Helmerich and Payne Inc (HP) 2008 Q4 法說會逐字稿

Good day and welcome to today's program. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the conference over to Mr. Doug Fears, please go ahead sir.

Thank you Tony and welcome everyone. We are glad that you're here for the Helmerich & Payne conference call and webcast to discuss the Companies fourth quarter and fiscal year earnings.

With us today are Hans Helmerich, President and CEO, Executive Vice Presidents John Lindsay and Alan Orr and Juan Pablo Tardio, Director of Investors Relations. And 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 statistics and you may find GAAP reconciliation comments on the very last page of today's press release.

Today the Company reported net income of $461.7 million or $4.34 per share from operating revenues of just over $2 billion for fiscal year ended September 30, 2008. Compares with $449.3 million or $4.27 per diluted share from operating revenues of $1.6 billion during the prior fiscal year ended September 30, 2007. Included in fiscal 2008 net income are nonoperating related after tax income items of $0.27 compared with $0.74 per diluted share during 2007. Those items can include gains from the sale of investment securities, gains from insurance settlements and income from asset sales.

Net income for the fourth quarter of fiscal 2008 was $126.5 million or $1.18 per diluted share from operating revenues of $583.7 million that compares with $116.4 million or $1.10 per diluted share from operating revenues of $449.4 million during last year's fourth quarter. Included in net income were gains from non operating type activities we just mentioned, that totaled $0.05 per diluted share for the fourth quarter of 2008 and $0.13 for diluted share for the fourth quarter of 2007. Also included in the net income for the fourth quarter of 2008 as we mentioned in the press release were $0.07 per share of abandonment charges.

The Company also announced today, that since its last announcement in late July, 13 more long term contracts have been signed with five exploration and production companies to operate 13 new FlexRigs. Since the beginning of fiscal 2008, the Company has announced contracts of 63 new FlexRigs under long term contracts. This brings to 140 the total number of long term commitments for new FlexRigs that have been announced by the Company since March of 2005. To date, 107 of those have been completed with the remaining 33 scheduled for completion by calendar year end 2009. Given the new bill commitments announced today, the Company's new estimate for 2009 capital expenditure has risen from the $800 million discussed to approximately $900 million.

Given these new commitments and management's desire to have capital available for other opportunities, we have engaged in discussions with secure an additional $100 million to $150 million of short term bank debt which we expect to secure by late December or early January. We currently are two years into a five year, $400 million bank facility which as of today has $85 million of borrowing capacity remaining. The remainder of the Company's debt consists of $175 million of privately placed debt of which $25 million is due in August of 2009, $75 million in 2012 and the remaining $75 million in 2014. At September 30, 2008, our long term debt to total capitalization ratio was 17%.

Additionally, the Company owns large equity holdings in Slumber Shea and Atwood Oceanics with a total current market value of approximately $178 million to $180 million. In the past we have liquidated portions of these investments to help fund our capital expenditures. But at current prices, we have no plans to monetize any of these positions.

Just for modeling purposes, you maybe have calculated our effective tax rate for fiscal year 2008 at 36.5%. We estimate our 2009 effective rate to be in the 37% to 37.5% range.

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

Thanks Doug, good morning everyone. Our 2008 fiscal year saw energy prices skyrocket and spiral downward in the face of the recent economic meltdown. Natural gas prices have fallen by more than half and future exploration and production spending plans are in the process of being aggressively scaled back.

We find the business in a sudden and dramatic reversal of fortune from our last quarterly conference call. A month ago we would have predicted that 2009 would be softer and likely unfold in a similar fashion that we saw in 2007. Then natural gas price concerns combined with worries of potential over-building softened the market enough to see 400 rigs go to the sideline in the US. Many observers expect a similar number of total US rigs to be idled in 2009. A more sobering comparison correction that the industry experienced in 2002. Then, nearly 50% of the industry's US rigs were idle.

While we are not predicting a low water mark, the story continues to unfold as we speak. One obvious factor influencing the death and longevity of the correction is how cold the current winter will be. While that speaks to the demand side clearly E&P players are not awaiting that outcome in order to act. They are sidelining rigs today. Reflecting the concerns of the sizable production growth experienced year-over-year.

