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Executives

Douglas Fears – Chief Executive Officer

Hans Helmerich – President, CEO

John Lindsay – Executive Vice President

Analysts

Pierre Connor – Capital One Southcoast

Waqar Syed – Tristone Capital

Michael Drickamer – Morgan Keegan

John Daniel – Simmons & Co.

Kevin Pollard – J.P. Morgan

Andrew Coleman – UBS

[Phillip Jonas – Merrill Lynch]

Thad Vayda – Stifel Nicolaus

[Frederick Russell – Frederick E. Russell Investment Management Company Inc.]

Mark Close – Oppenheimer & Close

Helmerich & Payne Inc. (HP) F4Q08 Earnings Call November 20, 2008 11:00 AM ET

Operator

(Operator Instructions) It is my now my pleasure to turn the conference over to Mr. Doug Fears.

Douglas Fears

Welcome everyone. We're glad that you're here for the Helmerich & Payne conference call and web cast to discuss the company's fourth quarter and fiscal year earnings. With us today are Hans Helmerich, our President and CEO, Executive Vice Presidents, John Lindsay and Alan Orr, and Juan Pablo Tordia, Director of Investor Relations.

As you know, much of the information provided today involves risks and uncertainties that could significantly impact expected results and that are discussed in our most recent 10-K. We'll also be making reference to certain non-GAAP financial measures such as segment operating income and operating statistics. You may find the GAAP reconciliation comments and calculations on the very last page of today's press release.

Today the company reported net income of $461.7 million or $4.34 per share from operating revenues of just over $2 billion for fiscal year ended September 30, 2008, compares with net income of $449.3 million or $4.27 per diluted share from operating revenues of $1.6 billion during the prior fiscal year ended September 30, 2007.

Included in fiscal 2008 net income are non operating related after tax income items of $0.27 compared with $0.74 per diluted share during 2007. Those items can include gains from the sale of investment securities, gains from insurance settlements and income from asset sales.

Net income for the fourth quarter of fiscal 2008 was $126.5 million or $1.18 per diluted share from operating revenues of $583.7 million. That compares with net income of $116.4 million or $1.10 per diluted share from operating revenues of $449.4 million during last years fourth quarter.

Included in net income were gains from non operating type activities that we just mentioned that totaled $0.05 per diluted share for the fourth quarter of '08 and $0.13 per diluted share for the fourth quarter for '07. Also included in the net income for the fourth quarter of 2008 as we mentioned in the press release, were $0.07 per share of abandonment charges.

The company also announced today that since its last announcement in late July, 13 more long term contracts have been signed with five exploration and production companies to operate 13 new Flex Rigs. Since the beginning of fiscal 2008, the company has announced contracts for the construction and operation of 63 new Flex Rigs under long term contracts. This brings to 140 the total number of long terms commitments for new Flex Rigs that have been announced by the company since March of 2005.

To date, 107 of those 140 new builds have been completed with the remaining 33 scheduled for completion by calendar year end 2009. Given the new build commitments announced today, the company's new estimate for 2009 capital expenditures has risen from the $800 million discussed in our last web cast to approximately $900 million.

Given these new commitments and management's desire to have capital available for other opportunities that may arise, we've engaged in discussions with our current bank group to secure additional $100 million to $150 million of short term bank debt which we expect to secure by late December or early January.

We currently are two years into a five year $400 million bank facility which as of today has approximately $85 million of borrowing capacity remaining. The remainder of the company's debt consists of $175 million of privately placed debt of which $25 million is due in August of 2009, $75 million in 2012 and the remaining $75 million in 2014. At September 30, 2008, our long term debt to total capitalization ratio was 17%.

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

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

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

Hans Helmerich

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

We find the business in a sudden and dramatic reversal of fortune from our last quarterly conference call. A month ago, we would have predicted that 2009 would be softer and likely unfold in a similar fashion that we saw in 2007. Then, natural gas price concerns combined with worries of potential overbuilding softened the market enough to see 400 rigs go to the sideline in the U.S.

May observers expect a similar number of total U.S. rigs to be idled in 2009. A more sobering comparison would be the correction that the industry experienced in 2002. Then, nearly 50% of the industry's U.S. rigs were idle.

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

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

While no one can say with certainty how things will develop for the land drillers, we believe we are uniquely positioned to weather the slow down. Let me just quickly hit on some highlights to make this point.

First, we have the newest, most capable fleet and in other down turns have seen us sustain higher utilization and day rig margin than our peers. When the smoke clears and operators rationalize their rig rosters, performance and efficiency will still win the day in their choice of rigs to engage.

