Helmerich and Payne Inc (HP) 2009 Q1 法說會逐字稿

Good day and welcome to today's program. At this time, all participants are in listen-only mode. Later, you will have an opportunity to ask questions during the question-and-answer session. I will be standing by should you need any assistance.

It is now my pleasure to turn the conference over to Mr. Doug Fears. Please go ahead.

Thank you, Megan, and good morning, everyone. Welcome to Helmerich & Payne's conference call and webcast to discuss the company's first quarter earnings. With us today are Hans Helmerich, President and CEO, Executive Vice President, John Lindsay and Juan Pablo Tardio, Director of Investor Relations. As you know, most 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 operating statistics. You may find the GAAP reconciliation comments and calculations on the last page of today's press release. This morning, we did release that Helmerich & Payne reported record net income of $145.3 million or $1.36 per diluted share from operating revenues of over $600 million for its first quarter ended December 31, 2008. That compares with net income of $107.8 million or $1.02 per diluted share from operating revenues of approximately $456 million during last year's first fiscal quarter. Included in this year's first quarter net income is a penny per share of asset sales and insurance proceeds. Also included in this year's first quarter income are amounts paid as a result of early termination of term contracts. That number totaled $18 million pretax or $0.11 per share after tax. These payments are a result of a combination of early termination for one new build, early termination of a term contract on a previously existing rig, and early -- and other types of early termination revenue. We expect to have additional early termination revenue this second quarter, but we prefer not to speculate on that amount at this point in time. In any case, what is important to remember is that our long-term contract cash flow is well protected.

Before Hans and John make their comments, I would like to touch on a few financial details. As mentioned in the release, the company recently closed on a $105 million, 364 day unsecured bank credit facility. With this facility, the company has adequate liquidity given its 2009 capital spending estimate, which has been lowered to $850 million. $250 million of which was spent during the just completed first fiscal quarter. Much of the capital spending for the year relates to the new FlexRigs that are scheduled to be completed by the end of 2009. As of today, the company has approximately $160 million of total unused borrowing capacity in its bank facilities. As a result of approximately 56% of the company's US land potential revenue days working under term contracts for the remainder of fiscal 2009, and 42% during 2010, our projected need to draw on our credit lines will end during the September 2009 quarter. And substantial free cash flow will be generated beginning with the first fiscal quarter of 2010, which ends December 31, 2009. The company's debt-to-total capitalization ratio is currently 17%. Also, the company continues to hold large equity holdings in Atwood Oceanics and Slumber Shea totaling over $170 million in value. I will now turn the call over to Hans Helmerich, President and CEO, and after Hans and John made their comments, we will open the call to questions. Hans?

Thanks, Doug. While our first quarter earnings set record highs, they seem overshadowed by a rapidly deteriorating energy market. After peaking in October, rigs have been pushed to the sideline as a result of a potent combination of plunging energy prices and credit markets in disarray. The resulting uncertainty has driven E&P capital spending budgets down or slowed or shuttered a broad range of projects. The drilling industry today is reeling, caught up in a dynamic situation of rigs being idle until demand destruction slows and a pricing bottom materializes. At this stage, rigs across the board have been impacted, including an unprecedented number of FlexRigs. Once the smoke clears from this dramatic dial back, we anticipate the next stage will entail a sorting process of projects that will survive lower prices and equipment and services that will be engaged to provide the best efficiencies. As we mentioned in our previous call, the last time the industry experienced a correction of this magnitude was in 2001 and 2002. Then we saw 40% of our US land rigs become idle during first quarter before recovering to 84% utilization for the fiscal year. Similar to that and other down cycles, we are hopeful that the speed and the severity of the current pull back will set up a self-correcting response that will usher in a cyclical improvement. While it is too early to call at this stage when that reset will occur, we are experiencing a purging effect that seems faster and more severe than many could have imagined just a few months ago. Still, as we come out of the winter months, we expect things will get worse before they get better. The brunt of the pain will be borne by the industry's older legacy rigs. Their suitability was under scrutiny before the downturn, and their competitive position will come under increasing pressure going forward. When conditions improve, they will not only compete against other legacy assets but against an available supply of high efficiency rigs, including idle FlexRigs.

We take some consolation in that our fleet profile is not only the newest and most advanced, which should continue to provide best in class performance in the spot market, but it is also well positioned with more contracted revenue day protection than any other time in our history, and that buys us time. We also derive a benefit from the remaining rig orders that continue to be delivered into the fall of this year. Those new rigs will absorb trained and experienced personnel from idle rigs and help maintain valuable continuity. We're in a strong position to wait out this storm. We will do what we have done in previous downturns, look for ways to improve your organization to strengthen the brand and prepare for opportunities that accompany improving market conditions. With that, I would like to have John make his comments.

