Helmerich and Payne Inc (HP) 2009 Q4 法說會逐字稿

Good day, welcome to the a Helmerich and Payne fourth quarter and fiscal year-end earnings conference call. (Operator Instructions) At this time, it's my pleasure to turn the conference over to Mr. Doug Fears, Executive VP and CFO. Please go ahead, sir.

Thank you, Aaron. Good morning everyone and welcome to the conference call. With us is Hans Helmerich, President and CEO, the Executive Vice Presidents John Lindsay and Alan Orr and Juan Pablo Tardio, Director of investor relations. As you know and as we always say, 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'll find the GAAP reconciliation comments and calculations on the last page of today's press release.

Today, we did release our earnings and for the fiscal year ended September 30, 2009, we reported net income of $353.5 million, or $3.32 per diluted share from operating revenues of $1.9 billion, that compares with net income of $461.7 million or $4.34 per diluted share from operating revenues of $2 billion during the prior fiscal year ending September 30, 2008. Included in those numbers are non-operating related income of $0.04 for '09 and $0.27 for 2008. For the fourth quarter fiscal '09 income was $51.5 million or $0.48 per diluted share from operating revenues of over $362 million. That compares with net income of $126.5 million, or $1.18 per share from operating revenues of just over $362 million that compares with net income of $126.5 million or $1.18 per share for operating revenues of just over $583 million for last year's fourth quarter. Included in net income, were gains from non-operating items that totaled $0.01 per diluted share in the fourth quarter of '09 and $0.05 for the fourth quarter of 2008.

Before Hans and John make their comment, I would like to touch on a few financial items. The Company reported total 2009 capital expenditures of $881 million. We expect the capital spending during 2010 will total about a quarter of that or $225 million. About half of the $225 million for 2010 Cap Ex will be maintenance spending including tubulars. With the other half spent to complete the remaining new bills with long-term contracts and for other projects. Although capital spending will likely fall, depreciation expense will increase for 2010 to somewhere in the 260 to $270 million range. Given the significant reduction in capital spending, and the remaining term contracts that generate significant cash flow for the Company, it's anticipated the Company will pay off its $105 million bank facility in January and generate free cash flow during 2010. Additionally, the Company will have significant borrowing capacity remaining on its $400 million bank facility, which expires in approximately two years. At September 30, 2009, borrowings under that facility were $70 million our debt-to-total cap was 16.4%.

The Company also continues to hold an investment portfolio, which is mostly made up of eight million shares of Atwood Oceanics and slightly under one million shares of Schlumberger a total investment portfolio had a pretax market value of approximately $400 million. As you saw in today's announcement, there has been progress made in Venezuela regarding our accounts receivable position. Principally as a result of the $32 million of US currency equivalent collected since the last earnings release on July 30, 2009.

As of today, the total invoice amount by the Company that remains pending payment from PDVSA is approximately $73 million, including approximately $31 million in invoices issued since the Company changed its revenue recognition to a cash basis for its Venezuelan operations. Invoices issued under cash basis revenue recognition, include approximately $55 million in potential future revenue and approximately $6 million in non-revenue billings. As explained in previous webcasts, much of the increase in this year's effective tax rate is caused by the fact that revenues (inaudible) even though not look for GAAP purposes in the US, must be accrued for tax purposes in Venezuela. As a result, the effective tax rate for the past year was 40.4% and was higher than it would have otherwise been.

Potential payment of the unrecognized revenue billings during 2010 will result in financial income that will not be taxed. And, thus, will lower the effective rate for 2010 from roughly 36% if nothing as collected to as low as roughly 34% if all funds are received. Operationally, all 11 of the Company's rigs in Venezuela that formerly worked for PDVSA have completed their contract obligations and are now not idle. I would like to turn the call over to Hans Helmerich, the President and CEO and after Hans and John have made comments, we will open up the call for questions. Hans?

Thanks Doug. Good morning, everyone, thank you for joining us on this call. We have been encouraged by several trends that we're seeing in the market since our last quarterly call. Higher oil prices since early summer held above $70 and after natural gas spot prices drifted down to nearly $2 in early September, they recovered nicely in the last two months. Rig counts have responded to the higher commodity pricing. The oil director drilling has more than doubled in the last five months. And gas-oriented drilling has bottomed and increased by 10% since our last call.

