Helmerich and Payne Inc (HP) 2008 Q3 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. Please note, this call is being recorded.

I will now turn the call over to Doug Fears, CFO. Please go ahead sir.

Thank you Heather 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 Hans Helmerich President and CEO, Executive Vice Presidents John Lindsay and Alan 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'll also be making reference to certain non-GAAP financial measures such as segment operating income and operating specifics. You may find the GAAP reconciliation comments and calculations on the last page of today's press release.

This morning Helmerich & Payne reported net income of $125.4 million or $1.18 per diluted share for third quarter ended June 30, compared with net income of $115.4 million or $1.09 per diluted share during last year's third fiscal quarter. Included in this year's third quarter net income are $0.09 per share of after tax gains from the sale of portfolio securities and $0.04 per share from the sale of drilling equipment and insurance settlements as well as a charge equivalent to $0.07 per share from the in-process research and development write-off corresponding to the previously announced acquisition of TerraVici Drilling Solutions.

Included in net income for the third quarter of fiscal 2007 were gains of $0.21 per share from portfolio and equipment sales and insurance settlements. As we stated in the release, all three of our drilling segments recorded improved result over the second fiscal quarter. John will give you more details, but the continued growth we've experienced results primarily from newly constructed FlexRigs continuing to move to the field, while utilizations and average rig margins continue at high levels.

Also as mentioned in the report, the company announced the signing of 18 long term contracts for 18 new FlexRigs, bringing to 50 the total number of new rig contracts announced for this fiscal year. John and Hans will touch more on the new build program and the current demand for new rigs.

As a result of these orders, out capital expenditure estimate for fiscal 2008 has moved up slightly to about $800 million and our capital budget for fiscal 2009 has not yet been completed. During the third quarter we sold 170,000 shares of our Schlumberger holdings, and now own 967,500 shares of Schlumberger and 8 million shares of Atwood Oceanics. Our portfolio pretax market value currently is approximately $480 million.

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

Thanks Doug. Good morning. The first nine months of our 2008 fiscal year has seen tremendous volatility in oil and gas prices. Since a year ago, oil prices have shot up 88% before giving up 10% in the last month. Natural gas prices were up 111% over the same period, until recently dropping by over 30%. The energy business is no stranger to price volatility.

The last big run-up in natural gas prices was followed by an industry rig building boom in 2005 and 2006. Some observers believe the industry has already kicked off another new build expansion this summer. Certainly the future level of natural gas pricing will influence the scale of new build opportunities. Excuse me.

At the same time, we have customers that have sponsored significant upgrades to their rig roster throughout a range of various gas pricing. We believe this is part of a multiyear retooling effort that is occurring in part because the new demand placed on the industry fleet exceeds its profile of largely older, less capable rigs. Our company remains well positioned to lead in this effort. In the first expansionary round, the company led the industry in terms of net additions with 67 announced new builds.

Those familiar with the company will recall that that growth was preceded by a 50 rig campaign earlier in the decade, where we introduced the industry's first fast moving high efficiency rig, which became known as the FlexRig. That bit of history is useful in providing some context for today's announcement of 18 additional new build orders. This announcement brings our fiscal 2007 and 2008 rig order total to 60.

Perhaps more impressively, it means that 2008 with a quarter of our fiscal year remaining, will be the strongest single year for our new build order book that we've ever secured, with 50 and counting, and a campaign that now spans ten years. We retain several distinct advantages going forward. One is the continuity of effort that we've sustained. We have a steady production of three or four rigs per month in 22 of 27 months; the difference representing months where we produced two rigs. This is a tremendous advantage in keeping experienced people engaged, amassing organizational experience, managing supply chain related issues, and providing a steady push for innovation and improvement. One example of pursuing innovation is our previously announced acquisition of TerraVici Drilling Solutions which is currently developing a patented rotor steerable system to enhance horizontally and directional drilling. This is a modest early investment in what we believe, once commercial, will become a complementary technology to our FlexRigs.

