Helmerich and Payne Inc (HP) 2006 Q2 法說會逐字稿

Good day and welcome to today's teleconference. At this time, all participants are in a listen-only mode. Later, there will be an opportunity to ask questions during our Q&A session. This conference may be recorded.

I will now turn the program over to Vice President and CFO of Helmerich & Payne, Inc., Mr. Doug Fears.

Good morning, everyone, and welcome to Helmerich & Payne's conference call and webcast to discuss the Company's second-quarter earnings. With us today are Hans Helmerich, President and CEO; John Lindsay and Alan Orr, both Executive Vice Presidents of the Company's wholly owned subsidiary Helmerich & Payne International Drilling Company; Juan Pablo Tardio, Manager of Investor Relations; and I am Doug Fears, CFO and vice president.

As always, there will be forward-looking statements and estimates made today. We will also be rounding some numbers in hopes of adding some clarity and brevity to our comments.

We attempt to be as accurate as possible with our comments and information that we provide, but it is important for you to know that much of the information provided involves risks and uncertainties that could significantly impact stated results. There is a complete discussion about this in our public filings, the most recent of which is our 10-K filed on 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. reported record net income of $64,573,000 or $1.22 per diluted share. Our revenues were $290,830,000, this for the second fiscal quarter ended March 31. This compares with net income of $22,350,000 or $0.43 per diluted share from operating revenues of just above 185 million during last year's second quarter. Included in this quarter's net income were gains from the sale of portfolio securities and drilling equipment of $0.04 per share for this quarter and $0.01 for the second quarter of '05.

For the six months ended March 31, the Company reported net income of $115,387,000 or $2.18 per diluted share from operating revenues of a little over 0.5 billion. This compares to $1.20 for the six months of last year on revenues of over 360 million. Included in last year's net income -- I'm sorry, included in this year's net income were portfolio gains and drilling equipment gains of $0.08 per share and last year's six months of $0.44 per share.

Before Hans, Alan and John make their comments, I'd like to touch on a few items within the financial statement and provide an update on our stock split plans. As we mentioned in the last quarter's announcement and webcast, the first fiscal quarter was the first quarter that Helmerich & Payne was required to include stock-based compensation expense in its P&L. And that totaled 2.7 million of the 11.9 million of G&A expense. The second-quarter total for stock-based compensation was 3.9 million, and the estimate for the third and fourth quarters is 1.6 million for stock-based compensation expense. Just to help a little bit, we are guessing that for both the third and fourth quarters, we expect G&A to be in the range of about $12.2 million.

Secondly, we mentioned in the announcement that during the quarter, we sold our one idle U.S. land rig, which was a mechanical rig that we brought back from Bolivia about two years ago and which did not fit our fleet profile. Most all of the income from asset sales recorded in the P&L represent the gain from the sale of that rig.

On the balance sheet, you should add the cash and cash equivalents total of 195 million to the short-term investment total of a little over 81 million to get our total cash liquidity at the end of the quarter of approximately 276 million.

You will note that through the first six months, our capital expenditures were a little over 170 million. We still expect to finish the year with approximately 500 million in capital expenditures.

The Company now owns 2.3 million shares of Schlumberger and 4 million shares of Atwood as a result of stock splits in both those companies. Those positions, along with other minor positions, bring Helmerich & Payne's current value in our portfolio to just under 400 million or a little over 250 million of after-tax value or about $5 per share.

As previously announced, the Company will hold a special shareholders' meeting to authorize additional shares to facilitate a two-for-one stock split. The special meeting is now scheduled for June 23. Assuming shareholder approval of the authorization, the split will take place on July 7 for shareholders of record on June 26.

I will now turn the call over to Hans Helmerich, President and CEO.

Thanks, Doug. Since our last webcast on January 26, we have seen energy markets continue to make headlines. We hear almost daily about higher and higher gasoline prices. We are all concerned about serious geopolitical issues in Iran, Nigeria, Venezuela, Russia and other oil-producing countries. The market seems to be betting that the risk of a supply disruption trumps what has been a significant build in oil inventories.

