Helmerich and Payne Inc (HP) 2007 Q4 法說會逐字稿

Welcome to today's teleconference. At this time all participants are in a listen-only mode. Later there will be an opportunity to ask questions during our Q&A session. And please note this call is being recorded. I will now turn the program over to Mr. Douglas Fears, Vice President and CFO of Helmerich & Payne. Please begin, sir.

Thank you, Kevin. And good morning, everyone. Welcome to Helmerich & Payne's conference call and webcast to discuss the company's fourth quarter and fiscal year earnings. With us today as usual are: Hans Helmerich, President and CEO; Executive Vice President, John Lindsay, and Alan Orr, and Juan Pablo Tardio, Manager of Investor Relations. And as you know, much of the information we provided today involves risks and uncertainties that could significantly impact expected results, and these are discussed in our most recent 10K. We'll also be making reference to certain nonGAAP financial measures such as segment operating income and operating statistics, and you can find these GAAP reconciliation comments and calculations on page nine of today's press release.

Earlier today Helmerich & Payne reported record net income of $449.3 million or $4.27 per diluted share for our fiscal year just ended September 30. This compares with net income of $293.9 million or $2.77 per diluted share for last year. Included in our income figures are gains of $0.73 for 2007 that include portfolio sales, sales of drilling equipment and insurance settlements. Net income for 2006 included $0.16 per share from similar transactions. For the fourth quarter of fiscal '07, we reported net income of $116.4 million or $1.10 per share compared with net income of $98.5 million or $0.93 per diluted share during last year's fourth quarter. Included in these results from the sale of portfolio securities, drilling equipment and insurance settlements are $0.13 per share for the fourth quarter of '07 and $0.06 for the fourth quarter of '06. We are naturally very encouraged and enthusiastic about these results.

The company's sequential increase in earnings was primarily driven by U.S. land rig margin and rig activity increases as the company continues to deploy new rigs to the field at attractive day rates, margins and contract terms. Average U.S. land rig revenue per day rose by $265 over the previous quarter to $23,666 per rig day, and our average cash margin averaged $12,221 per day for the fourth quarter, up by $439 per day sequentially. For the past fourth quarter the company recorded 13,263 rig activity days, up 7% above the previous quarter. All of these statistics come when many contractors are reporting sequential net reductions in rig margins and activity. Hans and John will comment more about these encouraged -- encouraging statistics in just a minute. Before they do, I will touch on are just a few other financial details.

At September 30 the stock portfolio had a market value of $455 million. Currently, the market value of the portfolio is approximately $460 million or an after tax value of approximately $2.75 per Helmerich & Payne share. Our capital expenditures for the September quarter totaled $213 million, bringing the total fiscal 2007 total to $894 million. At this time we're estimating 2008 capital budget to be approximately $375 million. Within the fourth quarter depreciation total of $44.8 million is approximately $2.7 million of abandonment kind of year-end cleanup charges. As you can tell our effective tax rate for the year was 36.4%. And we estimate that next year it will be between that number and 37%. I will now turn the call over to Hans Helmerich, President and CEO, and after he and John have made their comments we'll open the call for questions. Hans.

Thanks, Doug. Good morning, everybody. We're pleased to report the company's highest all-time year end results. This accomplishment is the third consecutive year of record setting results and in some ways more satisfying as it comes a year after the cycle peaked out in terms of day rate highs. Why more satisfying? Because our strategy never was based on cyclical highs and rig scarcity, where demand has to outstrip supply to make this an attractive business, where customers pay more for any available rig. We've long believed a more enduring approach is enabling customers to enable lower total well costs through the industry's safest, newest, and innovative land fleet. We've been busy building that fleet at a rate of four rigs per month. And perhaps this year's most significant accomplishment is found less in the financials and more in the on-time, on-cost execution of that aggressive program. It is really a credit to our guys to daily deliver on the entire value chain involved, the design, manufacturing, commissioning, training, and field performance. So it is only fitting to recognize their dedication and contribution to the company's accomplishment.

