Helmerich and Payne Inc (HP) 2005 Q4 法說會逐字稿

Good day and welcome to today's teleconference. [OPERATOR INSTRUCTIONS] Please note this call may be recorded. I would now like to turn the call over to one for your hosts for today, Mr. Doug Fears. Go ahead, sir.

Thank you and good morning everyone. Welcome to Helmerich & Payne's conference call and webcast to discuss the Company's fourth quarter and fiscal year earnings. On the call today are Hans Helmerich, President and CEO; George Dotson, President of the Company's wholly owned subsidiary, Helmerich & Payne; I'm Doug Fears, Chief Financial Officer and Vice President; I'd also like to introduce for the first time on a call, Juan Pablo Tardio, who is the Manager of Investor Relations for Helmerich & Payne, named to that role about six months ago.

As always there will be forward-looking statements and estimates made today. We will be rounding some numbers in hopes of adding clarity to our comments. We attempt to be as accurate as possible on our comments and information that we provide to you, but it is important for you to know that much of the information provided involves risks and uncertainties that could significantly impact expected results. A discussion of these risks and uncertainties is contained in the Company's 10-K filed with on December 13, of 2004 with the SEC. You may obtain this filing along with a copy of today's press release on our website.

Today the Company announced net income of over $127 million or $2.45 per share from revenues of over 800 million for its fiscal year 2005. That compares with net income of slightly over 4 million or $0.09 per diluted share from operating revenues of almost 590 million for the previous year. Net income for 2004 -- I'm sorry, net income this year includes the gain from a sale of portfolio securities of approximately $0.32 a share, and last year of $0.31 a share. Net income for fiscal 2004 includes a noncash charge of over 51 million, or about $0.63 per share for impairment of a portion of the Company's Gulf of Mexico offshore platform rigs. Net income for the fourth quarter of fiscal 2005 was a little over 36 million or $0.68 per diluted share from operating revenues of over 233 million. Included in this years fourth quarter net income was $0.01 per share of gains from the sale of portfolio securities. The Company recorded a loss for its fourth quarter of fiscal 2004 of over $12 million, or $0.25 per diluted share from operating revenues of about 164 million, and that loss included the $0.63 impairment charge.

During the fourth quarter of 2004 the Company recorded $0.16 per share from gains from the sale of portfolio securities. I'd like to remind everyone that we made an accounting presentation change that was implemented in our first quarter of 2005 and shown on that announcement and conference call and I mention that to you today because some of you may be comparing last year's operating income by segment in today's announcement to some numbers from last year's announcement in conference call and will notice some differences. We began in the first quarter to remove gains from the sale of equipment out of their respective segments and reported them as a single line item on the consolidated income statement. And in today's announcement the segments reported for both this year and last year, equipment sales, are not included in those numbers.

In reviewing the segments I'd like to provide some summary explanations that might help to explain some variations and results. George will also cover some of these areas in his discussion. For example in U.S. land rate operations, George will get in some specifics regarding the increase in average rig expense per day and the improvement in margin per day. In the offshore platform rig operations you'll notice that we had almost a 200 day improvement in activity days and the resulting improvement in utilization. However, rig revenue per day was down, expense was up, and margins were down.

During the fourth quarter of 2005 most all of the improvements in activity days resulted from three rigs being mobilized during the quarter and revenue days being counted when the Company earned revenues from those mobilization days. However, these mobilization days generated a lower than average revenue per day of approximately 26,000 a day, higher expenses per day of roughly 19,000 a day, and lower margins of approximately 7,000 a day. It was a unique quarter in that three of our active rigs were in some stage of mobilization with the typical but lower profitability days. The December quarter that we are currently in will be closer to a normal type of revenue and margin generating quarter with the exception of rig 201 which will be generating some reimbursement revenue but at 0 margin.

Regarding the international business segment, we mentioned in the release that there was 1.865 million accounting error that was discovered which explains a significant piece of the same in profitability sequentially. You'll notice in looking at the segment reporting data in the announcement that we also had an increase in our depreciation of approximately 700,000. Most of that was the discovery of under depreciation of some drill pipe in Argentina. So those two items represent approximately $2.5 million of reductions in operating income recorded during the fourth quarter of 2005 that will not be reoccurring in the current quarter. George will discuss in more detail the expected improvement in rig activity during the current quarter and the coming months.