On the natural gas side, inventories are the main story after a record-breaking warm winter. Gas prices have dropped in the short term, but appear remarkably resilient for the long term. All of this is to say we are faced with serious long-term energy challenges that will continue to drive a long cycle.

That is why we believe our customers remain committed to the long haul, as evidenced by expanding drilling expenditures and a very strong rig demand. That strong rig demand helped produce another record quarter for the Company. All of our drilling segments showed improvement, led by our U.S. land operations, where average cash margins increased by $1548 to $12,567 -- a 14% increase per rig day. John Lindsay will discuss our operational performance in just a minute.

Our new book order continues to increase. We have now secured long-term contracts for a total of 61 new builds -- 13 Flex3s and 48 Flex4s. Looking ahead, we continue to receive active inquiries about additional new-built orders. Early field performance achieved by the Flex4s should further influence and drive customer interest.

Not surprisingly, the strength of this current upcycle presents its own set of challenges. Our aggressive growth ramp, a 68% increase in our land fleet, U.S. land fleet, means that we must successfully attract nearly 1200 additional employees, as well as defend and retain our current folks in a tight labor market.

Labor is just one example. We are seeing cost pressures across the board in both our operations and manufacturing effort. We've seen these conditions in previous upcycles, but we'd point out a couple of differences. First, both offshore and now onshore drilling fleet are undergoing significant expansion simultaneously. And second, last year's hurricanes brought added pressure to bear to an already tight labor market.

In terms of our manufacturing effort, as we mentioned in our release, we're now estimating up to an average of 13% higher than budgeted capital costs for 30 rigs scheduled to be delivered through the remaining of this fiscal year, September 30.

I'd like to ask Alan Orr to add a few additional comments at this point. Alan?

Thank you, Hans. Hans mentioned we are projecting a 13% overall increase to total construction costs for the first 30 of the new-built rigs. This increase is attributable to higher costs than originally estimated for the following -- basic steel fabrication, rig assembly, commissioning and testing, uneven production cadence due to prototype design issues, overtime and rework, manufacturing of the industry's first mobile land rig, no-touch tubular handling system.

As Hans stated, most of the higher costs result in the stronger than expected industry upcycle and hurricane hangover. While those forces were unexpected, we are seeing at this stage of our efforts positive similarities to our earlier FlexRig3 manufacturing effort. FlexRig3 construction effort experienced similar earlier cost overages, then costs declined as later unit cycle times were reduced and the production cadence smoothed.

We're now making real progress in our manufacturing mode. Implementation of lean manufacturing principles with our subcontract steel fabricators close to hurricane [RIGA] workforce is producing positive results in terms of reduced component fabrication cycle time and cost.

There are now five new-build Flex4s working and we expect to deliver five or six more rigs before the end of May, followed by five or six more rigs in June. We now have progressed through the prototype design and fabrication learning stage and have a clearer visibility toward a steadier cadence per month. Again, the FlexRig3 construction project experience assures our support for this visibility.

As previously communicated, approximately 30 new rigs are scheduled to be delivered before the end of September '06. The new rigs in the field have created very early positive results. Let me give you some examples.

The new generation enhance rig control system has been virtually trouble-free compared to the early Flex3Rigs' control systems. The new H&P [dry works] FlexHoist has performed flawlessly and is less than half the cost to H&P compared to purchasing finished product from traditional suppliers.

The bidirectional steering system for the H&P Flex4s has proven its capability to move from well to well on pads with two rolls of wells in minimal time. The utilization of the Tesco casing running tool on the rigs has provided enhanced personnel safety and reduced personnel on location, while providing potential to rotate and circulate to assist in running casing strings to bottom.

The earlier experience with our [central five] Tesco topdrive has met expectation. The no-touch tubular handling system has been an engineering and manufacturing challenge and is still being refined. However, based on earlier experience, the system's potential overall value in terms of safety and efficiency is intact.

