Helmerich and Payne Inc (HP) 2005 Q2 法說會逐字稿

At this point, I would like to turn the program over to Mr. Doug Fears, Vice President and CFO of Helmerich & Payne Inc.. of Helmerich & Payne Inc.. Please go ahead, Sir.

Thank you Tony, and good morning, everyone. Welcome to Helmerich & Payne conference call and webcast, to discuss the Company's second quarter earnings, and recently announced contracts with Williams and Conoco Phillips. With us today 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 and CFO. 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. We'll attempt to be as accurate as possible on our comments and information we provide. But it is important for you to know that much of the information provided 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 10K filed December 13th, 2004. You can obtain this filing, along with a copy of today's press release on our Web site.

This morning we reported net income for the second fiscal quarter ended March 31st, 2005 of $22,350,000 or $0.43 per diluted share from operating revenues of $185,450,000 . This compares with net income of: $6,048,000, or $0.12 cents per diluted shares from operating revenue of $143,24,000 during last year's second fiscal quarter. Included in net income were gains from the sale of portfolio securities and drilling equipment of $0.01per share for this year's second quarter and $0.09 cents per share for last year's second quarter. And for the six months ended March 31st, the company reported net income of $61,660,000 or $1.20 per share, versus $0.25 cents a share for the six months ended March 31st of '04. Included in those numbers were gains from the sale of portfolio securities and drilling equipment of $0.45 cents per share for the first six months of this year, and $0.16 cents per share for the first six months of last year. In the financials that are included with the announcement, please note that our cash balance has risen to $208 million at March 31st. What's not shown is that the market value of the stock portfolio was approximately $239 million on a pretax basis, or if you sold it and taxed it it would be $159 million dollar value at March 31st. Those numbers are slightly lower today and are roughly $227 million pretax and $151 million after tax.

Our capital spending for the first six months was almost $23 million, almost about half of of of the original $55 million dollar cap ex budget that we've been disclosing. At this time, our estimate for 2005 is $105 million, which includes $50 million of the new projects announce. We've announced two projects with a total cap ex of roughly $125 million and our estimate is that we'll spend about $50 million of that in fiscal '05 and $75 million in 2006. One other thing I would like to point out to you, as many of us compared day rate acceleration among land drillers. I want to remind you that H&P does not include in its revenue per day numbers, the portion of total US land operating revenue that are called reimbursables. Reimbursables are really pass-throughs, but are included in other land driller day rates or revenue per day disclosures. For example in the quarter just ended, including H&P reimbursables in revenue per day would have added over $1100 dollars per day to our revenue per day, making it $16,127 per day instead of $15,018. So when you're comparing day rates or revenue, you want to keep that in mind. So while that's interesting, it's really more important to focus on margin improvement. I would now like to turn the call over to Hans Helmerich, President and CEO, and after he and George Dotson have made their comments, we will open the call for questions. Hans?

Thanks, Doug. On our last call, we reported 2005 was off to a strong start with cash margins increasing by nearly a third in our U.S. land business during the first quarter. Our second quarter, operating income improved an additional 40% in that segment as the industry continues to experience tightening rig availability at a time when customers are expanding their drilling commitments and spending levels. We also mentioned on our last call, that we were encouraged by customers' inquiries into long term contract arrangements on existing rigs, and in securing new builds with term contracts that captured flex 3 performance in a H&P designed rig modified for unique drilling applications. We are pleased to report that during the second quarter, we've been given the opportunity to make strides in each, and have seen those developments move successfully forward.

Just over a month ago we, announced the largest project in the company's history to construct and operate 10 new FlexRig four's, for Williams Production Company. Each of the rigs will operate under a three-year term contract, that will will include a fixed day rate plus a possible incentive performance payment. Adding to that success, we announced today that the company had received a letter of intent from Conoco Phillips to build and operate three FlexRig four drilling rigs also on a three-year term contract and attractive terms. The FlexRig four design benefits substantial from the earnings gleaned from the flex 3, but is both smaller less costly and well suited for shallower depth range of six to 10,000 feet. In that sense, it compliments the FlexRig3, by offering customers the proven reliability, safety and superior drilling efficiencies in a new rig designed for a shallower depth segment in a new market for the company where we believe further potential exists. We consider these announcements together as an important validation for the FlexRig program we launched in 1998. Let me step back to that time and just review an approach that was unique in our business.