On the balance sheet you'll notice that our cash balances have grown to over 288 million at September 30. The market value of our portfolio was approximately 290 million at September 30, and at the close of yesterday it was approximately 268 million. Capital expenditures for 2005 totaled approximately 87 million and our current capital expenditure estimate for 2006 is approximately $500 million. We expect to fund our capital expenditures, current cash balances, company cash flow, and portfolio liquidation. I will now turn the call over to Hans Helmerich, President and CEO. After he and George have made their comments we will open the call for questions. Hans.

Thanks, Doug. Our fourth quarter performance represents an all-time high in the Company's 85-year history in terms of continuous operating income. We reached another important milestone with the announcement of our 50th new build order. That number is up from a 22 rig order book we discussed on our last webcast. The operator preference for H&P drilling services and their willingness to make long term commitments provides an encouraging lens on how customers perceive the unusual longevity and potential of this current cycle. It also provides us the opportunity to take advantage of our financial strength and ample liquidity of fund organic growth opportunities going forward. The meaningfulness of that internally generated growth is underscored by today's new build announcement that will increase our domestic fleet by more than 50%.

Our current cash balance, combined with future operating cash flow, and proceeds from the sales of portfolio securities, should allow the Company to fully cover our projected capital expenditures that Doug mentioned, of 500 million for fiscal year '06. As the cycle continues, we should be able to internally fund similar levels of investments in the years that follow. The resulting large boost in operating assets should add substantial value to our shareholders during the coming years. Once the buildout is completed, it will bring the total number of FlexRigs to 100. At that time, FlexRigs will constitute over 70% of our entire U.S. land fleet. That distinctive fleet profile allows us to present our customers an across-the-board quality offering and fleet uniformity that I believe to be unmatched in the land industry. As I mentioned on our last call, 75% of our fleet has been built new since 1995, and these new orders only build on that strength.

Just as competing new build programs will have varying impacts on the respective fleet profile, new construction itself will vary in the desired result. Our desire can be plainly stated, and it's consistent with long-term company-wide resolve to provide customers the most innovative and advanced rigs in the industry for the purpose of driving the customer well cost down. Combined with the very best field execution, performance, safety, reliability, we believe we deliver a compelling value proposition. Those satisfied customers, in turn, provide us with unique growth opportunities and improve shareholder returns.

Not everyone shares this approach to new builds, or has this same desired outcome. In fact, most will not set the bar nearly that high. One industry observer states that only one in four of the planned industry new builds could even be considered a modern technology rig. The time worn misconception that a rig is just a rig will apparently find currency in the notion that a new build is just a new build. But we are in pursuit of a bigger prize than just unit expansion, which is reflected in the Flex4's no touch tubular handling system, advanced control system, casing running system and other innovations gleaned painstakingly from our earlier FlexRig learnings and experience. We believe that experience will well position us to successfully compete against a broad range of old rigs, refurbished rigs, old design, new builds, half Chinese, full Chinese, Italian, and other various combinations and offerings that we may see as this energy cycle unfolds. With that I will turn the call over to George.

Thank you, Hans, and good morning. Drilling operations reported a record level of operating income this quarter at $64.7 million. This was driven largely by our U.S. land operation with revenues up 18.6 million or 13% compared to the third quarter, and an operating income increase of 19% to $56 million. The U.S. land rig count and day rates continued to escalate, and we are motivated by continued market interest and additional new builds. As Hans mentioned earlier we now have a total of 50 new FlexRigs on three and four-year term contracts. These continue to give the Company substantial leverage in this up cycle. These new rigs represent a 100% expansion of our existing rig fleet and a 56% expansion of the total U.S. rig fleet.

The 50 existing FlexRigs worked in U.S. land operations at an average daily revenue and margin of $19,340, and $10,184 during the fourth quarter. The 50 new FlexRigs give visibility to robust earnings in the future. On average we expect the new build rigs to have a 100% after-tax pay back in approximately 38 months of operation. Average annual return on invested capital over the term of these new build contracts is expected to be in excess of 20%.

