Helmerich and Payne Inc (HP) 2011 Q2 法說會逐字稿

Good day, and welcome to the Helmerich and Payne incorporated second quarter's earnings conference call. This time all participants are in a listen only mode . Later, there will be an opportunity to ask questions.

(Operator Instructions)

Please note that this conference is being recorded. It is now my pleasure to turn comments over to the Vice President and CFO of Helmerich & Payne, Mr. Juan Pablo

Thank you, Mark and welcome everyone. With us today, Hans Helmerich President and CEO, John Lindsay, Executive Vice President and COO, and Mike Drickamer, Director of Investor Relations.

As usual, all forward-looking statements made during this call are based on current expectations and assumptions that are subject to risks and uncertainties. As discussed in the company's annual report on form 10K and quarterly reports on to Form 10-Q. The company's actual results may differ materially from those indicated or implied by such forward-looking statements.

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.

I'll now turn the call over to Hans Helmerich, President and CEO and after Hans, John Lindsay and I will make additional comments and will then open the call for questions. Hans?

Thanks, Juan Pablo. Good morning.

Well, our second-quarter results were somewhat disappointing after such a strong first quarter, where, US land average rig revenues were up and related expenses were down, even beyond our own expectations at the time. While the revenue numbers we reported this morning, were in line with our expectations, our expenses were driven higher by several factors.

On this call, we will talk about those things and work through some of the noise around the numbers for the second quarter, discuss the clearly positive developments announced today, and address some of the opportunities we see for the remainder of 2011.

During the quarter, we incurred pre tax expenses of approximately $7 million or $0.04 per share after tax. They were unrelated to normal operations. While Pablo will provide some additional information related to these charges, and to other unexpected quarterly increases in G&A and income tax rate.

On the positive side, today, we announced new contracts for 8 additional new builds, bringing to 14, the number of awards secured since our last quarterly call. On that call, we talked about a powerful trend of customer shifting their drilling targets to oil and gas liquid rich plays.

Importantly, they are employing unconventional drilling techniques to conventional reservoirs. Increasingly, well designs as becoming more complex and incorporating longer lateral sections. This trend towards greater drilling complexity is particularly well-suited to the capabilities of the FlexRig and is reflected in the number of new orders and ongoing interest being expressed by our customers.

The opportunity for additional new builds is also being driven by resurgent energy cycle with increasing energy prices now in particular oil, and national gas liquid prices, and the unfolding growth ramp of shale plays. Taken together, these three drivers, increasing well complexity, strong oil prices, and the growing scale of drilling requirements of several shale plays, should provide for continuing momentum.

Longer term, this momentum could be enhanced or sustained by additional international activity and modestly higher natural gas prices leading to a time when the gas directed rig count stabilizes or grows instead of declining. For now, the unrest in the Middle East and low natural gas prices push out the potential of these two factors in 2012 and beyond.

Currently, our focus remains on strong execution. Leading field performance paves the way for additional new build opportunities. Our field performance, measured by reduced downtime and safety is at an all-time high level. Once orders are secured, we must execute our manufacturing efforts, ensuring those deliveries are on time and on budget. While that is easier said than done, it is an area in which our folks have consistently excelled. We are beginning to hear of other land rig construction projects that are being delayed and experiencing cost increases. That has not been our experience.

In the last 12 months, we have led the industry in delivering 26 new builds on time and on budget. We are on track to continue that performance for the 19 scheduled deliveries for the remainder of the calendar 2011.

Our increase in cadence to 3 rigs per month beginning last January, has gone smoothly and has allowed us to respond and a timely manner to increased demand. We are well-positioned to play a lead role in what we have called for some time now a replacement cycle. A market in which customers more complex drilling requirements are being satisfied by efficient high-performance land rigs.

I will now ask Juan Pablo to make some further comments before John provides his operational report. Juan Pablo ?

Thank you. As announced earlier today, the company reported $99 million in income from continuing operations for the second fiscal quarter. Or $0.91 in diluted earnings per share.

Included in the $0.91 are $0.02 of after-tax gains from the sale of used equipment and $0.04 of after-tax charges that are unrelated to normal operations and our attributable to the settlement of a lawsuit and unrelated increases and litigation accruals.

