Helmerich and Payne Inc (HP) 2006 Q1 法說會逐字稿

Good day. All sites are on the conference line in a listen-only mode. Please note that today's call may be recorded. At this time, I'd like to turn the conference over to Doug Fears, Vice President and CFO of Helmerich & Payne Inc. Go ahead please.

Thank you, Eric, and good morning everyone. Welcome to Helmerich & Payne's conference call and webcast to discuss the Company's first quarter earnings. With us today to provide statements and answer questions are Hans Helmerich, President and CEO; George Dotson, President of the Company's wholly-owned subsidiary Helmerich & Payne International Drilling Company; Vice Presidents John Lindsay and Alan Orr; Juan Pablo Tardio, Manager of Investor Relations. And I'm Doug Fears, Vice President and CFO.

As always, there will be forward-looking statements and estimates made today. We'll be rounding some numbers in hopes of adding clarity to our comments. We attempt to be as accurate as possible with our comments and the information we provide, but it is important for you to know that much of the information provided involves risk 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-K filed December 13, 2005. You may obtain this filing along with a copy of today's press release on our website.

This morning, Helmerich & Payne Inc. announced record net income of 50,814,000 or $0.96 per diluted share from operating revenues of over 255 million for its first fiscal quarter ended December 31. That compares with net income of 39,310,000 or $0.77 per diluted share from revenues of slightly under 175 million for last year's first quarter. Included in this first quarter number of $0.96 per share is $0.03 net income from gains from the sale of portfolio securities. Out of last year $0.77 per diluted share are $0.42 that relate to gains from the sale of portfolio securities and the sale of two drilling rigs.

In just a few minutes, George will discuss some operational details about all of the drilling segments. I'll just take a minute to remind you that there were a couple of accounting adjustments relating to the International segment. As you may recall from our fourth quarter announcement that there was a $1.9 million accounting error that was adjusted for that negatively affected the fourth quarter 2005 operating profit.

There was also a onetime increase in international depreciation of 700,000 regarding some drill pipe that had been under depreciated. Those two items, totaling almost 2.6 million, were non-reoccurring type of items that negatively affected the September '05 quarter. Even if you adjust that quarter upwards, you still saw a nice improvement in our international operating profit for the first quarter.

As noted in today's announcement, the first quarter of 2006 is the first period the Company is required to include stock based compensation expense in its financial statements. At this time, our estimate for a typical quarter would be roughly 1.6 million of pre-tax expense relating to those stock based compensations per quarter. However, for both the first quarter just reported and the coming quarter, they contain some acceleration in amortization of stock options brought about by George's retirement on March 1. That acceleration of amortization pushed pre-tax total stock based compensation to 2.7 million in the first quarter and will total 3.9 million in the second quarter.

On the balance sheet, you'll notice our cash balances have grown to over 300 million at September -- I'm sorry, at December 31. The market value of our portfolio was approximately 293 million at December 30 and at the close yesterday was approximately 350 million, or an after-tax liquidation value of approximately $4.50 a share.

Capital expenditures for the first quarter, although totaling only about 54 million, only -- our 2006 -- excuse me, our 2006 estimated capital expenditures still remain at 500 million. We expect to fund our capital expenditures out of current cash balances and Company cash flow. I would turn the call over to Hans Helmerich. After he and George have made their comments, we will open the call for questions.

Thanks Dough. Good morning. Our 2006 first quarter results established a new record for the Company. Our U.S. land operations saw average cash margins push over $11,000 per rig day, an 18% increase over the previous quarter and almost double the margin a year ago.

In addition to strong U.S. land performance, we're pleased to see steady improvement in our U.S. platform business even with the loss of operating income from rig 201 related to previously disclosed hurricane damage. We are now working 7 platforms with 3 rigs returning to full day rates during the last quarter.

Our international business boasted its strongest quarter since 1999 with a 138% sequential improvement in operating income. This energy cycle continues to show long-term strength and provide new opportunities for the Company. We announced earlier today our FlexRig new orderbook has expanded to 54 firm customer commitments. That number is up from 50 orders announced on our last webcast. We believe we are capturing a disproportionate new build market share because of the proven track record and the real world field performance of the FlexRig.