Good morning. As Hans discussed, most, if not all of our customers are suffering significant drilling budget reductions. In the rush of the pull back, rig releases have seemed to be indiscriminant. The best in class performing spot market rigs are being stacked. We believe the scenario will continue until operators gain visibility that the bottom is near. The current market conditions are having varying effects on our three operating segments, US land, offshore and international, and the following comments will cover some of the details. In US land, as of today, 152 of 194 existing US land rigs are active, a 78% utilization rate. Only 41 of the 152 active rigs are currently operating in the spot market, including 27 FlexRigs. The remaining 111 active rigs, or 57% of the fleet, including 100 new builds are under term contracts. The 42 rigs that are idle include 22 mobile and conventional rigs and 20 FlexRigs, five of which are early terminated new builds. We averaged 177.4 active rigs during the first fiscal quarter as compared to 178.1 during the previous quarter. In average, 10.1 rigs were idle during the first quarter of '09 as compared to 3.6 idle rigs in average during the previous quarter. Average rig expenses per day increased by $375 to $12,246 during the first quarter. We announced in the last call that market conditions at the peak required a field labor increase effective on October 1 of 2008. As a result of the current market downturn, effective February 1, field wages will revert to the September 30 pay levels, reducing our costs by approximately $600 a day. Given this reduction, we are hopeful that we can keep cost per rig day flat to slightly down, given other cost variables that tend to rise in this type of market transition.

Spot pricing began to deteriorate during the first fiscal quarter. Since the peak, and through the end of January, average spot pricing for H&P rigs in the spot market has declined by approximately 14%. Currently the H&P day rate average for rigs in a spot market is approximately 11% lower than the H&P day rate for rigs under term contracts. As we predicted on the last call, we ended the first fiscal quarter with 24 stacked rigs. That said, the market is significantly worse today than anticipated during our last earnings call in November. Looking forward, we could see our stacked rig count increased to over 60 rigs by March if the market continues on its current trend and doesn't improve. Thus far, our offshore activity has not been affected by the slowdown, but we could see some impact in the third fiscal quarter if oil and gas prices do not improve. For offshore operations during the first quarter, the average activity was unchanged at eight average rigs running through the quarter and as of mid-January, all nine rigs are receiving a rate. The ninth rig is currently on a relatively low standby rate and is expected to commence operations in the Gulf of Mexico in the summer of 2009. The average rig margin for the second fiscal quarter is expected to remain at just over $20,000 per day. We currently expect three rigs to finish contract commitments by mid third fiscal quarter. We may have two or three of those rigs remain idle for the remainder of the fiscal year. This is first indication of softening in our offshore segment.

In our international segment, average international operating activity increased from 25 rigs during the fourth quarter to 26 rigs during the first fiscal quarter. Nevertheless, seven of the company's international land rigs are now idle and as mentioned in the press release, additional rigs are expected to become idle during the current quarter. As you know from our news release today and press reports from other oil service peers, H&P and many other service providers in Venezuela are experiencing accounts receivable collection issues. We are working hard to get this situation resolved, and are hopeful we can get the operation back to normal in the near future. We are going to do our best to continue our long relationship with PdVSA. However, as a result of the current situation, we expect additional rigs to become idle during the second fiscal quarter in Venezuela. All 11 of the company's rigs in Venezuela were active during the first fiscal quarter. The accounts receivable collections from PdVSA have slowed considerably over the last few months. The receivable balance from PdVSA is approaching $100 million. Accordingly, we are ceasing operations on rigs as their drilling contracts expire. Two of the company's 11 rigs in Venezuela have recently ceased operations, and it is expected that further cessations will idle a total of five rigs in that country by the end of February 2009. Absent any improvements of receivable collections, the remaining rigs would probably become idle by the end of July of this year. With all of these challenges, we would not be surprised to experience a 20% to 30% quarter-to-quarter decline in international average activity as we transition into the second quarter. Average margins per day may sequentially decline by 30% or more given deteriorating conditions in the market during the second fiscal quarter. One the bright spots in our Latin American operation is the performance of the first three of seven new FlexRigs working today in Colombia and Argentina. The rigs have set most, if not all of the existing field records in the short time in operation. In the first three to six months, they have already reduced full well cycle times by 40% as compared to the competition. The remaining four FlexRigs contracted for Argentina are not yet active as a result of mobilization delays. We anticipate one rig to begin operations in the second fiscal quarter, two rigs in the third and one rig in the fourth quarter. In closing, there continues to be strong global influences that negatively impact the drilling business today. We believe H&P is well positioned for the long term with over 80% of our fleet consisting of FlexRigs and 57% of our fleet under term contracts. But until the short term confidence is restored and commodity prices and those prices stabilize at reasonable levels that will allow our customers to increase drilling budgets, rigs in the spot market will probably continue to be sidelined. Once the dust settles and operators begin to high grade their fleets, stacked FlexRigs should be among the first to go back to work. And now I will turn the call back to Doug.