Historically, once the industry rig count establishes a clear upward move off a low bottom, one should expect a prolonged positive trend of recovery. While that is certainly the typical pattern, we're cautious about this upcycle, particularly for the next six to nine months. Let me quickly mention some of our concerns and make some observations on some positive trends we see for the long-term. The following concerns are widely understood to be the key variables that will most likely shape the recovery ahead. The first relates to natural gas demand in 2010. Industrial demand was hammered this past year and the size of the rebound and demand will be tied to achieving real economic recovery in this country. More than we would like seeing a real winter with above-average heating days would also sure help.

Longer-term opportunities for improved natural gas demand are plentiful, including making end roads into the transportation fuel market. Of course, on the supply side of the equation, caution abounds, especially in the short-term. In addition to the well-known gas shale potential, an all-time high inventory level, which is currently buttressed by a sizeable backlog of uncompleted wells. Some estimate there are approximately 1500 of these deferred wells in the US. Future LNG imports are an ongoing source of added supply potential. If worldwide capacity having jumped by a third in the last two years, it's uncertain how much this new capacity will end up landing in the US.

While these concerns set up a possible second bottom, we believe the more likely outcome is that they act to somewhat flatten the curve and push it to the right. In many respects, avoiding the typical volatility even on the upside, will probably be a good thing. Arguably, the worst thing for the industry would be another big price spike. We get that same sense in conversations with our customers. We hear from them a shared belief that a reasonable price fairway would be a favored outcome for operators, suppliers and customers, not to mention the national security. One customer went on to remark recently that in an environment where prices are range bound, somewhere between $4 and $7, efficiency is king. At first to hear that and to say efficiency is king, sounds counterintuitive because the first thought is that efficiency savings are most valuable in a high-cost service environment. While true enough, the high prices of up cycles also tend to cover a multitude of sins, create a tailwind and become a rising tide that carries all boats.

Take all that away and business becomes tougher, more demanding and more performance-focused. Going forward, fewer overall rigs will be required to maintain a supply balance. Those rigs will be tasked with more challenging wells, more operators will adopt a high efficiency model and customers' demand for consistent performance and efficiency gains won't be satisfied with additional day rate discounts thought to somehow equalize substandard performance. Sure, excess capacity will pressure margins and while our prices have come down, we have not had to match the deep discounts from our peers to capture additional incremental work. Our utilization and margins remain best in class.

Our focus and energy remains on delivering value to the customer through added efficiency, an approach we believe aligns us with the customers' long-term success drivers. We added 25 first-time FlexRig users since the bottom several months ago. All of them had cheaper alternatives in terms of day rates. Our job will be to take these new customers and help them grow and succeed. We hope to add them to a roster of long-term relationships that have driven our success. In closing, I'm reminded that our success is earned every day, 24/7. It requires hard work, a focus on safety and is often conducted under challenging conditions.

As the Company enters its 90th year as the industry's oldest contractor, I'm reminded that it's strong values of our past combined with a drive for innovation, better ideas, and improved performance that secures our future. And, it's in that spirit, that I feel a deep sense of gratitude toward the H&P men and women whose commitment and loyalty make that possible. With, that I would like to turn it over to John Lindsay for his comments.

Thank you, Hans, and good morning. In stark contrast to our last two calls, we're more optimistic and our discussions with customers and recent contract commitments that may signal an ongoing improvement. in the rig count. Additionally, the spot market is developing again in the US and we're actively bidding on projects. Operators still don't have great confidence in gas prices but they continue to high-grade their fleets. We're hopeful that H&P is able to increase market share in the US and international markets because of the current availability of FlexRigs and our track record of reducing our customers' well cycle times and delivering best values.

The forecast for all three operating segments have improved in the last few months and the following comments will outline some of the details. In our US land segment as compared to the 113 rigs reported during our last conference call in July, 127 existing US land rigs are contracted today. Including six completed new builds that are generating revenue; however, no revenue days before their initial field deployment. Activity in the spot market continues to improve as 31 of the 127 contracted rigs are currently operating in the spot market, including 28 FlexRigs. The remaining 96 active rigs, including 80 new build FlexRigs are under term contracts. The number of active rigs during the fourth quarter averaged 107.6, compared to 102.2 during the previous quarter.

This does not include an average of approximately eight new build rigs under term contracts that generated revenue during the fourth fiscal quarter due to customer-requested delivery delays and, again, no revenue days are counted there. As expected, revenue related to early terminations and customer request to new build delivery delays in the US land segment totaled approximately $28 million during the fourth fiscal quarter. We currently estimate that this type of revenue to total approximately $40 million during all of fiscal 2010, about 40% of which is expected during the first fiscal quarter. After a prolonged decline since the peak last fall, average pricing for H&P rigs in the spot market appears to have stabilized in the mid-teens. The average revenue per day for H&P rigs under term contract is expected to remain in the mid-20s.

