Helmerich and Payne Inc (HP) 2002 Q3 法說會逐字稿

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Please stand by, the conference is about to begin.

Good day. All sites are now on the conference line.

At this time I'll turn your program over to Doug Fears. Go ahead, please, sir.

Thank you and good afternoon to everyone. Welcome to Helmerich & Payne's third quarter conference call and Webcast.

If you've not received the announcement released today, you may find it on the company's Web site at hpinc.com.

Our primary speakers on the conference call today are Hans Helmerich, President and CEO of Helmerich & Payne; George Dotson, President of the company's wholly-owned subsidiary, Helmerich & Payne International Drilling Company; Steve Shaw, Vice President of Exploration and Production. And I'm Doug Fears, Vice President of Finance and Chief Financial Officer.

Each of the conference call participants will provide statements regarding their respective areas, and following those remarks we'll open the conference call to questions. And we would expect this call to last no longer than one hour.

I want to remind you that there will be forward-looking statements and estimates made today, and while we've made every attempt to be as accurate as possible in the information we give to you, the information involves risks and uncertainties that could significantly impact expected results.

You may see a further discussion of these risks and uncertainties in the most recently filed 10-K with the SEC, filed on May the 15th of 2002. Additionally, we'll be rounding numbers in estimates in hopes of adding clarity to our comments.

As announced today, Helmerich & Payne's net income for our third fiscal quarter was $28.2 million, or 56 cents per share. The 56 cents per share includes 30 cents per share of gains from the sale of portfolio securities.

So to compare operating results or recurring income with previous quarters, we'll use 26 cents per share for this quarter, and compare it with 21 cents per share of last - for the previous quarter, and net income of 76 cents of recurring income during last year's third quarter.

Although George will give you more contract drilling details in a minute, a short general description of the quarter compared to last quarter would be that the contract drilling division held its own because of a greater number of U.S. land rigs available, working at higher utilizations in the U.S., even though revenue per rig was down slightly from the previous quarter.

Additionally, we were able to hold our own in the offshore platform rig sector where two new rigs went to work, although utilization in that sector was lower.

Our international business continues to suffer from poor business and economic environments in South America.

The increase in recurring net income for the second quarter was helped by improved natural gas prices that resulted in slightly higher oil and gas division operating profit.

As mentioned in the press release, we did sell a portion of our portfolio securities, generating $36.8 million in gross proceeds. We sold our entire positions in Sunoco, Kerr-McGee, Bank One and ONEOK.

Our cash balance at June 30 was $48.2 million, and the market value of the portfolio at June 30 was $219.5 million. However, today, the portfolio is worth slightly more than $170 million.

Capital expenditures for the first nine months were $257.5 million. That included $42.5 million in the exploration and production division, and $212 million spent in the contract drilling division, with the remaining $3 million in real estate and corporate expenditures.

Projected fiscal 2002 capital expenditures are $300 million for contract drilling and $55 million for exploration and production.

Now, I want to mention that Hans Helmerich, CEO and President of the company, is connected to this call from a remote location in Colorado where he is on vacation.

And now I'd like to turn the call over to Hans.

Thanks, Doug.

As we look forward over the rest of 2002 and the beginning of 2003, we believe that the fundamentals remain strong for an improving energy cycle.

Clearly, industry-wide natural gas production declines argue for increased drilling activity, and international efforts appear to be improving with better oil price stability.

At the same time, uncertainty, reflected primarily in reduced confidence, is very real. This is not hard to understand in the face of the seemingly constant onslaught of news involving fraud and gross mismanagement. The loss of trust is taking a toll on markets and capital investment.

It's impossible to predict how this will play out moving ahead, but it does underscore the importance of integrity and trust with customers, investors and co-workers. The value of the company's long-earned reputation is something we are serious about preserving and enhancing every day. We consider it inseparable from the company's future success.

Now turning to the third quarter, we continue to make progress toward closing our spin/merge deal with Key Production and the creation of Cimarex. We believe that that closing will occur in September of this year.

Also during the quarter we moved forward on previously discussed plans in regard to our financing the FlexRig3 construction program. We have increased our revolving bank lines of credit to a total of $175 million. We are also in the process of finalizing a $200 million intermediate term debt facility.

And finally, as we have said, we've taken steps in selling down the company's stock portfolio, generating $36.8 million of gross proceeds. And we were fortunate in the timing of those sales. Had we sold the same stocks yesterday, we would have realized 21 percent less value.