Dimension charges, equivalent to $0.04 per share, impacted our direct operating expenses as reported in the US land segment by approximately $4.8 million. And, our direct operating expenses, as reported in the offshore segment, by approximately $0.5 million.

Dimension charges also impacted our total interest expense by approximately $1.7 million. Interest expense for the first 6 months of fiscal 2011 was $10 million and we now estimate that the total for the fiscal year will approximate $18 million .

General and Administrative expense, or G&A, total $44 million during the first 6 months of the fiscal year, after significantly increasing during the second fiscal quarter. The increase is mostly attributable to a growing level of personnel required to support our growth, market driven adjustments to compensation metrics, and a greater level of professional service expenses, as compared to those are originally forecasted. We now expect G&A to total between $95 million - $100 million during fiscal 2011.

Our income tax rate for continuing operations, although higher than expected during our second fiscal quarter, is at this point expected to be closer to 37% during the remaining 2 quarters of fiscal 2011. Total depreciation expense during the first 6 months of the fiscal year was $149 million and is now expected to total approximately $320 million during the fiscal year. The expected growth is result of the ongoing success of our new build program.

Our latest capital expenditures estimate for fiscal 2011 is $850 million, but the actual spending level for the year may vary depending primarily on the timing of procurement related to the company's ongoing new build construction program. At this point, we estimate that approximately 75% of the mentioned 2011 CapEx estimate will be directed to our new build program, approximately 20% to maintenance CapEx, and the remainder to special projects. We continue to expect to be able to fully fund the CapEx program from existing cash and from cash to be provided by operating activities during the remainder of the fiscal year.

Our investment portfolio, primarily comprised of 8 million shares of Atwood Oceanics and 967,500 shares of Slumber J, recently had a pre tax market value of approximately $450 million and after-tax value of approximately $290 million.

I'll now turn the call to John Lindsay, and after John's comments, we will open the call for questions.

Thank you, Juan Pablo, and good morning.

The following comments will describe the operational results for the second fiscal quarter of 2011 and the outlook for the third fiscal quarter of 2011 for our 3 operating segments .

Beginning with our US land segment, operating income improved during the second fiscal quarter, primarily as a result of taking delivery of 9 new build FlexRigs with firm term contracts and the remaining FlexRigs returning from Mexico. Accordingly, that our Reading income from the US land segment increased by approximately 4% percent sequentially $164 million.

Revenue days increased slightly more than the 3% sequentially during the quarter with an average of 198 active rigs, 132 rigs on term contracts and 66 off market. Average rig revenue per day increased by almost $700 per day to $25,640, as the average revenue per day for rigs in the spot market increased by over $1200 to approximately $24,700 per day. Average rig expense per day increased by over $500 to $12,457 per day. Approximately half of the cost increase is unrelated to normal operations during the quarter as Juan Pablo discussed.

Additionally, almost $100 of the increase was due to higher labor costs, which contractually is a dollar per dollar pass-through to our customers and was offset by corresponding revenue per day increase. Going forward, we expect to continue to benefit from growth in our US land fleet. Today, we announced contracts supporting the construction of 8 additional FlexRigs.

Including the 6 new builds commitments we announced in March, we have total of 14 new build signed since our last conference call in January. These 14 new FlexRig commitments total 45 signed long-term contracts over the past 12 months.

With these new commitments, our plans are to continue to deliver 3 rigs per month from January 2011 through our September 30 fiscal year end. As the 45 new flex rigs announced since March 2010, 26 have been completed and are working today and the 19 remaining contracted rigs should be completed by the end of calendar 2011.

Now turning to the outlook for the third fiscal quarter in the US land, we're scheduled to complete the construction of 9 contracted new build FlexRigs during the quarter, increasing total revenue days by about 5% - 7% as compared to the second fiscal quarter.

As of today, we have 208 contracted rigs making H&P the most active contractor in the US land. Of these 208 rigs, 137 are under term contracts and 71 are in the spot market, including 68 FlexRigs. Our current term contract backlog includes an average of 130 rigs under term contract during fiscal 2011, including 133 in our third fiscal quarter and 100 rigs during fiscal 2012.