Finally, the continuity of effort allows for a seamless collaboration with out customers, as they remain very focused on improving efficiency and reducing their total well costs. Exceeding the customers' expectations and consistently delivering superior fuel results continues to drive record breaking demand for our FlexRigs.

With that I'm going to ask John to make his comments.

Good morning. Today's announcement of 18 additional new FlexRigs provides a fiscal year to date total of 50 new FlexRigs for H&P. Keep in mind, all 50 contracts are supported with at least a three year term contract. This is a clear signal of customer commitment to the FlexRig brand and the continuing strength of the retooling requirement in this business.

I will comment on a few important metrics of the activity and trends of our three operating segments and I'll begin with an overview of US land. Today we have 98% activity with 177 out of 181 rigs working up 11 rigs since the last webcast. And we -- with an approximate average of 177 working during the fourth fiscal quarter. Of our currently active fleet of 177 rigs, 74 are in the spot market and the remaining 103 active rigs which includes 92 new builds are under term contract. So, 58% of the fleet is under term contract today. Average rig revenue per day for H&P's entire US land segment increased sequentially $128 per day to 24,543.

Although spot pricing has improved in the last few weeks and is expected to continue to improve through the quarter, we expect average rig revenues per day to remain relatively flat from quarter to quarter. Spot pricing improvements will be at least partially offset by the increasing number of previously idle conventional rigs returning to the market at day rates that are low when compared to our US land fleet average, which is heavily impacted by significantly higher FlexRig day rates.

Average rig margin per day for third quarter increased by $507 to 13,365 and average rig expense per day decreased by $379 to 11,178. A future snapshot of the existing H&P US land fleet with term commitments reveals that approximately 55% and 38% of the segment's potential revenue days corresponding to fiscal 2009 and 2010, respectively, are already contracted at attractive day rates. FlexRig continued to deliver outstanding field performance evidenced by the signing of 33 new build FlexRigs for US land during the last 90 days. Now turning to our offshore operations where we had a very good quarter in the segment.

The recent commencement of operations of two additional platform rigs in the Gulf of Mexico and one platform rig offshore Trinidad helped increase average day rates. Margins and rig utilization for the segment during the third quarter compared to the second quarter. Average rig margin per day increased by $8063 to $20,128. Average activity in the segment increased sequentially from 5.6 to eight rigs during the quarter and is expected to remain at that level during the next two quarters. The average rig margin per day for the fourth fiscal quarter is expected to remain in the low $20,000 range.

The last which is our ninth rig is currently contracted and expected to commence operations in the Gulf of Mexico in early to mid-calendar 2009, at which time it will start to contribute to the segment's operating income. We also had improved utilization in our international operations where as expected average operating activity increased from 19.7 to 21.2 rigs. The company sold two small conventional rigs in Ecuador during the current quarter bringing the total international rig count to 25. Today 25 of 25 rigs are active in international operations.

In addition, two of the seven new FlexRigs for Latin America have been completed, including one in the third quarter and one in the fourth quarter and both are currently mobilizing. The first of these new FlexRigs is expected to commence operations early in the first fiscal quarter of 2009. The remaining six are scheduled to commence operations at the rate of one per month after that.

We expect an average of 24 to 25 active rigs for the duration of the fourth fiscal quarter and as expected, average rig margins per day decreased to $13,071 from the second to the third fiscal quarter as a result of significant mobilization activities. Average rig margins per day are expected to increase by 5% to 10% during the fourth fiscal quarter, now that four rigs that were mobilized from country to country have commenced operations and are fully able to contribute to the bottom line.

In closing, we're very pleased with the direction of the business. The retooling effort for land rigs should continue as our customers pursue more difficult wells, employing horizontal and directional drilling to deliver better and more cost effective reservoir performance in shales and other unconventional plays. A statistic from Baker Hughes that reinforces this statement is the following.

The incremental rigs put to work since the start of 2008 in US land indicates that 79% of the rigs are drilling horizontally. And 97% of the incremental rigs are drilling horizontally, directionally, or both. This increasing trend of more horizontal drilling and longer horizontal sections underlies our customers' continued support and growing demand for H&P FlexRigs.

