Helmerich and Payne Inc (HP) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's program.

(Operator Instructions)

Today's conference will be recorded. At this time it is my pleasure to turn the program over to Mr. Juan Pablo Tardio. Please go ahead, Sir.

Thank you, Mike, and welcome everyone to Helmerich & Payne conference call and webcast corresponding to the second quarter of FY14. The speakers today will be John Lindsay, President and CEO; and me, Juan Pablo Tardio, Vice President and CFO.

As usual, and as defined by the US Private Securities Litigation Reform Act of 1995, 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 10-K, and quarterly reports on 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 will now turn the call over to John Lindsay.

Thank you, Juan Pablo, and good morning everyone. We had another strong quarter while achieving record revenues and record rig activity. Our continued success is a result of our people and new technology solutions that drive lower well cost for our customers. I would like to thank each of our employees for their contribution to the effort.

Our drilling and safety performance continue to lead the industry and provide growth opportunities for the Company. Our US land rig count today stands at 287 rigs, up over 40 rigs since our second-quarter call this time last year. We are pleased to announce nine additional new builds this morning, comprised of six FlexRig3s and three FlexRig5s.

When combined with the 35 previously announced new builds, we now have a total of 44 new builds for the 2014 fiscal year. All with long-term contracts and attractive economic returns. Of the 44 new builds announced, we have already delivered 25 with 13 FlexRigs that began work during the second fiscal quarter.

We delivered two rigs per month for the first half of the fiscal year. And during April we increased our construction cadence to three FlexRigs per month. Our plan is to continue that cadence at least through the remainder of the fiscal year. The market continues to be resilient and we are encouraged by customer discussions for additional new builds. Our engineering, manufacturing, and supply chain capabilities will allow us to respond quickly if future new build demand supports transitioning to a four rig per month cadence.

As we review the macro environment, oil and gas prices remain stronger than expected for 2014. This has resulted in allowing many of our customers to expand their drilling budgets. The US land industry activity is up around 80 rigs in 2014, according to the Baker Hughes rig count, and H&P has been able to grow along with the expansion and capture incremental market share gains. The increase in activity has primarily been associated with horizontal wells with longer laterals and pad drilling requirements that FlexRigs are designed to drill. As a result, we expect our activity and market share to continue to improve.

As evidenced by our new build contracts, our customers are seeking to both high-grade and expand their rig fleets as they transition into the development phase of the unconventional resource plays. This demand has improved the current day rate trends for our US land segment on both spot market and term contract pricing. Juan Pablo will give more color on pricing in his comments. Overall we are pleased with the improving trend.

An instrumental part of rig demand in the US is the Permian Basin. With approximately 500 rigs working today, it is the most active and one of the most promising basins in the world. And it should be no surprise, it is our fastest growing area. Three years ago our Permian operation had 25 active rigs and we found ourselves out of office and yard space. In the past 12 months, we have added over 30 rigs and are now operating nearly 80 rigs.

Fortunately we had the foresight to buy additional land in Odessa in 2011. We built a large facility and moved in, in 2012. Our timing was good, as many have been surprised by the faster than expected switch to horizontal drilling in the Permian and the demand for Tier 1 AC-drive rigs.

The total horizontal rig count in the Permian today is approximately 300 rigs, which is a 200 rig increase from 2011. However, only 45% of the 300 rigs are AC-drive rigs. As compared to the other large unconventional basins, like the Eagle Ford and Bakken, where approximately 65% of the horizontal wells are drilled utilizing AC-drive rigs. Contrasting these two metrics would indicate a lot more growth potential for AC-drive rigs in the Permian. And we believe FlexRigs will continue to gain market share over competitor rig offerings.

Even though the Permian has captured close to 50% of our new builds announced this fiscal year, we have also contracted new builds in the [Scoop], the Eagle Ford, Utica, Bakken, Haynesville, Woodbine, and the Niobrara. We believe this demonstrates a continued high-grading of the existing rig fleet in basins that have had AC-drive rig working for multiple years.