Secondly, we have never had a stronger contractual coverage going forward. 58% of our 2009 fiscal potential revenue days are under term contracts and 43% of our 2010 revenue days are under term contracts.

Thirdly, our customer roster distinguishes itself with about 80% majors and super independents. They not only have the best staying power but will look for opportunities to upgrade their rig rosters.

Next, with today's announcement, Doug mentioned 13 new build orders all with long term commitments. Our manufacturing visibility extends into the early fall of 2009 compared to last year when our order book only took us into the following February.

Importantly, the strength of our balance sheet continues to allow us to fund the largest single year of new build orders totaling 63 in the company's history. These new rigs, all at attractive day rates will act as an important counterbalance to softening spot rates going forward.

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

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

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

John Lindsay

We're pleased with the operational and safety performance the company's been able to achieve during 2008. Drilling performance and well cycle time reductions for our customers have been a catalyst for today's announcement of 13 additional new Flex Rigs and 63 over the last 12 months.

All 63 contracts are supported with at least a three year term contract, signaling customer commitment to H&P and the Flex Rig brand.

All three of our operating segments shared successes in 2008 and I will comment on each. Beginning with an overview of U.S. Land, today we have 95% activity with 180 out of 189 rigs working, up three rigs from the last web cast, and we estimate a relatively flat average rig count from quarter to quarter.

Of our currently active fleet of 180 rigs, 68 are in the spot market and the remaining 112 active rigs including 100 new builds are under term contracts. All 150 Flex Rigs are operating today, represented by 100 new rigs with term contracts, eight previously existing rigs on term and 42 in the spot market.

We averaged 178.1 active rigs during the fourth fiscal quarter as compared to 167.7 during the previous quarter, an improvement of 10.4 rigs. An average of 3.6 rigs were idle during the fourth quarter of fiscal '08 as compared to an average of 7.6 idle rigs during the previous quarter. Average rig revenue per day for H&P's entire U.S. land segment increased sequentially $491.00 per day to $25,034 during the fourth fiscal quarter.

We expect continued growth in rig revenue per day during the first fiscal quarter. After increasing during the first month of the quarter primarily as a consequence of wage pass throughs, spot pricing has declined in the last few weeks and is expected to continue to decline through the quarter.

With day rates for rigs under term contracts also being adjusted to reflect the wage pass through and new term contracts averaging higher than market pricing, we expect average rig revenues per day to be flat to slightly up from the fourth fiscal quarter 2008 to the first fiscal quarter of 2009.

Average rig margin per day for the quarter decreased by $202.00 to $13,163. Average rig expenses per day increased by $693.00 to $11,871 during the fourth quarter. This cost increase was primarily from maintenance and supply costs and other miscellaneous expenses.

As we discussed in our last call, we were feeling market pressures to increase our labor rates and consequently we increased labor per day on average $628.00 effective the first fiscal quarter of 2009. Everything considered, we expect average daily expenses to be flat to slightly up quarter to quarter although we may continue to see some volatility in daily expenses during fiscal 2009.

In summary, depending on how severe the down turn in the U.S. Land market is for the remainder of 2008 and beginning of 2009, we could see a range of 6 to 15 additional H&P rigs released and potentially stacked during the next six weeks. We believe that as the cycle progresses, operators will be looking to upgrade their fleets and several of these rigs should return to work in the short term.

Some of our older rigs being released however, are probably not going back to work in the near term due to a lack of prospects. Nevertheless, at this point, we continue to expect year to year growth in activity in the segment. Our U.S. Land operations achieved an average of 163 average rigs working in fiscal 2008. Today, we have 180 active rigs and over 30 new builds scheduled to commence operations during the next 12 months.

Our offshore operations had a very good quarter. Average rig margin per day increased by $2,257.00 to $22,385.00. Average activity in the segment was unchanged at eight average rigs running during the quarter and expected to remain at that level during the first quarter of '09.

The average rig margin for the fourth fiscal quarter is expected to remain at over $20,000 per day. The last, or the nine rig in the offshore fleet is currently contracted and expected to commence operations in the Gulf of Mexico in early to mid calendar 2009, at which time it will start to contribute to the segment's operating income.

As expected, average international operating activity increased from 21.2 during the third fiscal quarter to almost 25 rigs during the fourth fiscal quarter. The company sold two small conventional rigs in Ecuador in July. Today, 25 of 27 rigs are active in international operations as a result of two large conventional rigs now stacking in Argentina. Both rigs will be actively marketed but we don't expect them to contribute during the second fiscal quarter of 2009.

