Helmerich and Payne Inc (HP) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's teleconference. At this time, all participants are on a listen-only mode. I will now turn the program over to Doug Fears, Vice President and CFO.

Thank you, Carrie, and good morning, everyone. Welcome to Helmerich & Payne's conference call and webcast to discuss the Company's third quarter earnings. With us today are are Hans Helmerich, President and CEO, John Lindsay and Alan Orr are both Executive Vice Presidents of the Company's wholly owned subsidiary Helmerich & Payne International Drilling Company, and Juan Pablo Tardio, Manager Investor Relations.

As always, there will be forward looking statements and estimates made today and we'll be rounding members 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 we provide involves risks and uncertainty and could vary significantly. There is further discussion about these risks and uncertainties in our public filings, most recent of which is 10-K filed December 13, 2006.

This morning Helmerich & Payne Inc. reported net income of over 115 million or $1.09 per diluted share for third quarter ended June 30. Included in this quarter's net income were gains from the sale of portfolio securities of $0.15 per share and $0.06 per share from gains from the sale of drilling equipment and insurance settlements. During the third quarter we sold 362,500 shares of [Slumberjay]. And since the end of the June quarter have sold another 50,000 shares. We still hold over 1.2 million shares of Slumberjay and 4 million shares of Atwood Oceanics. At September 30, that portfolio had a market value of approximately 409 million and most recent valuations show that value being 420 million. Which on an after tax basis equals approximately $2.50 per Helmerich & Payne share.

As announced today the U.S. land rig operating income increased to over 114 million surpassing last quarter's 109 million of segment operating income. This sequential growth was driven by increased activity days as a result of additional newly constructed rigs commencing operations. Average rig margins per day were down 4%, or by $476 per day from the previous quarter. Although our average rig revenue per day actually moved up slightly from the previous quarter to over 23,400 per day. Our rig expense per day increased by 8% and rig utilization remained high at 96% compared to 97% the previous quarter. That equates to about an average of 5.2 rigs being inactive during the quarter.

Offshore operations improved slightly from the previous quarter to over 3 million of operating income driven by slightly higher activity days and higher margins, and our international operations saw a nice increase to over 30 million of operating income from 21.5 million the previous quarter. Although total international activity has dropped just slightly, day rates and margins rose significantly reflecting tighter markets in some of our areas of operations.

Capital expenditures during the quarter were 247 million. Bringing the 9-month total to approximately 681 million. Additional and new build contracts and equipment purchases have moved our estimate for total 2007 capital expenditures to approximately 890 million.

John Lindsay will cover more details about operations in a few minutes. But now I will 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. We find ourselves in an uncertain market environment today that presents an interesting mix of challenges and opportunities. On our last call, we commented on a choppiness that we saw in the market through the rest of 2007. It still appears that way, but we'll comment briefly on why we like our position going-forward.

First, we are nearly a year past the peak of a very strong cyclical ramp up in the North American land market. For over a year, the twin concerns of natural gas pricing and rig capacity additions have been top of mind for many industry observers. Clearly today the wall of worry centers more on declining gas prices with spot pricing down around $6 . Gas inventories 16% above 5-year averages and a mild summer in terms of both temperatures and tropical storms.

While pricing concerns always have an impact on our industry, they are not impacting every drilling contractor the same way. For our company, activity rates today are at 94% and we're rolling rigs over it in the spot market at attractive rates. Our customers are overwhelmingly the majors and super independents and they seem to be taking a longer view on natural gas pricing. They also share a view on the value proposition offered by the FlexRig which will make up 3/4 of our U.S. fleet.

The concerns around capacity additions have impacted different players in different ways as well. For our company, the customer has awarded us a disproportionate share of the new build opportunities, and for the last year, we've achieved our targeted production cadence of 4 rigs per month while maintaining our construction budget in an environment of increasing costs. Our field performance measured against the benchmark of a very successful flex 3 rollout has exceeded that mark. And the trend analysis continues to show steady and impressive improvement. Because our new build effort was never an exercise in replacing old and tired rigs, we are delivering net unit growth and capturing increased market share.