In addition to our growth and market share gains in the US, we are also pleased with the recently announced contracts with YPF in the Vaca Muerta shale located in the Neuquen Province in Argentina. As a reminder, in March we announced that YPF contracted 10 existing FlexRig3s that are being sourced and prepared for service from our US land fleet. The rigs were contracted with five-year term contracts with the first rigs scheduled to be delivered this summer. The last rig should deliver during the second fiscal quarter of 2015.

It has been reported the Vaca Muerta is estimated to hold over 20 billion barrels of oil equivalent. And reportedly it's the only unconventional resource outside of the US which is actually producing oil. And many believe it has the greatest commercial potential of all unconventional shale plays outside of North America. We see this as a great opportunity to assist YPF and other operators in developing this unconventional shale play.

Our offshore fleet is now fully utilized with the ninth rig receiving a commitment to work. The rig will be undergoing upgrades and is expected to commence operations early in FY15. Juan Pablo will share more offshore segment details in his remarks. All three of our operating segments have encouraging prospects for improving activity and are setting up nicely for the remainder of the fiscal year.

On another note, I want to remind everyone of a point we have made on previous conference calls. Approximately 40% of all active rigs in the US today are AC-drive rigs. That is over 700 AC rigs out of approximately 1,750 currently active rigs. The remaining 60% of active rigs are comprised of legacy SCR and mechanical rigs, Tier 2 and Tier 3 rigs.

The past five years have demonstrated a consistent trend whereby AC-drive rigs have replaced legacy rigs. The AC rig market share has grown from 15% to over 40%, even with premium pricing levels as compared to the legacy equipment. The industry's been forced into a restructuring of the fleet profile during this replacement cycle. And are still having to manage aging SCR, as well as mechanical rig fleets, while drilling these complex horizontal wells we've been talking about.

Fortunately for H&P this hasn't been the case. Today we are only working AC-drive FlexRigs and US land unconventional resource plays. We believe the fleet uniformity of the Flex3, the Flex4 and the Flex5s are paying dividends with regards to maintenance costs, training effectiveness, and providing a lean manufacturing environment. We will continue to strive for improved and more reliable levels of performance.

Let me conclude my remarks by noting H&P's long-term strategy for growing shareholder value. We will continue to drive innovation at the rig site and in the back office. We will invest in technology to drive safety improvements for our people and operational excellence for lowering our customers' drilling costs. And finally, we will continue to invest capital that results in attractive returns.

Going forward we believe H&P is the best-positioned land drilling contractor to capture this ongoing market share opportunity, both in the US and international markets. Now I'll turn the call back to Juan Pablo

Thank you, John. The Company reported $893 million in revenue during the second fiscal quarter of 2014, along with $255 million in operating income and $175 million in net income. In trying to outline some of the key drivers that led to these results, I will first review each of our drilling segments and will then expand on other noteworthy considerations.

Our US land segment lead the way, delivering $245 million in segment operating income. The number of revenue days increased by about 3.6% from the prior quarter, resulting in an average of approximately 270 active rigs during the second fiscal quarter. In average, approximately 155 of these rigs were active under term contracts. And approximately 115 rigs were active in the spot market.

Excluding the impact of having only 90 calendar days in the second fiscal quarter as compared to 92 in the prior quarter, the average number of active rigs increased by almost 6% as compared to an average of 255 active rigs during the prior quarter. Excluding early termination fees, the average rig revenue per day was practically flat at $28,037. And the average rig expense per day was up by approximately 1% to $13,080. Resulting in an average rig margin per day of $14,957.

As of today, the 325 available rigs in the US land segment include 287 contracted rigs, 33 idle rigs, and 5 rigs currently held for the YPF Argentina project. Of the 33 idle rigs, only one is an AC-drive FlexRig. The 287 contracted rigs are comprised of 286 AC-drive FlexRigs and one 3,000-hp SCR rig that was reactivated for ultra-deep operations. Included in the 287 contracted rigs are 161 rigs under term contract and 126 rigs in the spot market.