These moves taken together will allow us added flexibility, but at the same time maintain a conservative capital structure going forward.

We continue to be pleased with the customer response to our FlexRig3 program. And to give you more details on that and also our drilling operations, I'll turn the call over to George Dotson.

Thank you, Hans.

Operating earnings for total drilling operations were $17,907,000 in the third quarter, off slightly from $17,949,000 in the previous quarter.

Drilling performance was highlighted by H&P's U.S. land operations, reporting a 12 percent increase in operating earnings to $6.5 million from $5.8 million in the second quarter.

The average number of H&P rigs working in U.S. land operations increased 11 percent to 49.1 rigs during the third quarter compared to 44.3 rigs in the second quarter.

Average revenue per day decreased seven percent to $11,501 versus $12,386 in the second quarter. Average daily cash margins for all of U.S. land rigs decreased four percent to $3,390 versus $3,545 in the second quarter.

The Baker Hughes active rig count for U.S. land increased 14 percent to 722 rigs on 28 June, but down 35 percent from the recent high of 1,114 land rigs on the 13th of July in 2001.

Today, 24 July, H&P has 85 percent activity, or 60 land rigs available in the U.S., with 51 rigs working and nine rigs stacked. Our average day rate for all land rigs today is $10,719.

As a note of explanation, the average third quarter revenue of $11,501 per day is day rate plus daily mobilization revenue, while today's average day rate of $10,719 is day rate only.

Second quarter operating earnings from offshore operations increased one percent to $7.8 million from $7.7 million in the second quarter.

Eight of our 12 platform rigs are contracted, however, one rig is on standby at reduced margin, and another rig will be released in mid-August.

Two of the four idle platform rigs are now in shipyards completing modification projects. Another of the idle platform rigs is scheduled to begin a 90-day modification project. We do not have follow-on contracts for the four idle platform rigs at this time.

We completed the construction projects for two new self-moving platform rigs during the third quarter. Each project finished on schedule and slightly under budget. Rig 205 went on the payroll 7 April for Shell, and Rig 206 went on the payroll 20 May for BP.

Third quarter international operations reported a 20 percent decrease in operating earnings to $3.5 million from $4.4 million in the second quarter.

An average of 15.3 international rigs were contracted out of 32 available during the third quarter, and average daily revenue was $19,900.

Four deep 3,000-horsepower rigs worked in Venezuela throughout the quarter. Six deep rigs and four smaller rigs were idle. We have received the first encouragement in over 12 months with the receipt of a bid request from PDVSA, the national oil company, for up to four additional deep rigs. We are encouraged that this is the front end of a long-term improvement in Venezuela.

Six or seven rigs in Ecuador were contracted for the full quarter, with the seventh rig starting to work recently. Our eighth rig has just begun drilling its first well in a one-year contract.

One rig continues to work for BP in Colombia. However, the rig will be released in early August. In addition, we have two other land rigs stacked in the area. We are reviewing our alternatives for these three stacked rigs.

Two deep rigs in Bolivia and one deep rig in Argentina are currently operating. Devaluation, currency restrictions and economic turmoil continue to cloud the outlook for Argentina. And we will continue to review our alternatives for that operation also.

Despite third quarter reports of flat demand, lower prices and reduced margins throughout the U.S. land market, our mobile and FlexRigs continue to perform at higher activity and margins.

Thirty out of 31 mobile and FlexRigs are working today. This 97 percent activity for our 31 mobile and FlexRigs compares to 21 of our 29 conventional rigs working at 72 percent activity.

Not only are H&P's mobile and FlexRigs working at 97 percent activity, they earned an average daily cash margin of $4,194 during the third quarter, compared to H&P's conventional rigs, which earned $2,137 per day.

Delivery of the new FlexRig3s is slightly behind schedule, although we expected to deliver 10 new rigs in this fiscal year, we now estimate we deliver eight rigs by 30 September. We will deliver the remaining 17 new FlexRig3s by July 2003.

Two new FlexRig3s are currently operating, and a third is preparing to ship to the first location. Customers have committed to the first eight of the new FlexRig3s on programs from one to five wells.

We are committed to delivering the best value and safety and field performance to all of our customers. Our investment in new ideas, new rigs and applications of new technologies enhances that best value.

Our customers' commitments to our mobile and FlexRigs at almost full activity and higher rates, is clear evidence we are meeting or exceeding their expectations.

And now I would like to turn the program to Steve Shaw.

Thank you, George.