This is a move, which, at some point will enact supply side of the equation and stands in contrast to the general approach taken in 2007 of drilling through the soft spots. In the event that a more severe response plays out, the result will be a purging effect that acts in a self-correcting way to shorten the down cycle.

While no one can say with certainty how things will develop for the land drillers, we believe we are uniquely positioned to weather the slowdown. Let me quickly hit on some highlights to make this point. First we have the newest, most capable fleet.

In other downturns have seen us sustain higher utilization and day rate margin than our peers. When the smoke clears and operators rationalize their rig rosters, performance and efficiency will twin day in the choice of rigs to engage. Secondly, we have never had a stronger contractual coverage going forward. 58% of our 2009 fiscal year potential revenue days are under term contracts and 43% of our 2010 revenue days are under term contracts. Thirdly, our customer roster distinguishes itself with about 80% majors and super independents. They not only have the best staying power but will likely look for opportunities to upgrade.

Next, with today's announcement, Doug mentioned 13 new billed orders, all with long term commitments. Manufacturing visibility extends into the early fall of 2009. Compared to last year when our order book took us into the following February. Importantly, the strength of our balance sheet continues to allow us to fund the largest single year of new build orders totaling 63 in the Company's history. These new rigs, all attractive day rates will act as an important counterbalance to softening spot rates going forward.

Lastly, it is important to remember that the seeds of recovery lie in the fact of the rapid depletion profile or blowdown of 30% for domestic gas production. When the cycle does improve, the most promising shale and other unconventional plays still require extensive drilling with increasing technical challenges and today over 70% of our FlexRigs are engaged in this type of play.

We will continue to focus on strong field performance where our people win the confidence of the customer every day. It's from our people's efforts that we have achieved our brand leadership. And it's to their credit that the Company reported record earnings today, making the third consecutive year we've achieved record earnings. Our 88 years in this business help prepare us for the challenges and the opportunities that lie ahead.

With that I'd like to turn it over to John for his comments.

Good morning. We're pleased with the operational and safety performance the Company has been able to achieve during 2008. Drilling performance and well cycle time reductions have been catalysts for today's announcement of 13 additional new FlexRigs and 63 over the last 12 months. All 63 contracts are supported with at least three year term contract signaling customer commitment to H&P and the FlexRig brand. All three of our operating segments shared successes in 2008 and I will comment on each.

Beginning with an overview of US lands, today we have 95% activity with 180 out of 189 rigs working. Up three rigs from the last webcast. And we estimate a relatively flat rig count from quarter to quarter. Of our currently active fleet of 180 rigs, 68 are in the spot market and the remaining 112 active rigs, including 100 new bills are under term contracts.

All 150 FlexRigs are operating today. Represented by 100 new rigs with term contracts. Eight previously existing rigs on term and 42 in the spot market. We averaged 178.1 active rigs during the fourth fiscal quarter as compared to 167.7 during the previous quarter, an improvement of 10.4 rigs. An average of 3.6 were idle during the fourth fiscal quarter of 2008 as compared to an average of 7.6 idle rigs during the previous quarter.

Average rig revenue per day for H&P entire US land segment increased sequentially $491 per day to $25,034 during the fourth fiscal quarter. We expect continued growth in rig revenue per day during the first fiscal quarter. After increasing during the first month of the quarter primarily as a consequence of wage pass throughs, spot pricing has declined in the last few weeks and is expected to decline through the quarter.

With day rates per rigs under term contracts also being ingested to reflect the wage pass through. And new term contracts averaging higher than market pricing, we expect average rig revenues per day to be flat to slightly up from the fourth fiscal quarter 2008, to the first fiscal quarter of 2009. Average rig margin per day decreased by $202 to $13,163. Average rig expenses increased by $693 to $11,871 during the fourth quarter. This cost increase was primarily from maintenance and supply costs and other miscellaneous expenses.