Spot pricing has continued to slightly increase and it is still about 5% lower as compared to pricing for rigs under term contracts, most of which were originally priced in even stronger markets during the last few years. As we transition into the third fiscal quarter, we expect revenue days to increase by about 7% quarter to quarter, along with relatively flat average rig revenue per day levels and relatively flat average rig expense per day levels.

Regarding our US land term contract backlog, we already have term contract commitments for an average of 157 rigs for the remaining two quarters of FY14 and an average of 110 rigs for FY15. The average quarterly pricing level for these contracted rigs is expected to remain relatively flat during the corresponding six quarters. Should spot pricing continue to improve, we would not be surprised if our total average rig revenue per day begins to slightly increase a few quarters from now.

Let me now transition to our offshore segment, where segment operating income was approximately 5% stronger than in the prior quarter. And the average rig margin per day again exceeded our expectations at $27,665. Eight platform rigs remain active. And our ninth platform rig is now committed and expected to commence operations in FY15.

As we look at the third fiscal quarter, we expect flat utilization levels in our offshore segment and a decline in the average rig margin per day to approximately $25,000, primarily as a result of a pricing adjustment on one of the eight active rigs. The pricing adjustment will take place during the third fiscal quarter and after the rig finalizes the first phase of an ongoing project that required a significant upfront investment. This pricing adjustment is also expected to unfavorably affect our fourth fiscal quarter average rig margin per day by another few thousand dollars as compared to the third fiscal quarter.

Additionally, we have continued to experience a strong contribution to our offshore segment operating income from management contracts on customer-owned platform rigs. The contribution during the second fiscal quarter was slightly under $5 million and it is expected to decline to approximately $4 million during the third fiscal quarter. And increase to approximately $5 million during the fourth fiscal quarter. The quarterly contribution from management contracts may increase to $6 million or $7 million during FY15.

I will now transition to the international land segment, where segment operating income declined by approximately $1.6 million, as we experienced a lower level of activity during the second fiscal quarter as compared to the first fiscal quarter. Revenue days decreased by about 6% for an average of 22.6 active rigs, as a rig in Tunisia and a rig in Colombia became idle during the second fiscal quarter. Nevertheless, the average rig margin per day increased by $576 to $10,919 during that same period.

As of today our international land segment has 22 active rigs, 13 of which are AC-drive FlexRigs. Eight of the active rigs are in Argentina, four in Colombia, five in Ecuador, three in Bahrain, and two in the UAE. A total of seven rigs are currently idle in the segment, three of which are in Colombia, two in Tunisia, one in Argentina and one in Ecuador. In addition one new rig is in transit to its first location in Colombia. And one rig is in the process of moving from the US to Mozambique.

For the third fiscal quarter we expect international land revenue days to be relatively flat as compared to the second fiscal quarter. The corresponding average rig margin per day is expected to be down by approximately 5%, as compared to the prior quarter. Looking further ahead, the new 3,000-hp AC-drive rig that is in transit to its first location in Colombia, is expected to begin operations early in the fourth fiscal quarter. In addition, we expect two of the 10 rigs deploying to Argentina from the US and the rig in transit to Mozambique to also commence operations before the end of the fiscal year.

I will now transition from segment related information to other important topics, including our revised capital expenditures estimate and our expected income tax rate for the rest of the fiscal year. Given today's announcement of an additional nine new build commitments, other previously announced contracts, and ongoing conversations with customers that may lead to additional FlexRig commitments, the Company's new FY14 capital expenditures estimate increased from $950 million to $1.1 billion.

This will provide significant flexibility in terms of our ability to deliver additional new builds during the first fiscal quarter of 2015. Approximately 60% of the revised CapEx estimate corresponds to our new build program, approximately 25% to maintenance CapEx, and the remainder to other projects. The actual spending level may vary depending primarily on the timing of procurement related to our ongoing new build efforts and actual maintenance capital requirements during the year. We still expect to be able to fully fund our FY14 CapEx program, as well as other scheduled commitments from existing cash and from cash to be provided by operating activities during the fiscal year.

