Helmerich and Payne Inc (HP) 2003 Q3 法說會逐字稿

Good afternoon. All conference sites are on line. I'd like to introduce your host, Doug Fears, Vice President of Finance, and CFO of Helmerich & Payne. Please begin.

Thank you, and good afternoon everyone. Welcome to HP third quarter conference call and web cast. Earlier today we released our third quarter earnings and it is available at the web site, at hpinc.com

Speakers today are Hans Helmerich, President & CEO, George Dotson, President of the wholly owned subsidiary. International Drilling Company. And I'm Doug Fears, CFO.

Each of the conference call participants will provide statements regarding their respective areas and then following those remarks we'll open the call to questions.

I would remind you as usual we have forward-looking statements and estimates today. And we've made every investment to be as accurate as possible but obviously there are risks and uncertainties that could significantly impact expected results. You may see further discussion of these risks and uncertainties in our most recently filed 10-Q, which was filed may 14 with the SEC. And as always, we'll be rounding numbers and estimates in the hope of adding clarity to our comments.

As announced today, HP's net income for the third quarter was $8,162,000, or 16 cents per diluted share. This compares with $22,551,000, or 45 cents per diluted share from continuing operations for the third quarter last year, and 5 cents per share during the second quarter or previous quarter of this year. The 45 cents per share earned last year--or last year's third quarter includes 30 cents per share of gains from the sale of portfolio securities. Today, while the portfolio's worth $170 million, roughly or about $3.40 per share on an untaxed basis, and approximately $2.40 of semi full liquidation and taxation.

As mentioned in the press release, the company sold its entire position in Trans Ocean, Inc. (ph) and also sold several other holdings, including 100,000 shares of Conoco Phillips. No net gain or loss was recorded for the company in the quarter from those portfolio sales.

Third quarter earnings were better than anticipated. As the company has continued to experience successful deployment of the flex FlexRigs at premium day rates, and managed to reduce ongoing costs. Additionally, higher average day rates in the platform rig business has helped offset the decline in activity in that sector.

As the company has continued to deploy rigs able to implement cash margins, EBITDA has increased from this approximately $31 million in the June quarter last year, and from $27.4 million in the second quarter of this year, to approximately $39 million for this year's June quarter. That's a 25% increase from last year's third quarter, and 42% increase sequentially.

Our 15 cent third quarter earnings is a good example of how difficult it is for the company to predict earnings on an ongoing basis. As you will recall, we attempted to alter the guidance approach early this year by providing what we call baseline numbers at that time. We're not providing any guidance this quarter except to say that the 9 cent baseline number we provided some time ago is clearly too conservative for the fourth quarter unless there is a significant negative surprise for the company.

Additionally, what we're attempting to do is to provide you more information from which to make your own estimates of future earnings. We are currently discussing some changes to our reporting format that will be effective in our next earnings announcement. The contemplated changes won't alter the financial bottom line, but reclassify and regroup numbers in order to make it easier to monitor and model company performance. The preliminary date for our year end earnings release and conference call is November 13th.

I would now like to call r turn the call over to Hans Helmerich, President and CEO.

Thanks, Doug. I'll make general comments and then let George make some more specific comments about our operations.

While the pace of the recovery may seem slow in the context of strong energy prices, there has been a strengthening of the overall rig count, and some firming in day rates since our last conference call. Strong natural gas injections into storage over the recent weeks including this morning's 83 BCF number have muted some of the alarms surrounding the potential storage deficit.

Since the federal reserve chairman's congressional testimony warning about low gas supplies and high prices, prices have actually fallen 27%.

That being said, chairman Greenspan's comments did bring national attention to the long-term challenges the energy industry is faced with. A mild summer that has reduced east coast consumption by nearly 20% from a year ago may alleviate storage concerns, but does little to address the sharp production declines and shrinking reserves of supply.

We would agree that the challenge is long-term in nature, and that we are still on the front end of an improving energy cycle. In part, this led to our announcement last month to extend our FlexRig 3 construction effort by an additional seven rigs once the 25-rig program finished on schedule earlier this month. By applying a somewhat slower pace from the two rigs per month rate, we had earlier achieved, our current and uninterrupted construction effort will carry this latest commitment through March of 2004.