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

(Operator instructions) And our first question from the site of Waqar Syed of Tristone Capital. Your line is open.

Yes, hi, Hans, do you have a figure for the contracted EBITDA for the remainder of fiscal year '09?

Oh, not beyond just, Waqar, what we said about the percentage of our fleets under contract. I mean, we haven't tried to say more than that.

Okay. And now, you -- how much -- of your international rigs, how many, if you exclude the Venezuelan, how many rigs are under term contract for the remainder of fiscal year '09?

Nine are.

Nine rigs are. Okay. And then in 2010?

I think we -- I think we dropped -- I think we have seven. I think we have seven and a half, eight. Yes.

Seven and a half to eight rigs. Okay. Now, you mentioned that you may be moving some employees from the rigs that are stacked to the new builds. Should we be assuming that the start-up costs for the new builds are going to come down now?

Well, you will have less, if any, training costs associated with those rigs. So that's a saving that we expense on the front end. So yes, that would be a positive.

How much is that? Could you quantify that in terms of per rig, how much are the training costs?

Oh, Waqar, we have a good sense of what that number is, but it begins to get into competitive issues.

Sure. Okay. And do you have any guidance for G&A and DD&A for the remainer of the year?

Waqar, this is Doug. I would just maybe begin with G&A being at least flat, if not slightly downward, but I would just use flat from this quarter.

Okay. All right. That sounds good. That's all for me. Thank you.

Thank you.

And our next question comes from the site of Mike Drickamer with Morgan Keegan. Your line is open.

Good morning, guys.

Good morning.

Hans, can you remind me, what do I have to pay to cancel a contract here? Is it the cost of the rig, or is it the remaining life of the -- revenues expected to be received under the remaining life of the contract?

Well, contracts vary, Mike. But they -- as you know from following us, I think we've got very strong contracts and they capture the economic value in terms of trying to cancel those. So, you know, I guess a little more on that would just be what we try to do is take the remaining revenue days and capture the day rate margin of those.

Okay. So day rate margin. Now, I think John commented that there were five new builds released from their contracts, and Doug had mentioned that one of those was in the first quarter. Does that mean there's at least four here in the next quarter?

Yes, that's right.

Hans are any of these rigs being released because of the E&P companies can't pay the bills or that they don't want to pay the bill?

Well, I think we've got a great customer roster in terms of counterparty credit worthiness. So I think it's just a strategic decision on their part, Mike.

Okay. And then remind me, what's going to be the strategy here in Venezuela? We talked about additional rigs being idled as they cease their contracts. Are you going to leave those rigs in country and see if they pay or are you looking back to mobilize those rigs out of the country?

Well, let me step back and say this is something we have watched over the years, and we have been down there over 50 years, and there have been some years with more anxiety associated with them than others, but we've got a long-term relationship down there and to your question about well, do you move those rigs out? First of all, we expect to get paid. We expect to resolve this situation and work through this. Secondly, you've heard me say those rigs are particularly well suited for Venezuela, and it's a nice fit in terms of that market down there. As you look back, as well, this represents about 6% of the company's revenue, 3% of our net book value in terms of our long term, long lived assets. So I don't want to deminimize it, because it's something that we are putting a lot of energy and effort into, but I just want to right size it a little bit. And I guess another comment on that would be we have reduced our exposure in Venezuela on an absolute basis over the years from 22 rigs to 11 rigs. And then as we've had the growth ramp in the last several years, that's acted to also reduce the exposure we have down there. So that just gives you a little more color, Mike, on our thoughts down there. What I would like to see, we all would, is that this thing moves forward, they get caught up and we go back to work.

Okay. Hans, I guess the last question on that topic would then be, one of your offshore drillers saw PdVSA taking over one of their rigs. Any concerns that may happen with your rigs?

I think the situation is different. We're -- as we mentioned, as you saw, we are rolling -- these rigs have been without contract,and so it gives us some more flexibility. And, no, we haven't had any discussions like that where PdVSA says they are going to take over the rig.