As we discussed in our last call, we were feeling market pressures to increase our labor rates and consequently we increased labor per day on average $628 effective the first fiscal quarter of 2009. Everything considered, we expect average daily expenses to be flat to slightly up quarter to quarter, although we may continue to see some volatility in daily expenses during fiscal 2009. In summary, depending on how severe the downturn in the US land market is for the remainder of 2008 and beginning of 2009, we could see a range of six to 15 additional H&P rigs released and potentially stacked during the next six weeks.

We believe that as the cycle progresses, operators will be looking to upgrade and several of these should return to work in the short term. Some of our older rigs being released are probably not going back to work in the near term due to a lack of prospects. Nevertheless, at this point we continue to expect year to year growth and activity in the segment. Our US land operations achieved an average of 163 average rigs working in fiscal 2008. Today, we have 180 active rigs and over 30 new bills scheduled to commence operations during the next 12 months. Our offshore operations had a very good quarter.

Average rig margin per day increased by $2257 to $22,385. Average activity in the segment was unchanged at eight average rigs running during the quarter and is expected to remain at that level during the first quarter of 2009. The average rig margin for the fourth fiscal quarter is expected to remain at over $20,000 per day. The ninth rig in the offshore fleet 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. As expected, average international operating activity increased from 21.2 during the third fiscal quarter to almost 25 rigs during the fourth fiscal quarter. The Company sold two small conventional rigs in Ecuador in July.

Today, 25 of 27 are active in international operations as a result of two large conventional rigs now stacking in Argentina. Both rigs will be actively marketed, but we don't expect them to contribute during the second fiscal quarter of 2009. Two of the seven new FlexRigs for Latin America began day work operations in Colombia during the first fiscal quarter of 2009. The rigs are performing very well, in the first three months they've already reduced full well cycle times by 40% compared to the competition. The remaining five FlexRigs contracted for Latin America are scheduled to begin operations at the rate of one per month in Argentina, beginning in December, 2008. We expect an average of 25 to 26 active rigs during the first fiscal quarter of 2009.

Although average rig margins per day were expected to slightly increase during the fourth fiscal quarter. Higher than expected operating expenses pulled average margins for segment down by 14% from $13,071 to $11,244. $1,413 per day of the margin shortfall is a result of nonrecurring charges and the remaining shortfall is associated with rig moves and miscellaneous expenses. We expect average rig margins to stabilize in the $11,000 to $12,000 range for the first fiscal quarter of 2009.

In closing, short term, there's a lot of uncertainty regarding rig activity. Natural gas and oil prices and the magnitude of downward pricing pressure on day rates, those variables aren't within our control. But we continue to believe that with the demanding drilling requirements of todays 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 operator desire to drill a well efficiently, safely and in environmentally friendly ways.

Regardless of the rig count, operators should continue to look for opportunities to high grade their working fleets. 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 a commitment to organizational excellence and executing on the valued proposition to our customers.

Now I'll turn the call back to Doug.

Thank you John, and we would now like to open the call up to questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Pierre Conner from Capital One Southcoast. Please go ahead. Your line is open.

Good morning, gentlemen.

Good morning.

Thanks for all the information, John. First question on term contract terms, what -- you mentioned we've got the coverage in the term days. What kind of cancellation provisions are in there? I'm assuming that they would be the same.

Pierre, I'll start and then John can add comments to this.

Okay.

I think and you followed us. Our term contracts we think are top rate and the best in the business. And so that gives us a competitive advantage. And what we can't do is get into a lot of detail on that.

But it's basically a three year term, no cut, take or pay contract. And in contrast to our peers where as we listen it's hard for us to figure out exactly what they mean by a long term contract in terms of term, performance outs and other elements of their contracts. Ours are pretty straight forward. And they're long term and take or pay.

Okay. Second one, on the positive side, wondered if you or John wanted to talk about maybe some of your numbers, exposure to some of the plays that, from what I hear will be relatively stable, potentially growing, how much can you tell us about a couple of like Haynesville, Fayetteville, and I know you're not disclosing customers, but where the trend is and what you think your rig count is going to be.

Pierre, this is John. We see the Haynesville and the Barnett and the Bakken all being really strong. They've been strong and we see that continuing.

