Helmerich and Payne Inc (HP) 2008 Q2 法說會逐字稿

Welcome to today's teleconference. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during our Q&A session. Please note this call may be recorded.

Now I will turn the call over to Mr. Doug Fears, Vice President and CFO. Sir, you may begin.

Thank you, Tommy, and good morning everyone. Welcome to Helmerich & Payne conference call and webcast to discuss the Company's second quarter earnings. With us today are Hans Helmerich, President and CEO, Executive Vice Presidents, John Lindsay and Allen Orr, and Juan Pablo Tardio, Director of Investor Relations.

As you know much of the information provided today involves risks and uncertainties, that could significantly impact expected results, and that are discussed in our most recent 10-K. We will also be making reference to certain non-GAAP financial measures, such as segment operating income, and some operating statistics. You may find the GAAP reconciliation comments and calculations on the last page of today's press release.

This morning Helmerich & Payne Inc. reported net income of approximately $102 million, or $0.96 per diluted share for it's second fiscal quarter ended March 31, 2008. This compares with net income of approximately $107 million, or $1.02 per diluted share, during last year's second fiscal quarter ended March 31, 2007. Included in this year's second quarter net income are $0.04 per share of after-tax gains from the sale of portfolio securities and drilling equipment. 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 $0.05 per share from after-tax gains related to an insurance adjustment.

Although the Company experienced declines in it's offshore and international businesses, our U.S. land rig segment continued to perform at historically high levels, while continuing to establish itself as the performance leader in the land rig industry. The Company recorded it's 17th straight quarter of revenue day increases, and maintained a high utilization rate of 94% for the second fiscal quarter. Average revenue per day for the quarter reached an all-time high of $24,415 per day.

Although the Company recorded a sequential margin decline of $253 per day, it still commands a significant premium over our competitors in the U.S. land rig industry. As mentioned in the announcement, the international segment operating profit for this quarter was negatively impacted by an adjustment of $5.9 million, or $0.04 per share after tax, relating to the depreciation of certain assets recorded in prior years.

Capital expenditures during the quarter were $172 million, bringing the total for the six-month period to approximately $322 million. Our capital budget for the year is approximately $650 million, but will rise with additional commitments to build.

At March 31, our stock portfolio had a market value of $489 million, and our most recent valuation for the portfolio totaled approximately 565 million. If you assume the entire portfolio was sold, and taxes were paid, the net proceeds would total approximately 340 million. Although our effective tax rate went up slightly compared to the previous quarter, we still expect the overall effective rate for the year, to average somewhere between 36.5 to 37%.

I would now like to turn the call over to Hans Helmerich, President and CEO. After Hans and John Lindsay have made their comments we will open the call for questions. Hans?

Thank you Doug. Good morning. The Company's second fiscal quarter experienced some declines across all of our business segments. Most if not all of these factors represented transitional matters, and not developing trends.

As we move into the second half of the fiscal year, we expect to deliver operating income growth, in all three of our drilling markets. We will continue to detail on our call today the issues of costs, one-time adjustments, and rig transitions that impacted the second quarter.

More broadly, the first half of our 2008 fiscal year has been quite strong. In a softer market that saw over 400 competitor rigs sidelined, our utilization for the U.S. land fleet remained at 94%. While the FlexRigs worked 100% of the time. Our customers reward us with significant day rate premiums compared to our competitors, and our growth in activity days make steady and impressive progress, while our top peers lost market share.

Our rig order book has continued to grow, providing valuable continuity to our manufacturing and assembling effort. That area continues to execute well with on-time and on-budget deliveries. As we move into the second half of our fiscal year, and look at developing trends, the backdrop has turned decidingly better. As always the primary driver is commodity price environment, and we have seen a dramatic improvement in the natural gas prices coming out of the recent winter.

The cold weather was one of several variables that now combined, to dispel a crowd of concern that has hung over the natural gas markets for the last two years. Predictably higher prices and a bullish natural gas outlook will embolden customers to increase their E&P budgets as 2008 continues to unfold. It appears that the market has already called the bottom, and is asking if we are on the front end of another upcycle. And if so, what will be different this time.

One possible difference will be the plight of hundreds of rigs sidelined by customers over the last 18 months, even when offered deeply discounted day rates. In previous upcycles most of these rigs would find their way back into service, and eventually enjoy some pricing improvements. But since late 2006 the land rig market has been highly segmented, with customers showing a strong preference for high efficiency rigs.