All right, I will let someone else have a chance. Thanks, guys.

Thanks.

And our next question comes from the site of Arun Jayaram of Credit Suisse. Your line is open.

Yes John, I was wondering if you could elaborate elsewhere internationally where some of the rigs have gone idle and outside of Venezuela, what your -- what the prospects are of maintaining the current ready utilization. Think five other rigs outside of Venezuela are idle today.

Yes, Arun, we have one in Colombia and the others are in Argentina.

And what are the prospects of maintaining these five which are idle, the rest of the rigs working outside of Venezuela?

I think it looks pretty good right now. We've actually had a few operators interested in a couple of the rigs that have been stacked recently. I mean, that's at least encouraging to see that. I don't have any visibility right now that would say any of the current rigs that are working would stack any time soon. So right now, that's as much visibility as we had probably at quarter out.

Okay. Hans, in terms of the PdVSA You outlined the worst case scenario is if you don't get paid, more rigs would go idle. Is there anything that keeps you optimistic about potentially -- firstly, getting paid for what they owe you and maintaining some level of utilization in country?

Well, I think they faced declining production and maybe a little different than what has happened with the different E&P companies there. I believe they recognized that they have a strategic partnership with oil fuel service folks that's very critical to their ongoing operations. So there's a sense that it's a win/win. They need the oil fuel service industry there. I think the other thing is we have a long relationship. We have good communication with those folks. I think they have every intent of continuing to work and develop. They've got the best reserves in the ground of anybody in this hemisphere. So I think those are the things that keep us optimistic. We've got a good organization down there, and it's recognized in terms of performance by PdVSA. So, you know, there are things that longer term, I think make us optimistic.

Okay. And last question for John. Can you comment on geographically where you are seeing more weakness in the US segment. In particular, where some of the FlexRigs are going down?

It eight be easier to talk about the area that is strong.

Okay. Louisiana?

Oh, East Texas is a strong market, the Haynesville is a strong market. Here recently we have seen some softness that we hadn't seen prior in the Barnett and in the Peonce. Whitford still seems to be holding pretty well. South Texas is holding it pretty well. Again, most of our rigs in the Rockies are on term contracts commitments. So I don't believe we've seen some of the slowdown that others may have seen. I know the Rockies have been pretty slow.

Okay. And with the fear of asking too many questions, how many additional FlexRigs -- I know the first set of contracts is signed, I believe in March or April of '05. How many of those initial rigs would come off contract for the balance of the fiscal year?

17, Arun. We previously had projected 20. Now it's 17.

All right, thanks JP. Talk to you later.

Thanks, Arun.

And our next question comes from the site of Dan Boyd of Goldman Sachs. Your line is open.

Hi, thanks. Hans, you mentioned on the contracts that were canceled that you were able to recoup the expected margin on those rigs. Does that mean from an NPV perspective, you are actually better off?

Yes, I mean, I think you could look at it that way. We would rather be out there working, but, yes, you can look at it that way.

Okay. And then also, Oxy announced today $58 million in rig contract termination payments in the fourth quarter. Do you have any exposure to that, or should we expect that from peers.

We are really, Dan, in a position where because of the nature of the contracts, we'd prefer not to comment on any specific customers.

Okay, fair enough. How about a follow up to the last question then? In terms of specific areas where you are seeing slowdowns, the rigs that were canceled, the contracts that were canceled so far, were those in the Peonce and the Barnett or were those in other regions?

Oh, let's see. Some were in Peonce. I'm trying to think if they were any in the Barnett. None in the Barnett that's coming to mind right now, Dan.

Okay. And then the last question I had was if you look at the rig days that you have under contract, you mentioned that was 56% of the potential rig days. Can you help us out to make sure that you are okay on math of how many days that equals and then what the average margin for those rigs would be?

We can take that offline if you would like that. I don't have those details in front of me.

All right. That would be great. That's all I have then. Thanks, guys.

Thanks, Dan.

Our next question comes from the site of Angie Sedita of Macquarie Securities. Your line is open.

Great, thank you. This is a follow up on the early termination payments. Is it fair to say that you actually made whole or close to whole on a cash flow basis for the remaining contracts on those rigs?

Yes, that's right Angie.

Okay. And then any concerns about the rigs that are currently under construction and the customers' appetite for those rigs, termination of those contracts? Can you give us an update there?

I think all of those are intact, and we continue to see an average of three rigs a month go through that facility, and so I think that's steady ahead. Okay. So while 56% of the rigs are -- available rig days are on term contracts, on every contract there is an ability to have early termination, but for a sizable fee, correct? Correct.

