Helmerich and Payne Inc (HP) 2007 Q1 法說會逐字稿

Good day. [OPERATOR INSTRUCTIONS] At this time, it's my pleasure to hand the conference to your moderator, Doug Fears, Vice President and CFO of Helmerich & Payne. Go ahead, please, sir.

Thank you very much, and good morning everyone. Welcome to Helmerich & Payne's conference call and webcast to discuss the company's first 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, and Juan Pablo Tardio, Manager of Investor Relations. As always, there will be forward-looking statements and estimates made today. We'll also be rounding some numbers in hopes of adding some clarity to our comments. We intend 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 risks and uncertainties that could significantly impact expected results. There is further discussion about these risks and uncertainties in our public filing, the most recent of which is a 10-K filed December 13, 2006. You may obtain this filing along with today's news release on our website at hpinc.com.

This morning, Helmerich & Payne reported record net income of over $110 million, or $1.06 per diluted share from operating revenues of over $386 million for its first fiscal quarter, ended December 31, 2006. That compares with net income of just over $50 million, or $0.48 per diluted share, from operating revenues of over $255 million for last year's first quarter. Included in net income were gains from the sale of portfolio securities of $0.15 per share for this year's first quarter, and $0.02 for last year's first quarter. Before Hans and John make their comments, I'd like to touch on just a few details, few financial details. As we discuss our growth and earnings during today's call, I want to remind you that the announced earnings for our previous quarter -- the September quarter -- totaled $0.93 and included $0.05 from gains from the sale of portfolio. So the $0.88 of operating earnings was also positively impacted by a $0.12 per share adjustment to deferred tax accounts in some of our international locations. So when you compare this quarter's earnings and exclude portfolio sales, or $0.91 a share, that number should really be compared to $0.76 per share for the fourth quarter of our fiscal 2006, or about a 20% increase. Another way to look at our earnings growth would be as we stated in the third paragraph of the announcement today, where we noted that there was also a 20% jump in pre-tax operating profit for the company from the fourth quarter of 2006 to the first quarter of 2007. As we will be discussing more in detail during the call, much of this increase came as a result of a slightly over 1000 activity dates being added during the quarter as a result of our new-build FlexRig program. We expect our new FlexRig construction program to add 900 to 1,100 activity days per quarter for the rest of this fiscal year.

As of December 31, our stock portfolio had a market value of $322 million. Currently the market value is approximately $310 million, with an after tax value of slightly over $200 million or $2 per Helmerich & Payne share. During the December quarter the company sold 500,000 shares of Schlumberger. Our capital expenditures for the December quarter totaled a little over $187 million. As previously discussed we estimate that our 2007 capital budget will total approximately $750 million. The company has secured a $400 million line of credit which will help fund capital spending in excess of our cash flow and security sales. I will now turn the call over to Hans Helmerich, President and CEO, and after Hans and John have made their comments, we will open the call for questions. Hans?

Thanks Doug, good morning everyone. We are pleased to report another record quarter. It's come in the face of concern for the future direction of natural gas prices. The first half of the winter started out 15% warmer than normal contributing to an ongoing uncertainty about how land rig markets would be impacted as we head into 2007. Even with the weather beginning to cooperate, we have already seen increased push back in the land drilling markets. We know now that industry activity rates are down and day rates are under downward pressure. We don't know how the severity or length of the correction will play out. If all boats were listed in the last phase of the cycle the next phase may be more discriminating -- differentiating between the players. In any event, we believe there are additional phases to follow ,and substantial opportunities before this long-term up cycle runs its course.

Let me mention some reasons why we believe that we're better positioned than any time in our company's history for the uncertainty ahead, even for a market softening. First, over 50% of our U.S. land activity days are firmly contracted during 2007. Of our uncontracted rigs, over half are FlexRigs. Historically, the FlexRigs have averaged activity levels of 98% and premium day rates, and our conventional rigs have operated with significantly better utilization than their counterparts. Second, we expect to benefit as operators high-grade their own rig rosters, resulting in a more pronounced market segmentation. This sorting out process plays directly to our strength. During frothy times old rigs and poor field execution often get overlooked. But when the customer is afforded a real choice, those underperformers get voted off the island.