Two of the seven new Flex Rigs for Latin America began day work operations in Columbia during the first fiscal quarter of 2009. The rigs are performing very well. In the first three months, they've already reduced full well cycle times by 40% compared to the competition. The remaining five Flex Rigs contracted for Latin America are scheduled to begin operations at the rate of one per month in Argentina beginning in December 2008.

We expect an average of 25 to 26 active rigs during the first fiscal quarter of 2009. Although average rig margins per day were expected to slightly increase during the fourth fiscal quarter, higher than expected operating expenses pulled average margins for the segment down by 14% from $13,071.00 to $11,244.00. $1,413.00 per day of the margins short fall is a result of non recurring charges and the remaining short fall is associated with rig moves and miscellaneous expenses.

We expect average rig margins per day to stabilize in the $11,000 to $12,000 range for the first fiscal quarter of 2009.

In closing, short term, there's a lot of uncertainty regarding rig activity, natural gas and oil prices and the magnitude of downward pricing pressure on day rates. Those variables aren't within our control, but we continue to believe with the demanding drilling requirements of today's rig fleet, the most efficient rig will win and old rigs will continue to be retired as the 30 plus year old legacy fleet is unable to satisfy operators' desire to drill a well efficiently, safely and in an environmentally friendly ways.

Regardless of the rig count, operators should continue to look for opportunities to high grade their working fleets. In addition to the drilling demands placed upon the rigs, quality personnel continues to be a strategically important advantage for H&P, and we believe we have the best people in the business.

Our success over the past six years growing our fleet with advanced technology, AC drive rigs is a result of a commitment to organizational excellence and executing on a value proposition to our customers.

Now I'll turn the call back to Doug.

Douglas Fears

We would now like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first call comes from Pierre Connor – Capital One Southcoast.

Pierre Connor – Capital One Southcoast

First question on term contract terms, you mentioned that we've got the coverage in the term days but what kind of cancellation provisions are in there? I'm assuming that all your term contracts would be the same.

Hans Helmerich

Our term contracts we think are top rate and the best in the business and so that gives us a competitive advantage and what we can't do is get into a lot of detail on that, but it's basically a three year term, no cut, take or bake contract. In contrast to our peers, where we listen, it's hard for us to figure out exactly what they mean by a long term contract in terms of not only term but performance outs and other elements of their contracts. Ours are pretty straightforward and they're long term, and take or pay.

Pierre Connor – Capital One Southcoast

On the positive side, I wondered in you or John wanted to talk about some of your numbers exposure to some of the clays from what I hear would be relatively stable, potentially growing. How much can you tell us about Haynesville, Fayetteville, where you are in rig count, not disclosing customers for these new orders, but where the trend is and what you think your rig count is going to be in some of those clays.

John Lindsay

We see the Haynesville and the Barnett and the Bock all being really strong. They're strong today, they've been strong and we see that continuing. We have approximately 30 rigs in the Barnett. The Haynesville we're over 10 or so, or will be up to 10. We're not up to 10 right now. In the Bock we're around eight or nine rigs working.

All those are strong and of course most of those are term contract commitments. So we see that continuing to be strong for us.

Pierre Connor – Capital One Southcoast

When you mentioned the six to 15 potential releases, obviously they're not coming from those and they're not coming out of the Barnett particularly.

John Lindsay

We don't see, there's a little bit of softness in the Barnett, but I suspect that what rigs we have released in the Barnett will put those rigs back to work primarily because the performance of the rigs. Not all of the rigs in the Barnett are on term contracts. So there's always that exposure, but we've really been successful at being able to put those rigs to work.

One of the advantages we have too is that many of the rigs working in the Barnett are very suitable for work in the east Texas and the east Texas Haynesville as well as the Louisiana Haynesville so if there's demand in the Haynesville we can take those rigs over there, and that's primarily Flex three's.

Pierre Connor – Capital One Southcoast

So Haynesville specifically not quite at 10. Do you have a projection? Is there enough visibility of where that number goes? Do you have enough visibility to where your exposure in the Haynesville goes over the next couple of quarters?

John Lindsay

No. I think it's going to continue to grow. The 10 that I'm talking about now is what's actually working. We're going to continue to have new builds delivered into the Haynesville, so we're going to see that grow.