George will detail some examples of our increased efficiencies in his comments in just a moment. While we understand this market has seen exploding rig demand, we remain convinced that certain customers are attracted to something more than just new iron in the field. That customer recognizes the brand value represented by the FlexRig. There is a saying we like that describes brand value. The brand is not a name. It is the meaning of the name in the mind of the customer.

The FlexRig is not a promise. It is not a new strategy. It is not a sudden response to strong market cycle. It's the result of an entire organization's commitment built on years of experience, years of innovation and shared learnings, safety achievements and unmatched customer service. Today, we're translating 204 rig years of FlexRig operational know-how in order to deliver day in and day out on this brand value to the customer. The customer, in turn, is providing us with unique growth opportunities and allowing us to deliver attractive shareholder returns.

Before I ask George for his comments, let me just mention that as we announced in early December, George will be retiring on March 1. In his 35 years with the Company, George has been a tireless champion and leader in establishing H&P's unique brand value. His commitment and personal integrity have not only serve H&P's success, but has benefited the entire industry. The most prominent example has been his career-long dedication to improving rig safety.

George will continue to serve on our Board and act as a special adviser to the Company, so we're not going to let him wander very far from the ranch. And as part of that December 8 announcement, we named John Lindsay to Executive Vice President of U.S. and international operations and Alan Orr to Executive Vice President of Engineering and Development. Both positions will be my direct reports.

John has twenty years with the Company and has run our U.S. land operations for the last nine years and Alan is a 30-year H&P man and has spearheaded the Company's FlexRig development. We really feel blessed to have a bench strength at H&P that John and Alan represent and that extends throughout the organization. John and Alan are at the table this morning and will be available during our Q&A time. At this time, I would like to turn the call over to George.

Thank you very much Hans. Drilling operations reported another record level of operating income this quarter at $85.4 million. This was driven largely by our U.S. land operation with its operating income increase of 27% to $71 million. As U.S. land rig count and day rates continue to increase, the market interest continues to be strong for additional new build rigs. The 54 new FlexRigs have firm long-term contracts and are increasing the Company's leverage in this up cycle.

These new Rigs represent a 60% expansion on our December 2005 U.S. land rig fleet. The 50 existing FlexRigs working U.S. land operations had an average daily revenue and margin of $20,888 and $11,815 during the first fiscal quarter. Our U.S. land rig operating costs decreased by $67 per rig day or less than 1% during the quarter.

Daily maintenance and supply costs decreased by 12% or $312 while daily labor cost increased by 2% or $135. Other daily cost increased by 12% or $110. Daily labor cost included $104 attributed to FlexRig4 crew training. This incremental daily cost is expected to increase to approximately $250 per day by the fourth quarter of 2006 before declining to zero by mid 2007.

In addition to the contracts for new FlexRigs 32 U.S. land rigs are currently operating on term contracts. We have also committed to refurbish an existing 3000 hp rig, rig 134 under two-year term contract with attractive terms and conditions. Approximately two-thirds of our existing U.S. land rigs remained in the spot market during the first quarter.

Today, on 26 January 2006, H&P has 99% activity for 91 land rigs available in the U.S. with 90 Riggs committed. Our average day rate for all U.S. land rigs today is $21,622, an increase of $2071 when compared to $19,551 on 16 November, 2005, the date of our last webcast. Seven rigs are currently active on customers' offshore platforms, excluding H&P rig 201. As previously announced, rig 201 was damaged by Hurricane Katrina and is not expected to contribute to operating income until the first fiscal quarter of 2007.

Three of the seven active rigs began drilling operations during the first fiscal quarter. An eighth rig is currently being mobilized and is expected to begin drilling operations during the second quarter. Given the initial mobilization operations of the 3 platform rigs during the first quarter, only 561 of the 644 total revenue days in the segment generated daily margins. We expect a sequential increase of approximately 20% in the number of days to generate daily margins in the second quarter.

Two rigs remain idle and have been bid on projects. Two management contracts remained active during the quarter, one in the Gulf of Mexico and the other on the West coast offshore California. Today, 24 of 27 international land rigs are fully active in South America. And the 25th rig is mobilizing and scheduled to begin operations in the third fiscal quarter of 2006. Three of the 25 active rigs completed mobilization operations late in the first fiscal quarter. As expected, these three rigs will have a full impact on operating income in the second quarter.

In addition to these H&P rig operations, one management contract remained active in Equatorial Guinea during the quarter. The Company will continue 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 first quarter of $21,289 a day and $12,291 respectively. Further, 13 of the 32 FlexRig3 rigs are presently working at day rates of $26,500 or higher.

