Helmerich and Payne Inc (HP) 2003 Q4 法說會逐字稿

Good day. All sites are now online in a lecture mode, and now I would like to turn the call over to your moderator, Mr. Doug Fears. Go ahead, please.

Thank you, and good afternoon, everyone. Welcome to Helmerich & Payne's conference call and Webcast. Earlier today, we released our fiscal 2003 and fourth-quarter earnings in an announcement that is now available on our Website and HPINC.com. Our primary speakers on the conference call today are Hans Helmerich, President and CEO; George Dotson, President of the Company's wholly-owned subsidiary, Helmerich & Payne International Drilling Company; and I am Doug Fears, Vice President and Chief Financial Officer. Each of the call participants will provide statements regarding their respective areas, and then following those remarks, we will open the conference call to questions. We expect this call to last about an hour or less.

I want to remind you that there will be forward-looking statements and estimates made today, and while we have made every attempt to be as accurate as possible in the information that we give 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 on August 14th of this year. Additionally, we will be rounding numbers and estimates, in hopes of adding clarity to our comments.

As announced earlier today, the Company's net income for the fiscal year ended September 30, 2003 was 18,730,000 or 37 cents per diluted share. This compares with net income of 53,706,000 or $1.07 per diluted share from continuing operations in 2002. Fourth-quarter net income was 7,387,000 or 15 cents per share, compared with last year's fourth quarter's net income from continuing operations of 4,899,000 or 10 cents per share. This year's fourth-quarter earnings were down from our third-quarter net income of 16 cents per share.

I'd like to mention some other financial facts, and touch briefly on some components of income for the quarter, and then review the changes to our reporting format, as outlined in our news release. On the balance sheet, you will notice that cash balances totaled 38.2 million at year end. Market value of the portfolio was 169.3 million at September 30, and at the close of yesterday was just slightly improved from that to 171 million. Total debt for the Company is comprised of our intermediate-term notes, which totaled 200 million, plus we had 30 million of bank debt at September 30th. Capital expenditures for 2003 were $246 million, and our projected CapEx for 2004 is approximately $100 million.

I would like to draw your attention to the Company's implementation of a couple of new approaches to segment reporting, and a change to our consolidated statement of income that we think will be beneficial to readers of our reports, and to those of you who model and follow our company. The changes were driven by last year's spinoff of our exploration and production company, wherein we shifted from being a multi-industry company to a pure-play drilling company. We made the decision to wait until now to make these changes because we just needed more time to focus on the various elements of the changes, and how the details of the change should be implemented.

First, I'd like to discuss the changes we've made to our business segment reporting, and then I'll relate one of those changes to the consolidated statement of income. If you have your release with you, please turn to the last section, entitled Segment Reporting. You will note that we have expanded the total number of contract drilling segments from two to three. Whereas, before, our segments were listed as Domestic Contact Drilling and then International Contract Drilling, we now have contract drilling segments as U.S. Land, U.S. Offshore and International Operations. And we will continue to carry Real Estate Operations as a business segment, as well.

In addition to more segments, we are providing significantly more information for each of the contract drilling segments reported. As you review segment reporting in today's announcement, you will see that we have included revenues, direct operating expenses, general and administrative expense, depreciation and then the resulting operating profit. Previously, we just listed revenues in operating profit. Also, we've included operating statistics for each of the contract drilling segments that include activity days, average revenue, average expense per day, margin per day and rig utilization for each period. This kind of information should make it easier for one to model actual activity and plug in assumptions for future periods, in order for one to make their own cases of prospecitve levels of income, cash flow and other financial estimates.

The delineation of operating profit and G&A costs within the segments complements one other change in our reporting format. By reviewing the segment data along with the consolidated income statement, you will note that the sum of the G&A expense shown in each of the three drilling business segments, in addition to the unallocated G&A reported at the end of the segment income section now equals the G&A expense number on the consolidated statement of income. As most of you realize, but I think it's very important to state, segment operating profits in total were not changed. If you go back historically, the sum of U.S. Land and U.S. Offshore are the same, as we reported as Domestic Operations alone before. Also important to note is that net income was and is not affected in any way by these changes in methodology. Changes on the consolidated income statement only involve the reclassification of a portion of operating costs to G&A expense. You may access the complete retrospective look, since 2001, of segment reporting, consolidated statements of income and operational statistics, using this new methodology, by logging onto our Website at HPINC.com, and then click Investors. With these changes, we are very pleased and excited to provide what we believe is a significant improvement in presenting H&P's financial and operating data to the public. We help you will find this helpful.