Our exposure in the Haynesville today is primarily on the Texas side, and as these new rigs roll out we're going to see more exposure into the Louisiana side.

Pierre Connor – Capital One Southcoast

Relative to a tone in the market, it's impressive to get these additional 13, what can you tell us about it? What period during the quarter were those? Right after the last call? How recently have you had some interest in rebuilds?

Hans Helmerich

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

Operator

Your next question comes from Waqar Syed – Tristone Capital.

Waqar Syed – Tristone Capital

The six to 15 rigs that you mentioned that could be released, can you give us a breakdown of how many could be conventional and how many would be Flex Rigs?

John Lindsay

Probably on the high side of the 15. You would be looking at five to six. Again, those relate to notifications not necessarily we think the rigs will go back to work. We're trying to give a worst case scenario. And the rest would be conventional and mobile type rigs.

Waqar Syed – Tristone Capital

There has been some talk that you've got some rigs that are coming off contract in the next couple of months. Do the skid rig types, what's the demand situation for the skid rigs? How do you see that market developing over the next couple of months?

John Lindsay

I think we're going to continue to see that application revival in many areas. It is viable today in the Barnett. We've had customers discuss opportunities is west Texas. We've had customers discuss opportunities in Utah and other areas of Wyoming other than where we're working now. So we think there's a great application for that.

I think that when you consider in areas where they're wanting to reduce the environmental footprint, they want to be able to drill multiple wells on a single pad that you're going to continue to see this. I think we said it before. Long term, looking ahead in the Marcellus, that's going to be a development opportunity in the Marcellus as well.

We're really encouraged that those rigs will continue to work. It's just a matter of where, whether it continues to be in [Peonce] or whether it continues to be in other areas.

Waqar Syed – Tristone Capital

Do those rigs if I recall correctly will contracted back in 2005 probably at spot rate I would think with maybe $5,000 to $6,000 below it is right now. Do you expect the rates to be higher when these rigs become available in the new contracts?

John Lindsay

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

Waqar Syed – Tristone Capital

Of the 33 rigs that are scheduled for delivery over the next 12 months, could you give a breakdown on a quarterly basis what the schedule for delivery is?

Hans Helmerich

We're looking over the next couple of quarters at three to four rigs per month and then towards the end it slows down to two or three. We're still working out optimum cadence on that but that will give you a feel for what we're expecting.

Waqar Syed – Tristone Capital

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

Hans Helmerich

I think one thing to remember is we've matched every one of our new builds with a real long term contract. We still managed the supply chain and in a fashion, particularly on long lead items, we're being aware and sensitive to that. So yes, there's that moving part.

One of the big advantages of our own effort is the flexibility that you're asking about and so we in fact do have some flexibility, and we'll just continue to watch that carefully and manage it going forward.

Waqar Syed – Tristone Capital

What's the status on the [Terravicci], where you are in the new effort? There's some talk about some non conventional clays opening up in Europe and Eastern Europe primarily and some of the majors are looking at that. Has anyone approached you to talk about that? That could be, if that develops that could, some of the Flex Rigs could work quite well there too I would think.

Hans Helmerich

I think we've had discussions and what we're seeing is some of the drilling challenges internationally are increasing and they are a nice fit for the Flex Rigs as you mentioned. John can add to that particularly on the Eastern Europe question.

On Terravicci, as people know, right now that's in a non commercial development phase. Those tests are proceeding. We're encouraged by the progress we're making. We're still probably nine to 12 months out and we just kind of keep pointing ahead on that.

John Lindsay

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

Operator

Your next question comes from Michael Drickamer – Morgan Keegan.

Michael Drickamer – Morgan Keegan

What's your appetite for building rigs at this point presuming you had a customer come with a contract? Would you be willing to build a rig here for the U.S. market?

Hans Helmerich

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

Michael Drickamer – Morgan Keegan

You discussed earlier how most of the new builds that were placed were earlier in the quarter. Are you still seeing any international opportunities to build the Flex Rigs, perhaps more in South America?

Hans Helmerich

We have been. We still have interest and we've seen the Flex Rigs that you mentioned, the ones that were early on arriving in South American have already performed very well and created additional interest in their own right. I think we'll continue to see that. I think it just speaks to a larger point of what we believe notwithstanding the current environment, there's a long term retooling opportunity out there both domestically and internationally that we think we're taking a lead in and will continue to have ongoing opportunities with.

Michael Drickamer – Morgan Keegan

Depreciation came in a little bit hard I expect. Do you have some guidance perhaps for depreciation for 2009 with all the rigs coming in?

