Helmerich and Payne Inc (HP) 2007 Q2 法說會逐字稿

At this time it's my pleasure to hand over the conference to your moderator, Doug Fears, Vice President and CFO. Go ahead please sir.

Thank you, Colin. And good morning, everyone, Welcome everyone 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 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. And we'll be rounding numbers in hopes of adding clarity to our comments. We attempt to be as accurate as possible with our comments and information we provide but it's important for you to know that much of the information provided involves risk and uncertainties that could significantly impact expected results.

There's further discussion about these risk and uncertainties in our public filings. The most recent of which is a 10-K filed December 13, 2006. You may obtain this filing, along with a copy of today's press release, on our Website.

This morning, the Company reported net income of over $106 million or $1.02 per diluted share from operating revenues of over $372 million for our second fiscal quarter ended March 31, 2007. This compares with net income of over $64 million or $0.61 per diluted share from operating revenues of over $290 million during last year's second fiscal quarter ended March 31, 2006. Included in net income for the second fiscal quarter of 2007 was approximately $0.18 per share from after tax gains related to the sale of two platform rigs. And another $0.05 per share from after tax gains related to ongoing insurance settlements for hurricane damage to rig 201 and other asset sales. Comparable after tax gains from the sale of assets totaled $0.02 per share net income for the second quarter of last year.

For the six months ended March 31, the Company reported net income of over $217 million or $2.08 per diluted share from operating revenues of over $758 million. This compares to net income of $115 million plus or 1.09 per diluted share from operating revenues of over $546 million during the six months ended March 31, 2006. Included in these numbers were after tax gains from the sale portfolio securities and drilling equipment, and the insurance proceeds, which all totaled $0.39 per share for the first six months of '07 and $0.05 per share for the first six months of fiscal '06.

Just a couple other models and information before I turn it over to Hans and John. Capital expenditures during the quarter totaled $246 million bringing the total for the six month period to approximately $434 million. As stated in earlier calls, our capital budget for the year is approximately $750 million. At March 31, our stock portfolio had a market value of $373 million, roughly.

And our most current valuation of the portfolio totals about $400 million. If you assume the entire portfolio was sold and taxes paid on the gains, the net proceeds would total approximately $2.50 per Helmerich & Payne share in terms of value. Our effective tax rate during the first six months of this fiscal year was 36.6% and we expect it to remain at that rate for the rest of the fiscal year.

General and administrative expenses rose during the quarter due to compensation and related benefit expense increases. And we expect it to stay in the same $13 million range for the next two quarters. I will now turn the call over to Hans Helmerich, President and CEO. After John and Hans have made their comments, we will open the call for questions.

Thanks, Doug. Good morning. During our February 1 conference call we discussed the deteriorating market conditions and downward pressure on rates. We predicted then that U.S. land margins might pull back approximately 10% as pricing momentum succumbed to lower energy prices and capacity additions. After eight sequential quarters of earning increases, the Company saw our second quarter earnings decline from the last quarter as all three business segments posted lower results.

We had anticipated reduced performance from our land and offshore segments but our international numbers were a little softer than we expected at that time. We will discuss each of these segments in more detail on this morning's call, as well as some general market observations. One of those observations is that in spite of all the market turmoil, we are still adding real growth to our U.S. fleet. We deployed 12 additional new builds during the quarter and saw a net increase to the segment's overall activity days.

So during a time we were adding net unit growth to our new builds program, our top two competitors have sidelined well over 120 rigs between them. Our 97% average utilization during the quarter reflects the quality and newness of our fleet and positions of the Company to continue to capture increased market share. We've often mentioned how a choppy market affords the customer little choice as he in effect carries less desirable and lower end rigs, not so in a softer market. Rig availability allows the customer to be more discriminating.

This is all part of the much anticipated market segmentation where asset quality and performance standards are assigned different price points. Over time, we continue to expect to fare well in this ongoing development. But in the short term, we'll not be immune from the shift in pricing leverage. That shift in part is the customer pushing for lower pricing and in part a contractor-on-contract for bidding war to maintain utilization and protect market share.

We believe we are the price leader throughout the cycle and we're in good shape to cope with increased market volatility. In addition to a strong contracted base of 50% of our 2007 and 2008 revenue days, our customer roster is made up by approximately 80% of major and super independents. Larger ENP's tend to maintain their drilling programs even when smaller players move to the sidelines. The current resiliency in the rig count is a testament to large customers holding steady or building on their rig rosters. We also see anecdotal evidence of large customers taking advantage of this soft period to high-grade their rig rosters.