We've often said that the field performance of the FlexRig creates measurable value. We also believe that the company's design and construction effort, the experience gained through repetition and continuous improvement, made possible by a project of this scale, allows us to capture additional value for our shareholders.

Through three quarters of 2003, capital spending has totaled slightly over $200 million dollars, and will total an estimate of 250 million for all of fiscal 2003. Although we've not completed our capital spending plans for 2004, it's safe to say that we're in strong shape, given the size of our equity portfolio, our increasing cash flow and $100 million dollars of unused bank line. We divested our Trans Ocean holdings and securities generating over $12 million during the quarter, and we would expect to find other opportunities going forward for further portfolio sales.

Operation George will detail the steady improvement in our U.S. land Business, and some encouraging movement in our international operations. Our offshore fleet continues to cope with weak activity levels in that market segment. A portion of the improvement in the land business has been achieved through a focus on cost containment. That effort will be ongoing, and extends into every area of the company, including administration. We took steps during the quarter and announced earlier that we would adjust and ultimately freeze the company's defined benefit plan.

We concluded this change will deliver future cost savings without compromising our ability to continue to attract and retain a top notch work force. The key factor in our future success. With that I'd like to turn the call over to George Dotson.

Thank you, Hans. I would like to comment in greater detail on our activity, margin, operations information, FlexRig 3 performance, and the status of the FlexRig 3 project. We are encouraged by continued strong activity rates, lower costs, and higher margins in U.S. land operations.

Our third quarter operating earnings for U.S. land operations increased to $9.1 million dollars from $4.7 million in the second quarter. Average revenue per day increased 2% to $11,683 dollars from 11,433 dollars in the second quarter. Average expense per day declined 4% to $7,916 dollars versus $8,271 dollars in the second quarter. Accordingly, average daily margins increased 19% to $3,767 dollars versus $3,162 dollars in the second quarter.

Our U.S. land rig activity was strong with an average of 65 rigs working during the quarter, compared to 59.6 in the second quarter. U.S. land rig activity during the quarter was 82% compared to 80% in the previous quarter. Existing mobile rigs and FlexRigs achieved 98% activity with an average of 49.6 rigs working compared to 94% in the previous quarter, when an average of 42.6 rigs worked.

Conventional U.S. land rig activity declined to 53%, and an average 15.4 rigs worked during the quarter compared to 59% activity and an average of 17 land rigs working in the previous quarter.

Today, the 24th of July, HP has 86% activity for a total of 83 land rigs available in the U.S, with 71 rigs committed and 12 rigs available for work. Our average day rate for all U.S. land rigs today is 10,700 dollars, compared to the same number 10,700 dollars on 24th of April, the date of our last web cast.

Demand and activity continue to be weakest for deep rigs. Of our 12 idle rigs in the U.S, five are 3,000 horsepower very deep rigs and five are 2,000 horsepower deep rigs. Our second quarter operating earnings from U.S. offshore operations including management contracts, increased 28% to $9.7 million from $7.6 million in the second quarter. Six of our 12 platform rigs are contracted and six rigs are idle without follow-on contracts. Five of the six idle platform rigs are available for contracts, and the sixth rig will require shipyard maintenance.

International operations are showing a long awaited strengthening. Second quarter international operations including one management contract, reported operating earnings of $3.9 million dollars, compared to $1.2 million in the second quarter. An average of 13.2 international rigs worked during the quarter out of 31 rigs available. The average daily revenue was $20,205 dollars. Our operations in Venezuela (ph) were steady throughout the quarter with five deep rigs operating (inaudible) PDVSA (ph) An additional deep rig has begun operations for PDVSA in the fourth quarter. And two additional deep rigs are committed and scheduled to begin work during this fourth quarter, one for PDVSA, and one for an international operator.

