Helmerich and Payne Inc (HP) 2004 Q2 法說會逐字稿

Welcome to today's Second Quarter Earnings Conference Call given by Helmerich & Payne. You've been joined by the moderator for today's conference, Mr. Doug Fears, Vice President and CFO of Helmerich & Payne. Go ahead, Mr. Fears.

Thank you, Nate, and good afternoon, everyone. Welcome to Helmerich & Payne's second quarter conference call and webcast, and as usual with us today to provide statements and answers to questions are Hans Helmerich, President and CEO, George Dotson, President of the company's wholly owned subsidiary, Helmerich & Payne International Drilling Company, and I'm Doug Fears, Vice President, CFO.

As always there will be forward-looking statements and estimates made today. We will also be rounding some numbers in hopes of adding clarity to our comments. We attempt to be as accurate as possible with our comments and information that we provide but it is important for you to know that much of the information we provide involves risks and uncertainties that could significantly impact expected results. There's further discussion about these risks and uncertainties in our public filings, the most recent of which is the 10-Q filed February 13th, 2004. You may obtain this filing along with a copy of today's press release on our website.

As announced earlier today Helmerich & Payne's net income for second quarter 2004 was $6,048,000, or 12 cents per diluted share. This compares with $2,574,000, or 5 cents per share for last year's second quarter, and $5,629,000, or 11 cents per share for the previous quarter, or the first quarter this fiscal year. As mentioned in the announcement, second quarter income includes $4,337,000, or 9 cents per share of gains from the sale of portfolio securities. There were no material gains from securities sales and last year's second quarter, and there were 4 cents per share of gains in the first quarter earnings of this fiscal year. During the second quarter, the company sold it entire position of Conoco Phillips, which was 140,000 shares.

The value of the company's portfolio is currently approximately $220 million and as of the end of the second quarter it stood just below that at $219 million. The after-tax value is approximately $150 million or approximately $3 per Helmerich & Payne share. Capital spending during the recent quarter was approximately $23 million bringing the six-month total capital expenditures to $52.7 million. We believe we're on track to end the fiscal year with approximately 100 million of total capital expenditures.

I would now like to turn the call over to Hans Helmerich and after he and George Dotson have made their comments we will open the conference call for questions. Has?

Thanks, Doug.

I want to direct my comments today to our sense of where we are in this slowly improving energy cycle and speak to the much anticipated prospect for price improvements. Looking back there's been some frustration with the level of oil field activity and pricing power during a backdrop of such strong commodity prices. This disconnect has been discussed at length within the industry and has been attributed to a combination of lack of prospects, more focused discipline on capital spending, and the uncertainty that higher prices will be sustained. Whatever the contributing factors, the slow oil field recovery has made this cycle unique, but the pressing question now deals with how the rest of the energy cycle unfolds from here. Clearly our second quarter numbers provide little evidence of such improvement, and anecdotal feedback from the field suggest price competition in the U.S. remains intense.

Some of the most destructive rig on rig pricing occurs during a cycle transition as land contractors attempt to activate idle equipment. Typically as capacity is soaked up, attention shifts to a more rational pricing strategy. With land rig counts moving up this is the day rate improvement industry observers are waiting for.

We are confident that we are the price leader in each of the markets in which we operate. Because we do not have to keep prices low to provide a cover to introduce older units back into active service, we can focus on creating operating efficiencies that provide true value-added for the customer. Our challenge is to continue to push this value creation and to participate through improved pricing in a greater share of this larger value pot.

Across the board customers will see prices go up as the dynamics of supply and demand take effect. They will become more sensitive, as they should, to what they are getting for the higher day rates. Too often the industry will pull out a piece of equipment from the corner of the yard that just six months earlier would have been deemed unacceptable. This is a reflection of the low reinvestment and the average age of 25 years for a typical land rig.

We are in a position in the unfolding up cycle to offer customers a unique and very different solution. With the completion of our 50 new FlexRigs this month customers are demonstrate ago clear previous reps for our solution. This vote of confidence shows up in nearly 00% activity rate for FlexRig 3s, the premium day rates they earn, the customer retention and loyalty they engender, and a new opportunity and markets they open for the company. The potential returns they provide our investors are attractive.