Our U.S. land operating cost increased by $807 per rig day or 10% during the quarter. Daily maintenance and supply costs accounted for $600 per day of this increase. Daily labor cost increased by $415. Other daily costs decreased $208 a day. 25% of the increased labor costs is attributable to increased wages and salaries, which are reimbursable through higher day rates. The remaining 75% is attributable to the provision for 2005 bonuses to field supervisors. In addition to the contracts for new FlexRigs, we currently have 32 existing U.S. land rigs on term contracts.

The day rates for which average over $18,300, with an average remaining term of approximately 20 months. This positions us with two-thirds of our existing U.S. land rigs in the spot market. We're comfortable with this position and we will continue to evaluate future long-term opportunities on a case by case basis. Today, on the 16, of November, H&P has 99% activity for 90 land rigs available in the U.S. with 89 rigs committed. Our average day rate for all U.S. land rigs today is $19,551, an increase of $1,589 when compared to $17,962 on July 27, the date of our last webcast.

Five rigs remained active on customers' offshore platforms during the fourth quarter, including H&P rig 201, which, as previously announced, was damaged by hurricane Katrina. Three additional rigs began mobilization operations during the fourth quarter and have commenced drilling operations during the first quarter. As previously announced, a ninth rig is committed and expected to start drilling operations in the second fiscal quarter. We have bid each of the two remaining rigs on projects that could begin operations by the fourth quarter.

As mentioned by Doug, one-time adjustments were made during the fourth quarter that adversely affected the operating income from international operations. Today, on the 16 of November, H&P has 93% activity for 27 international land rigs. 20 of these rigs performed drilling operations during the third quarter, and an additional four rigs were contracted and mobilizing during the quarter. Today, 21 out of 25 contracted rigs are fully operational. Three of the remaining four rigs will begin drilling operations by 1, December in Venezuela, Chile, and Bolivia. The fourth rig is currently being mobilized to northern Argentina and is expected to commence operations in the second fiscal quarter. Therefore, we expect the full impact of these four newly deployed rigs will not be reflected until the second or third quarters of fiscal 2006. Two rigs remain idle in Venezuela. In addition to South America, the Company continues to pursue other international opportunities.

The 32 FlexRig3s continue to lead the industry in field performance and strong pricing with an average daily revenue and margin in the fourth quarter of $19,736, and $10,830 respectively. Further, 8 of the 32 FlexRig3s are presently working at day rates of 23,000 per day or higher. Hurricane Rita delayed new FlexRig component deliveries from a major supplier. The supplier is not yet delivering components at a rate equal to our pre hurricane schedule. First deliveries of new FlexRigs have been delayed approximately six weeks. We will deliver the first new FlexRig in December and following new rigs at the rate of two per month. We plan to increase the production rate to three FlexRigs per month in the spring and to four FlexRigs per month in the summer of 2006.

While prices for drilling machinery continued to increase, we are able to maintain our schedule for deliveries from our remaining suppliers. We are fortunate to have 50 FlexRigs in the field today and firm contracts for the addition of 50 new FlexRigs to the fleet. Managing our assembly operations gives us good control over total cost, delivery schedule, and field performance. We see continued interest in additional new build contracts and believe we are well positioned to take full advantage of this up cycle. Thank you. And I'll turn the program to Doug.

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

[OPERATOR INSTRUCTIONS] We'll go first to the site of Arun Jayaram from Credit Suisse First Boston.

Hans, when you signed the first contracts under this newer vintage of FlexRigs, it was in March, I believe it was the Williams deal, and you signed those at day rates around 17.5, which at the time were about a 30, 35% premium to rigs in the Rockies of that same drilling capability. I was trying to see if the new contracts you were signing are at similar kinds of premiums to what you're seeing in the spot market and just to give you a sense, since that time, spot day rates in that market have, for example, gone up by about $2400.

