Helmerich and Payne Inc (HP) 2004 Q3 法說會逐字稿

Welcome to the Helmerich & Payne third quarter earnings conference call I'll now turn the call over to Doug Fears, Chief Financial Officer. Go ahead, please.

Thank you Margo, and good afternoon everyone. Welcome to Helmerich & Payne's third quarter conference call and webcast. With me today to provide statements and answer questions are Hans Helmerich, President and CEO, and George Dotson, President of the company's wholly owned subsidiary, Helmerich & Payne International Drilling Company and I'm Doug Fears, Vice President and Chief Financial Officer.

As always, there will be forward-looking statements and estimates made today and we'll be rounding numbers in hopes of adding some clarity to our comments. Of course we will attempt to be as accurate as possible on our comments and with the information that we provide. But it's important for you to know that much of the information provides or involves risks and uncertainties that could significantly impact expected results.

There is further discussion about these risks and uncertainties in our public filings the most recent of which is a 10-Q filed on May 13th of this year. You may obtain this filing along with a copy of today's press release on our Web site.

As announced today, Helmerich & Payne's net income for the third quarter of fiscal 2004 was $4,347,000 or $9 cents per diluted share. This compares with $8,162,000 or 16 cents per share for last year's third quarter and $6,048,000 or 12 cents per share for the previous quarter, or the second quarter of this fiscal year.

Of those three quarters just mentioned only the second quarter of this year where there were gains from securities sales which totaled for that quarter 9 cents per share out of the 12.

For the nine-month period ending June 30, the company reported net income of $16,024,000, or 32 cents per diluted share, compared with $11,343,000 or 22 cents per diluted share last year. While this year's 22 cents per share includes no gains from the sale of securities, I'm sorry, as last year's 22 cents includes no gains from security sales, this year's 32 cents income for the nine months includes 13 cents of gains from security sales.

As mentioned in the press release, we've seen strengthening in the U.S. land rig segment where third quarter operating profit totaled $9,579,000, which was a 52% increase from the previous quarter and 25% over last year's third quarter. The company's total net income has been hampered by lower operating profit from the offshore platform rig business.

Also the international sector has shown signs of improvement but has still not met our expectations in terms of growth and profitability. Hans and George are prepared to cover that in more detail in just a moment.

As mentioned earlier there were no portfolio sales in this quarter. The market value of our portfolio at June 30 was approximately $235 million and is currently valued at about $242 million. On an untaxed basis, that amounts to $4.84 per Helmerich & Payne share in value and if it were all sold and taxed that value would be $3.29 per Helmerich & Payne's share.

Capital spending during the quarter was approximately $17.9 million bringing the nine-month total of capital spending to $70.5 million. So at this time it appears that capital spending may be closer to $90 million by the end of our fiscal year, a little lower than our original budget of $100 million.

Now I would like to turn the call over to Hans Helmerich and after he and George have made their comments we'll open the call for questions. Hans.

Thanks, Doug. During the company's third quarter, we witnessed continued strengthening in the number of active U.S. land rigs, the overall rig count reaching slightly better than 15% compared to year-ago levels. We're approaching totals similar to the highs of the 2000 and 2001 up-cycle.

We are also seeing the long-anticipated uptick in day rate take hold as capacity in the market tightens. Going forward, we would expect this cycle to be quite different from the last one. We already know there's additional capacity of some 200 rigs to absorb this time around and relative day rate pricing has been slower to move.

The unknown, of course, is the sustainability and strength of today's robust energy price environment. Many made the compelling case for a protracted up-cycle and we would concur that the supply and demand fundamentals appear very promising. Not only do the last two up cycles compare favorably at similar points but we believe the company's position is considerably more favorable as well.

First and foremost, we started the last up-cycle with only the first six of our next generation FlexRigs on the ground. Today we have 50 FlexRigs and a track record of performance of setting the standard for drilling efficiency in the land industry.

As we mentioned on our last call this performance differential makes a more profound impact on customers as they pay higher day rates across the board. Clearly it provides us an opportunity to capture on the value-added we bring to increasingly discriminating customer. Depending upon how this up cycle develops. We would anticipate customer demand and favorable economics to drive additional FlexRig construction.