Okay. Thank you. That's all I have.

Thanks, Angie.

Our next question comes from the site of John Daniel from Simmons & Company. Your line is open.

Hey, guys. Just a couple more follow ups on Venezuela and international. Of the $100 million that's owed to you, have you had to reserve for any of that yet?

No, not yet. And, again, it's -- due to the good history of always, really, collecting, even though they run late. And so we're still anticipating that to happen.

Okay. Turning over to Colombia, I think you mentioned that one of the new term FlexRigs is going into that market. Can you expand a little bit on what you have there and what you are seeing in Colombia?

John, we actually have two flex fours in Colombia.

Okay.

They have been right there at -- the longest one has been out there five to six months, and that's fairly shallow drilling and again, that's one of the real bright spots because the performance has been so good, and that's really gotten a lot of folks' attention. And we're encouraged that we think that will open up some opportunities for more growth and not necessarily just Flex fours but I think it it opens up opportunities for Flex threes.

Okay. I guess a final, just a housekeeping question is on the CapEx. Of the 850, what is the ongoing maintenance, and what would you expect maintenance to be in '10?

Oh, it is about 15% of that amount, of the 850. 15% to 20%.

Okay. All right. Thanks, guys.

Thank you.

Our next question comes from the site of Kevin Pollard of JPMorgan. Your line is open.

Thanks. Good morning.

Good morning.

John, you mentioned you thought you could have potentially 60 idle rigs up from, I guess, 42. So of those potentially 18 rigs that could go idle, can you tell us, is that -- are you expecting that to come out of your conventional rig fleet, or is that FlexRigs in the spot market going idle, or is that a function of more FlexRig contracts being canceled? How would that shake out?

It's really a combination, Kevin, of all. There will be some conventional rigs. There's going to be some FlexRigs that are in the spot market. I mentioned in my comments about FlexRigs that are top performers in a field and those rigs are being released. I mean, it's just a situation where the customers are really needing to spend within their cash flows. So it really doesn't matter at that stage, but it's going to be all, and there's potential that there could be other rigs that would be early -- have an early termination provision. It's always possible.

Okay. And then in terms of the pricing, you mentioned that it had come down. I think last conference call, you indicated the FlexRigs margins had come down from $16,000, to $15,000 a day level. Where are they now in the spot market?

Yes. I think -- it's probably best just for us to say they are continuing to be under pressure, and they are coming down. I prefer, again, for competitive reasons, not to give any real clear visibility into that, but they are coming down.

Are the declines roughly matching the declines you are seeing in the conventional rigs in terms of what percent down? Are they falling faster or slower?

On a percentage basis, yes. Clearly because of the performance and with the customer base that we have, they are able to, I think, still maintain a competitive advantage, a differential compared to the conventional rigs. But, yes, they are coming down as well.

I guess, Kevin -- this is Hans. I would just add, the speed by which this has happened kind of makes it difficult to really peg the data points that I know you guys are interested in, because it just happened so fast. So, I think it will become more clear as we move forward, and we'll be happy to try to give you better information.

Okay, that's fair enough. Let me ask you on the term contract terminations, is that process, is that something where you have to sit down and negotiate a settlement or is that pretty much well defined in the contract, and when they tell you they want out, you say, fine, here's what the bill is?

Well, our contracts are pretty clear, and I think they are strong. We are willing to sit down and talk with customers. We do that all the time. We are looking for a win/win. In our situation, we've spent the money and we have made that commitment. And so it's not like we have legacy rigs we're kind of trading back and forth with. We're in a situation where we spent the money, and we are looking for the return on our investment. So I think they understood that. As you know, Kevin, I mean, it's a situation too where just like that customer may have hedges he expects to stay in place, this kind of provides us a similar protection. We have had in earlier stages of our order book, times when the spot rate exceeded the contract rate, and it's a cyclical business, and that reverses itself. So those are things I believe the customer understands, and we just work through.

Okay. And with so many FlexRigs starting to show up in your idle fleet and some rigs -- presumably you haven't started construction on the back end of your queue for the new builds, does it make sense to start perhaps trying to sub idle rigs in place of those in lieu of building out of the remainder of the program?

No, it gets kind of back to what I said. I mean, the --we have worked with the customer to have a slot in our manufacturing line. We've identified that rig, we start spending the money as soon as we sign up, and so it really doesn't lend itself to what you are suggesting. Again, I think some of our peers have different contractual setups on their new builds. They also have a large overhang of legacy fleets that -- legacy rigs that perhaps behooves them to use as a trading item. We aren't in that situation. So I think it would just have us go forward with what we have done, which is to protect the currency and protect the value of those contracts.