I will now turn the call ever to Hans Helmerich, President and CEO; and, after he and George have made their comments, we will open the call for questions. Hans?

Thanks, Doug. Our first full year as a stand-alone drilling contractor included a strange mix of external factors, including unusually high commodity prices, a second Gulf War, a major strike in Venezuela and subsequent turmoil within Pedavesa (ph), our largest customer in South America. Gas storage levels started the ejection (ph) season at a historic 40 percent reduction to all other years, but then achieved an unprecedented fill rate during the summer and early fall. Finally, a cautious and sometimes bumpy increase in the overall rig count carried the industry to a 78 percent utilization rate by the end of the quarter, but without upward pressure on day rates.

As the Company transitions into 2004, we have a number of challenges and opportunities. One challenge is the softness in our platform drilling business, where activity has slipped to 5 of 12 rigs running. While retaining the strongest marketshare position in this niche segment, the general market weakness we face has not only impacted the Company in 2003, but will continue to be felt at least through the first six months of 2004. At this point in time, we expect our platform business to show sequential declines from those reported in our most recent quarter, since long project leadtimes provide little upside until later in the third or fourth quarter of 2004.

Another challenge has been our international operations, where rig utilizations averaged only 39 percent for 2003. We have been encouraged recently by the level of bid activity, and have seen our activity level as of today increase to 56 percent. Looking to 2004 and beyond, we see significant opportunities for growing our international business, and believe we bring a unique combination of experience and innovation to this market. Our FlexRig offering will play an important part in capturing this potential, as we work to introduce this unique technology into international markets.

On the U.S. land drilling side, the overall industry is in a cyclical transition that, for a time, presents a challenge for our domestic business. Our high utilization rates and premium day rates come under increased pressure from rig-on-rig price competition, as industrywide utilization increases. Typically, as the upcycle continues, contractors gain some pricing power that leads to more attractive returns. The Company is able to differentiate itself more dramatically on the front end of a cyclical transition, as we achieve significantly higher-than-industry utilizations at better rates, as well as, once the cycle progresses past the current transition phase. Sometime after approximately 80 percent of industry capacity has been reached, the more destructive rig-on-rig pricing pressures ease, as supply and demand tightens. It is in this stronger cycle segment that the customer refocuses on total project value, and that new build projects favor the more experienced and innovative supplier. Here again is where the FlexRig continues to prove itself to our customers in the U.S. land drilling market, and why we're optimistic that we are well-positioned, as we move into 2004 and beyond.

With that, I would like to turn the call over to George.

Thank you, Hans. I will comment in greater detail on our activity, our margins and operations information.

Our fourth-quarter operating profit for U.S. land operations decreased to $6.4 million from $7.7 million in the third quarter. Days worked during the quarter increased 7 percent, while average revenue per day decreased 4 percent, to $11,236 from $11,752 in the third quarter. Average expenses per day continued their decline to $7,837 per day versus $8,080 in the third quarter. Average daily margins decreased 7 percent to $3,399 versus $3,672 in the third quarter. Our U.S. land rig activity was strong, with an average of 68.5 rigs working during the quarter, compared to 65 rigs in the third quarter. U.S. land rig activity during the quarter was 83 percent, compared to 82 percent in the previous quarter. Existing mobile rigs and FlexRigs achieved 95 percent activity, with an average of 51 rigs working, compared to 98 percent activity (technical difficulty) rigs worked.