Douglas Fears

Depreciation came in a little higher because of our abandonment charge was included in that.

Michael Drickamer – Morgan Keegan

That's where the abandonment charge was?

Douglas Fears

Yes. I think probably about 230 or 240 of the depreciation. We generally don't give guidance on that but that will give you just a rough idea of where that's headed perhaps between 240 and 250.

Operator

Your next question comes from John Daniel – Simmons & Co.

John Daniel – Simmons & Co.

On the new term contracts, can you tell us whether the five E&P companies are new or existing Flex Rigs customers?

Hans Helmerich

They are all existing Flex Rig customers.

John Daniel – Simmons & Co.

With business slowing down and presumably steel prices and things like that coming down, do you see that your supply chain management group reducing the cost of the new builds next year?

Hans Helmerich

There's some lag effect in that actually flowing through. At the same time the continuity that we've had has allowed us to continue to push on lien manufacturing and good process efforts and our guys have done a great job in terms of price per ton and man hour per ton, continuing to chip away at costs and expenses.

We think that will continue and eventually I think we'll see some flattening and some potential improvement from you mentioned which are raw material process.

John Daniel – Simmons & Co.

On the contracts that you have in place now, I recognize they're firm contracts but at this point have you had any customers approach you to discuss breaking or renegotiating those contracts?

Hans Helmerich

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

Operator

Your next question comes from Kevin Pollard – J.P. Morgan.

Kevin Pollard – J.P. Morgan

I wanted to follow up on your comments you've seen some weakness in day rates. Is that in your conventional rig fleet or is that actually hitting some of the 42 Flex Rigs in the spot market?

Hans Helmerich

It has hit both. Of course it hits the conventional rigs a little more than it does the Flex Rigs but we've had a slight reduction in the Flex Rigs in the spot market.

Kevin Pollard – J.P. Morgan

Can you give us some sense, 5%? And how would that contrast with the conventional rigs? Is it like 5% for the Flex Rigs and 10% for the conventional? Can you give us any color along those lines?

Hans Helmerich

In general I would say the Flex Rigs are $1,000 a day and the conventional rigs are going to be a little more than that, $2,000 a day in some cases.

Kevin Pollard – J.P. Morgan

I'll shift over to your manufacturing. You've always insisted on a term contract to manufacture and I know you've got a back log extending out 12 months which probably gives you some ability to keep holding on to that term contract requirement before you have to start reducing capacity. But at some point would you be willing to build rigs speculatively in order to keep at least a minimum manufacturing going or are you going to stick to the term contract requirement, long term is still the plan?

Hans Helmerich

I mentioned in my comments that a year ago at this time we only had visibility into the following February so I think we're in a great spot because as you mentioned, we have visibility now going into early next fall. Our approach has always been that we've developed a high performing rig and we put our money on the table up front and we would like a reasonable return on that. So that's our preference.

At the same time, we're going to keep from being tone deaf and we're going to be aware of what the market is doing but thankfully we've got that decision pushed forward quite a bit.

Kevin Pollard – J.P. Morgan

With the backlog, it's kind of a slow month at what point do you have to start making that decision if there aren't any term contracts coming in? Is it 12 months out or is it sooner than that?

Hans Helmerich

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

Kevin Pollard – J.P. Morgan

Some of the customers obviously are lowering their spending considerably, fairly recently, even making that decision since ordering some of the new builds. Have you had anybody come to you and say, "I still want the rig but maybe take your time with the manufacturing", where you end up perhaps pushing the delivery cycle out beyond 12 months in sort of a mutual agreement with your customers? Have you had any discussions along those lines?

Hans Helmerich

This has been a volatile time and we've had lots of ongoing discussions so the answer is yes, we're sitting down with customers and talking. We've got no plans to change our roll out at this time, so that's probably the best I can answer that with.

Operator

Your next question comes from Andrew Coleman – UBS.

Andrew Coleman – UBS

I wondered if you could give us some color on the outlook of contract roll overs for Flex Rigs and if you're seeing much competition there from other competitors in the build in terms of are they hampering your ability to renew those?

Hans Helmerich

And you're referring to the new builds that roll off in '09?

Andrew Coleman – UBS

Yes.

Hans Helmerich

We have three in the second quarter, fiscal quarter, six in the third, I guess it would be eight in the third and another nine more in the fourth quarter. As far as competition with competitors new builds, we really don't see that right now. Obviously it's a situation that we didn't have previously but as far as competing with competitors new builds, but we really like our chances.