We have been asked what happens to all those old rigs. Well, typically contractors are reluctant to retire rigs. It's the customers that retire old technology challenged rigs. They are sidelined and forced out by virtue of poor reliability and performance, safety increasingly becomes a real concern, crewing becomes tough, and the customer finally yells uncle. Having said that we're thankfully not managing to that challenge. At the end of our build out, 75% of our U.S. land fleet will be FlexRigs. The remainder of our fleet has already received major reinvestment and has years of earnings power ahead. That also means our new build effort is successfully capturing real new unit growth and greater market share. We're not just replacing older rigs in our existing fleet. Because attrition and obsolescence will play a more visible role it it will be important to track who is able to deliver real growth to their working rig count. In 2006, Helmerich & Payne deployed more new builds, 34, in the U.S. land market than its four largest competitors combined. In 2007, while that peer group may see net reductions, we expect to add 39 additional rigs to provide a strong net addition to the fleet.

The larger point is we anticipate further growth opportunities ahead. We're thinking less about hunkering down and more about the ongoing retooling needs and how to reduce total well costs because customers remain interested in drilling efficiencies and the value proposition of the FlexRig. We expect to see additional opportunities in markets inside and outside the U.S. where international inquiries have dialed up. We're in good shape to respond. Our manufacturing effort has done an impressive job in overcoming the production ramp up challenges we faced and talked about a year ago. We're now comfortable with our ability to deliver four rigs per month. We are maintaining that pace for this quarter. We are also in good shape in terms of our supply chain management and our cost containment efforts.

So while the day rate side of the coin may be temporarily softening, on the flip side we're consistently growing our fleet by three to four rigs a month throughout 2007 and gaining market share. Additionally, we can can now provide customers with deliveries that are eight to nine months out instead of over a year away. So while we would expect the pace of new orders to slow some, we believe opportunities to add to our 73 rig order book will unfold during the year as the industry retooling effort continues.

John will provide more detail to each of our operating segments. It's a difficult time to provide much forward visibility. Our best sense is the magnitude of the pull back will be in the order of 10%. If true, that would feel more like a speed bump than a major market correction. We have said before that our business plan does not hinge on ever increasing day rates, but is driven by unique opportunity to drive improved efficiencies and reduce total well cost to our customers. In turn, they reward the company and our shareholders with disproportionate growth opportunities going forward. Now I'm going to turn the call over to John for his comments.

Thank you, Hans, and good morning. We are pleased with the results of the first quarter as drilling operations reported the 5th consecutive record level of segment operating income this quarter at $149.9 million as compared to $127.6 million last quarter. As you know, this includes land, offshore, and international operating segments as shown in the segment reporting on the press release. The $22.3 million improvement was a result of increased activity in U.S. land and increased margins in international operations. Hans talked about factors in the business that play to H&P's strength. Primarily the clear indication at this phase of the cycle is focused on retooling the industry. I will expand on a few of those strengths in a moment.

But first let's turn to our operating performance in our U.S. land offshore and international operating segment. Each segment discussion will cover operating margins and a few activity highlights. I'll start by discussing our margins for the first quarter in U.S. land. We again posted record daily margins in the amount of $13,514 -- a $226 a day increase as compared to the fourth quarter of '06. This was achieved by reduction of daily expenses of $338. We commented in our last webcast that we expected a flattening in spot market pricing for the quarter and that is what occurred. Slightly under 50% of our activity days during the quarter were attributed to rigs in the spot market.