With these additions, all 8 of our 3,000 horsepower deep land rigs in Venezuela law will be contracted. We also have contract possibilities for our two 2,000 horsepower deep rigs in Venezuela. Our other rig is not likely to return to work soon. In summary, 8 rigs should be operating by the end of August And we are optimistic about adding two more rigs in the first quarter of fiscal 2004. Because our deep rigs are the best equipped and maintained in Venezuela our day rates and margins continue to be very attractive. PDVSA reduced its accounts receivable from $17 million dollars to $11.5 (ph) million dollars during the third quarter. And PDVSA (inaudible) is now paying us at a rate greater than our current billings. We are optimistic PDVSA will reduce further the outstanding balance during the remainder of the fiscal year.

Seven of our eight rigs in Ecuador were contracted at 83% activity for the quarter. We are currently operating five rigs with two rigs expected to resume operations in August. One of our three deep rigs in Colombia continues to work. Rates and margins continue to be attractive in Ecuador and Colombia. None of our six rigs in Bolivia and two rigs in Argentina are presently working.

One rig will begin work in Argentina during the fourth quarter and one rig will begin work in Bolivia during the first quarter of fiscal 2004. The outlook for deep drilling is weak in Bolivia and Argentina, and we are considering opportunities to move some of the idle rigs to areas with greater potential for future work.

Two FlexRigs are committed to short-term international contracts. The first FlexRig is contracted to a U.S. FlexRig customer for a contract in Hungary. The six to eight-month contract will commence by the end of this month. The second FlexRig will begin a 6 to 8, month contract in Chad for an international operator in December 2003.

The FlexRig 3 project delivered seven new FlexRig 3s during the second quarter and completed the year-long FlexRig 3 project with the 25th new rig in late June. We announced an extension of the FlexRig 3 project with the addition of seven more rigs. The manufacturing rate will slow from two per month to a rate that delivers the seven additional rigs between July 2003 and March 2004. We will review future plans for the FlexRig project during our next fiscal quarter.

26 new FlexRig 3s are currently operating. And the field results continue to improve and exceed expectation. Of 121 complete wells drilled to date, FlexRig 3s have drilled 83 wells or 71%, in less than the customers' estimated drilling time and eight wells, or 8%, on the customers' estimated drilling time. Almost 80% of the 121 wells drilled to date with new FlexRig 3s, new technology and new crews, have met or exceeded the customers' expectations of performance.

Our efforts to reduce operating costs have shown steady progress in each of the last four quarters. Our average cost per day for all U.S. land rigs, including move costs, have decreased 7.4% from $8,549 dollars per day, in the fourth quarter, to $7,916 dollars per day in the third quarter. The FlexRig 3 operation has led the way in reducing costs from $8,173 dollars per day, in the fourth quarter, of 2002, to $7,575 dollars per day in the third quarter.

Combining reduced FlexRig 3 expenses with increased day rates, FlexRig 3 margins increased to $4,300 dollars per day for the third quarter. At 4,300 dollars per day operating margin, the new FlexRig 3s are earning an internal rate of return, after tax, of 9%. The operational and economic performances of the FlexRig 3s are on track with our original project estimates.

Recognition and acceptance continue to grow among our customers and their nonoperating partners. That the FlexRigs are reducing well costs and well cycle times. These customers continue to reward us with a contract awaiting each new rig, 100% activity for the 26 new FlexRig 3s and premium day rates.

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

Thank you, George. We would now like to open the call for questions.

Thank you. If you would like to ask a question, please press star-1 on your Touch-Tone phone. To withdraw your question, press pound.

We'll take our first question from Robert Ford. Sir, please go ahead.

Thanks. Good afternoon, gentlemen.

Good afternoon.

Is John Lindsay on the call?

No.

Okay, make sure you pass my regards along on the job he's done on costs. Down significantly over the last three quarters U.S. land, how much more can you get, George and over what time frame?

Robert, I don't have a figure for that. I think the encouraging thing that we continue to see is that downtime continues to reduce throughout the operation, in particular with the new FlexRig 3s. During the last quarter, they were below 1%, and all those rigs of course have top drives, so that's a complex piece of machinery.