Let's consider where we are today. Five FlexRigs 3's are now contracted at leading edge base rates of $12,000 per day. Assuming an investment value of $10,750,000 per rig the $12,000 day rate is producing a cash-on-cash return for H&P of 15%. And a first year financial net income return on invested capital of 5.3%.

As a preview of the potential near-term future, we have negotiated a one-year term contract for a new FlexRig 3 at a rate that yields a cash on cash return this year of 20%. And first-year financial net income return on invested capital of 8.7%. Moreover, every incremental $1,000 increase in daily margin results in an incremental 3% of cash on cash return.

I'll conclude my remarks by saying we are clearly not satisfied with the result's in the first half of the year. It has not been a surprise to anyone that has followed us that our international and offshore segments have been challenging and have masked the positive contribution from the FlexRigs. We can see some improvement in both of these segments as we move into the second half of the year. We believe we are well positioned for an improving cycle that could very well extend for a considerable period of time. With that I'd like to turn the call over to George Dotson.

Thank you, Hans. Second quarter earnings for U.S. land operations were lower compared to our last quarter. Our second quarter operating profit for U.S. land operations decreased 10% to $6.3 million from $7 million in the first quarter. Our rigs worked 6,758 days during the quarter, compared to 6,280 days in the first quarter, while average revenue per day decreased slightly to $11,302 from $11,340 in the first quarter. Average expenses per day increased 2%, or $191 per day to $8,032 versus $7,841 in the first quarter. The 2%, or $191 per day, increase in expenses is attributed to our decision to relocate five rigs to stronger markets with better economics and long-term prospects. Accordingly, average daily margins declined 7% to $3,270 from $3,499 in the first quarter.

U.S. land rigs working increased to an average of 74.3 rigs in the quarter compared to 68.3 rigs in the first quarter. U.S. land rig activity during the quarter was 86% compared to 81% in the previous quarter. Existing mobile rigs and FlexRigs achieved 97% activity with an average of 56 rigs working compared to 92% in the previous quarter when an average 51.2 rigs worked. Conventional U.S. land rig activity increased slightly to 63%. And an average 18.3 rigs worked during the quarter compared to 59% activity and an average of 17 land rigs working in the previous quarter. Today on April 22nd, H&P has 90% activity for a total of 87 land rigs available in the U.S. with 78 rigs committed and 9 rigs available for work. Our average day rate for all U.S. land rigs today is $10,833 compared to $10,660 on the 22nd of January, the date of our last webcast.

Price competition kept FlexRig 3 daily revenue flat at $11,981 in the last quarter versus $11,968 in the first quarter. Daily expenses increased 2% to $7,893 versus $7,703 and reduced FlexRig 3 margins to $4,088 in the second quarter from $4,265 in the last quarter. Half of the increase in FlexRig 3 daily expenses is attributed to our decision to move the FlexRig 3 to a major new market for a long-term customer.

We have not experienced any near-term improvement in the demand for deep land rigs in the U.S. H & P has 18 deep rigs in the U.S., of which 9 rigs are working and 9 rigs are idle. We continue to monitor deep drilling activity and our rigs are prepared to return to work with any increase in demand.

In 1994, H&P made a decision to shift the company's principal focus from the deep drilling market to address the mid-depth drilling market of 8 to 18,000 feet, a segment which we believe would experience the greatest demand in future growth prospects. We believe that our decision was timely and has met with considerable success. According to Smith International's land rig report dated the 9th of April, 2004 approximately 70% of the 1,104 active U.S. land rigs operated at depths from 8 to 18,000 feet. This is precisely the mid-depth range targeted by our 48 new FlexRigs and the existing fleet of mobile rigs and non-deep conventional rigs. Today fully 83% of our U.S. land fleet is focused on this mid-depth market. Notwithstanding our shift in focus, H & P's operating philosophy of being the industry leader in safety, performance, and best total value remains unchanged.

Second quarter operating profit from U.S. offshore operations decreased slightly to $4.1 million from $4.4 million in the first quarter. Six of our 12 platform rigs are contracted and 6 rigs are idle without follow-on contracts. We continue to forecast a slow recovery in our platform rig activity. We have some inquiries for future work and we are optimistic we will secure contracts for one or two additional rigs by September 2004.