Day rates on the spot market continue to be an area of focus. We have seen downward pressures on rates, but operators are differentiating among contractors and rigs based upon quality and performance. The H&P rigs in the spot market have maintained over 95% utilization. There is a rebalancing in the marketplace and a high-grading of the overall fleet. We have had rigs released, and most of those rigs have been contracted to operators looking for more efficient rigs. This is a healthy process for H&P and the industry resulting in the best rigs in the overall U.S. fleet continuing to work. The very old 25 to 30-year-old conventional fleet that has not been upgraded over the years are being stacked. Under this scenario, the contractors with these older rigs may be forced to retire a large number of rigs. We have also used a pushback on market pricing by operators as an opportunity to explore moving rigs out of traditional operating area into areas that offer H&P additional growth opportunities. We think the the 58 rigs in the spot market and operators high-grading their fleets to FlexRigs will be an interesting trend to follow. A total of 38 of the 58 rigs or 55% that are in the spot market are FlexRigs. H&P's rigs on the spot market have seen day rate reductions of 5 to 10%, but keep in mind that 13 of the 19 rigs scheduled to roll off with two year term contracts during fiscal '07 are FlexRigs. And this is allowing H&P an opportunity to improve margins on those rigs. So our expectation is FlexRigs should perform in this cycle like previous cycles. They should maintain historical utilization in excess of 98% and command premium day rates to the market. The other 26 rigs on the spot market are made up of quality conventional SCR rigs and highly mobile rigs. We expect our older fleet will continue to compete favorably with competitors' rigs. Our older fleet has had ongoing upgrades from the late 90s and those continue today.

Activity and growth of the H&P fleet remains a positive trend. Regarding our new build construction program, 38 new FlexRigs have been completed to date, and are either working or moving to their first location. 37 of the 38 are in U.S. land and contributed to the total active rig count of 124 rigs at a 98% total fleet activity rate. We will continue adding an average of three to four rigs -- three to four FlexRigs per month to the active fleet through 2007 for a total of 162 rigs. H&P has experienced growth in active rig count of 10.5 rigs from the last quarter. In fact, we added 27 rigs to our total active rig count during calendar year 2006 and believe that to be greater than the total active rig count growth of our four largest competitors combined. This is a clear indication of how the quality of our personnel, the existing fleet, and our FlexRig construction program will provide significant growth leverage as attrition rates for low performing rigs in the market becomes more evident.

Now I'll turn to offshore operations and talk about our margins. Margins in the first quarter for '07 were up sequentially 3% or $426 dollars a day to $14,923. But total operating earnings were down $1.2 million due to one rig stacking and three rigs going to a reduced standby rate. As we discussed, in our previous two webcasts, there has been uncertainty in regard to our platform activity in the Gulf of Mexico for the fourth quarter '06 and first quarter '07. And that uncertainty today looks like fewer operating days in the second and third fiscal quarters as well. The activity today reflects six rigs are currently active with three on full rate and three on standby. One of the three active rigs has been contracted for international work and I'll give more details in a moment. Rig 201 continues to wait on the customer's platform. The rig has a new firm five year term contract commitment. It should begin moving and rigging up in the third fiscal quarter and should contribute to operating margins in the fourth fiscal quarter. One of the stacked platform rigs is in the contract signing stage and operations are expected to begin the third fiscal quarter. The other stacked rig has prospects, but nothing is imminent.

We announced in the last webcast that on an operating basis we expect comparable earnings in 2007 compared to 2006. And today with operator decisions to go on standby for various reasons on three rigs and with only two rigs expected to be fully active during much of the second and third quarters, 2006 earnings don't appear achievable in 2007. So our expectation today is that operating income for fiscal year '07 could be reduced as much as 30 to 50% as compared to fiscal year '06 and that's based upon our customer schedule activity as we see it today. Several factors decided by the operator determine whether the three rigs currently on standby go back to an operating rate.

Now there are some bright spots to our offshore segment. We mentioned in the news release the sale of two inactive platform rigs. We should close the transaction in February, reducing our offshore Gulf of Mexico fleet to nine rigs, and we're pleased to have been able to secure this opportunity for H&P. I mention the international platform work earlier and this is another example of our offshore fleet creating value. We have a contract in Trinidad which further reduces H&P's Gulf of Mexico platform fleet to eight rigs from nine, but it does enable H&P to utilize technically superior self moving platform rig outside of the Gulf of Mexico with an attractive term and return.

