferation of drilling activity in South America, coupled with the Company’s long experience in the region, has provided ample opportunities for expansion over the past ten years. At the close of 1996, Helmerich & Payne International Drilling Co. had 36 land rigs in the countries of Venezuela (21), Colombia (10), Ecuador (3), and Bolivia (2), with an average utilization of 85 percent. Revenues and operating profit increased 23 percent and 48 per- cent respectively over the 1995 mark, largely the result of a full year of service from new rigs sent to Colombia and Venezuela during 1995. Approximately 48 percent of international revenues comes from Colombia, where the Company has ten rigs working on BP Exploration’s Cusiana/Cupiagua field development. Another 42 percent of international revenues comes from activities in Venezuela where the major customers are Corpoven, S.A., and Lagoven, S.A., subsidiaries of Petroleos de Venezuela, S.A. A growing number of customers in Venezuela are international companies who have recently started operations after the coun- try reopened portions of its prolific reserve basin to foreign investment. The Company moved three additional rigs to Venezuela during 1996, two from the U.S. and one from Trinidad. At the close of the year, helicopter rig 22 was in the process of being relocated from Bolivia to Peru and is sched- uled to begin working in January under a multi-well contract with Shell Prospecting and Development Peru B.V. SUMMARY Keeping the focus on the customer and providing the highest quality in personnel, safety, service, and equipment will remain the Company’s major objective. There have been definite improvements in the industry, but the environment is still very competitive across all market segments. Sustaining growth and profitability will continue to require exemplary performance and the commitment of human and financial resources that our customers have come to expect from Helmerich & Payne International Drilling Co. 6 Exploration & Production H E L M E R I C H & PAY N E , I N C . Helmerich & Payne, Inc. explores for, acquires, and pro- duces oil and natural gas primarily in the states of Kansas, Louisiana, Oklahoma, and Texas. Higher oil and natural gas prices combined with a 31 percent increase in natural gas sales volumes produced a 60 percent increase in exploration and production revenues in 1996, compared with 1995. Operating profit increased sharply to $26.3 million in 1996, compared with a loss of $24 million in 1995, which included an impairment charge of $20 million under Financial Accounting Standards No. 121 “Accounting for the Impairment of Long-Lived Assets.” Earnings before interest, taxes, depreciation, and impairment charges increased nearly three-fold to $47 million in 1996, from $16 million in 1995. The Company also engages in natural gas marketing activities through its wholly-owned subsidiary Helmerich & Payne Energy Services, Inc., which matches purchasers of natural gas with production belonging to the Company and other third party producers. Revenues and operating profit from this Division also increased sharply in 1996. At the close EXPLORATION AND DRILLING ACTIVITIES of the year, the Company had proved reserves of approxi- mately 272.3 billion cubic feet (Bcf) of natural gas and 6.5 million barrels of oil. The Company participated in the drilling of 63 (35 net) wells in 1996, 55 (28 net) of which were productive and 8 (7 net) were dry holes. The highlight of the year was the Rocky East prospect which is located in Washita County, Oklahoma, along a subterranean mountain front known as the Wichita Uplift. The Company drilled six wells in the prospect with an average working interest of 93 percent. Cumulative net production from the Rocky East prospect was 2.6 Bcf of natural gas in 1996, approximately seven percent of the year’s total natural gas production. At the close of the year, these wells were flowing at a combined gross rate approximating 20,000 thousand cubic feet (Mcf) per day. The Company is in the early stages of exploring a 7 geologically similar prospect southeast of Rocky East called Oakdale South. An initial exploration well is being drilled and the Company has a 12.5 percent working interest. Helmerich & Payne, Inc. has a significant acreage position in the area with offset working interests ranging from 40 to 100 percent. The Company continues to hold an acreage position in two Louisiana Austin Chalk prospect areas. The Company has been involved in five wells in the Masters Creek prospect located in Rapides Parish, Louisiana. The results from these wells led the Company to participate in two additional wells with 16 percent working interests. West of Masters Creek is the Artillery Range prospect where the Company is partici- pating with carried interests in two wells, and has plans for a third in 1997. The drilling in each of these areas is deep, complex, and expensive, but the results so far have been encouraging enough to warrant additional participation in the coming year. The Company has net undeveloped lease- hold interests in 2,300 acres in the Masters Creek prospect area and 13,000 net undeveloped acres in the Artillery Range. SUMMARY At the end of 1995, the Company began to restructure its exploration and production group into geographically focused teams which are responsible for exploring and developing key regions, primarily in the Mid- continent and Gulf Coast areas. Although one year is not sufficient time to gauge the outcome of the new structure, much has been accomplished during this period. The 1996 exploration and development program led to the addition of more reserves through drilling than in any other year this past decade. The Company’s strategic focus will continue to be the profitable growth of its reserve base and production capacity, primarily from exploration and development drilling. 8 Real Estate and Chemicals Helmerich & Payne Properties, Inc., a wholly-owned sub- sidiary of Helmerich & Payne, Inc., owns, manages, and develops commercial real estate exclusively in the Tulsa, Oklahoma, area. The Company’s properties have approxi- mately 1.7 million square feet of leasable space and include one retail shopping center, two office buildings, and six industrial warehouse and combination office-warehouse developments. Overall occupancy improved to an average of 94 percent in 1996, compared with 87 percent in 1995. Revenue increased seven percent, with most of the improve- ment coming from the six warehouse developments where average occupancy jumped to 94 percent from 82 percent the prior year. Operating profit increased 134 percent to $5.1 million in 1996, compared with $2.2 million in 1995 which included a $2 million charge related to Statement of Financial Accounting Standards No. 121. The key holding in the Company’s real estate portfolio is Utica Square Shopping Center, which has approximately 400,000 square feet of retail space and is centrally located in midtown Tulsa near Helmerich & Payne, Inc. headquarters. During the year, Bath & Body Works and Gloria Jean’s Gourmet Coffee joined the many fine merchants in Utica Square which include Williams-Sonoma, Saks Fifth Avenue, Miss Jackson’s, Ann Taylor, and Banana Republic. Effective August 30, 1996, Helmerich & Payne, Inc. sold Natural Gas Odorizing, Inc. (NGO) to a wholly-owned sub- sidiary of Occidental Petroleum Corporaton in exchange for 2,018,928 shares of Occidental common stock. The divestiture coincides with increasing capital demands in the Company’s contract drilling and exploration and production businesses and closes a very productive and profitable relationship with NGO which spanned almost four decades. The impact of this transaction is reflected as discontinued operations in the Company’s consolidated financial statements. 9 Revenues and Income by Business Segments HELMERICH & PAYNE, INC. Years Ended September 30, 1996 1995 1994 (in thousands) SALES AND OTHER REVENUES: Contract Drilling - Domestic ...................................... Contract Drilling - International .................................. Total Contract Drilling Division ..................................... $108,336 135,695 244,031 $ 93,890 110,695 204,585 $ 86,521 98,111 184,632 Exploration and Production....................................... Natural Gas Marketing............................................. Total Oil and Gas Division .................................... Real Estate Division ................................................ Investments and Other Income .................................. 76,643 58,507 135,150 8,082 5,992 47,986 35,301 83,287 7,570 11,279 58,884 51,889 110,773 7,803 6,944 Total Revenues ............................................................ $393,255 $306,721 $310,152 OPERATING PROFIT (LOSS): Contract Drilling - Domestic ...................................... Contract Drilling - International .................................. Total Contract Drilling Division ............................... $ 10,066 31,176 41,242 $ 7,127 21,110 28,237 $ 5,874 14,645 20,519 Exploration and Production....................................... Natural Gas Marketing............................................. Total Oil and Gas Division.......................................... Real Estate Division ................................................ Total Operating Profit ................................................... OTHER: Miscellaneous operating .......................................... Income from investments ......................................... General corporate expense ...................................... Interest expense..................................................... Corporate depreciation ............................................ Total Other ........................................................ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, EQUITY IN INCOME OF AFFILIATE AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ......................................... Note: This schedule is an integral part of Note 11 (pages 27-28) of the financial statements that follow. 26,333 3,415 29,748 5,055 76,045 (1,663) 5,782 (9,083) (678) (860) (6,502) (23,961) 1,892 (22,069) 2,157 8,325 (1,624) 10,846 (8,801) (407) (851) (837) 3,245 1,525 4,770 4,460 29,749 (1,292) 6,303 (8,908) (385) (1,162) (5,444) $ 69,543 $ 7,488 $ 24,305 10 Management’s Discussion & Analysis of Results of Operations and Financial Condition HELMERICH & PAYNE, INC. Business Environment and Risk Factors The following discussion should be read in conjunction with the con- solidated financial statements and related notes included elsewhere herein. The Company’s future operating results may be affected by various trends and factors which are beyond the Company’s control. These include, among other factors, changes in general economic conditions, rapid or unexpected changes in technologies and uncer- tain business conditions that affect the Company’s businesses. Accordingly, past results and trends should not be used by investors to anticipate future results or trends. With the exception of historical information, the matters discussed below under the headings “Results of Operations” and “Liquidity and Capital Resources” may include forward-looking statements that involve risks and uncertainties. The Company wishes to caution readers that a num- ber of important factors discussed in this report and in the Company’s other reports filed with the Securities and Exchange Commission, could affect the Company’s actual results and cause actual results to differ materially from those in the forward-looking statements. Results of Operations Helmerich & Payne, Inc.’s net income for 1996 was $72,566,000 ($2.94 per share), compared with net income of $9,751,000 ($.40 per share) in 1995, and $24,971,000 ($1.02 per share) in 1994. Included in 1996 is $24,050,000 ($0.97 per share) of income from the sale of the Company’s chemical subsidiary, Natural Gas Odorizing, Inc. (NGO). Net income in 1995 included a non-cash, non-recurring charge of $13,600,000 ($0.55 per share) as a result of the Company’s adoption of Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Results for 1994 included $4 million ($0.16 per share) of income due to a one-time reduction in the Company’s deferred income taxes