While no plans are in place today we are working to design the next generation of FlexRig to capture further efficiencies, lower costs and improve returns. We're uniquely positioned in this up cycle as an organization in terms of the hard-earned experience of delivering on a project of significant scale and securing the customer satisfaction based on field performance.

We're also well positioned financially since the successful spin-off a similar (inaudible) last cycle of H&P in the last cycle our focus has been drilling business. Additionally to the strong balance sheet our investment portfolio is capable of supporting substantial growth. In fact, since 1998, we have drawn down our tax bases by over 50%, providing $157 million in after tax proceeds. The current pretax market value of the portfolio is approximately $240 million.

We've demonstrated a willingness and desire to fund our future growth with those investment assets while still maintaining a conservative capital structure. We have two major positions in our portfolio. Slumbersha and Atwood Oceanic. Yesterday we filed a 13 D announcing that Atwood filed a registration statement covering all three million shares of Atwood stock owned by us. And that subject to market conditions, each company may offer to sell up to 1 million Atwood shares at simultaneous public offering.

Let me move on to mention in closing some opportunities and challenges that exist in our other joint segments. The Gulf of Mexico is languishing as some major customers' focus - their focus shifts to either international waters or deeper targets. Independence has not taken up the slack in the resulting lag in activity has negatively impacted our platform business.

Our international business also hampered by depressed activity levels showed positive movement during the last quarter with rigs being added in both Equador and Venezuela. Both of these business segments representing together about a third of our total fleet have longer project cycle times. This means that we've not looked for improvement in activity to contribute significantly until our 2005 fiscal year. That being said, we would certainly expect this up cycle to continue into 2005 and beyond and believe our shareholders are well positioned to benefit. I'd like to now turn the call over to George Dotson.

Thank you, Hans. As Doug said our third quarter operating profit for U.S. land operations increased 52% to $9.6 million from 6.3 million in the second quarter. Our U.S. land rigs worked 7,071 days during the quarter, compared to 6,758 days in the second quarter.

And average revenue per day increased 2% to $11,550 from $11,302 in the second quarter. Accordingly average daily margins for U.S. land rigs increased 12% to $3,657 from $3,270 in the second quarter. U.S. land rigs working increased to an average to 77.7 rigs compared 74.3 rigs in the second quarter.

U.S. land rig activity during the quarter was 89% compared to 86% in the previous quarter. Existing mobile rigs and FlexRigs achieved 98% activity with an average of 57.7 rigs working compared to 97% in the previous quarter at an average 56 rigs worked. Conventional U.S. land rig activity increased to 71% and an average 20 rigs worked during the quarter compared to 63% activity in an average of 18.3 land rigs working in the previous quarter.

Today, on the 22nd of July, H&P has 92% activity for 87 land rigs available in the U.S. with 80 rigs committed and seven rigs available for work. Our average day rate for all US land rigs today on July 22, is $11,795, an increase of $962 per day when compared to $10,833 on the April 22, the date of our last webcast.

Our mid-90s decision to shift the company's principal focus from the deep drilling market to address the mid-depth growing market of 8,000 to 18,000 feet was timely and has been very successful. With the addition of 48 new FlexRigs to the US fleet, 80% of H&P's U.S. land fleet or 70 rigs is targeted on the mid depth market.

The H&P mid depth fleet worked at 98% activity in the third quarter while the 17 rigs in the H&P deep fleet worked at 53% activity. Of our 17 deep land rigs in the U.S., 10 rigs are working and seven are stacked. There have been some increases in inquiries for deep rigs. And our rigs are prepared to return to work with any improvement in demand.

Due to changes in the mix of rigs on full day rates versus stand by rates, third quarter operating profit from U.S. offshore operations decreased slightly to $3 million from $4.1 million in the second quarter. Six of our 12 platform rigs were contracted during the quarter, and a seventh rig started a new contract in July 5 rigs are presently idle without contracts.

We continue to experience a very slow recovery in Gulf of Mexico platform rig activity. Third quarter international operations reported an increase in operating profit of $1.8 million compared to $1.5 million in the second quarter, an average of 17.1 international rigs worked during the quarter out of 32 rigs available. The average daily revenue was $18,833.