The the idea was simple: Design and build a rig that safely drills the best value wells. We learned the real work was off the drawing board and the assembly line and in the field. Our people responded, and delivered by setting a new standard in safety, move times, drilling efficiencies, activity levels, and premium rates. We stayed the course as the cycle went through the most 2001 slump, and the drilling industry lost 30% of its pricing power. It hit our return on capital. But all the while the operator was watching the field performance. Clearly the results were adding value. As we raised the bar, even our detractors began to talk about drilling efficiencies, move times and safety. The focus began shifting from size to performance. We think the customer is voting, and they fully understand best value wells. To that customer, recount numbers are less important than a favorable commodity price deck, combined with building the best drilling value wells. That simple approach is reflected by the two FlexRig four announcements, and we believe it will produce additional opportunities and an attractive return to our shareholders. With that, I'd like to ask George to make his comments.

Thank you Hans, and good morning. Continued increases in day rates and margins, and U.S. land operations carried the company to a significant increase in operating income for the second quarter. New term contracts were 13 new build FlexRig's, and ten existing rigs give us confidence in the direction and the robustness of the U.S. land-market. Our second quarter operating income for U.S. land operations increased 40% to $35.8 million from $25.6 million in our first quarter. Average revenue per day increased 12% to $15,018 dollars, from $13,363 in the first quarter. Average daily operating cost increased 4% to $8074, versus $7,800 in the first quarter. Accordingly, average daily margins for U.S. land rigs increased $1381 a day or 25%, to $6944 from $5,563 in the first quarter. I'd like to take a moment to address the costs.

$244 of the $274 daily increase in cost was attributable to increases in maintenance and supply costs. There were no increases in daily labor costs. However, this will change in the third quarter. Effective the 1st of April, we increased field wages an average of $400 per rig day, and we are recovering this cost increase through our contracts or through open market increases. U.S. land rigs working increased to an average of 84.3 rigs in the quarter, compared to 82.5 rigs in the first quarter, and activity increased to 94%. Existing Mobil rigs and FlexRigs achieved 100% activity, with an average of 61 rigs working, while conventional U.S. land rig activity, increased to 80%, with an average 23 rigs working during the quarter. As Hans mentioned earlier, we have contracted thirteen new FlexRig four's on three-year term contracts. In addition, we have contracted 10 existing rigs on two-year firm contracts. Of these 10 rigs, 8 are FlexRigs, contracted at an average day rate of $17,325 dollars, and two older rigs at $15,500. Customers for these ten firm contracts are the majors with three rigs, large independents with six rigs, and a small independent has one rig. The Company presently has four uncommitted land rigs in the U.S. Two, 3,000 horsepower deep rigs require $1million to $3 million in investments per rig and term contracts, before returning to work. One, 1,000 horsepower and one, 2,000 horsepower rig,were previously returned from South America. And they are presently in our Houston facility. Today on the 27th of April, H&P has 96% activity for 91 land rigs available in the U.S., with 87 rigs committed. Our average day rate for all U.S. land rigs today on April 27th is $15,844, an increase of $1,468 dollars when compared to $14,376 on January the 26th, the date of our last webcast. Of our 16 deep land rigs in the U.S., 13 rigs are working and three are stacked.