What we're seeing, of course, is a very volatile and aggressive spot market. We've got leading edge rates that are at 25,000 and slightly exceeding that. So the answer is, no, we're not signing three-year term contracts at premiums to that level. On the other hand, what we've said, and really what we'll probably limit ourselves to saying, is we're targeting a return on invested capital in excess of 20% which the contracts all represent and, of course, we've got the three-year term that will just right on pay out the investment. So that's really the model we're going by.

Okay. And do you -- would it be incorrect to assume that -- has there been any escalation in pricing? Because the costs have gone up a little bit. I'm just trying to understand is -- is are you getting a little bit higher returns on the newer deals versus what you signed in March?

Yes, we are. We're seeing some cost escalation, but the answer to your question is the more recent ones we're seeing better returns.

Okay. Second question for you, Hans, is strategically you've seen some of the players in the South American land market, Toddco and Pride indicate a willingness to shed assets in that market. Given how there could be some assets on the market, would you like to get bigger in South America?

We've looked at some of those assets in the past, Arun, and if we're going to put ourselves in position to be an acquirer, it won't be in South America unless it's something that we don't have on the radar screen today, because what we look for is an opportunity to have a beach head in a market that we don't already have a nice franchise in. I think we could operate anywhere in that hemisphere with a great group of people and experience, and so to acquire something, our interest would be to be someplace else in the world, whether that's North Africa, perhaps in the Middle East, Russia, something that would give us a beach head that we don't have right now.

Last question is for Doug. Doug, can you give me some tax rate guidance for fiscal year '06?

I would just, for right now, just stick with what we did in '05. I don't see any great change right now. It might come down just a little bit as income from the U.S. becomes a larger percentage of total income.

Thanks a lot, gentlemen. Thank you.

We'll take our next question from Robert Ford with Sterne, Agee.

I want to spend quite a bit of time on costs, George. Labor costs, U.S. land up $415 sequentially. You've said in the past you thought we could see $300 sequential increases for the foreseeable future. Still the case, or is it going to be more toward 500 maybe going forward?

I don't think it's going to be that high going forward, Robert. I think of the number that we gave out this morning, 25% was due to wage increases. I think going forward, we'll probably have some greater increases in the next couple of months, then it will slow down and it will be a little lumpy going forward. I think what makes this month unusual is that for the first time in a couple of years we're going to have a significant bonus opportunity for our field supervisors, and that all fell into the fourth quarter, and that has -- that's driven this larger than usual number.

Okay. And then jumping over to the supply and maintenance costs, those costs were down sequentially in the June quarter, so, I did expect them to pop back a couple hundred dollars this quarter but 600 was a little more than expected. Is that a case of throwing costs into the fourth quarter, buying some extra supplies, or is this just a trend of we're pushing the rigs very hard and it's going to cost more to maintain them going forward?

I think there are several contributors. First, as you mentioned, the fourth quarter effect, and it's -- has generally been there in the past. The second thing is, prices are going up everywhere. The third thing is that we've just had some higher M&S costs, maintenance and supply costs in the fourth quarter. I don't think that they will be -- that that's going to be a firm and hard rule going forward. I think we will continue to have some months where we have flat, maybe even down a little bit maintenance costs. But the fourth quarter is what the fourth quarter is. I wish we didn't have 600 to report but I think we've touched on all the reasons. I do want to say, I don't think it's because we're pushing our equipment harder. We maintain our equipment well, and we tell our customers that all of our equipment is expendable. We are not going to nurse our equipment to reduce our expenses and to extend the operations on any hole. We have always and we will continue to push our equipment to the point that it delivers the best value to the customer. So there's no change in that for us.

Okay, good. Training costs for the crews on the new builds. When do we -- is that all being capitalized at this point, and will be amortized as the rigs start their contracts, or are we going to see any pop in that as the rigs come out here next month?

I'm going to ask Doug to speak to that, then I may add something at tend.

Robert, from an accounting standpoint, those training costs will be folded into the G&A portion for the U.S. land rig segment. George may address the day rate part of that. But that's where that expense will begin to show up.

I would just add that, on each of our 50 contracts to date, we have a provision in the day rate or in lump sums that covers all training costs. So those funds have been provided for. The training is underway, and at this point we see that the costs are going to be at the levels that we're expecting.