Conventional U.S. land rig activity increased to 60 percent, and an average 17.5 rigs worked during the quarter, compared to 53 percent and an average of 15.4 land rigs working in the previous quarter. Today, on the 12th of November, H&P has 81 percent activity, for a total of 85 land rigs available in the U.S., with 69 rigs committed and 16 rigs available for work. Our average day rate for all U.S. land rigs today is $10,613, compared to $10,700 on the 24th of July, the date of our last webcast. As we have said for many quarters, demand and activity continue to be weakest for deep rigs. Already soft rates for deep rigs to appear to be headed lower, in intense price competition. Of our 16 idle rigs in the U.S. today, five are 3,000-horsepower very deep rigs, and seven are 2000-horsepower deep rigs.

Our fourth-quarter operating profit from U.S. offshore operations, including management contracts, decreased 20 percent, to $8,900,000 from $11,100,000 in the third quarter. 5 of our 12 platform rigs are contracted, and seven rigs are idle, without follow-on contracts. Six of the seven idle platform rigs are available for contracts, and the seventh rig will require shipyard maintenance. The reduced level of offshore activity in the U.S. Gulf of Mexico is apparent; and, as we have previously said, recovery in our platform rig activity will be slow. Going forward, we expect to maintain five rigs under contract, but the total margins may decline. Some of the long-term projects are reaching full development, and the platform rigs will earn less in total margin if they move between operating and standby rates.

Fourth-quarter international operations, including one management contract, reported a decline in operating profit to $600,000, compared to 3.9 million in the third quarter. International operations, however, continued to show signs of strengthening. An average of 12 international rigs worked during the quarter, out of 32 rigs available. The average daily revenue was $19,820 per day. Activity today has improved to 19 rigs working, out of 32 rigs available.

Our operations in Venezuela were steady throughout the quarter, with six deep rigs operating for Pedavesa. A seventh deep rig began operations for an international operator during the quarter. Our eighth deep rig is committed to Pedavesa, but start of work has been delayed. We now expect this rig to begin work during the second quarter. We have also contract possibilities for our two 2,000-horsepower deep land rigs in Venezuela. A shallow rig is not likely to return to work. Our deep rigs are the best equipped and maintained in Venezuela, and our margins continue to be very attractive. Seven out of our eight rigs in Ecuador were contracted at 73 percent activity during the quarter. One of our three deep rigs in Columbia continues to work. Rates in margins continue to be attractive in both Ecuador and Columbia. One of our six rigs in Bolivia and one of our two rigs in Argentina are presently working.

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. This FlexRig is presently drilling its third well, after a smooth, incident-free startup. The second FlexRig is rigging up in Chad, and will begin a six- to eight-month contract for an international operator in approximately three weeks. The FlexRig 3 project has now delivered 29 new FlexRig 3's. We should complete the last three of the approved FlexRig 3 rigs by March of 2004. We will review future plans for the FlexRig project during our second fiscal quarter. 28 new FlexRig 3's are currently operating, and the field results continue to improve. Of 188 complete wells drilled to date, FlexRig 3's have drilled 133, or 71 percent, ahead of the customers' estimated drilling time, and 11 wells, or 6 percent on the customers' estimated drilling time. The new FlexRig 3's, the new technology and the new crews have met or exceeded the customers' expectations of performance in 77 percent of the 188 wells drilled to date. A highly effective FlexRig 3 training program has enabled us to add 650 new personnel to H&P. Our training program was a major investment in training for the new technology and team building. 18 months into the effort, we have achieved a 78 percent retention rate for the initial training effort. One year ago, we were reporting the cost of training, and today, we can report distinctively good results. Trained and stable crews have enabled the FlexRig 3 to achieve outstanding field results. Our efforts to reduce U.S. land rig operating costs have shown steady progress during the year. Daily costs for U.S. land rigs, including move costs, declined 9 percent, from $8,564 per day in the fourth quarter of fiscal '02 to $7,837 per day in the fourth quarter of this year. Our average cost per day for all U.S. land rigs, including move costs, decreased 3 percent in the fourth quarter alone. The FlexRig 3 operation reduced costs 7.5 percent, from $8,287 per day in the fourth quarter of '02 to $7,670 per day in the fourth quarter. Price competition reduced the FlexRig 3 rates, and FlexRig 3 margins declined 9 percent, to $4,256 per day for the fourth quarter, from $4,671 per day in the third quarter of '03.