Notably, none of the new rigs have used manual tongs in their operations to date. The first rig with the VFD powered PLC controlled air drilling system is on its first well and thus far has performed well and has been problem-free.

We look forward to continue improvement of Flex4 field results and believe that our commitment to the H&P brand and value proposition will be strengthened. Hans?

Thanks, Alan. Well, we are proud of our early Flex4 operational performance and the innovation that they provide customers. And we are working hard to cope with these cost pressures going forward. As we estimate the financial impact of these increases, let me remind you that in light of when these first 30 rigs were contracted, they provided a return on invested capital of slightly less than 20%. Adjusting for these increased costs, these returns are still in the high teens for these 30 rigs. And more importantly, our entire order book of 61 rigs still deliver returns over 20% in terms of return on invested capital.

We are convinced we still have a compelling business model and we're pleased with our performance for the first two quarters of 2006. As we go into the second half of 2006 and look forward to 2007, we are confident that we will be able to enhance and grow the FlexRig brand. That means building on our organizational strength to execute in the field above the customers' expectations and through innovation, safety and lowering overall well costs for the customer.

Now I would like to ask John Lindsay to make some comments.

Thank you, Hans. Drilling operations, which includes land, offshore and international operating segments as shown in the segment reporting and the press release, reported the third consecutive record level of segment operating income for this quarter at 103.3 million, as compared to 85.4 million last quarter. The 18 million improvement was driven by all three operating segments -- U.S. land, 11.9 million; international, 3.8 million; and U.S. offshore at 2.3 million.

The U.S. land rig count and day rates continue to escalate and the customers' interest for new Flex rigs remains very strong. As Hans mentioned, the 61 new FlexRigs announced represent a 68% expansion on our December 2005 U.S. land rig fleet, and all have firm three- or four-year term contracts. The 55 operating FlexRigs working in U.S. land worked at an average daily revenue and margin of $23,614 and $13,310, respectively.

I would like to address costs for a moment. First, I want to assure you that we are continuing to focus on controlling our costs. We have an excellent supply chain process and our people are using good practices and controls. Our U.S. land rig operating costs increased by $847 per rig day, a 9% increase compared to the previous quarter. Daily maintenance and supply costs increased by 12% or $277, while daily labor costs increased by 3% or $155. Other daily costs increased by 41% or $415.

Today, H&P has 100% activity from 94 land rigs available in the U.S. Our average day rate for all U.S. land rigs is $22,847, an increase of $1225 when compared to $21,622 on January 26, 2006, which was the date of our last webcast. Approximately two-thirds of our existing U.S. land rigs are participating in the spot market.

H&P's offshore operations have seen increasing demand for the services we provide, resulting in nine of 11 rigs contracted, including Rig 201, and eight are on full operating rate. This has generated a 20% increase in operating margin per day compared to the last quarter.

As previously discussed, Rig 201 is undergoing repairs after Hurricane Katrina and is not expected to contribute to operating income until the first fiscal quarter of 2007. The two idle rigs had been bid on several projects. We have two management contracts that have remained active during the quarter, one in the Gulf of Mexico and the other offshore California.

Our international operations have also seen improving activity in rates. Today, 26 of 27 international land rigs are contracted in South America. Two of these 26 rigs are mobilizing and scheduled to begin operations in the third fiscal quarter of 2006.

The second quarter experienced pricing improvements for many of the 24 active rigs, and we expect to see additional pricing improvements on other remaining rigs in the third and fourth quarters. Additionally, the fourth quarter will reflect the 26 rigs with a full impact on operating earnings. The one idle rig has been bid on several projects, but it is not anticipated to affect 2006 numbers.

In addition to H&P's South American rig operations, one management contract remained active in Equatorial Guinea during the quarter. The Company continues to pursue other international opportunities.

Talk about safety -- our customers and our employees value what a strong safety culture brings to H&P. And we believe safety performance is the best proxy for total contractor performance in the field. I would like to cite an example for each of our operating areas.