Second quarter international operations reported a decrease in operating profit to $1.5 million compared to $3.8 million in the first quarter of 2004. As we reported earlier, exchange losses in Venezuela accounted for $1.4 million of the decrease.

An average of 16.2 international rigs worked during the quarter out of 32 rigs available. The average daily revenue was $21,826.

Average -- I'm sorry, activity today is 19 rigs, contracted out of 32 rigs available.

Our operations in Venezuela increased to 7.1 deep rigs in the second quarter compared to 6.4 deep rigs in the previous quarter. Today 7 deep rigs are operating and an eighth deep rig is moving to it first well for Pedavesa. A ninth deep rig is operating for an international operator.

We are betting on other contracts that offer possibilities for our two 2000 horsepower deep land rigs in Venezuela and for other H&P deep rigs that are idle in Columbia, Bolivia, and Argentina. To improve our chances for success, we are mobilizing a 3,000 horsepower deep land rig from Argentina to Venezuela. Our deep rigs are the best equipped and maintained in Venezuela and our margins continue to be very attractive.

In Ecuador an average of 5.4 rigs worked during the quarter. We are currently operating 5 rigs in a sixth rig is contracted to start in May.

Although two deep rigs in Columbia are idle there is encouragement one rig may return to work in the third quarter. One of our 6 rigs in Bolivia and one of our 2 rigs in Argentina are presently working. As stated previously, the second rig in Argentina is mobilizing to Venezuela.

Two FlexRigs are working on international contracts in Chad and Hungry. Both contracts should continue through the fiscal year.

The FlexRig 3 project has delivered 32 new FlexRig 3's. We are winterizing the 32nd rig for operations in Wyoming. As we announced previously, we are now suspending construction activities and we will review future possibilities and plans for the FlexRig 3 project.

The FlexRig 3 effort continues to be a major success for H&P and our customers. The field results are outstanding. Our field personnel, rig design and new technology are delivering faster drilling times, less down time and faster moves. Today, 58% of our FlexRig 3s are drilling complicated deviated wells compared to 28% of all U.S. land rigs drilling deviated wells. Despite more complex wells and increasingly aggressive performance target the FlexRig 3s have drilled 67% of their first 315 Wells turned customers' estimated drilling time. Average down time for FlexRigs 3 declined to 66/100 of 1% in March, and lien, move planning, and practices are removing one additional day from FlexRigs 3 moves.

In embarking on the new FlexRigs program, H & P made a further strategic decision of investing counter cycle through the downturns beginning in 1998 and 2002. The principal rationale for this decision was to position H&P to have maximum leverage at the onset of the next up cycle. Further, we believe counter cycle timing would enable H&P to collaborate with our suppliers in delivering the best investment value. We were successful. The FlexRig 3s and crews have set new performance standards and the average rig investment for the last five rigs has declined to $10.75 million, including drill pipe and all taxes.

Our customers continue to recognize the value added by FlexRig 3 operations. Every new rig has gone directly to a job. And 14 of 31 rigs have never been released by their original customers. The FlexRigs 3s have achieved 99% activity in the first 34 rig years of operations. And FlexRig 3s earn a premium over conventional rig rates.

The FlexRig 3 has opened up new markets for H&P. In mid-2002 the, for instance, we had no rigs in the active east Texas markets. Today FlexRig 3 successes have led to 10 FlexRig 3s operating in east Texas. We are currently operating 11 FlexRig 3s in south Texas, 3 in the Texas Gulf Coast, 3 in the mid continent, 2 in Colorado, 1 in Louisiana and 1 FlexRig 3in west Texas.

Our FlexRigs 3 are acknowledged as the industry catalyst for reducing well cycle times, which reduce total well costs for our customers, accelerate the production of their oil and gas, and unlock possibilities for better returns.

And now I'll turn the program back to Doug.

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

Thank you, Mr. Fears. At this time if you would like to ask a question you may press the star 1 on your touch-tone phone. If you are listening via speakerphone, please pick up the handset before you press star 1. You may withdraw your question at any time by pressing the pound sign. Once again, the instructions for asking a question, star 1 on your touch-tone phone. We will take our first question from Aaron Jarron with CSFB.

Good afternoon, gentlemen.