Recognition and acceptance continue to grow among our customers and their non-operating partners. The FlexRigs are reducing well cost and well cycle times. These customers continue to reward us and the FlexRig 3's with a contract awaiting each new rig, 98.7 percent activity for the first 17 months, and premium day rates.

Now, I'll turn the program back to Doug.

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

(OPERATOR INSTRUCTIONS). Robert Ford.

Could you talk a little bit about the international utilization in the fourth fiscal quarter? It actually declined 5 percentage points. Is that the August fiscal year end versus September fiscal year end? That was a month off? Because I notice you're up to 19 now. Was there something unusual in the quarter that caused that sequential decline?

Robert, maybe Doug is looking for something. But I can't recall anything unusual. I am trying to think back what the third quarter might have held for us. I believe it probably was in Ecuador, and we had, I believe, maybe two rigs that were down for the full month and perhaps another rig partially. That would have been the third quarter.

Also, in the other costs, internationally, you have got the other revenue, the platform rigs. The other costs jumped up 2 million sequentially, and running about 1 million more than it has been over the first half of FY '03. Was there something unusual there?

Robert, I'm sorry; I didn't follow you there. Tell me again?

Well, you've got -- if I run your day rates and utilization through the model for the international rigs, obviously, I'm going to be missing about 3 million of other revenue and about 3.5 million of cost, that's attributable to the platform rigs, et cetera.

In your international operations?

Right.

No; we do not have any offshore platform rigs running internationally.

What about Jade?

We have a management contract.

The cost there jumped up 2 million sequentially. It's running about 1 million more than it has for the prior two quarters before the third quarter. Was there anything unusual there?

The only calculation, or the only thing that could be missing are a couple of things. One are the currency translations, and then we did have an accrual issue in the fourth quarter that I will need to probably just get back to you on. I can't remember the amount on that.

Paul McRae (ph), Wellington Management.

George, what, in your view, is needed for the industry to improve domestic onshore revenues and margins from this point onward? Is it really just getting utilization up over 90 percent before we can begin to get the benefits that seem to be needed for better earnings?

Paul, it's a puzzle. I think that we've all known that there are more rigs out there that can work in this cycle than there were in the cycle of 2001. And we've all said, well, when the activity rates for the new number of rigs working -- workable -- gets to 80 percent activity, we should see some improvement in rates. And we have not seen that improvement in rates, even though we've gotten to that 80 percent level, and we continue to hope and believe that it's right around the corner. In fact, just in the last few days, we have begun to see some improvement. I think also it may be about segments. I think there are probably some contractors that could say, well, we've been able to get rate increases. And I think they probably have a sector of the market, maybe it's shallower rigs, where they have been able to do that. I know that in putting the FlexRigs out, they have been very, very capable, and they have delivered a lot of performance for our customers. And as they've gone out, they have taken a job each time. So they have been targets for the competition, and I think it's just been very hard. We had actually had to lower some day rates on Flex 3's, just because of lower-priced competition. We have been able to maintain the premium, but because the rate at which we were competing went down, the rates of FlexRig 3's went down slightly. So at the same time, again, it's a bit of a puzzle. We hope that when we got to the 80 percent level, we would see gradually increasing prices throughout. But it's been spotty for us. So we're hoping that that will improve, but it's a bit of a long discussion, and I hope I haven't --

I guess your gut says that we are due to get it soon, if we can maintain domestic gas prices where they are currently. You would expect it to happen fairly soon, would you not?

I certainly would. And again, I think the encouraging thing is that, just in the last 10 days, we have begun to see some improvement in the overall demand that has allowed us -- we reported 16 rigs that are without jobs, and we've had some of those rigs committed to recently. That gives us some feeling that the business may move ahead. Again, we've had that feeling several times, as all of our competitors have, too, only to have the business just move sideways. But we're hoping it's here.

John Woodbury (ph).