Activity in Venezuela increased to eight deep rigs in the second quarter, compared to 7.1 deep rigs in the previous quarter. Today eight deep rigs are operating for Pedevesa (ph) and a ninth deep rig is operating for an international operator. We are discussing further possibilities in Venezuela for our two 2,000 horsepower deep land rigs and other H&P that are idle in South America.

To improve our chances of 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 attractive. An average of 5.1 rigs worked in Ecuador during the quarter.

We are currently operating six rigs and a seventh rig is contracted to start in early August. Although those deep rigs in Columbia were idle during the quarter. One rig returned to work in mid-July. We believe the second rig could return to work in the second quarter of fiscal 2005.

One of our six rigs in Bolivia is working and a second rig is contracted and moving to its first location our one rig in Argentina is presently working. As stated previously, the second rig in Argentina is mobilizing to Venezuela. The FlexRig in Hungary should work through the first quarter of fiscal '05. The FlexRig in Chad has finished its contract and is demobilizing to Houston with an expected arrival of September.

Our international operations in South America have turned a corner and our entering a phase of improved activity with new contracts in Bolivia Ecuador and Columbia; we should have 20 or 30 rigs active by the end of the fiscal year. We have not had 67% activity in South America since August 1998. In undertaking the new FlexRig program H&P made a strategic decision to invest counter cycle through the down turns beginning in 1998 and 2002. Principal rationale for this decision was to position H&P to have maximum leverage at the onset of the next up cycle. We have been successful.

There are 50 Flexrigs in the field and giving H&P maximum earnings leverage in this up cycle. Further the FlexRig 3s are setting the industry pace in pricing with eight rigs contracted today at $13,000 per day or higher. Our customers continue to recognize superior value by rewarding FlexRig 3s with the highest rig rates, 99% activity in the first 45 years of rig operations and a growing level of inquiries about FlexRig availability. At this time I'll turn the program back to Doug.

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

Thank you. [OPERATOR INSTRUCTIONS] We will take our first question from Aaron Jarron from Credit Suisse First Boston. Go ahead, please.

Good afternoon, gentlemen.

Hi, Aaron.

George, I was wondering if you could may be elaborate on the sequential declines and international day rates. I think they were down you know 14% sequentially?

Yes, they are, Aaron and as we look at that, there is no one large factor that impinges on that. What we see are a number of things that have happened across the different operations.

For instance, in one area we have had taxes that we have had to reserve for and others we've had some local issues but there's been nothing large. As we've put rigs back to work, we are not seeing the kinds of day rates that we did two or three years ago. We also had higher mobilization charges in Chad and Hungary for the two FlexRigs that are operating there. But really nothing that we can identify as a principal contributor to those short falls.

OK. And would you expect some -- I mean it sounds like there's some one-time kind of costs that negatively impacted that number this quarter. Would you expect that to increase sequentially going into next quarter?

Well, as we move some rigs around, there will be some costs that we can capitalize, but others are going to be offset against the contracts and the revenues, the earnings from those contracts. So again we may see lower earnings from some of these new contracts because of the amounts that we'll be amortizing. That could prolong the period of time that we see the kinds of cash flows that we're presently seeing.

OK. And George, just looking at international results you know broadly, this is a segment that you have generated up to $50 million in annual operating profits. You know the last four quarters you've been around you know two million or less than $10 million annualized. If you get the 20 rigs working by year-end, what types of operating profits do you think you could generate you know next year?

Aaron, I'm not sure I can comment on that. Let me put it to you in another way. When you spoke about generating $50 million a year, you're right, we were able to do that. But one of the big engines in that effort was a ten-rig operation that we had in Columbia at very high rates for an international operator. And today that program doesn't exist.

And it really doesn't exist anywhere in the world as far as I know it. So it may be, we're not going to be looking at that kind of number as a potential if we get back to full activity again. But we do expect things to improve. We're seeing it but as activity improves, we're going to see margins improve but margins are not going to start back at the high rates that we saw three or four years ago.

OK. Thanks a lot.