Okay. And just one last question. I just need to double-check a number you gave, George. Term contracts. You now have how many?

We have 32 term contracts in our existing fleet.

Okay.

And those average on the whole 20 months per rig.

Okay. Correct me if I was wrong, if I'm wrong, but three months ago, we were at 14, correct?

Yes, we were higher.

I want to say 22, Robert.

That's what I recall also. Low 20s.

That's all I have. Thanks, guys.

Another thing I would add, Robert, is again, we mentioned it, but to focus on the fact that two thirds of our rigs in the U.S. market are available in the spot market.

Do you see that 32 number continuing to get bigger, or next quarter will you tell me 42, or do you think we stay somewhere around where we're at?

I think as we mentioned in our comments this morning, we're comfortable with where we are. There may be some opportunity that will be compelling, but at this point, I think we're going to stay where we are.

Okay. Thanks, guys.

Thank you, Robert.

Thank you. We'll take our next question from the site of Waqar Syed from Petrie Parkman.

Couple of questions. One, just a clarification, the two term contracts that you talk about for your -- long-term contracts for your domestic land rigs, what is the average day rate on those? I believe you mentioned that before. I missed that.

On the existing rigs?

Yes, it was $18,300 a day. That's for the 32 existing term contracts.

Now if I understand correctly, the 75% of the labor cost increase, that's about $300 a day, will not be showing up in the future, at least the next three-quarters?

I'm sure that there will be some reserve established going forward, but it will not be at the $300 per day.

So we could see daily operating costs come down in the coming quarters, or the labor cost increases, otherwise -- wage increases would offset that?

I think it's possible that the rates could come down. For instance, again, the fourth quarter was where we caught a year's bonus provision, and going forward, that will likely be spread over a longer period of time.

Okay.

And in terms of increases for daily labor cost, those costs are going to be lumpy. We may have an increase in one quarter and then have a quarter with no increases. So again we can look forward to that.

But all of those labor cost increases would have an offsetting revenue impact?

For the daily labor cost increases, increases in wages, yes, it is--.

That's possible to do?

Very likely that those will be covered by increases in day rates.

Right. Now, for these new -- nine new contracts that you received, when do you expect to start putting those rigs out of the yard into the market?

It will be in late calendar 2006 and early calendar 2007.

And these will be at a rate of about two a month, or?

No we hope to be operating at four rigs per month during that time, Waqar.

Okay. Now, Doug, on the DD&A side we noticed that the DD&A was up by about $2 million or so versus the previous quarter. Could you explain that? Where's that increase coming from?

Well, as I mentioned, about a third of it came from the international side, where we had underdepreciated some drill pipe, and the drill pipe should have been totally depreciated, and it wasn't, and so we took that -- we took that total depreciation there. I would have to say that I haven't looked at the detail, but my guess would be just through additional drill pipe and equipment purchases and being at full activity, we've got a lot of equipment movement that triggers additional depreciation. So, again, don't have any detail there, but that would be my guess.

Now, the international part of increase was about $700,000 or so in increase, right?

Yes.

So if I take that out and then just assume the remaining portion was the domestic activity, then could we get that kind of increment in DD&A going forward, taking out any increases from the additional rigs that are coming in?

I'd have to look at it. That looks a little bit larger of a larger of a jump for just ongoing, existing U.S. operations to me. The offshore, we didn't see much increase at all in depreciation, but in the U.S. land is where we saw the additional pickup on top of the international. So I would just have to look at it. My gut tells me just on ongoing operations I'd be surprised to see 1.5 million or 1.4 million type of increase from quarter to quarter like we saw this last time.

Okay.

I'll be happy to look at the detail and talk to you about that off-line.

That will be great. Thanks very much. That's all.

[OPERATOR INSTRUCTIONS] We'll go next to the site of Andrew O'Connor with Wells Capital.

I may have missed this. We're half-way through the first quarter of '06. Can you give us any sense for rig margins and utilization in the first quarter and perhaps how they're trending? Thank you.