We continue to believe additional growth opportunities exist for our investors as we maintain a leadership position of consistently providing the customer with the total lowest well cost. While lots of rigs were built, and refurbished over the last 18 months, less than 1/3 of those capacity additions addressed the growing demand for high efficiency rigs, capable of extended reach and horizontal drilling, characterized by most nonconventional gas plays. We think it's also significant that 11 of the 77 new rig orders, including the two we announced this morning, occurred after last year's cyclical peak, demonstrating the customer's desire for a differentiated performance, unavailable from conventional rigs.

We've been asked, what happens to the new build effort going into 2008. Our express preference is to continue with the current model of long term contracts and attractive returns, and we remain encouraged enough by ongoing discussions that we have no plans to change that approach. While additional demands should result in further new builds, the building surge that occurred at the end of 2005 and through 2006 was driven by a convergence of industry factors that likely will not repeat themselves. That means that the [frost] has been removed and capacity additions will most likely dial back to a manageable level in 2008 and 2009. The winners will be carefully chosen on demonstrated performance and field results, in short, a great environment for us to compete in.

Controlling our own production effort affords us lots of flexibility. It will allow us to reduce our cadence to match a combination of demand visibility, need for capital spares and shop continuity. Maintaining experienced personnel and shop floor space.

We expect our international business to augment the domestic demand for new builds and we're seeing an up tick in those bid opportunities. Our customer base provides an important sponsorship of growth. This year Marks our 50th anniversary of international operations, commencing with the acquisition of Sinclair Rigs in Venezuela. We are pleased that Venezuela led the improvement in this quarter's international results. Today we can compete all over the world with an experienced team of people and top quality equipment. We've seen over the years that operating in international markets requires patience, judgment and additional risk and complexity. We're encouraged by the increased international opportunities we see, but we realize the timing of these projects will push any impact into the second half of 2008.

Before asking John for his comments, let me just close by saying, we believe the short term market uncertainty and volatility does not foreclose some exciting opportunities for the Company. We look forward to the chase as we finish 2007 and move into

Thank you, Hans and good morning. A major story line today is the plentiful number of very old rigs available in the market at lower rates. And yet customers continue to find best value available in the flex rate. And the reason is that even at 30 to 40% higher day rates as compared to conventional rigs, the FlexRig allows operators to attain lowest total well costs, net present value gains and more wells per year. This advantage will become more evident as operators continue to upgrade their fleets. I'll talk more about what drives customer interest in H&P operations and FlexRig in a moment.

But first, let's review our three operating areas made up of U.S. land, offshore and international. A few important points regarding U.S. land. Today we have 94% activity, with 143 out of 152 rigs working. Up six rigs since the last webcast. Our active rig count is up 40 rigs since the third quarter of 2006 webcast a year ago. FlexRigs continue to maintain 100% activity today with 113 operating rigs. We have 13 FlexRigs remaining in our current new build order book that will be completed by the second quarter of 2008. The 9 stacked rigs are primarily 2,000 and 3,000 horsepower conventional rigs and the deeper wells market that these rigs target will probably remain soft for the remainder of the current quarter. Therefore, we don't expect these rigs to contribute in the fourth quarter.

Day rates in H&P's U.S. land spot market have declined by a total of approximately 12% or about $3,000 an average, since the peak late in 2006. Spot pricing in general has flattened during the last few months. Today we have 65 rigs that are not under long term contracts and that are in the spot market. Quarterly average rig of revenue per day, corresponding to H&P rigs in the U.S. land spot market declined sequentially by approximately $1200 or 5% from the second to the third fiscal quarter. Notwithstanding this decline. Average rig revenue per day for H&P's entire U.S. land segment increased sequentially by 2%, as a result of increasing revenue per day from rigs under term contracts.