H&P's international operations surpassed 2 million man-hours in April without a lost-time incident and have reached this milestone four times since 2000. U.S. offshore operations reached 10 million man-hours and five and a half years without a lost-time incidence in March of this year. Our U.S. land operations completed the first calendar quarter with the best-ever safety record, or a total reportable incidence rate of 1.41. That is an achievement that is 78% better than the IADC or the industry average for 2005.

To deliver best value to our shareholders and customers, we are 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 some examples.

Three H&P Flex3s have drilled a total of 48 wells for a super major in the Rocky Mountains since 2003. The drilling times have been reduced from 67 days to an average of 29 days, which represents a 56% improvement. It is this standard of drilling and safety performance that continues to motivate operators to replace their existing rig fleets with H&P FlexRigs.

The first five new FlexRig4s are in the field and have operated incident-free in both the construction facility and in the field. The four rigs working in the Piceance Basin have experienced marked drilling efficiency improvements. I have discussed early performance with our customer and they mentioned 10 to 40% efficiency improvements. Granted, it is still early in the project, but we are optimistic about the future.

The 32 FlexRig3s built new from 2002 to 2004 continue to set the industry benchmark in field performance and pricing, with an average daily revenue and margin in the second quarter of $24,441 and $14,771, respectively. Today, 17 of those 32 Flex3s are working at day rates of 27,500 or higher. Our experience and proven ability to deliver substantial well savings to our customers with new FlexRigs will allow H&P shareholders to take full advantage of this extended upcycle. We are fortunate to have 55 FlexRigs in the field today and at least an additional 56 new FlexRigs deliver over the next 15 months.

I'll turn the program back to Doug.

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

(OPERATOR INSTRUCTIONS). Arun Jayaram, Credit Suisse.

Guys, over the last two quarters, your U.S. land rigs day rates have increased by about $4000 and the margin are up 3250. I was wondering if you could compare what the FlexRigs have done over the last two quarters relative to the rest of the fleet?

We are saying if we have that broken out, Arun. Just a sec.

And Arun, you are asking about the FlexRig3?

Yes, just trying to understand if you're seeing a greater increase in terms of margin expansion for some of the premium rigs in your fleet versus the other rigs.

Keep in mind that the Flex3s were probably earlier to have the higher increases. What we have seen lately is a little bit of catch-up, if you will, on some of the conventional rigs. We are seeing those rigs increase in pricing. As we've said, we've got 17 of the Flex3s that are over 27.5 or higher right now. But as you can imagine, there is the tail of the rest of the rig fleet, whose rates are beginning to increase. So it is kind of hard to say exactly. But I would say they are starting to catch up. The other rigs are starting to catch up.

I guess the second question, Hans, Ken and I have received a lot of questions I guess regarding Venezuela following the article in the Wall Street Journal on Monday. Can you just remind us, in terms of Venezuela, how many rigs do you have working for Pedevesa versus other operators? And have you seen any change in customer behavior regarding Venezuela regarding the tax situation?

Arun, we've got all 11 rigs working for Pedevesa. We've got 12 down there. We are following the same news you are and you keep waiting to see something positive come out in the press about Venezuela, and so far he's not on that kind of streak. He's on a negative streak.

But I do think there's a difference between how the oil companies are being treated. And if you remember, if you go back three years ago or so, they had a very aggressive plan to ramp up production by 25 or 30%. And as part of that, they tried to attract outside investment, outside international oil companies. But all the bets are off now in terms of that goal, and we have watched their production fall.

But I just wanted to distinguish, to make a distinction between the position the oil companies are in and the oil field service providers. As Pedevesa has lost headcount, we really are providing a service that is more and more valuable to them. And so I think that it does make our position a little bit different.

I don't want to oversimplify that. I don't know if I mentioned -- all 11 rigs are running for Pedevesa. And so it is a situation where we are continuing to watch it. I think at the same time, we are seeing better results out of Venezuela. Our receivables are in good shape there. So I think it is steady ahead.