I'll talk about international operations now. We have experienced our second sequential best ever quarter. Average rig operating margins increased 31% or $3,035 per day to $12,812 in the first quarter versus the fourth quarter. And margins have increased 89% from the first quarter of 2006 which were at $6,773. Approximately $3 million or 40% of this improvement in operating earnings were from nonrecurring events. Day rates have increased in each of the last five quarters, ending with an average rig revenue of $27,690 per day for the international fleet. This average includes nonrecurring items equivalent to approximately $500 per day. 7 of the 27 rigs are under firm term contracts and the average length of those term is around 12 months remaining. We expect the next few quarters for pricing to be flat and should not expect margin expansion as in the last two quarters. As far as our current activity, our only rig in Bolivia was stacked during the first fiscal quarter and it currently has no immediate prospects for work in the region. Today, 25 of 27 rigs are working, and activity should remain strong in each of our operating areas. A 26th rig which is in Venezuela is waiting on location and is expected to begin operations during the spring.

We talked about in our last webcast about our first Flex 3 in international operation and it's in Tunisia, North Africa. The FlexRig technology continues to perform extremely well. The early success has motivated several operators in neighboring countries to visit the FlexRig3. And this will certainly help H&P efforts in marketing in North Africa. There are other areas of interest as we continue to pursue opportunities for our new rigs in several regions of the world. With natural gas price uncertainty in the U.S. and improving international markets, opportunities for existing FlexRigs have become available for international expansion, whereas this opportunity didn't exist previously. Among the areas of most interest today appear to be North Africa, Indonesia, India and the Middle East.

Now, back to the theme of Hans' comments about this phase of the cycle being advantageous to H&P. We believe there remains the potential for new-build contracts even with uncertainty of gas prices. H&P is in a position to capitalize on an ongoing retooling effort. We continue to discuss new FlexRigs with operators, and considering the following trends, those opportunities make possible further growth. The first trend is in the U.S. and international markets combined, there are approximately 1,500 very old conventional rigs that average 30 years in age. Many have been without major refurbishment and they are mechanically incapable of competing with H&P FlexRigs. The second trend we have talked about before are the unconventional gas [plate] that require a gas manufacturing approach to drilling efficiencies. Individual operators need to drill literally hundreds of wells per year and are charged with delivering 4,000 to 8,000 wells -- in some cases 10,000 wells in the next five to ten years. If you think about that in terms of a 30-year-old rig trying to drill thousands of wells for the next five to ten years, it kind of gives you an idea of the challenge. There are huge cost savings and net present value gains for operators that are willing to invest in FlexRigs.

The final trend is we have 88 FlexRigs working today. And we will have 123 working by the end of the year. As we continue to help our customers deliver total well cost savings, best in class safety performance, and the best personnel in the business, FlexRigs3s and FlexRigs4s will continue to provide the opportunity for H&P to penetrate new markets. Keep in mind that our new FlexRigs cover a depth range of 3,000 to 20,000 feet accounting for 97% of the wells drilled in the U.S. and overall the performance has been outstanding and it's been consistent since '98.

Finally, what is the theme of this call and what do we hope to leave you with? Well, the retooling effort in the drilling rig business is alive and well and H&P is best positioned to take advantage of this portion of the cycle. We have 50% of our U.S. land revenue days booked for 2007 and we're going to add 10 to 12 rigs per quarter in 2007, all with attractive returns and at least three year term contracts. And 'll turn the program back to you, Doug.

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

[OPERATOR INSTRUCTIONS] Very well. We will take our first question from Arun Jayaram from Credit Suisse. Go ahead please.

Good morning. John, I was wondering if you could comment on the field performance of the FlexRig4s.

Well, there's -- we're working in several basins and overall the performance has been very good. I think when we look at our Flex4 performance today contrast it with early Flex3 performance, I think the results are encouraging. If you look overall, I think we have drilled around 250 wells with Flex4 ranging in depth from 3,000 feet to 13,000 feet. And around, I think, 65 to 68% of those wells have been under the customer's target curve . If you look at Flex3 going back to 2002, we have drilled over 1,200 wells with those rigs and we're in that same range of performance, 65 to 68%. I think the other thing to note is that's versus a customer's target curve. Some target curves are based on the best well in the field, some are ASE-based there's a lot of different variables. But I think overall the performance has been very good.

Okay. John, you also mentioned a couple contracts in the platform rig business, one at 201 and one in Trinidad. Can you give us the day rates on those?

We really can't at this point Arun.