Since day rates peaked in late 2006, we've experienced a 10% average day rate decline in the spot market through the end of April 2007. Going forward into the rest of 2007, we think the industry can avoid the destructive pricing strategies of previous cycles. Improving commodity pricing and an uptick in the drilling permit data are encouraging signs. Still, we probably have not seen the end of the choppiness. We would anticipate a flattening of downward pricing, but nevertheless, softer day rates to continue to work through the system over the next couple quarters. Our international and offshore segments, together representing 18% of our total segment operating income, show some choppiness as well.

After closing on the sale of two of our platform units, our offshore segment will continue to represent a smaller piece of our efforts but contribute in positive ways and with attractive returns. Many of the technological advantages found in our FlexRigs were sourced from our offshore experience. Our international business, going forward, will provide an important platform for introducing advantages of the FlexRig performance, often to the same customers that have endorsed our efforts in the U.S.

We anticipate second half results of our international segment to improve and we continue to market into promising areas but would not expect much headway from those efforts until 2008 and beyond. Much of our efforts today are focused on the execution of our new build program. We are still achieving a production cadence of four rigs per month and have recently completed 51 of 75 planned new build.

We are pleased with their performance to date and we're working hard to drive further performance enhancements. Our past experience of building and delivering over 100 total FlexRigs tells us that exceeding the customers' expectations creates the most promising future opportunities. With that, I'd like to turn to John and have him make his comments.

Thank you, Hans. And good morning. We continue to be very upbeat about the long up cycle in the business as well as the potential for additional growth, both in our U.S. and international operations. To date, we have grown the rig fleet by 40% since January 2006 and will have grown 59% at the completion of the 75th new build. Hans spoke about the Company's long term growth and focused on field performance and he stressed factors in the current fundamentals that illuminate H&P strength. I will try to 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 segments. First of all, with U.S. land operating activity it was in line with our general expectations. 51 new FlexRigs were delivered through April of 2007. 50 of those were in U.S. lands. 18 of the remaining 24 new FlexRigs are scheduled to be completed by September of '07.

Average rig revenue per day in the quarter was $23,032, a reduction of approximately $1,200. We achieved average rig margins of $12,258 per day for the entire U.S. land fleet, a decrease of $1,256 per day, as compared to the first quarter. Nevertheless, the number of average active rigs increased by 8% to 124 during the quarter.

Going forward, we expect increasing average daily margins from rigs under term contracts to at least partially offset any further declines and daily margins corresponding to the rigs in the spot market. Should we experience flattening daily margins as expected, increasing activity during the third fiscal quarter, attributable to deployment of new FlexRigs should deliver growth in the segment's operating income. There are many variables determining day rates on the spot market and they continue to be a source of interest and concern by those following the sector.

The new and refurbished supply of rigs is one variable seen by some as an oversupply of rigs and is worrisome on a supply/demand scenario. But the influx of new and refurbished rigs is a long overdue development in the U.S. land sector. This new supply of rigs causes a rebalancing of new and old rigs, which will result in a high-grading and segmentation of the overall fleet.

But by far, the most influential variable is performance. In order to have the best performance, having the best personnel is the key. And in order to have the best personnel, you need the best and safest rigs and the required organizational support. Let me give you a few examples of Flex' forward performance to date. 412 wells drilled, 71% under the target curve. 62% directional and horizontal, so the wells are really more difficult than what you would see on an average well basis.

A Flex 4S in Pinedale, Wyoming drilled a customer's record well by beating the curve by 10 days. Today that same rig is drilling a new well faster than the technical limit. And on top of that, we just completed the third safest first calendar quarter in the history of the Company while working the most rigs ever. Of H&P's total land fleet of 140 rigs, 57 rigs are on the spot market with the potential of operators high-grading their fleet to FlexRigs.

A total of 34 of those 57 rigs or 60% in the spot market are FlexRigs. FlexRigs on the spot market have experienced smaller day rate reductions as compared to other H&P rigs and our expectation is that 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 activity and growth of the H&P fleet remains a positive trend. H&P has experienced growth in average active rig count of 9.3 rigs from the last quarter. Current utilization is 136 of 140 rigs working, with three of the stacked rigs previously working. This is a clear indication of how the quality of our existing fleet and our FlexRig construction program has provided significant growth leverage.