We'll take our next question from Ken Sill of CSFB. Go ahead please.

I guess you know we're the only ones cued up today. I want to follow up on you know what are you guys seeing in terms of behavior by the big integrateds? Are you seeing anybody out there trying to ramp up or potentially start some programs in South Texas or other areas along the Gulf coast have been a little weak?

Ken, We visited marketing people in Houston earlier this week and then got a report today. We talked about South Texas. South Texas is a little slower than other areas. At the same time it continues to be strong for the FlexRigs. We continue to have a number that operate there and operate at very good rates. I think other areas that continue to be strong for us, again, East Texas, the mid continent and the Rockies, as far as any large integrated super major that has announced plans for a large program.

No, what we see is continued support for the rigs that they do have operating and we have a steady stream of inquiries from existing customers and from new customers looking for not only one rig but multiple rigs. Just this week there have been eight inquiries that went back through this morning. These are from both existing and new customers that are wanting between one and multiple rigs and they've said we want a FlexRig.

And we've said they're not available and they said well can we somehow get in line in case someone takes a holiday on one or two wells. That didn't exist six months ago and it has been improving steadily what I'm reciting to you now.

A follow up on that. You said day rates has been up just under a $1,000 I guess since the last conference call in the U.S. How much backlog do you have on your fleet right now and how long will it take for further pricing gains to roll into the numbers?

As far as backlog, as I mentioned earlier, we have 80 rigs that are contracted and we have 17 rigs that are on return contracts of some agreement, at some length, now those are not long-term contracts. The average is now six to seven months. And most of them, only three or four, have been made in the last year at favorable rates at the time.

But those are rolling off over the next six or seven months and we will move those rates up. As far as the leading edge of the pricing as I mentioned, we have eight rigs that are over $13,000 a day and we have -- we've had success in raising rates and it's really one based on the value. I think that if people see the value, they would rather not pay the higher rates but they understand to continue the value that's the rate they're going to have to pay.

Right a bit the 63 rigs that are on term contract are those mostly rolling every 45 or 60 days or do they have more than a couple of weeks of work lined up for each one so far?

For the most part the operators are not turning loose of the rigs they're still well to well come contracts. Some of them have 90-day pricing clauses in that we will not raise the price on every well but will review it every 90 days. So I would say on those 63 jobs that for the most part we are raising rates every 60 to 90 days.

OK, thank you.

We'll take our next question from Andy Vietor from Stifel Nicolaus. Go ahead please.

Good afternoon guys.

Hi Andy.

George, have you seen any acceleration or ability to accelerate the increases over the last 60 to 90 days in the U.S. land business?

Yes, we have.

What's the kind of center of magnitude or change, if you will?

Two numbers. One is over the last 90 days I mentioned that it's gone up a $1000 a day from April 22nd to July 22nd. I think $960 was the number we recorded. Another number is in looking at average FlexRig 3 day rates, now day rates, those have moved up on the average of, looking at average FlexRig 3 day rates in the last quarter to today that's $750 a day.

So, that's probably the speed that we're seeing right now. But, again, we feel very good about the leading prices. What we need to do across the business is make sure that we bring up this long tail of lower prices to some position that's closer to the leading edge.

Are there any cost pressures in the U.S. land business or are your costs going to stay relatively stable?

Well, we were able to reduce prices in the last quarter and I think going forward there are two large sources of cost increase. One is for labor. And we have -- we had no labor increases in the third quarter but we have had some labor increases that will have an impact for the full fourth quarter and not across the board but in enough areas that we will experience about $150 a day per average rig.

Even though it didn't affect all rigs, still spread it over all rigs $150 a day in the fourth quarter. So, we see that increase. And then also we see some there will always be pressure on cost of supplies and repair parts, that sort of thing. We've been able to manage that well but nevertheless that pressure is out there.

I would also say that the cost increases associated with manpower are cost increases that our customers are responding to. They know what the industry is up against. They want to make sure that they maintain good competent crews and they are working with us and to this point have reimbursed us for those wage increases.

OK. That's great. Now on your offshore business, your margins effectively have been cut in half on a year-over-year basis. Do you see any meaningful change over the next, say, six to 12 months in the outlook for that business?