Okay. And finally, Doug, depreciation was flattish, you know, sequentially, and I thought it was going to go up given the rig additions. Can you comment on that?

Sure. Really, it was more of the fourth quarter being higher than normal. We probably had a million eight [sic] of items that hit the fourth quarter that normally don't hit a quarter. So knock the fourth quarter down by a million eight [sic] and you will probably get more of a quarter to quarter comparison. At 12 rigs a quarter, you're probably looking at somewhere in the neighborhood of $2.7 million of depreciation a quarter for the U.S. land rig depreciation increase each quarter.

What is that on the full year basis for depreciation?

About $11 million, something like that.

Okay. Thanks a lot.

No problem.

Our next question comes to us from Pierre Conner of Capital One South. Go ahead please.

Morning everyone. Hey, Pierre. Hans, first on your mentioned international inquiries up, and John mentioned opportunities for new -- excuse me, existing FlexRigs. So I wanted to see if you could clarify your international inquiries, is there still interest in new construction for international applications?

That's right, Pierre. As you know those markets take a little longer to go full cycle and actually put rigs on the ground. But we have got inquiries on new construction. Then I think the other piece that we will explore is if we have in some of our uncontracted FlexRigs, if we have market availability and depending on the returns offered in international markets we would be willing to move available Flex3s into those markets. So it gives us a broader set of choices being able to market not just in the U.S., but in other international markets as well.

Just to clarify, Hans, you were saying -- I know it's just a gut, on what the pullback could be, you mentioned 10%. I'm assuming that's an activity level, is that correct?

No, it really wouldn't be.

Or rate.

It would be more what we're seeing just in the market today, Pierre, with day rates.

Okay.

As you know that's a lot of moving parts, some are flat, some are up, some are down.

Okay. And then -- John, getting to the land side on your numbers, what was, what could you attribute to the reduction in cost? Natural progression or was there some specific thing you implemented?

Pierre, I don't think it's anything in particular that we -- surely haven't implemented over the last quarter. I think we do have an excellent supply chain effort. I think that helps us. I think our fellows try to be disciplined. But I think in general that we shouldn't expect that this next quarter is going to see a similar reduction. We still continue to see pressures out there on cost -- labor cost. We haven't had an increase, but it could happen. And I think just in general maintenance and supply costs are not visibly coming down in a visible way.

Got it. Of the -- of your two year term rigs that are rolling off into the spot, you mentioned, so like 13 of the 19 rigs rolling off are Flex -- and what sort progression of that over the course of the remainder of the year pretty evenly in those, rolling off of the longer, lower rates?

Yes.

I'm looking.

Obviously, what I'm trying to get to is, are there a bulk of them coming available in the near term or is it fairly evenly spaced throughout the rest of the year?

Pierre?

Go ahead.

This is Doug. We have three that will expire in this second quarter that we're in now. Nine will expire in the third quarter. And seven in the September quarter or the final fiscal quarter.

That's exactly, okay, great. Then one last one on the rates and trying to get some of these moving parts. Previously there was a projection that because of the rigs, these three to four coming in every month, having been contracted on an eight month prior rate now spot has weakened, those rates I'm assuming are still accretive to your current blended day rate?

Actually, the current margins on contracts that are going on stream actually are a little lower than our average fleet rate. And below the spot market rate. And of course over time that will ratchet up to higher than the current average rate.

But I think that Pierre's question, you're talking about new Flex4s that roll into

Yes.

The fleet. And Pierre was asking I think about as we recontract rigs, primarily Flex3s coming off of eight month old -- those are in fact accretive to our current averages.

Yes.

Okay.

I misunderstood your question.

No, and that's fine, that was a lot of moving parts. Guys, I'm going to let some of the other guys ask questions, thank you.

All right.

Thank you. We will next move to the site of Mike Drickamer from Morgan Keegan. Go ahead please.

Hey, good morning guys. Hey, Mike. John, in your comments you talked about what we're seeing in the market right now you have opportunities to move rigs to markets receiving more growth opportunities. Can you be a little more specific, what markets do you see growth opportunities for yoursel?