Hi, Aaron.

George, first question is internationally your operating margins or your daily margins were down 11% sequentially. Given the pickup in contracted activity, do you expect margins to improve based on what you're seeing today?

Yes, we believe they'll at least be flat if not up slightly. I think that that will come as a result of the additional work in Venezuela. We also had some higher expenses associated with mobilization in Chad and also moves in Hungary, so I think we'll see some recovery in the margins for international land rigs.

For the three additional rigs you have contracted, George, what are some of the leading edge rates you're seeing in Venezuela?

Oh, Aaron, I'm not sure that that's a number I feel comfortable in giving you at this point because it's a competitive number, and I think we'll pass on that one.

Okay. And, George, can you elaborate a little bit about the relocation of rigs, where are you taking -- which market are you moving the rigs from and where are they going to?

We are -- we have moved some rigs from south Texas to Wyoming. They're on their way to Wyoming. And others have moved to the mid continent. One moved to west Texas. I'm trying to think if there were any other major moves.

George, how many rigs do you have now in the Rockies?

We have 6 rigs today, 4 in Wyoming and 2 in northwestern Colorado and we are sending an additional 2 rigs to Wyoming in the late spring.

Okay. That's all I got. Thanks, George.

Thank you.

Thank you. We'll take our next question from Waqar Syed at Petrie Parkman.

Couple of questions. If you exclude the mobilization cost from your operating rig day costs on U.S. land, what would underlying cost be, would have been?

Oh, just one second. We had it here at our fingertips a moment ago.

You're asking for cost data, expense data?

That's right, yes.

7,800.

Is that a good number to forecast for the future, coming quarters?

I think it's probably -- one second.

Well, I believe that cost has all of the [INAUDIBLE] stripped out of it for all rigs, does it not?

Okay. So you're likely to incur mobilization costs for additional rigs you're moving into Wyoming?

I think I hear what you're saying. Let me just be clear here. To all the direct expense per day that we show on our segment reporting has all mobilization expense for all rigs wrapped up. I think you're asking for just the mobilization expense connected with these moves that are -- that took place, the special moves, I'll call them, that took place this past quarters. Is that what you're asking?

That's right.

I'm not sure we have that data handy. I don't believe we have that real handy.

But generally it would cost like maybe half million dollars or so to move a rig? Would that be a safe number?

Well, it depends on where you're going with it.

Moving it to the Rockies from Texas, would that cost had $250,000 for the move and maybe 250 to winterize the rig?

To move a rig from south Texas to the Rockies, couple things involved. One is winterization, the other is just mobilization. The mobilization could easily be $500,000 from south Texas to the Rocky Mountains.

Just the mobilization?

Just the mobilization, which means all transportation and also the rig up -- the initial rig-up in Wyoming, or wherever the location is.

And how much is the winterization? How of the transition cost?

The winterization can run half a million to three-quarters of a million dollars.

And you are expensing these costs immediately or are you capitalizing some of these costs?

On winterization we're not expensing that, we're capitalizing that, and on the cost to mobilize, and rig up, a good part of that is being reimbursed by the operator. So it's being expensed.

Okay. Now, what would you -- for the third quarter and fourth quarters, what kind of operating costs would you guide us to? For the U.S. land business

Waqar, we have tried not to guide people on these kind of numbers, and I think you can see over the last couple is quarters we had a pretty tight range of operating costs. I think I would rely on those.

Now, in your last conference call you had mentioned that day rates, leading edge day rates had gone up by $300 or so. But, you know, it now appears that actually the average revenue per rig came down. Could you explain the -- what exactly happened during the quarter that average day rates down?

Our leading edge rate were, in fact, up. Not substantially. Our problems continued to be with rigs that are, perhaps, older and conventional, and when you balance all those out, we had very little growth in the average day rate across the company. As we look at rates going forward, I think I gave you what our average is today, and as we look even further out, the last five rigs that we've put to work, they have an average day rate of $11,300, so you can see there's a $500 gain on the next five rigs that will go to work. But, again, it has been very, very slow in moving the entire fleet ahead.

And the problems have recently been just in south Texas and the Gulf Coast area, is that where the competition has been the most intense?