In US land , the Company expects an average of approximately 95 rigs to remain under term contracts during the first fiscal quarter of 2010 and an approximate average of 90 rigs to remain under term contracts during all of fiscal 2010. While average rig margin per day for the segment, excluding the impact of early termination and the delay of revenues might be relatively flat sequentially, we expect to experience a 5 to 10% quarter-to-quarter increase in revenue days or average activity for the first fiscal quarter. In our offshore operations, average activity in the segment ended up averaging 78% for the third fiscal quarter. Today, eight of the Company's nine offshore platform rigs are active. A rig that was previously expected to become idle and demobilize continues to work and is now expected to be released at the end of November.

Furthermore, one of two previously idle rigs has been contracted and is now mobilizing to the customers' platform and the other one has good work prospects for calendar 2010. The number of revenue days for the segment from the fourth to the first fiscal quarter is expected to remain relatively flat and the average rig margin per day is expected to increase by 5 to 10%. In addition, we continue working with two platform rigs owned by customers under management contract and should restart operations under third management contract and equatorial Guinea. In the international segment, compared to 15.3 average rigs active during the fourth fiscal quarter, our number of international active land rigs has increased to 22 rigs operating today. Including six in Mexico, five in Argentina, five in Colombia, four in Ecuador and two in Africa. 12 of the 22 active rigs are under long-term contracts for the duration of fiscal 2010 and beyond.

In addition, one international bound new build FlexRig under a long-term contract remains delayed and earning revenue while wide waiting on the customer to determine the first location. As previously mentioned, the first fiscal quarter of 2010, will be one of transition for our international segment. So far during the first fiscal quarter, the last of our 11 rigs in Venezuela became idle. Two additional new built FlexRigs commenced operation in Argentina and the startup of operations in Mexico ramped up to a total of six active rigs. We expect quarterly activity or revenue days for the segment to sequentially increase by 15 to 20% from the fourth to the first fiscal quarter. Even with the transitional nature of the quarter, we still expect our average rig margin per day to continue to improve. A key driver in the recent success growing our FlexRig footprint internationally is the current availability of FlexRigs in the US, supported by the drilling-- by the record drilling performance by FlexRigs in Colombia, Argentina, Tunisia, and, of course, in the US.

In summary, there are indicators that H&P is well-positioned for long-term growth both in the US and international. A global trend of increasingly difficult wells defined by higher percentages of horizontal and directional wells with progressively longer laterals and smaller targets will highlight the limitations on the legacy fleet capabilities. Our long-term customers have voted. The old conventional rigs are not capable of drilling the more difficult wells as efficiently as a FlexRig and increasingly, new customers are beginning to experience the advantages that H&P has to offer. Now I will turn the call back to

Thanks, John, and before we open it up for questions, I need to clarify something that I misspoke earlier. I was discussing the amounts owed by PDVSA to H&P which is $73 million, which include $61 million of invoices, I earlier said $31 million , but it is $61 million which was also in the announcement . $61 million of that is from invoices issued since we changed to the revenue recognition to the cash basis in Venezuela. So I needed to correct that. So Aaron we're ready to open it up for

(Operator Instructions) It looks like the first question comes from the site of [Matt Conlan with MKM Partners]. Please go ahead.

Hey, guys, very good quarter. I was wondering, you said that you have 90 rigs on term contracts through fiscal year '10. That is higher than, you told us, a quarter ago. What are the margins on the new-term contracts. Are they anything comparable to the new build contracts?

We have added, Matt, contracts since the last call. But I'm looking around and I don't think we're going to disclose what the margins are. I think we're encouraged that at this time in the cycle, people are wanting to secure the rigs to go forward with and are willing to put those under contract. I will tell you the margins were attractive and we were happy to get those new contracts.

Okay. Can you tell us where those contracts were? What regions?

They're really, Matt, they'respread out, there are some in the Haynesville, there are some in the [Baukins], Marcellus, they are really, as you would expect, king of sprinkled around in some of the more active areas that we have seen.

Okay, are they generally one-year terms or longer?

They average one year. So, they not long-term contracts.

Great. Thank you very much.

Thanks, Matt.

Our next question comes from the site of Pierre Conner with Capital One Southcoast.

Good morning, gentlemen.

Hey, Pierre.