Our effective income tax rate for continuing operations during the second fiscal quarter was reported at approximately 36.6%. This higher than expected effective tax rate for the quarter was primarily due to updated tax estimates for the year that no longer allow us to realize or take advantage of previously estimated excess foreign tax credits during FY14. We expect the effective income tax rate for the second half of FY14 to be between 34% and 35%. And the effective tax rate for all of FY14 to be approximately 35%.

As related to our investment portfolio, the Company sold 250,000 shares of its Schlumberger holdings for a total proceeds of over $23 million that favorably impacted earnings per share by approximately $0.12 in the quarter. Our remaining investment portfolio recently had a pretax market value of approximately $260 million and an after-tax value of approximately $160 million.

Regarding other previously provided FY14 estimates, we still expect our annual depreciation expense to total $500 million, and general and administrative expenses to total approximately $130 million. Interest expense net of capitalized interest is expected to be in the range of $4 million to $6 million during FY14.

That concludes our prepared comments. And, Mike, we will now open the call for questions, please.

(Operator Instructions)

Robin Shoemaker, Citi.

Thank you. Juan Pablo, can you just explain again what led to the decline in average rig margins sequentially? And were you saying that you expect the average rig margin per day in the US to be relatively constant for a few quarters? Going forward?

Hi Robin. I think your question regarding the margin relates to our transition from the first fiscal quarter to the second fiscal quarter going slightly down. We had previously guided our average rig revenue per day to be flat to slightly down. And we did expect our average rig expense per day to be at 13,000 or probably higher, as we spoke about it during the last conference call. We weren't surprised to see that slight drop in average rig margin.

As we go into the next several quarters -- so let me first address the June quarter. As you know we guided toward a relatively flat revenue per day numbers and a relatively flat expense per day numbers, which would yield approximately relatively flat margin per day results. That's in general our expectation for June.

As we see how the combination of our terms -- of our rigs that are under term contracts, and our rigs that are in the spot market, and how that pricing works out in terms of total-weighted average as rigs roll off of term contracts, and as new builds are deployed, et cetera, there's a lot of moving variables there. So I just wanted to give you a sense in terms of what would happen if we continue to see the level of spot pricing go slightly up quarter over quarter in that type of setting.

What we would expect, and would not be surprised by it -- again, if we continue to see this slight trend of increasing pricing is that the average rig revenue per day may slightly go up during the next -- I should rephrase that -- during a few quarters from now or in a few quarters from now. Not in the June quarter but perhaps in the September quarter, maybe in the December quarter, depending again on many moving variables.

We hope that rig expense levels per day continue to be relatively flat. The assumption there would be, of course, if average rig revenue increases and average rig expense continues to be more or less flat, then yes, we would expect to have some increase in the average rig margins for the segment.

Okay. In terms of the 44 new builds that are under long-term contracts, is there any upward movement in the long-term contract rate and let's say in the ones you have signed recently of the 44 versus six month ago or eight months ago? Is that term contract rate moving at all as the spot rate is?

Robin, this is John. Yes, the pricing is improving. The contracts that we've entered into recently have higher rates than what we had six months ago or so.

Okay. And then if I may on the same topic on the new builds. Is there with any increase in the new build cost, either because of equipment costs or because you're going from two per month to three per month? So maybe that would maybe slightly lower the cost, I'm not sure. Is there any upward trend at all in the cost of building a Flex3 or a Flex5 compared to last year?

If you're comparing on an apples-to-apples basis, the costs are relatively flat. We really don't see -- what I'm speaking to, Robin, is a standard Flex3, say without a skid system or without additional higher pressure capability. It's going to be a similar type investment to what we've had over time. But we are -- again FlexRig5s are a higher investment than a Flex3, a standard Flex3. That investment is higher.

As we have -- customers desire longer -- going from a 100 foot skid system to a 200 foot skid system adding 7500 psi pumping systems, all of those things drive the investment up. At the same time we're getting a corresponding rate increase that's going to again keep our rates of return at the levels that you've been used to seeing us.

Okay. Good. Thanks a lot.

Thank you.

Byron Pope, Tudor, Pickering, Holt.