We have approximately 30 rigs in the Barnett. The Haynesville we're over 10 or so, or will be up to 10. We're not up to 10 right now. And the Bakken we're around eight or nine rigs working. All those are strong and most of those are term contract commitments. So we see that continuing to be strong for us.

Okay. So you mentioned the six to 15 potential releases. They're not coming out of the Barnett particularly?

Right. We don't see -- there's a little bit of softness in the Barnett. But I suspect that what rigs we have released in the Barnett, we'll put those rigs back to work primarily because of the performance of the rigs.

Not all of the rigs in the Barnett are on term contracts. There's always that exposure but we've really been successful in being able to put those rigs to work. Many of the rigs in the Barnett are very suitable for work in East Texas and the East Texas Haynesville as well as the Louisiana Haynesville. So if there's demand in the Haynesville, we can take those rigs over there and that's primarily Flex3s.

So Haynesville, you're not quite at 10, do you have a projection. Is there enough visibility as far as where that number goes?

I'm sorry Pierre, can you --

I'm sorry, John. I've got the sense you're a little less than 10 rigs in the Haynesville. Do you feel enough visibility to where your rig count over the next couple of quarters goes?

No. I think it's going to continue to grow. We're going to continue to have new bills, we'll see that grow. Our exposure in the Haynesville today is primarily on the Texas side. As they roll out we'll see more exposure into the Louisiana side.

And then one last one. For Hans, relative to sort of a tone in the market, it's impressive to get these additional 13. What can you tell us about at what period in the quarter, were those right after the last call how recently have you had some interest in new bills?

Your hunch is right. They were earlier in the last quarter than later. And that's to be expected going forward. I think there's just so much market volatility that we're going to have to wait and let things settle down before we get lots of interest back in the queue.

Okay. Thanks, gentlemen. I'll let it go back.

Next we'll move to Waqar Syed with Tristone Capital.

Couple of questions here. Number 1, John, the six to 15 rigs that could be released. Can you give us a breakdown of how many could be conventional and how many would be FlexRigs.

Probably on the high side on the 15 you would be looking at five to six. And again, those are released notifications, not necessarily -- we think the rigs willing back to work. A worst case scenario and the rest would be conventional and mobile type rigs.

Okay and there being some talk that -- you have some rigs that are coming off of contract within the next couple of months. Those are skid rig types. What's the demand situation for the skid rigs? How do you see that market develop in the next couple of months?

That's a good question. I think we're going to continue to see that application be vital in many areas. It is viable today in the Barnett. We've had customers discuss opportunities in West Texas.

We've had customers discuss opportunities in Utah, in other areas of Wyoming other than where we're working now. So we think there's a great application for that. I think when you consider in areas where they're wanting to reduce the environmental footprint. They want to be able to drill multiple wells on a single pad that you're going to continue to see this. I think we've said it before. Looking ahead in the Marsalis, that's going to be a development opportunity in the Marsalis as well. We're encouraged that those rigs will continue to work, it's just a matter of whether it continues to be in Piceance or in other areas.

Those rigs were contracted back in 2005 when the spot rate was, maybe $5,000 to $6,000 a day below where it is right now. So do you expect the rates to be higher when these rigs become available in the new contracts?

I don't think we're in a position to really talk about that. You're right though. We contracted the rigs at high teens. But keep in mind over a three year period you've got labor cost pass throughs, you've got your oil field inflation pass throughs. Those rates are going to be in the lower 20s range. But that's really about all the color we can add today.

Okay. And then of the 33 rigs that are scheduled for delivery over the next 12 months, could you give a breakdown on a quarterly basis what the schedule for deliver is?

I think we're looking over the next couple quarters at three to four rigs per month. And then towards the end, it slows down to two or three. But we're still working out optimum cadence on that. That would give you a feel for what we're expecting.

You could tweak your manufacturing program -- you were previously ordering a little equipment ahead of actually receiving the contracts. Has that changed now? Are you going change that?

Well, I think one thing to remember is we've matched every one of our new bills with the real contract. We managed the supply chain in a fashion that particularly on long lead time items we're being aware and sensitive to that. So yes, there's that moving part. One of the big advantages of our own effort is the flexibility that you're asking about and so we in fact do have some flexibility. And we'll just continue to watch that carefully and manage it going forward.