While dayrate growth is slowing, we expect continued improvement in our average term and spot rates, such that the total average rig revenue per day is expected to increase between $300 and $400 per day, as compared to the second fiscal quarter. We continue to be encouraged by the improving activity levels and US land and a bullish outlook by our customers.

Historically, during high rig activity, the industry experiences cost pressures on both labor and rig maintenance and supply costs associated with oil field inflation. Therefore, we expect average rig expense per day to trend higher.

Now, looking at our offshore segment where we benefited during the quarter from 1 of our rigs returning to work during the quarter, as well as work continuing longer than expected on one of our management contracts during the second quarter. Offshore segment operating income sequentially increased almost $2.5 million dollars to over a $11 million. With 1 of our rigs returning to work during the second fiscal quarter, total revenue days increased to 618 days from 587, the prior quarter. This rig earned a margin of the prior average, positively impacting average rig margin per day in the third fiscal quarter which increased by over $5000 per day to $23,747.

For the third quarter, 1 rig that is making a platform to platform move will have an effect on the segment by about 2% fewer total revenue days during the third fiscal quarter, which produces a reduction in average rig margins per day for the segment between 3% - 4% from the second fiscal quarter.

Additionally, 1 of our management contracts is now cold stacked. Management contracts are not included in the per day calculations, but this cold stack is expected to negatively impact segment operating income by about $1 million as compared to the second fiscal quarter.

Now, we will look at our international land segment. While the US land operating segment benefitted from the mobilization of rigs from Mexico to the US, this movement significantly reduced the size of our international operations. As we discussed on the January call, we expected the reduced activity margins.

Operating income for the international land segment decreased to $2.4 million in the second fiscal quarter from over $14 million in the prior quarter. The sequential decrease in segment operating income is attributable to 26% fewer revenue days during the quarter combined with a 39% decline in average rig margin per day.

Tunisia has been a consistent performer, but as a result of the civil unrest in Tunisia, one of the rigs and the country became idle at the end of January and is still waiting on a contract which will negatively impact the third fiscal quarter.

During the quarter, we experienced some downtime between contract between 2 rigs in Ecuador. Both of these rigs have now returned to work and should have a positive impact during the second half the third fiscal quarter.

The third FlexRig in Bahrain has started operations even while we experienced some limited downtime due to the civil unrest that occurred in the second quarter. We believe that the addition of the third rig will contribute about 2 months in the third quarter.

In Argentina, our last active big conventional rig stacked in March. The 4 remaining active rigs in Argentina have received a reduced day rates due to the labor union strike in that country, which is also expected to negatively impact the third fiscal quarter.

In Columbia, we expect to work 5 of 6 rigs during the quarter, and the outlook is positive or improved activity later in the year. As of today, we have 17 rigs active in the international segment including 4 rigs in Argentina on reduced day rates. We expect the total revenue days for the international segment will increase during our third fiscal quarter by 2% - 3% over the prior quarter.

With no further early termination revenues expected from Mexico and the effects of the disruptions of Tunisia and Argentina, we expect average rig margin per day for the international segment during the third fiscal quarter to decrease by about 25% from the prior quarter. The outlook for the remainder of the 2011 fiscal year does not show signs of improvement for our international segment in large part, due to moving the 6 FlexRigs out of Mexico.

While this was a negative event for the international segment, this is clearly has been a benefit to the company as the rates in the US deliver at least 50% higher margins than in Mexico. While in the shorter term, the sentiment is not as positive as we would like for international operation, we think the segment has long-term growth potential.

But the recent political unrest in the Middle East and North Africa has set the timetable back on many projects as our customers are trying to figure out where they will spend 2011 and 2012 budget dollars.

In summary, since 2006 H&P's Houston manufacturing facility has commissioned and delivered 166 new FlexRigs at an average cadence of approximately 2.5 rigs per month. The highest cadence has been at 4 rigs per month and through the downturn of 2009, we still delivered at least 1 FlexRigs per month.