Good morning guys. John, are we at the point in the cycle where we should expect to see some of your FlexRigs that are currently working in the spot market start to get termed out? And if so, what's the nature of those conversations in terms of the tenor of the term? Is it starting to push out toward a year plus? Just curious as to your thoughts on that?

We're slightly over 50% of the working fleet that's on term. I think probably a year ago we were closer to two-thirds of our fleet that was term. So I wouldn't be surprised to see that from our perspective, I don't think we'd be interested -- we're not going to be interested in a six-month. It's going to need to be I would think longer than a year, a year to two years.

I think other than that we'd probably just as soon remain in the spot market. But I think it's reasonable to expect for us to maintain that 50% to 60% range of term contract to spot market. Does that answer your question?

It does. It seems like your strategy is to grow your US rig count via new build FlexRigs. So how do think about the long-term strategy for the SCR rigs in your fleet? Are those going to be opportunistic on the international side as opportunities arise? How are you thinking about those rigs?

You noted that we do have -- we did put an SCR rig back to work, it's a 3,000 horsepower. We have eight of those, I believe, in the US today. Actually, I guess we have seven SCR 3,000 horsepower in the US. That's an ultra-deep well that it's going to work on. I think there's the potential to have more of that type of work in the future.

As far as the rest of the fleet, from our perspective there's not customer demand for 1,200 hp, 1,500 hp SCR-type rigs. Obviously our competitors are utilizing those rigs and growing their fleet in that capacity. From our perspective, again, at least from our customers we don't see a demand from them or a desire from them to pick up one of our Flex1s or Flex2s or one of our older SCR type of rigs.

If you think about it from our perspective too, the SCR fleet is so small on a relative percentage basis compared to the rest of our operating fleet. When you hear us talk about the uniformity -- the advantages of having a uniform fleet -- the consistency that we're able to provide from a training, from a supply chain, from a performance perspective, it really is a bit dilutive for us to think about putting those rigs back to work right now.

I do think there are -- again there's competitors out there that are putting SCR rigs back to work. There could be a situation where those SCR rigs could be sold to another contractor or be sold to international markets as a possibility. But at least from our perspective, we see far too many advantages to leveraging the uniformity of our fleet. We just see a lot of advantages there.

And last question from me. I think I heard of the nine new build FlexRig contracts that you announced today. I think I heard six Flex3s and three Flex5s. Just curious as to the basin and distribution of those and whether all or most them have skidding systems.

The distribution of four of the nine are going to the Permian. Two to the Eagle Ford. Two to the Utica and one to the Haynesville. It's about a 50-50 mix on skid systems.

If you were to look at -- it's interesting if you look at the 44 that we've announced this fiscal year, you're looking at about 60 -- about two-thirds of those rigs have skid systems. But if you were to differentiate between the Permian and then all the other basins that I talked about that we're working, the Permian has an average of about -- about 40% of those rigs have skid systems. Whereas those other basins are closer to 85%.

So I think what it is, it's an indicator of those other basins that are further along the path of the development -- the development phase of drilling and going more into pad drilling. I think clearly there are some of our customers in the Permian that are at that phase but there are still a lot of customers out there that are still probably holding acreage and exploring to a certain extent.

Interesting.

The great news, Byron, is all of those Flex3s that don't have skid systems and we continue to build additional skid systems for Flex3s in the fleet in addition to our new builds. Those rigs are all capable of having the skid package added at a later date. That's been I think very successful for us and for our customers.

Thanks, John, I appreciate it.

Thank you.

Kurt Hallead, RBC Capital Markets.

Good morning. I want to come back in and look at the US land drilling dynamic -- the fact that you have 95% plus utilization on AC-class rigs. Yes, you have some other legacy rigs that may be adding to the marketplace but really not satisfying demand completely.

Your outlook on a relatively flat pricing and margin is a head scratcher I guess. Given the tightness of the market. I know you gave some explanation a little bit earlier but something's not adding up.