I wish I could, Mike. I can't. There's some ongoing negotiations and work that we have got ongoing. I think that will prove positive for us -- can't really talk about it much now. But I can talk about some of the international markets and I mentioned those areas. I think what it does is just, if you have got a FlexRig that's on the spot market, it gives you an opportunity to take that rig to an international market in a few months as opposed it to waiting on a new-build, say, what was 12 months, and so I think that gives us an advantage.

Okay. So you're talking about these potential growth markets being international markets, not moving them around domestically from one market to another.

No, it's both, it is both, but I'm just not in a position to really talk much about the domestic right now.

All right, I can respect that. You also talked about mobilizing the platform rate, the Trinidad. I apologized if I missed that -- did you give a start date of when that rig would start up in Trinidad?

We didn't. Part of that is hinging upon the current job and when that current job ends so I hate it to mention that. You know how those projects go, it can be delayed for various reasons. I think we will have more clarity in the next call.

Okay. Hans, a little bit higher level here -- a lot of your competitors are talking about one of the biggest challenges right now is all the supply coming to the market. I imagine you guys are even less popular now than you were a couple hours ago talking about opportunities for building more rigs. At what point do you think you start cannibalizing your own rig count of building new rigs or by hurting your own rates by continuing to build rigs?

I think it goes back, Mike, to the retooling opportunity, and that's a hard number to pin down, but I think it's very real out there, and it has a couple ways it impacts market. One is the concern about the new-builds that you mentioned and we're part of that overall number. But I think that concern gets diminished when it sets up against attrition and obsolescence. So the net adds become fewer. And then to your question, well -- do your net adds ends up getting hurt too? And I really don't think so. And I think it's back to the profile of our fleet. With the youngest most capable fleet in the business in terms of large land fleets, we're not carrying an old 30-year-old component of our fleet forward. You look at our peers, and even the ones that are constructing new rigs, they still have a large component of older rigs. And so in our case, 75% after our buildout of our U.S. fleet is the FlexRigs. So again it's a function of the fleet profile, and we just don't anticipate and you have kind of watched it is since '98, we just don't anticipate that kind of cannibalization in our own fleet.

Okay. Thanks, a lot guys, I'll turn it it back.

We will now go to the site of Andrew O'Conor from Wells Capital Management. Go ahead please.

Good morning. Congratulations on your quarter.

Thank you.

Wanted to know are there additional planned sales of portfolio securities going ahead in '07 and what would the catalyst for further sales be?

I think kind of the general answer, Andrew, there is that yes, we would see as we continue to use cash to build rigs that we would incorporate the portfolio to fund that effort. We have not tried to give a whole lot of predictions in terms of timing or what the catalyst would be, but the overall goal is to translate that portfolio into new-builds and I think you will see that continuing to happen in '07.

Okay, fair enough. And then secondly, you guys have kind of talked around this thus far in the Q&A, but have you seen any slowing in customer interest for new FlexRigs? I think the last company announcement for new customer agreements was in November, is that correct?

Yes, that's right, we announced seven in mid November. And, you know, that's a fair question. It would be a little easier to answer if there is this clear pattern over the last 18 months. But it kind of felt a little bit like a batch mode looking backwards. We get different groupings of orders, some of which would surprise us in terms of just the number. So having said that, we still have several conversations going on with folks. I think we have just come off the holidays, we have just come off a seasonally kind of quiet period anyway, but we're encouraged by the number of ongoing conversations -- including conversations with customers that have the Flex4 on the ground and are seeing what it can do. What we saw with the Flex3 is as that field performance and field execution played out, it just resulted in a satisfied customer coming back into your order queue. So I think that you're going to see that -- we have had question on field execution performance already -- you always have some teething issues. The fact is, I think we're way ahead on our ability to look at the situation and correct problems, improve the performance. And that improvement will be ongoing and I think it will just pique additional customer interest. So maybe a final comment -- would we expect that to be slower in '07 than it has been in '06? Yes, I think that would be a reasonable expectation. But again, being able to add to the order book going into '08 would be a very positive thing and we expect that to happen.

Okay. Thanks for your comments, again nice quarter.

Thank you.

[OPERATOR INSTRUCTIONS] We will now go to the site of Mark Close of Oppenheimer & Close. Go ahead, please.