I might ask kind of around Matt's question, but do it this way. So, John you said the average rate in the term contracts should remain in the mid-20s. In -- not to put words in your mouth, but I'm assuming there are two buckets of term contracts and if we could call them the legacy term contracts on the new builds coming out and the term contracts for the additional rigs going in the Marcellus, the Baukin and Barnett. Are those appreciably different and so I'm trying to reconcile that with your comment about -- that the average of the term contracts is relatively stable.

Well, the new term contracts, again, are spread out over different areas. Obviously, different areas have different operating costs. Some of those rates are what we would expect to have seen in the term and some of those are less. We're not going to get a lot of details on it, Pierre. They good pricing, we're pleased with the pricing that we're receiving. In all of those contracts.

But directionally, though, as we add -- maybe this is the followup. Do you see some additional potential term opportunities out there for the Marcellus, for example, that you could actually -- I mean you actually increased, recently do you see additional increase in term opportunities?

Yes, I think there is some opportunities and, obviously, there is various reasons. But I think as Hans mentioned, there are a lot of customers out there wanting to lock up rigs of choice and not be, not be in a position if the market does continue to improve to find themselves needing to exploit the, some of these unconventional resource plays and having to do it with less than efficient rigs. Yes, there are people out there that are interested in locking up rigs on term and there is a range. I mean there is one year and there is two-year opportunities and some even more for people that know they're going to have long-term drilling programs in some of these places.

Is the Marcellus, we're seeing the rig count there, obviously, continue to climb. I would assume that is an area you're focused. Would you tell us what your current activity is in terms of, I know, you had recent awards there. What is the total count there now?

Today, we have four rigs operating in the Marcellus today, and several more that we're in discussions with customers about. And we're happy to report that the early performance has been very good and we have, already in some places, kept average times in half and so I think there is a lot of opportunity for growth and I would think that it would be similar to what we have seen in a lot of the other areas that we were first time participants in several years ago and now we have taken that and grown the footprint nicely.

Okay. And good. A couple more quick once. We're six now in Mexico, that's a hot topic of what the future plans will be. But, are you hearing of some discussion, any more potential for you or is it at this point, a wait-and-see opportunity?

Well, Pierre, the situation there is an uncertainty on the go forward as well as some budget considerations. I think that we're going to have more opportunities there as that all gets straightened out. There is lots of work to do down there and we're pleased. Now, we have those six rigs on the ground. They're drilling, they're performing well. We think it's going to drive some long-term opportunity for us.

Okay, just trying to get some timing on that. That two more quick ones, Doug, I know 40% of the non-operated,payments coming in expected in 1Q, the remainder is, do you have some perspective of a schedule pro rated over the remaining quarters or, again, the majority that is in the second quarter?

I am going to let Juan Pablo.

Okay.

Hi Pierre. We expect about $11 million in the second fiscal quarter, about $7 million in the third and the remainder in the fourth.

Perfect, thank you. Last one, back to John. Giving us good perspective on what you thought margins would do in most areas and then you mentioned, I guess, in international, we would see some days improve and then, of course, I'm going to ask you to bracket the margin improvement. You thought improve but I wondered if it was in the 5 to 10% range you that guided us on the other two segments or--

Well, again, pretty consistent theme in the last quarter and this quarter internationally. It's been a transitional period and there have been a lot of moving parts. When you move rigs around, you know how that can impact. We think there will be some increase but we hesitated to give any particular guidance on that.

Okay, I understand. I'm going let some other guys go through. Gentlemen, thanks for the perform information.

Thanks, Pierre

The next question comes from the line of [Scott Grubel with Bernstein Research]. Please go ahead.

Yes, good morning.

Good morning.

Some of your peers commented that they were starting to see rates rising in certain markets, nothing material, but directionally moving higher. Are you seeing the same thing and if so, where?

Yes, Scott. This is John. We have had -- we have seen some improvements lately. I mean it's not a big surprise when you see rig count demand in places like the Haynesville, the Eagleford has been an area that has seen a lot of growth over the last month or so. the Baukin as well as the Marcellus

I think we should see a little bit of movement there and we're not talk about large numbers. From a contractor's perspective, it's nice to see, at least to feel like you hit the bottom and you're coming off bottom and starting to see some improvements. I think the relative amount of improvement is going to be highly leveraged to how well you can perform and how fast you can drill the wells.

Yes And on the performance side, are you seeing your costs continue to come down?

We obviously saw some cost improvement in US land over the last quarter and we were pleased with that. Again, kind of going back to the comment earlier on international and being transitional.