Okay. And last question, your CapEx, I think was $900 million, to $850 million. What accounts for the decline there?

Kevin, this is Doug. Really, actually, as Hans has stated, with the new builds that we had on order, we try to do a good job of ordering ahead, so most of that money is committed, and so a lot of -- there is some reduction in that, some pure equipment that we were able to just not order that we anticipated ordering, and there is some movement into 2010, which happens there as well.

Okay. Thanks, guys.

Thank you.

Next, we have our question from Pierre Conner of Capital One. Your line is open.

Hi, gentlemen.

Hi, Peter.

John, first a question on your commentary about the international margins sequentially, and your thoughts on that decline. Is that because of the expectation for the additional idle rigs, or are there some other rate negotiations? In other words, is it a mix issue or are there downward pressure on some of those international contracts as well?

Well, it's -- you can probably sum it up as being a mix. I mean, obviously we are -- as we stacked rigs in Venezuela and you look at the rates on those rigs compared to some of the other rigs, that pulls it down. And then there's just also costs associated with going through that process. Just, again, a lot of uncertainty, and with the visibility that we right now, I think that's really the best way to sum it up, the way that I mentioned it. A lot of moving parts. I mean, it's really hard to nail one or two things down.

I understand. Actually, staying on margins and then going back to US, so the decrease in the labor rates you point out that should revert back earlier. Is that going to be a commensurate decrease in day rates as well, or was that a pass through that needs to come out?

Yes, that's correct.

Okay.

It is a pass through back to our customers on term contracts.

Okay. So a little bit of question here. You mentioned that offsetting other pressures, but it it really feels like we're getting downward trend on other costs as well. So what is the offset there, just fixed cost spread amongst the remaining operating, or is there truly any remaining inflation?

Well, as you stack a rig, of course there's costs associated with that, costs associated with maintaining a stacked rig. You have got personnel issues, overhead splits, just all of that. Again, we're hopeful, again, we're hopeful that we can get our costs down, but I think at this stage, with all the moving parts and having the number of rigs that we are looking at that could potentially stack, I think we are better off to really be focusing on keeping the costs kind of forecasting costs staying flat.

I understand the guidance there. And then the last one goes back to strategy a little bit in not wanting to negotiate on the conference call, per se, but given what you are hearing from your customers relative to their sort of uncertainty where they might be faced with paying all of the margin on that contract, are you considering deferrals of those contracts into later years, for example, just to delay delivery of equipment that might be coming? In other words, if we were to expect a decrease in the coverage contracts in '09, is there some potential that some of that just slides into 2010?

I don't think so, Pierre. I mean, I think we are expecting both parties to honor the contracts and again, this isn't a matter of us not sitting down with the customers and looking for a win/win. They recognize we have real value in this situation, and they are -- I think they've been very understanding about it. But to your question, no, I don't think you should anticipate that.

Okay. Okay. So -- okay. I think the rest have been covered. Thanks, gentlemen.

Thanks, Pierre.

And next we have Mike Mazar from BMO Capital Markets. Your line is open.

Good morning, guys.

Good morning.

Just one thing I wasn't sure if I misheard or not. But if I understood correctly, there's four new FlexRigs from the new build program going into Argentina, and there's four rigs currently idle in Argentina?

Yes, it's just -- Those aren't the same.

No, I recognize that. But is there any risk of those contracts being sort of terminated before they get going if there's already idle equipment there?

No. Mike, that's a good question. We are talking about entirely different well profiles. Much shallower work with the Flex four, and the rigs that are stacked in Argentina are large rigs. They're 2,000 and 3,000 horsepower rigs. So no, I don't believe so. The operation that we are going into in Argentina with the Ms are -- that kind of work is going to maintain activity.

Right. Okay, that was it. Everything else has been answered. Thanks, guys.

Okay.

And next is Kevin Pollard with JPMorgan. Your line is open.

Thanks. Hans, I just had a quick follow up question for you. On the term contracts if you -- I just want to be clear. If you receive a payment to sort of make whole on the contract and then -- you can -- after that, you are free to turn around and represent the rig back out to someone else immediately, is that correct?

That is correct.

And if you -- and I realize in this market, it it's not likely, but let's say you are successful in immediately redeploying one at similar margins, there's no rebate or something for lack of a better word on the determination payment. Once it's paid, it's paid and it is yours.

Yes, there's no tail on that.