The first new FlexRig4, rig 271, was completed in December and is currently operating in western Colorado. To take advantage of the FlexRig4's pad capability, the first location is a drilling pad designed for 10 wells. Rig 271 is off to a good start and our customer is pleased with startup performance. Additional new rigs will be delivered at the rate of two per month. As previously announced, 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.

To deliver best value to our shareholders and customers, we're making every effort to safely drill each well at the lowest possible total cost. The results have been very rewarding to us and to our stakeholders and I want to give you some examples. Safety performance is the best proxy for total contractor performance in the field. Our U.S. land operations completed 2005 with a total recordable incidence rate of 1.93, an achievement that is 70% below the expected IEDC or industry average for 2005.

In 5.7 million man-hours working U.S. land operations during 2005, our employees sustained only three lost time injuries. We know of no other peer contractor with equal or better results. Today, we're setting our best-ever safety record of 41 consecutive days and 1.2 million man-hours without a recordable injury across the entire Company.

I mentioned the good start of rig 271 in western Colorado. In East Texas, rig 213, a FlexRig3, just drilled its 78th well in 3.5 years. It continues to work for its only customer, a super major operator, has never had a recordable injury, had 4% annualized turnover in 2005, and has reduced drilling time to 99,500 feet from 21 days to 6 days.

Three H&P FlexRig3s drilled 38 wells in 2005 for a large operator in the Barnett Shale. Our average drilling time to 10,000 feet was 14 days compared to 29 average drilling days for all similar wells drilled by other contractors in the same two-county area during 2005. Our customer has contracted four new FlexRig4s in the same area. In another southeast Texas field, FlexRigs have steadily reduced our own record times to drill 12,000 foot wells from 23 days in 2003 to 11 days earlier this month.

Yes, day rates are higher, but H&P has been a very effective catalyst in its efforts to safely deliver the lowest total well cost to our customers. Our experience and proven ability to deliver substantial well savings to our customers with new FlexRigs will allow H&P shareholders to take advantage of this extended up cycle. We're fortunate to have 51 FlexRigs in the field today and an early start on the addition of at least 53 new FlexRigs to the Fleet. Thank you Hans.

Thank you, George. And we would now like to open the call to questions.

(OPERATOR INSTRUCTIONS). Arun Jayaram, Credit Suisse First Boston.

Hans, we haven't gotten a lot of color on some of the contract terms for the new builds, I guess since probably the Williams deal. You have 54 -- or new builds under the term contracts. I was just wondering if for modeling purposes, you could help us with where the -- maybe the average day rates are for those new builds and maybe what the margins look like -- maybe on an average basis.

Part of that has been just the competitive marketplace, and what we have said and I think what we told folks is that from the very beginning, we were targeting a 20% plus return. You have got a three year term contract. And in fact, we're seeing that 20% return improved upon somewhat as we continue to contract new rigs. But I am reluctant, just on a competitive basis, to give you the color that I can appreciate you want. But I think again, we've established a model that we like and that we're improving on, and continue to see interest in the marketplace.

Okay. Hans, could you maybe talk about how the returns have improved? You talk about an improvement, but maybe quantify how the returns have improved since the Williams deal, versus maybe some of the recent announcements you have done?

I'm looking around the table and I think we're going to stay with if it's -- we're not going to give out average day rates. I think that we are seeing returns improve above the 20% range and I'm just going to stick with that. Again, I can appreciate your question, but I just don't want to map out what we're doing.

Okay. That's fair enough. In terms of getting 54 rigs up and working, you're probably going to have to add somewhere around 1000 field personnel -- somewhere in that magnitude. Can you talk about where you are at in terms of that level of staffing?

Well, I'll say and I will let George and John Lindsay, because both of those guys are leading that charge, but I'll say we've had experience in training folks for the first round of FlexRig deployment, so we -- again, we've been doing this for several years and have a systems that has worked well. We've I think been surprised and pleased with our ability to attract interest, attract qualified folks. People are very interested in being able to work on the best equipment out there in the field, but why don't -- George, you and John add something to that.