Then last question -- can you give us some guidance in terms of margin expansion this quarter? Do you continue to expect your margins to be up over $1000 sequentially in the U.S.?

Well, as you know from following us a long time, and in earlier conversations, we really have not tried to predict that. And if we had tried to predict it, it would not have had nearly as positive an outcome as we have seen over several quarters. It has outstripped our expectations.

I think at the same time, we can say -- so won't try to peg it for the third quarter, but at the same time, we are still seeing very strong rig demand. And as we've talked and others about, well, have gas prices scared off any customers, we've said that we haven't even gotten the first phone call in terms of a line being drawn in the sand, and in fact we're getting calls in terms of, hey, if there are available rigs, we still are adding to our rig count in order to execute on our program.

So, I think what we are seeing, Arun, is continuing momentum going forward. I would have thought at each one of these places that we would see it flatten off. And at some point, we will be right and it will flatten off. We just can't make that call today.

Pierre Conner, Capital One.

John, first, for you, a little bit -- a question on some of the cost and rate data on the U.S. land side. So was any of the increase in operating costs passed through such that some of that is showing up in the increase in daily revenues?

Yes. I will give you a little bit of background on that. On M&S costs, as an example, our M&S over the last 15 months are up 15%, which tracks right on target with the producer price index of 15%. And we have the ability the pass those costs through on term contracts as well as capture those, of course, in market increase. So yes, those costs are covered. On labor costs, most if not all of our labor costs are pass-throughs in all of our contracts. So yes, those costs are passed through.

Now, the other is a fairly large percentage. And so maybe that by definition is just other. But is there any one piece of that that we should be aware of relative to expectation of its continuing either at that level or that kind of increase?

We don't expect that we are going to see that. But I want to keep in mind, it's kind of hard to get your hands around it, but the other account is made up of several different moving pieces. I will name five -- insurance, property taxes, field office overhead, rentals, miscellaneous trucking -- you kind of get a flavor for that. And then add another 15 or 20 in there. So there's an opportunity to have that. But overall, no, we don't see a large fluctuation in those costs.

And I'm sorry to dig into this in so much detail, and you can pass me on to later if we need to, but between the average day rate at the time of the last conference call and the average revenue per day secured during the quarter, it was a nice increase. And I wondered if there were any moving parts in there relative to your ability to pass on mobilization costs or anything of that nature in the current environment?

Well, mobilization costs are 100% pass-through. And typically, I mean, there is cash flow involved in mobilization in this market as compared to previous markets.

So it is a positive, net positive. Great. Just two more quick ones, then, on moving on to offshore. The nice improvement in the daily revenue per rig -- looking for some guidance on sort of when that came in during the quarter. Basically, what does that number look like for the next quarter? Are all the increases effective during your second fiscal, or is it something that because it came in late we should see further follow-through on the increase?

The quarter reflected full -- in the first quarter, there were two rigs that spent half of the quarter moving and half of the quarter operating. In the second quarter, those two rigs had a full quarter operating and then a third rig that was in mobilization. So this quarter would see that third rig, a good portion of the quarter operating.

So that should be a net positive?

Yes.

And then again, lastly, on rates, you mentioned additional pricing in international to show up in third and fourth. So of course, looking for some perspective on that. A couple of percent type sequential?

We've talked about that and, again, we've talked about giving guidance. But if you look at it, we think that by the fourth quarter, we could see some increases -- another thousand dollars a day in the fourth quarter.

That is helpful, John, thanks. And then Hans, can't let you get away without some questions. So first, on the economics of the new builds relative to the cost increases, and I think if I look back at some information, you talked about needing $11,000 a day margins to get you north of 20% returns on Flex3 program. Is that still the number, with margins here -- we're still well in excess of 20%. With this cost increases, has that moved that bar up significantly higher?