It's sort of two parts. First, if you could give a little more color on the 100 million of CapEx in '04, and maybe your thoughts, at this point, on how many more FlexRigs you think you want to bring to the market, and what sort of market do you think you need to get before you start adding some?

I'll address the first part, the capital spending part. Of the 100 million, just a little over 90 will be in the contract drilling, and the rest of it would be in real estate and just corporate type CapEx. And then, of the 90, about two-thirds of that is going to be -- or at least projected to be in the U.S. land rig side. And then, of that 60 million-ish, as you know, we've already got FlexRig 3's that we're planning to construct through March. And so that takes up about a third, a little more than that. So that just kind of gives you a general idea of where that is headed. George, do you have anything to add to that?

Well, I think, whether we had FlexRigs or not, that's one that we're going to continue to keep that issue open at H&P. I think that one of the things we have to think about is, if we wait for the business to get better, it generally creates more hardships in the fabrication of the rigs. There are fewer resources to get access to, and what you really want to do is be able to have the rigs that are ready to move into an improving market. So again, we have a construction program that will go on through March, and we have time to review that. And we'll consider it in the future.

I might just add that one of the benefits of the organic growth that we've achieved is that we really do maintain a flexibility by being our own general contractor and assembler on that effort. We have lots of options, so we really don't have to make that decision today, and we don't have plans, as of today, or an announcement to that end. So it's something that we will watch and decide later. We're interested in seeing how the international marketplace develops, and what kind of promise there. And it looks like we were addressing just some market conditions to Paul on the previous questions, just watching how that develops, as well.

Sandy Goldman (ph), Hartline Investments.

One of your assumptions on the FlexRig was that you would get paid for the incremental productivity. And, based on what you said, it hasn't happened yet. Do you have any question that that may not be the case, even as rates improve?

I believe it's always going to be a struggle, just the nature of the business. But we're getting a premium today. We always would like to get more. We'd really rather have higher day rates. But I believe that, going forward, we'll continue to get a premium. And I think that one of the things that we're seeing is -- and this makes it a little more difficult for us, but it's very good for the industry. What we're seeing is that, as we operate the FlexRigs, and we turn in performance that is striking and very attractive to our customers, our competitors see that. And they say, we have got to do whatever we can to improve our own performance. So, they may not be getting the kind of performance we're getting on FlexRig 3's, but nevertheless, the industry -- by and large, in the areas where we operate, the industry is delivering better performance, higher productivity than it was before the FlexRig 3 came on the market. So that's good for the industry; that's good for the operator. That makes it a little less clear about the FlexRig 3 -- how do you maintain the kind of premium that you used to get when you deliver this large operating performance lead over other rigs? But as we move ahead, that may not be as much. But I believe that we will find new ways to continue to increase the performance, and lead the business into better total performance overall.

Seeing what you see now, if you were to sit down again and look at the whole FlexRig program, in terms of the amount of dollars spent and the sources, would you do it all over again in the same way?

I would have to tell you that we absolutely would. This business is far better off because H&P put its mind to trying to advance drilling technology. The business is far better off, and H&P is far better off. Today, we have 85 rigs in this country, where we had 30 rigs two years ago. Now, we could have gone and bought those 50 rigs more cheaply.

Yes.

By, by the time we operated them to deliver anything more than what our competitors had, then I don't think we would have done it for any less money than what we have today. You may argue that point, but I believe that we have something that is going to accrue to H&P.

And the final thing I would tell you is this isn't about the last 17 months; this is about the next 10 years.

Okay. But clearly, the premium you thought you would get -- not just a premium over day rates -- is not yet encompassing a return on the incremental productivity versus the other person's rigs?

No, we are not being fully compensated for that. You are absolutely right.

The other question is a miscellany. Atwood -- what about that holding (technical difficulty)? You know, you've got a large, large holding in the Company. Has there been any new views toward how that is going to be looked at in the future?