Increasingly in fact the legacy rigs are proving unsuitable, for the more demanding and growing unconventional gas plays. Absent an aggressive cyclical upswing on the scale of what we saw in early 2006, which for many reasons we do not expect, this segment of legacy rigs may well languish under pressure of both softer pricing and lower activity levels.

We believe we can sustain our strong leadership in the new build segment of the business. It is difficult to identify a clear matrix or scorecard, but we know we have won a significant share of the new build opportunities. Of course we don't win them all. The customers tell us in those cases, our competition is requiring less term or no term at all, and they are willing to take substantially lower day rates. Putting it another way, we know of no case where competitor matched or exceeded our terms, and was awarded the project.

Our brand leadership continues to be driven by a combination of Best-in-Class rig design and field performance. We have been pleased with the pace of new build orders in this recent market, with one-third of our order book having been secured after the peak of the latest cycle. In addition to today's announcement, we would anticipate ongoing customer conversations to yield additional new build orders in the second half of our current fiscal year.

With that, I would like to turn the call over to John Lindsay for his comments.

Good morning. Second quarter was a transitional quarter in many respects. Dramatic commodity price increases, improved U.S. land activity and rig mobilizations, all setting the stage for a very good third and fourth quarter. What had been consistent is H&P's drilling and safety performance.

Our performance continues to garner interest from out current and future customers for more new build FlexRigs. As we discussed in the last call, during the second fiscal quarter the offshore and international segment experienced the mobilizations of the three offshore rigs, and four existing international land rigs from country to country. The transition is behind us now and we should be poised for a strong third and fourth quarter. The U.S. land segment should continue to improve in the third quarter, as a result of strong natural gas prices, increases in rig activity, and spot market rates finding bottom. Following are some details on the activity and trends as we discuss our three operating segments.

First an overview of U.S. land. Today we have 95% activity, with 166 out of 175 rigs working. Up 10 working rigs since the last webcast. Our active rig count is at 30 rigs, or 22% since the second quarter webcast a year ago. We anticipate an average of 166 rigs working during the third fiscal quarter. The announcement of three additional new rigs brings the total FlexRig count in U.S. land to 139 rigs, of which 136 are working today.

The three new builds are scheduled for delivery during the third quarter, for a total of six new FlexRigs delivered in the third fiscal quarter. We are encouraged by ongoing contract negotiations for more new FlexRigs, and we are pleased with the progress of those negotiations. Nine convention rigs are idle today, compared to 11 rigs during the last call. We believe that at least three of the nine rigs will be active by the end of the third quarter, and should contribute fully in the fourth fiscal quarter.

Of our currently active fleet of 166 rigs, 67 are in the spot market, and the remaining 99 active rigs, including 86 new builds are under term contracts. About 56% of our potential revenue days for fiscal 2008, and 50% for 2009 are under term contracts. Average rig revenue per day for H&P's entire U.S. land segment increased sequentially $409 per day, to $24,414.

We expect average rig revenues per day for rigs under term contracts and rigs in the spot market to remain relatively flat for the third quarter. There is clearly a high demand for quality rigs as a result of higher natural gas prices. So it is possible that we could see day rates improve going into the fourth quarter.

Average expense per day increased by $662 from quarter-to-quarter, as a result of higher maintenance and supply costs, and slightly increased labor costs. We commented in the last call that the first fiscal quarter costs were substantially lower than the previous two quarters, and we did not anticipate the lower cost of to be sustainable. When comparing the second fiscal quarter cost to the average of the last four quarters, costs were up only 2%. In contrast to oil field inflationary cost increases of 7.3% over the last 12 months.

Flex rates continue to deliver outstanding field performance, resulting in better personnel safety, and reduced drilling times for our customers. This is a value proposition confirmed by the continued support of our customers, to contract FlexRigs with attractive rates in term contracts. A powerful thing continues in the unconventional resource plays, like the Barnett Shale, where horizontal drilling is required to get the most efficient production. FlexRigs are best suited to tackle the difficult drilling and gas factory performance that it requires.

Moving to our offshore operations where average activity in our offshore segment increased sequentially from 5 to 5.6 active rigs, out of the total of 9 available rigs during the second fiscal quarter. We expect activity for the third fiscal quarter to increase to an average of 7 plus rigs working. Average rig margin per day increased by $2608 to $12,065. This decline was mostly attributable to start-up expenses during the quarter. This expense will be more than offset by mobilization and holding revenues to be allocated during the first year of operation.