I was just hoping you might be able to try to add again -- at least for my benefit -- add a little color to why the flattish outlook when the market is just so tight. And you do have 115 rigs available to the spot market. So it's not like you're 80% contracted and you can't benefit from the spot market pricing. Can you help me connect the dots here?

Yes, Kurt. This is John. I want to say a few things and then I was going to have Juan Pablo give a little more granularity. It's a great question and we understand because it is a strong market. We are doing our best to get our spot market pricing back to the level that it was in 2012 prior to the slowdown that we all saw. I think we're still approximately 5% or so away from that.

It's interesting, Kurt, when you look at our average spot market day rates and our average term contract day rates today, compared to other all-time highs -- they're pretty much spot on. We do have some -- what we would consider very attractive pricing. We're continuing to price that up.

Part of the challenge is -- and that's what Juan Pablo can give a little more color on -- when you consider all of the different variables associated with the different rig sizes, and types, and areas, and rigs rolling off of term contract that drives that. Juan Pablo surely you can give a little more color on that.

I think that the easiest way to understand it is to consider that the rigs in general that are on the spot market, as we mentioned earlier, was set in terms of pricing and stronger markets, in general. So what is happening is that as those rigs roll off of their term contract, their pricing is coming down to approximately where the spot pricing is today.

That dynamic provides a downward pull to the average. Which is offset by what you mentioned. We're seeing an increasing trend in terms of pricing on the spot market which offsets that downward pull that I just mentioned in terms of the term contracts.

Okay. That's helpful. That's it for me. Thanks.

Tom Curran, FBR Capital Markets.

Good morning guys. John, since you opened the door I'll step through it. What do you think your SCR rigs on average could command in the secondary market right now? And have you entertained any interest from potential buyers?

We haven't sold a Flex1 or Flex2. We have sold some SCR rigs in the past two years or so that were horsepower ranges from a 1,000 up to probably 1,500. And varying condition. The range was a probably $3 million to $5 million, $3 million to $6 million range.

It's really hard for us to say again. Without us being out there marketing those rigs it's hard to say that. We're going to continue to evaluate our options on what we might possibly do.

Again, the point I made earlier -- the great position that we're in, is our idle SCR fleet is a very small percentage of our overall available fleet. We don't have any mechanical rigs. And so we're not having to be out there fighting to try to gain market share, by investing additional dollars in those older rigs and trying to make them competitive.

It's a great question. I don't have an answer for you right now. Again I just threw out there as a possibility. We have been successful in selling some SCR rigs over the last couple of years. Whether we could be successful going forward on these others is hard to say at this stage.

Okay. Shifting gears to the new build program. With the resurgence in incremental Tier 1 new build award flow we've seen since the start of the second half of 2013, you guys have reclaimed the lead in terms of your win rate of the awards that have been made to the big four land drillers.

Why wouldn't you now go ahead and step up your speculative construction and take your cadence today to four rigs per month? And start adding those speculative new builds to the queue?

Tom, again, that's a great question on your part. I think from our perspective we like the model that we've used over the years. We've been successful with it. One of the key advantages, of course, we have is our ability to scale our cadence up and then pull it back if need be.

Obviously for the first time that I can recall, last summer when we didn't have new build pricing that would support new build contracts we continued to build rigs at two a month. And for our own account -- for our spare capacity -- and fortunately the market responded and we were able to take advantage of that. But from a purely building on spec, we don't view it as that. Again, if you look at our fleet profile, we've got to have those spare capacity -- that spare kit.

If the demand gets to the level it needs to, we're going to be able to respond quickly. We've been able to do that in the past. You've seen us before go from two to three to four in a relatively short period of time. We can do the same thing here.

So I think we're going to let the demand drive that. I don't think, Tom, that we're really giving up any material number of rigs by doing what we're doing versus what you're suggesting, which is go ahead and kick into four a month right now. I don't think we're really giving up anything.

So no concerns about you seeing potential renewed erosion of poll position here, by holding off on that?

Tom, I don't because if you look at -- we've been estimating that for 2014, 80 to 100 new AC rigs would be built. Interestingly enough we thought last year there would be 80. I think it ended up being less than 70, turned out to be around 65. We're thinking that now it's probably 90 to 100 for 2014. I don't know what that spells for 2015 yet.