Average rig expense per day increased by 8% this quarter. Rig personnel and services are still in very high demand. And we expect to continue to feel cost pressures, although we are diligently working to reduce costs in the third quarter.

The new FlexRig [4s] continued to perform very well. The two new builds announced are FlexRig 4s and this is one example of several opportunities that is we continue to pursue for U.S. land. We are pleased with the prospects ahead.

Next a quick overview of our offshore operations, and as a reminder, offshore represents only 2% of total segment operating income. Today, 5 of 9 platform rigs in our offshore operations are active. And an additional 2 are being prepared for work under long-term contracts. One is expected to start operations in Trinidad in the second quarter of 2008 and the other is estimated to begin operations in the Gulf of Mexico in the second quarter of 2009. The remaining two platform rigs remain idle and are currently being marketed. Although average rig margins per day have recently increased for [two rate] as a result of transitioning from cold stack to full operating day rate status. The utilization rate during the quarter is expected to decline as one previously active demobilized rig, and this was something that we expected, is now stacked. Consequently, we expect operating earnings to remain relatively flat during this current fourth quarter.

Now turning to our international operation, which represents 20% of total segment operating income, had experienced a very good quarter on the strength of 40% margin increase in the quarter due to rate increases in South America. These day rate improvements, however, were accompanied by contractual cost increases which account for the escalation and average rig expense per day during the quarter. Today 23 of 27 rigs remain active in international operations. Activities should remain at this level for the remainder of the fourth quarter. The management contract in Equatorial Guinea is currently on a coal stack rate after seven years of activity and will not contribute to operating earnings. Rates and margins for international should be flat for the fourth quarter. However, we expect activity to be down from the third to the fourth quarter. Consequently, operating earnings for international are expected to decline by 10 to 15% for the fourth quarter as compared to the third quarter.

As we've mentioned in previous calls, the FlexRig 3, working in Tunisia, is setting new performance benchmarks in drilling and safety performance in North Africa. There have been multiple rig bits by operators and the response has been very favorable.

As Hans highlighted our international operations celebrated 50 years of business in Venezuela, dating back to 1957. In addition, earlier this year, our Venezuela operation received two ISO certifications, the first, ISO 14001, for environmental management system, and ISO 9001, for quality management system. And we're very proud of our Venezuela operation.

So, in closing, a few comments related to H&P field performance. We are in the customer service business, and we pride ourselves in delivering great value to our customers. In a recent independent survey of [E&P] operators, conducted by Energy Point Research, on customer satisfaction, H&P was the number one ranked drilling contractor with the highest rankings in safety, technology and job quality. We believe that these aspects of customer satisfaction make H&P the preferred contractor for the continuing retooling effort taking place in the U.S. and international land business. And it's the FlexRig and its innovative design that serves as the catalyst to create the performance for our customers. It is H&P's culture, safety, people and the organizational support that really set us apart from the competition. H&P's top ranking by our customers is a direct reflection of our people's tireless effort, strong values and professionalism.

And now I'm turn the call back to Doug.

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

(OPERATOR INSTRUCTIONS) We will take our first question from the site of Arun Jayaram of Credit Suisse, go ahead.

Good results, guys.

Thank you.

I was wondering if you could comment a little bit about opportunities for new builds internationally, and maybe give us a sense of how the bidding activity is doing, because it sounds like you're getting good results in Tunisia. Just trying to understand what the international opportunity set would be for the FlexRig new builds?

Okay. As you know, the -- just kind of the cycle time in an international bid is different than it is domestically. We talked about, and you mentioned North Africa, that would be an area we have additional interest in, some in the middle east, we have bids -- additional bids active in both of those areas today. There's additional interest in FlexRigs and new build potential in Indonesia, that'd be an area. We've been interested in Russia, that's probably not as active for us right now. I know they've been in the news with some potential rig opportunities and we'll continue to watch that carefully. I'm trying to -- I don't know if that answers your question. I think that we have active bids today that we're waiting to hear on. And like I mentioned, the cycle time just gets somewhat extended in international work.