But we have seen reduced downtime and our FlexRig 3. And all of our FlexRigs are operating below budget on our maintenance costs, and it's because we are experiencing much better service than we expected from the AC equipment, the AC drives. As we hoped, that equipment is able to run with less wear and tear on the equipment. So things are turning out as well as we hoped that they would be.

Looking ahead, I think we'll continue to see reductions. We've had 7% over the last year, it probably will be hard to see that kind of number ahead for the next year, but we're certainly going to give it every effort.

Costs are also coming down significantly in the international land business. Do you expect more reductions there as well, George?

I think in our international business, there's been a real focused effort by the people and by the organizations in our international operations. I think there's still room for improvement in all of those operations, and so organizationally we will be pointed toward it.

The company has also embarked on a major effort in supply chain management, and using our wide area network, we're able to begin to see some economies from that also.

So we have two things going for us. Three things. We have equipment better signed, better overall operating characteristics, that's the FlexRig 3. We also have a greater organizational awareness, and now we also have the supply chain management initiative. So again, I think we'll see continued reduction both internationally and in the U.S..

Okay, thanks, I'll pass it along.

Thank you. We'll take our next question from Paul McCrae of Wellington Management. Please go ahead, sir.

Good afternoon. George, I'm excited to see you're moving into the eastern hemisphere. One rig in Hungary and one rig in Chad. But one rig in countries like that don't really make an economic unit.

What is your goal in terms of getting a mass of rigs? In other words do you need two or three or four in each of those countries to really make is sensible for a move?

Yes, Paul, obviously that's our hope. And we know that you can't really build a business the way you would like on one well operations in scattered countries. But we believe that each of these short-term contracts represents an opportunity to build a larger operation in each of the areas into which these rigs are going.

So there are follow-on opportunities in both areas for these two. When we look back over our history in the last 20 years, we've had several one-rig operations that, in the end, drove dry holes. And they moved on to do other things.

But there have been some large successes, too. I think Colombia was a notable success for us, so we started with one rig and wound up with ten rigs in a short period of time. So one always hopes that is a possibility out there. I think we will continue to focus on expanding our international operation and there are several things that we are pursuing at this time that will be more than one-rig opportunities for us.

Actually, I believe I saw your company's name appear on -- as one of the companies attending the meeting on Iraq in Dallas recently. I guess that would be of interest potentially. Is that correct?

Yes, it would. And of course, in that article there were several land contractors mentioned.

Correct.

All of them strong and capable competitors. But certainly we have an interest in opportunities like that, and I think that's only one of several that we and other contractors are following.

Do I assume that the rigs in Chad and Hungary are not FlexRigs?

No, the -- both rigs are FlexRigs.

So the goal here, then, is to get your foot in the door and prove to the client how much more effective they are in the hopes there will be follow-on business?

That's correct. And in the case of Hungary, we are shipping a FlexRig there, and in fact it should spud by the start of next week. That rig was specified because the customer in Hungary has a FlexRig -- has had a FlexRig for several years in Texas and has been very impressed with the results and wanted to introduce better technology, better performance, better moves in the Hungary operation.

So they are opportunities for us to demonstrate that these FlexRigs are capable of operating in much broader geographical areas and delivering the same operational and move savings.

For Doug, if I could. Not being an accountant, my question would be, if you were to face the existing exchange controls on the Bolever (ph) at the end of this fiscal year, would your accountants require you to take some further reserves in this regard?

No. It's my understanding that a potential currency devaluation is something that a reserve is not taking -- has not taken like you might in accounts receivable, an uncollectible accounts receivable. I think the point in time at which a reserve would be taken, if there was actually a secondary market that was clearly in effect and working and viable. Then there would be a reserve considered.

But under these particular circumstances, where the government has a fixed exchange rate and is clearly in a position to continue to fix a rate at some point in time, then there would be no reserve taken.

Thank you.

Thank you. We'll take the next question from Waqar Syed, said a from Petrie Parkman.

Congratulations, gentlemen. Excellent quarter. I have a couple of questions. First, did I hear you correctly that the day rate afternoon day rate is 10,700 unchanged from April; is that right?