The customer's endorsement of the FlexRig is in the end a buy-in to those people that stand behind our outstanding fuel performance. We're occasionally asked how do you -- how do the current market conditions change your thinking. Well, today we're managing to the same challenges and opportunities we've talked about on these calls and elsewhere for a long time: deliver growth to shareholders by securing and executing on an aggressive order book; win the customer's trust by consistently and safely providing differentiated fuel results; take advantage of an ongoing retooling effort in an increasingly segmented industry, still top heavy with all of the less capable rigs; expand into additional drilling markets with more focus on expanding our international effort. While this isn't an exhaustive list, it should be familiar to our regular listeners. Perhaps more notable is what the list excludes, namely we are not managing to the dilemma of carrying a large percentage of old, less capable rigs, while the customer increasingly votes in favor of high efficiency rig offerings.

This dilemma reflected in recent public comments as our peers ponder the trade-offs between market share and price discipline. That sounds a little like the classic prisoner's dilemma with the logical best choice being price discipline. Since after all the market drives demand, contractors have to fight against being reduced in a soft environment to engaging in a downward spiral of rig-on-rig price destruction. Some industry observers are asking why are we not seeing more pricing discipline in a market with historically high rig counts? One reason is that truly differentiated performance has driven a segmented marketplace. We see on our end existing FlexRigs that have worked on the spot market this last quarter are 100% active and still commanding over $25,000 rig revenue per day on average, while competing rigs aggressively cut price and are still pushed to the sidelines.

Take a look at last year in terms of margins and activity by comparing the fourth quarter of fiscal 2007 to that of 2006. Our average rig margin per day in the U.S. land market has only declined by 8% to $12,221. This daily margin is now 40% greater than that of our four largest peers. Moreover, our quarterly average number of active rigs increased by 38% year-over-year, while that of our four largest peers combined experienced a net reduction of 14%. We passed the point where competitors can credibly position idle, old equipment as future operating leverage. Back to the prisoner's dilemma, the next logical exercise in discipline is to cut up old industry rigs that are increasingly obsolete, ill suited for today's drilling demand and potentially unsafe. In strong up-cycles, the natural rate of attrition is artificially interrupted until supply comes back into some equilibrium. It turns out, the capacity concerns surrounding new builds are being shouldered by the industry's oldest and least capable equipment as they should be.

Are there too many old rigs? That seems to be the question, but in any event there are not too many new builds. They represent the customer's tool of choice for the future. All of this reinforces our conviction and retooling theme that continues to provide us attractive opportunities going forward. The new order of six FlexRigs we announced this morning further adds confirmation that even in a soft market the customer supports the company's value proposition. With that I am going to ask John Lindsay to make his comments.

Good morning. In the last call we stated that the major theme in the U.S. was how operators continue to find best value available in the FlexRig at premium pricing in spite of the plentiful number of very old rigs, idle and available in the market at lower rates. We believe that this remains the overwhelming theme today. Our primary competitors are stacking excess of 200 rigs, while H&P customers continue to contract FlexRigs for the purpose of achieving lowest total cost per well and accelerated production by completing more wells per year. Toward the end of my comments I'll review a few trends that our customers face regarding the difficulty of drilling wells today that should continue to generate interest and additional FlexRigs, but first I will review our three operating segments made up of U.S. land, offshore, and international land.

A few important data points regarding U.S. land, today we have 94% activity with 151 out of 159 rigs working, up eight rigs since the last webcast. Our active rig count is up 35 rigs since the webcast a year ago. FlexRig continue to maintain 100% activity today with 121 operating. With the latest announcement of six more new build FlexRigs, we now have 11 FlexRigs remaining in our current new build order book that will be completed by the third fiscal quarter of 2008. The eight stacked rigs are primarily designed for deeper well depths. They're 2,000 and 3,000 horsepower conventional rigs, and the market that these rigs target will probably remain soft. Therefore, we don't expect these rigs to contribute in the first fiscal quarter.

Of our currently active fleet of 151 rigs, 64 are in the spot market and the remaining 87 rigs, including 71 new builds, are under term contracts. About 50% of our potential revenue days for fiscal 2008 and 2009 are already under term contracts. Average rig revenue per day for H&P's entire U.S. land segment increased sequentially by 1% or $265 per day. We expect average rig revenues per day to continue to increase for rigs under term contract while continuing to decrease for rigs in the spot market. This would result in relatively flat average rig revenues per day during the next few quarters. The new flex rigs continue to perform very well. Overall fuel results have met our expectations, and we see ample opportunity for improvement which we fully intend to capture going forward. We continue to have discussions with customers regarding construction of additional new FlexRig3 and FlexRig4s. The additional -- the six additional new builds announced today are FlexRig3s, bringing our total FlexRig3 rig count to 59 by 2008. You may recall we built the first 32 FlexRig3s from 2002 to 2004. We continue to be pleased with the prospects ahead given our proven FlexRig performance.