As customer demand continues, our internal manufacturing and supply-chain efforts should allow us to maintain the current 3 rigs per month cadence through the end of calendar year 2011 and into 2012. The ongoing dialogue with customers is encouraging regarding additional new build opportunities.

As the industry continues to transition toward more complex well designs involving horizontal and directional wells, we believe that the industry replacement cycle will continue and FlexRigs should remain in high demand. And now I will turn the call back over to Juan

Thank you John, and Mark, we will now open the call for questions.

All right.

(Operator Instructions)

Mike Mazer, BMO Capital Markets.

One quick question.

Some of your competitors have spoken about the weather impacts in Q1, in Texas Oklahoma, etc. You guys didn't mention anything about that. Was it a non-issue are you or was there something in there as a result of that?

Mike, this is John Lindsay, no there was really no impact, Mike. I'm sure there were some rig moves that were delayed, but there really wasn't any impact to our overall earnings.

Okay. That's great. That's all have thanks.

Thanks.

Waqar Syed, Macquarie. Please go ahead.

Thank you.

In the past, as you mentioned that you built at the rate of four rigs per month, as it possible to increase from three rigs on month to four rigs a month any time soon? And, do you see demand for four rigs on month? Going from three to four? Is that a supply chain issue?

Waqar, this is Hans.

I think the driver is what you mentioned in your question. It has been, for us, a demand pull model where we had sponsorship from customers and they have, in essence, set the pace and what our cadence is. I think we were pleased to be able to maintain the three rigs per month that we kicked off in January and, we have the full supply chain support for that effort and we mentioned we see that going on through the rest of the year.

Your question is, could you respond to demand that would drive four rigs per month? I think like you mentioned, we have historically been able to do that. Of the balancing act is going to be from some of those learnings, not only hitting on the right cadence in terms of demand, but also finding the sweet spot in terms of efficiency and in terms of cost.

So, I'm not trying to hedge so much as to say, as the visibility improves and demand continues to ramp, we could be responsive to that. It has, as you know, lots of moving parts and considerations.

Some of your competitors are reactivating older rigs, even that [fifteen hundred horse power] now they're not that many rigs in the inventory that are left. Would it not be, at this point, what it be more rational to expand capacity to four rigs per month?

I don't think it would que off of the conventional rig space is you have suggested. I think it's going to be some of the dynamics we talked about. And you've heard us talk about the long time.

Which is, the customer wants right tool for more complex well designs and we have a robust order book now. We feel good about that continuing forward. It really won't be, I think so much tied directly to what is occurring in the conventional a SCR space.

Okay. Do you have the supply chain side, do you feel comfortable, that over the next six months, if demand shows up, that you would be able to increase capacity or no?

I think we have the best supply chain effort and the business and, our guys do a great job of working that. That is not to say there won't be challenges and I think some of those challenges are being reflected in orders and production that you are hearing from other industry players as they move deliveries to the right. Again, that is why we emphasize the 24 deliveries. That we've already accomplished on time and on budget.

That will be a good marker for people to pay attention to and watch. I like where we are on our supply chain. Our guys are confident that we are going to be able to respond customer demand.

Sure. Now on a different note, in Argentina, mentioned that maybe there are some labor issues. It appears that's kind of a recurring issue. It happens fairly regularly. Do you have any interest? Are you considering moving those rigs to another market or right now you are committed to that market?

This is John. Those rigs, those four rigs that we discussed are all on long-term contracts.

Okay.

Tom Curran, Wells Fargo. Please go ahead.

Hans, I'm curious, looking back over the last two quarters worth, Q1 new builds awards, how many of those were deployed outside of shale place?

Well, I'm not sure that there were any, John?

Most of those are -- well, I take that back.

There have been several new builds and I don't know what several, I don't know how many that is. Several have gone to Permian that are not necessarily unconventional shales or unconventional plays in general. The more conventional reservoir that in some cases they are being exploited in an unconventional way with horizontal drilling. But, they are not unconventional.

That's exactly what I was referring to. So, could you quantify how many actually are, have been deployed, during horizontal development of conventional reservoirs?