Yes, that's correct. And the reason for that is that there was a change in the mix. We had essentially we had a couple of term contracts that ended during the quarter, and I think those probably early in the quarter so we felt the full impact of that for the quarter.

At the same time, we were able to make up the shortfall by some improvements in day rates within different classes of rigs. So we offset those losses with other increases.

if the leading edge day rate remains unchanged at current levels, do we have any contracts rolling over at low day rates that would cause the average revenue number, average day rate number go up during the quarter?

No, we will not have any rigs come off contract with rates that are lower than market. We will have some continued rigs rolling off of higher contracts and we will again we'll be making those up, we hope, through improved day rates across the rest of the fleet. But we -- everything that comes off contract in the future will be at a higher rate than the present market rate.

And how many contracts at high rates are rolling off in this quarter?

Oh, in the quarter coming up, let me just -- we will have one coming off in the next quarter. At the present time, we have -- let me just check a number here.

We have 10 rigs with term contracts, and the average length of time is almost 10 months remaining on those contracts. And we will have one come off in this next quarter.

That means the fourth quarter?

In the fourth quarter, correct.

All right. Now, you mentioned that the weaker spot in the domestic land business was the deeper drilling. There's been some comments recently that the deeper drilling market is improving, at least in some small increments. Have you noticed anything like that?

Yes, we have. We had some rigs released three months ago, and I think probably everyone remembers that, and some of our deeper rigs were released at the end of that. We've had difficulty in putting deep rigs back to work, as I mentioned, we have five 3,000s and five 2,000s that are presently down. We have just in the last month been visiting with some of our major customers about very deep wells, below 20 thousand 20,000 feet, and we have one deep rig that is committed and we have some of others that are already under contract but that will move to deeper wells. So for the first time in some years, we see some interest in wells below 20,000 feet with some prospect of success with them.

Okay. Now, you said there are 17 one rigs that are committed. How many of those are active right now?

I think 70. One is rigging up. The other 70 are actually drilling wells.

Now, so this one deep rig that you mentioned, that's included in this 71 number or that's additional?

That's the one that's rigging up.

That's the one that's rigging up, okay. Now, my understanding is the rig that's moving to Hungary is FlexRig 1, is that correct?

That's correct.

Now, the one going to Chad will be which?

a FlexRig 1.

Rig 1 as well, okay. And when do you expect that rig to go off contract in the U.S. to prepare it to go to Chad?

It's coming off this weekend, and it will be moving to Houston for some inspections and then loading to go on the mobilization to Chad.

And for the rig that's going to Hungary, any revenues for mobilization or anything that you've received in this -- in the previous quarter, in the third quarter?

Everything has been awash. That was a break-even mobilization.

Waqar Syed Okay. But you did incur some loss in revenues because the rig was inactive?

That's right, we suffered an opportunity loss.

Okay. That's all I have, thank you very much.

Thank you. We'll take the next question from Ken Sill of Credit Suisse First Boston. Please go ahead.

I wanted to clarify one of the prior questions. George, you said that the day rates were flat quarter to quarter, right, on the average?

That's correct.

It wasn't up 700, it was 10,700 flat.

Yes, 10,700 flat. And also, Ken, those are day rates. Earlier in the web cast we talked about revenues per day, which include mobilization revenue.

Yeah. And those were up but just in terms of day rate, those were flat.

And you know, the deep drilling is picking up. What do you think it would take to get day rates to move up another 500 dollars a day?

How far away are we from seeing day rate improvement? We've seen some of our competitors talk about getting reasonable day rate increases sequentially but they didn't have rolling off high term contract which is a high quality program to have.

Well, I'm not sure that I can add to the thinking on what's the magic number of rigs that need to be operating before we see rates move ahead at an accelerated pace. But we are continuing to see a lot of resistance as we try to raise rates, and we do on every job.

I think that probably we sense it more than others, because we've tried to lead pricing higher. So another $500 dollars (inaudible) per day? I don't know, I would say if we had another hundred rigs working it would certainly ease the difficulty in getting that done, but I don't know the magic number.