Eight of nine platform rigs are now active. The average rig margin per day for the third fiscal quarter is expected to be in the high-teens and increase to the low-20s in the fourth fiscal quarter. The ninth rig is contracted and expected to commence operations in the Gulf of Mexico in early to mid-calendar 2009, and is currently in the shipyard undergoing upgrades.

Now turning to international operations, where as expected average international operating activity declined by approximately two rigs to slightly under 20 rigs, as full rigs mobilized between countries, to commence work under new contracts during the second quarter. Today 22 of 27 rigs are active in international operation. Activity should improve to 24 rigs by the end of the third fiscal quarter. An average of about 21 active rigs is expected for the third quarter.

Average rig margins per day increased by $227 to $14,396 for the quarter, but are expected to be negatively impacted by 5 to 10% during the third fiscal quarter, given the high level of mobilization activity. This decline should be offset by an increase of similar scale in the fourth fiscal quarter, once all rigs have commenced operations, and are able to fully contribute to the bottom line. The first of seven new international FlexRigs is expected to commence operations in the first month of the first fiscal quarter of 2009. The remaining rigs will commence work at the rate of one per month.

We continue to view the international market as having great opportunity, as evidenced by our bid activity, and ongoing conversations regarding FlexRig performance, and potential expansion areas. In closing, the best illustration of future growth for H&P should be viewed by the announcement of 20 new builds during the last three earnings calls. One-third committed to international expansion, and two-thirds capturing additional market share in U.S. land.

H&P is active and growing in the unconventional resource plays. The Barnett, Piceance, Bakken, and Woodford Shale, and in west Texas and California. We have rigs running in the Haynesville area, and we are developing plans for entering the active Marcellus areas. H&P's focus will remain on executing on the value proposition to our customers. And it is that execution which will produce our growth into the future, and continue to provide returns for shareholders.

I will turn the call back to Doug.

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

Thank you. (OPERATOR INSTRUCTIONS)

We will pause for one moment to allow questions to cue. Our first question will come from Mike Drickamer with Morgan Keegan, please go ahead, your line is open.

Good morning guys.

Morning.

Hans, could I get you to qualify, make sure I understood, right you believe there are 400 idle rigs on the sidelines?

I think that the number reached and exceeded that. I don't know what it would be Mike, as of this week. I think there have probably been some of those rigs that have returned to work.

Okay. And the vast majority of those idle rigs though are legacy rigs?

I mean, I think what we saw happen was the rig count didn't as you know decline in a precipitous way, but the rigs that were idled during the last 18 months, were pushed out of the bottom of the food chain, because I think that once the customers had a chance to absorb some of the new builds that was clearly their preference. So I would expect those rigs sidelined today, are the rigs that are most challenged, in terms of their acceptability to customers.

Okay. I guess where I am trying to go with this how many of those rigs, I mean how high could we get the rig count here? Do those rigs come back, as you commented, these are lower spec rigs, and will have a tough time working here.

Yes, I think that is an important thing to watch as we go forward, and the difference in this cycle that I was trying to point out is the customer has expressed a preference for new builds. So as the cycle improves the notion that those rigs automatically reengage, and go back into the market, I think is an assumption we can't make. They will have to compete against the customer preference for new build high efficiency rigs.

So it's a guessing game Mike, but I think you could have a couple hundred of those rigs that don't ever return to work, and if you look at that in the context of what should be the natural attrition in an industry that the average rig in some cases exceeds 30 years, the attrition should be in our opinion between 100 and 150 rigs. So it wouldn't be a surprise at all for 200 of those rigs to remain sidelined.

Okay. Then one more, Hans you talked about you expect to an announce additional new build announcements in the back half of the year. Can you quantify perhaps as a range how many new rigs you expect to build, comparable to the 10 we have seen over the last two quarters or --?

Oh, as you know we have always been reluctant to try to put a hard number on that. I think that we are going to see the opportunity to, I think we have stated this before, to in fiscal year 2008 to have about 25, perhaps more new builds than that. That is probably all I can say Mike, in terms of a number. But I would say that we are confident that we are going to see additional new orders. We may be able to announce something in the next 30 days or so.

Okay. So would you take an announcement in 30 days, or just wait until the next conference call as you have done the past couple of quarters?

Yes, that is always a question in our minds. We would love for the customers to cooperate and arrange things for our conference calls, but they don't. And so I think if it is a sizable order you guys should know about, then we will tell you about it as it comes to the table.