First quarter operating income from U.S. offshore operations was steady at $4.2 million dollars. Five platform rigs remained contracted during the second quarter, and the sixth rig has been contracted to start operations late in the third quarter. Five rigs are presently idle without contracts and, we expect to contract one of the idle rigs to start in the fourth quarter. The first quarter international operations reported a 42% decrease in operating income to $3.6 million, compared to $6.2 million in the first quarter. The decrease is primarily due to a devaluation expense of $1.6 million and to the absence of one high margin rig in Venezuela. An average of 19.2 international rigs worked during the quarter at an average daily revenue of $19,430. 8 rigs worked in Venezuela during the quarter. A ninth rig was contracted and went on day rate last week. Two of the three remaining rigs are bid on new drilling opportunities. All of our eight rigs in Ecuador worked at 100% activity during the quarter. Two deep rigs worked at 96% activity in Columbia during the quarter. Both rigs should remain working through the end of the fiscal year. One deep rig in Argentina is presently working. And three deep rigs are idle, but contracted in Bolivia and Argentina. One of the contracted rigs began day rate on 15 April, and the remaining two rigs are expected to start ,1June and 15 July. The FlexRig formerly in Hungary, completed its unloading in Houston yesterday. It will move immediately to a two-year term contract in North Texas. All 50 of our FlexRigs are located in the U.S., and are giving H&P maximum leverage to fleet growth and margin growth in this up-cycle.

The 32 FlexRig three's are continuing to set the industry standards for field performance and strong pricing, with an average daily revenue and margin in the second quarter of $16,727 and $8,925 respectively. Further, 24 of the 32 FlexRig three rigs, are presently working at $17,000 per day or higher. In summary, U.S. land operations carried the Company to a significant increase. We feel the outlook for the third quarter calls for continued high activity and strong margins in U.S. land operations, strengthening in our international operations, and stability in our U.S. platform rig operations. Further, the three-year term contracts for thirteen new built FlexRig four's and 10 two-year term contracts for existing rigs, strengthens the Company's outlook for future earnings. And Doug, before turning it back to you, I would like to comment a little bit further on the FlexRig 4 program.

The FlexRig four is a smaller version of the FlexRig three, and it's designed to leverage off the value and success we have delivered in over 700 wells with the FlexRig three. The principle contributor to the FlexRig three success, has been the use of VFD, AC power and a control system that uses PLC's to optimize the drilling process. The FlexRig three's and FlexRig four's, are built to deliver and capitalize on this technology and capability. The first FlexRig four's will serve two customers that have different requirements. The William project will take the FlexRig three capability and use it on pad drilling. The pad drilling in the Rocky Mountains will be very attractive from an environmental standpoint. On the pads that we presently have, we expect to be able to drill up to 20 wells or more, and we will utilize two directional skidding over multiple rows of wells. Depending on the location and the tightness of the location, our ig and skidding system, which is designed for simultaneous drilling completion and production, will offer an opportunity to accelerate production and to improve the operator's internal rates of return. At the same time, the Conoco Phillips project requires single well development, and the FlexRig four will be modified for high mobility. We'll be drilling single well locations from small locations. The rig will be highly trailerized for high mobility, and we expect to be able to move in six to eight hours. That's from the release on one well, moving perhaps a mile to three miles, and spudding the next well. That compares to perhaps two hours between moves on the Williams project, as we are skidding between locations.

The Conoco Phillips rig will also be a singles rig. We will be handling one joint of 45 foot range 3 drill pipe at a time. The rig will also have mud and air capability. And we will be introducing a VFD powered, PLC controlled air system, which we think will greatly improve the effectiveness of air drilling operations. The two rigs will have some things in common. Those are a no-touch pipe handling system that is a highly mechanized system for moving drill pipe from trailers onto the rig and to the center of the well bore, without men being involved in it. They will also have a Testco casing running tool. We want to improve the safety of casing operations, and we will seek to eliminate direct contact of men with the casing operation. We will also design a drawwork for the flex 4 rigs, and we will operate with four-men crews. The depth capacity for the Williams rig will be at 12,000 feet, maximum depth capacity, and the Conoco Phillips will range between 4 and 10,000 feet. That should give our listeners an idea of the capability and the flexibility of the FlexRig 4 design to handle both of these projects. Doug, at this point --

Thank you, George. Appreciate those comments. And now we'd like to open the call for questions.