Now, let's talk about our offshore operations. And a strategic highlight in offshore operations was the closing of the sale of the two Companies' 11 offshore platform rigs in February of 2007, which had a positive impact of $19.2 million or about $0.18 a share on this second fiscal quarter's net income. As reported earlier today, our offshore operations segment operating income of approximately $2.2 million for the second quarter of fiscal 2007 compared with approximately $5.7 million for the first quarter of fiscal 2007.

As we discussed in the last earnings call, the annual segment operating income for U.S. offshore operations is expected to decrease by 30% to 50% from fiscal 2006 to fiscal 2007. Six offshore platform rigs are currently active but only three are on full rate. One is being repaired to return to work and two are stacked. One of the currently active rigs in the process is being prepared for an international assignment.

In our international operations, we experienced a reduction in operating margins largely due to long periods waiting on locations to be built and other just various factors out of the control of H&P and most of that associated with rig moves. Average rig margins decreased 12% or $1,533 per day to $11,270 in the second quarter versus the first quarter of '07. Average rig revenue per day was basically flat, down 2% to $27,000 from the previous quarter.

As announced, we expect increases in day rates and margins on some of the rigs to have a favorable impact on the segment's operating income in the third and fourth quarters. Our activity today. 23 of 27 rigs are active. Two rigs are now stacked in Ecuador, one in Venezuela and one in Bolivia. We believe one of these rigs will return to work late in the third quarter. Prospects exist for the other three rigs but timing is unclear as to whether the activity would impact the third fiscal quarter. Activity for the second quarter averaged 93%, down from 96% in the previous quarter.

We've talked in the past about our first FlexRig, FlexRig 3 in international. And the FlexRig technology continues to perform extremely well in Tunisia. We've drilled four wells to date, with the last well beating the field record to TD by six days. That's about 25% savings. And again, that's versus the field record. In addition to the drilling advantages, the FlexRig is moving approximately 10 to 15 days faster per move compared to the competitor rigs. And that's about a 70% improvement.

And we've done all that without any safety incidents. So, we're very pleased about that. There are other interests for FlexRigs internationally, we've discussed it before. We continue to pursue those opportunities in several regions of the world. The process is slow but we're convinced that we're going to be successful.

In closing, Hans commented about this phase of the cycle being advantageous to H&P. I think there's a few positive indicators that exist that will show that. You've heard us comment before. H&P is in the best position of any drilling contractor to capitalize on an ongoing new build effort. We continue to discuss new FlexRigs with operators and considering the following trends, those opportunities make possible further growth.

First, is our advanced technology FlexRigs, they offer performance advantages to our customers. Employees in the field prefer to work on FlexRigs. Unconventional gas play require a gas manufacturing approach to drilling efficiencies. We've talked before about operators needing to drill literally hundreds of wells per year. And they're charged with delivering thousands of wells in the next five to 10 years. And if you think about that, having a 30-year-old rig, it's already 30 years old, drilling -- continue to trail thousands of wells and doing that for the next 10 years, creates its own set of challenges.

Our ability to deliver wells earlier can improve cost savings and net present value gains for operators that are willing to invest in FlexRigs. We have 101 FlexRigs working today. And we'll have approximately 123 working by 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. We believe Flex 3's and Flex 4's will continue to provide opportunity for H&P to penetrate new markets. And I'll turn the program back to Doug.

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

(OPERATOR INSTRUCTIONS) We'll take our first question from the site of Pierre Conner from Capital One South. Go ahead please.

Hans, first question for you. See if you can expand a little bit on the term contracts coming into the land fleet at least offsetting the current potential spot price weakness. So maybe a little more on the numbers of? And did you want to also differentiate between these new rigs coming in on term or will there be an impact from rigs that have been on term for an extended period now rolling into a slightly weaker market within say the last quarter, albeit stronger than when they were put on term?

Pierre, I'm going to let Juan Pablo address that first part of the question for you. If you don't mind?

Okay. Fine.

Basically, we expect the spot margins to continue to see some softness as we reported. But the rigs that are on term contracts, we expect will continue to see some increases going forward. And the combinations of both of those variables will probably lead us into a flattening of the margins going forward, perhaps slightly decreasing.