Next, I will cover quickly our offshore operations. Average activity and our offshore segment decreased sequentially by 11% to an average of 5.3 active rigs during the quarter, and is expected to decrease to an average of five rigs during the current first fiscal quarter. Five of HP's nine platform rigs in our offshore segment are currently active. One is being mobilized to Trinidad, and one rig is being prepared for work under a long-term contract. One of the five active rigs is Rig 201 which is now fully operational. And as you may recall, Rig 201 was damaged by hurricane Katrina in the fall of 2005. Two platform rigs remain idle and are currently being marketed. Two potential customers have expressed interest in contracting each of these idle platform rigs, and we're currently negotiating what appear to be good prospects for these rigs. In summary, by mid-year we expect to have eight of nine rigs operating in the offshore segment, so overall we're very encouraged by our offshore outlook.

Now turning to our international land operation, we experienced another very good quarter and 100% year-over-year growth in operating income on the strength of very good day rates and activity during the year. We continue to view the market as being very robust for international activity even with a slight softening in near term activity. Average international activity decreased sequentially by 9% to an average of 22 rigs during the quarter. Today, 22 of 27 rigs remain active in international operations, and activity should remain at this level for the remainder of the first quarter.

As mentioned in the press release, there was an early termination fee of approximately $6 million, which favorably impacted the average rig revenue and margin by approximately $3,000 per day. Without the early term income, average day rates and margins were relatively flat sequentially and should hold steady at those levels during the first quarter of fiscal 2008. Three of the five currently idle H&P rigs in South America have good work prospects that are currently under negotiation and should be reactivated early in the second fiscal quarter of 2008. However, several of the active H&P rigs in Ecuador may become idle in the second quarter of fiscal 2008, as ENP companies are in the process of trying to determine their future plans given the growing industry challenges in that country. As we've mentioned in previous calls, the FlexRig3 working in Tunisia is setting new performance benchmarks in drilling and safety performance in north Africa. We remain encouraged that we'll see expansion of FlexRig activity in both Latin America and the eastern hemisphere.

In closing, a few comments related to the H&P edge and field performance and further growth. Perhaps this is best illustrated by listening to a few examples of the operator's technical drilling challenges for rigs today and why demand will continue to grow for rigs with advanced technology. First, over 40% of all wells drilled in the U.S. are directional horizontal, and that's up from 20% in 2002. The percentages are even higher in unconventional plays. An example is over 90% of all wells drilled in the Barnett Shale and the Piceance Basin are directional and horizontal in 2007. Horizontals and extended reach horizontal wells require rig performance that is exceeding the capability of the old mechanical rig fleet. In general, more difficult reservoir characteristics and the ability to navigate more precisely in those reservoirs continue to be a challenge for old rigs. In response H&P customers employ FlexRigs on directional and horizontal wells 60% to 70% of the time.

So considering these technical challenges, it stands to reason that the industry has reached a tipping point, a segmentation in the market where proven advanced technology rigs continue to be additive to the fleet and old conventional less capable rigs are stacked. H&P will continue to focus on the strategy of providing the best value to our customers by offering FlexRigs supported by the best personnel, best safety record, and over 300 rig years of FlexRig experience. We expect to be able to continue to grow our fleet both in the U.S. and international based on customer demand for FlexRigs. So now I'll turn it back to Doug.

Thanks, John. We'd now like to open the call to questions.

(OPERATOR INSTRUCTIONS) And we'll go first to the site of Pierre Conner from Capital One Southcoast. Your line is open.

Good morning, gentlemen.

Hi, Pierre.

I don't often throw this out, but congratulations on a great quarter.

Thanks.

John, first, on the -- or maybe JP actually, you've given us some perspective on the amount of rigs on term for fiscal '08 and '09, and what expected margins could be for the term portion. And so my question obviously is with the six additional, have you redone that and/or directionally obviously the percent on term is going up, but what does that do to those average margins there?

It doesn't really impact them in a big way. We still have an expected 54% contracted during fiscal '08 and 46% during fiscal '09.

Okay. And so this is not enough to change those estimated margins within the term portion of already contracted, correct?