Okay. And two final questions quickly, one on the status of the TerraVici, and where you are and the new effort.

And number 2, there's some talk about non-conventional plays in Europe and Eastern Europe, primarily, and some of the majors looking at that. Has anyone approached you to talk about that? That could be -- if that develops, it would work quite well there I would think. Thank you.

Thanks. I think we've had discussions and what we're seeing is some of the drilling challenges internationally are increasing and they are a nice fit for the FlexRigs as you mentioned. John can add that particularly on the Eastern Europe question. And on TerraVici, as people know, right now that's in a noncommercial development phase. Those tests are proceeding.

We're encouraged by the progress we're making. We're still probably nine to 12 months out and we just kind of keep pointing ahead on that. John, do you want to mention anything?

I don't have much to add on the unconventional plays. Eastern hemisphere. We've had discussions and they're preliminary discussions. We're encouraged overall that even in a softer market, it does offer us some opportunities to expand. So we're encouraged by that opportunity and others.

Thank you very much.

Thank you.

Thank you. Next we'll move to Mike Drickamer Morgan Keegan & Co. Please go ahead.

Hans, sorry if this has been covered. What's your appetite for building rigs. Presuming you had a customer come with a contract. Would you be willing to build a rig here for the US market?

We sure would be. One of the things that has been positive for investors is, as you look over the whole span of our record book, the model is intact in terms of strong financial returns, three year terms, so it's still a very attractive business model for us to pursue. And as Doug mentioned, we've got the balance sheet that would support it. So we would certainly sit down and work a deal out.

Okay. How about -- you kind of discussed earlier how most of the new builds were earlier in the quarter. Are you seeing any international opportunities to build the FlexRigs? Perhaps more in South America?

We have been. We still have interest. And we've seen the FlexRigs that you mentioned, the ones that are early on arriving in South America have already performed very well and created additional interest in their own right.

And I think we'll continue to see that. And it speaks to a larger point of what we believe notwithstanding the current environment, there's a long term retooling opportunity out there both domestically and internationally that we think we're taking the lead in and we'll continue to have ongoing opportunities with.

Okay. And then Doug, depreciation came in higher then I expected. Do you have some guidance for depreciation for 2009 with all the rigs coming in?

Of course depreciation came in a little because of our abandonment charge was included in that.

Oh, thats where the abandonment charge was?

Yes, yes, so -- well Paul what do you think, 230, 240 of depreciation, we generally don't give guidance. That's a rough idea of where it's headed. Perhaps between 240 and 250.

All right, guys. That's all for me. Thank you.

Thank you.

Next we'll move to John Daniel with Simmons and Company, please go ahead.

Good morning. Guys. Just a couple of quick ones. On the new term contracts, can you tell us whether the five E&P Companies are new or existing FlexRig customers.

They are all existing FlexRig customers.

And then, with business slowing and some of the steel prices coming down. Do you see your supply chain management group reducing the cost of the new builds next year?

Well, it's a good question, John. And there's some lag effect in that actually flowing through. At the same time, the continuity that we've had has allowed us to continue to push on lean manufacturing and good process efforts and our guys have done a great job in terms of price per ton and man hour per ton, continuing to chip away at cost and expenses. And eventually we'll see some flattening and potential improvement from what you mentioned which are raw material prices.

Okay. And then just one more. On the contracts that you have in place now. I recognize they're firm contracts. At this point have you had customers discuss breaking or renegotiating those contracts?

No, again, It's laid out where we're going to have our margins and economic results protected in any kind of early termination payments. So there's some neutrality from our viewpoint on that.

Sure. Okay. That's it for me. Thanks, guys.

Thanks.

Thank you. (OPERATOR INSTRUCTIONS) Meanwhile, well move to Kevin Pollard with JPMorgan, please go ahead your line is open.

Good morning, I wanted to follow-up on the comments you've seen weakness in day rates. Is that in your conventional rig fleet or is that hitting the 42 FlexRigs in the spot market?

It has, Kevin it has hit both. It hits the conventional a little more than the FlexRigs. We've had a slight reduction in the FlexRigs in the spot market.