Well, I think we have done a lot in those contracts, as you know, to protect margins. And so what we are really trying to speak to here is does the -- and we have addressed the first tranche of 30 rigs -- does the price increases do undue harm to our returns?

And as I mentioned, it dials it back a couple of points on the first trance, but then we end up -- and what we have typically done, Pierre, as you know, is talk about our whole order book and a business model that provides over 20% return on invested capital for the order book. And that is still intact. So again, we don't think of it as good news. But we are working hard on it, and I think it keeps us in a place where we still have a very strong model.

Great information. And lastly, big picture -- anything to report relative to progress in Russia?

Well, we have been involved over there and have people on the ground over there. We have a couple of outstanding opportunities -- outstanding meaning we don't know if we are going to get them or not. And so that is still the status today. And we are waiting to hear back. That's still a market we have got long-term interest in. But there really just isn't anything to report.

Nothing in the near term?

Yes.

Mike Drickamer, Morgan Keegan.

Hans and Alan, talking about the increased costs of these new builds here, are we seeing any delays or any additional delays in the delivery schedule?

I think Alan touched on it in his comments -- we've got four out in the field, Michael, a fifth one ready to go. That, as you know, because we've talked to people over the months, represents a delay. Some of that was anticipated. What it means is we will push hard to ramp up to a four rig per month effort sooner than we had earlier talked about.

We've got an opportunity to do four or five rigs in this next month. So all of that is with the target of 30 rigs out by September 30. And we are fighting alligators to make that happen. That is going to be a real effort. But we are already seeing, and Alan has touched on it, some nice progress.

And there's a certain cadence, and we experienced this in our earlier manufacturing effort, that you get those initial prototypes out, you get some things debugged, and then you do enjoy a certain cadence and momentum that we are beginning to see now. So we do not want to pull back from that target. But you need to know it is going to be a challenge.

And then Doug, for you, with the higher costs, can you give us an update on your guidance for depreciation?

Well, I think in the past, we have said something like 107 million for the year. Depreciation is a tough one to estimate exactly because you've got so many assets in there that are spun off -- you've got drill pipes that are coming off different periods.

My guess would be that just because of our own inaccuracy and for no other reason, you might see our depreciation estimate come down a little closer to between 100 to 105 million for the year. Just now that we're down six months and we see we've only booked 46 million, I think, for total depreciation, I don't think we will make 107.

And then Doug, the tax rate for the quarter came in a little bit lower than what I expecting. Was that related to the strong international performance?

In a way, it was, but really more importantly to that number coming down was the ever-increasing percentage of U.S. income in the totality of things. We just incidentally had a better tax rate quarter for international as well. But when you got such an increase in the percentage of U.S., it's going to pull you closer to a rate that over time probably for the year will average closer to 38%. It was down a little bit in the quarter because I think we overestimated a little bit for the first quarter. So there was a little adjustment factor in there.

And then on the operating costs, U.S. land operating costs -- you know, the big other, the $400 -- was there anything in that operating cost that maybe is one-time, some kind of accruals or anything?

I don't know that you would call it one-time. We probably had a little higher insurance accrual for that -- well, not probably, I know we had a little higher than normal accrual for insurance in there. And hopefully, that will come down in the quarters. You always hate to say that it will, not only because you don't know that, but also you've got other costs that are moving in there. But yes, there was one number in there that we hope will come down in the third and fourth quarters.

Hans, I know you are trying to get away from giving some guidance on this operating margin. Perhaps we can just talk about the cost side of the margin. Do you think what we see here as a daily operating cost -- is this sustainable? Should we expect further increases from here and maybe the magnitude of the increases from here?

Yes, we talk a lot about that and look at it internally. I think that we can expect continued labor pressure this year. I think that John mentioned our supply chain management -- that is producing results. We think that that will be somewhat of a counterbalance. But we are just in an environment, Michael, right now where we just have pressure from lots of fronts. I think we're doing a good job in having that captured in increasing day rates and trying to protect the margins. But it is just difficult to provide a line of sight much beyond that.