But I think it's significant in that, it's not just new builds, it may be that there is a much larger percentage of rigs that have been transferred out of some of the unconventional pure gas plays that have been moved in. For instance, we have all of our flex 4Ms now in the fleet in the US with the exception of two which we have in California. They are all in the Permian today. Those are super singles that are really designed to drill at 6,000 to 12,000 foot range. There in there doing a lot of that will Wolfberry and Sprayberry work that is historically been done with the conventional, you know, rig. Box on box rig.

And some cases, they are still, our FlexRigs are still doing vertical work but in a lot of cases we're seeing that the customer is taking that traditional well path and now drilling in horizontal well. And, of course, as in all of these plays, they continue to try to reach for more lateral.

In your sense, ever more of the conventional drilling shifts to the Mitchell method for development that the preference will remain to do that with tier 1 class rigs or have you had customers express an interest in potentially upgrading some of your tier 2 rigs, including those that you just sold into of a new build contract?

No, I think it is definitely, from our perspective, it'll the AC drive rigs that are designed to move efficiently. Whether that movement is on a well to well with conventional move with trucks, or if it's a multi welled pad arrangement where we are drilling three to six to 12 wells on a pad.

So, again, I think one of the things to keep in mind, because of the success of the AC rigs as cycle times increase, or improve, and your rig move cycles happen more frequently in a year, it doesn't bode well for a conventional rig upgrading to adding a top drive and adding additional components because it helps on the drilling site, but it delay's, it extends the delay of rig moves. As the cycle times get faster and faster, the rig move plays a bigger and bigger part of the total well cycle.

Just to add one thing Tom.

As we go back five years, and look at a time when proportionately we had more flex rigs targeted engaged in vertical type wells, we still were enjoying a demand shift and a recognition of better and better efficiency. So, I think, like John says, the trend is in place and I think imperical now on what the customer wants.

I think one other driver that I think continues to be a hindrance to upgrading older rigs is, if you look at the dayrates that those contractors were able to command with those rigs, I think what you will find is a pretty low $17,000, $18,000 a day dayrate which, with the investment that is required, that is not a very good return on your investment , as well as the challenge for them to get a term contract associated with that new investment dollars. So, I really think there's several barriers to reactivating a lot of those older

You made some cogent points there. Each of you.

Shifting gears here, internationally, looking to 2012. Just based on the indications you have right now, conversations you're having, the opportunities you feel most confident about, how much could we see your contract account grow by the end of 2012? Off of where it is today? How many incremental rig could we see deployed across your existing international markets? And some of those being new markets maybe an indication of where they would be?

Tom, I think that there's some pause today with what is happening in the middle east and some of the uncertainty in international markets. It's a little bit hard to track because, I think there's some positive trends, certainly with oil prices and the need for additional drilling and for longer term. That drilling being very suited to what we do with this kind of backdrop of uncertainty and watching the ongoing unrest that you have. So, it's harder, I think today than 100 days ago to be able to say with certainty what the answer to your question is. That's a good question.

We think that some of that move to the right, it doesn't fall off the cliff, but, you are seeing customers, or at least we are, they are pointing back to North American opportunities, if you will, ramping that up. And if so, we are a beneficiary of that, too. As you know, we are committed to looking for opportunities internationally, but I think they did move to the right some, and the net of that helps drive further North American advances.

Okay. I appreciate the color. I will turn it back.

Thank you.

(Operator Instructions) Ayrun Jayaram, Credit Swiss.

Wanted to pick your brain a little as, John, with what your thinking about the some of the conventional rigs you had stacked for a while. Do you, are there opportunities are customers asking you to reactivate those? Or will the focus continue to be on this increasing your leverage to new builds and FlexRigs going forward?

Well, you summed it up with our customers asking what we are seeing as evidenced by the new build commitments. What we see customers wanting FlexRigs. Obviously, the performance is much better from our perspective, the challenge is, as I mentioned on the earlier question.

Yes.

As you begin to look at our competitors and what type of a dayrate they are able to command, and the investment that is required to reactivate the rig, that doesn't turn out to be a good investment. And, again, in addition to that, a lot of customers are not going to be willing to commit to a term contract for an upgraded conventional rig. On the other hand, they are willing to commit to three-year terms on FlexRigs.