Not dramatic. I think the big source of the decline we had some contracts for new build rigs that were high rigs. They were $40 to $50,000 a day. And those contracts have ended. We also have some of our TLP rigs that were at higher rates. And they have moved back to some have moved back to stand by rates. I think going forward we will see fewer stand by rates and more full operating rates but we will not recover to the average rates that we saw a year ago.

OK. Question for you, Hans. Assuming you guys sell some or all of your Atwood stake what would you earmark the cash for if you could sort of prioritize what your corporate objectives would be with that cash? That would be great. Thanks.

Well, we don't have a stated use of proceeds at this point but I think as we see this up cycle shape up, Andy, we would suspect that we're going to have an opportunity to construct more FlexRigs, but I think you'll see it -- you'll see it focused on that type of opportunity.

OK. Thanks.

[OPERATOR INSTRUCTIONS]. We'll take our next question from Pierre Conner of Hibernia South Coast. Go ahead please.

Hi everybody.

Hi Pierre.

George, first on those FlexRigs that are getting, eight of them getting over $13,000 a day. Is there any geographic area that you're seeing better than others?

We've been pleasantly surprised. It's been a broad pricing move for us, some in east Texas and all the way up through the Rockies. So it's been broadly based.

OK. That is good. Can you tell us what an absolute leading bid on a FlexRig, may be that depends on location, though?

It does. And Pierre, I think I would rather pass on that one if I may.

OK fair enough. What about the rig coming back from Chad then, arrival in Houston in September. What is the plan there and sort of give us a layout of the schedule from there.

Well, we will bring it back. It will be demobilized and we're looking at work in this country at very attractive rates. We're also looking at an international job that has possibility for a smooth sit up. So, we have a number of alternatives, but in two different locations.

If you put it back to work domestically it would be you know sometime October time frame or --

I think that once it's off loaded from the vessel it will be ready to move to its first location.

Let it roll. OK.

Yes, the rig was completely functional operating when it has finished the last job.

What about Hungary there, Pogos changed their plans a bit. What's the future outlook there?

Our local people continue to tell us that the work we have ahead of us will take us at least through near the end of the calendar year. Our first quarter will end at the end of November. So we are pretty confident that the rig will operate through that period of time and we'll see it from there.

OK. Good. And then more of a conceptual one, the Gulf of Mexico platform business and just to frame it, you've had some people build rigs into contracts for TLPs and such.

So, if you could tell us some of the equipment has been idle now for what period. There's some other options you considered other than of course just waiting for you know a potentially extended cycle that causes an up tick in platform activity beyond say the seven rig level. What other options do we have here?

Well the rigs that have been built or modified for TLP or Spar operations most recently have been smaller rigs that fit on smaller foundations and it was not the kind of work that our rigs could do. They are too large for that.

OK, right.

Our options going forward are as you say to wait for an improved cycle. But there have been a couple of international opportunities that we have looked at and so we're hoping that that may create some possibilities. But if those don't work out, Pierre, at this point we will have to wait for an improved business cycle in the Gulf of Mexico.

I understand. OK. Well, very good. I think that's -- I think that's all we've got for now, guys. I appreciate the information and I will turn it back.

Thank you.

We will take our next question from Paul McRay of Tower Bridge Advisors. Go ahead, please.

Good afternoon. Two questions if I could. We focused a little on Hungary and Chad. Are you less enthusiastic, generally, about the opportunities in the Eastern hemisphere for your big rigs or is this somewhat of a disappointment in Chad not just necessarily changing your long-term view?

I think the Chad operation was always a one-rig exploratory operation, and we drilled four wells there trouble free and we elected not to extend that contract and we demobilized the rig. But it has no bearing on our enthusiasm for work outside the Western Hemisphere.

In Eastern Europe, we always knew that that was going to be a market with perhaps limited potential for us. We're there because our customer was a FlexRig user and he said I want a FlexRig and I want to use it in Hungary and that's why we're there.

There are other operations that we are pursuing outside of the Western Hemisphere. And I have to tell you we're as keen on investigating those and potentially expanding H&P's operations into those areas as we ever have been. So we haven't lost any interest or any heart. This is just business. We knew it took patience and took time. So we're still keen on the idea.