We're starting to see some rigs go back to work and that's got some positive influence we would like to think on cost. We did spend money on FlexRigs as we stacked them and we would like to think they will come out and go to work and start up nicely and start earning margin early. I think it's hard to predict whether costs will continue down. We traditionally see our costs in a range when you look at our maintenance cost and we're kind of in that band right now. And it's kind of hard to predict we would actually see more cost reductions from here on.

Okay. And do you have your utilization figure for your Flex Threes and Fours in the US at present?

Of course, we have and we would prefer not to talk in details about that. We're putting them back to work and we're saying in a lot of areas where the availability of FlexRigs are pretty minimal and so, obviously, that has some impact on driving pricing a little bit as well. So we're not in a position to really share what the activity is today.

Okay. One of your competitors mentioned that for the new bill, their utilization rate was up towards the 90s. Are you in that type of range? That close?

Yes, we're -- Scott, I think you're hearing from us some reluctance to talk about things that we think end up being competitive factors in the marketplace, as I mentioned on my comments. We typically are the price leader where we have had more resilient pricing, so we're, we are seeing an absorption rate on our rigs, we're seeing utilization improve. We're happy to hear that our competitors are seeing the same and hoping that that shows up in the marketplace as well and I think those are positive trends, but our reluctance to give you detail. Those are good questions, but In our mind, competitive information.

Okay, that's all for me. I'll turn it back.

Thanks.

Our next question comes from the site of Mark Brown with Pritchard Capital Partners. Please go ahead.

Hi, guys. I was just wondering internationally what percent of the rigs are FlexRigs and which countries do you have those in?

We have six FlexRigs in Mexico, have four in Argentina. Two in Colombia and we have two in Africa. Is that all, JP? Yes

And I was wondering, you talked about Cap Ex for next year. Are there any considerations about building additional FlexRigs or any equipment that you would like to add to any of the non-FlexRigs in the fleet in order to be best for the different shale plays that you talked about or are you fairly set and primarily doing maintenance Cap Ex and finishing the new build program you currently have in place.

It's really the latter part of your comment. That number that we talked about in terms of our Cap Ex, Mark, is not anticipating additional new bills and in terms of our conventional rigs, they really have by and large the money spent, those are fully equipped. So we don't anticipate having to spend additional capital dollars there. So, I hope that answers your question. That is a base line number and doesn't anticipate additional bills beyond what we talked about.

Okay. And offshore, I wanted to ask if -- it seems like you will be pretty close to fully utilized going into Q1. I wondered if you have, if all of that is long-term contract throughout the year or if you could give any color in terms of the coming-off term and on the margin improvement, what was driving that? Was it utilization or pricing.

Mark, it's on the activity side. First of all, not all of those are term contracts. There are a few that are on term contracts. Some of those rigs are on cold stack and warm stack rates and some are full-activity rates. That is part of what drives the margin improvement is if you have a higher margin rig going back off cold stack into an activity, an active mode, or if you have a rig that goes back to work that has a higher rate and higher margin. That is really what drives the margin improvement.

Okay, thank you very much.

Thank you.

Thanks.

Our next question comes from the site of [Joe Hill] with Tudor Pickering Holt.

Good morning.

Hi, Joe.

A lot of my questions have been answered but there are a few here I think you might be able to help me with. There are reports recently out of Argentina that the government's announcing a new program to allow gas sales at higher prices, I guess they are importing gas from Bolivia at $6 an M. You think this is going to stimulate activity there and do you think you can put additional rigs to work there?

Yes, Joe, it's early and we have been thinking we would have seen more growth in Argentina, even over the last 12 months. We're talking to various customers and some new customer possibilities. I would say that is a real opportunity. Again, another example of FlexRigs coming in and literally cutting well times in half and moving very efficiently and of course, we will expect to see growth opportunities. Those are flex 4Ms and think there is an opportunity for Flex 3s, which is a little bit larger rig than the Flex 4M.

Okay. And you mentioned earlier that the blunder grade for term contracts is flattish in the mid-20s. Is your expectation that as the older contracts fall off and the newer contracts come in, that you stay flat in the mid-20s or do you think you can get a little bit of gain as the older contracts fall off?

No, I think-- was your questions on-- if we have new build contract roll off and we contract those rigs what kind of a rate would we see on the new rates?

Right. I am looking for the net movement as the old fall off and the new come in. What is the average going to do in 2010?

Yes. Go ahead, JP.

Joe, this is Juan Pablo. We only consider it a term contract that remain under term contract and that are currently contracted going forward. Then, that average day rate should slightly continue to go up.