I think most of the competition has been in those areas, but we've seen it in others. In the stronger growth areas like the Rockies and maybe the mid continent that's where we've seen the strongest pricing.

Now you see losses in Venezuela. What would the effect be on after-tax basis?

I didn't hear that.

Would you repeat your question, please, Waqar? And we probably ought to make this your last question.

The $1.4 million devaluation loss in Venezuela what would that be on an after-tax basis?

You ask a very complex question because that 1.4 in a nutshell is not technically deductible either in the U.S. or Venezuela but it enters into the -- what's called the monetary correction indexing procedure within an income tax calculation. It's very, very complex. At the end of the day, you get adjusted in your tax for inflation and there's not a direct correlation. There -- it does -- sometimes it goes the right way and sometimes it doesn't, and so you do get some positive tax benefit but it's very difficult to just state that in a number. Our estimates are that we probably got bumped up a little bit on our effective tax rate because of it.

Thank you very much.

Thank you, Waqar.

Our next question comes from Sandy Goldman, Heart Line Investments.

Hans, question. You talked before that the FlexRig program as you described today gave you premium rates, but you also discussed the fact that you didn't get the returns you had hoped originally and now you're relooking the program. Could you talk about what are the factors on the relook, and if you decide not to build more FlexRigs other than opportunistically what are you going to do for the growth?

First of all, Sandy, we looked at the returns from a project life basis and we knew we'd have day rates that weren't going to be at one single point but they would move up and down. So, yeah, I'll be the first to say I wish the last 15 months or so would have had stronger day rates but we expect that to come in the future, and you think with some of the return numbers I mentioned, we're moving into a space that we're more comfortable with the returns.

In terms of what kind of considerations will go into add-on construction and additional efforts there, I think that, you know, clearly we see the FlexRigs opening lots of opportunities for us. George mentioned some of the markets that we're in because customers have invited us to bring a FlexRig into that market. We're having discussions now with customers that take that idea further and I think what you'll see is opportunities that the company will have to take additional FlexRigs and match what customers want to do. We don't really have, on today's call, a layout of here are the criteria or the four or five features that would let us begin additional construction. I think there's lots of moving parts to that. But I guess the message is we would fully expect to construct additional FlexRigs. We think that we're going to have attractive opportunities to do so. We think the return numbers that were mentioned previously on the call will head further into a positive area so we're still upbeat about it.

Hans, you talked about starting this program in a trough. Where do you feel you are now, in terms of building substantial number of new rigs other than on a case-by-case basis?

I don't think you'll see us launch, you know, a notion of a substantial number of rigs. I don't think we need to do that. I think, as we were in this program, we wanted to demonstrate to ourselves and also have rigs in the field because a lot of, as you know, a lot of the value is the actual day to day execution in the field. So I think what you'll see now, and to me it's a positive, it speaks to the flexibility we have, it speaks to the way we're able to respond to a customer. I think you'll have a smaller handful of rigs that meet specific customer opportunities.

Last question is, given the improvement in the pricing, does the premium go up, vis a vis others, now that most rigs are utilized, or do you plan on just continuing the premium you've got?

I think I tried to speak to this notion that as -- like you said, more rigs are out there, pricing is going to increase. I think what that does is it makes the customer sensitive to what value he's receiving, and I believe that we have a larger portion of the value that we're helping to create. I think we have the ability to see that come to us in the form of higher day rates. So I would guess and history in the last upturn would bear this out. I think you'll see us widen the gap between the premium day rates we're receiving and our competitors.

Thank you very much.

Thank you.

Thank you. Our next question comes from Pierre Connor, Hibernia Southcoast Capital. Please go ahead.

Good afternoon, everybody.

Hi, Pierre.

Doug, I think maybe what Waqar's getting at is basically, what should we assume as the base tax rate going forward and we would assume it was your historical average. Is that correct?

I would hope that well, I'm pretty sure it will not be would it was this quarter.

Sure. Okay.

It's probably going to be closer -- between 41.5 and 42.5, somewhere in there.

Sound great. Just to make sure again on the foreign currency exchange does it show up anywhere under your segment operating numbers? For instance, under your international is it anywhere associated with direct operating costs or where does it show up?

It is in the segment reporting, and it is in the direct operating costs. We do not include it in our average expense per day in margins per day.

