Helmerich and Payne Inc (HP) 2002 Q4 法說會逐字稿

Good day. All sites are now online in a listen-only mode. I'd like to now turn the conference over to your speaker today Mr. Doug Fears, VP of Finance and CFO of Helmerich & Payne Incorporated. Please go ahead, sir.

Thank you, Kristi. Good afternoon, everyone.

Welcome to H&P's year end conference call and webcast.

If you have not received an announcement that was released earlier today, you can find it on the company's website at www.hpinc.com.

Our speakers today on the conference call, are Hans Helmerich, President and CEO of Helmerich & Payne, George Dotson, President of the companies wholly owned subsidiary, Helmerich & Payne International Drilling Company, and I'm Doug Fears, Financial Vice President and CFO. Each of the conference call participants will provide statements regarding their areas and following the remarks we'll open the call to questions and we expect this call to last no longer than one hour.

I want to remind all of you 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 convey to you, the information involves risks and uncertainties that could significantly impact expected results.

You may see further discussion of these risks and uncertainties in the most recent 10-Q filed with the SEC filed on August 15, 2002. Additionally, we will be rounding numbers and estimates in hopes of adding clarity to our comments.

First I'd like to turn the call over to Hans Helmerich, President and CEO.

Thanks, Doug.

This is the first conference call we've conducted as a stand alone drilling contractor. On September 30, 2002, we successfully closed on a transaction that created a new company named Cimarex. Helmerich & Payne shareholders received a tax-free special dividend that represented our oil and gas assets combined with Key Production Company.

While the company has no remaining ownership in the oil and gas business, we did retain ownership of our securities portfolio and real estate holdings. We believe this was the right transaction for our shareholders and well positioned the company for the future.

Speaking of the future, it's been slow in arriving in terms of the widely-anticipated improvement in the energy cycle that industry observers including ourselves would have expected just a few months ago. Several factors are now contributing to a rig count that appears to be stalled at around 700 rigs.

Clearly there is a more careful, if not cautious, capital spending discipline being pursued by operators. The possibility of military action against Iraq is a factor along with more conventional uncertainties as the winter weather, gas storage draw downs and the questions concerning the strength of an economic recovery.

It is important to remember these factors are playing themselves out against a back drop of accelerating natural gas production declines that require a significant step up in drilling activity in order to remedy. We expect some material improvement to show up in increased drilling budgets for the year 2003.

We are seeing some encouragement in our international markets evidenced by today's announcement of securing new work in Venezuela. We're disappointed in the slowness of the timing but remain firmly committed to our strategy and are confident that it will pay off for our shareholders.

We completed eight of the first 25 FlexRig3s as of 9/30, 2002 representing much of our $312 million capital spending budget for last year. For 2003 we anticipate a capital budget of $195 million, a portion of which will finish out the new bill program of the finally 17 Flex3 rigs. Our balance sheet remains one of the strongest in the industry. We completed our private debt placement on October 15th, securing an attractive long-term debt f $200 million.

Combined with a after tax portfolio value of over $125 million, we are well positioned to see our new build program through to the completion and maintain our financial flexibility going forward.

With that I'd like to turn the call back to Doug.

Thank you, Hans.

As Hans mentioned, with the Cimarex spinoff and merge with Key Production, you'll notice in your announcement and in the financials that we're now reporting our former exploration production division as income from discontinued operations.

Cimarex will hold it's own conference call and discuss the former [inaudible] exploration and production results this Friday, November 15th at 11:00 Eastern, 10:00 Central. It is important to note that in the results that we reported today, we continued using the successful efforts method of accounting. Cimarex however, will be using the full cost method and therefore their results will be different than what we reported today as income from discontinued operations.

As mentioned in the press release, for our fiscal 2002, the company earned $1.26 per share.

I want to break this down a little bit so we can understand what would be comparable for next year for the stand alone drilling company. First of all gains from security sales for the year were 30 cents a share meaning that operating income for both the drilling and the E&P business was 96 cents per share. Of the 96 cents per share, 19 cents per share was from discontinued exploration and production business meaning that 80 cents per share for 2002 is a comparable number going forward.

During the fourth quarter of 2002, the company reported 17 cents net income which included a 1 cent writedown from the equity portfolio. Included in that income was also 7 cents from discontinued exploration and production business. So the 17 cents adding back the 1 cent writedown gives you an 18 cent number and taking away from the 18 cents the 7cent income from discontinued operation gives an 11 cent operating income from the continuing Helmerich & Payne, Inc.