Our first question will come from Robert Ford, calling from Sterne Agee. Please go ahead.

Thanks. Good morning guys, how are you doing?

Good.

Congratulations on the new contract. Wanted to talk, George, a little bit about costs. Repair and maintenance up a couple hundred bucks sequentially. Do you expect that to continue, or should that fall back in the current quarter?

Robert, in the last quarter our costs were down. And while we were very pleased, we cautioned people that costs go up and they go down. Well, this quarter they were up slightly. It is interesting. Our conventional rigs, and our flex three rigs were no change. They continued to be at the former low level. We have brought one or two rigs back from other places, put them in the service, and those costs pushed up our maintenance and supply costs on the whole. When I look at the $274, if we look at inflation alone and look at the producer price index in the last quarter, it was up over 4%, which was $100 a day of that $270. And really $100 of the $244. So we probably had $150 a day that came from just things that we influenced. So again, costs were up. I think that we're going to be able to hold it here for a while. The first month that we're looking at in this quarter appears to be in the range we want it to be. So I don't think we're looking for increases ahead, but I don't think we're looking for dramatic increases. We hope we can manage that.

Okay. And the increased wages, $400 a day. You're pretty confident that all of that will get passed through?

Yes. We either get that reimbursed by the operator under the terms of contracts or agreements we have with them, and in the other part of it -- most of our rigs were renegotiated for new rates on 1 April. And knowing that we had this labor increase, we had gone to the operators and said, part of the increases that we'll be asking for are not just market adjustments, but for reimbursement of these labor costs. So yes, we have covered all of this.

Okay. Turning to U.S. land rig day rates. Your average day rate today, almost $1500 higher than it was three months ago. That number three months ago was about $1300 higher than the preceding quarter. So some acceleration in day rate progression from quarter-to-quarter. Looking right now George, at your leading edge, the difference this month versus last month. Are we still accelerating? Is that kind of stabilized? Are the increases about the same? Or are they continuing to grow? Are we still accelerating or have we kind of leveled off in terms of the rate of increase?

Robert, I think because we have probably been ahead of the rest of the industry in pricing over the last couple of quarters, I don't see us accelerating if we had $1300 in the last quarter and today its over $1400. I don't think that we should look forward to $1600 or $2,000 in the next quarter. I think it's going to slow down. I think that we will continue to look for better pricing, better margins. But at the same time ,this company is highly focused on delivering better value, so that when we do go it our customers and ask for these increased prices and margins, we're able to demonstrate that we're delivering - we're maintaining value at a time when it normally declines. And better than that, we're improving value.

Okay, I'll hand it off. Good quarter guys, and I'll talk to you later.

Thank you.

Thank you. Next we'll move to Aaron Gyurum[ph], with Credit Suisse First Boston. Please go ahead.

Good morning, guys. Nice quarter.

Good morning.

First question, George. What is the day rate or some of the revenue terms for the Conoco Phillips contract that Are they similar to Williams?

Aaron, they are similar. Under our agreement with Conoco Phillips, we can't comment on that at this point.

Okay. Fair enough.

We're looking at essentially the same deal.

Same deal. Okay. Second question, George. Can you talk about the sequential improvement in FlexRig three revenue per day or day rates? Q2 to Q1?

Aaron, it comes back to value.

Or just -- could you just quantify the impact?

Yes. On revenue alone from the first quarter, it was $14,308, and it moved to $16,727.

So almost $2400, more than $2400.

That's right. And on the margin, it moved from $6,709 to $8,925.

Okay. George, a pretty good quarter internationally. Ex the $1.6 million, it looks like devaluation loss. What's the outlook for international margins going forward?