I think the chairman of one of your competitors knows that answer. Whenever he's done regaining market share, we'll know. But thanks, George.

Okay.

Thank you. We'll take our next question from Arun Jayaram (ph), of Credit Suisse First Boston. Please go ahead.

I think that's my name. Good afternoon, guys.

Hello.

Good, guys. George, could you give us perhaps your outlook for the offshore platform business?

Well, that is a tougher business to foresee. We have held our own for some time now, and as we look out ahead, there's still -- there still are not opportunities developing for new contracts. And it's been disappointing, I think, for everyone, who is in this business. We don't see a lot of relief ahead.

I think it's probably going to mirror the general offshore business in the Gulf of Mexico and if we see that begin to improve, then we will see more opportunities for platform rigs, but at the present time we just don't see what's going to be the catalyst for that.

Okay. And on the six rigs you have working now, what's the term on those? Do you expect to keep those working for the rest of the year?

We expect that five of those six will work through at least the end of the calendar year, and several of them for -- we can see several years out. They don't have term contracts any longer, but we're going to be continuing to work.

Okay, and one additional question is the revenues from the labor contracts came in a little bit higher than we had. Do you still have three of those in the U.S. and one internationally?

Yes, that's correct. Two in California and one in the Gulf of Mexico, and then one in Equatorial Guinea.

Okay, and could you again just perhaps on a sequential basis go through maybe an aggregate what your revenues were from those labor contracts? The third quarter versus the second quarter?

Give us just a second here. I don't have revenues here. Our earnings -- oh, let's see. Earnings were about 2.2 in the second quarter, up to about $3 million-three in the second quarter, and there was one larger adjustment, favorable adjustment in the third quarter that made up the difference. Those are generally, very flat and predictable.

Okay, and one final question. Are you seeing any changes in customer mix between perhaps the majors or independents?

No, we are not. We have seen a customer shift over the last couple of years. In general, on shore we're running 45% for the majors, 35% for the large independents, and 30% for the -- for the smaller independents.

And I think those mirrored in our Flex 3 customer list, where with the 25 or 26 rigs that we have contracted, we have 10 of those 26 rigs, or 38%, working for the majors; 9 of 26, or 35%, working for the large independents; and 7, or 27%, working for the independents.

So again, much more evenly balanced than they we would have seen three or four years ago when traditionally we ran 60% of our operation for the majors.

Okay, and one final question. I promise. Are you getting any traction in the burnet area of Texas?

No, we are not involved in that area.

Okay, thanks.

Just one other comment back to your drilling revenue. On the drilling revenues for our management contracts in the U.S, they're about $5 million, and then international we're looking at $3.7 million, $3.8 million.

Okay, thanks.

All right.

Thank you. We'll take our next question from Bucky Miller (ph) of Bonains & Scattergood (ph).

Thanks.

George, I guess I'll throw this at you. Has there been some sort of shift in the perception of the economics in the gulf, and I'm asking you, I suppose, to stand in the shoes of your customers, that would explain the reticence in -- or the lack of pickup in activity?

I mean, what are these guys thinking? It seems to me with prices being what they are, that they'd have every incentive in the world to start spending a little bit.

I can't really comment on the gulf in general as a deep water or the shelf that is suitable for jack-ups. I think in that band (inaudible) that is particularly attractive to platform rig drilling, we have not seen construction of many new platforms, so that reduces opportunities.

Jack-ups are able to operate in a little deeper water, and I think that probably is a competitive factor for us. And I think that, again, it's about capital allocation. Our customers are very, very disciplined today in the expenditure of capital funds. I think many of them have large projects in the Gulf of Mexico and elsewhere around the world, and they just have not come back to put it into the platform rig business. We continue to hope that that will change.

And there are a number of other issues, but I think those are pretty well discussed in the industry press. So I really don't have any unusual answer for you in that respect.

To summarize, you are really suggesting that there has been a change in their thinking about the economics.

Well, I think that that's right. I think for anyone in the platform business, we probably are not going to be out building a lot of new platform rigs. I think what that says is that there are opportunities but those opportunities we're still wait waiting for those to match what the existing resources are available. And so in the grossest sense, you're right.