Now let's describe briefly what happened in the balance sheet. The spinoff of Cimarex at September 30 is treated as a dividend for accounting purposes but not for tax purposes. As we stated before, the transaction is income tax-free to Helmerich & Payne, Inc. and tax deferred to shareholders.

However, for accounting purposes, Cimarex's balance sheet items were basically stripped out and spun off to shareholders leaving the balance sheet as depicted in our announcement. All the equity section-related accounts were added together and subtracted from retained earnings. You'll notice that the equity is now slightly less than $900 million. A couple of other balance sheet items to note.

Our cash position excluding Cimarex cash was approximately $26.9 million at September 30.

As Hans mentioned, the value of our portfolio securities at September 30 was about $175 million on a pre-tax basis, about $125 million on an after-tax basis. That portfolio is down slightly today. Probably a little less than $170 million.

October 15th, we received a second portion of our private debt placement and so now our debt stands at $200 million as of today as opposed to the $100 million September 30. As mentioned before, this is intermediate term debt averaging almost ten years in maturity and a 6.3 mixed interest rate.

As Hans mentioned, capital spending for 2002 was $312 million, that excludes the 56.5 spent by Cimarex and as we have announced earlier, our anticipated capital spending for 2003 is $195 million. Before I pass this on to George, I want to discuss the earnings guidance a little bit.

In September we provided earnings guidance under two scenarios both of which included an assumption that international operations would improve modestly beginning in the second quarter. Under one scenario we assumed that land rig day rates and offshore platform reutilizations would move up in the third and fourth quarter. Given those assumptions we felt earnings could reach in the neighborhood of 90 cents to $1a share for 2003.

Under another scenario, we assumed flat utilizations and day rates for U.S., land and offshore platform rig businesses. Under that scenario fiscal 2003 earnings could be approximately 60 cents a share. But under either one of those, our estimate for the first quarter was 7 cents a share.

This is lower than the 11 cents of operating income or net income for the ongoing Helmerich & Payne, Inc. for the fourth quarter mainly due to lower U.S.offshore platform rig utilization going on right now in our first quarter and a full quarter of higher interest rates from recent borrowings.

Now I'd like to turn the call over to George Dotson, President of Helmerich & Payne International Drilling Company.

Thank you, Doug.

Doug has described the overall financials performance of our drilling operations and I would like to speak in greater detail about our activity, margins, prospects and the FlexRig project.

Fourth quarter earnings for H&P's US land operations decreased 4% to $6.3 million from $6.5 million in the third quarter. An average of 52.5 rigs worked in U.S. land operations during the fourth quarter compared to 49.1 rigs in the third quarter. Average revenue per day increased 1% to $11,600 versus $11,500 in the third quarter. Average daily margins declined 10% to $3,054 versus $3,390 in the third quarter.

The Baker-Hughes active rig count for US land has not met expectations during 2002 and it fell to 696 rigs on the 8th of November or 38% below 2001s high of 1,114 rigs on 13 July of 2001. Today on the 13th of November, H&P has 80% activity for 69 land rigs available in the U.S. with 55 rigs working and 14 rigs stacked. Our average day rate for all land rigs today is 10,460.

A moment ago I mentioned the average revenue and now I'm talking about the average day rate which is lower because it does not include the mobilization revenue. Our high level of activity is even more note worthy as H&P has added 23 rigs to the US land fleet in the 16 months since July of 2001. Five rigs were transferred from South American operations and 18 rigs are new FlexRigs.

Second quarter operating earnings from offshore operations decreased 8% to $7.2 million from $7.8 million in the third quarter. Six of our twelve platform rigs are contracted and six rigs are stacked without follow-on contracts. Three of the six idle platform rigs are presently in shipyards and two of the three rigs will complete their shipyard projects in the first quarter of fiscal 2003.

Third quarter international operations reported a substantial decline in operating earnings to $1.3 million from $3.6 million in the third quarter of 2002. An average of 14 international rigs were contracted out of 33 available during the quarter. The average daily revenue was $19,500.

In our last webcast we reported our encouragement about prospects in Venezuela with the receipt of a bid request for four deep rigs. We are now mobilizing two deep rigs to their first locations on two-year term contracts.