Let me make some comments about our present situation and I am going to ask John to make some comments about the training operation. Personnel are really a twofold question. One, how do you minimize the turnover in your present organization so it doesn't aggravate the task that you have in attracting new people? And to that end, in previous up cycles, we have seen turnover rates at H&P be as high as 90% annualized, all focused at the newest personnel in our Company -- the lowest skill positions. That doesn't sound good, and it's not good. I believe that is by far the best record in our business, which says that turnover rates are even higher in other places.

This year, our turnover rate for 2005 just ended was down to 52%, which again is high for some businesses, but in our business that is a dramatic improvement. It is down to 40% for the month of December. And what is creating that reduced turnover rate which allows us to focus our energy on attracting new people, and I think it is a number of things, but with the announcement of 54 new rigs, people know that with all of this improved business, they can stay at H&P with prospects of promotion and better jobs.

The second thing is the introduction of new equipment. There are many men in this business who have never worked around a new rig and they are attracted to H&P. And then our training operation will add to that. So we have been able to minimize turnover in the existing operation, and John will make some comments about the training organization that's underway.

We have -- we first of all have an excellent reputation in the field (technical difficulty) for attracting very good people, people who want to work in an environment that is safer. They want to work on new technology rigs and we've been able to do that. George mentioned the training. We bring these men in and spend several weeks training on the equipment, hands-on type training. We developed that with Flex3 and it has proved to be very effective.

We still maintain a large portion of the men that we trained over three years ago on Flex3. I believe it begins with our reputation. H&P has some of the best people, if not the best people in the business, and people want to work in that environment. And we continue to see people attracted to come to work on the new Flex4s and the Flex3s.

Thanks for the color. Last question would be on the FlexRig4, what are the manning requirements on the rig versus the FlexRig3? And are the operating costs any different, because I think that you may have one less person on that rig?

That's right. The Flex4 is a base four-man crew compared to a five-man crew, and of course the daily cost is less than a traditional rig.

Pierre Conner, Hibernia South Coast.

George, first, best wishes to you and congratulations on the impressive career at H&P. And congratulations to you John. First, Doug, just some mechanical stuff. The depreciation difference seemed to be a little smaller than I anticipated even with a 900,000 reversal -- or 700 excuse me. Could you give us a little outlook on the depreciation trend here?

That is a good question. The depreciation has held pretty steady because we haven't had much new construction over our fiscal 2005. We had a little bump up in depreciation in the fourth quarter of 2005, one because of the amount that you mentioned. We also just had some depreciation that ended in 2005, so when 2006 started, we were down some from that.

We are expecting for the year, with the anticipated new construction, that total depreciation will be in the $107 million range. So if you take away the first quarter, you're going to see quarters that range from about 25 million a quarter and ratcheting up to the $30 million range -- 30, 31, 32 a quarter.

Okay great. That is helpful. And I think on the G&A, I think you gave us the -- basically the only thing going on there is the difference in the accrual for the options expensing and of course for these last -- or these first two quarters a little difference, and other than that nothing else going on in the G&A side.

Well, it is a little different looking G&A and it's a little bit more complex when you're trying to accrue for bonuses and things like that. You will look at, I think, an increase in the second quarter for the stock based compensation. But in the third and fourth quarter, I wouldn't anticipate that it would necessarily drop below what we saw in the first quarter.

Okay great. Thanks. George, improvement in the cost side on the onshore land, and we talked about some of that might be mixed as well, but how are you getting materials and supplies, rope, soap, and dope actually coming down? Is it just -- or well, how is that?

In the fourth quarter of 2005, we had some maintenance issues. We had some top drive issues that were expensive on a couple of rigs and much of that was expenses. So really it was a onetime thing

Non-recurring.

(multiple speakers) Talked about it a little bit in our last webcast, but with the absence of those, we're back where we thought we would be. In fact, I think when we looked at maintenance costs over the last year, they have been relatively flat.

You're holding them. Good. On -- and this is kind of on Arun's question a little bit. I am trying to get a feel for where these rates were rolling. Maybe some description of the third of the fleet that is on a term basis, those 32 rigs -- can you characterize for us, George, a little of -- maybe how long they have been on term, are we halfway through the term? Are they terms you just recently signed and they're going to extend from here into nine months or one year timeframe? Just trying to get a feel again for modeling purposes of what rate of rollover does that third of the fleet have versus where it was contracted on term?

Okay, well the original total terms were -- they averaged 26 months. And today, we're down to 18 to 19 months remaining on those rigs.