Let me ask you this, it may be a little different way, Hans. Is this a 5 rig opportunity internationally, or is it 10 to 20? That's what I'm trying to understand.

Yes. I think it's probably -- if you look at not hearing something in our fiscal year '07, so that takes us through September 30, we don't expect to hear anything from outstanding bids until then, I think that what we have on the table now is in a 5 to 10 range, I think if you looked at the whole year it could be 10 to 15 in terms of what we look at now. And, of course, you probably won't bat 100%, but that gives you a sense of scale.

That's very helpful. Secondly, Hans, I was wondering if you could comment, or John, on how you're doing on the capital efficiency on the new build program in general?

You're saying capital efficiency, just so I understand what your question is.

How you're doing on the new builds relative to your budgets, et cetera, and maybe give us a sense of what it cost you to build a FlexRig 3 or FlexRig 4 today?

Yes, if you remember it's been a year ago now that we stepped back and realized that we had underestimated, particularly the used the personnel expense, welders, fitters, folks necessary in that process, and we announced, Aaron, at that time, a 16% increase. Since then, we have been on our capital budget, so it's been something in an increasing cost environment. I think our folks have done a great job of pushing that hard and delivering those rigs on budget and at a four-rig per month cadence. We've talked about the average and what -- we have different models, so we don't really try to break out all the granularity on this, but, a Flex 4 today is approximately $15 million, a Flex 3 fully outfitted, can be a little higher than that, so that gives you kind of a sense of what construction costs are.

And that does include pipe?

Yes.

And last question, JP if you're listening, could you give us a sense of your expectations of what your U.S. land margins could look like for the September quarter?

Well, Aaron, we expect that margins -- we're hopeful that margins are going to be flat as a combination of spot pricing. We're continuing to see, as you can imagine, downward pricing -- downward pressure on spot market pricing. We're holding our own there. But then, of course, the new builds as they come on, they're coming on at higher rates and better margins, so you know, our hope is that we'll be able to maintain that, keep that flat.

Okay. That's helpful, John, thanks.

We will take our next question from the site of Pierre Conner of Capital One. Go, ahead.

John, actually following up a little bit to Arun's question about margins in U.S. land, you had that sequential increase, and I wondered if you could discern a little bit what that increase was, and you mentioned working hard to reduce your costs in the sequential quarter, could you tell us the kinds of things you were looking at?

Well, in, good morning, the cost side being up 8%, it's labor and M&S, we had a good portion of that increase due to labor, we had a labor increase that hit about 1/3 of our working fleet. A good portion of that was a cost pass -- we don't expect to see that in this quarter. We're hopeful third quarter to fourth quarter, and we feel confident keeping it flat, but we think there's an opportunity to actually have our expenses lower for the fourth quarter as compared to the third quarter.

Okay. Sometimes in the fourth quarter adjustments for various accruals and such may affect that number, right?

You're absolutely right. I mean, we're looking at it purely just looking at it in the field, (inaudible), thinking what we can do, but, yes, there's always that opportunity or possibility.

And further, a little more, I think, again, on Arun's question, not trying to beat this up too much. But this is a point where the incremental deliveries that have already been contracted could be accretive enough to the averages to offset any of the spot. Now, you did say you thought the spot had leveled out in the last 30 days? Just to make sure I was clear on that.

Yes. If you look at -- of course, we track that, we've seen a real flattening over the last 30 to 60 days, but as I said before, there's always that downward pricing pressure from the operator wanting to get pricing down, and, of course, based a lot upon what the competition may be doing. But we've been very successful with the FlexRigs, maintaining some nice pricing leverage there, and then as we had the new rigs that were on two-year term contracts roll off that come back in the market at higher rates and then, of course, the new build. That's what's enabled us to keep that relatively flat.

Have done very well with that. On -- so the percent of rigs that are on term now, maybe that was the point you made about 65, is that essentially what you have that's on the spot. And that's it, the rest is on term?