We are optimistic that two additional deep rigs will also begin work on two-year contracts in December. The four newly contracted rigs will join three working rigs for a total of seven deep rigs under contract by the end of December. We believe there is a possibility our remaining four deep rigs may return to work during fiscal 2003.

All eight rigs in Ecuador were contracted for the full quarter. One rig will be released shortly without an immediate follow-on contract; however, we expect that rig to be contracted shortly.

None of our three rigs in Columbia are presently contracted; although, we expect one deep rig to return to work in the second quarter of fiscal 2003. We believe there is potential for adding further to our activity in Columbia during fiscal 2003.

In South America's southern cone, we have only one rig of six working in Bolivia and none of two rigs in Argentina. The outlook for drilling in Argentina and Bolivia is not strong and we are reviewing our alternatives for those operations.

The fourth quarter was generally characterized by flat rig activity, slightly lower prices and reduced margins throughout the U.S. land market. H&P's good performances in rig activity and daily margins were highlighted by the continuing strength of our mobile and FlexRigs. Thirty seven of forty mobile and FlexRigs are working today. This 93% activity for our 40 Mobile and FlexRigs compared to 18 of our 29 conventional rigs working at 68% activity.

Not only are H&Ps Mobile and FlexRig working at 93% activity, they earned an average daily cash margin of $3,613 per day during the fourth quarter compared to H&P's conventional rigs which earned $1,865 per day. Delivery of new FlexRig 3's is now on schedule. We delivered eight new rigs by 30 September and we are currently producing two new rigs per month. We will deliver the remaining 17 new FlexRig 3's by July 2003. Ten new FlexRig 3's are currently operating and the eleventh is mobilizing to the first location.

Customers have committed to the next three FlexRig 3's on program from one well to six months.

We designed, constructed and now operate the new FlexRig 3's to deliver the best value and safety in field performance for our customers. The FlexRig concepts are sound and the innovations and new technology are adding value.

Challenges confront every attempt to achieve a step change improvement in performance and the FlexRig 3 project has challenged us. The competence and persistence of all H&Ps personnel have overcome these challenges and field performance of new rigs and crews on first wells has been distinctively good. Our customer's commitments to our FlexRig 3's at full activity and higher rates is clear evidence we are meeting and exceeding their expectations.

Now I'd like to turn the program back to Doug.

Thank you, George. Now we'd like to open the conference call to questions.

At this time if you would like to ask a question, press the 1 on your touch tone phone. To withdraw the question press the pound key.

Once again if you would like to ask a question, press the 1 on your touch tone phone. We will take our first question from the site of John Woodberry with Global Capital. Please go ahead.

I couldn't quite capture on the release, what was the utilization for the international?

The international utilization is 42%. 40-42%.

Okay. Thank you.

We will take our next question from the site of Wikar Sayad with Petry Partners. Please go ahead.

Hi gentlemen. I've got a couple of questions. First for your guidance for '03. What kind - Your optimistic outlook, what of changes in U.S. domestic mandate are you assuming for fiscal third quarter and fourth quarter?

Wikar, in that scenario, we assumed that day rates for U.S. land rigs or revenue per day, I should say for the first two quarters would average $11,500 a day. In the third quarter it would move up to $13,000 a day and in the fourth at $14,000 a day. That's for U.S. land.

We assumed that our platform rig revenue per day would stay flat as well as the average international revenue per day. Platform revenue per day would hover somewhere around $28,600 a day and about $20,000 a day for international revenue per day.

Okay. Now these new rigs, the four new contracts that you've got in Venezuela. Are these at current day rates as the day rates are what were you were getting before for Venezuelan rigs or [inaudible] you seen an improvement there?

There was no improvement. They are at the same rates, same average rates we have for our international operation and that also happens to be the existing rate for deep rigs in Venezuela on our other three jobs. So no changes.

Okay. And your effective tax rate for this quarter was slightly higher. What was the rational for that and the guidance going forward?

Well, our guidance going forward will be slightly lower.

It was higher because in Venezuela where you have currency fluctuations and monitory gains, you get taxed on that and it moves your effective rate up. Also, when income is generally lower, what small amount of nondeductable chargeable expenses you have in those countries help reduce the effective rate. Also in many of these countries, you get taxed on pieces of your revenue and even if your income is low, you still pay that same tax so all of that causes your effective rate to go up particularly when your earnings are not very high.

And the other than income line, could you define? What are those taxes and how you expect them to change going forward?