Okay. And then are they pretty much all going to roll off, are [they termed] about the same period?

I think probably in 2007 from February, March through the summer, that will be the period of time.

Okay, that is helpful too. Thanks. And of course for Hans, so on the people side which is a great question too and it is a large expansion of the workforce, would you even -- if that becomes the difficulty in maintaining the progress you made on the safety record, would you even consider changing your fleet some? Do you have at all consideration that some of your, say, smaller [davit] mechanical rigs that you could -- you would sell those and take the personnel that you trained and [had been] H&P experienced, put them on the new fleet? How tight is it going to be? Would you consider anything different like that in order to man the growth in fleet?

We sure haven't talked about that, because in terms of scale what we believe we're going to be able to do and what we have to be able to do is attract new people to this business. We're paying wages that in fact allow us to do that. And then it's going to be on the backs of it a training program and then the training is more than just the front end training. It's also the mentoring and teamwork that we established on the rig floor. So what we're seeing, though, in having done this, we're seeing a nice flow of folks that I believe are going to allow us to man these new builds.

So again, it's going to be challenging. It is something we have put a lot of effort into, but it's not going to drive us to what you're talking about. That is another issue that of course we watch all the time. And we have -- we are looking at the fleet and one of the things that we are proud of it is the age and capability of the fleet that we're taking forward.

I have said to you before 75 -- more than 75 -- I think it's over 80% of our fleet has been built new since 1995, and so no one else can say that. We've got a fleet that is in great shape to go forward the next five to ten years, and so will continue to monitor that as well, but it won't be to solve our labor problems.

Okay. That's great. And the one last one really maybe for John too. George has set you up with a very impressive utilization onshore at 97% utilization here last quarter. How sustainable is that? Maybe some commentary about how many downtime days, are you anywhere near there? Mobilization seems to have stabilized now between regions. Is that effectively basically all you can get? Our how do you look at that John?

Well, every rig (technical difficulty) George mentioned rig 134 and it will go to work in the March, April timeframe. We only have one other rig that is not currently utilized and trying to decide what we're going to do with that rig. But as far as from an efficiency perspective, we will continue to see near 100% utilization. And we're seeing of course good turnaround times on [lobes] and I just -- I see us right at 100%.

Excellent. Very good information guys. I will turn it back. Thank you.

Mike Drickamer, Morgan Keegan.

Thanks guys. Not much left to ask after Pierre (indiscernible). Let me ask you, I know you get a little bit of pushback on the rates every time you bid a new contract. That is part of the dance, part of the negotiation. Are you seeing a higher level of pushback on the day rate increases now than you saw, say, three or six months ago?

Our customer base -- those guys do a very good job and part of their job of course is to keep rates down. And whether it's a $12,000 or an 18,000 or $26,000, their effort is to try to keep the rates as low as they can. I don't know that it's -- that there's any more pushback now than there was before. Those guys -- that's their job. Their job is to continue to try to keep their costs down.

But for us, the advantage that we have is the value proposition. And when you began to talk about well cycles and higher day rates, and as George mentioned, we're still drilling record wells. And when you compare 2001 to today and the larger percentage of our fleet being FlexRigs, we're delivering greater value a larger percentage the time. And so I don't believe -- let's just say we would get the same pushback as maybe some of our competitors that are not drilling -- continuing to drill the types of wells we're talking about.

Okay, even with the value proposition, you guys are getting a little bit higher day rate here. I think George said your current average day rate is now over $20,000 a day. You're just not running into people who say no, I can't make this well economic at this rate?

We -- it's interesting. I can go back a long way talking about day rates in that very response. And I heard that response at 12,000 and 15,000 and I think that will be the response. Again it's their responsibility to try to hold down the cost, but when you run the numbers yourself, if you look at it, it's pretty clear that the value proposition that we have is clear. And if you can reduce cycle times -- and we're talking about reducing cycle times in half, and of course the commodity price has been strong and the numbers are there. I haven't heard anybody say well, we can't take that rate and we're going to have to release the rig.

All right. I realize you guys don't really track backlog, but if you were to quote a new customer how long would it take them to get a rig, has the length of time required to get a rig, has that decreased?

No, not yet. For us to deliver a new rig with the ones we just committed, it is still on the order of one year from today. There might be one or two spots maybe in December, but it's really one year from today.

How about rigs that are already in your fleet? If I wanted to contract a rig that is already in your fleet, how long would I have to wait to get it?