We don't see -- we don't see many opportunities to build platform rigs in the future and we hope that we'll be able to employ what we have.

I'll throw one more in here, and I'm going to throw it at Doug.

Does that naturally lead to your decision to reduce the Trans Ocean as opposed to some of the other choices?

Actually, Bucky, the Trans Ocean has a long story that I'll make real short. Trans ocean, as you recall, at least for us, that own (inaudible) our ownership was a result of the spinoff of the offshore business. And we booked a financial basis in that, based on the market price at the time of the spin. Actually, it was technically a dividend for tax purposes, but --

So we booked, I think a $33 per share financial basis and booked some income at that time. When that stock has not been -- that stock has been down from $33 for some time, and frankly, we're facing an accounting impairment charge, because that stock had been under water quite some time. Under water for us.

And so, we could have just taken the impairment charge and sold some stock, but we have plenty of exposure to the offshore business through our ownership in Atwood and with our construction of FlexRigs, we decided to go ahead and just sell the Trans Ocean position and then sell other stocks to offset the financial loss. So that's the long-winded story behind the reason to sell Trans Ocean.

Great, thanks very much, Doug. Appreciate it.

You bet.

Thank you. We'll take our next question from Pierre Conner from Hybernia Southcoast.

Thank you. Good afternoon, everybody. Doug, first quick question for you. Considerable improvement in G&A. Could we take that as a trend. Or was there anything special in there?

Or improvement versus what we estimated?

Our G&A is sometimes hard to track because particularly in the quarter ended December and the quarter ended March has some bonuses in there and has some other things that usually show up. So most of the time the June quarter is going to show up smaller than the March quarter. So no real trend there, Pierre.

but September quarter probably more reflective of June?

Probably so, yes.

Pierre Conner Okay, great. And then George, I know you mentioned the delivery of The flex rigs or through March of '04. Could you characterize a little more of the near term in do you expect some in this quarter, when and then what would be your expectation for them going to work?

Yes, we already have one new FlexRig 3 in the market of the seven, and we should have another two come out in this quarter. And then starting October the 1st, we'll deliver the next four at the rate of one every six weeks. So we are slowing down that process gently.

Pierre Conner Right.

And in terms of having the rigs contracted, yes, I believe we're out now the next two rigs have been contracted. And we have avoided going out and contracting all of them just want to go try and stay apace of the market.

Market, right, understand. Then on your -- the revenue per rig improvement relative to the day rate staying flat, and you mentioned mobilization.

Is that a trend of pushing off a little more mobilization on to the customer? Or help me understand a little bit there. Are there other mix issues in that?

I think there are other mix issues. For instance, trucking costs going up all the time. And we also are drilling more wells per rig. Because of the flex 3 and the reduction in well cycle time.

There's just more moves.

That's right, there are more moves. In fact, in the flex 3s alone, had 51 moves in the third quarter.

Okay. That would explain it considerably. And then one more on Chad, and I apologize, you may have mentioned some of this to Waqar,, it cut out a little bit. Two questions, if could you. And if they'll allow you to disclose a little bit on revenues and costs there for Chad.

And then secondly, I would understand that the Chad prospects would be somewhat different than Hungary being more of an expiration play and Chad being fairly low risk. That that seems to me it has more upside potential and maybe taking to market share. Could you expand a little bit upon your opportunities in Chad, and are they different?

Well, in Chad, our operator has some extensive holdings, and he wants to test those. Some have been tested in the past with some encouragement. And so we believe there's a strong possibility that we'll be able to continue on with the same operator.

There is another operator in the country that has a program that there may be possibilities with that program, that program is more expensive.

Okay, thank you. That helps, because I guess the point is your program in Chad is different than the existing development that's underway.

That's right, and what we are working on is an exploratory program and there is another program that is different than that. In Hungary, there is production, and I think one of the challenges there is being able to drill wells in less time, lower cost and do this through this exploratory program and I think the hopes are quite high and we'll move from there.