Okay. Okay. Thanks and finally, are customers beginning to be willing to work with you in terms of paying for mobilization out of the Rockies at this point?

I guess I'm not following your question, Joe.

Okay. If you have idle rigs in the Rockies.

Right.

My understanding is you couldn't get your low cost reimbursed if you were going to move outside of the Rockies. Has that changed?

I don't recall us talking about that, Joe, but we have, we have had customer sponsorship on moving rigs out of the Rockies, out of Oklahoma and out of Louisiana in the past to move rigs into the Marcellus or into the Baukin. I would expect that the trend would be that customers would sponsor more of that and I'm not saying it was 100% sponsorship. In large part, the customers are paying for those mobilizations.

Okay, great. Thanks a lot.

Our next question comes from the site of Waqar Syed with Macquarie

My question relates to (inaudible). What is the status I wish you could talk about that, how long would these the (inaudible) costs you would constitute incur. Any guidance on that?

Sure we're anticipating that we continue to have about a $2.5 million per quarter burn rate going forward and we're 16 months or so from having purchased that, we knew we were going to have a phase of commerciality where we had to have available testing and be able to accomplish a lot of that in the field. And so, part of the downturn has lessened the appetite of the customers willing to test that, understandably and so it moved those efforts somewhat to the right. But we talked about achieving the 2010, hope for commerciality, and I think we still have that hope. It will be later in 2010 than it might have otherwise been. That is kind of where we find ourselves today.

Okay, then on the international business side, the margins for this quarter, and the quarters have been low, understandably, because you were recognizing costs-- operating costs in Venezuela and not recognizing the revenues. Now that all the rigs are down, that should change and shouldn't be operating costs. Recognition maybe that some fees costs that you still have to recognize. The margins should pick up quite sharply in the coming quarter and international business. Could you provide any guidance on that?

I'll have JP do that.

Thank you, Hans. Waqar, I think that is a fair expectation. But, as John mentioned earlier, we have a lot of moving parts during the quarter, a lot of transitions and so we're not exactly sure how far up that average margin per day might go.

Okay, but-- if you look back historically, the margins have been in the 8 to $10,000 a day range if you exclude Venezuela. You should at least come close to the $8,000 margin number, is that fair?

I think that might be a fair expectation going forward into perhaps the second fiscal quarter of 2010. But, in the first fiscal quarters, as I said there are too many moving parts.

Sure. To be a fair estimate at this point. Okay. Sounds good. Thank you very much.

Thanks, Waqar.

Our next question comes from the site of [Monroe Helm with Cimarron Capital]. Please go ahead.

Congratulations on the great quarter and great strategy. You talked about rigs under contract for fiscal 2010, if you didn't send up anymore rigs under long-term contracts, what would that number be for fiscal 2011.

We go into 11 just right at 70 rigs under contract.

On average, will probably go down to 58 for 2011.

Yes

On average.

Yes

And then around 35 on average, again, for 2012.

Okay.

It goes from third -- excuse me, from 90 to 58 to 35.

Okay. Terrific. Thanks. You made the comment earlier that you're not willing to match, go down and match some of these lower margin bids that are out there. Can you talk about the differences between what other people are willing to put the rigs to work at and where you're trying to hold the pricing.

It's anecdotal in nature and hard to say. We'll see in some cases, three to $5,000 a day difference. Again, most of that is just anecdotal in nature, the feedback when you win or when you lose-- mostly when you lose a bit. So, we tried to defend our FlexRigs pricing model as much as we can and I think we have been successful in most cases.

The companies are willing to accept three to 5,000 less. Are their rigs comparable to FlexRigs, would you say? Or are they lesser rigs?

Really, I think that is, at the end of the day, when you look at it, I think it's days on well times the total cost and I think that is why I think we have been successful in being able to charge the higher rates. That's really, you can't really say that, at the end of the day, it's the customer that makes that decision.

Okay. The last question has to do with the fact that you're going to have a lot of free cash flow as we move forward, unless you build any new rigs. I would assume you're not interested in acquiring other rigs. It's your chance,-- is that a correct assumption, one, and two, would you look to, if you had enough surplus cash flow to return some of that to the shareholders and in the form of a special dividend or some sort of more substantial ongoing dividend?

Monroe, that is something we would look at and the preference is to take advantage of trying to build FlexRigs when that makes sense, but if that is not an opportunity that has reasonable returns, then we're going to figure out how to get the excess cash back to our shareholders.

Okay. One other question just kind of popped in my head. Given your outlook, things have gotten better here. Early on, we don't put this many rigs to sustain deliverability as we thought in the past, is that a correct statement, one and two, do you see a consolidation phase coming in the segment over the next few years?