John may have a better feel for that. It's a list that doesn't move. But -- John?

There's really not, that I can think of, any of our customer base that has plans to say in June, well my program is going to end, like we saw in previous cycles when their drilling budgets would be up in a June or September timeframe. We don't see that any more. And I don't expect that any rigs will be coming available anytime soon.

All right, Hans. So it sounds like not much is waking you up at night now.

I think we've got nice momentum going forward. And again, you heard us, Mike, talk about it a lot. But what we're focused on is the field performance and the safety and delivering the lowest cost well, so those of the things that we've got to continue to do well every day.

Robert Ford, Sterne, Agee.

Thanks. A handful of questions here. First, George, the day rate figures or the revenue per rig day figures that you quoted as of today, you said it was up $2071 since I am assuming November 16th? Was that the date you gave me?

That's correct.

Okay, so we've had a market reacceleration in day rate increases over the last 75 days. Okay good. Jumping back to your cost side domestically, I missed the number -- I think George, what did you say your R&M cost did sequentially?

It went down 300 -- I have to (technical difficulty) -- it went down -- $312 today.

Okay, and your training costs -- the $250 that you mentioned, George, is that incremental to today?

No.

It will increase by 250?

No, it is 100 -- say $100 today and we expect it to go to 250. And I don't really want to get into all the details on this. But as we have said in previous webcasts, Robert, we -- with our Flex3 experience, we knew we were going to have training costs, and we put that into each one of our pricing for the contracts. So while we are expensing on the front end here, we will see that coming back later in the contracts. And we won't talk about it, but there will be a positive cash flow that comes out of the moneys that we have set aside for this.

We can't capitalize any of this. It has to be expensed. But the money has been provided for in the budgets and it's there, so -- again it's a (inaudible).

That's a good reminder. I will have to go forward in 2008 and add -- take the cost down by a like amount. Rig 134 starts when?

March, April timeframe.

Okay. And last one, George, the one we talk about and wrestle with every quarter, international land rig costs down big-time sequentially. Last year, they averaged about 14,000 a day and we averaged about 13,500 in the December quarter. Should -- over the -- and I know they are going to jump quarter to quarter. George or John, over the next year or two, should I be thinking 14,000 a day or should I be thinking a little higher or a little lower there as kind of my bull's-eye?

We're thinking that the 14,000 range is appropriate.

Okay. And then the revenue per rig day also jumped up pretty nicely sequentially. Anything in there unusual, one time? Or is that kind of the base that we now work off of going forward?

We believe that is going to be the base going forward. We also, as we mentioned in the comments, we have some better news out there. We have three rigs that are working and we should see the full impact of those rigs during the second quarter, so that is some encouragement that indicates that perhaps we're going to see a better level of margins out of the international rigs.

Okay. Great. That is all I have. George, congratulations. I really enjoyed it and enjoy your time.

Waqar Syed, Petrie Parkman Company.

Great quarter, gentlemen. I have a couple of (indiscernible) questions first. The day rate that you quoted for [today] when you -- the rate 21,622, is that the day rate or is that 70 per day as of today?

That is the day rate, Waqar. So again as you pointed out, there is a difference between that day rate and the revenue figures that we quoted earlier.

Okay. And secondly, in the press release, I -- the way I read it, I understood that you will be at a rate of building four rigs a month by the end of September 2006, so early October. But in, George, your comments, I understood that maybe around July, June/July timeframe you thought that they could be -- you could get four rigs a month? Could you clarify that a bit?

We can make some comments on that. Let me ask Alan to comment on the construction program.

As George said in his comments, we're going to average two rigs per month here, and then three rigs per month in the spring, and up to four rigs in the summer. Right now, our schedule, we're looking at those four rigs coming in in June.

Now are you seeing any kind of cost escalation in your -- in the program? Or you think that you can still -- the cost that you initially thought that [at best] you could build these rigs, you still feel pretty good about those numbers?

The answer to that is yes and yes. We feel like we're going to be able to deliver these rigs on budget, but we have seen continued pressure on all outside purchase components. And we expected that; we planned for it. And the rates that we have been bidding on these later contracts have been higher to compensate for the increased investment. So again, we expect to deliver all of the rigs on each individual budget. The rates will be going up throughout the building cycle to compensate for these increases in the acquisition of components.