The rigs are performing very well. They've been out there working for three years and the performance is outstanding. So I think we're going to do well if we're facing head to head with any of our competitors.

Andrew Coleman – UBS

E&P CapEx volatility in any given year can be pretty significant. Given that we're looking at a lower start, how quickly have you seen those numbers change in past years either good or bad? If we think that just because we're sitting here in November with a pretty dour look on our face this could all change in a six month period.

Hans Helmerich

I think that's one of the reasons we set up the comparison between '07 and then 2001, 2001. In that earlier time period you had a 45% drop and it had somewhat of a cliff effect and in '07 it seemed to be slower and more rational in developing.

You're right. We're on the front end of trying to figure this out and we don't know what will transpire except that it's just that we've had times when it was more shock and awe than it was slow and rational. That's what we're waiting to see unfold.

I think we're well positioned in any one of those scenarios to continue to push forward and focus on field performance and continue to win over the ongoing support of the customer.

Operator

Your next question comes from [Phillip Jonas – Merrill Lynch]

[Phillip Jonas – Merrill Lynch]

In you view, how big a drop in the rig count do you think it would take to idle an un-contracted Flex Rig? I know you said the five to six couldn't be released.

Hans Helmerich

It's very volatile in the sense that you have turn over where you've got a customer that may not have additional drilling needs but then you have customers on the receiving end or folks that are interested in improving and upgrading their rig roster. Moving forward is hard to predict.

[Phillip Jonas – Merrill Lynch]

If you could describe the discussions you're having with your bank group, how confident are you that the revolver is going to be increased in the fourth quarter? Are there likely to be any other changes to the credit agreement such as covenants or rates?

Douglas Fears

We're not anticipating any change in covenant and I would rate us as very confident that we'll be successful in securing some more bank financing.

[Phillip Jonas – Merrill Lynch]

Then that should be enough to cover the remaining capital program in 2009 and then after that you'll probably be free cash flow positive in 2010.

Hans Helmerich

That is correct.

Operator

Your next question comes from Thad Vayda – Stifel Nicolaus.

Thad Vayda – Stifel Nicolaus

Following on some of the questions about the flexibility around capital spending and so forth, in the context of turn downs in '02, what we saw in '07, how are you thinking about labor retention plans going forward? We certainly have an enormous pull back, you're going to have to make some decisions on what you do with field personnel, expertise on Flex in particular is important to the efficiency argument that you make. You going to do anything different this time? How long would you carry folks in a severe down turn? Could you provide some comments on that?

Hans Helmerich

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

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

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

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

Operator

Your next question comes from [Frederick Russell – Frederick E. Russell Investment Management Company Inc.]

[Frederick Russell – Frederick E. Russell Investment Management Company Inc.]

These prices, is the Board tempted to buy back its stock or is the priority so overwhelming, so attractive for capital expenditures that despite the compelling nature of the stock price you'd rather not consider or work on a buy back at this time?

Hans Helmerich

As you and I have talked before, the Board is always interested in that and we revisit the issue frequently. As I think as we talked this morning, we're very pleased with the order book we have in front of us and how that kind of balances going forward and I think that that's priority number one. As we go through '09 and have some better visibility on 2010 and what other opportunities there may be there, domestic and international, we'll have a better feel for the potential for share buy backs if we're generating free cash.

I think that would be something that you shouldn't expect in the next several months, but it will be something that the Board continues to look at carefully.

Operator

Your next question comes from Mark Close – Oppenheimer & Close.

Mark Close – Oppenheimer & Close

I just want to confirm the guidance that you gave on international margins was in the $11,000 to $12,000 range for '09 and just a couple of quick questions on international. Is that fleet, you're starting to deploy more Flex Rigs there, the new builds and the recently placed in Columbia as well as the Argentine rigs that will be coming up, would we expect to see those contracts as those units are deployed, would we expect to see rig day revenue average day revenue change much? We've seen a fairly significant increase in international rig expense, where are you looking at that in the coming year and especially as it pertains to Flex Rigs.

Hans Helmerich

On the margin, you're right and what we were speaking to was the first quarter of '09. That's the visibility that we have right now, is for the first quarter of '09, that $11,000 to $12,000 range. We'd like to think that that would continue, but that's really the nearest visibility that we have.

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

Operator

At this time we have no further questions.

Hans Helmerich

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

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Source: Helmerich & Payne Inc. F4Q08 (Qtr End 10/31/08) Earnings Call Transcript
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