During the third quarter of 2002, Helmerich & Payne participated in 29 wells, of which 24 were producing or waiting on pipeline connections or completing, three were dry and two were temporarily abandoned pending further evaluation.

Approximately 75 percent of H&P's third quarter drilling activity has been in Oklahoma, Kansas and the Texas Panhandle. The remaining 25 percent has been primarily along the Texas and Louisiana Gulf Coast.

For the first nine months of fiscal 2002, we've drilled 51 wells, of which 39 were completed or are completing, four are temporarily abandoned, and eight were dry holes.

Capital expenditures year-to-date for drilling only is approximately $32 million. We are currently anticipating the drilling of 87 gross wells for the fiscal year and spending around $45 million for drilling only.

We have spent $4.4 million for acreage and seismic in the first nine months of the fiscal year. Current estimates for land and seismic for the year is $5.2 million.

Production for the third quarter averaged 2,044 barrels of oil per day and 103.5 million cubic foot of gas per day. The average price for oil was $24.34 per barrel, and the average price for gas was $2.94 per mcf. We were forecasting an average of approximately 115 million cubic foot per day equivalent for the fiscal year.

Helmerich & Payne Energy Services generated a cash flow of $133,000 for the third quarter. This results in a cash flow of $2.15 million for the first three quarters of fiscal 2002. Dropping spot prices during the month have resulted in lower cash flow for HPESI for the third quarter.

Energy Services typically purchases gas at market prices at the beginning of the month, and sells a portion of its gas at spot prices during the remainder of the month.

With that, I'll turn the program back over to Doug Fears.

Thank you, Steve. As we mentioned in the press release, we're not changing our guidance for earnings from what we had announced in our second quarter announcement. We're expecting net income for the year, exclusive of the current 31 cent per share gain from the sale of equity securities to be in the range of $1.00 to $1.10 per share.

However, with recent declines in offshore platform rig utilization and the fourth quarter softness in international rig activity, as well as just uncertainty in natural gas pricing, we would lean more toward the $1.00 than the $1.10 for guidance.

We would now like to open the conference call to questions.

At this time, if you do have a question, please press the one on your touch-tone phone. To withdraw that question, press the pound key.

Again, if you do have a question at this time, please press the one on your touch-tone phone.

We'll take our first question from Mark Urness from Smith and Barney. Go ahead, please.

Yes. Good afternoon.

Hi, Mark.

George, I wanted to ask about the performance of the two FlexRigs that are out so far. How have they been doing?

Mark, the initial rig-ups took a little longer than we expected on the first one. There were still some teething issues.

We have gotten launched. We're drilling ahead. We still have a few little things that we are working on, but the operations move ahead.

And I think on both rigs it's fair to say that, compared to the launch of the FlexRig2s, we have certainly improved the delivery and performance.

So we're transmitting our learnings back to the rigs three, four and five. And I think that we'll see that those have even smoother startups.

But all in all, it's been a lot of work, but we've been very, very pleased with the performance so far.

You mentioned, too, that you have the first eight out of 25 committed now. Could you commit more than that if you wanted to? Or is eight pretty much the limit of the interest right now?

Mark, yes, I believe that we could commit more rigs. What we have done is just put a hold on any rigs beyond what we thought we would deliver in this fiscal year. And that was the eight rigs.

We do have people that are interested in talking about additional rigs. And I think that once we get the next couple of rigs out, we'll be ready to commit more rigs.

OK, and then my other question relates to Venezuela. That's the first sign of any real activity down in Venezuela. One of your competitors reported today, as well, that they've got zero of eight working in Venezuela and didn't really allude to any recent bid requests. So this is quite encouraging.

Do you expect these rigs to go to work after your current fiscal year ends?

Well, as I mentioned, Mark, first of all, it is a bid request. So we'll bid against other contractors in the area.

The bids are due I think in the first week of August. It normally takes a month or two to get things unraveled. I would think that it might be end of the fall, maybe even toward the end of the calendar year before those rigs - if those contracts are awarded, and we believe they will be. I think it'll be closer to the end of the calendar year before the rigs go to work.

We're hoping it'll be earlier. We're hoping that we'll be the, be successful on some of the those awards, too.

OK. Thanks.

Great. We'll take our next question from Robert Ford from Sanders, Morris, Harris. Go ahead, please.

Thanks. George, I may have missed this, but could you talk about the nature of the delays in the construction program?

Yes. To go all the way back, Robert, we had some steel issues in the beginning, and we had specifications that we had issues and the receipts of the steel did not meet our specifications. And so we lost several months in that.