This is Hans. I'm still thinking about your first question, Sandy. I think it's hard -- and George touched on it. There is some intangible value. One of them is, of course, higher utilizations in all different types of market conditions. I think another one is what George touched on at the last, which is we really are changing the mindset of the customer, in regard to what is possible, and how they can look in a new way at their own drilling plans, and what they can expect in terms of productivity. And so I think we would like to have a more fully compensated share of the productivity gains we have put on the table, but it is tough to measure going forward in the future, competing against an average life rig of 24 years old, and the customer seeing now what is actually possible in the field -- how does that translate into the opportunities we're going to be afforded in the future? So I think we are very bullish on it, notwithstanding some of the things we have talked about earlier. But in regard to Atwood, we still view it as an investment, and will still look for an opportunity to have that pay off. There's no new thinking about it or no different -- difference in the way we regard the Company today.

On the Atwood, then?

Yes, sir.

A question about the Atwood. Is there any change in the view of how it's going to be looked at in the future?

I don't know if I have anything to add -- regarding it is an important investment in our portfolio. We said before that we think it has some synergies, in terms of operations. But we look at it, really, as an investment. And too, the other investments -- we expect to continue to translate that portfolio value into operating assets. We don't have a time specific for that.

Hans, if you make a decision in a few quarters that you do not want to build more FlexRigs, will you still look at the portfolio as a source of funds to do something else?

Yes, I think we would. I think our goal is to translate that into operating assets. And that could be FlexRigs, that could be other opportunities.

Bucky Roland Miller (ph), Boeing and Scattergood (ph).

I guess I'll shoot this at Doug, just housekeeping. What were the shares issued at 9-30?

Hang on just a second.

I guess, issued and outstanding?

Outstanding shares at September 30 was 50,140,364 shares.

The gain on undeveloped acreage -- can you give some detail there -- how many acres and where and how much was realized, what the basis was??

It was some undeveloped property, 16 acres, approximately. We sold to Cox Communications; they are building a regional office on that. And the sales price was approximately $2.2 million.

What securities were sold in the quarter, and can you give us some portfolio detail?

Yes, just generally. As you know, our portfolio consists of four primary holdings in the portfolio, and then we have a number of stocks. I would estimate there to be 20 or 25 smaller holdings, whose total market value is about 20 million, that were results of venture capital investments made back in the 80's. And these are spinoffs out of that capital of the venture capital companies -- which, by the way, the returns on those investments are extremely high. So we hold a number of public companies, and I think I tallied 14 of those companies whose portion of stocks of those companies were sold -- various companies, not in the energy business. So that's what made up those sales in the quarter, Bucky.

I'm sure you've talked -- I know you've talked about this previously, but maybe we can really kill this dead horse. The Chad venture -- presumably, you all, in the back of your heads, view that as a possible beachhead. Any developments along that line and thoughts on a permanent operation on that comment?

We don't have any indication that the job will be any more than what it is right now, but we certainly believe, with their prospects, that that venture could grow with its demand for more rigs. And the reason that we pursue one-rig operations -- we would prefer not to. But first of all, you have customers that that ask you to do that, or ask you to bid on it. And we do, and so sometimes we win those things. But there have been operations in the past that were one-rig outpost (ph) ventures, and they drilled dry holes and that was the end of it. And we've had others that we sent in one rig, they had a discovery, and then other rigs went in to develop it. And I think the biggest success for us was we still had one rig in Columbia, and within five years, we had 10 large rigs. We invested well over $100 million in that, and it was a great operation for H&P.

So that's why we do those things -- one, to respond to our customer; and two, believing that there's nothing ventured, nothing gained. And hopefully, we will have long-term work there. That's why we do those things.

Andreas Vietor, Stifel Nicolaus.

A question for you, George. How much lower do you think you can get your operating expenses in the U.S. domestic land business?

Because we have moves and other things in there, I would say that $7,500 a day is probably the near-term. If we can get that sustained, we'll feel good about that. I think that there are going to be opportunities for us to drive that cost down. We were in the first quarter, maybe first third (ph) of a company-wide supply chain management effort. And we are seeing encouraging results from that. But I feel comfortable with that range. The other thing I would tell you is that in the beginning, when we built the first FlexRig 3's, these were the first rigs with all AC power, variable-frequency drives. We were not sure about that; it has turned out much better than we expected. And we're actually operating those rigs at levels below our conventional rigs, so, again, we don't know how much better that that can get.