Those are a number of different tax items. For example the company's portion of FICA tax on pay roll, ad valorem taxes, sales taxes, franchise taxes. And going forward, that's a good question. I assume that they would probably rise but ever so slightly. Probably more of a function, although not a linear one, with pay roll, with total pay roll.

And your guidance for G&A going forward?

Our G&A and I'm glad you brought that up.

To touch on that, we mentioned this before, when we spun off Cimarex, we really spun off an operating group. There was really no synergies involved from our perspective. We did have more than 30 staff people that went with Cimarex.

They also were able to charge out $2 million a year in what's called copus credits. So they had $2 million of income coming in to offset overhead and that went with Cimarex. So, as we said many times since we made our deal, we were not going to see effective improvement in our G&A.

We will see G&A go up for 2003. One of the main things that will happen there is that the financial accrual for our defined benefit pension plan will increase. And you've probably seen this with other companies that have that as the stock market has hit these pension plans, then the following year you make adjustments in your financial expense there.

So we will see G&A move up some. If you're wanting a specific number I don't have that in front of me now. Hang on just a minute.

Wikar, that's probably going to move closer to the $20 million mark for 2003.

I beg your pardon. I'm looking at a different line here. It should be closer to $22 million with the pension increase.

Okay. Great.

That looks at this time to be a non-cash expense. We were well over funded for years and this is an adjustment to the decline in the pension value.

So the non-cash part is about $2 million?

No, sir. The non-cash portion of the pension expense will be larger than that. And I'm not sure exactly what that's going to be. It's a guesstimate at this point in time.

Thank you very much.

Once again if you would like to ask a question, press the 1 on your touch tone phone. We will take our next question from the site of Andy Victor with Steeple Nicholas. Please, go ahead.

Good afternoon, guys.

Hi, Andy.

George, on your operating expenses, the 10% jump sequentially, what accounts for that?

Andy, we are having some start-up, added start-up costs, with our FlexRig 3 projects and I think that's probably been the biggest part of it. We also had higher costs across the range of our maintenance and supply items.

Those have been the two largest sources of increases in operating costs.

Would you expect a run at that sort of same high level until you finish your new bill program around July?

No.

We have seen that the highest cost have been in the first half dozen of the new rigs that we put out and with the learnings that we have gotten from those and been able to distribute across the company, we've been able to begin the process of reducing cost on additional rigs, the operating cost and also make corrections to the first six rigs that went out.

So, no. We don't expect that to continue on. We do expect to reach some lower equilibrium on operating costs for the new rigs.

Would you anticipate getting down toward the level you were able to achieve in the third quarter?

Uhm - I have those numbers in front of me and yes, that's certainly within our grasp.

Okay. In terms of your platform business, what will it take to get a turnaround in those operations?

Andy, it depends on our customers.

At this point, our customers are operating with some very tight financial capital budgeting and they have slowed down expenditures in the Gulf of Mexico on projects that involve platform rigs. Unless there's some improvement and early on in fiscal 2003, we think it could take us the rest of the year, the rest of 2003 to get back to virtually all of the rigs running. But it's going to be a slow recovery.

Okay. In the three FlexRigs coming out and that have commitments [inaudible] oil well for six months, what kind of customers are those? And does your customer base - is it more large independents at this point that are using the new rigs or is it sort of a mix between the majors and the large independents at this point?

It's a mix. Overall we continue to run 60% of our rigs contracted to the large majors, 20% to the large independents and 20% to smaller independents.The first of the FlexRig 3's were contracted in large part to the majors. It's been increasingly the large independents.

And are you seeing any resistance in terms of the day rates that you're looking to charge on the FlexRigs from the customers or are they embracing it because of the efficiency improvements?

No, we've not seen any resistance and when I say that I know everyone would love to have a lower price, but we've not had anyone that we consider to be a strong prospect say no, we won't take it at that price.

What we are seeing is that the performance of the new FlexRig 3's on the initial wells and on the wells succeeding has been very good.

We've been able to reduce drilling time and been able to cope with a number of challenges. No, we're seeing that the performance in the field both in terms of safety and terms of productivity have been sufficient to compensate our customers for taking on the new rigs at the prices we've been quoting.

Great. Thank you very much.

Thank you.

We will take our next question from the site of Robert Ford with Sanders, Morris and Harris. Please go ahead.

Thanks.