Good morning. I wonder if you can detail to us what your accounts receivable balance was at the end of the quarter, and of that how much was Venezuela and how much success you're having with getting them up-to-date? Or current?

I don't believe we showed the accounts receivable balance in our published numbers, but first of all let me tell you that the Venezuela receivable situation has improved dramatically. I think on December the 1st we said in our 10-K that there was a $66 million balance there, and we've collected almost $40 million against that balance. And so we are back in the fairway of normal as we call it here with our Venezuela receivable situation. That really was the only and is the -- well, that was the only one that we have been concerned about. The rest of the receivables are in great shape and down the fairway of normality.

Okay, thanks.

Yes.

We will go next to the site of Jason Podraza from Howard Weil. Go ahead, please.

Morning, guys.

Morning.

Just a quick question, maybe for John. You mentioned on the international front in the quarter with margins up nicely over $3,000 a day sequentially, you mentioned 500 a day, $500,000 a day nonrecurring from the revenue side of the business, and certainly costs were down in the quarter. Just trying to look for additional color on what made up the balance of that improvement that we saw sequentially there and also maybe what the specific nonrecurring item was that helped you out to $500,000 a day in the quarter there.

Well, as far as the nonrecurring, it was $3 million. I really don't have any details on that. The rest of -- besides the cost the rest of it was all due to day rate improvement that expanded the margin. And what we're saying is we really don't expect to continue necessarily to see that margin improvement in the next couple quarters.

So principally just broad based improvement away from the cost line as well on the revenue side? There's nothing unusual in terms of some of the benefits you saw in that region other than the $500 today you outlined.

Yes, the $500 a day relates to the nonrecurring -- the $3 million that we talked about.

Okay. Nice quarter down there. Thanks guys.

Thank you.

We will move on to the site of Andreas Vietor from Stifel Nicolaus. Go ahead, please.

Morning. I wanted to ask a question about the rigs you anticipate coming off contract in '07. First, contract negotiations -- where are you seeing a change in the tone of operators? Is the pushback primarily on nonoperating items -- in other words you have given up more on the low cost side of it, or is it across the board?

It's really a combination. I mean that's just kind of, it's normal, it's just the course of business being a drilling contractor, it's just part of it. It's really in all of it, as far as where you get the pressure.

Okay. And I guess in terms of the timing of inquiries for these rigs, I mean if you sort of flashback to last year about this time -- how much in advance are operators approaching you? So it sooner to the point when the rig is released, is it about the same? And also as far as contract terms are concerned, do they tend to be shorter in nature?

Well, as far as the operator in communication, you know, we make it a habit in all cases if possible to put notification language in contracts. So we very seldom are going to get surprised. And so if we have got a 30 day notification, then they're going to make sure that they give us notice within 30 days. But Hans mentioned the holidays and the seasonality piece of it. This time of year, December -- November, December, January historically tend to be kind of slow. People are on holiday, as well as you couple that with the some of the gas price questions, and so I think in general we have just seen more discussion about that over the last couple of months, primarily in January than what we have seen. And how it's going to play out over the next couple months we're not really certain. What I'm encouraged by is that we have had rigs released for various reasons and we're putting those rigs back to work. And we're putting them to work at nice day rates and we're seeing in some cases we have the information that we're actually replacing a rig that wasn't quite as efficient as the operator wanted. So that's what we have been talking about for a long time and that's what we're going to keep trying to do.

All right, thank you.

We will move to the site of Mike Breard from SAMCO. Go ahead, please.

Yes, that was an excellent quarter. Your operating income -- net income was almost as much for all full year of 2005. The people that are talking to you about new rig orders -- do you foresee a jump in new rig orders if the gas price would go up unexpectedly? Or are they looking for a day rate reduction or what seems to be the main reason that they haven't committed?

Oh, I think Mike, we're -- there are lots of moving parts to that. I think the important point is that the type of drilling, particularly the unconventional gas and what it requires out of a new rig, and the opportunity for reduced well cost all keep the customer very interested in employing additional and new FlexRigs going forward. So it's an unusual time when you can have a softening in the overall market but still have opportunities that I think we will see going forward.