We continue to see improvement in rig rates, and I think you can get that from looking at the comparison of our rig rates today versus July 27, and you see what our average rig rates were. We've mentioned that in the webcast. So the rates continue to move ahead, and margins continue to move ahead also. Hans mentioned what the leading rate is and, of course, leading means you may have one, or two, or three rigs at that kind of level. But, again, those are encouraging trends, and what we see.

Okay. And then I wanted to know if I could get some sense of history. I think, Doug, perhaps you mentioned at the beginning of the call that the fourth quarter earnings, an all-time high in the history of Helmerich & Payne. How would you guys compare and contrast current market conditions with prior cyclical peeks in contract drilling?

Well, yes, I think they're -- there's some differences. One, in the last real peak, going back to the late '70s, early '80s, you had 5,000 rigs available, and today we've run out rigs at kind of the 1500 mark. That's one difference. I think another difference is we're seeing the customer approach their drilling inventory differently in that it's not like it was 20-plus years ago driven by an NGPA of 78 that had lots of activity in deep gas, highly faulted, kind of risky -- I mean, what we're seeing the big demand for now and what the FlexRig is particularly well suited for is this unconventional gas, kind of gas factor, if you will, play. Long runs, where the quick moves and drilling efficiency really favors what we're offering. So I think the other thing that's unusual is just the sense, and maybe this worries you, but the sense of the look forward and the consensus of where prices are going to be. It doesn't have to remain at the real high natural gas prices or current oil level prices. You could back those off and people, I think, would still be executing on very strong drilling budgets. So all those things are encouraging to us.

I would add, just two other things, I think that today the commitment by operators is giving us visibility that we have not had in previous up cycles. For instance, the contracts we announced today, the rigs will go into service January for average purposes, January 2007. They will go out three and four years. So they will go out to January of 2010 and January 2011. At no time, not even back in '78 to '82 did we see that kind of visibility based on commitments by super major customers. And the last thing is, I think what's different this time is there is now an established awareness that it's not just about price. It's about the total cost of a well and how do you -- what is your best opportunity to lower that total cost. And so it's about value, not just the lowest day rain. I think those are two big drivers for us.

That's helpful. Thanks very much.

Yes.

Thank you. We'll now go to the site of Thad Vayda from First Albany Capital.

Wanted to chat for a second about the delays on these new construction rigs. Slipped an additional two weeks due to some vendor problems. Can you give me some insight into how this affects the follow-on rigs in terms of when you get started and essentially how long it will take you to catch up? But more specifically, is there a cost, a penalty, if will you, for the delays, and more broadly, how do you write your contracts to protect yourself against this sort of thing?

Well, let me talk just a little bit about the delay and what the costs might be, and I think some others can perhaps speak to how we address that in contracts. Our biggest issue has been with a major supplier whose plants were directly in the path of hurricane Rita. And it was not so much the damage to his facility as it was damage to his his employees. They were scattered, they were focused on taking care of their families and then getting back to work. But along with that came some interference. FEMA is involved in the areas and cleanup. They are paying much higher rates for the temporary work. That's attracted some people away from our effort.

At the same time, there were plans for refinery upgrades and expansions with the Katrina and Rita than those plans have been enlarged and accelerated. And there was a shortage of trained people, trained craftsmen in that area before we had the hurricanes. We've managed to get it to the point where our supplier is no longer losing people, he's stabilized it, but he is having to go elsewhere to look for the additional people. We're close to having the number of people work on our projects that we had before, but the issue has been the productivity, and it's improving, but that has -- it's been slower than we had hoped for.

What does this vendor provide, what components?

He provides the fabricated items. That is, he takes the structural steel and through welding and other processes, he puts it into a semi finished product. It's finished in our own assembly facility when we add the wiring and all the other issues to it, but the mast, the substructure, the mud systems, a lot of steel and fabrication involved in these rigs, and he's been the primary supplier for that. He did all of the work on FlexRig3, the 32 rigs, and he was able to not only handle that but increase production and reduce our total cost as he moved down the learning curve. So he was a natural choice for this work. And he'll recover, but the issue for us is the delays and it has pushed the -- pushed back the delivery of the first rig.

What we're hoping is that we'll be able to use our lean manufacturing, our other resources in Houston to regain our original manufacturing schedule. Every day that goes by puts in that jeopardy, but we think that by midsummer we should be close to the original schedule. That's our hope, that's our plan. I might ask someone else to speak to the contract.