Right.

Again, we are just picking from our perspective, from the H&P perspective, we don't do see a lot of customer demand. Well, that is in today's market for us in today's environment. That is very high oil prices, but very low natural gas prices. If you were to see a pickup in natural gas prices that would go above $5 dollars or above $5.50, the game could change. Who knows , and who knows when natural gas prices are going to

Okay.

I would think I would add to that, one of the nice things we find is we are solving for something over 10% of our fleet. I think over two thirds of our fleet were comprised of conventional assets. We make take a different tack. We voted, over the years, we voted for certain view of the future and what type of installed asset base we want to serve customers going forward and so it gives us some more flexibly.

I got you. So as we think about modeling rig count gains going forward, is always all going to be new builds. Is that a fair comment?

Yes.

Okay. John, I also wanted to comment. You mentioned in your remarks that dayrate growth is slowing. As is still increasing or can you give us some numbers around that? Or, you made the comment code so I just wanted understand a little bit more.

Well, it is still increasing if you look at the average spot market pricing is about $1000 less. About a $1,000 less than the overall, our overall rate in average.

So it, there's still some pricing, if you look at leading edge pricing, they are still some rigs that we have, and of course FlexRigs we will come in higher pricing them Flex 4's, and Flex 1's and 2's and some of those rigs that are still not up to the leading edge pricing. There is some pricing power there.

I think in general, we have, no doubt it's a very strong the market. Oil prices and liquids are driving that, but you still have a very soft, vary weak natural gas price, which I think has some influence. On keeping the business from being the real frothy business that we saw in 2007 through 2008.

Okay. Last question.

John, what exactly is going on in Argentina? What do you think these will normalize?

Well, wish I can tell you exactly. That's a good question. It is a labor union strike that really, we don't have any control over. I think the country, in general, is shut down in an overall strike in a lot of respects. We get some indication, it sounds like that maybe that is becoming to come to an end.

The reality is, since we have been in Argentina, and this particular area where these four rigs are working, we have had all of labor union issues and a lot of strikes. It's, it may only be a day or two in some cases, this has been extended. Obviously, as you can imagine, is very disruptive.

Now I will also say, in other parts of Argentina and other states that we haven't had those types of strikes. We had a very good labor relations. Whenever say we, I don't mean we as an H&P, I mean we as in the oil and gas industry in general. Just generalize Argentina, to say that all areas have typically -- we see that they haven't. This particular area does.

I've read it's been about a month or so and it looks like is beginning close to finishing, but, it sounds like it not.

We get some indications that we are close to the end on this particular strike.

Okay.

Again, this one has been more difficult than others. What we are hoping that eventually there is some common sense injected into the situation and we can come to some kind of a resolution where we can continue, we as an industry, can continue to move forward and make progress. Is good, it's very disruptive.

Thanks gentlemen.

Thanks.

Robin Shoemaker with Citigroup.

Thank you. I wanted to clarify on the cost side of things here. You're expecting your second quarter revenues , average rig rate to be higher. It was. You're expecting rig cost be flat and they were up. Was that the nonrecurring items that drove up the average rig

Yes. Well there was about 350 of the 500. About 100 --

170--Was related to the four point -- was related to the $0.04 charge that I mentioned.

Okay.

But in attention to that, there was hundred dollars or so that was a labor charge that is a pass through. We had a corresponding revenue increase.

Yes.

So that would also, when we talked about in the last quarter that we expected to model flat, obviously, if you have a labor increase, you're going have a pass through. And then these, what we would consider, nonrecurring or non-operational type, would have been outside of that. Is really about 100 to 150 on the operations side.

And you indicated for the current quarter that, you see a $300 or $400 increase in revenue per day. Is there an expectation that cost will be similarly up or flattish with the second quarter?

Well, in my comments, I talked about, the fact is we had a labor increase. There's potential for other labor increases. I don't have any one particular area right now right say hey, I will have one here.

But when you look at the growth in a lot of the areas that we are working, it's massive rig count growth, and a lot of the challenges with some people's growth, is obviously personnel. That has a tendency to drive cost increases on the labor side. Again that will be a pass through.