Okay, okay. That's all I had. Thanks.

Thanks, Kevin.

Next, we have Andrew Coleman with UBS. Your line is open.

Thank you. Good morning, guys.

Hi, Andrew.

I had a couple of questions. As you look at the rigs come into the market, and I know this isn't something that you guys would do, but are you hearing any anecdotal points of some operators going more to -- starting their own turnkey contracts again?

I've not, Andrew. This is John. I have not heard of any turnkey, other than kind of what's normal.

Okay.

We have seen that in the past. I wouldn't be surprised to see some people go to that in certain markets that are kind of an easier drilling environment, but let's face it, it a lot of the work that we do that's horizontal, directional has got a high level of competency involved. I don't think you will see that kind of work go to turnkey.

Okay. And then thinking about how the actual activity unfolds for each rig from a footage basis, what are some ways that, I guess, footage might come down? Is it just straight from the rigs being laid down, or is it possible that you have longer time between rig up and rig down?

Andrew, I'm not exactly following your question on the footage.

I looked at some footage calculations that were out from EIA, and it showed that we were drilling footage levels we haven't reached since the 1980s, and I'm just kind of curious how that -- how you expect footage to decline in response to all the rigs coming off. Is it that more people will drill in shorter laterals? Is it just that -- or do you think footage is going to stay on a similar trend that it has been on for the last, say,12 to 18 months?

Well, I think that the metric, as rigs go down, will have obviously less footage. I think the average rig today makes about the same amount of footage per year as they did previously. The difference is, is that -- and the same number of wells. The difference is, they are actually making more footage but the difference is the well count, because the wells rather than being a straight 10,000 foot vertical hold, it's a 14,000 foot the well with 4,000 foot of lateral. So you are going to see -- it should be a direct response as rigs go down. The total footage is going to reduce, but I think on the per rig basis, the number probably won't change very much.

Okay. I -- and I can send you a report. I was just curious, because it looked like gas footage is similar to some levels from about the early '90s. Of course, oil has gone up on an oil rig basis for the last 20 years, but anyways. Thank you.

I would like to see it, if you wouldn't mind sending it to me. We can talk about it offline.

Sure, you bet. Thank you.

Thank you.

Next is Mike Drickamer with Morgan Keegan. Your line is open.

Hey, guys. Just a quick follow up here. At the risk of stating the obvious, you guys had an $18 million termination fee in the previous quarter on two rigs. You commented you have at least four terminations in this quarter. Is it fair to say then that the termination fees probably are going to be greater than it was in the previous quarter?

Not necessarily, Mike. We have -- those early terms can happen at any stage in a contract. So it's dictated by the remaining days in the contract. There is a very specific calculation in the contract. It's the way it's done. But it's a function of how much is left on the term contract. So it could vary.

Okay. But the four new builds, so you have have to assume that there's some time left on those contracts. Is that correct?

I'm sorry, when you say forward new builds, what are you referring to there?

The four that were released early terminated.

Oh, four. Oh yes. There's still term left on those contracts,yes.

Okay. All right guys, that's it for me. Thanks.

Thank you.

Next we have Fred Russell from Frederick E Russell. Your line is open.

Good morning Hans, Doug. You spoke of some self correcting mechanisms. Do you see any evidence of these beginning to take hold and exert some influence?

Well, Fred, you recall, I said it's kind of early to see that reset take place right now, but as you know, this is -- I think one of the concerns in the market was might the industry drill through, if you will, any softness the way they talked about and I think in effect did in 2007? And clearly, that's not happening. I mean, we're seeing a very fast and dramatic kind of purging effect. So it takes a little bit of time. It's a little bit like the Fed lowering the discount rate. It takes a little bit of time for that to work through the system and for it to show up in supply, but if you have the number of rigs go down that we think will become clear over these next few weeks with conference calls of our whole peer group, I think that number will be pretty clear that it is going to have an impact on supply.

Do you think, based upon your studies of building around the country by your competitors and by yourself -- you are saying, Hans, that the supply of new rigs offered is likely to contract dramatically?

Well, yes. I think that's a good question and an important point in that you don't have to go back too long in mid 2008, where things looked so strong, and by that time of the year, there were already over 100 new builds announced, and there was a reasonable chance for -- if that had continued to ramp up, we would have had several hundred new builds follow. In fact, that didn't happen, and we think that some of the new builds that were announced by the industry will go away or move to the right or be canceled. And so I guess one of the silver linings in all of this is when you look at the 2,000 plus rigs that are out there and were not too long ago working, we would guess fewer than 350 of those are high efficiency rigs. Now we will add probably something around 100 rigs to that count. And the point being we have the largest proportion of those. And so in a market that's still dominated by older legacy equipment, the supply availability of high efficiency rigs is not that great, and we forestalled increased capacity into that segment. So in some ways, that puts us in a strong position as we go forward and we don't think longer term -- and I'm talking longer term now, but we don't think the retooling effort required or necessary in this industry is over. And so we think there will be opportunities there as well.