With the demanding drilling requirements of today's rig fleet, the most efficient rig will win. And old rigs will continue to be retired as the 30 plus year old legacy fleet is unable to satisfy operators' desire to drill a well efficiently, safely, and in an environmentally friendly way. And finally, we would be remiss if we didn't mention the importance of a strong field organization.

In addition to the drilling demands placed upon the rigs, quality personnel continue to be a strategically important advantage for H&P. And we believe we have the best people in the business. Our success over the past six years, growing our fleet with advanced technology AC drive rigs, is a result of the commitment to organizational excellence and executing on the value proposition to our customers. Now I'll turn the call back to Doug.

Thank you, John. And now we'd like to open the call to questions, please.

(OPERATOR INSTRUCTIONS) We'll take our first question from Pierre Connor from Capital One. Please go ahead

Good morning, gentlemen.

Good morning.

Congratulations on the additional orders. Good to see. I guess my first question relates to that. And in terms of the design that customers are looking for, there's more and more comment about specific, unique, etc.

So I wanted to just open it up and let you talk about if you've been pushing the envelope a little bit on designs and then in particular there's been commentary about very unique designs for something like the Marcellus. So without giving away the competitive advantage to someone else that might be designing something, where do we go from here in terms of specific built rigs?

I'll take a shot at that, Pierre, and then John can add on. One advantage we have -- and it gets back to my comments about continuity -- we have been designing and making improvements in our product for ten years. And so as we look at different areas -- and you've mentioned some -- today we have the capability -- and I think as we take the Marcellus, we think it's going to require more than just one rig type.

But we think that we have design enhancements already in house that will address some of the challenges of that field. We also think that field will be suitable for some skid rig designs that we've had a lot of success with already. So I think to answer your question this way, I think we're in very good shape with what we're able to do design wise and ready to go today for that effort.

Okay. And maybe if John was going to follow on with that, if you fold in sort of what would be your interest -- I know that potentially on shore in Mexico it would be a fairly dramatic difference in types of rigs with some would call tubing drilling capability built in. Do you have an interest in pursuing that as well? Or with what you have and the variations you can meet what you want?

Pierre, this is John. We've looked at coil tubing and think there's applications for coil tubing. I think one of the things we immediately see is the fact that we drill wells with FlexRigs the more pressure it puts on other technologies. And I think we've been very successful in doing that. If you just look at the rig types, Flex3 has really been the workhorse in our fleet since 2002. And customers continue to really be satisfied with the Flex3 design.

It's a 1500 horsepower rig and it drills on a eight to 18,000-foot and at time seven 20,000, 21,000-foot range. So it's very adaptable to a wide depth range. And then of course Flex4s with the fast move packages, the skid capability, really captured another market share, if you will, for us. If you look at the 33 rigs in the last 90 days, a little over half of those are Flex3s and the other half are various combinations of Flex4s.

In addition to that, we have casing running that we're providing in some cases. We have air packages. We've got high mobility moving packages, skid capability, there's a lot of different things that we're doing. Kind of building on what Hans said, it's been a continuous improvement on each of the different generations of rigs that we've put together.

No, I'm sorry. Go ahead.

I was going to say hopefully that answers your question.

It does. I mean I think the threes are well suited for something like Hainesville, fours for Marcellus and what I hear is that you're obviously continuing to evaluate other potential to fit the purpose. One last one related to that.

All my questions are around this potential continued expansion. Is, I would anticipate there's more and to that extent what becomes our constraint again on additional construction, be it components, etc.

Well, I think that the big driver, Pierre, is having the market demand. I mean, when -- and not to try to circle back to a continuity theme, but typically, the tradeoff in trying to have manufacturing continuity is you can either have the customer request the product and in our case all the rigs we're talking about, our new builds, are three year term. So we have that type of customer demand.