No, not in a material way.

Got it. That's fine. Perfect. John, so good work on the cost side in the year end here. Just to make sure we get a head's up going into the first quarter sometimes there is a little extra accrual for workers comp and such. What could you give us thoughts on where you see the average daily U.S. domestic land operating costs going sequentially?

Well, like you said, Pierre our costs were down, and we mentioned that in the last call that we felt like we were beginning to get a little handle on costs, and we were hoping for flat and possibly down. I think right now I don't see any reason to expect the costs would be increasing. I think there is still an opportunity for us to at least hold them flat in general. Does that answer your question?

Yes, absolutely. That's great. Gentlemen, I think earlier you gave us a delivery schedule when you expected the additional rigs that you've just been awarded to be delivered, and so my question is relative to we hear a lot about a tightness in components and such. Have you ordered the components that you need externally yet, and what is their delivery issues associated with it in, if any relative to your commitment on delivery to the field?

Peter, this is Hans. One of the things we've done I think very well, and our guys get credit for, is just managing that supply chain, and so we will be able to -- that's the other thing that's nice today is that we don't have these long lead times that we have to put in front of our customers, and so we are going to be able to begin delivery, and it will be in an orderly fashion that runs through the -- April, first part of April, and so we're all set up to accommodate that new order.

Okay. So even with the tightness in the market for equipment you're in good shape. The last one, Hans, back to you, I'm always interested in the potential for the international adoption of new Flex, and so I'll be straight up, I think a competitor rig builder is out there with commitments in Russia. Do you still feel there there's opportunity in Russia remaining beyond what's sort of already been signed up with some others and where else is there still international opportunity?

Well, we are still encouraged by the level of inquiry, and then we have active bids in the works in several places, Pierre. One of them would be Russia. And so that's a market we're still interested in, and so, yes, I think that our thoughts haven't really changed. We think that the FlexRig technology is going to be attractive to customers both NOCs and both our current roster of strong customers, and I think we'll be hearing more as we go forward into this year in terms of, we mentioned I think on a call or so ago that we didn't expect anything to really happen that would make an impact before kind of mid '08, and I think that's still true. And we still have to wait and hear, but we have several things going on, a lot more than we had six months ago or certainly a year ago, and so don't get discouraged yet. It's -- we've been careful not to over promise on the international markets because we know they take more patience and at the same time I think we'll see some encouragement there.

Okay. Alright. That's great. Maybe one more actually, and, JP, could -- do we -- is the number of term contracts that are rolling fairly evenly spaced during fiscal '08, or do we expect some more now out just sort of a trend in those roll those rollovers?

Sure. They're evenly spread out. We start the first fiscal quarter with an estimated average of 15.9 previously existing rigs on term. That goes to 13.4 for the second quarter, 9.7 for the third quarter, and 3.3 for -- 7.7 for the fourth quarter. Those are just estimates at this point.

Excellent. Thank you. And thanks, Doug, for your narrowing down that estimated tax rate so tightly. Appreciate it.

You bet. You're welcome.

Gentlemen, I will turn it back. Thank you very much.

Thank you.

We get our next question from the site of Mike Breard from Hodges Capital Management. Your line is open.

Yes. Excellent quarter. I was just wondering, the FlexRigs have been staying essentially 100% active in the U.S. Is there excess demand? In other words, if you have two available, do you have three or four people that want rigs? And the reason I ask, is there any chance that you might considering -- consider building rigs spec if indeed there is excess demand?

Well, we're trying to generate as much excess demand as we can, but really we like the model we have now with -- and most folks on the call are familiar with, where we're asking for a three-year term, and very attractive financial returns. One of the things that we were encouraged by is this latest announcement really fits that model, so it is not a one-off contract. And your question is a fair one, but our preference is to continue to have opportunities to build, not to, at this point, think about spec building because we really would encourage a customer to get into our production queue.

Okay. Thank you.

We'll take our next question from the site of Mike Drickamer with Morgan Keegan. Your line is open.

Hi. Good morning, guys.

Hi, Mike.

Doug, I don't know who exactly best wants to handle this. Maybe it is for you. If you look at the 10 new rigs delivered during the quarter, what was the impact from those rigs on the average daily revenue and average daily margin? Did they have a appreciable impact on the increases we saw sequentially?

Yes, they did. Juan Pablo, you probably want to address that.