After that, when we began to assemble the rig and go into the testing, some of the software on our new control systems, it required some adjustment. There have been other little tweaks that we've had to do to certain systems.

We have also increased the scope of some of the equipment, and some of it was new to rig number three, and that's taken some time to get together.

But again, it's been an all-out effort to try and deliver a rig to the location that was going to have a minimum number of problems. And so, the focus has really been in the rig-up yard, to get it right, and also to transmit all the learnings back up stream, so that we can those corrections in the assembly facility, or in the suppliers' workshops.

So all that has taken more time than we thought. But again, we're pleased with the progress, and we see steady progress being made all the time. And those learnings are going in to reducing the rig-up and delivery time on the next units.

OK. Steve, I missed it. I was writing as fast as I could. I couldn't keep up with you, though.

Could you give me your full year production estimates again?

Full-year production estimates are probably going to be in the 113 million cubic feet a day equivalents.

We have been, you know, first quarter was almost 123, and the last two quarters have been in the 115 to 116 equivalent range.

And with - I mean, again, as I've said in past statements, we may be able to be high - this may be conservative as far as our forecast.

Right.

With additional drilling, and this is going on and bringing those wells on line.

OK. Doug, just to make sure I've got the securities sold right. You sold Philips, as well, right?

No, we did not. We ...

OK. So you've got Philips, you've got out. What have you got - Schlumberger and you've got Transocean left, right?

That is correct.

OK. What was your cash balance at the end of the quarter, Doug?

Forty-eight point two million.

OK. That's all I have. Thanks, guys.

All right. Thank you, Robert.

Once again, to ask a question, please press the one on your touch-tone phone.

We'll take our next question from Ken Sill from Credit Suisse First Boston. Go ahead, please.

Yes, good afternoon.

I was wondering if you could revisit the cap ex briefly. And could you break down how much was spent this quarter on the new rigs and maintenance? And how much is maintenance cap ex?

Ken, hang on, we'll see. I don't know that we have these numbers handy for you. I'm glad to get those to you, though, off-line.

OK. And then, just what is the new schedule for the FlexRigs coming out over the next few quarters?

Ken, again, we expect to have eight by the end of the fiscal year, and then we should hit our manufacturing and delivery stride of two per month thereafter.

OK. So that's eight between now and September 30th, or does that include the two that you just - that just went on?

Oh, that ...

So eight this quarter.

... that includes. We'll have ...

OK.

... eight total out. We've put out two. We should have another one this month. And then we will have another five over the next two months.

That will bring in eight total.

And then it's back up to the two per quarter run rate?

Two per month.

I mean, I'm sorry, two per month, yes.

And then, Ken, on your question about maintenance cap ex, that is quite small in comparison to investment in new rigs, and I would think we're probably averaging $6 to $8 million per quarter - I'm sorry, no - it's at the rate of about three - three to four per quarter.

Three to four million per quarter? And there's been no change in the cost on the FlexRigs as you kept moving forward?

The first FlexRig has run - it's run more than we expected, because of the time in the yard. I would think that once all 25 are complete, we're going to be looking at $10.75 million per each.

That's a half-a-million dollars per rig more than where we started. Half of that $250,000 is for additional equipment that we decided to add. And the other half of the $250,000 has just been improvements in the manufacturing process that we've made that have cost us. So, I would say $10.75 million.

OK, great. Thanks a lot.

And we'll take our next question from from JP Morgan. Go ahead, please.

Hi, guys. Can you go over what the capital structure of the drilling company will be after the spin-off is done? In the press release you mentioned securing additional debt. I only assume that's to finance the FlexRig program.

That's correct. I can give you some real estimates. We won't know, of course until it's all said and done. But just generally speaking, we would expect our shareholders equity in Helmerich & Payne, Inc. after the spin to be somewhere in the neighborhood of $900 million - $850 to $900 million.

And then that we would have intermediate term debt of $200 million. If, as we go forward, the funding dates may be a little later than the spin-off, so, but within a month or two.

And then we have $50 million of a bank, revolving bank borrowings right now. And that may or may not stay there. I don't know.

So, at a minimum it would be roughly $900 million of equity and $200 million of intermediate debt. We may have another 50 of bank debt on there.

And then as we go forward, well, it kind of depends on cash flow and the timing of capital expenditures and other projects that come on, whether or not we incur other debt from the revolving bank facility.

Is that, that they were going to draw down on the term immediately?

On the intermediate term, yes, we will.