Right. Okay. I think that helps. Good. And then -- I'm kind of rehashing some of the same area, but, George did mention that 2% of the increment of the expenses per day was associated with the decision to relocate five rigs, and I just wanted to clarify, if that was into a higher operating expense area and that 2% would be something that was continuing, or that was -- that I know crease was associated with the cost to move those five rigs, and it was a one-time deal.

That 2% was associated with the cost to move into the area. It's a one time issue. And we move them into areas where we expect higher margins.

Okay. All right, that's very helpful. Again, on the revenue side to make sure on your segment operations discussion, that that's really on an operating day, is there any impact to that revenue per day for mobilizations when rigs are actually off of contract, day rate contract, or not?

Yeah, those days are actually revenue days, which would be either or both a mobilization day or a full contract day. So I think that might answer your question.

Well, it might, that's true, because it's on a mobilization you're actually charging less per day. If there's more mobilizations going on then I would assume that would dilute the revenue per day.

That is going to negatively impact your revenue per day.

I think that does help there. This is good stuff. And then Hans, on mentioning -- I'm just looking at your perspective on the impending, let's call it steady increase in activity in the up cycle here, make sure we're not feeding on each other, wanted to know, give me some of your thoughts as to what's the data point telling you that that's the case terms of your customers or is it -- well, basically, what tells you that that's the case? And I'm talking about U.S. land here particularly, I suppose.

I think it's mainly anecdotal, Pierre, but I think you're hearing the peer group saying, well, we want to see a certain number of rigs out and then we'll address some pricing issues. One of the things I wanted to make the point of is we're the pricing leader, and so there's not -- we don't have the strategy of having to suppress pricing. I think what you'll see, because as you look at the opportunities that the whole segment has, is really the leverage is in pricing and so we think there may be an inflection point now where you'll start to see better pricing.

If I can adjust one small anecdotal story to Hans' comments, this just happened in the last couple of days.

We had a rig that finished a job, a Flex 3 that finished a job, a customer wanted it but there was going to be perhaps a week's delay before they got the location and the new operator with whom we had an agreement said, well, we can't pay you for that. And we said, if you can't pay we need to go and look for someone who needs the rig immediately and will pay. And within four or five hours we had a major independent that said we can't drill for a week but we'll pay you full standby for that period of time. When you begin to experience those sorts of things, that tells you that the market is beginning to move, and that is very tangible evidence that things are beginning to improve.

It is. Would you say, George, you do see some, and I realize it's mostly -- well to well, but that you see some type of backlog so to speak of interest?

Yes, in the sense that people say we want a rig and many times they say we want a FlexRig and we say they're all busy. Well, then, we'll take another one of your rigs, or they may say, we'll wait. But what we find is that those people want to stand in line and wait for an H&P, rig where perhaps six month ago they would not stand in line.

That was exactly the the question, is over what time period did you see that change, and it's within the last three to six months, is that fair?

Yes. I think there's one other piece of evidence. On these longer mobilizations we are seeing that the operator is willing to participate in that cost and even in some cases, cover all of it, where three to six months ago, we had to make those moves on a policy basis and pay for most of it ourselves.

I'm familiar with your one to Wyoming. Thank you for the information. I will turn it back.

Thank you. At this time wavy question from Robert Ford, Sanders, Morris, Harris. Go ahead, please.

Thanks. Just clarify a couple of things. George, you finished five moves in the past quarter?

Five major inter-region moves, yes

How many this quarter? Two that you've got coming up?

We have two major ones. I don't know of any others right now but these are two major from the Houston area to Wyoming.

Okay. Going to the international land market, the sequential increase in average day rate, that's just the shift toward the deeper drilling, putting more deeper drilling?

Actually, there were some unique things that fell in, and one was, I mentioned earlier, situation in Chad where we completed a long mobilization, received a lump-sum payment that fell into the quarter, then also we had a couple of moves in Hungary which were high-revenue, high-cost, and those fell in and drove up our average revenue.

The platform rig that just went to work, that went to work at a rate above the average in the last quarter, correct?

Yes, it did.

Hans, I hate to make you repeat yourself but at the very end of your comments you gave me some -- you gave us some return sensitivity to day rate changes. Could you give me that again?