Yes.

Okay. I appreciate all these updates. Hans, I think I maybe mentioned last quarter, if I'm wrong correct me, that you were undertaking a strategic review of real estate, is there an update there? I know it's kind of a minor issue.

I think, Pierre, we're seeing this market improve some, and I mentioned last quarter, that, as we have opportunities and interest in those properties, we entertain those and look for ways to move on that, there's really not anything that comes to mind as a big change. Just over the last three months, there, though.

Fine, I understand. The last one, Doug, any update on some of the housekeeping guidance you might give us, tax, G&A and do you have any '08 CapEx directions you could you give us?

From the last question, Pierre, we're in our budget saves, so right we'll be having budget meetings this month, so we have nothing official. And, as you know, it will be driven largely by any new build contracts that we might land overtime.

Right.

So you start off not having quite the backlog that we did this time last year, but you start off knowing we'll be down, we haven't really noodled through that number yet.

Okay.

On the G&A number, we had a nice decline, we'll probably see that bump up just a little bit in the fourth quarter.

Okay.

And then our tax rate is pretty much online with what we think it will be for the remainder of the year in the 36.5% range.

Perfect. Gentlemen, appreciate the input I'll turn it back, thank you.

Thanks, Pierre.

We will take our next question from the site of Waqar Syed of Tristone Capital. Go ahead, please.

Good morning, everyone, great quarter. On the international side you have four land rigs down, could you provide some detail where these rigs are located, the ones that are down, and what you see beyond the next quarter in terms of activity levels?

Waqar, this is John. We have two rigs down in Ecuador, one in Venezuela and one in Bolivia. And we think that there's a possibility to have two of those rigs go back to work but that wouldn't impact -- they would impact the first fiscal quarter of 2008.

And which ones would those be? Where are those located?

One in Venezuela, and one in Ecuador. And again, it may not work in Ecuador, it may work in other places, we're bidding in several other countries. But, you know, I think in general, we have two of the four that we feel pretty confident that we might be able to put to work.

Now, these two are they already contracted or already, you're in vast negotiations and it just needs to be signed or is there -- they've have pended and so you still have to enter negotiations there?

No. We're still working on it, Waqar, one is hopeful and the one there are some discussions, nowhere near in the bag at this point.

That sounds great. And then on the -- the two new builds that you announced, are the terms of those contracts different from the terms that you've been -- you signed maybe a year ago or you still looking at full payment in the first contract for payment of the capital?

It follows, Waqar, the business model that the first 75 came under, so it's very consistent with that.

Okay. Great. And then on the operating cost side, you mentioned there were some personnel and other costs that resulted in costs going up. Was anything else unusual as well in the quarter that hit -- it's quite a big increase in operating costs. Were there any work done on new builds, anything that could have impacted the quarter?

No, it was heavily weighted on the labor side, and as I mentions, the $200 a day across the fleet, and then other labor, let's face it, we're still putting out 4 rigs a month, and if you look at how many rigs are working out there, a lot of demands for people. And there's just a lot of challenges and a lot of demands, but we think that again we feel pretty good about the fourth quarter.

You think that the fourth quarter price by day costs could go down until or do you think it's going to be relatively flat for the quarter?

Yes. (laughter) I think there's a chance that it could be down, Waqar. I know we're working awfully hard on it, and that's -- I sure can't make any guarantees, but we sure feel like there's a possibility that we could have them down from the third to the fourth quarter.

Okay. And Hans, next year if you're not building the 48 rigs, you could possibly be -- you possibly have free cashflow available next year, and then you also have a major investment in Atwood and Slumberjay what do you plan to do with those investments? And if you have free cash flow, what do you plan to do with that in '08.