That's impressive in and of itself. To to get to that 7,500-dollar level, is that going to be something that happens over six months, or is that more like 9 to 12?

I think it could be as early as the next 90 days. But again, the big issue is, can we sustain it? If we get to that level and then in bounces up 5 to 7 percent, that won't be very satisfying. So the drive will be to sustain it at the new levels that we have reached.

And I was hoping you can expand on your comments with regard to the competition, in terms of rates at the deep end of the domestic market. What's driving the competition? Is there something that's going to forestall this and stop it and make it turn around in the near future?

You did say the deep end of the business?

Yes, where I think you made comments that it was very competitive in some of your big rigs?

It is competitive, and we have seen some instances where the rates have gone even lower. And we don't know whether we'll be successful in those or not. But I think, Andy, it comes back to that graph that we've been talking about for the last five years, that there is not a lot of work in this country that is truly deep work. And there are a number of rigs -- go ahead?

No, that was the operator interrupting.

There are a number of deep rigs out there that are available to do that kind of work, and I think it's just no contractor is going to get it all. And I think that there are going to be contractors out there that are willing to take this job, that job, at very low rates, just to make sure that they stay in the business. And there are going to be some jobs that are masthead type jobs, and they are going to bid even lower for that, in order to get their name on the masthead. So that's why, for us, the real business has been between 8 and 18,000 feet.

Yes, absolutely. One last question for you, and denying going to jump off. You suggested there would be some softness for your U.S. platform margins. Any sense of magnitude that you can provide us?

No, I really can't. All in all, I just can't. I think we probably tried to describe that as well as we could, in the written report that was released today. It's new territory for us, as well.

Arun Jayaram, CS First Boston.

George, as you conclude at least this part of the FlexRig program, what is your bias, in terms of the next few rigs, US/international? Are you seeing any opportunities for (indiscernible)?

Yes; we are seeing some opportunities for international work, even in South America. As we have said for some time, we believe that Venezuela is going to be a very valuable part of our operation. And I can see us perhaps moving existing equipment into Venezuela from operations in other parts of South America, or even out of the state. We are looking at some additional work in other South American countries. The difficulty is going to be in the Southern column (ph) -- in Bolivia and Argentina. And there, we just have more rigs than we can see, going to work in the next couple of years. So we just looking for the right opportunity to move those big rigs to some other area. Other areas -- we continue to look; we continue to visit with operators and hope that we will see some opportunities. It's too early for us to be any more specific than that.

And would you characterize it a meaningful -- or some sort of improvement internationally, would be what you would be looking for to expand the FlexRig program beyond March? Or what drivers are you thinking about -- factored in that decision? Is it more of an improvement domestically, or would you need to get a leg up internationally, as well?

I think you've hit on both the possibilities. I think, if we saw that the rig count moved from the 80 percent range to the 90 percent range in the next four or five months, and rates strengthened, the we would feel more comfortable in moving ahead with FlexRigs. As Hans once said, we're never going to build another 25 at one time. And it's going to be a few at a time.

The other possibility is that there will be some opportunities for FlexRigs to work internationally. We have two working internationally now. We have some other possibilities that we are actively working, and there have been some discussions about FlexRigs. But again, it is so formless, at this point, that I really can't go much further into it.

Vincent Mati (ph), Solstice.

I might have missed this in your discussion of international markets. It sounds like you said you have got 19 rigs working now. Is that kind of what I should expect, kind of average, for the next quarter? And also, is the margin likely to be more similar to what it was in the quarter ended June 30th? Or is it kind of similar to this quarter? Or any sense of just direction?

You can't look for an average of 19 rigs in the next quarter, because some of these, they will not have worked for the full quarter. So our average will be something less than 19. And in terms of the margins, I would think that they may be a little bit less than what you've seen in the past, because some of the rigs are not going to be as big as the ones that have gone to work in Venezuela. Venezuela continues to have the strongest rate structure for H&P. (multiple speakers).

It appears we have no further questions.

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