from the cumulative effect of adopting SFAS No. 109, Accounting for Income Taxes. Included in the Company’s net income, but not related to its operations, were after-tax gains from the sale of investment securities of $346,000 ($0.01 per share) in 1996, and $3,481,000 ($0.14 per share) in 1995. Also included was the Company’s portion of income of its equity affiliate, 11 Atwood Oceanics, Inc., which was $0.07 per share of income in 1996 and $0.04 per share in both 1995 and 1994. Company revenues from continuing operations increased to $393,255,000 in 1996, from $306,721,000 in 1995, and $310,152,000 in 1994. Total revenues increased by 28 percent from 1995 to 1996 as a result of increases in exploration and production (60 percent), natural gas marketing (66 percent), international drilling (23 percent) and domestic drilling (15 percent) segments. Contract drilling revenues rose by 11 per- cent from 1994 to 1995. Oil and gas division revenues declined by almost 25 percent for the same time period due primarily to lower natural gas prices and production volumes. Revenues from investments declined to $5,782,000 in 1996, after increasing to $10,846,000 in 1995, from $6,303,000 in 1994. Gains from the sale of investment securities were $566,000 in 1996, $5,697,000 in 1995, and $124,000 in 1994. Dividend income was stable during 1996, 1995 and 1994, but interest income steadily decreased as cash balances and interest rates declined during these periods. Costs and expenses from continuing operations in 1996 were $323,712,000, 82 percent of total revenues, compared with 98 percent in 1995, and 92 percent in 1994. Total costs for 1995 were abnormally high due to the adoption of SFAS No. 121 which resulted in a total pre-tax impairment charge of $22,000,000 recorded as additional depreciation, depletion, and amortization. Operating costs as a per- centage of operating revenues declined to 59 percent in 1996, compared to 64 percent in 1995, and 66 percent in 1994. General and administrative expenses increased to $9,083,000 (3 per- cent) in 1996, from $8,801,000 in 1995, and $8,908,000 in 1994. Income tax expense, as a percentage of pre-tax income, remained at 37 percent for 1996 and 1995. A lower effective tax rate of 33 percent in 1994 was caused by the usage of foreign tax credit carryforwards, tight sands tax credits, and a reduction in Venezuelan taxes as a result of the monetary correction tax law enacted there. CONTRACT DRILLING DIVISION revenues increased by 19 percent from 1995 to 1996, following an 11 percent increase from 1994 to 1995. Domestic drilling operating profit increased to $10,066,000 in 1996, from $7,127,000 in 1995, and $5,874,000 in 1994. The Company’s total domestic revenues and operating earnings increased this past year due primarily to the addition of offshore platform rig 201 (which commenced operations in May for Shell’s Mars Tension Leg Platform (TLP)); increased revenues and earnings from the Company’s three offshore labor contracts; and a slight improvement in revenues and 12 margins from U.S. land rig operations. This year’s revenues and earnings increased in both the offshore platform and lang rig segments as rig uti- lizations for 1996 were 70 percent and 88 percent, respectively. From 1994 to 1995, offshore platform rig revenues and earnings declined as utilization fell from 79 percent in 1994 to 66 percent in 1995. However, U.S. land rig dayrates and margins improved as utilization for that seg- ment rose from 66 percent in 1994, to 73 percent in 1995. During the fourth quarter of 1996, three of the Company’s platform rigs became inactive. Another became inactive during the first quarter of fiscal 1997. Due to the negative impact of those rigs not working, it is anticipated that domestic contract drilling revenues and operating profit for the first half of 1997 could be the same or lower than that of the last half of 1996. Revenues and operating profit should improve during the last half of 1997 with the commencement of work in the spring for H&P rig 203 on Shell’s Enchilada platform and for H&P rig 202 on Shell’s Ram/Powell TLP. Additionally, it is anticipated that operating costs and dayrates for U.S. land rigs will increase during the year as costs to maintain adquate rig crews will likely increase. Most, if not all, of these costs will be passed on to customers through increased dayrates. It is uncertain at this time whether dayrates can be increased enough to improve land rig profit margins. International revenues climbed to $135,695,000 in 1996, from $110,695,000 in 1995, and $98,111,000 in 1994. Operating profit for the international contract drilling sector improved by 48 percent to $31,176,000 for 1996, compared with $21,110,000 for 1995, and $14,645,000 for 1994. During 1995, six additional rigs were shipped to Venezuela and three to Colombia. In 1996, three more rigs were shipped to Venezuela. Revenues and operating profits generated by these new rigs accounted for a significant portion of the international revenue and earning increases the past two years. Additionally, H&P offshore platform rig 200, a joint venture with the Company’s invest- ment affiliate, Atwood Oceanics, began receiving a standby rate during the year which helped increase profits. Although the Company expects international revenues and earnings to continue to grow, it does not anticipate the level of growth experienced during 1995 and 1996 to occur in 1997 because the Company does not expect to ship as many rigs to international markets this year. In Venezuela, approximately 65 percent of the Company’s billings are in U.S. dollars and the other 35 percent are in bolivars, the local currency. As a result, the Company is exposed to risks of currency devaluation in Venezuela because of the positive bolivar net working capital balances 13 created by the local currency billings. Over the past three years, total net devaluation losses in Venezuela have not been material because the Company has been able to offset such losses through the purchase of Brady Bonds. A Brady Bond is a dollar-denominated Venezuelan govern- ment debt that is guaranteed by the U.S. government and traded on the world’s major stock markets during periods when Venezuela’s currency was set at fixed exchange rates. Gains on the bonds were realized because, soon after their initial availability, they were trading at a pre- mium of 30 to 50 percent above the official exchange rate. Brady Bonds are no longer available and the currency is again allowed, within a range, to float at market rates. Although devaluation losses will likely occur, the Company does not presently believe that such losses will have a material impact on the Company. However, if the country experiences extreme economic difficulty, accompanied by severe devaluation and/or inflation, the Company could experience material losses. OIL AND GAS DIVISION revenues and operating profit increased dramati- cally this year as average prices received for the Company’s production rose to $19.00 per barrel of oil and $1.75 per Mcf of natural gas, from $16.37 per barrel and $1.27 per Mcf last year. In 1994, average prices were $14.83 per barrel and $1.72 per Mcf. Although oil production was flat over the past two years, average natural gas production increased by 31 percent over last year to 94.4 million cubic feet per day (Mmcf/d) dur- ing 1996, compared with 72.4 Mmcf/d in 1995, and 73 Mmcf/d in 1994. The Company’s natural gas production grew as a result of allowing more of its existing reserves to be delivered to the market and by virtue of dis- coveries and production of new natural gas reserves. The most significant discovery was in southwestern Oklahoma in the Rocky East field where a total of six wells were completed by the end of 1996 which added a com- bined average of approximately 15 Mmcf/d of total net production to the Company. Due to the significant increases in product prices and natural gas production volume, exploration and production revenues increased by 60 percent to $76,643,000 in 1996, from $47,986,000 in 1995, and $58,884,000 in 1994. Exploration and production operating profit increased to $26,333,000 in 1996, compared with a loss of $23,961,000 in 1995, and a profit of $3,245,000 in 1994. In 1995, the Company elected to adopt SFAS No. 121, resulting in a pre-tax, non-cash charge of $19,982,000 to the Oil and Gas Division. Earnings for 1996 were also aided by lower dry hole and abandonment charges, lower geophysical expense and reduced depletion per produc- tion unit than in the previous two years. During the past three years the Company has not hedged any of its oil or natural gas production and does not intend to do so during 1997. Therefore, increases or decreases in its product prices will affect its ongoing results accordingly. 14 A lawsuit was filed in an Oklahoma state court in November of 1995 against Helmerich & Payne, Inc., in which five named plaintiffs, on behalf of themselves and other unnamed plaintiffs, are demanding their royalty share of a gas contract settlement. The plaintiffs are attempting to certify a class which would contain certain of the Company’s lessors and certain other mineral owners who own an interest in wells covered by such gas contract settlement. If a certified class is awarded a royalty share of the gas contract settlement, then any such award could have a material impact on income from continuing operations for the applicable quarter. Management believes that any such award should not exceed approximately $2.7 million. Natural gas marketing revenues, which are primarily derived from selling natural gas produced by other companies (third party), increased to $58,507,000 in 1996, from $35,301,000 in 1995, and $51,889,000 in 1994. Operating profit was $3,415,000 in 1996, $1,892,000 in 1995, and $1,525,000 in 1994. The Company’s approach has been to use the existing capacity of its personnel and facilities to derive additional profit from matching its customers with third party producers when the marketing situation is not conducive to the sale of the Company’s own natural gas. Although revenues are likely to increase during periods of rising natural gas prices, it is expected that competition will continue to limit fees and premiums for third party natural gas sales. REAL ESTATE DIVISION revenues of $8,082,000 for 1996 were up slightly over 1995 and 1994, and operating profit improved to $5,055,000 during 1996 as occupancy levels increased, particularly in the Company’s industrial properties. Operating profit for 1995 was down from normal levels due to a $2,000,000 charge to two properties in connection with the adoption of SFAS No. 121. No major changes are anticipated in the Real Estate Division for 1997. On August 30 of this year, the Company exchanged all of the stock in its wholly-owned subsidiary and chemical division, Natural Gas Odorizing, Inc. (NGO), for 2,018,928 shares of Occidental Petroleum Corporation common stock in a tax-free transaction valued at $48 million. The sale yielded a gain of $24.1 million (net of deferred income taxes of approximately $14.8 million) which is reported as gain on sale of discontinued operations. Prior period operating results for the division are reported as discontinued operations. LIQUIDITY AND CAPITAL RESOURCES The Company has maintained a very strong balance sheet for many years with current ratios above 1.74 for the last three years. During 1996, the Company reduced its committed line of credit from $75 million 15 to $50 million. At year-end, the Company had borrowed $5,000,000 under this line of credit and had letters of credit outstanding in the amount of $6,991,000. At the end of 1995, the Company had borrowed $21,700,000. The borrowing in 1995 was the first time the Company had gone to outside sources for capital funding since the early 1980’s. Capital expenditures for each of the last three years were over $100 million and exceeded the funds generated internally during 1994 and 1995. Cash provided by operating activities totaled $124,923,000 for 1996, $88,572,000 for 1995, and $79,909,000 for 1994. It is anticipated that during 1997 capital expenditures will be approximately $130 million and, although internally generated cash is projected to be slightly higher in 1997 than in 1996, additional borrowing may be necessary. Capital expenditures budgeted for 1997 include continued exploration and development drilling activities and major offshore plat- form rig construction projects for Gulf of Mexico operations. Capital expenditure totals could be significantly increased by additional pro- jects now being considered. Additional borrowings and/or portfolio liquidations would fund the potential increase in spending. The Company manages a large portfolio of marketable securities which had a cost basis of $138,599,000 at September 30, 1996, and a total market value at that time of $274,994,000, including its invest- ment in Atwood Oceanics, Inc. During 1995, the Company adopted SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, which resulted in a balance sheet adjustment to market values for investments in companies owned less than 20 percent. Accordingly, a deferred tax estimate was added to deferred taxes under the liability section and the net unrealized holding gains were reflected in the shareholders’ equity section of the balance sheet. During 1996, the Company paid a dividend of $.505 per share which represented the 25th consecutive year of dividend increases. Stock Portfolio Held by the Company September 30, 1996 Number of Shares Book Value (in thousands,except share amounts) Market Value Occidental Petroleum . . . . . . . . . . . . . . . . . . . . . . . . . . . . Atwood Oceanics, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . Schlumberger, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sun Company, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sun Company PFD A . . . . . . . . . . . . . . . . . . . . . . . . . . . Phillips Petroleum Company . . . . . . . . . . . . . . . . . . . . . . Liberty Bancorp.