The other providers of AC rigs, I don't see a huge appetite on their part to really ramp up their production cadence and so I don't know whether they have the capability or not. But I sure don't get the feeling that we're going to lose market share or our lead position by holding off at this stage of the game. Again, there might be some information out there that I am not aware of. But I sure feel like that we're in the lead and we're well-positioned and I feel like we're going to be able to continue to maintain.

Thanks for the candor, John. Last one from me. Moving south to Vaca Muerta. What's the earliest, timing wise, we might see a follow-on traunch of awards? And what would be the potential size range for that next traunch?

I think it would be very difficult to respond prior to 2015. And so I think that's what probably makes the most sense. You heard earlier we're essentially at 100% utilization of our AC fleet here.

We've got five rigs in the US that are idle now that are going. And so that means there's additional five that are working that won't go. And then even from a new build perspective it would probably be hard to get that done. But it's going to be a 2015.

I think a 5 or 10 -- if we could add another 5 or 10 in 2015, I'd be really pleased with that. But again you've heard me say before that my predictions on international growth has been off before. So it's just really not clear for us at this stage on what the size and scope for 2015. We do know that it'd be difficult to respond prior to 2015.

Thanks for the answers, John. I appreciate it.

All right, Tom. Thank you.

(Operator Instructions)

John Daniel, Simmons & Company.

Thank you. It's been a long morning so forgive me for being slow. When you guys mentioned that your contract coverage is 110 rigs for FY15, that's including all of the contracted rigs that haven't been delivered yet, correct?

Yes, John.

Okay. So you average 157 contracted rigs for the next two quarters, then drop to an average of 110 for next fiscal year. So the drop-off in contracted rigs is more rapid than the new builds that are being delivered. And you've got a 5% delta between contracted and spot revenue per day. Basically until we see it, call it 5% improvement in the spot market it's tough to see rapid growth per day increasing. Have I summarized that?

That's fair.

If that's fair then do you see that type of pricing leverage unfolding in the next three to six months in the spot market?

John, it's hard to say. Again, I mentioned earlier we're trying to get our 5% or so back that we gave up. We've gotten some of that back and we'd like to get the rest of it back. And again let's face it, it's a function of our customers and it's a function of our performance.

As much as we'd like to say it, really the customers are the ones that are driving this. Both from a demand perspective and what they're willing to pay for a contractor's given performance. I think that's really what it's a function of. I like our chances. I think we're in a great position to continue to capture some of that pricing back. And hopefully we'll be able to deliver that over the next couple of quarters.

Fair enough. I won't beat a dead horse.

When you guys report average revenue per day of $28,000, how much of that revenue per day is not true day rate? Ballpark, $1,000, $500, $100?

It's a mixed bag in terms of each of the contracts that are out there. On average, it's probably around 5% to 10%. But that's just a rough estimate.

That's fine. And then what type of rig is going to Mozambique? (inaudible)

That's a FlexRig3.

And then last one for me. Don't take this the wrong way, but do you have any payment protection into the YPF contract and are you going to be able to get cash out of the country?

I think we've done a very good job -- we obviously understand the risks. But I think we have as good a contract as we could expect to get. I'm pleased with that. It's not risk free but again we've worked in Argentina and other countries internationally for a long time. And so I think we've done a good job protecting ourselves and I feel good about that.

Fair enough. Thanks guys. Thanks for taking the call.

Thank you, John.

(Operator Instructions)

Brad Handler, Jefferies.

Good morning guys. Please forgive me if I'm re-treading on old ground. I don't think I am but it has been a lot of calls this morning. Question on operating costs. It seems like you've held your ground at the $13,000 day range despite having a lot of rig moves.

I guess I am curious if there is an opportunity or how you might describe the conditions. If the rig moves slow and do you think rig moves might slow? That, that might allow for some operating cost opportunity?