Can you give us some sense of kind of 5% and how would that contrast with the conventional rigs? Is it like 5% for the FlexRigs and 10% for the conventional or can you give us any color along those lines?

In general the FlexRigs are probably $1,000 a day and the conventional rigs are a little more than that, $2000 a day in some cases.

And if I could shift over to your manufacturing, you've always insisted on a term contract to manufacturing. You've got a backlog extending out 12 months, which probably gives you some ability to keep holding onto that term contract requirement before you have to start reducing capacity. But at some point, would you be willing to build rigs speculatively in order to keep at least a minimum manufacturing cadence going? Or are you going to stick to the term, long term still the plan?

I mentioned in my comments, Kevin, that a year ago at this time we only had visibility into the following February. So I think we're in a great spot because as you mentioned, we have visibility now going into early next fall.

And our approach has always been that we've developed the high performing rig and we put our money on the table up front and we would like a reasonable return on that. And so that's our preference. At the same time, we're going to keep from being tone deaf and we are going to be aware of what the market is doing. And thankfully, we have that decision pushed forward quite a bit.

With the back log at 12 months, at what point do you make that decision if the contracts aern't coming in? Is it 12 months out or is it somewhat sooner?

It will be somewhat sooner. And as you've probably heard us talk about before, we have purposefully not had capital spares that would be required to support the overall fleet with as an aggressive manufacturing effort where you can go into the line and pull out needed components. So there's going to be -- assuming theoretically you have this hard stop, some buffer going forward that you would secure a reasonable number of capital spares to support your fleet.

Okay. And some of the customers obviously lowering their spending considerably. Probably even making that decision since ordering some of the new builds.

Have you had anybody come to you and say I still want the rig but take your time with the manufacturing? And push the -- where you end up perhaps going -- pushing the delivery cycle out beyond 12 months in mutual agreement with your customers? Have you had any discussions along those lines or deferring deliveries or --

This has been a volatile time and we've had lot ons ongoing discussions. So the answer is we're sitting down with customers and talking. We have no plans to change our rollout at this time and that's probably the best I can answer that with.

Okay. All right. That's it for me. Thanks a lot, guys.

Okay. Thanks.

Next we'll move to Andrew Coleman calling from UBS.

Good morning, a couple of quick ones here. Can you give us some color on the outlook contract rollovers for the FlexRigs and if you're seeing much competition from other competitors new builds in terms of how it would hamper your ability to renew those?

And you're referring to the new builds that roll off in 2009?

Yeah.

We have three in the second quarter, fiscal quarter, six in the third, I guess it would be eight in the third. And another what is that?

Nine.

Nine more in the fourth quarter. As far as competition with competitors new builds, we really don't see that right now. Obviously, it's a situation that we didn't have previously.

But as far as competing with competitors new builds, but we really like our chances. The rigs are performing very well. They've been out there working for three years. And the performance is outstanding. So I think we're going to do well if we're facing head to head with any of our competitors.

Okay. And second question, E&P CapEx volatility in any given year can be pretty significant. Given that we're looking at a lower start, I guess how quickly have you seen those numbers change in past years? Good or bad because we're sitting in November with a dour look on our face. But, this could change in a six month period.

I think that's one of the reasons we set up the comparison between 2007 and then 2001, 2002, in that earlier time period, you had a 45% drop and it had somewhat of a cliff effect. And in 2007 it seemed to be slower and more rational in developing. You're right. We're on the front end of trying to figure this out.

And we don't know what will transpire except I think it's worth mentioning that we've had times when it was more shock and awe than slow and rational. That's what we're waiting to see unfold. I think we're well positioned in any one of those scenarios to continue to push forward and focus on field performance and continue to win over the ongoing support of the customer.

Okay. Thank you.

Thank you.

Thank you, next we'll move to Phillip Jungness With Merrill Lynch, please go ahead.

Hey, guys. Just wondering, in your view how big a drop in the rig count do you think it would take to idle an uncontracted FlexRig. I know that you said that five to six could soon be released.