OK. Thank you.

Yes.

We'll take our next question from from Northwestern Mutual. Go ahead, please.

Good afternoon, Doug.

Good afternoon.

Just a couple of quick questions. If you could talk about Argentina and your other South American markets, are you still getting paid in dollars per the contracts that you have there on whatever rigs are working? And do you have any repatriation issues of that cash?

Well, in Argentina, we do have - we do have those issues, only because that country's government have mandated certain laws and restrictions on the movement of currency and the conversion of currency from the Argentina peso into dollars.

To this point, we've received what we think are meaningful and good assurances from our customer about making us at least close to being whole on our receivables.

So, is there an issue there? Yes, there is. But we still are confident that we will collect a good portion of our receivables, and that at the end of the day we'll be OK there.

It is clearly a country that is in the midst of economic problems, though.

So you're getting paid in pesos now, is that right, then?

Well, we are. But the difficulty is getting pesos converted to dollars and out of the country. We're still working on that.

OK. All right. And my other question was, with respect to the daily - average daily revenue per rig, I know you mentioned it has come down a little bit to $10,900 or so.

Is there a number that you - is there a number where if it would fall down to, it would cause nervousness and kind of - it would be difficult for the company to cover its fixed cost at that level?

This is George. Obviously, there is a number. But we think that we're comfortably on the other side of that.

What we have found, and I think the evidence shows that, and what I've - the information I've given you today, customers are willing to pay H&P at a higher rate and a higher margin for our services.

So, again, we watch what the breakeven is all the time, but we are comfortably over that at this time with our rate structure.

OK. Thank you.

Once again, to ask your question, please press the one on your touch-tone phone.

We have a follow-up question from Ken Sill from Credit Suisse First Boston. Go ahead, please.

Yes, just following up on what's going on in the domestic market with day rates. You know, it seems like there's a lot of interest with the FlexRigs, so I'm assuming the price in there is staying pretty good.

What are the plans - I mean, where do you see day rates moving over the next six months? Or is there really not much visibility on that?

And how long do you think it'd take before you put the idle conventional rigs back to work?

Ken, I think it's probably a common thought out there that the next six months are going to be - going to be filled with a lot of uncertainty, and people are waiting to see what kind of final gas storage numbers that we have, what kind of weather we start off the fall with.

All kinds of things will have an impact on gas prices, which will ultimately translate to demand for rigs.

I - we just don't know. I - we are confident that the FlexRigs will continue to work, and they will work at near or full capacity, even as we introduce the new ones.

On the conventional rigs, we will be doing our best to hold where we are, which is about 70 percent. Every opportunity we get, why we will try to add to that.

I would guess that over the next six months, if we see sort of business as usual and not an increase of another dollar per mcf, or something of that favorable an impact, that we're going to have full employment in our FlexRigs. We will be increasing those. And we'll be at this 70 percent mark.

Pricing has been, has certainly been weaker for the conventional rigs.

Is pricing still going down? Or has it firmed up?

It has gone down very, very slightly over the last month or two. We thought we saw it stabilize. It did. We thought we would start to see some increases. We even saw a few very small increases.

But there's a lot of pressure from competitors on our conventional rigs. And I think the average rollover rig rate right now - this is day rate - is 9,100. So that tells you a little bit about the pressure on it.

OK. And ...

So this ...

... so you're not really seeing any change in the bidding or interest. It's kind of a still wait and see, over where we are.

There was a lot of expressed interest. And just before it materialized in more rigs going to work, things flattened out again. And so we're kind of in a holding pattern.

Now, that 9,100 I mentioned to you, Ken, that is for conventional rigs and a rollover market.

That's pretty good for a down market, all things considered.

Yes, and I think that that is the good news in this cycle, that I think all contractors agree that we did not go as low in the rates during the down cycle as we did in the previous down cycle.

So that's a plus for the industry.

And, you know, last question about how much average backlog do you have for your rigs that are working today?

Oh, I don't think we have a backlog. We're working well-to-well on all but 11 rigs. And so it's well-to-well. I think that we generally know that we have a next well, and maybe even two wells.

But really, there's no assurance. No one is saying, look, you've got eight months' work or 12 months' work here.

OK. Thank you.

Yes, thank you.

It looks like we have no further questions at this time.

You've also - have any comments before we - Hans, do you have any more comments before we ...

No. No, I don't. Thank you.

All right. Thank you. We appreciate everybody joining us, and hope you have a good evening.

Thank you and goodbye.