Or typically the trade off is well you sell select and you determine your own output. Well, we've been able to achieve the continuity we spoke of even having customers sponsor under term contracts everything that we're producing, so that's going to be the very first piece. And then we've demonstrated the capability of going to a four rig per month cadence. We have the capability of doing that.

Again, it will be driven by what the market is telling us to do. You mentioned and I think it's an area we excel in, supply chain management. I think we have a group of guys that just do an outstanding job with that and I think we're in good shape in that regard. So that's kind of our approach to it and our hope is to be able to keep the business model that allows us to have that kind of customer sponsorship.

Alright, I'm going to let some other guys get a chance. I appreciate it very much.

Thanks, Pierre.

Our next question comes from John Daniel from Simmons and Company. Please go ahead.

Hi, guys. One question for you. It seems like your competitors are becoming more aggressive with their new build programs and many have announced three year contracts. Have you seen bidding get more competitive? And given that they are getting similar duration contracts, could we assume that customers view their rigs as similar quality as the FlexRig?

Well I will let John throw into this as well. We would like to see it be more competitive. Because we have led in both term and day rate. And I am assuming, you're right that there are folks signing three year deals, we know of cases. The customer feeds back to us gosh we have opportunities to do something in a two year term or a one year term.

And we know that they've said to our competitors you're going to charge that day rate, we'll just go to a FlexRig. I mean you have to bring in some lower number for us to be interested. Again, that's anecdotal, John. But I think what pulse we have on this is we're still leading that effort.

Okay.

And John, I would agree with what Hans said. I think in general, again, this is feedback we get from our customers. Is that our competitors are usually willing to do a deal in less than three years, and that's one of the things that they comment on. But in general, most of our customers really don't have a big concern with three year term contracts.

In fact, we have a large portion of term contracts recently that are four year and in some cases even longer than four year. And I think in addition to the term contract, it's the pricing. Our pricing is still substantially higher in a lot of cases than our competition.

But there's no doubt that the competition is going down the new build path and I think that's great for the industry and it's great for H&P and we welcome the challenge. And the object is to continue to get better and that's what we're seeing in our fleet.

And we'd love to see, John, all our competitors require a three year term, require full day rates. We think this is the part of the cycle where people willing to invest capital and new ideas back in the business ought to have some reward for doing that.

One follow-up if I may. The contracts that you sign, is it safe to assume that you get pass through for labor costs if they should rise over the term of the contract?

Yes. We have inflationary protection both on labor and not only labor but also oilfield inflation, parts and supplies, which we call PPI index. And again, we're making a substantial investment and we're protecting our investment from a margin perspective.

Thank you.

Thank you.

We'll take our next question from Arun Jayaram from Credit Suisse. Please go ahead.

Good morning, guys.

Hi Arun.

Hans, I was wondering if you could comment on what you're seeing from the major oils, a customer group you've historically done very well with. We've seen some pretty interesting property transactions with BP and Exxon and Shell in North America. Just wanted a comment on what you're seeing from those customers?

Well, I think that you're right. They appear to be more interested in some of the domestic shale and gas plays, and we take some encouragement from that. I can let John say if there's anything more updated than that, we haven't I don't think released customer lists from this recent new build order. But it's people that both majors and super-independents that continue to prefer the FlexRig.

Yes, we have -- we still continue to have the Hans said the majors and super majors that are contracting rigs and they're big customers of ours. But I think we're also continually encouraged by some of the smaller players that have begun to contract FlexRigs. And so we would expect that anywhere -- our current base of customers have some expansion opportunities that we're going to be included in the mix.

That's helpful. And John, I was just wondering if you could elaborate on what you're seeing in South America, obviously adding some new builds, I believe for [Oxey]. But I was just wondering if you could comment on what you're seeing in Latin America and particular in Venezuela?

I think Venezuela is more of the same. We have 11 rigs and it looks like the rigs are going to continue to be busy. There's obviously a demand for the services there. I don't see us growing our fleet there. Receivables seem to be in good shape. And we're just kind of clicking along.