I think -- I imagine, Mike, those rigs that were deployed during the quarter had significantly higher day rates than the average for the previously deployed rigs, so as you expected, the average will continue to go up through mid to -- yes, mid fiscal '08 as it stands today.

And that's for new builds that you're referring to.

That's correct.

If we -- those 10 rigs had not been delivered, would the average daily revenue in margin actually have decreased in the quarter?

I am not sure, Mike. I would have to run those numbers. I would be happy to visit about that off line.

Okay. The six new rigs that were delivered, I mean, even though the rest of them market as being day rates falling, is it safe for us to assume that you're getting the comparable returns on these six new rigs as to the previous ones?

It is. The returns that we've had and talked about for our overall order book, these match and are very similar to those, Mike.

Okay. And then, Hans or John, I am not sure which one wants to take this, but if we look at the eight rigs you guys have idle now, they're in the 2,000 to 3,000 horse power range, are there international opportunities for those rigs, either you working them internationally or selling them to somebody else to work internationally?

Yes, Mike, I think there is an opportunity for that. We're looking at various options for those potential moves. Right now just the beat market in general in the U.S. is pretty soft. I think a few of those rigs will potentially go back to work in the second half of the year, and so I see them as opportunities. But, no, I think there are opportunities to also look at those internationally.

Would those rigs be for sale if somebody came with a good offer?

I would think anything is for sale if the price is right.

Okay. Thanks a lot, guys, I will turn it back.

We'll take our next question from the site of Matt Conlan from Weeden & Company. Your line is open.

Hi, guys. Great quarter. Looking at the -- including the six new contracts you announced today, you have 11 rigs to be delivered in the future including seven by the end of December. That implies that two of -- at least two of these new six rigs are going to be delivered this quarter, which is an alarmingly quick delivery. I just wanted to ask if you had already ordered this equipment ahead of time or whether you are continuing a building program starting to construct rigs on semi spec at this point in your construction program?

Don't be alarmed, Matt. The -- yes, there is a quick response, but we've talked before about when we've had such an aggressive order book we have taken all of our capital spares out of that production line. So you if needed a mast, or a motor, an engine, we purposely squeezed out all of our capital spares as we were engaged in that effort. So we have as part of our supply chain consideration for capital spares that are necessary. So it's -- and the other thing we talked about last call, and I think I you and I have talked about, is just the value of the continuity of our manufacturing effort on several fronts in terms of people, in terms of shop, floor space, in terms of the learnings we continue to push. So, yes, there is a balancing of having and being prepared, and again we face the same thing today even after this what we think is a nice contract.

We have several conversations going with additional builds, so we have got to be prepared for, but I think we're doing that in a very balanced way. We don't have -- the intention is not to preorder or to have a lot of what would be considered by some spec rigs on sidelines. That's not the case, but it is a very thoughtful, managed process, and I think the big driver is the need we're going to have for capital spares going forward. So it gives us some flexibility in that regard, and I think it is the right approach.

Well, let me put it another way. If somebody came to you today and asked you for two new rigs, when could they be delivered?

It would depend a little bit on rig type and --

FlexRig3.

That would be either March, April timeframe.

That's terrific. Great assembly line you've got going there. Alright. Terrific.

If I make one clarification to just to make sure the numbers are interpreted correctly, the seven rigs we expect to deploy during the first fiscal quarter include three rigs that have already been deployed. So we only have four of the 11 rigs being deployed this quarter. The other seven will be deployed in fiscal -- excuse me, in calendar 2008.

Okay. I guess --

We can talk about that off line, but I just wanted to clarify.

I guess I misread that, then.

All right.

Thanks.

We'll take our next question from the site of Ian Macpherson from Simmons & Company. Your line is open.

Hi. Good morning, and congratulations. Hi. I guess, Hans, I would be curious to know if your capital costs for the FlexRig3s are pretty static or if you see them trending higher or lower on the margin with your most recent here?

What we're seeing is I think some overall moderating of upward price pressure. Heretofore we've been fighting the oil field inflation and price cost pressures just by becoming more efficient in our manufacturing efforts. So we pay a lot of attention to man hour per ton and gaining production efficiencies. And so that's all to say to your question these most recent ones really reflect that average costs for Flex3 that we've been talking about, and to remind folks we said the overall order book is a little over $15 million, the Flex4s and Flex3s is different models. One is a little less expensive than the other, and we really haven't given much more granularity than that. But to give some comfort, yes, we're seeing flat costs as we go forward on this most recent order.