Aaron, they're improving. We -- in a couple of countries we have negotiated increases and margins that are by experience over the last couple of years, they're good margin increases. And those will go into effect early in the third quarter, and we expect that in the third and in the fourth quarter. Also in Bolivia and Argentina, our ability to contract the remaining three rigs at attractive rates. Unfortunately, they won't all start as early as we'd like. One is on the payroll now. One will go on June 1st, and one on July the 15th, but we're seeing strengthening from that. And in Venezuela. Venezuela continues to be challenging for us in the sense that the rates are good, the margins are good, and we certainly don't like to see the devaluations. But also once we get a contract, it takes us a little longer to get that rig on the payroll than we would like. And that's just part of doing business in Venezuela at this time.

Okay. Thanks a lot guys, I'll hand it over.

Thank you. Next we'll move to Kevin Simpson, Miller Tabek. Please go ahead.

Good morning and good quarter.

Good morning, Kevin.

Good morning, Kevin.

It seems like with rigs in such short supply that there must be a very strong kind of operator move here to try to lock up rig supply. Looks like you're kind of addressing that to some degree with the incremental contracts on some of the flex three's. George, how do you handle that going forward? Are new a position where you probably could lock everything up if you wanted to? And what's your strategy in terms of time -- kind of rig contracting over the -- what looks like it's going to be a strong market into next year?

Kevin, term contracts have been a big winner for H&P over a long period of time. And whenever we see good rates, we begin to think about term contracts. There is the right mix, the appropriate mix. I'm sure we could put many more rigs on contract than we are. But we would like to be as right as we can in the process. The rigs we put together that we've put on term contracts, have been in the last two months, and they have been put on term contracts at the highest spot market prices. So that's encouraging. At the same time, people would like to put a higher number of flex three's on these term contracts. and what we don't want to do is get too concentrated with our flex three's tied up on term contracts. So I think after the next couple, we'll stop for a moment and reassess where we think the market is, and we may wait a while. But I think we'll do more term contracts, but we want to make sure that we ladder those over a period of time at different rates.

Okay. I kind of apologize if I missed this, but where do you stand now in terms of the number of, say, total U.S. land rigs with more than six months of term, and then how much -- how many FlexRigs?

We have today, we have ten rigs that are committed on term -- ten existing rigs that are committed on term contracts.

Okay. The ones you went over then.

And then we have the 13 new rigs, so we'll have 23 out of 105 rigs, so we're looking at slightly -- oh, about 20%. A little over 20%. Of those, we have six that are FlexRig threes. And we have four that are spread across conventional and other FlexRigs.

And you just said before that you would probably not lock up too many more at least of the flex three's.

Not without thinking about it, and taking a period of time to assess where we were going.

Great. Okay. Thanks. And then the other quick question would be, you've done a lot in terms of new supply over the last two good -- great contracts. How much additional capacity is there for additional flex four's or three's possibly, and are you working on any other deals you might be announcing over the next three to six months?

Well, the last question first. Yes, we continue to talk to prospective customers. But we don't have anything that we can comment on at this time at this point. And in terms of capacity Kevin, are you talking about our ability to deliver the rigs, or the ability of the customers to contract them?

Your ability to deliver them.

We can deliver at the rate of two per month, and we feel very confident about that, having done it before. So at this point we have ten rigs starting in November, we'll go one per month. And then the rest of the capacity is taken up for the first three months. So we have capacity starting in -- we can deliver rigs as early as February, March of 2006.

Okay. Great. Okay. Thank you very much. Those are good answers.

Thank you.

Thank you. Next we'll move to Pierre Conner with Hibernia Southcoast. Please go ahead.

Good morning. Actually Kevin handled that question for me on your remaining capacity, so just some little house keeping items. George, just to be clear on the labor cost increase. Is that recovery pretty much immediate, or is there a lag time being your paying that increase and then your ability to come back to pass it on?

Pierre, we always try to match those back-to-back. Sometimes there is a little delay, but in this case there will be no delay. We were able to do that back-to-back.