Brad, this is John. That's a great question. I think your sense is right. There's a possibility, of course -- there's always the other side, which is what are other variables that have changed that we may not have great insight into at this stage of the quarter. Obviously, if you look at previous quarters there have been times that we've reported expenses at 12.7, 12.8. So that's possible.

But we're continuing to deliver a lot of rigs. Both new builds as well as moving rigs from basin to basin. Anytime that's happening I'm always a little bit concerned about that. But overall again I am very pleased with our peoples work on getting the cost more consistent.

They've worked very, very hard on it. They've worked on a lot of systems type things that have helped us. If we had our vote, we'd vote for yes. We'd vote for 12.7 or 12.8. [ Laughter ] At this stage I think 13 -- the range that we've got it to makes the most sense.

It gives you some room it sounds like for other variables as you say.

I think it's fair. If you look at our expense per day trends over time, we've seen a $1,000, $1,500 a day fluctuation. But if you look at our last six-quarter average, it's right at $13,000 a day. And again we have some that are higher and some that are lower. It's a possibility that it could come in lower but we're sure not expecting it.

Okay. Got it. Maybe a separate question and I have a feeling I am starting to tread on ground that's been well-trod on this call, so please forgive me. Have you shared spread between current term rates and spot rates?

Yes, Brad. This is Juan Pablo. We mentioned that the pricing difference is still at around 5%.

Okay.

That is an apples-to-apples comparison, just to make sure that everybody's clear in terms of where we are on the market.

Got it. Okay, I won't tie up with other redundancies. Thanks very much. I'll turn it back.

Thanks Brad.

(Operator Instructions)

All right. If there are no other questions, Mike. Thank you everybody.

Pardon the interruption gentlemen. We do just have one more.

Okay. We'll take that one more.

Mike Breard, Hodges Capital.

Good morning. I was just wondering, you're holding five rigs in the US for shipment to Argentina. Are you getting a standby rate on that? Or what're the mobilization moves?

Mike, it's a little bit of a mixed bag because those rigs haven't all been sitting there idle. There's this churn -- you've heard us talk about this in the past where we have a churn. Even though quarter to quarter we may have had 12 or 15 or 18 AC rigs idle, it wasn't the same 12 or 15 or 18. There was a churn.

And so what we've tried to do as best as we can is when rigs roll off the term contract or off of a contract, those are the rigs that we are pulling and going. Any standby time or anything like that's going to be built into the mobilization as far as in our bid. You're just not talking about any material type of effect at all.

But it's a great question. We've done the best we can. I think our people have worked with our existing customers and figured out ways to make this happen

If you put more rigs in Argentina into 2015, I guess theoretically it could be a mixture of new rigs and existing rigs?

I think it would be -- potentially be difficult to make new build economics work in Argentina. I think it would be more likely that we would continue to send existing FlexRig3s and FlexRig4s. There are some additional demand for some of the smaller rigs as well. That would be our expectation just from a new build economics perspective.

So they don't need quite as advanced a rig. They're not drilling the longer laterals and all that stuff that we're drilling here in the US.

Mike, I wouldn't agree with that. What I would say is, they're on the front end of developing that shale. And in fact, some of the wells that are being drilled -- some are horizontal and some aren't. They're trending more towards horizontal.

All of these rigs will have our skid system. I think they'll likely have in the US. I think they'll start with -- I'm just going to throw a number out -- 4,000 foot laterals. And over time they'll trend like we have trended here in the US. They'll get to 6,000, 8,000, 10,000 foot laterals. Obviously there is a learning curve and it takes time to figure out on the frac side, how to do things in the most efficient way.

These rigs that we're sending, are our advanced technology Flex3s. These rigs are going to drill wells down there as if we were sending a new build FlexRig. We're sure not sending a compromised product at all. We're just sending an existing rig.

Otherwise, again, we couldn't do it with new builds and we couldn't do it because of the new build economics. But I think it's an attractive situation for us and for YPF.

Okay. Thank you very much.

All right, Mike. Thanks.

All right. Thank you everybody for joining us and have a good day.

This does conclude today's program ladies and gentlemen. We do appreciate everyone's participation. You may disconnect at any time.