Okay. That's helpful. And then if I may ask, could you sort of frame that capital requirement with what you might be spending on international deployed FlexRigs, if they were to arrive?

Well, I am not sure I am following, except to say we do have bids to international work that would give us opportunities to build new into that, but maybe I am not following your question.

I guess typically we think of international land rigs requiring a lot more capital investment just because of all the redundant capabilities and just ancillary equipment around it. So I am wondering if we should think about interpret contract opportunities entailing significantly higher cost per rig than what you're spending in the U.S.?

Okay. I am sorry. Yes. I think that there are international -- there are issues that are particular to those markets, so some would require camps, and that's true even in the U.S. where we might have winterization package, might not have, or we would have other requirements that customers would spec out internationally. So those would all of course be add-ons. You have mobilization increases as well, so, yes, those would all, depending on what the customer wanted, would be an add-on to those averages I mentioned.

Okay. Thanks. I will hop off.

Thank you.

(OPERATOR INSTRUCTIONS) And we'll go next to the site of Arun Jayaram from Credit Suisse.

Good morning, guys. Good results.

Thank you.

I wondered if you could comment, your rig count is up about 40 rigs on a year-over-year basis in terms of work. Can you comment a little about the geographic distribution of your rigs, and what geographic markets in the U.S. are you seeing the most incremental demand?

Arun, probably the largest demand we've seen has been in the Rockies, continue to be in the Rockies, and the Piceance Basin we see demand in the Barnett. I guess in general the unconventionals continues to be a lot of demand from our customers.

Okay. And how big of a position do you have now in the Rockies in and the Barnett?

Oh, geez. I think in Piceance we're around 20 rigs, Rockies overall we're in the 40s, 40 range, and in the Barnett we're, gosh, I think we're in the 20 range, 25 range there too, I think, somewhere in that ballpark.

And can you give us a sense of where the six rigs are going?

In the U.S.

Okay.

We can't right now, Arun. They're U.S. based. We're really excited about the opportunity and --

Okay. Moving the line a little bit, in terms of your quarterly results, your average rig margins offshore more than doubled sequentially up about $10,000. Can you give us a sense of what that increase related to, and is that a sustainable margin going forward? It went from $8,500 a rig to [$1,880] offshore.

I think the way to look at offshore right now, Arun, we've reshifted some of the the way we report in those segments as you read, and so those numbers are a little clear shifting, but as we go through the first fiscal quarter, you might expect a slight decline in operating income and a decline in margin per day. As we go through the rest of the year, through the rest of the fiscal year, we do expect some significant improvement and hope to be able to attain operating income levels for that segment that are perhaps even higher than those that we saw in fiscal year 2006.

That's helpful. And last question. John, in your prepared remarks you mentioned that you anticipated margins being flattish for several quarters going forward with some of the spot work being offset by higher margins from the new builds. Would that imply that margins stick around this 12.2% margin level for quarters to come?

Yes, Arun. That's what we're saying. Again, it is just a function of new rigs coming on and spot markets at higher margins, and the spot pricing declining, and of course that's par to the course. We can't predict how much the spot market will decline. There is still further pricing pressure there, but that's what we estimate right now.

Okay. That's helpful, guys. Thanks.

Thank you.

We'll take our next question from the site of Dan Pickering from Tudor Pickering. Your line is open.

Good morning, guys.

Good morning, Dan.

A simple fact on the new builds briefly. Can you explain a little bit why either you or the customer doesn't really want to talk about where the rigs are going, and is that a competitive issue or are you displacing other rigs? Just what's the dynamic behind that, the mum's the word here?

I think it is pretty typical for a customer not to want just lots of information out there, and we share some of that, and then this is -- this news is recent, and so I think there may be more to be said later about it, but part of not giving the geographic details is I think it is easier to back into who it might be.

Okay. I understand. Will -- I am going to poke around a little bit to try to understand better. Will all of these rigs go to the same place geographically? In other words, is it a cluster of rigs for you?

Not necessarily, necessarily, Dan. That's still to be determined, but, no, not necessarily in the exact same location or same area.

Okay. And, again, I am just trying to understand the customer's philosophy here. Will this be -- these be rigs to start up new drilling programs, or will it be essentially replacing other rigs, kind of capitalizing on the efficiency issues you guys talked about?