By implication, are you implying that Middle East is still on your agenda at some point?

Yes, it certainly is a possibility. I think that there are some other areas that we have also looked at. The Fareast, there are a couple of opportunities that are being bid or will be bid there and we'll be participating in that. Along with other contractors. We have always had Russia on our scope.

We have opened an office in Moscow. We don't know where that will lead. But we believe the prize is big and we want to be involved in that. So again those are some of the areas that we're pursuing. And again it's a great deal of effort and energy from all of H&P.

I was pleasantly surprised by the average rig expense on a daily basis actually being down a touch from the March quarter. Could you elaborate a little bit on that. We talked about the increase in labor cost but that appears to be in pretty good control, the overall cost. Is that an accurate statement looking forward?

Yes, it is. And we expect more assistance in that direction. I would give the credit principally to our field organization. I think they understand the need. They are committed to doing their best to operate the rigs and equipment and the organization as prudently as they can.

I think the other thing that is producing benefit for us is supply chain management effort within H&P and that is delivering increasingly and it will reach its maximum effect at the end of this year. So those two things I think have helped us manage our costs.

Is there a learning curve in working a FlexRig such that after it's been in the field for three to six months your average costs just literally getting used to operating the thing might be able to flatten if not decline slightly?

The experience, Paul, has been that from day one the FlexRigs have operated more effectively, more efficiently than we thought they would in terms of costs. They are consistently below where our target was. And I think that that, your question really speaks to the great strength of the FlexRig and H&P.

The technology has been a great contributor to the value. But the real value has been in the commitment of the entire organization to make the FlexRigs work, to field 32 of those in a very short period of time with new crews but with good training, good supervision, the power of the organization has really created the value that we see with the FlexRigs.

So I think not only in operations but in the reliability of the operations, the down time is down to one half of 1%, which is great for any operation but particularly for a new one. So we did not have the learning curve that you might expect. I think we attacked it with a very company -- a big company wide effort that put us on the flat very quickly.

Thank you very much.

We'll take our next question from Mukkar Saeed of PT Partners. Go ahead, please.

Good afternoon, gentlemen. Couple of questions. First on Chad. Are you going to be paid for the mobilization of the rig?

Yes, we are.

OK. And could you tell us what the size of that rig, what type of rig is it?

It's 1500 horsepower land rig. It's what we call a FlexRig 1.

Secondly, you mentioned your average current rate for the rig fleet in the U.S., how does that compare to the average day rate for the quarter, for the past quarter?

It's about $750 a day more.

If you had let's say $150 per day increase in labor costs maybe $50 to $100, you could still maybe get $400 to $500 per day margin improvement?

Yes, you asked me about day rate.

What's that?

You asked about day rate.

That's correct.

Because our numbers we put out all deal with revenue per day and I just want to make sure that we're clear. We're talking about day rate per day.

That's correct, yes.

You're right. The $750 a day would be reduced to $150 a day by the labor increase that I mentioned.

Right. There are some other supply cost increases that you mentioned as well and those could may be what $50 to $100 per day per rig?

It could be.

OK. That's all I have. Thank you very much.

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

I just want to go over and make sure I heard everything right on the international side. George you said new contracts are at lower than -- lower day rates than what you've been posting as averages for the last couple of quarters. So I'm assuming you're seeing at least one more quarter declines in the average day rate down south? Am I hearing that right?

No, I'm not sure that that follows. And again, no, I wouldn't come to that conclusion. I think that as I mentioned earlier there were a number of small things that combined to drive down the daily margin in the past quarter. And hopefully some of those things will not be there.

Also, the rigs that we had will help us reduce overhead per rig day. So I think there are several things that could assist us in maintaining or increasing the daily margin, even though that the rigs that we had may be had rates at margins less than what we saw a year ago or three years ago.

OK. In terms of mobilizations international, there's just two this quarter, the one from Chad and the one from Argentina up to Venezuela?

That's right. I believe we're only looking at two major mobilizations.

Yes, the Chad one is paid for. How about the one up the Venezuela?