Do you have any wage hikes planned at this point?

We don't have anything on the ground except that is something, as you know, I mean, we watch that every week. So if we are going to be responsive to that, we've got people that are the best in the business that we have every intention of retaining and building on. And so I could say, no, we don't have a plan for that, and then next week we would be responsive to something like that.

Last question, then. A lot of the offshore operators, especially those in the Gulf of Mexico, jack-up operators, have talked about the higher insurance costs, some even separating out the windstorm damage. How is your offshore insurance rates looking?

It's going up. I will let Doug mention some --

You are right, Michael, it has been an interesting thing to watch. Interestingly enough, our renewal was right after the hurricanes, and I think we actually got away with better premiums having to renew at that time than the ones that have had to renew since that time. I think the insurance market continues to assess just how much money has been lost there. And so there's been some very, very -- rumors of high renewals out there in the oilpatch, as you probably have heard.

So the bulk of our renewal doesn't really come until late in the summer. And we are certainly doing all we can to address those situations, not only in terms of lowering our premiums, but also getting operators to share in the cost.

Some of those costs do pass through contractually.

Right.

Waqar Syed, Petrie Parkman.

What is it costing you to build these last two rigs that you announced today?

Well, what we have done, Waqar, is not break that out. And it is really because of competitive considerations. So we don't want to disaggregate a lot of information on that kind of data.

And could you tell us which regions those rigs are going to go to?

You know, thinking about -- before I leave that first question, I mean, we have said that the Flex4s now are approximately 12 million and the Flex3s we see prices of around 15. So that gives you a general idea.

John, do you want to speak to the destination of the last --

These first rigs have all gone to the Rockies.

I mean, the last two that you announced today that you are building -- they are going to go to the Rockies?

Yes, they went to the Rockies. Did you hear me, Waqar? They are going to the Rockies.

Yes, they are going to the Rockies. Okay. And now you announced that the 30 rigs that you will be building this year, this fiscal year, the cost escalation there is about 13%. What do you see for the rigs -- the remaining 29 rigs that were originally scheduled to be built?

So you are saying, after the 30, what is the impact on the remaining 31?

Right.

I think what we are able to see today is that we bring those back in at budget. And so that is partly a function of being able to work through some of these cost pressures. That's partly a function of as we have signed up the latter rigs, they have higher cost estimates.

And now in your future contracts, would you put in clauses for pass-throughs, cost pass-throughs, if the construction cost goes beyond budget or you can't cover those?

You know, we have talked about that internally, but again, I don't want to on this call give people all of our contractual negotiation ideas.

That's fair. The other thing -- your margins overall average about 12,500. What is the average margin for the 50 or 60 rigs that you are building? Is that higher -- or if you don't want to give the number, is it higher than 12,500 or is it below?

Our guys are looking at it. But we again don't put that information out, Waqar.

Can you say if it is higher or lower or--?

I can say we like it. I can say it helps drive that 20% return number. Waqar, you have probably asked us this before. So I just think that it's best if we don't try to give too many details.

Robert Ford, Sterne, Agee.

I am going to come at it from a little bit different direction. 13% increased depreciation on the annual basis, assuming 15 years' depreciation per rig, I come up with, what, $2.6 million. Is that what you guys are coming up with?

Well, Doug has got his model over here, Robert, but I don't know that we can confirm that is our exact number.

Just one other question. Everything else has pretty much been taken care of. I just want to reconfirm that you said what I think you said, and that is that the leading-edge day rates on the rate of increase is still pretty much what we have seen over the past couple of quarters -- it hasn't really slow down at all. Is that correct?

Yes, we just aren't seeing real-time evidence of a slowdown.

(OPERATOR INSTRUCTIONS). It seems we have no further audio questions at this time.

Thank you for joining us today and have a good day. Bye-bye.

Ladies and gentlemen, this does conclude today's call. Thank you for participating and have a great day.