Well, again, I don't know all the inside details. What I understand is that I think it is kind of a classic wase case of what we've seen where more difficult drilling is being seen and operators have greater needs and the older conventional rigs are not able to do some of that drilling. And what I understand I think is it is a replacement of some -- I don't know that it is necessarily a growth. I really don't know those details. I do know at least there are some rigs being replaced.

Okay. Great. And then switching gears, your $375 million capital budget, roughly how much of that is maintenance?

About $150 million, Dan.

Okay. And that $150 million is -- that incorporates the offshore, the international, and the domestic rigs, is that correct?

That is correct.

So, roughly $150 million. So the incremental $225 million then is the new build program that you've laid out to date?

That is correct, new builds and some other capital projects that might have to do with international or offshore.

Okay. Great. Thank you.

Thank you.

We'll go to our next question from the site of Alan Laws from Merrill Lynch. Your line is open.

Good morning.

Hey, Alan.

You're definitely setting the standard here in the land market. First question I had was, I would like to ask about the quality issue which some of your competitors actually think is a debate still. Would you say that the recognition of the bifurcation of the market is growing.

I think that we're seeing that. It gives us some encouragement because we talk to potential new customers all the time and there's that recognition. And I think one of the best, most effective marketing efforts that occurs is when customer-to-customer where operators are sharing just the success that they're having, and that's a partnership we have with them. The FlexRig becomes a catalyst to a lot of the efforts they put out. So when that operator-to-operator selling occurs, it is very positive for us.

Okay. You also mentioned in your early statements there today was the challenges that older rigs are facing to compete even financially by cutting rates. When you look at the presence and expected domestically rig market for 2008, how low do you think the spot margins are going to go for lower quality equipment including your nonFlexRig equipment you have out there today?

Well, that's difficult to predict, and what I was saying in my --

I will ask it this way, do you think there is significant further downside in it?

I think that's what circles back to the notion of pricing discipline. We -- we're the price leaders. We feel like we continue to provide a certain umbrella type, but more -- maybe more important is the segmentation in the business really does separate out and the market is recognizing, as it should. This happens in other industries. They're recognizing the higher value and highway higher quality on the upper end. So I think what does happen is, in the lack of some pricing discipline you do have rig-on-rig competition which is typical in down cycles, and it can drive prices, and the operator kind of steps to the sidelines and watches the prices get driven down. So I think that that's a concern because at some point there is potential contagion that runs upstream, I suppose, but I think that's a legitimate concern.

Okay. My last question had to do with -- I know you're not in the Canadian market, but there seems to be more announcement from Canadian contractors of bringing their fast-moving or new configuration equipment into the market. Any thoughts there around added competition, or are we talking about more of a niche situation?

Well, that's a good question, too. We're very watchful on just what the competition is and what the landscape looks like, and I think you're right. I think you're going to see some migration down, but our sense is we'll continue to do well. I think those typically address a little shallower market opportunity, and so I am not sure I would call it niche, but it is a slightly different market opportunity, and it is something that I think is important to watch going forward.

All right. Okay. Thank you very much for the answers. Appreciate it, guys.

And we have a follow-up question, this one from the site of Mark -- Mike Breard from Hodges Capital Management. Your line is open.

Yes. Just a quick question. Six new rigs, is that a brand new customer or somebody that's already using a FlexRig, and in general are you seeing more people picking up your FlexRigs for the first time?

Well, we're sure seeing interest in customers that would be first timers, but, Mike, we can't tell you if that's a new one or an old one in terms of a FlexRig customer.

Okay. Thank you.

And we have another follow-up question, this one from Ian Macpherson from Simmons & Company. Your line is open.

I just had a quick follow-up. I don't know if I missed this or I'm sorry if I did, on the questions around the spot market. Did you provide where the range of spot day rates were for the average of the past quarter and where they are today?

Yes, well, if you take the average for the H&P rigs that were in the spot market during our fourth fiscal quarter, I think that number is close to 24,100, and we believe that that will slightly continue to decline as we've seen in previous quarters.

All right. Thanks, JP.

Yes, sir.

I am showing no further questions at this time.

Thank you very much. Have a good day.

This does conclude today's teleconference. Thank you for your participation. Have a great day. You may disconnect at any time.