From Argentina to Venezuela that we're going to receive some compensation for that and another piece of it will largely be expensed.

OK how many did that you mobilize last quarter? Internationally?

Robert, I believe there was only one last quarter. And that was from Columbia to Venezuela.

Going -- shifting over to the domestic market George. Do we have any -- we're done mobilizing inter-regionally, correct? Do you have any more of those going on this quarter?

No, we are finished with that. We could always receive a contract to mobilize another one. But at this point with the way the rate structure is, I think any mobilization that we have would be -- would be net zero to H&P, there would be no impact.

OK. How many did you have in the last quarter?

Two, if I recall, two.

Two. OK, that's all I had. Thanks, guys.

Our next question will come from the line of Jerry Heffernan of Lord Abbott. Go ahead, please.

Good afternoon, gentlemen.

Hello, Jerry.

In regards to the question, a previous questioner had asked about you're, are you less enthusiastic about this Hemisphere. You seemed to say no you're not less enthusiastic about it but yet you're indicating that the Chad rig is being brought back per your own decision. So, I'm not sure, if you're enthusiastic about it, wouldn't it be best to continue to try to seek out business and at least with the rig over in that Hemisphere it would be a shorter distance to get it to the next new business versus bringing it home?

Well under the terms of the contract, in order to earn demobilization we had to return it to Houston. And I know this is difficult to accept it at first glance, but to move it to Houston is cheaper than taking it to Libya or to Algeria. It's just the way the prices worked out in that part of the world.

OK, all right then. I guess, it does explain it. I have a hypothetical for you all. And Hans, I guess trying to get you while you're in a selling mood. You have spoken at great length about the benefits, how good of a rig the FlexRigs is and as time goes on the reviews, your reviews of that rig only get better.

And if I think back to the last several years I try to think OK when was the last time we had just plain simple good news on the platform business and just plain good news in the international land business and given the size of your rig fleet now in the FlexRigs, why not say, hey, you know something I just want to be a FlexRig company? And you know we are entering a strong cycle here. There are markets for these other assets and to say we're going to regroup as a 100% pure FlexRigs market.

Well, I think one of the strengths of the company, Jerry has been three different segments and we've had the international business, platform business, U.S. land and over a period of time different segments have performed better than others and clearly now the U.S. land was carrying to some extent the platform international business and within the U.S. line of FlexRig is carrying that.

So, I think some of that diversity has served us well, and we intend to stick with it. A question was earlier asked about our platform business and you know looking forward on that and I think there aren't a lot of alternatives out there. I think there will be additional markets we may be able to explore there. So, you know this is our part of your question and I'm trying to stay in a seller's mood but I think we like the diversification we have.

Fine, I certainly understand diversification but at some point you say well you know we just have not had an acceptable return on this one type of asset and it's time to cut our losses and move into an asset we feel more confident about on the long-term. I think feeling more confident about the FlexRig on a long-term is an appropriate description of your attitudes.

And you know when it comes down to the platform business, I at least for one am scratching my head as to OK, how -- it's leaving my bounds of creativity to figure out how we make those a appropriate return of capital asset?

I think if you look at the life cycle of those rigs, they have provided positive returns to the company. I think there's not a clear buyer out there for those assets. We had the best platform rig assets in the business today. There are competitive assets that aren't nearly as work ready as our platform rigs are. So, I mean we're going to keep an open mind and we'd like to be creative about it. But as we've talked today, we're hoping that we see some improvement in this cycle.

OK. In regards to the conversation that started up on the international rates and I believe the question was are we seeing the new day rates lower. The answer was no but then did the answer come out to be that the margins are lower. So, I started to get confused between the, whether we were talking about day rates or margins?

Could you just for the next two quarters, tell us what you see going on in regards to day rates of the international land assets and then separately what do you see happening to the margins of the international land assets?

Jerry, this is George. I think as we look at the next two quarters for rigs going back to work in our international operations. In some areas like Bolivia, perhaps Argentina, we're going to see that the rates that we go back to work at or add rigs will not be equal to the day rate or the margins from one year ago.