Thank you.

Thank you.

Thank you, Fred.

Next, [Phillip Jungworth] with Banc of America. Your line is open.

Good morning, guys.

Good morning.

What is the total value on the remaining PdVSA contracts which you intend to complete? And what's the thinking behind completing those versus stopping the work now?

I think it is a contractual issue and we have an obligation contractually to finish up on the well. And so that's the thinking.

Do you have a dollar amount for the remaining value of those, though?

Oh, I think we've modeled some of that. I'm going to see what Juan Pablo has to say on it.

Well, it varies depending on the length of the wells. So we prefer not to speculate on that amount at this point.

Okay. And then -- I mean, you guys have been there a long time, you said 50 years earlier. Have you ever experienced anything on this magnitude in terms of unpaid receivables? Some reports are putting the total amount owed at $8 billion industrywide. Have you ever seen the problem this bad before?

No. We haven't and I think it was the quick turn around of the peak of 145 plus oil price that went down so precipitously. So, yes, I think it's the result of that quick transition. But I think it is been more difficult than in years past.

Okay. And then just finally, how much of those receivables are denominated in local currency versus US dollar? And then, do you have any cash balances there denominated in local currency which could be at risk of devaluation?

We do have balances in the $40 million range, US converted. It's in the local currency, the believer. So we do have dollar balances that are subject to the potential devaluation there. What was the other part of your question? I'm sorry?

Just what proportion of the $100 million in receivables are in local currency versus US dollar.

We don't have that number with us right now.

Okay. Thanks, guys.

Thank you.

And next we have our question from Monroe Helm with CM Energy Partners. Your line is now open.

Thanks a lot. I appreciate your candid answers. Just two questions. In your discussions with people who are looking to lay rigs down, have you -- have any of them -- or have you been willing to negotiate lower rates for a longer term?

Monroe, that's part of that discussion. I guess what we are reluctant to do is try to recapture different private conversations. But I think I want you to go away with this, is that both sides recognize, hey, there's real economic value here. How do we make this work? And then part of what you suggest where, hey let's make the contract longer, it is just a matter of can you strike that balance? And so, sure, that's on the table.

Okay. Second question is, it seems like in this downturn, other than -- different from the '01/02 downturn is the fact that the banking industry is in such trouble that a lot of these E&P companies are probably fearful of their credit lines being reduced on them. With commodity prices down, their reserves may be down because of year end reevaluations. Are you hearing that as an issue in laying some of your rigs down? And what are your thoughts being an impediment to an upturn once commodity prices bottom?

I think your question captures an important point, and that is you not only have the huge fall in commodity prices, but you have the credit market situation and it's -- it kind of raises its head in a couple of ways. One is just the availability of credit in the face of falling prices. And then two, just the uncertainty that that injects into customers' thinking, and it kind of has them want to leap frog ahead of potential problems. So I think their actions in terms of idling rigs becomes more, in our mind, Draconian or dramatic than it otherwise would have, absent the uncertainty surrounding what's going on in the credit market. So, what we would hope is that you get some better visibility on work commodity prices are going to be and where they go, and maybe demand destruction adds and we get a sense some of stability out there. And I think the collective -- we are all biased, but I think the collective sense is, gosh, prices are too low now, and you can't -- they don't relate to incremental units of -- in terms of cost of additional production. So I think time will help, and time will bring a certain stability and that's kind of what we are playing out.

Okay. One other question, if I could. In the '86 downturn, where there was this a larger surplus of rigs, (inaudible) than we have today, there was a lot of rig companies that went out of business. Do you think we will see that happen in this cycle?

Well, I think the legacy rigs out there are going to be very challenged. And it is hard to -- you have a couple of things that differ from '86. One, you don't have the segmentation in the industry where you have clearly a group, albeit a smaller group of smaller, higher efficiency rigs that are outperforming. So you have this kind of separation and distinctiveness that you didn't have in '86. And then you just have legacy rigs that have benefited from a great run over the last several years, and now they are going to be tested in a way they haven't been tested before.

Okay. Thanks again for your comments.

Thank you.

And it appears we have no further questions at this time.

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

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