Okay. It obviously depends on any further weakness. And maybe that's the next question, is I think I've heard Hans -- and this is just on the fringe here now talking about going forward to some increased commodity prices, increasing permit counts. Do you see that for keeping your utilization on your spot equipment being able to further out hold these rates? Either for John or Juan Pablo?

Well, Pierre, there's no doubt that there is downward pricing pressure for all the reasons that you've talked about and we've talked the reasons that you've talked about and we've talked about. I think there's going to continue to be a range on some of the rigs of 5% to 10% pricing pressure down on those rigs. Let's face it, it's -- there's available rigs out there but we like our chances with the efficiencies and the quality of our rigs. But there's going to continue to maintain that negative as far as the next couple of quarters, as far as we can see.

Okay. Well, onto a bigger picture, longer term on potential additional new FlexRigs to be built. Can you -- what -- if we ordered some now, when would they be delivered if they were similar design to your most recent orders? What's the backlog timing-wise?

Pierre, this is Hans, we've got slots available in November and in December, so it lets us respond in that time frame now.

Okay. That's good. And then Hans, would you -- if you could say whether at this point, obviously, any additional -- I think you mentioned there's still interest in additional, it's obviously in the lower 48. But are you seeing any interest for new construction in international with the success of the rig in Tunisia?

Yes, we have had lots of interest in North Africa from operators and I think that rig will help us market in that area. We also have some bids active in international markets that would place new FlexRigs. So we're encouraged by that. We've talked before just about the timing of international work seems to always be longer but we have that in interest in place today. And so we would expect to see some of that as we go forward.

We'll take our next question from the site of Stacy Nieuwoudt. Go ahead please.

On the offshore side, you have nine platform rigs remaining. Any plan to exit this business?

Well, we've been, as I said before, that the business generates strong returns for us. And as I mentioned, it's also been a source of personnel development and also idea development. We've had the opportunity to migrate some of the technology from our Internet -- I'm sorry, offshore work on to land. So there's some positives there, clearly, though, Stacy, it doesn't have the same strategic import that it had several years ago. There was a time when we were being supported quite a bit in terms of percentage of cash flow that the offshore group was delivering. That's going to get smaller as we continue to build FlexRigs and so it will have a smaller proportionate contribution. So, that's our thinking. Those rigs are still, I think, the best rigs available in that niche market. And so we would be open for ideas but I think that's kind of our best thinking to date.

That's helpful. Thanks. On the international and day rate side, can you tell me how many -- what percentage of your fleet reprices over the next few quarters?

On international?

Yes.

Really, really small percentage, Stacy. Most of the repricing we've already -- we're in the process of accomplishing now. I don't see additional repricing over the next two quarters.

And then on the cost side on the lower 48, drilling operating expense today has been relatively flat. Cost pressures seem to have abated. Now that the industry has entered a period of somewhat weakness, are you seeing actual opportunities to lower labor costs?

No. I tell you, there's still a very robust market in terms of people. And of course, we're growing the fleet for by four rigs a month and so we continue to hire people. And I know others are laying down rigs but it's still a very tough market for personnel. And, of course, you want to have the best personnel. And so at this stage of the game, no, I don't see any chance to lower our labor costs.

That's been very helpful. Thanks, guys.

Thank you. We'll next go to the site of Mike [Breard.] Go ahead, please.

On the rigs that you have rigs overseas, are these kind of one at a time deals or do you see opportunities to add maybe five rigs for one customer or something like that?

Well, Mike, our preference in that type of bid is always to have more than just one unit. And in exceptional cases, particularly when it's aimed at an area that we would like to see our business expand in like Tunisia or North Africa, we were willing to take a one unit opportunity. But the bids I'm referencing all have multiple units involved. So, that would be our preference, you just get some economies of scale by doing it that way.

Do you have any idea of -- I know it's a very difficult question but when you might get your first -- or your foreign next order?

We want it to be sooner than later. I think that when you look at the condition of the international fleet, it mirrors a lot of what provided an opportunity in the domestic market. It's an older, kind of tired fleet. And with our customer base being so geared toward folks that have international operations, it really does provide us I think a unique opportunity to expand there.

We've been in international markets for over 50 years, we've got a good group of people and the organization is able to support that type of effort, really anywhere in the world. So, I think we're in a great position to compete heads up with anybody in international work. And again, the trend would suggest, with little better activity rates that those opportunities are going to increase and not decrease. So that's what we're hoping to see.