Okay. Alright, great. And then a little odd one here, but one other service company spoke about an increase in activity in the shelf, in the Gulf of Mexico. So I wondered if you are seeing any additional inquiries, or if the inquiry rates have changed on the platform side of the business.

No, they haven't, really. We are pleased that this year and a year ago today, we didn't have any prospects. And today we have some prospects, but they are still slow to come. I think the activity on the shelf is still generally too shallow water depths for our platform rigs. Today we're operating on platforms that are out in excess of 500 feet of water. So that's -- that's not enough to help us at this time at this point.

Got it. Okay, fair. And then any commentary on certain perspective on issues in Venezuela? Changes that you foresee? Anything politically, or business as usual?

It is business as usual for us, and again, we're delighted with the work that we have. And we've had a good relationship with Pedovesa[ph]. It is really just focused on day-to-day operations, and looking for the incremental opportunity to put one more rig to work.

Okay. Great. All the rest has been handled, so I'll let someone else go. Thank you.

Thank you.

Next we'll move to Mike Trigamire[ph], with Morgan Keegan.

Good morning, guys.

Good morning, Michael.

Quick question for you here. I'm really interested in these new contracts you're getting, 13 new build rigs here. The prospects that they're going to be drilling on, is it something specific where they had to have this new FlexRig four technology? No other rig could meet this requirement? Or is it something more broader in the industry where by, more companies are starting to become more concerned about rig availability?

Well, Michael, I think that the case is other rigs were available and you followed what our peer group has said about making rigs available. So I don't think it was a matter of we're just all out. I think it's more reflective of what we've talked about on this call, which is drilling the best value wells and then they begin to work the economics of that. Having their production on quicker, having the consistency, reliability, and then just the things that we've talked about. And it becomes a compelling case for a different solution. So it wasn't that they were locked out of -- they just had no other equipment alternative. I think it was more a buy-in to what we've been talking about for for a long time, and the value that the FlexRig delivers.

Okay. And then in your capacity to deliver about 2 per month. Are you seeing any problems yet in getting parts -- are you seeing any problems yet in getting parts?

No we're not. As long as we plan ahead, we have been able to get what we need. Because of our normal demand for some of these items, we always have some that are programmed to come in. That helped us. And also some of the critical things H&P will be taking off the main line of normal procurement, and we will actually be designing and they will be built to our specifications by -- by builders that are not normally, in the greater oil field supply operation.

Okay, great. Thanks a lot.

Sure.

Thank you. Next we'll move to Waqar Syed, calling from Petrie Parkman. Please go ahead.

Good morning, great quarter. Question on your day rates and costs side. You mentioned that your average day rates is about -- up about $1500. If we were making the apples-to-apples comparison on the operating costs side as well, would you say the operating costs are up about $600 from that point on, or maybe around $270 or so from your repair and maintenance and then another $400 for labor?

The $400 for labor, and I think on supplies, hopefully we'll see a lower number on that. But Waqar, probably that's as good of a place to start as any. Our goal will be to reduce it, but that's fair.

Okay, so the average day rate today that you mentioned, reflects the $400 pass-through that you've been implemented. Is that right?

That's correct.

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

Thank you.

Thank you. Next we have a follow-up from Robert Ford. Please go ahead.

Thanks. George, need to go to the platform business real quickly, average day rate jumped up 34, $3500 sequentially. Could you explain that, please?

We had a rig that moved off of stand-by and moved to full day rate, and also we had a rig return to work that was at higher rates, so all those things have --

How many do you have on stand by right now?

We have one rig on stand by, and when I say "on-stand by" it has an appropriate margin associated with it.

Right. The one that came off of stand-by, how long do you expect that one to remain active? IE, not on stand by?

Don't know. Hoping a year, or more.

Okay.

But just don't know.

Okay. All right. Thanks a lot.

Thank you.

And at this point, we have no further questions.

Well if there are no other questions, we'd like to thank you for joining us and have a good day. Good bye.

Thank you. This does concludes today's program. You may disconnect at any time, and have a great day.