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Oryx Energy Company . . . . . . . . . . . . . . . . . . . . . . . . . . Oneok . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,018,928 1,600,000 740,000 466,451 329,053 240,000 395,000 625,000 225,000 $ 48,000 25,215 23,511 5,742 3,192 5,976 5,743 6,032 2,751 12,437 $138,599 $ 47,192 70,400 62,530 10,728 7,897 10,260 15,010 11,094 6,188 33,695 $274,994 16 Consolidated Statements of Income HELMERICH & PAYNE, INC. Years Ended September 30, 1996 1995 1994 (in thousands, except per share amounts) REVENUES: Sales and other operating revenues ....................................... $387,473 5,782 Income from investments..................................................... $295,875 10,846 $303,849 6,303 393,255 306,721 310,152 COSTS AND EXPENSES: Operating costs ................................................................. Depreciation, depletion and amortization ................................ Dry holes and abandonments ............................................... Taxes, other than income taxes ............................................. General and administrative .................................................. Interest ............................................................................ 229,584 59,442 7,986 16,939 9,083 678 188,497 76,443 10,095 14,990 8,801 407 201,637 49,414 10,369 15,134 8,908 385 323,712 299,233 285,847 INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, EQUITY IN INCOME OF AFFILIATE AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE................. 69,543 7,488 24,305 INCOME TAX EXPENSE ................................................................. 25,803 2,786 8,101 EQUITY IN INCOME OF AFFILIATE net of income taxes ............................................................ INCOME FROM CONTINUING OPERATIONS ................................. INCOME FROM DISCONTINUED OPERATIONS .............................. GAIN ON SALE OF DISCONTINUED OPERATIONS......................... INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ........................................................... CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE....... 1,686 45,426 3,090 24,050 1,086 5,788 3,963 72,566 9,751 904 17,108 3,863 20,971 4,000 NET INCOME ....................................................................... $ 72,566 $ 9,751 $ 24,971 PER COMMON SHARE: INCOME FROM CONTINUING OPERATIONS................................... $ INCOME FROM DISCONTINUED OPERATIONS .............................. GAIN ON SALE OF DISCONTINUED OPERATIONS......................... CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ........ $ $ .24 .16 $ $ 1.84 .13 .97 .70 .16 .16 NET INCOME ........................................................................................ $ 2.94 $ .40 $ 1.02 AVERAGE COMMON SHARES OUTSTANDING ............................ 24,690 24,536 24,416 The accompanying notes are an integral part of these statements. 17 Consolidated Balance Sheets HELMERICH & PAYNE, INC. Assets CURRENT ASSETS: September 30, 1996 1995 (in thousands) Cash and cash equivalents.................................................................. Short-term investments....................................................................... Accounts receivable, less reserve of $712 and $489 ................................. Inventories ....................................................................................... Prepaid expenses and other ................................................................ Net assets of discontinued operations .............................................................. $ 16,892 1,005 75,374 16,915 4,182 $ 19,543 8,989 57,034 19,329 5,628 6,836 Total current assets ..................................................................... 114,368 117,359 INVESTMENTS..................................................................................... 229,809 156,908 PROPERTY, PLANT AND EQUIPMENT, at cost: Contract drilling equipment .................................................................. Oil and gas properties ........................................................................ Real estate properties ........................................................................ Other .............................................................................................. Less__Accumulated depreciation, depletion and amortization..................... 568,110 401,804 46,970 53,547 1,070,431 606,935 501,682 392,806 46,642 55,655 996,785 578,492 Net property, plant and equipment .................................................. 463,496 418,293 OTHER ASSETS ................................................................................... 14,241 14,501 TOTAL ASSETS .................................................................................... $ 821,914 $ 707,061 The accompanying notes are an integral part of these statements. 18 Liabilities and Shareholders’ Equity September 30, 1996 1995 (in thousands) CURRENT LIABILITIES: Accounts payable .............................................................................. Accrued liabilities .............................................................................. Notes payable................................................................................... Total current liabilities ................................................................ $ 25,622 31,943 5,000 62,565 $ 25,462 20,159 21,700 67,321 NONCURRENT LIABILITIES: Deferred income taxes........................................................................ Other .............................................................................................. Total noncurrent liabilities............................................................ 98,335 15,044 113,379 66,062 11,243 77,305 SHAREHOLDERS’ EQUITY: Common stock, $.10 par value, 80,000,000 shares authorized, 26,764,476 shares issued ................................................................ 2,677 2,677 Preferred stock, no par value, 1,000,000 shares authorized, no shares issued............................................................................ Additional paid-in capital ..................................................................... Net unrealized holding gains ................................................................ Retained earnings ............................................................................. Lesstreasury stock, 1,878,840 shares in 1996 and 1,999,856 shares in 1995, at cost ...... Total shareholders’ equity............................................................ 50,410 56,550 557,543 667,180 21,210 645,970 48,436 38,004 495,692 584,809 22,374 562,435 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY .................................. $821,914 $707,061 The accompanying notes are an integral part of these statements. 19 Consolidated Statements of Shareholders’ Equity HELMERICH & PAYNE, INC. Additional Unrealized Net Common Stock Shares Amount Paid-In Capital Holding Gains Retained Earnings Treasury Stock Shares Amount (in thousands) Balance, September 30, 1993 ............. 26,764 $2,677 $47,412 $ Cash dividends ($.49 per share) ...... Exercise of stock options.................... Lapse of restrictions on Restricted Stock Awards............... Stock issued under Restricted Stock Award Plan.......................... Amortization of deferred compensation ............................... Net income ....................................... 549 (246) 481 $482,405 (12,097) 2,127 $(23,567) (43) 415 (814) (30) 333 1,815 24,971 Balance, September 30, 1994 ............. 26,764 2,677 48,196 496,280 2,054 (22,819) Adjustment to beginning balance for change in accounting method, net of income taxes of $21,106..... Change in net unrealized holding gains, net of income taxes of $2,187....................................... Cash dividends ($.50 per share) ...... Exercise of stock options ................... Lapse of restrictions on Restricted Stock Awards............... Forfeiture of Restricted Stock Award . Amortization of deferred compensation ............................... Net income ....................................... 34,435 3,569 859 (229) (390) (12,372) (69) 615 560 15 (170) 1,473 9,751 Balance, September 30, 1995 ............. 26,764 2,677 48,436 38,004 495,692 2,000 (22,374) Change in net unrealized holding gains, net of income taxes of $11,367 ................................... Cash dividends ($.51 per share) ...... Exercise of stock options.................. Lapse of restrictions on Restricted Stock Awards ................ Forfeiture of Restricted Stock Award . Amortization of deferred compensation ............................... Net income ...................................... 18,546 (12,670) 2,197 (61) (162) (131) 1,274 272 10 (110) 1,683 72,566 Balance, September 30, 1996 ............. 26,764 $2,677 $50,410 $56,550 $557,543 1,879 $(21,210) The accompanying notes are an integral part of these statements. 20 Consolidated Statements of Cash Flows HELMERICH & PAYNE, INC. Years Ended September 30, 1996 1995 1994 (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income ........................................................................ Adjustments to reconcile net income to net cash provided by operating activities- Discontinued operations .......................................................... Depreciation, depletion and amortization........................... Dry holes and abandonments ......................................... Cumulative effect of change in accounting principle................ Equity in income of affiliate before income taxes ................. Amortization of deferred compensation ............................. Gain on sale of securities............................................... Loss (gain) on sale of property, plant and equipment, other... Change in assets and liabilities: Accounts receivable ................................................... Inventories ............................................................... Prepaid expenses and other ................................................ Accounts payable ...................................................... Accrued liabilities ...................................................... Deferred income taxes ........................................................... Other noncurrent liabilities........................................... Total adjustments ...................................................... Net cash provided by continuing activities ................... Net cash provided by discontinued operations................ Net cash provided by operating activities......................... CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, including dry hole costs, from continuing operations ..................................................................................... Proceeds from sale of property, plant and equipment .................. Purchase of investments....................................................... Proceeds from sale of investments.......................................... Discontinued operations................................................................... Purchase of short-term investments ........................................ Proceeds from sale of short-term investments ........................... $ 72,566 $ 9,751 $ 24,971 (27,140) 59,442 7,986 (2,720) 1,683 (566) 776 (18,340) 2,435 1,706 (1,115) 14,237 6,668 3,802 48,854 121,420 3,503 124,923 (3,963) 76,443 10,095 (1,752) 1,473 (5,697) (1,195) 275 86 (2,768) 3,030 (2,701) (1,630) 2,563 74,259 84,010 4,562 88,572 (3,863) 49,414 10,369 (4,000) (1,458) 1,815 (124) (2,539) (3,864) (3,260) 5,047 (1,317) 1,023 4,106 (1,857) 49,492 74,463 5,446 79,909 (109,985) 3,987 (1,196) 619 (2,746) (109,901) 2,923 (12,858) 11,713 (977) 7,984 7 (102,264) 5,971 (1,500) 373 (619) (12) 124 Net cash used in investing activities............................ (101,337) (109,093) (97,927) CASH FLOWS FROM FINANCING ACTIVITIES: Payments made on long-term debt.......................................... Proceeds from notes payable................................................. Payments made on notes payable........................................... Dividends paid.................................................................... Proceeds from exercise of stock options................................... Net cash provided by (used in) financing activities ......... 35,000 (51,700) (12,530) 2,993 (26,237) 37,100 (15,400) (12,365) 1,282 10,617 (3,139) (11,965) 913 (14,191) NET DECREASE IN CASH AND CASH EQUIVALENTS ................ CASH AND CASH EQUIVALENTS, beginning of period ................. CASH AND CASH EQUIVALENTS, end of period ......................... (2,651) 19,543 $ 16,892 (9,904) 29,447 $ 19,543 (32,209) 61,656 $ 29,447 The accompanying notes are an integral part of these statements. 21 Notes to Consolidated Financial Statements HELMERICH & PAYNE, INC. September 30, 1996,1995 and 1994 NOTE 1 SUMMARY OF ACCOUNTING POLICIES CONSOLIDATION - The consolidated financial statements include the accounts of Helmerich & Payne, Inc. (the Company), and all of its wholly-owned subsidiaries. Fiscal years of the Company’s foreign consolidated operations end on August 31 to facili- tate reporting of consolidated results. TRANSLATION OF FOREIGN CURRENCIES - The Company has determined that the functional currency for its foreign subsidiaries is the U.S. dollar. Foreign currency transaction gains for 1996 and 1995 were $764,000 and $1,845,000, respectively, with a loss of $2,764,000 for 1994. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires manage- ment to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. PROPERTY, PLANT AND EQUIPMENT - The Company follows the successful efforts method of accounting for oil and gas properties. Under this method, the Company capitalizes all costs to acquire mineral inter- ests in oil and gas properties, to drill and equip exploratory wells which find proved reserves and to drill and equip development wells. Geological and geophysical costs, delay rentals and costs to drill exploratory wells which do not find proved reserves are expensed. Capitalized costs of producing oil and gas properties are depreciated and depleted by the unit-of-production method based on proved developed oil and gas reserves determined by the Company and reviewed by independent engineers. Undeveloped leases are amortized based on management’s estimate of recoverability. Costs of surrendered leases are charged to the amortization reserve. Effective July 1, 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”, which requires impairment losses to be evaluated for long-lived assets used in operations when indicators of impairment are pre- sent and the undiscounted cash flows are not sufficient to recover the assets carrying amount. Adoption of SFAS No. 121 resulted in a before-tax impairment charge of $22 million which is included in depreciation, depletion and amortization expense. After-tax, the impairment charge reduced 1995 net income by $13.6 million, $.55 per share. The before-tax impairment charges included $20 million for proved Exploration and Production properties and $2 million for Real Estate properties. The Company evaluates 22 impairment of exploration and production assets on a field by field basis. Fair values on all long-lived assets are based on discounted future cash flows or information provided by sales and purchases of similar assets. Substantially all property, plant and equipment other than oil and gas properties is depreciated using the straight-line method based on the following estimated useful lives: YEARS Contract drilling equipment ............................................. 4-10 Real estate buildings and equipment.............................. 10-50 Other ............................................................................... 3-33 CASH AND CASH EQUIVALENTS - Cash and cash equivalents consist of cash in banks and investments readily convertible into cash which mature within three months from the date of purchase. INVENTORIES - Inventories, primarily materials and supplies, are valued at the lower of cost (moving average or actual) or market. DRILLING REVENUE - Substantially all drilling contracts are daywork contracts and drilling revenues and expenses are recognized as work progresses. GAS IMBALANCES - The Company recognizes revenues from gas wells on the sales method, and a liability is recorded for permanent imbalances. INVESTMENTS - The Company adopted SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, effective October 1, 1994. SFAS No. 115 requires that available-for-sale securities be carried at their fair value determined based on quoted market prices. Upon adoption of SFAS No. 115, the Company recorded an increase to shareholders’ equity of $34 million, which was net of income taxes of $21 million. The cost of securities used in determining realized gains and losses is based on average cost of the security sold. Investments in companies owned from 20 to 50 percent are accounted for using the equity method with the Company recog- nizing its proportionate share of the income or loss of each investee. The Company owned 23.9 percent and 24.14 percent of Atwood Oceanics, Inc. (Atwood) at September 30, 1996 and 1995, respectively. The quoted market value of the Company’s investment was $70,400,000 and $32,100,000 at September 30, 1996 and 1995, respectively. Retained earnings at September 30, 1996 include approximately $13,034,000 of undistributed earnings of Atwood. Summarized financial information of Atwood is as follows: Gross revenues .............................................................. Costs and expenses ........................................................ Net income .................................................................... Helmerich & Payne, Inc.’s equity in net income, net of income taxes .................................................... Current assets ................................................................ Noncurrent assets ........................................................... Current liabilities ............................................................. Noncurrent liabilities ........................................................ Shareholders’ equity ........................................................ Helmerich & Payne, Inc.’s investment................................... 1996 1995 (in thousands) $ 84,760 73,392 $ 11,368 $ 1,686 $ 44,170 115,139 18,019 35,736 105,554 $ 25,215 $ 77,315 70,255 $ 7,060 $ 1,086 $ 34,266 118,587 20,505 37,456 94,892 $ 22,495 1994 $ 68,045 62,045 $ 6,000 $ 904 $ 37,965 115,065 13,752 53,000 86,278 $ 20,743 INCOME TAXES - Effective October 1, 1993, the Company adopted FASB Statement No. 109, “Accounting for Income Taxes.” Under Statement No. 109, deferred income taxes are computed using the liability method and are provided on all temporary differences between the financial basis and the tax basis of the Company’s assets and liabilities. OTHER POST EMPLOYMENT BENEFITS - The Company sponsors a health care plan that provides post retirement medical benefits to retired employees. Employees who retire after November 1, 1992 and elect the Company’s coverage pay the entire estimated cost of such benefits. The Company has accrued a liability for estimated workers compensation claims incurred. The liability for other benefits to former or inactive employees after employment but before retirement is not material. EARNINGS PER SHARE - Earnings per share are based on the weighted average number of shares of common stock outstanding during the year. Common stock equivalents are insignificant, and therefore, have not been considered in the earnings per share computation. NOTE 2 SHORT-TERM BORROWINGS AND CREDIT ARRANGEMENTS The Company maintains a line of credit agreement with certain banks which provides for maximum borrowing of $50,000,000 at adjustable interest rates. Under the agreement, $50,000,000 may be borrowed through May 1997, and $10,000,000 may be bor- rowed through May 1998. As of September 30, 1996, the Company had borrowed $5,000,000 at a rate of 8.25% and had letters of credit outstanding in the amount of $6,991,000, leaving an unused portion of $38,009,000. Under the line of credit agreement the Company must meet certain requirements regarding levels of debt, net worth and earnings. The Company has an additional $14.0 million line of credit with a bank to be used primarily for letters of credit. As of September 30, 1996, the Company had letters of credit outstanding in the amount of $2,547,222 leaving an unused portion of $11,452,778. NOTE 3 INCOME TAXES Effective October 1, 1993, the Company changed its method of accounting for income taxes from the deferred method to the lia- bility method required by FASB Statement No. 109, “Accounting for Income Taxes.” The cumulative effect of adopting Statement No. 109 as of October 1, 1993 was to increase net income by $4,000,000. The components of the provision (credit) for income taxes from continuing operations are as follows: Years Ended September 30, 1996 1995 (in thousands) CURRENT: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,909 Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,037 1,050 State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,996 DEFERRED: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL PROVISION: 3,757 725 325 4,807 $ 25,803 $ $ (802) 6,104 276 5,578 (3,083) 534 (243) (2,792) 2,786 1994 1,451 2,677 649 4,777 (29) 3,430 (77) 3,324 8,101 $ $ 23 The amounts of domestic and foreign income are as follows: Years Ended September 30, 1996 1995 1994 INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES, EQUITY IN INCOME OF AFFILIATE AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE: Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,299 28,244 Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 69,543 $ (11,399) 18,887 7,488 $ $ $ 11,885 12,420 24,305 Effective income tax rates on income from continuing operations as compared to the U.S. Federal income tax rate are as follows: Years Ended September 30, 1996 1995 1994 U.S. Federal income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends received deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excess statutory depletion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of higher foreign tax rates . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-conventional fuel source credits utilized . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35% (1) - 2 (1) 2 37% 35% (8) (3) 19 (8) 2 37% 35% (3) (1) 4 (2) - 33% The components of the Company’s net deferred tax liabilities are as follows: 1996 At September 30, 1995 (in thousands) DEFERRED TAX LIABILITIES: Property, plant and equipment Available-for-sale securities Pension provision Equity investment Other Total deferred tax liabilities DEFERRED TAX ASSETS: Financial accruals Other Total deferred tax assets $ 46,706 49,889 4,720 4,840 709 106,864 5,213 3,316 8,529 $ 39,921 23,293 4,774 3,920 919 72,827 4,733 2,032 6,765 NET DEFERRED TAX LIABILITIES $ 98,335 $ 66,062 NOTE 4 STOCK OPTIONS, AWARD PLAN AND RIGHTS The Company has reserved 1,179,962 shares of its treasury stock to satisfy the exercise of stock options issued under the 1982 and 1990 Stock Option Plans. Options awarded under these plans are granted at prices equal to at least market price on the date of grant. Options granted under the 1982 plan have a term of nine years while options granted under the 1990 plan have a term of seven years. Options granted under both plans become exercisable in increments as outlined in the plans. Activity for the incentive stock option plans, was as follows: Years Ended September 30, Outstanding at October 1, ................................................ Granted............................................................................. Exercised.......................................................................... Cancelled ......................................................................... Outstanding at September 30, ......................................... Exercisable at September 30, .......................................... Weighted average exercise price of options outstanding . Weighted average exercise price of options exercised..... 1996 841,271 247,000 (140,015) (94,146) 854,110 74,224 $ 27.25 $ 23.51 1995 835,879 107,750 (78,094) (24,264) 841,271 110,399 $ 26.39 $ 19.68 1994 780,079 110,250 (46,510) (7,940) 835,879 70,889 $ 25.65 $ 21.77 24 The Financial Accounting Standards Board has issued a new accounting standard, FAS No. 123 “Accounting for Stock-Based Compensation”, effective for fiscal years beginning after December 15, 1995. As provided for in the standard, the Company will not adopt the recognition provisions and will provide the pro forma net income and earnings-per-share disclosures required by the standard in its annual financial statements for the year ending September 30, 1997. The Company currently follows Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees”. Under this standard, because the exercise price of the Company’s fixed plan common stock options equals the market price of the underlying stock on the date of the grant, no com- pensation expense is recognized. As of September 30, 1996, the Company has issued 360,000 shares of treasury stock under a Restricted Stock Award Plan (the “Plan”). The Company recognized deferred compensation totalling $12,832,000, which was the fair market value of the stock at the time of issuance, as a reduction of retained earnings. Treasury stock was reduced by the book value of the shares issued, $4,058,000. The difference was recognized as an increase in paid-in capital. The deferred compensation is being amortized over a seven-year period as compensation expense. The unamortized balance at September 30, 1996 and 1995 was $1,235,000 and $3,189,000, respectively. Restrictions lapsed with respect to 68,000 shares, 61,000 shares and 61,000 shares in 1996, 1995 and 1994, respectively, and the shares were released to Plan participants. There were forfeitures of 10,000 and 15,000 shares in 1996 and 1995, respectively. On January 8, 1996, the Company extended the benefits afforded by its existing rights plan by adopting a new stockholder rights plan. On September 30, 1996, the Company had 24,885,636 outstanding common stock purchase rights (“Rights”). Under the terms of the new plan each Right entitled the holder thereof to purchase from the Company a unit consisting of one one-thousandth of a share of Series A Junior Participating Preferred Stock (“Preferred Stock”), without par value, at a price of $90 per unit. The exercise price and the number of units of Preferred Stock issuable on exercise of the Rights are subject to adjustment in certain cases to prevent dilution. The Rights will be attached to the common stock certificates and are not exercisable or transferrable apart from the common stock, until 10 business days after a person acquires 15% or more of the outstanding common stock or 10 business days following the com- mencement of a tender offer or exchange offer that would result in a person owning 15% or more of the outstanding common stock. In the event the Company is acquired in a merger or certain other business combination transactions (including one in which the Company is the surviving corporation), or more than 50% of the Company’s assets or earning power is sold or transferred, each holder of a Right shall have the right to receive, upon exercise of the Right, common stock of the acquiring company having a value equal to two times the exercise price of the Right. The Rights are redeemable under certain circumstances at $.01 per Right and will expire, unless earlier redeemed, on January 31, 2006. As long as the Rights are not separately transferrable, the Company will issue one Right with each new share of common stock issued. NOTE 5 FINANCIAL INSTRUMENTS Short-term investments consist mainly of U.S. treasury notes carried at cost, which approximates fair value. Notes payable bear interest at market rates and are carried at cost which approximates fair value. The following is a summary of available-for-sale securities, which excludes those accounted for under the equity method of accounting (see Note 1): Equity Securities: September 30, 1996 September 30, 1995 Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value (in thousands) $113,384 $ 64,804 $92,081 $61,455 $871 $158 $204,594 $126,101 During the years ended September 30, 1996, 1995, and 1994, marketable equity available-for-sale securities with a fair value at the date of sale of $619,000, $11,713,000 and $373,000, respectively, were sold. The gross realized gains on such sales of available- for-sale securities totaled $596,000, $5,734,000 and $124,000, respectively, and the gross realized losses totaled $30,000, $37,000 and $0, respectively. NOTE 6 DISCONTINUED OPERATIONS Effective August 30, 1996, Helmerich & Payne, Inc. exchanged all of the common stock of its wholly-owned subsidiary, Natural Gas Odorizing, Inc. (NGO), to Occidental Petroleum Corporation (OPC) for 2,018,928 shares of OPC common stock with a fair market value of approximately $48 million. The sale yielded a gain of $24.1 million (net of deferred income taxes of approxi- mately $14.8 million) which is reported as gain on sale of discontinued operations. NGO comprised the Company’s chemical operations. Prior period operating results for such operations are reported as discontinued operations. Summarized operating results of discontinued operations are as follows: Years Ended September 30, 1996 1995 1994 Revenues............................................................... Operating Profit...................................................... Provision for income taxes..................................... Income from discontinued operations.................... $19,540 5,656 2,566 3,090 (in thousands) $19,055 6,221 2,258 3,963 $18,849 5,994 2,131 3,863 The assets and liabilities that were transferred to OPC in the sale are presented in the Consolidated Balance Sheet on a net basis at September 30, 1995. Net assets consist of current assets ($4.5 million), net property, plant and equipment ($5.4 million), less current liabilities ($2.3 million) and other liabilities ($0.8 million). 25 NOTE 7 EMPLOYEE BENEFIT PLANS Defined Benefit Plans: The Company has noncontributory pension plans covering substantially all of its employees, including certain employees in foreign countries. The Company makes annual contributions to the plans equal to the maximum amount allowable for tax reporting purposes. Future service benefits are determined using a 1.5 percent career average formula. The net periodic pension expense (credit) included the following components: Years Ended September 30, 1996 1995 1994 Service cost-benefits earned during the year ............................... Interest cost on projected benefit obligations................................ Return on plan assets ................................................................... Net amortization and deferral........................................................ Net pension expense (credit) ............................................... $ 1,979 1,553 (3,214) (304) $ 14 (in thousands) $ 1,589 1,301 (2,798) (301) $ (209) $ 1,557 1,191 (2,639) (302) $ (193) The discount rates used in determining the actuarial value of the projected benefit obligation for 1996, 1995 and 1994 were 7.75%, 7.25% and 7.5%, respectively. The average expected rate of return on plan assets was 8.5% for 1996, 1995 and 1994. The assumed rate of increase in compensation was 5.0% for 1996, 1995 and 1994. The following table sets forth the plans’ funded status and amounts recognized in the balance sheet: At September 30, 1996 1995 (in thousands) Actuarial present value of benefit obligations: Vested benefit obligation .................................................................... Accumulated benefit obligation .......................................................... Projected benefit obligation................................................................ $ 17,376 $ 20,675 $ 23,534 $ 16,199 $ 19,215 $ 21,735 Plan assets at fair value, primarily listed stocks, U.S. Government securities and guaranteed insurance contracts ................................. $ 42,609 $ 38,114 Projected benefit obligation less than plan assets ..................................... Unrecognized net gain, including unrecognized net assets existing at October 1, 1987............................................... Unrecognized prior service cost ................................................................. Prepaid pension cost.................................................................................. $ 19,075 $ 16,379 (8,430) 1,740 $ 12,385 (5,959) 1,978 $12,398 Defined Contribution Plan: Substantially all employees on the United States payroll of the Company may elect to participate in the Company sponsored Thrift/401(K) Plan by contributing a portion of their earnings. The Company contributes amounts equal to 100 percent of the first five percent of the participant’s compensation subject to certain limitations. Expensed Company contributions were $1,908,000, $1,735,000 and $1,588,000 in 1996, 1995 and 1994, respectively. NOTE 8 ACCRUED LIABILITIES Accrued liabilities consist of the following: At September 30, 1996 1995 Accrued royalties payable........................................................................... Accrued taxes payable - operations ........................................................... Accrued income taxes payable................................................................... Accrued workers compensation claims ..................................................... Accrued equipment cost............................................................................. Other .......................................................................................................... (in thousands) $ 7,709 4,645 4,915 2,561 2,197 9,916 $ 31,943 $ 5,977 2,521 388 1,280 4,017 5,976 $ 20,159 26 NOTE 9 SUPPLEMENTAL CASH FLOW INFORMATION Years Ended September 30, 1996 1995 1994 Cash payments: Interest paid ............................................................................ Income taxes paid: Continuing operations .......................................................... Discontinued operations ............................................. Noncash investing activity: Accrued equipment cost ..................................................... $ 798 15,491 2,563 $ 2,197 (in thousands) $ 408 $ 371 2,102 2,522 7,059 2,457 $ 4,016 $ 3,000 NOTE 10 RISK FACTORS CONCENTRATIONS OF CREDIT - Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of temporary cash investments and trade receivables. The Company places its temporary cash investments with high quality financial institutions and limits the amount of credit exposure to any one financial institution. The Company’s trade receivables are primarily with a variety of companies in the oil and gas industry. Management requires collateral for certain receivables of customers in its natur- al gas marketing operations. INTERNATIONAL OPERATIONS - International drilling operations are significant contributors to the Company’s revenues and net profit. It is possible that operating results could be affected by the risks of such activities, including economic conditions in the international markets in which the Company operates, political and economic instability, fluctuations in currency exchange rates, changes in international regulato- ry requirements, international employment issues, and the burden of complying with foreign laws. These risks may adversely affect the Company’s future operating results and financial position. NOTE 11 SEGMENT INFORMATION The Company operates principally in the contract drilling and oil and gas industries. The contract drilling operations consist of contracting Company-owned drilling equipment primarily to major oil and gas exploration companies. The Company’s primary international areas of operation include Venezuela, Colombia and Ecuador. Oil and gas activities consist of ownership of mineral interests in productive oil and gas leases and undeveloped leases located primarily in Oklahoma, Texas, Kansas and Louisiana. Intersegment sales, which are accounted for in the same manner as sales to unaffiliated customers, are not material. Operating profit is total revenue less operating expenses. In computing operating profit, the following items have not been considered: equi- ty in income of affiliate; income from investments; general corporate expenses; interest expense; and domestic and foreign income taxes. Identifiable assets by segment are those assets that are used in the Company’s operations in each segment. Corporate assets are principally cash and cash equivalents, short-term investments and investments in marketable securities. Revenues from one company doing business with the contract drilling segment accounted for approximately 19 percent, 18 per- cent, and 14 percent of the total consolidated revenues during the years ended September 30, 1996, 1995 and 1994, respectively. Collectively, revenues from three companies controlled by the Venezuelan government accounted for approximately 12.8 percent and 13.4 percent of total consolidated revenues for the year ended September 30, 1996 and 1995, respectively. Summarized revenues and operating profit by industry segment for the years ended September 30, 1996, 1995 and 1994 are located on page 10. Additional financial information by industry segment is as follows: Years Ended September 30, 1996 1995 1994 Net Income (loss): Contract Drilling - Domestic ................................................. Contract Drilling - International ............................................ Exploration and Production .................................................. Natural Gas Marketing ......................................................... Real Estate Division ............................................................. Other .................................................................................... Equity in income of affiliate .................................................. Net income from Continuing Operations.......................... Change in accounting principle ............................................... Discontinued operations .......................................................... Net Income .............................................................................. $ 6,796 17,693 17,335 2,247 3,121 (3,452) 1,686 $ 45,426 27,140 $ 72,566 (in thousands) $ 4,506 12,106 (13,906) 1,230 1,324 (558) 1,086 $ 5,788 3,963 $ 9,751 $ 3,697 8,459 2,710 869 2,751 (2,282) 904 $ 17,108 4,000 3,863 $ 24,971 27 Years Ended September 30, 1996 1995 1994 (in thousands) Identifiable assets: Contract drilling - Domestic .................................................. Contract drilling - International ............................................. Exploration and Production .................................................. Natural Gas Marketing ......................................................... Real Estate division ............................................................. Corporate and other............................................................. Discontinued operations....................................................... Depreciation, depletion and amortization: Contract drilling - Domestic .................................................. Contract drilling - International ............................................. Exploration and Production .................................................. Natural Gas Marketing ......................................................... Real Estate division ............................................................. Corporate and other............................................................. Continuing operations...................................................... Discontinued operations .................................................. Capital expenditures: Contract drilling - Domestic .................................................. Contract drilling - International ............................................. Exploration and Production .................................................. Natural Gas Marketing ......................................................... Real Estate division ............................................................. Corporate and other............................................................. Continuing operations...................................................... Discontinued operations .................................................. $169,363 213,171 141,058 15,602 23,628 259,092 $821,914 $ 13,879 22,120 20,299 725 1,455 964 59,442 754 $ 60,196 $ 57,004 24,801 24,320 435 776 830 108,166 1,581 $109,747 $138,359 188,587 142,474 10,192 24,380 196,233 6,836 $707,061 $ 12,111 19,557 39,895 298 3,623 959 76,443 672 $ 77,115 $ 32,503 55,044 20,956 252 907 1,255 110,917 859 $111,776 $132,804 131,767 175,003 8,846 26,958 133,442 12,869 $621,689 $ 10,990 15,722 19,523 290 1,624 1,265 49,414 654 $ 50,068 $ 31,692 25,723 45,809 76 916 1,048 105,264 619 $105,883 NOTE 12 SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES All of the Company’s oil and gas producing activities are located in the United States. Results of Operations from Oil and Gas Producing Activities - Years Ended September 30, 1996 1995 1994 Revenues ............................................................................ Production costs .................................................................. Exploration expense and valuation provisions ....................... Depreciation, depletion and amortization .............................. Income tax expense (benefit)................................................ Total cost and expenses.................................................... Results of operations (excluding corporate overhead $ 76,643 20,080 9,931 20,299 9,187 59,497 (in thousands) $ 47,986 18,035 14,017 39,895 (7,243) 64,704 and interest costs) ............................................................ $ 17,146 $ (16,718) $58,884 18,854 17,262 19,523 890 56,529 $ 2,355 Capitalized Costs - At September 30, 1996 1995 (in thousands) Properties being amortized: Proved properties ................................................................................................. Unproved properties ............................................................................................. Total costs being amortized .............................................................................. Less - Accumulated depreciation, depletion and amortization................................. Net .................................................................................................................... $392,562 9,242 401,804 269,994 $131,810 $384,755 8,051 392,806 257,988 $134,818 28 Costs Incurred Relating to Oil and Gas Producing Activities - Years Ended September 30, 1996 1995 1994 (in thousands) Property acquisition: Proved ............................................................................. Unproved.......................................................................... Exploration........................................................................... Development........................................................................ Total.............................................................................. $ 256 3,178 9,874 14,131 $27,439 $ 1,228 1,565 13,497 9,703 $25,993 $23,115 4,893 12,418 12,888 $53,314 Estimated Quantities of Proved Oil and Gas Reserves (Unaudited) - Proved reserves are estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demon- strate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those which are expected to be recovered through existing wells with existing equipment and operating methods. The following is an analysis of proved oil and gas reserves as estimated by the Company and reviewed by independent engineers. OIL (Bbls.) GAS (Mmcf) Proved reserves at September 30, 1993 ................................................................... Revisions of previous estimates ................................................................................ Extensions, discoveries and other additions.............................................................. Production.................................................................................................................. Purchases of reserves-in-place ................................................................................. Sales of reserves-in-place ......................................................................................... Proved reserves at September 30, 1994 ................................................................... Revisions of previous estimates ................................................................................ Extensions, discoveries and other additions.............................................................. Production.................................................................................................................. Purchases of reserves-in-place ................................................................................. Sales of reserves-in-place ......................................................................................... Proved reserves at September 30, 1995 ................................................................... Revisions of previous estimates ................................................................................ Extensions, discoveries and other additions.............................................................. Production.................................................................................................................. Purchases of reserves-in-place ................................................................................. Sales of reserves-in-place ......................................................................................... 6,883,199 302,200 261,114 (887,455) 159,580 (8,427) 6,710,211 124,361 328,539 (808,058) 310 (26,251) 6,329,112 629,154 298,986 (809,571) 21,912 (1,477) 289,445 (819) 8,818 (26,628) 19,900 (64) 290,652 5,222 8,775 (26,421) 1,934 (116) 280,046 5,098 21,311 (34,535) 647 (266) Proved reserves at September 30, 1996 ................................................................... 6,468,116 272,301 Proved developed reserves at September 30, 1994............................................................................................... September 30, 1995............................................................................................... September 30, 1996............................................................................................... 