Okay. Great. And then, again back to Chad. Can you disclose any about day rate revenue expectations there?

I really can't, because it's an area where I think there's still some competitive possibilities for us. But the rates are attractive and the margins are attractive. It is a remote area, and again -- and we will earn everything we get.

Right. Very good, thanks for the information and I'll turn it back.

Once again, if you would like to ask a question, press star-1 on your Touch-Tone phone. We'll take our next question from Robert Ford from sanders Morris. Please go ahead.

Thanks. George, what's the leading edge for FlexRig 3?

At 12.5.

So up another thousand over the last two and a half months, I guess. Could you give me, I don't know if you have it with you but could you give me your term contract schedule as far as when rigs are rolling off. I have one this quarter. How about the other nine?

Rob, I'm going to try to give you dates. Let me give some times. We have four that will come off in 12 to 14 months. We have four that come off in two to six months. We have one that has multiple years to run, over two. And we have one as I mentioned that will come free in this quarter.

Okay. International revenue per rig day, improved about $850 sequentially. Was that an improvement in day rates, or is that some one- offs?

There was in improvements in day rates, we just had higher priced rigs go back to work during the quarter. In Venezuela we had one come in and another go out. We had a net five. But those kinds of things probably balanced out.

Turning to the platform rig market again, the $1.5 million dollar make hole payment you received, that's in the average revenue per day for the quarter, correct?

That's correct.

Now, the 206, that's one of the self-erected timbers -- tenders that came out --

One of the self-erecting platform rigs.

Right, sorry. Was that earning above, at, or below kind of the [38,000] level that you reported for the second fiscal quarter?

Slightly below.

Okay. Cost per day in that segment, up about a thousand dollars a day sequentially. Could you tell me what was going on there?

I can't think of anything that jumps out of this. I'm just trying to think if there were any unusual expenses. Robert, I can't think of it. It could have been in the way we computed the days, the days are correct.

But we may have had some demobilization in there that -- where we had high erection expenses that would have had an impact on the total averages.

Okay.

Nothing unusual going on, and in fact the rigs themselves their overall performance was at or below budget. So it must have been some special items in there.

Okay. That's all I had. Great quarter, guys. Thank you.

Thank you.

Thank you. We'll take our next question from Sandy Goldman of Hartline Investment. Please go ahead.

To what degree can you price your FlexRigs over and above typical relations with your -- the lesser quality rigs, the lower productive rigs?

You know, are they tied to some point and then all of a sudden you can charge much more of a premium, or what's the arithmetic?

The case for the FlexRig 3 is in its increased total productivity. And we have to spend a lot of time with new customers early on, explaining that. And as time goes along they become much more receptive to it. And that allows us to charge that price for the Flex 3s.

The other rigs, the conventional rigs may have some of the same equipment, like they may have a top drive, but they don't have some of the technology and the equipment that the Flex 3s do, and so they do not earn the day rate and they are more head to head competition with other competitors' rigs.

And those kinds of things don't shake out on a formula. It's experiential, and I'm not sure I'm answering your question.

Well, you are in a way. But at what -- can you get a premium from -- for the FlexRig over and above its economic savings versus using however number of lesser rigs to come up with the same output?

No, we can't.

Okay. So it's very much tied, then, to the overall pricing in the market?

That's right. And that is one of the challenges for us in this business. The savings delivered by our Flex 3 operations are significantly greater than what we are paid.

But we accept that as one of the ground rules in the game, but we are determined to try and change that in our favor whenever we can.

Okay. And at what point are enough incremental rigs utilized so that what remains is really garbage and then, you know, you can have the leverage on the FlexRig? Is that the 100 more rigs, sort of thing?

I don't know the answer to that. I'm sorry -- I'm not sure I can comment on that in a way that will avoid creating a firestorm from other people that may be listening to this.

Okay, all right, thank you.

Thank you. I show no further questions.

Very good. If there are no other questions, we'd like to thanks everyone for joining us today and wish you a nice evening. Thanks very much.

Today's conference has concluded. Thank you all for joining, you may disconnect at this time.