Well, on contracts, Thad, we've communicated with all the customers, and they've been understanding and cooperative in terms of contracts we're going to say very little about that except to say that they do provide for some delays, and so we don't expect any penalties from this particular delay.

Okay.

So it will have no economic impact.

If you could just clarify for me, I guess I'm sort of interpreting what this vendor does is sort of pre assembly. What percentage of completion, approximately, do you -- when you take delivery to your Houston facility to finish the work, how finished is the rig when it leaves this vendor's yard? 50%? 60%? Less than that?

It's difficult to think about it in that way. His contribution goes along with many other components, and, again, he's a major supplier, but I'm not sure I can attach a percentage to -- I don't think it quite fits.

But the bottom line at this point is you don't anticipate that there will be an economic penalty for late delivery to your customers, and second you anticipate that your delivery schedule will be back on track by midsummer. Is that correct?

That's correct in both cases. And again, there's some uncertainty. Can we really deliver? We have seven months to be able to get back to our original schedule. We believe that we can do that. But we'll after better feel in our next webcast.

A separate issue on premium spot rates for your term contract, how do you think about contract terms for nonnew build rigs? I understand that the calculation for rigs that you're building is going to be different and you want to get an appropriate return, but for rigs that already exist what type of a premium do you typically look for to spot rates when you let those for a two-year term, or whatever it might be? How different is the calculation there for you guys?

Well, it's -- that's an interesting question. I think at different phases of the market you'll have different answers. When we placed the majority of these 32 rigs on term contracts, and that was sometime ago, three or four months, for the most part, I think that we felt the rates were good and the rates were equal to the spot market rate. Maybe a slight premium in one or two cases but -- on the order of 5%, perhaps. Today we're not contracting those rigs at the top spot market rates, because, as Hans mentioned, when you have rates that are approaching the 25,000 a day, I think that operators are willing to pay that perhaps on a well to well basis in order to get the rig, but they're very shy about taking that on for three years or two years.

Perhaps as a percentage over an average spot rate as opposed to the leading edge. I understand what you're saying there. Is it still on the order of 5%? Is it 10%? Is it flat?

I don't -- if we were to contract one on a term contract today and -- at a compelling rate, I don't think we would have a premium. The rates on spot market are sufficiently high that if we locked that in for two years or three years we would think that it would be a very attractive long-term arrangement for the Company, and we probably would not see a premium. We'll never turn one down. We'll always be looking for it, but as a practical matter I don't think it's going to be there.

All right. Thank you very much.

Thank you. We'll now take some follow-up from Waqar Syed.

My question is regarding the FlexRig 4s. Your recent announcement says that the cost to build that rig is about $11 million. Previously it was in the 10 to $10.4 million. Is this new FlexRig4 exactly the same as the previous one, and so all the cost increase is just the general inflation, or this one has some additional equipment on it as well?

It may have slightly different equipment, but, Waqar, the principal source of the increase is our estimate of what the rig will cost. And we have a model that we work with. It's not a sophisticated model, but it's a model that has been reliable in the past, and each time we take on an order and it's going to be delivered further out, there's some escalation built into it.

Okay. So if the same rig was costing about $10.4 million to build, based on your analysis seven months ago, and now it's about 11, so it's about 6% cost escalation, is that what you think is likely to happen going forward as well, 6% or so inflation in building these rigs.

No, I would think it would be more than 6%. 6% per year?

Yes.

No, I would think it would be more than that. So if that's what your numbers are telling you, it's probably the other component is the change in the inventory for the rig.

Okay. So around 10% inflation in rig cost, rig building cost? Is that -- could that be a reasonable number on a 12-month basis?

It's really hard to -- we track this constantly, but it's hard to give you a best guess in terms of going forward the next six months or a year.

Okay. Thank you very much.

Thank you.

It appears at this time that we have no further questions, so I will turn the call back over to your host for any closing remarks, go ahead, please.

Yes, we'd like the thank you for joining us today and wish you to have a good day. Thank you very much and good-bye.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.