Things are going. I think we are encouraged by Latin America in general and growth opportunities. We're moving FlexRigs in and they're mobilizing now and there's a lot of excitement in the organization to see the growth down there. But really it just seems like things are continuing on the same path that we've been on.

Okay. And last question in order to achieve that four rig kind of per month cadence, what kind of operational adjustments do you need to make in terms of your manufacturing capacity in order to achieve that?

Well, we have, Arun, been at that pace and so there's really not a big stride in terms of what do you have to do on the ground to be able to go there? It gets back to what I mentioned earlier.

We're trying to be responsive to our customers. And when we see the demand that would drive a four rig per month cadence, we would move there. So -- and this is what I hear you asking. Are there certain hurdles that have to be overcome to achieve that cadence? And the answer is we have those well addressed.

Okay. That's fair. I appreciate it. Thanks, Hans.

Thank you.

We'll take our next question from Mike Breard of Hodges Capital. Please go ahead.

That's a great quarter. I wonder if you could give us a little bit more color on the TerraVici. Have they actually done some test wells? Maybe a little idea of what's going on there.

We're in a testing period. It's not commercial, as you know, Mike, and so it's going to be something that we'll keep folks informed as we make progress.

So as we look really to 2010 where we're scheduled to achieve commerciality, we'll begin to be able to give everybody more color on what we hope to do. And frankly we are kind of formulating our own game plan.

Okay, thank you. And one last question, the 18th rig that you just had ordered. When will that be delivered? I mean the last rig of the 18.

Mike, this is Juan Pablo, I believe our last rig at this point is scheduled to be delivered at the end of fiscal '09.

Okay. Thank you.

We'll take our next question from Mike Drickhamer of Morgan Keegan & Co. Please go ahead.

Hi good morning, guys. Great quarter. With 32 rigs now still left to be delivered of the I guess 127 total, what are you guys quoting new customers as a lead time for ordering another rig right now?

Well, we're pausing because we're hesitating to give a lot of granularity with how competitive this is, Mike, in terms of saying here are the slots that we have open. Because we have several conversations going on today and we know it's a very competitive space. So I think we're going to take a pass on giving you a whole lot of specifics on that.

Can we say it's at least, say, nine to 12 months?

Yes, I think if you wanted one in that time frame, we could make space for you in that time frame.

I'd appreciate that, guys. Let's go another direction then. Looking at -- you guys started this new build program in 2005. First rigs, I believe went into field in 2006. They should be rolling off contract here I guess in 2009. Can you remind me how many of those rigs are going to roll off contract in 2009?

Yes, beginning in our second fiscal quarter, we'll have three rigs roll off. And then in the following quarter, Mike, so the third quarter eight and then end up the year with nine coming off. So 20 rigs in our fiscal '09 year.

Okay. And then obviously, those rigs were put on contract before we saw the big increase in rates in say the '06 and '07 time frame? If you look at where those rigs are priced relative to say leading edge rates, how much of a differential do you believe to be there?

Well we're going to make the case, there's a large differential. You're right. Your sense of it is correct, that those were bid at a time on the early end of this. And so they would have room to go up. I'm going to let John give you if he wants to a better number of how much head room there is in a rollover for those contracts.

Well, there is -- it comes back to the original comment about the numbers and how much of it we want to share. There is a pretty large gap. One thing I do want to mention that the contract rate that we had at the time, today those contract rates are probably on average $2500 a day higher as a result of what we've discussed all along which is we have cost protection, we have cost pass-throughs. That's one thing to keep in mind.

Those day rates are probably right at the $20,000 a day range today as opposed to being and in some cases $21,000 as opposed to being high teens. So that's part of the advantage to having the inflationary protection. So there's several thousand dollars difference. You know where the market is today. And we're 20, 25, 27, $28,000 a day. So there's some opportunity there.

All right, guys. That's going to be it for me. Thanks a lot.

Thanks, Mike.

We'll take our next question from Dan Boyd of Goldman Sachs. Please go ahead.