I think in other areas like Venezuela, we continue to have very attractive day rates and margins there and a country like Columbia, we have run rig going back to work maybe a second. But they will not be at the rates that we had one year ago, certainly not five years ago.

OK and I'm just trying to stick with the here and now. When you said Venezuela very attractive, is that an increase or a decrease?

For the rigs in Venezuela, it would probably be and there will be an increase and an increase in price and margin. So, it's a mix and what we have said is that going forward that one -- it's likely that we will earn at the same kinds of rates that you're seeing us produce right now and hopefully it will be higher than that.

That would be on a how far out, when you see hopefully, how far out are you thinking there? I mean you're not thinking about the term quarter that we're in, are you?

I'm sorry we were talking here. Let me just back up and if you're saying is every, is every quarter for the next couple of quarters going to rigs $4,000 a day, my answer is no. I don't think so. Certainly hope not.

I think it's probably going to be more on the order of $5,000 a day. And that's higher than it is today but I would also tell you that today is, I believe, is an aberration for some of the reasons I mentioned earlier. I think going forward you probably ought to be looking in the order of $5,000 a day for every rig day worked over the next couple of quarters. That's average.

OK. So, you see it progressing from $4,000 up to $5,000 on a blended basis, the international land assets?

That's correct.

OK. And just so I'm perfectly clear, from that $4,000 to $5,000, are you looking two quarters or seven quarters?

Again I can't answer that. I hope it's no more than two. I hope we continue to see a strengthening in our international business. So, let's just stay with over the next two quarters that we're saying that $5,000 is a good planning number. Beyond that, we'll talk about that next quarter and the quarter after.

OK. Thank you very much.

So long.

Our next question will come from the site of William Sanchez of Howard Wheel. Go ahead, please.

Yes, George. A quick question for you. On the FlexRig included in the day rate of $13,000 a day, can you tell us what the average margins you expect to have on those rigs? And how those are going to be for the September quarter, how that compares I guess to your overall average that you expect in the quarter?

I think it's going to be $5,500 a day more or less, margin. And hope for more. But I'd say that's a good planning target.

OK. So it's $13,000 I think you said your average is like $11.5. So that it means you're pretty much you're capturing the full incremental amount and then some into that higher margin. Is that correct?

That's correct.

OK. My second question, just quickly, on the higher labor costs that you're experiencing on certain rigs right now. I'm curious what's driving that right now. Is it a function you're being poached by some of your competitors in certain hot markets?

Is it a function of is that your crew sees days rates going up they're trying to get their fair share here in the form of wage increases or is it just a function of trying to attract additional personnel to increase your utilization in the U.S. market here?

Will, I think it's all of those. I think the principal driver is we do lose some people. There is that element in all the crews that leave for $0.25 an hour more. And may be back two weeks from now. But there's that element. We watch that all the time.

Then there's the element of people, the large percentage that stay with you that are committed employees and they say, look, we heard this. We heard that. And we know that you as our favorite employer want to know what the competitive rates are and they tell us and we think about that and in the end, we want to have as happy and contented a work force as we can. And so we move on those things. So, I think that's probably the motivation in all contract levels.

OK. Last question. Do you see the market in general in the competitive landscape in the U.S. market people relatively pleased with the total number of rigs that are employed right now and the focus maybe becomes in the U.S. market not so much the continue to your brand and build capacity per se but to try to continue to push price more aggressively here now that pendulum has finally switched to the market.

I think you're speaking about contractors rather than operators?

Correct.

I think -- I don't know the answer to that. I think that some of our competitors are capable and may well choose to continue to put some rigs into the market. I've been surprised that it's gone on as long as it has. But it has. And I just don't know what to expect.

I do think that the number of rigs that can be put into the market at a very low price, investment price, is certainly diminished. And I think that probably is cutting back on the available in-flow into the market. So, I hope that's the case. And we'll see it reduced and we'll see beneficial impact on day rates. But we don't have a good feel or good control over that.

Thanks, George.

So long.

There are no further questions at this time. I'll turn it back over to management for closing comments.

We'd like to thank everybody for joining us today. And we appreciate your questions. And would hope that everybody would have a nice evening. Thank you. Good-bye.