Well, yes, it is a correct statement. We think there are lots of third-party studies that show some pretty powerful trends and we kind of talked to those in terms of the shale plays and the more challenging drilling and just efficiency, I made the comment here in our customers, saying efficiency is king Efficiency really is a game changer. It sets up what we believe even stronger today, is a bifurcated market and you have legacy rigs that will be challenged and will bear the burden of the fact that we don't think you're going have a return any time soon to the high level rig count we achieved in the fall of '08, so, we have heard different comments over the last few months about well, is it really a bifurcated market, is it overstated, didn't everything get blended in?

As you talk to our customers and see their performance and see the differential, I think the case becomes stronger and stronger for this notion that, no, there really are rigs that are capable of performing as these trends develop. And rigs that are going to be very challenged to do so. That's when you ask about, in the market when you see the pricing, are those rigs equal to your FlexRigs? Well, there is a lot we would like to say about that. Our senses know they're not. And the value propositions really still is very much in tact to the customer when he sees the reduced cycle times. So, I will stop there. I hope that begins to answer your question, but I think we're faced at least in the short-term with the world that is becoming much more efficient and much more performance and it will drive a lower overall rig count.

Okay, as usual, thanks for your candid comments, it was terrific.

Thanks, Monroe.

Our next question comes from the site of [Michael Clark with SIR Capital].

Hello, everyone.

Hi.

Hi. I realize there is not a lot you can say about this, but I wondered why where things stand with PDVSA and perhaps putting rigs back to work at some point.

Well, that would be our desire and I think as things go forward, what we hear in conversations about them and what we were able to read that there is a desire for them to engage in some more field activity and that would require more rigs and so what we have encouraged is just further progress.

They've made some nice progress but further progress on what they owe us and then we would like to have part of that is a local currency conversion, we would like to see that go through and then you probably heard us say from the very beginning in this. Our desires to go back to work there and to continue that relationship. And I, I am trying to say that I think we're probably getting closer to that, but I know it's required some patience from you folks to see that happen.

Thank you very much.

Thank you.

Our next question comes from the site of [Jose Clicksburg] with Black River. Please go ahead.

Hi. Thanks. Thanks for your conference. A quick question regarding Argentina for visiting a, what was mentioned before regarding the increase in gas sales. What do you know about it? I mean is that something that you have heard down there in the ground and then how do you see the situation on there, do you see in hiring more rigs, I mean from the different suppliers. What are -- what do you have planned in terms of land drilling.

Jose, this is John. I think we been as much as you do, as far as what has been in the headlines and, you know, I think in general. That is the extent of our knowledge and I do think that there will continue to be opportunities for FlexRigs in the country for all the reasons that we have talked about, but I don't know a whole lot about the details right now as far as who else might be interested in picking up rigs in the country.

Okay.

Our next question comes from the site of Mike Breard with Hodges Capital. Please go ahead.

Okay, great quarter. The rigs that you have under deferred delivery, the new rigs, are you saying your customers are taking delivery sooner than you had anticipated or how are things coming on those lines?

I think it's a mix. I will see if Juan Pablo has more detail on that.

There are no significant changes. We mentioned we still have six rigs that have been completed that are still waiting on the customer to begin their very first well. The schedule remains more or less the same, there are changes in both directions.

Okay. Thanks and one another thing. You, your performance with Slumberjay in Mexico, are you seeing interest from Halliburton and other large companies that might want to use your rigs in other places?

Well, in general, Mike, we're having conversations in terms of the overall IPM market and where that heads. But nothing specific to report. We're happy to be in Mexico with Slumberjay as I mentioned, even though we don't know what the timing is going to be. We think there is more work to be done down there.

Mike, we have had some discussions with some other international oil companies that have acreage positions there. That offers an opportunity as well.

Okay. A year from now, could you give just some guess, I guess, or estimate of how many rigs you might have based -- or considered to be international rigs?

That is a good question. They followed us for a long time and we see that that takes a little more time and effort to execute on. I mentioned in our news release we have gone from one FlexRig to 14 over the last 12 months.

Can we do that again? That will be a challenge, but I don't think it's unreasonable and maybe, I don't want to be too general, but we are encouraged by the number of conversations and interests. Our chatter, if you will, has been two or three X of what it's ever been in terms of customers interested in bringing FlexRig technology and efficiency into their international footprint. How that plays out, I wish I could give you better detail on and we're as encouraged as we have ever been, Mike n that regard.