Well, it's a very volatile in the sense that you have turnover where you've got a customer that may not have additional drilling needs. But then you have customers on the receiving end or folks interested in improving and upgrading the rig roster. So moving part is hard to protect.

Okay. And then also if you could just kind of describe the discussions you're having with your bank group. How confident are you that the revolver is going to be increased in the fourth quarter? And are there likely to be any other changes to the credit agreement such as covenants or rates?

I'll take the first one, no, we're not anticipating any change in covenant. And I would rate it very confident that we'll be successful in that securing more bank financing.

Okay. And then that should be enough to cover the remaining capital program in 2009. And after that you should be free cash flow positive in 2010.

That is correct.

Thanks all I have have.

Next we'll move to Thad Vayda with Steel Nicholas, your line is open.

Following on some of these questions about flexibility on capital spending and so forth, in context of what we saw in 2002 and what we saw in 2007, how are you thinking about labor retention plans going forward. That enormous pullback. What you do with field personnel, expertise on FlexRigs in familiar is important to the efficiency argument you guys make. Are you going to do anything different this time? How long would you carry folks in a severe downturn?

First of all, we do continue to roll out every 30 rigs over the next 12 months. That obviously helps us and we believe that the FlexRigs are going to continue to work ultimately. In a really down market it's just a matter of what the price is going to be. So I think the rigs are going to continue to work.

Obviously, we've invested a lot in our personnel and our intent would be to keep them. And we're continuing with our training programs and with a lot of things we're working on. And have high hopes for that. I don't see us making a dramatic change.

Obviously, in a dramatically down market if there's a softening in the labor market and on the cost side, then we would be paying attention to that. But that sure isn't our intent right now. We see a lot of opportunities ahead with these rigs coming out and having some new customers and continuing to grow the fleet.

And I think our guys in the field know our history and know our culture and we've like John said we feel strongly about having the people that are able to execute out in the field and we've done everything we can in a lot skinnier times than this to make sure that that keeps intact. And I think we have that reputation and confidence from our folks.

Great, thanks.

Thank you. Next we'll move to Frederic Russell with Fredric E. Russell Investment Management Co. Inc. Please go ahead. Your line is open.

Good morning. At these prices, Hans and Doug, is the board tempted to buy back its stock? Or is the priority so overwhelming and so attractive for capital expenditures that you'd, despite the compelling nature of the stock price you'd rather not consider or work on a buyback at this time?

Good morning, Fred. As you and I have talked before, the board is always interested in that and we revisit the issue frequently. I think as we've talked this morning we're very pleased with the order book we have in front of us and how that kind of balances going forward. And I think that is priority number 1.

So as we go through 2009 and have better visibility on 2010 and what other opportunities may be there, domestic and international, we'll have a better feel for the potential for share buybacks if we're generating free cash. So, I think that would be something that you shouldn't expect in the next several months. But it will be something that the Board continues to look at carefully.

(OPERATOR INSTRUCTIONS) We'll move to Mark Close with Oppenheimer & Close. Please go ahead. Your line is open.

Good morning, gentlemen. I just want to confirm that the guidance on international rig margins was in the $11,000 to $12,000 range for 2009. And just a couple of quick questions.

On international as you -- you're starting to deploy more FlexRigs there, the new builds both recently placed in Colombia and rigs coming up, would we expect to see those contracts as those units are deployed, would rig day revenue change much? And we've seen obviously a fairly significant increase in international rig expense. Where do you look at that in the coming year and especially as it pertains to FlexRigs?

On the margin, you're right. What we were speaking to was the first quarter of 2009. That's the visibility that we have right now. Is for the first quarter of 2009, that $11,000 to $12,000 range. And we'd like to think that would continue. But that's really the nearest visibility that we have.

As far as expenses, again, we had commented on the nonrecurring portion of that. We would expect that the cost will smooth out. But our experience is over time, when you're moving rigs from country to country or moving new rigs into a country by the quarter, you're in a position where you may have some spikes in there. We expect over time that it will flatten out. That our expenses will flatten out.

Okay. Thanks.

Thank you. And at this time we have no further questions.

Thank you very much for joining us today and have a good day. Goodbye.

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