And the last four rigs that you announced, the 51 to 54, how many of these are FlexRig3s and how many FlexRig4s? And what is the cost to build these rigs?

Two each of each type, and as far as the cost, let me take a look -- sorry.

Sorry. This is Juan Pablo. The estimated cost that we have for these latest rigs for the Flex4s were around 10.4 and for the Flex3s were around 14.6 (multiple speakers) million.

Okay, and are you placing them on the three year contracts or two year contracts?

Three year contracts.

Everything today has been three year firm, with the exception of two or three -- four rigs on three year -- on four year terms.

Right. Okay. Now, since -- since you announced your program to build rigs, that was sometime in the middle of last year, some of your competitors have now announced they are going to be building some rigs. Are you seeing additional competition when you're now bidding for new jobs? Or you think that it has not changed and the situation is pretty similar to where it was twelve months ago?

We're seeing competition and some of our customers are in fact contracting rigs from other contractors. And I think on one hand, that's good because we want to see other new builds in the market. We think it's good for the business. So I think we feel very good about what we have contracted so far. We see opportunities to contract additional ones even with the competition there.

I think that what people see is a proven record for the FlexRigs. As Hans mentioned, over 200 rig years of experience. Over 80 rig years alone for FlexRig3. So that continues to encourage people, to give them some comfort and satisfaction that they're going to sign up for rigs, the design, and also the Company behind it that's going to be able to produce. So again, the competition is there. It's good for the business, and I think we're going to do very well with respect to it.

Can you ramp your program -- rig construction program up from four rigs per month or you feel pretty happy with that kind of level?

I am sure we could, but at the present time we have bouts of exhaustion in coping with the workload ahead of us. And it is a broad program. It's not only the rig construction and procurement operation that's going on. It's the attraction of people, the training of people, and finally and most importantly, combining those to deliver on the expectation of both H&P and the operator. So at four rigs per month, I think that we have our hands full. It could be that we will see we can go beyond that, but for the present time, we're very comfortable with what we have.

And based on your current schedule, when would you deliver your 54th rig?

Second quarter of 2007.

Okay. And then final question, that is for Doug. The $500 million capital budget, how much of that is maintenance cap and how much is new construction cap?

I don't have the numbers in front of me, but as I recall, 370 million of that relates to the FlexRig3s and 4s that have been announced. The maintenance CapEx is probably in the $40 to $50 million range. And then I'm sure in that budget we had some estimates as to refurbishments and other items, but the 370 kind of sticks out in my mind as the 2006 portion of the FlexRig construction.

Okay. Well, just one more question if I may ask. How much would it cost to refurbish this (indiscernible) rig that you will be reactivating?

I'm trying to remember. It's not on the tip of my tongue. I think it's $6 million for a rig. That is the total refurbishing bill and there are a lot of other comments that go along with it, but it is a rig that with returns in the United States, it has worked in this century, but it really needed some substantial reinvestment.

Graham Madison, First Albany Capital.

Good morning. Just had a question. Are you getting any pushback from operators on the term contracts for the new builds, in terms of -- are they looking for longer or shorter terms?

There really hasn't been a lot of pushback of late. I think that they understand it's an expectation and that we weren't going to make a long-term investment without having that return. We really haven't had any pushback. There has been a few customers of course that have said rather than three year, we prefer to have four year recognizing even if they wouldn't take a rig delivery until 2007, but we really haven't had that much pushback.

Okay. And then in terms of the competitiveness in the field, the number of competitors coming out with new rigs, have you seen any competition or sort of your employees looking to move to the other rigs that might be as new or as safe?

We really haven't seen that. We have been very fortunate. Again, we have a great reputation. There is competition out there that wasn't there before, but up to this point, haven't seen it as hurting us at all as far as attracting and hiring quality people.

The only exception to that might be -- we've seen for the first time in several smaller cycles the interest of the operator in buying his own rigs. And in one case, that has presented a problem for us. In terms of other contractors introducing rigs into the market, yes, it certainly puts a strain on the entire labor supply. But as far as H&P, we have not felt the impact of that so far.

Thank you very much.

(OPERATOR INSTRUCTIONS). Jason Pondraza, Howard Weil.

All of my questions have been answered. Thanks. Good quarter guys.

With that, I would like to turn the conference back over to the host.

Thank you very much for joining us today, and if there are no other questions have a good day. Bye.