All right, good. Thank you very much.

Thank you.

I might also mention a couple of questions have been related to Argentina and I had mentioned FlexRigs but I failed to mention we have five large rigs in Argentina as well. One of which is working for that -- that could go to work. That offers some upside as well for rigs that are already in Argentina that could go back to work.

Our next question comes from the site of [Matt Bebe with Morgan Keegan & Company].

Thank you, good morning, guys.

Good morning.

Of the five rigs you took out of the US rig count, what is the best and most likely opportunity for those to be put to work and what is the timing expected for that?

Well, the five rigs in some cases, it may be more likely that they would go to work in the US, they would end up coming back to the US. It's not actually transferred ut of the US and they would actually work in the states. There is obviously a opportunity for them to still go to an international location, but as of right now, it appears most likely that at least three or four of those would work in the US.

Okay. Thanks. The -- .

That's related, really, to just registration cycle, timing, trying to get those things kind of preset to go and then we see demand increase here and so things kind of get jumbled around.

Okay, thank you. And then the remaining rigs that you all have to be completed, could you remind us how many of those are and what the pace of that looks like?

There are five of those that remain to be rolled out and that takes us through the middle to end of April.

Thank you very much.

Thank you.

And our next question -- excuse me, our next question is a followup from from Pierre Conner from Capital One Southcoast.

Thank you for letting me back in Hans, you mentioned uncompleted wells and so for you or John. Have you been approached about any kind of planning for what is suspect, a Flex 4 S would be suitable for large batch operations. Is that anything yet in the planning to give us a feel for the timing of the moving on some of these uncompleted wells?

Pierre, I haven't heard anything. I -- to the best of my knowledge on a lot of those uncompleted wells, I believe production casing was run and cemented and they're just, they haven't been completed or perfed and fracked and floated back. I don't see there is necessarily an opportunity out there. I haven't heard of any.

Okay.

Doesn't mean there is not an opportunity out there.

Okay, all right. On the cost side, John, anything here that you or Doug would want to let us know about on the cost relative to year-end? Any catchup accruals, workman's comp had been over accrued or anything that we should be aware of going into the sequential quarter that could change?

Pierre, I can't think of anything major. We always have little knicks and knacks in every quarter There is nothing of significance. I did mention the tax issue. But other than that, nothing comes to mind right now.

I appreciate that. That just double checking and then, two more quick ones, the housekeeping sort of. I just want to verify that, and I know you don't want to get into margins in Mexico, but as we get into the steady state of activity there, I'm assuming that your agreement is very much of a day rate-type. Should we be wary of weather delays, location delays, that affects some of the folks thar are in IPM exposure.. But, again, should we think about your agreement with Slumberjay as a dayrate type agreement.

Yes, Pierre. It's fairly typical day rate arrangement for us. And I don't see the weather or things like that coming into play. It's a term contract.

Got it. And the last one, back to PDVSA, and you alluded to your desire to get back, there a great opportunity base. Putting you on the spot, relative to the collections. Does it mean that you, to get back to the activity, you've got to have a clean slate or do you feel if you're showing some substantial progress you would be inclined to begin operating in?

We don't have established a bright line in our mind there and we want to see further progression. There would be a reasonable range of go for it and we would like to be encouraged that we don't push the restart button and find ourselves in a similar place six months from now. So, I think those things you work out, you talk out with the customer and we have had positive talks in that regard and we hope to see something break our way there.

Okay. Well, good. Thank you for letting me back through. We'll see you shortly.

Good, Pierre. Thanks.

Our next question comes from the site of Mark Close with Oppenheimer And Close. Please go ahead.

Thank you, my questions were already answered.

Thanks.

Thank you.

(Operator Instructions) The next question comes as a followup from Monroe Helm with Cimarron Capital, please go ahead.

You mentioned the part of your Cap Ex for next year is going to be devoted toward tubulars, can you talk about what is going on in the pricing in that market, give us any color on how you see that segment of the (inaudible) checking out?

Well, Monroe, we, we're pretty fully typed right now and city up with that. We're seeing those prices soften up some and go down. You remember it was spring, summer a year ago and it was this semi panic about what those prices would do and availability and lots of things. So, our long-term practice has been to fully pipe all of our rigs and they ready to go.

Okay, thanks.

One more question, if there is any out there?

(Operator Instructions) At this time, it seems there are no more questions.

Thank you, Aaron and we appreciate everybody joining us today. Have a good day.

Thank you.

Thank you.

This does conclude today's teleconference. You may disconnect at any time.