Great, I will turn it back.

Thanks.

(OPERATOR INSTRUCTIONS) Meanwhile we will move to Kevin Pollard with JPMorgan. Please go ahead, your line is open.

Thanks, good morning guys.

Morning.

I wanted to follow up on some of my questions on the outlook for new builds. I mean, would it be fair to say it would surprise you if the new orders didn't pick up quite a bit over say the next 12 months, versus the previous four quarters, given the increase in commodity prices, and of course, the heightened emphasis on shale plays, et cetera?

Yes, I think those trends that you identify are very positive. And we have been in a softer cycle, and I think one of the interesting things is when you think of the cycle peaking in the fall of 2006, day rates coming down, typically at that point, you would have no opportunity to build new, you wouldn't be able to sign long-term contracts. As we mentioned earlier, a third of our order book has come after that peak in 2006. Now, clearly as you mention, the market is more upbeat about the direction of natural gas prices. They have already taken a very nice bounce. There seems to be more and more momentum behind these shale plays, and unconventional gas plays. So I think we are going to see additional opportunities for new builds.

Have you noticed an increase I guess, I don't know if urgency is the right word, or inquiry level for new FlexRigs in the last 90 days, versus where we were at the beginning of the year?

Well, I think there is a certain lag effect, and I am not sure if we have seen, just trying to address your question in the last 90 days has it been more. I think we have been pleased with the ongoing interest that the customers had. When you think of the shale plays and what they require, in terms of the extended reach, and the higher capability rigs, I think the customer has a long view, and is making preparations for their execution in terms of the drilling program. So but I do believe as I said earlier, we are going to see some fruit from the ongoing conversations we have with customers now.

Are you seeing any trend of at least in the near term, and perhaps you maybe you can comment on the three new builds this quarter, are they existing customers just using more FlexRigs, or are you seeing additional, I guess new adopters for lack of a better word, kind of like you saw last quarter with a couple smaller independents?

I think a little bit of both.

This is John Lindsay. We have for the most part these have been existing customers. I think what is interesting about it though, is that it is customers in some cases taking rigs into areas that we haven't had much of a footprint in, for instance west Texas. And in those cases, replacing older convention rigs. But we do have continue to see interest from new customers, and that is encouraging to us as well. It seems like every year there is another handful of operators, the light bulb kind of comes on, and they begin to understand the value proposition. So we are encouraged by that.

Okay. My last question just real quickly, you touched on in your comments, I was wondering if you could, comment on the Marcellus just a little bit more. We are hearing from most of the operators today, they are saying given the unique requirements of that market, they will require almost exclusively purpose built rigs, I was wondering if you could comment on, what type of assets, how the FlexRigs could be modified, or a new version come up with that would be suitable for that line?

I think if you look at the success that we have had, our engineering group has been really on top of new areas, consider the FLEX 4, where we came in and designed a rig that was really purpose built to drill pad type wells, we are drilling 22 wells in a single pad with FLEX 4S. We have done some things with smaller, more mobile rigs, and I think there are a lot of components in place with the FlexRig now, obviously starting with AC drive and building on the success that we have already had in all of these other unconventional plays. I think there will be some purpose built nature to it, but that is part of the process that we are working on.

So probably a little early to tell exactly what role they are going to play in that market?

You think about it there's not been a whole lot of wells drilled out there. There are some early encouraging signs. We want to be out there with the right rig on the ground, so that is why we have the kind of investigation ongoing, and trying to figure out what the best rig design it.

All right, thanks guys, I appreciate it.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Meanwhile we have a question from Michael Breard with Hodges Capital Management. Please go ahead, your line is open.

I was wondering what you are seeing in terms of day rates just in the last couple of months? Has there been an increase where you have spot rigs available?

Mike, this is John. What we have primarily seen is a flattening out. I mean, we have stopped seeing the downward pricing pressure as you can imagine. It has still been a little early for real pricing increases. We have seen a few in a small way, but in general I think we would best describe it as spot pricing has flattened, with now I guess some upward potential in pricing. But we haven't seen a lot of that yet.

Okay, thanks.

Still a lot of rigs out there, still a lot of rigs out there competing, trying to get back into the market, so that is why we see that I think.

Okay, thank you.

At this time we have no further questions.

All right. Well, thank you everybody for joining us today. If there are no further questions, have a good day. Good bye.

Thank you. This does conclude today's teleconference. You may disconnect at any time, and have a great day.