Just in general, I think there's potential for oil field inflation as more and more rigs are working and just the general cost of goods of cost and services continued to go up. We continue it will continue to trend higher. I can tell you it's $100 or $200, but the costs in general will continue to trend higher. That's what we've seen in the past.

Yes. Okay. And ask you about the cost of building a FlexRig. Has there been any upward pressure on that?

Robin, this is Hans.

I think we're starting to see segueing from John's answer from general oil field inflation, we're starting to see the front end of that. I think we've been able to take what might be one or two percentage points that would include steel and some other costs. I think we have been able to continue to make progress on our efficiencies in manufacturing efforts such that we've kept those costs overall flat.

So, we're pleased with that. As we say, we will have to watch and see where the demand is and how much oil field inflation shows up.

Yes. Okay. And that would come in the rig components that your purchasing? The mud pumps or whatever?

I think you have to look at all aspects in terms of labor involved there, raw materials costs, steel, other pieces of the puzzle.

On the contracts that you're citing on the new builds, is the preferred term two years now or three? I know you have done both.

Robin, we are typically in the three-year term contract. Occasionally, we will have two year, but typically, were looking at a three-year term contracts on our new builds.

Right. Okay. Thank you.

Thanks Robin.

(Operator Instructions)

Pat Gruber, Bernstein.

That's Scott Gruber.

Just a few questions here. Any update us as to where the leading edges for the Flex 3's? Leading edge spot rate?

Scott, it is a range because, obviously, working in different areas. It's a mid 22 high 20s depending on the area that we are working. As we kind of said before, for competitive reasons, we will not spell it out too much more clearly than that. But, as kind of in that range.

Okay.

And then, do you believe that you're still maintaining a spread of a few thousand dollars to your competitors within the high efficiency market? Historically, that's been linked not only to the FlexRig design, but also superior operating efficiency in part given your longer experience operating the higher efficiency units. The competition now having a few years under their belt operating similar units, are you starting to see some compression in that spread?

Scott, I can't recall in recent memory or any memory, where we've gone head to head with the competitor for new build work, AC drive work with they've gotten the rate or the term, especially the rate that we bid. We honestly don't when all of it, we get our fair share.

But when we do this, we typically have a pretty good indicator as to what the competitor has bid and what they win at. And I have yet to see the one that is in the same range. You know, I just haven't seen it. Don't recall that ever happening. I don't think there's any doubt that our competitors are getting better.

Obviously, when they were new to the new build game, there have been some learnings, but we have been at this for over 10 years and I think we do a very, very good job and we're not standing still. We're not the same level of performance we were two years ago. We continue to improve systems and processes.

I'm encouraged. Again, I give those guys credit. I think that getting better. But as we've said , we think we can build a better rigs are less and we're able to charge more for it up because our customers are willing to pay for it because of better

Okay, great. It makes a lot of sense.

And then on the contracts you are securing for the active units, what types of term are you able to secure broadly on average and how has that changed over the course of the cycle?

You're asking about rigs that are either rolling off of term or just rigs in general that are in spot market that might -- and operator might put on term?

Right. Both. Non-new build term contracts. What type of term --

There usually one to two years. We rarely comment a rig to less than a year. Would just assume go ahead and play the spot market. But it's generally a one to two year timeframe.

That's really, and most cases, not driven by us by the customer. The customer has a drilling program that they know they're going to have in a certain area. They have complement of rigs. But like the rigs. They want major you can keep those rigs.

And a lot of those same customers are customers that continue to order new FlexRigs and they're growing the fleet in particular areas.

And it has the term been extending some as late in the strength of increased prices?

It seems like. I think we're probably, and a lot of cases, more than 12 months and the pricing has improved. You know, we obviously have more term contracts on average for 2012 as we announced today. We're encouraged by that. And, so there seems to be that. Again, I think customers want to make sure they got quality rigs and they can be assured that they have those rigs through their budget cycles.

Great. Thanks for the color.

[Janice] Rudd, Prichard Capital.

Yes. Good morning. Saw that you sold three conventional rigs, which three to cross of the list here and can you give us any color on the proceeds of when the last time any of these rigs worked was? And, through the buyer might have been?