Okay. One other question -- I don't know if you could answer this or not -- a two part question. What percentage of the wells you're drilling in the U.S. are predominantly gas wells and what percentage of those would be considered maybe marginal wells where you would really need $6 or $7 dollar gas price versus high production type wells where a $3 or $4 gas price is sufficient to make them economic.

I think most of -- I would say over 95% of our work, 90 to 95% of our work is for gas. The other question is a good question and I guess it's the million dollar question, because it depends on the operator and everybody I guess has different economics. Really kind of a hard number to say. We hear a lot of different numbers. And I think you just have multiple thresholds. I think you have prospects that go away at $6, you've got prospects that go away at $5, and kind of it has that kind of scaling effect. So yes, I don't know if we have any deep insight into that, Mike.

And there's, you know, clearly the the performance piece during the drilling of the well has an impact and there's other things that have an impact on it. But no, it's a hard one to put your finger on.

Okay. But obviously you could drill a gas well much more economically than your competition regardless of the gas price, so you ought to get more business. One more quick question on Venezuela, Chavez has gone after Pride for some back taxes, he's also talking about nationalizing more industries. Are you seeing -- yet you mention your payments come in since December 1st -- are you seeing any real change in your relationship there?

Well, I mean, we follow the news like everyone does and unfortunately he makes the news all too often. I think most of what you read about tends to be about the B&P [sic] companies and those relationships and contracts and they even took some effort in clarifying that they weren't addressing service companies. And that was a clarification for a reason, because I think they realized they need the [plumberjays], Halliburtons, H&Ps of the world to execute on arresting this decline in production they're seeing. So I mean, it's a volatile situation, Mike, and we're always watching it and trying to feel the pulse of it. And so it's something we will continue to do as we go forward.

All right. But obviously Venezuela is going to be a much, much smaller share of your earnings.

Yes, it is. We brought a rig back towards the end of last year, we've got 11 rigs down there. They're not 11 FlexRigs, they're the larger big rigs that are very suitable for the type of drilling they're doing there. And you're right, they make a smaller earnings contribution by virtue of the rest of our fleet growing.

One last question. Platform rig that you have moving to Trinidad -- will it have a better margin than the wells that it's currently drilling now in the U.S.?

Yes, the margin will be significantly better.

Okay, thank you.

Thanks Mike.

[OPERATOR INSTRUCTIONS] We will now go to the site of Robert Ford of Weiss Associates, Go ahead, please.

Thanks. Morning, guys.

Morning, Robert.

Just an a couple. First one -- I apologize if you already answered this, but the $338 sequential decline in cost per rig day in the U.S. -- I didn't hear a concrete answer on that, but I assume it's a decline in repair and maintenance costs?

Really, it's made up of a lot of different costs, Robert. It's not just maintenance and supply, but that is a part of it.

Okay. Could you give us an update on the stock buyback program?

Oh, I will let Doug say if he has the number what we did in this most -- latest quarter. That's something that -- our first priority, Robert, is using funds to back the new-build effort. The stock buyback is something we continue to watch, we talk about it, the board talks about it each meeting -- and again we will be opportunistic, but we don't really have guidance in terms of what to expect. We have a 4 million share authorization going forward and, like I said, we look at that each meeting.

During the quarter, Robert, we bought back 681,900 shares.

Okay. And last question is on the platform business. We have got three active, three on standby, what were the comparable numbers in the December quarter?

Robert, this is Juan Pablo. We had approximately six, a little over six rigs that were active under either fully operational rates or warm stack standby rates that were higher than we're experiencing today on the three that we refer to as standby. For those we should expect lower margins.

That's what, a couple thousand dollars a day when they're on standby, Juan Pablo?

It's higher than that. You should probably expect a decrease of somewhere between 30 and 40% to the total margins for the second quarter.

Okay. That's helpful, thank you. Which three rigs are on standby?

I don't know that --

We know the answer Robert, we're trying to decide if we should tell what that answer is. Oh, I think we won't go that granular on that, Robert.

That's no problem. That's all I had, thanks guys.

Thanks, Robert.

I am showing no further questions at this time.

We would like to thank everybody for joining us today, and have a good day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect at this time.