Yeah. We talked about -- well, let me mention, I started, Robert, with the $12,000 per day.

Right.

Assuming the rig cost ten and three-quarter million dollars, which is an all-in price tag and that drives a cash-on-cash return of 15%. And a financial net income return on invested capital of 5.3. And then we were just using the most recent rates and saying, okay, if you take now a contract we just signed, and we didn't say what the number was, but in the Rockies it generates a 20% cash-on-cash return and that gets your net income return on invested capital to 8.7. Then what I was trying to do with the $1,000 increase in daily margin was say, if you adjust rates that way, what kind of improvement does that give you, and it turns out that $1,000 increase in daily margins ups your cash-on-cash return in increments of 3%.

That's what I needed. That's what I was missing. Okay. That's all I have for now. Thank y'all.

Once again if you would like to ask a question please press star 1 on your touch-tone phone now. We'll take a question from Andy Vietor, Stifel Nicolaus.

Good afternoon.

Hello, Andy.

George, are you seeing any pressure on wages,i.e., you know, having difficulty finding or maintaining crews for your rigs?

We are seeing some pressure on wages. We have been able to maintain a higher wage rate in the business over the last 12 months and so we've had a little bit of time to consider what we do next. We did increase some selected wages in the mid continent about 30 -- maybe two months ago. But we do foresee wage rates ahead of us, wage rate increases ahead of us, and as far as maintaining crews, we've been able to do that. As I think back we made one decision on one day on one rig to delay the start of a new well for 12 hours. That has been the only impact on across H&P's entire fleet. I think that's unusual, but it also speaks to a long relationship with lots of lifetime employees.

Okay. Now, have you been able to pass on these wage increases in the mid continent or is that contributed to some of the margin compression?

No, in every case we've been able to pass these increases on and we have just announced an increase in our offshore operation and we've passed that on in its entirety.

Great. In terms of drill pipe in your requirement, have you guys placed any orders, I guess one of your competitors recently suggested that they've effectively placed orders for their projected requirements over the next 18 months. I was just curious where you stood on that?

Yes, we've done the same and we placed those orders probably 60 days ago.

Okay. And this -- competitor also suggested roughly 70% of their fleet is probably spoken for for the remainder of '04, in terms of backlog visibility and I was just curious if you could, you know, cast a little bit more quantitative feel for what your sort of projected U.S. backlog looks like across your fleet.

Andy, I believe that most of our customers, and maybe it's 70%, most of our customers intend to use our rigs for the balance of the year, but we continue to operate with them on a well-to-well basis, and we have a couple of term contracts that we are working our way through. We may have -- I think we may have 10 to 12 term contracts left. Two we've just added to. But again, the bulk of the fleet is still well-to-well, and I just haven't characterized it as having the backlog firmed up. It's still well-to-well and with a lot of demand out there ahead of it.

I also believe -- this is my last question -- on your last conference call, you suggested that you were trying to push rates, I think as much as $500 a day, and I guess Hans' comments were suggesting it was very difficult to achieve that in the quarter, and it sounds like to date you've been able to achieve some of that on an average basis and I was curious what your outlook is on your ability to move rates and what kind of magnitude you think you'll be able to move them over the next three to six months.

Andy, it is still much slower than I think we thought it would be. I think that 45 days ago we had one leading edge rate at $12,000 a day. We had not started that job. Today we have five rigs that are committed to that and probably three are operating. It just seems to move more slowly than we thought.

Do you have to get to a certain utilization level to tip that balance, or, you know, what's going to move you to the other side?

Well, we would -- obviously the demand supply balance has to become more favorable for contractors. At the present time I think that contractors are still able to put previously inactive rigs into the market and that takes a little bit of pressure off of prices.

Okay. Fair enough. Thank you.

Thanks, Andy.

Thank you.

Mr. Fears, at this time we have no further questions. Would you like me to read the instruction one more time?

No, that's okay. If we have no other questions, we'd like to thank everyone for joining us today and wish everyone to have a good evening. Thank you very much.

Thank you for your participation in today's teleconference. At this time the conference has concluded. You may now disconnect your lines. Once again, thank you for participating in today's teleconference. You may now disconnect your lines. Have a great day.