Hi, good morning. Kind of building on that one of where margins are today on the most recent round of new builds. Can you compare those to where some of the contracts you signed earlier this year? And can you confirm it also sounds like it's maybe $3000 or $4000 below what the peak that you received on some new build contracts, maybe in '06?

Today's -- well, today's pricing is very similar to what we would have seen in the peak on some of the new builds. It's really difficult to nail it down, Dan, because we're talking about a lot of different rigs, rig types, rig models, and customers have different requests.

I think one of the things that we've been pretty consistent on is out returns, are in that high teens range. And we continue to see that. And so it's rather than dealing with day rates and margin, we'd probably prefer to stick to the returns.

Okay. Fair enough. Can you also talk -- looks like you have 18 contracts here with, what is it, eight different customers. Are you seeing a different mix in the type of E&P company or the size of the E&P company that's inquiring and willing to sign three year contracts?

I touched on it briefly earlier. We do still have that same solid base of customers whether they be majors and large independents. But we have had a lot of interest from some smaller operators, and again, I think that's encouraging because there seems to be kind of a light bulb if you will effect. People are starting to catch on to what we've been talking about in terms of the value proposition.

And yes, you can pay more per day, but you can get lower total well costs and more wells delivered per year. And so we're encouraged by that. And so yes, we have expanded our customer base and I would expect that we'll continue to have opportunities to do that.

Okay and then lastly, given the big build out here in the US, can we assume that the international adding additional rigs to the new international account might be on hold here for the moment?

That's not the approach we're taking. And you've heard us say before, Dan, and we've taken an approach that says we look at this as an opportunity set. And a year ago when there was a lot of investor interest in more international expansion we looked at domestic and international business opportunities as an opportunity set then.

So we have several active conversations going internationally today where people are interested in FlexRig technology. And we'd still like to see a larger footprint there. At the same time our strong bias is going to be where the best returns are and what makes the most sense from an investor's perspective. So that's the balancing act.

We don't really have a goal in terms of here's the fleet split we want and we're going to drive that fleet split kind of no matter what. And so it's being responsive to the market. But just from your question, I wouldn't want to leave the impression that we're on hold there because we've got lots of active conversations working today.

Is it fair to characterize that the returns as similar in both markets, but maybe the risk profile of adding to the US fleet as being lower?

Well, yes, I think that there's what we've seen is that both returns and risk is more attractive in the US today. And I can give you just an example that comes to mind, Russia is an area that we have had people on the ground very interested in that market. Should be an attractive long term market. But clearly, its risk has gone up and the returns have gone down.

And this business that we're frankly pleased we don't have today. But we're open to hopefully it improving over the years because it's a market that holds a lot of potential. So it's that kind of tradeoff and we're trying to do the best we can in terms of how do you risk rate these countries and then are we able to get the kind of returns that make sense?

We've got the people and the experience of being in international markets. And there's not a blocking position someone else has out there. We're not invited to the table and given an opportunity to look at things. So it gets down to that type of thing you hit on which is the risk reward.

Appreciate it, guys.

Thank you.

Our next question from Doug Becker of Banc of America. Please go ahead.

Thanks. Hans was just hoping you could look a little bit further out. Do you anticipate seeing customer demand justifying expanding your manufacturing capacity beyond four rigs per month?

Well we're big believers Doug as you know in this multiyear retooling campaign that's underway. And we don't know how smooth or steady it will be. But to your question, we've looked at what is the right production cadence. What fits the best? And I was very proud of our guys and being able to run in that 2007 time frame 12 consecutive months at four rigs per month.

We did that on budget, we did it on time, we're getting better at this. So, kind of I hear your question being well, could you go to five? That's something that we'd be willing to examine again based on what the customer demand is. As you've heard us say before, a large part of our brand leadership is the field execution, having the people, training them, making sure that when we hit the ground, we're exceeding customer expectations.

So you can't solve just for the manufacturing end of it. You have to solve for the field end of it. And again kudos to our guys in how they have performed in that regard. Those are the moving parts to the question. But it's something that we're constantly under examination with.