6,649,672 6,270,216 6,441,803 267,688 262,319 261,519 Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves (Unaudited) - The “Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves” (Standardized Measure) is a disclosure requirement under Financial Accounting Standards Board Statement No. 69. The Standardized Measure does not purport to present the fair market value of a company’s proved oil and gas reserves. This would require consideration of expected future economic and operating conditions, which are not taken into account in calculating the Standardized Measure. Under the Standardized Measure, future cash inflows were estimated by applying year-end prices to the estimated future produc- tion of year-end proved reserves. Future cash inflows were reduced by estimated future production and development costs based on year-end costs to determine pre-tax cash inflows. Future income taxes were computed by applying the statutory tax rate to the excess of pre-tax cash inflows over the Company’s tax basis in the associated proved oil and gas properties. Tax credits and per- manent differences were also considered in the future income tax calculation. Future net cash inflows after income taxes were dis- counted using a ten percent annual discount rate to arrive at the Standardized Measure. 29 At September 30, 1996 1995 Future cash inflows .................................................................................................... Future costs - Future production and development costs ............................................................ Future income tax expense ................................................................................... Future net cash flows................................................................................................. 10% annual discount for estimated timing of cash flows ........................................... Standardized Measure of discounted future net cash flows ...................................... Changes in Standardized Measure Relating to Proved Oil and Gas Reserves (Unaudited) _ (in thousands) $549,033 $429,259 (193,047) (98,158) 257,828 (103,964) $153,864 (173,633) (63,183) 192,443 (81,509) $110,934 Years Ended September 30, 1996 1995 1994 Standardized Measure - Beginning of year............................ Increases (decreases) - Sales, net of production costs ............................................ Net change in sales prices, net of production costs ........... Discoveries and extensions, net of related future development and production costs................................. Changes in estimated future development costs ............... Development costs incurred ............................................... Revisions of previous quantity estimates ........................... Accretion of discount .......................................................... Net change in income taxes ............................................... Purchases of reserves-in-place.......................................... Sales of reserves-in-place.................................................. Other .................................................................................. Standardized Measure - End of year ..................................... $110,934 (56,563) 59,479 29,189 (6,651) 14,050 5,731 14,362 (31,158) 643 (124) 13,972 $153,864 (in thousands) $124,623 (29,951) (12,917) 8,179 (4,672) 9,703 2,825 16,171 (7,538) 1,202 (51) 3,360 $110,934 $178,757 (40,030) (80,347) 9,653 (14,571) 12,888 483 23,678 20,942 11,219 (62) 2,013 $124,623 NOTE 13 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands, except per share amounts) 1996 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Revenues ............................................................................. Gross profit .......................................................................... Income from continuing operations ...................................... Income (loss) from discontinued operations ......................... Gain on sale of discontinued operations .............................. Net income ........................................................................... Earnings (loss) per share: Continuing operations .................................................... Discontinued operations ................................................. Gain on sale of discontinued operations ........................ Net income ..................................................................... $88,427 16,971 9,468 1,625 $95,213 17,897 9,802 1,225 $101,358 23,256 12,650 508 11,093 11,027 13,158 .38 .07 .45 .40 .05 .45 .51 .02 .53 $108,257 21,180 13,506 (268) 24,050 37,288 .55 (.01) .97 1.51 1995 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Revenues ............................................................................... Gross profit (loss) .................................................................. Income (loss) from continuing operations .............................. Income from discontinued operations .................................... Net income (loss) ................................................................... Earnings (loss) per share: Continuing operations ........................................................ Discontinued operations..................................................... Net income ......................................................................... $73,993 6,273 2,736 1,680 4,416 .11 .07 .18 $73,350 8,818 4,127 1,693 5,820 .17 .07 .24 $74,648 8,760 4,114 470 4,584 .17 .02 .19 $84,730 (7,155) (5,189) 120 (5,069) (.21) (.21) Gross profit (loss) represents total revenues less operating costs, depreciation, depletion and amortization, dry holes and abandon- ments, and taxes, other than income taxes. Net income in the fourth quarter of 1996 includes the gain from sale of discontinued operations (see Note 6). All quarters presented have been restated to reflect discontinued operations. Net loss from continuing operations for the fourth quarter of 1995 includes an after-tax charge of $13.6 million ($.55 per share) related to the Company adopting SFAS No 121 (see note 1). 30 Report of Independent Auditors HELMERICH & PAYNE, INC. The Board of Directors and Shareholders Helmerich & Payne, Inc. We have audited the accompanying consolidated balance sheets of Helmerich & Payne, Inc. as of September 30, 1996 and 1995, and the related consolidated state- ments of income, shareholders’ equity, and cash flows for each of the three years in the period ended September 30, 1996. These financial statements are the responsi- bility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Helmerich & Payne, Inc. at September 30, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, effective July 1, 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”. As discussed in Note 1 to the financial statements, effective October 1, 1994, the Company adopted SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and as discussed in Note 3 to the financial state- ments, effective October 1, 1993, the Company adopted SFAS No. 109, “Accounting for Income Taxes.” Tulsa, Oklahoma November 15, 1996 Stock Price Information Closing Market Price Per Share 1996 1995 QUARTERS HIGH LOW HIGH First .................................................. Second ............................................. Third ................................................. Fourth............................................... Dividend Information QUARTERS $ 241/2 $ 301/8 341/2 27 381/4 33 435/8 LOW $255/8 271/2 241/2 265/8 31 343/4 30 275/8 $ 311/4 Paid Per Share Total Payment 1996 1995 1996 1995 First .................................................. $.125 $.125 .125 Second .............................................. .125 .125 .125 Third ................................................. .125 Fourth................................................ .130 $3,095,578 3,100,568 3,104,724 3,229,596 $3,089,758 3,087,958 3,092,973 3,094,813 STOCKHOLDERS’ MEETING The annual meeting of stockholders will be held on March 5, 1997. A formal notice of the meet- ing, together with a proxy statement and form of proxy, will be mailed to shareholders on or about January 27, 1997. STOCK EXCHANGE LISTING Helmerich & Payne, Inc. Common Stock is traded on the New York Stock Exchange with the ticker symbol “HP.” The newspaper abbreviation most commonly used for financial reporting is “HelmP.” Options on the Company’s stock are also traded on the New York Stock Exchange. STOCK TRANSFER AGENT AND REGISTRAR As of December 16, 1996, there were 1,514 record holders of Helmerich & Payne, Inc. com- mon stock as listed by the transfer agent’s records. Our Transfer Agent is responsible for our share- holder records, issuance of stock certificates, and distribution of our dividends and the IRS Form 1099. Your requests, as shareholders, concerning these matters are most efficiently answered by corresponding directly with The Liberty Bank of Oklahoma City at the following address: The Liberty National Bank and Trust Company of Oklahoma City Stock Transfer Department P.O. Box 25848 Oklahoma City, Oklahoma 73125-0848 Telephone: (405) 231-6325 FORM 10-K The Company’s Annual Report on Form 10-K, which has been submitted to the Securities and Exchange Commission, is available free of charge upon written request. DIRECT INQUIRIES TO: President Helmerich & Payne, Inc. Utica at Twenty- First Tulsa, Oklahoma 74114 Telephone: (918) 742-5531 31 Eleven-Year Financial Review HELMERICH & PAYNE, INC. Years Ended September 30, 1996 1995 1994 REVENUES AND INCOME* Contract Drilling Revenues............................................................... Crude Oil Sales ................................................................................ Natural Gas Sales ............................................................................ Gas Marketing Revenues................................................................. Real Estate Revenues...................................................................... Dividend Income .............................................................................. Other Revenues ............................................................................... Total Revenues††............................................................................. Net Cash Provided by Continuing Operations††.............................. Income from Continuing Operations ................................................ Net Income3 ..................................................................................... 244,338 15,378 60,500 57,817 8,076 3,650 3,496 393,255 121,420 45,426 72,566 203,325 13,227 33,851 34,729 7,560 3,389 10,640 306,721 84,010 5,788 9,751 PER SHARE DATA Income from Continuing Operations ................................................ Net Income3...................................................................................... Cash Dividends ................................................................................ Shares Outstanding* ........................................................................ 1.84 2.94 .505 24,886 .24 .40 .50 24,765 FINANCIAL POSITION Net Working Capital* ........................................................................ Ratio of Current Assets to Current Liabilities ................................... Investments*..................................................................................... Total Assets* .................................................................................... Long-Term Debt* .............................................................................. Shareholders’ Equity*....................................................................... 51,803 1.83 229,809 821,914 __ 645,970 CAPITAL EXPENDITURES* Contract Drilling Equipment ............................................................. Wells and Equipment ....................................................................... Real Estate....................................................................................... Other Assets (includes undeveloped leases) ................................... Discontinued Operations .................................................................. Total Capital Outlays ........................................................................ 79,269 21,142 752 7,003 1,581 109,747 50,038 1.74 156,908 707,061 __ 562,435 80,943 19,384 873 9,717 859 111,776 PROPERTY, PLANT AND EQUIPMENT AT COST* Contract Drilling Equipment ............................................................. Producing Properties ....................................................................... Undeveloped Leases........................................................................ Real Estate....................................................................................... Other ................................................................................................ Discontinued Operations .................................................................. Total Property, Plant and Equipment................................................ 1,070,431 568,110 392,562 9,242 46,970 53,547 __ 501,682 384,755 8,051 46,642 55,655 13,937 1,010,722 182,781 13,161 45,261 51,874 7,396 3,621 6,058 310,152 74,463 17,108 24,971 .70 1.02 .485 24,710 76,238 2.63 87,414 621,689 __ 524,334 53,752 40,916 902 9,695 618 105,883 444,432 377,371 11,729 47,827 48,612 13,131 943,102 * 000’s omitted †† Chemical operations were sold August 30, 1996 (see note 6). Prior year amounts have been restated to exclude discontinued operations. 3 Includes $13.6 million (.55 per share) effect of impairment charge for adoption of SFAS No. 121 in 1995 and cumulative effect of change in accounting for income taxes of $4,000,000 ($.16 per share) in 1994. 32 1993 1992 1991 1990 1989 1988 1987 1986 149,661 15,392 52,446 63,786 7,620 3,535 8,283 300,723 72,493 22,158 24,550 112,833 16,369 38,370 40,410 7,541 4,050 6,646 226,219 60,414 8,973 10,849 .91 1.01 .48 24,637 .37 .45 .465 24,576 104,085 3.24 84,945 610,935 3,600 508,927 24,101 23,142 436 5,901 629 54,209 418,004 340,176 10,010 47,502 45,085 12,545 873,322 82,800 3.31 87,780 585,504 8,339 493,286 43,049 21,617 690 16,984 158 82,498 404,155 329,264 12,973 47,286 43,153 11,962 848,793 105,364 17,374 35,628 10,055 7,542 5,285 20,020 201,268 50,006 19,608 21,241 .81 .88 .46 24,488 108,212 4.19 96,471 575,168 5,693 491,133 56,297 34,741 2,104 6,793 2,594 102,529 370,494 312,438 5,552 46,671 36,423 11,838 783,416 90,974 16,058 37,697 10,566 7,636 7,402 56,131 226,464 53,288 45,489 47,562 1.88 1.97 .44 24,485 146,741 3.72 99,574 582,927 5,648 479,485 18,303 16,489 1,467 5,448 1,153 42,860 324,293 287,248 5,507 44,928 32,135 9,270 703,381 78,315 14,821 33,013 __ 7,778 9,127 17,371 160,425 65,474 20,715 22,700 75,985 14,001 26,154 __ 7,878 10,069 15,206 149,293 54,959 17,746 20,150 64,718 15,223 17,251 __ 7,561 9,757 34,757 149,267 36,999 20,575 22,016 68,220 20,020 21,308 __ 6,839 11,033 29,261 156,681 53,477 6,249 7,025 .86 .94 .42 24,173 .73 .83 .40 24,166 .85 .91 .38 24,187 .25 .28 .36 24,187 114,357 3.12 130,443 591,229 49,087 443,396 17,901 30,673 878 6,717 815 56,984 323,313 279,768 5,441 48,016 29,716 8,156 694,410 135,275 6.10 133,726 576,473 70,715 430,804 19,110 25,936 3,095 2,496 815 51,452 313,289 251,445 3,305 47,165 27,798 7,370 650,372 135,139 6.68 140,431 571,348 74,732 420,833 13,993 27,402 6,128 2,012 336 49,871 309,865 228,214 4,197 44,070 28,274 6,602 621,222 108,331 5.61 158,311 563,236 79,340 408,185 23,673 11,767 1,409 2,026 281 39,156 307,199 215,488 7,294 38,131 28,454 6,286 602,852 33 Eleven-Year Operating Review HELMERICH & PAYNE, INC. Years Ended September 30, 1996 1995 1994 CONTRACT DRILLING Drilling Rigs, United States ................................................................ Drilling Rigs, International.................................................................. Contract Wells Drilled, United States................................................. Total Footage Drilled, United States* ................................................. Average Depth per Well, United States ............................................. Percentage Rig Utilization, United States .......................................... Percentage Rig Utilization, International............................................ 41 36 233 2,499 10,724 82% 85% PETROLEUM EXPLORATION AND DEVELOPMENT Gross Wells Completed ..................................................................... Net Wells Completed ......................................................................... Net Dry Holes .................................................................................... 63 35.3 7.3 41 35 212 1,933 9,119 71 84 59 27.4 5.9 PETROLEUM PRODUCTION Net Crude Oil and Natural Gas Liquids Produced (barrels daily)................................................................ Net Oil Wells Owned — Primary Recovery........................................ Net Oil Wells Owned — Secondary Recovery................................... Secondary Oil Recovery Projects ...................................................... Net Natural Gas Produced (thousands of cubic feet daily) ...................................................... Net Gas Wells Owned........................................................................ 2,212 176.9 63.8 12 94,358 378 2,214 186 64 12 72,387 354 47 29 162 1,842 11,367 69 88 44 15 1.7 2,431 202 71 14 72,953 341 NATURAL GAS ODORANTS AND OTHER CHEMICALS†† Chemicals Sold (pounds)* ................................................................. 9,823 7,670 8,071 REAL ESTATE MANAGEMENT Gross Leasable Area (square feet)* .................................................. Percentage Occupancy...................................................................... 1,654 94 1,652 87 1,652 83 TOTAL NUMBER OF EMPLOYEES Helmerich & Payne, Inc. and Subsidiaries† ....................................... 3,309 3,245 2,787 * 000’s omitted. † 1986-1989 include U.S. employees only †† Chemical operations were sold August 30, 1996 (see note 6). 34 1993 1992 1991 1990 1989 1988 1987 1986 42 29 128 1,504 11,746 53 68 39 30 100 1,085 10,853 42 69 46 25 106 1,301 12,274 47 69 49 20 119 1,316 11,059 50 45 49 20 108 1,350 12,500 44 46 48 18 115 1,284 11,165 45 30 50 19 110 1,182 10,745 39 16 48 19 110 1,384 12,582 44 30 42 15.9 4.3 54 17.8 4.3 45 20.2 4.3 36 15.3 3.4 45 15.2 2.8 45 14.6 1.6 18 5.2 .5 27 10.3 3.6 2,399 202 71 14 78,023 307 2,334 220 74 14 75,470 289 2,152 227 55 12 66,617 278 2,265 223 46 12 65,147 194 2,486 201 214 17 57,490 205 2,463 202 222 21 45,480 197 2,578 199 237 20 31,752 180 3,077 234 235 18 32,392 180 7,930 8,452 8,155 8,255 7,702 8,507 8,165 7,554 1,656 86 1,656 87 1,664 86 1,664 85 1,669 90 1,670 90 1,595 94 1,433 95 2,389 1,928 1,758 1,864 1,100 1,156 1,026 844 35 Directors Officers W. H. Helmerich, III Chairman of the Board Hans Helmerich President and Chief Executive Officer George S. Dotson Vice President, President of Helmerich & Payne International Drilling Co. Douglas E. Fears Vice President, Finance Steven R. Mackey Vice President, Secretary, and General Counsel Steven R. Shaw Vice President, Exploration & Production W. H. Helmerich, III Chairman of the Board, Tulsa, Oklahoma Hans Helmerich President and Chief Executive Officer, Tulsa, Oklahoma William L. Armstrong Chairman, Ambassador Media Corporation, Denver, Colorado Glenn A. Cox* President and Chief Operating Officer, Retired, Phillips Petroleum Co., Bartlesville, Oklahoma George S. Dotson Vice President, President of Helmerich & Payne International Drilling Co., Tulsa, Oklahoma L. F. Rooney, III* Chairman, Manhattan Construction Company Tulsa, Oklahoma George A. Schaefer Chairman and Chief Executive Officer, Retired, Caterpillar Inc., Peoria, Illinois John D. Zeglis Senior Vice President and General Counsel, American Telephone & Telegraph Co., Basking Ridge, New Jersey *Member, Audit Committee 36 Five-Year Production Review Years Ended September 30, 1993 1992 1991 Barrels 1990 1989 OIL AND LIQUIDS Annual Production ................................ 007,854,124 007,074,405 008,826,843 008,907,289 006,299,410 2,463 $15.54 6,299,410 Per Day Production ........................... Average Price per Barrel ...................... Year-end Proved Reserves .................. 2,486 $16.34 8,618,850 2,265 $19.42 8,102,761 2,334 $19.16 7,507,586 2,152 $22.12 7,074,405 NATURAL GAS Annual Production ................................ 16,600,054 Per Day Production ........................... 45,480 Average Price per Mcf ......................... $1.44 Year-end Proved Reserves .................. 294,596,000 296,229,000 279,923,000 291,630,000 279,562,000 20,983,983 57,490 $1.48 24,310,155 66,617 $1.35 27,622,018 75,470 $1.39 23,778,690 65,147 $1.48 Thousand Cubic Feet (mcf) Financial Highlights Years Ended September 30, 1993 (in thousands) Gross Revenues ............................................................... Pre-Tax Income ................................................................ Depreciation Expense....................................................... Capital Expenditures ......................................................... Year-end Book Value ........................................................ Average Occupancy ......................................................... $ 7,550 4,074 1,685 697 28,234 87% 1992 $ 7,558 3,722 1,633 2,190 29,194 86% Financial Highlights Years Ended September 30, 1993 1992 (in thousands) 1991 Gross Revenues ................................................................................. Pre-Tax Income .................................................................................. Non-Cash Charges......................................................................... Capital Expenditures .......................................................................... Pounds of Product Sold .................................................................. $ 7,550 4,074 1,685 697 28,234 $ 7,558 3,722 1,633 2,190 29,194 Summary of Property Owned Property Name Utica Square Shopping Center Utica Square Offices and Medical Center Plaza Office Building Space Center Space Center East Tandem Business Park Tulsa Business Park Maxim Center Maxim Place Southpark/100 East Industrial Park Description Square Feet Upscale Retail Professional Offices Corporate Offices Industrial Warehouses Industrial Warehouses Office/Warehouse Complex Office/Warehouse Complex Office/Warehouse Complex Office/Warehouse Complex Undeveloped 260 Acres Total Square Feet 406,260 94,969 90,156 495,000 202,500 88,084 204,600 40,800 33,750 1,656,119 37 Stock Portfolio Held by the Company September 30, 1993 Number of Shares Carrying Amount on Balance Sheet Market Value at End of Fiscal Year (in thousands,except share amounts) Schlumberger, Ltd.................................................... Atwood Oceanics, Inc...................................................... Sun Company, Inc. .......................................................... Phillips Petroleum Company. ........................................... Liberty Bancorp............................................................... Oryx Energy Company .................................................... Oneok............................................................................. Other .............................................................................. Total.................................................................... 740,000 1,600,000 907,164 300,000 500,000 700,000 225,000 $ 23,511 19,285 10,637 7,470 7,270 6,683 2,751 7,338 $ 84,945 $ 49,303 17,200 25,854 10,125 17,000 17,150 5,006 10,737 $152,375 On November 11, 1993 approximately 1,000 plaintiffs filed a lawsuit one of the Company’s subsidiaries, alleging person- al injury and property damage arising out of the operation of the subsidiary’s facility. The plaintiffs allege that the sub- sidiary released dangerous chemicals and waste into the air and ground water and are seeking actual damages of $500 million and punitive damages of $500 billion. This lawsuit is one of three lawsuits filed simultaneously. A similar lawsuit has been filed against another company and a class action lawsuit was filed against virtually every chemical plant and oil refinery in the area. Management believes that the lawsuit is without merit and that the ultimate monetary exposure is not material to the financial statements because they believe that the Company has complied in all material respects with applicable laws and regulations. The Company is also a defendant in other litigation arising out of operations in the normal course of business. In the opinion of management, after taking into account existing legal reserves, none of the various other pending lawsuits and proceedings should have a material adverse effect upon the consolidated financial position or results of opera- tions of the Company. 38