Well, the -- just one more thing. The problem I see is that you are building four rigs a month. At what point do you start laying off people or would you build rigs on spec to keep the manufacturing operation going?

Well, that's a good question and what we're hoping to do is take the ongoing interest to just add to our order books, so we're not having to wrestle that down. Timing-wise, we have the opportunity to look at that but we like the business model we have now of building those under term contract and that continues to be our plan today.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) We'll take our next question from the site of Waqar Syed. Go ahead please.

This is Waqar Syed. A couple of questions. First on the platform rig, when do you expect it to start up and how would the margins on that rig compare to your current international margins?

Which platform are you --?

You have a platform rig that's going to move to international, I believe in Trinidad?

Yes, it's not going to impact this fiscal year. I think we're probably looking at the second quarter.

So in the January '08 quarter or December? I thought it was December '08.

I think it's going --.

For December '07, I'm sorry.

Probably, the second fiscal quarter of '80.

Okay.

And there's still -- there's some uncertainty in that, we don't know that for sure but that's what the forecast appears to be right now.

And how would the cash margins be for that rig versus your international margins?

I think it's fair to say they'll be higher but we can't share the details behind that. But they will be higher than the margins we've been reporting on average in the U.S.

Okay. But you would start to report that in the international business, is that correct, once it goes to Trinidad?

As we're looking at it today, we would.

Okay. And secondly, it was mentioned that there may not be that many repricing opportunities for international rigs? So all the repricing that have taken place, maybe recently, are they all reflected in the recent quarter results?

No, sir.

No, sir? Okay. So, they're still coming. Then for AP -- if you take on new orders for rig deliveries into next year. What do the costs for billing rates look like, are you seeing continued inflation in billing rates or do you think the costs have stabilized there?

I think we're seeing stabilized costs. And we're continuing to push, Waqar, for just efficiencies and reduced manhours per ton and we're beginning to see some of that. Those efforts really have allowed us to hold the line on costs throughout this new build so far. So what you'd like to see is that you continue to gain the traction and actually see the tipping point there. One of the problems is labor costs are still very challenging when you think about all the activity you have in the onshore business and then offshore business as well. And then you add in refineries and other projects, we really are in a scramble for skilled labor. So that's the biggest challenge today.

Okay. And then on the -- it was asked about the [drilling and rig construction.] Now, my impression is that it's all contract labor that's involved in the construction of rigs, so even if you decide to slow it down, it wouldn't be a -- you won't have to let go of any of your own labor. Is that correct?

That's right. I think we've done -- and it's a balancing act but a good job of having third party suppliers and puts us in a position to adjust that production rate without having lots of cost implications to H&P or losing the skills and experienced folks that we have.

And then just one final question. There was some recent talk at OTC that there could be some demand from Petrobras onshore Brazil as well, and could be as significant as maybe 40, 50 rigs next year sometime. Is that something that you've heard as well?

We have. We've -- I don't recall the 40 or 50 rigs but I have heard that there is a demand and we have had people, of course, in-country having discussions. But I've not heard 40 to 50 rigs.

Okay. Great. Thank you very much.

Our next question comes from the site of [Mark Close] from Oppenheimer and Close.

Good morning, gentlemen. A question on Venezuela. If you could give us a little color, how your operations there are doing? And also, I know we ended up year end with a fairly large receivable. I know some of that was paid down in the last -- we spoke about it in the last call. But I wondered if you could bring us up to date on that? And then just as a follow-up, I know that the real estate operation had been under some strategic review and I wondered if you could give us any news on that?

Well, when we started -- on the real estate, we continue to look for opportunities to sell down there but there's nothing really new since our last call on that front. On Venezuela, as you mentioned, we have seen our receivables improve quite a bit. I think we're now in a range that's slightly better than it has been historically. And so, you'd always like it quicker and -- but, in fact, we're in, I think, a positive range right now. And we still combat the issue of, Chavez is often in the paper with negative news. But at the same time, they are focused on trying to arrest a production decline and they need the service industry to help them pull that off. So we think that we're going to see considerably better rates from Venezuela and lots of activity going forward. So, it's always a balancing act. It's something that we're obviously concerned about and watch carefully but I think it's steady ahead right now.

Thanks.

(OPERATOR INSTRUCTIONS) And I'm showing no further questions at this time, sir.

Very well, thanks for joining us. Doug, do you have any other comments?

I don't. And if there are no other questions, we'd like to thank you for joining us and have a good day.

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