Is it fair to say that it's really the field end that's the bigger constraint than say anything on the manufacturing end?

Well, it's fair to say that's what we're most sensitive to. Because we haven't had problems in attracting crews and training folks, but that's what we're most watchful of in terms of the formula we're talking about.

Okay. And then just a quick housekeeping item. Mentioned that some of the legacy rigs would be returning. How many are expecting return to the market in the upcoming quarter?

We have four stacked now. I would expect one of those four to return in this quarter.

Okay. And then kind of reconciling that with the revenue per day guidance, one legacy rig returning doesn't seem like that would be enough to keep rates flat sequentially. Is there another moving part there that I'm missing?

Yes, Doug, this is Juan Pablo. From quarter to quarter, the change is going to be more than one. We had an average of -- I don't recall the exact number seven or eight in the prior quarter and now we are going to have a number that's significantly lower than that we expect in this quarter. So quarter to quarter the change will be significant.

Got you. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) We'll take a follow-up question from Pierre Connor of Capital One. Please go ahead

Actually gentleman, Doug exactly asked the question which was just clarification on John's commentary about additional rigs coming into the fleet. Maybe to be more specific I don't know if you would venture out as to an average number of rigs that you could see operating in this quarter?

Yes, in this current quarter, I think we're going to average 177 rigs which is what we have running right now. We should average about 177.

That helps with your comments on Doug's question to explain it. Thanks very much, gentlemen.

We'll take our next question from Jason Ferguson of Merrill Lynch. Please go ahead.

Hi. Good morning. Just one last follow-up question on the manufacturing capability. I think you guys established that you're pretty confident in doing four per month. But is there any concern with competitors talking now more confidently about AC rig systems and top drives that you might rub into possibly constraints on component parts?

Well, that gets us back to our supply chain management and having a sense of where all those moving parts are and one of the things that we have are -- and it gets back to kind of some of the themes we've struck on this call the continuity makes us a very attractive customer to those folks. And so we've -- I believe -- put ourselves in a good position going forward on that.

But, I suppose hypothetically as we go further out and depending on the scope of this new build effort from the industry, and we don't have a great feel for where that goes in '09. There are things that would give you encouragement. But we've just managed it over the years and we don't have any reason to think we wouldn't be able to continue to do so.

Okay and then just one last question on kind of your outlook, kind of cost guidance for next quarter and that's my last one.

Jason are you talking about operating costs?

Yes, if you could break out kind of what the $400 sequential improvement and if you expect any inflation going into the fourth quarter?

It was primarily maintenance and supply, three fourths of that was maintenance and supply costs. And that's a hard number to predict quarter to quarter. If you just look at our cost per day, we were in that band. We were in that range that you would see if you just looked at it over the last six quarters. We were probably on the low end, if you will, of that band.

And I would expect that going forward, we're going to maintain our costs in that band. At the same time, I think we all need to recognize that as strong as the market is, we've not had a labor increase in over a year. So I think there's a potential that you could see a labor increase. But fortunately, there's a cost pass through mechanism there.

So we should be protected on our margin, but I think there is a chance that that cost would go up. I think on the M&S side, the maintenance and supply side, I think there's back to supply chain we have an effective supply chain group and they do a good job and I think that we'll be able to maintain our cost increases below what you would see oil field inflation because of that supply chain management.

Okay.

I think other things that was asked earlier about just the investment side on the rigs. And I think what we've been encouraged by is being able to build 127 rigs in an average cost range of $15.5 million. And that's a fully cost at $15.5 million. I mean it's got the drill pipe, BOP's and everything in it.

So I think that's also a real testimony to the engineering, design, and supply chain and everybody really doing a great job on those costs. That's the other cost side I thought you were asking about.

Yes, thanks a lot. I'll turn it back.

(OPERATOR INSTRUCTIONS) It appears that we have no further questions at this time.

Thank you Heather and thank you everybody for joining us today. Have a good day.

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