Doug, your taxes other than income, can you kind of break that down? How much is corporate, how much is real estate, how much is contract drilling? Just percentage, rough percentage.

Robert, I'll be glad to do that offline. I do not have the numbers with me now. I'll be happy to do that if you give me a buzz after the call here.

Okay. The $100 million of debt that you took down on October 15th, why $100 million, is that just the way it was structured? You had to take $100?

Yes. That's the way the contract was.

And just one more question.

George, could you kind of talk about the inquiry levels, maybe, in some of your different regions? Gulf Coast versus South Texas versus MidContinent and what's going on there?

We have only four rigs in the Rockies in Wyoming and that has not been an area of high inquiry.

Moving further south, in the mid-continent we've begun to see some increase in the level of inquiries but it's modest.

In East Texas and in South Texas, probably the strongest areas for us, and a growing interest in Louisiana. But still the level of inquiries is not what we expected it to be at this time. I don't think anyone in the contracting business has been satisfied with the rate of inquiries.

We continue to believe that it's just around the corner but at the same time I would characterize it as improving but only modestly.

Okay. Thank you. That's all I have.

Once again if you would like to ask a question press the 1 on your touch tone phone. We will take our next question from the site of Bucky Roulan Miller with Boning & Scatcher. Please go ahead.

I'll throw this at you, Doug.

The portfolio has been reduced over the last couple years. Do you all still own 3 million shares of Atwood and what would the other major portfolio constituents be?

The biggest are the Atwood at 3 million shares. We own [inaudible] it's a 1,480,000 shares. We have Phillips at 240,000 shares and TransOcean as a result of a spinoff of FedCo FourX from [inaudible]. And I don't have those number of shares in front of me. I want to say 280-some odd thousand shares and those are our four major positions and then we have several very small positions out there. But those four, I think when I looked earlier of the 170-ish of value, those four were at 155 million of it.

Great. Thanks, very much.

Once again, if you would like to ask a question press the 1 on the touch tone phone.

We have a question from the site of Bill Sanchez with Howard Will. Please go ahead.

Yes, good afternoon.

A comment was made with regard to the average rate currently of $10,460 a day. But, I guess the comment was also made that it's not an apples to apples number versus the $11,600 that's reported in the fourth quarter.

Are you able to reconcile that for us and is that $10,460 or the number, I guess, that you're gonna give us, is that an average so far for the fiscal fourth quarter or today's snapshot?

Bill, the $10,460 is the day rate today.

The earlier number of $11,600 a day, average revenue per day, and that was in the fourth quarter and that includes the move cost so it's day rate plus the charges that we make for moving rigs.

All the mobilized -- cost of mobilization are in that higher number.

And what would that roughly be on a dollar basis, the move costs?

Well, it's going to be a little over $1,000 a day on average.

The average move costs -- just a second. $45,000 on an average for a move cost.

Okay, great. One other question.

How much of an impact have you all seen so far during the quarter with regard to all the wet weather in East and South Texas on your results and is that impacting your outlook in terms of the first quarter estimate at all?

There's been an impact with bad weather, wet conditions, locations have been slowed and the biggest impact has certainly been along the Gulf Coast and in South Texas. So, we're going to have an impact of that during the first quarter but that will fit within the guidance that Doug has already given to you.

Okay, so that's included in the guidance.

Yes.

Great. That's it for me. Thank you.

We have a follow-up from Wicar Sayad with Petry Partners. Please go ahead.

Hi. Could you comment on some of the long-term contracts that may be at margins much higher than what the [inaudible] margins are and standing of expiration?

I'm sorry, Wikar. You mentioned long-term contracts at?

Long-term contracts for your rigs that may be expiring now and where the margin of contract day rate is much higher than short-term day rates.

At the present time we have eleven rigs that are on term contracts and those term contracts average one year remaining. And those rates have been higher. They're probably in the range between $5-$6,000 a day.

Okay.

I'm sorry, of margin.

Right. Do you have any expiring this quarter in the fiscal first quarter, second quarter?

In the first quarter we do not have any expiring. In the second quarter, we will have one and will be nearing the end of two more.

Thank you, very much.

Once again if you would like to ask a question, press the 1 on your touch tone phone. We have no further questions at this time. I'd like to turn it back to management for any closing comments.

We'd like to thank everybody for joining us today and wish you a good evening. Thank you and goodbye.

This concludes today's conference. Thank you for joining. You may disconnect at any time.