We've been in a great position of being able to grow the Company through the new builds and I think as we've talked before, Waqar, we see that opportunity continuing. We have -- we're in an interesting place in the market now, where a lot of those rigs are out, and I'm thinking now about competing rigs, and so now, it's really a race in terms of field performance and execution and delivering the lowest total well cost, all of which is to say, I think we're going to have additional opportunities to build, and we talked a little bit already about our international opportunities.

But to kind of go to your question, if things pull back some, and we expect them to slow down and our cadence to slow down. I think probably the first priority would be to look at debt and then, depending on what cash is available, it's going to be an exercise and figuring out a way to return that to shareholders and so there are different ways of doing that, and those have been in discussion with our board each meeting and we'll continue to have those discussions, so, I think it will be something that won't be a big surprise and the nice thing is we have lots of flexibility going-forward.

What do you plan to do with your 4 million shares that you own in Atwood Oceanics?

Well, as you know, we have sold some Atwood and will continue to just look at that as an investment and what makes the most sense for our investors. There's no real timing update on that or what we might do in the short term.

Okay. Great. Thank you very much.

Thank you.

We will take our next question from the site of Mike Breard of Hodges Capital.

Very good quarter. I'm just wondering on your new builds, would you possibly build some rigs on spec just to continue putting them out, maybe 2 or 3 a month, or what might your plans be if you can't get the additional sales?

Mike, I think our preference and what's worked well for us is to have the sponsorship of our customer, and we're putting lots of investor capital on the table, and we think having a term contract makes the most sense. I mentioned there's some moving parts that we'll watch going-forward. The biggest one is just how the demand works, and what kind of visibility do we have on that.

There other things that we would consider as well, which is as robust an order book as we have had, the capital spares really come out of your order book. And as things slow down, you're going to have a 200 rig fleet that you need capital spares, so it will give you some continuity going-forward on that issue. And continuity is a valuable thing for us, we continue to push innovation, we have a learning loop with the field that we're constantly making improvements on, so there's certainly a value proposition for all of us to have some continuity. What's nice, we can dial that back to a pretty slow cadence, and continue forward. So, it's going to be something that we pay a lot of attention to in the coming months, and we have got lots of options, and so that's what we'll do. We'll continue to watch that.

Okay. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from the site of Ed Muztafago from Citigroup. Please go ahead.

Hi, guys, how you doing? Maybe if I could just split some hairs over the margin issue a little bit. As the new rigs come out. I assume there has to be at least some initial efficiency issues with them as the guys get comfortable with them running and that. Can you maybe quantify for us if that's the case? And maybe what the extent of that might be across the fleet so that we could understand how that might come off in future quarters or maybe you could give us an idea if just whether the new rigs are under or over performing your sort of anticipated margins for what they were expected to be?

Ed, this is Juan Pablo. I think that in time what the impact of what you described will be is a slight reduction in costs across the fleet. As the number of activity days grow per quarter, the number really is a small number. We're talking about probably as large as $700 to begin with, but now probably quarter-to-quarter decreasing by maybe $100 each quarter. So, yes, you're right, it's something that we consider and something that hits our operating costs, but it's not something significant at this point.

Okay. So of that incremental jump in margins and the -- or decrease in margins in the quarter, there's very little of that associated with let's call it new build efficiency issues?

Yes, I think in terms of performance, I think we've been open about here's all the Flex 3 performance, all the number of wells, here's how often we exceed the customer's curve, we're doing that same exercise with Flex 4, and I think that we have been -- the performance has exceeded our expectations in terms of Flex 4. Now, having said that, that doesn't mean that you don't have any problems and you don't have to make improvements, but I guess that's the other thing that we're very encouraged by is, we have a capture and a way to watch and track downtime and every associated issue, and we're seeing trend improvement in those areas as well. So, I think that the performance and then the response in terms of quick correction, quick recovery has really been better than we thought, Ed.

No, that's absolutely fantastic. Thanks, guys.

Thank you.

It appears we have no further questions at this time. I will now turn the program back to Doug Fears.

Thank you, Carrie. We'd like to thank everybody for joining us today, and have a good day.