Well Janice, we have a bit of a confidentiality as far as we sold it to and what the pricing was. As far as the types of rigs, we sold one mechanical, 1000 hp mechanical, 1000hp SCR, and 2000hp SCR.

Can you tell me about the gain you took for the quarter? How much that was related to the rig and how much versus the stuff that you sell every quarter? The accounting number? Whether it was gain or loss?

Can you expand on the question? I am not sure I understand.

You said there's two sets of gains during the quarter. I was wondering how much of that was from the rigs versus drill pipe or whatever auxiliary equipment that you sold?

It's about half, but again, we are not going to expand much further than that.

Okay. Pemex Is going to be, or has contenders out for platform rigs. Are you interested in going back to work for Pemex?

Well Janice, when we were in Mexico, we were actually working for Schlumberger through an IPM arrangement. Our customer in that case was actually Schlumberger and their customer was Pemex. We are familiar with contenders, but no, we really don't have the rigs available for that type of work.

It tends to be smaller.

It tends to be -- it doesn't really fit our fleet profile.

Okay. Thank you.

Thank you Janice.

Steve [Mars] with Citizens Trust.

Gentlemen, earlier a caller discussed the duration, if you will, that you can operate at four rigs per month. Could you maybe go into that and give a little greater detail?

Well, I think the issue is driven by couple of things. One, we've been in a position where, and it somewhat in contrast our competitors, instead of just announcing what a new build book is going to look like, we're really responding to customer demand and then they are contractually sponsoring that effort. Part of it is a demand pull driven factor.

Then, more and more, I think people are paying attention to supply chain issues and long lead time items and just the ability to organize and coordinate a construction effort. And so, I think we're trying to make the point that our supply chain management effort, we think is very strong and our guys are on top of that. It allows us to be able to forecast a three rig per month cadence through the rest of the year.

And then, we're balancing some of the things were talking about now. The demand, and the supply chain issues going forward into '12. So, we don't really have plus of visibility or additional comments on what '12 unfolds like.

Things were wonderful for you guys. In oil and natural gas market. That, I guess my question is, could you folks operate at four rigs per month indefinitely?

Well, the last time we were four rigs per month, we sustained that effort for 12 months. And what slowed it down was customer demand. I think we are going to find a way to be responsive to what our customers are wanting.

Thank you for the wonderful detail.

And we will go next to the side of Josh Jane with Simmons. Please go ahead.

Thanks. My first question is, would you be willing to disclose where the 19 new builds are headed that are due to be delivered by the end of the year?

I think, just in general, Josh, Eagle Ford, Kendall Woodford, Bachan most of those are directed towards oil and liquids rich plays. That's kind of the overall. If you look at the 45 in general, close to 65%, 70% of those are in the Eagle Ford, Kendall Woodford, Buchan, probably Californian and Permian.

That's helpful. Thanks.

Secondly, with respect to new build pricing, I assume it is in the still high $20,000 per day range. Would you say that, it's held there in that range and that we would need a rebound in the gas rig count to sort of move pricing higher than that.

Well, I'm not sure it would be. So, clean a break of what happened on gas prices.

I think, one of the things that I hope people are paying attention to, because we are in a brave new world where we have, for the first time, and over, I think it's 15 years, more rigs running directly towards oil than guess. So, it is a significant backdrop and it suggests that, depending on your outlook for world energy prices and oil prices and lots of other issues, it looks like you could have increased demand and a less secular, less volatile forward cycle. Those things are all unfolding and I think the industry is trying to get their arms around that.

I mentioned in my comments that improving gas prices could be additive it could be a layer that would add on to that type of demand if we could see gas prices reverse and gas directed rig counts stop declining. So, I don't know if that helps, but I think we are in kind of a new area in terms of so much of the industry fleet being directed towards oil and liquids rich plays.

That's very helpful. I will turn it back.

Thank you.

And gentlemen, it looks like we have no more questions at this time .

You very much, Mark, and thank you everyone for joining us and have a good day.

This concludes today's conference. We thank you for your participation and hope that you have a nice day.