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Helmerich & Payne Inc. (NYSE:HP)

F1Q09 (Qtr End 12/31/2008) Earnings Call

January 29, 2008 11:00 am ET

Executives

Doug Fears - EVP and CFO

Hans Helmerich - President and CEO

John Lindsay - EVP

Juan Pablo Tardio - Director of Investor Relations

Analysts

Waqar Syed - Tristone Capital

Mike Drickamer - Morgan Keegan & Co.

Arun Jayaram - Credit Suisse

Dan Boyd - Goldman Sachs

Angie Sedita - Macquarie Securities

John Daniel - Simmons & Company

Kevin Pollard - JPMorgan

Pierre Conner - Capital One

Mike Mazar - BMO Capital Markets

Andrew Coleman - UBS

Fred Russell - Frederick E Russell

Monroe Helm - CM Energy Partners

Monroe Helm - CM Energy Partners

Operator

Good day, and welcome to today's program. (Operator Instructions.) It is now my pleasure to turn the conference over to Mr. Doug Fears. Please go ahead.

Doug Fears

Thank you, Megan, and good morning, everyone. Welcome to Helmerich & Payne's conference call and webcast to discuss the company's first quarter earnings. With us today are Hans Helmerich, President and CEO; Executive Vice President, John Lindsay; and Juan Pablo Tardio, Director of Investor Relations.

As you know, most of the information provided today involves risk 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 last page of today's press release.

This morning, we did release that Helmerich & Payne Inc. reported record net income of $145.3 million, or $1.36 per diluted share from operating revenues of over $600 million for its first quarter ended December 31, 2008. That compares with net income of $107.8 million, or $1.02 per diluted share from operating revenues of approximately $456 million during last year's first fiscal quarter.

Included in this year's first quarter net income is a penny per share of asset sales and insurance proceeds. Also included in this year's first quarter income are amounts paid as a result of early termination of term contracts. That number totaled $18 million pre-tax, or $0.11 per share after tax.

These payments are a result of a combination of early termination for one new build, early termination of a term contract on a previously existing rig, and other types of early termination revenue. We expect to have additional early termination revenue this second quarter, but we prefer not to speculate on that amount at this point in time. In any case, what is important to remember is that our long-term contract cash flow is well protected.

Before Hans and John make their comments, I would like to touch on a few financial details. As mentioned in the release, the company recently closed on a $105 million, 364-day unsecured bank credit facility. With this facility, the company has adequate liquidity, giving us a 2009 capital spending estimate that has been lowered to $850 million, $250 million of which was spent during the just completed first fiscal quarter.

Much of the capital spending for the year relates to the new FlexRigs that are scheduled to be completed by the end of 2009. As of today, the company has approximately $160 million of total unused borrowing capacity in its bank facilities.

As a result of approximately 56% of the company's US land potential revenue days working under term contracts for the remainder of fiscal 2009, and 42% during 2010, our projected need to draw on our credit lines will end during the September 2009 quarter. Substantial free cash flow will be generated beginning with the first fiscal quarter of 2010, which ends December 31, 2009.

The company's debt to total capitalization ratio is currently 17%. Also, the company continues to hold large equity holdings in Atwood Oceanics and Schlumberger, totaling over $170 million of value.

I will now turn the call over to Hans Helmerich, President and CEO. After Hans and John have made their comments, we will open the call to questions. Hans?

Hans Helmerich

Thanks, Doug. While our first quarter earnings set record highs, they seem overshadowed by a rapidly deteriorating energy market. After peaking in October, rigs have been pushed to the sideline, as a result of a potent combination of plunging energy prices and credit markets in disarray. The resulting uncertainty has driven E&P capital spending budgets down, and slowed or shuttered a broad range of projects.

The drilling industry today is reeling, caught up in a dynamic situation of rigs being idle until demand destruction slows and a pricing bottom materializes. At this stage, rigs across the board have been impacted, including an unprecedented number of FlexRigs.

Once the smoke clears from this dramatic dial back, we anticipate the next stage will entail a sorting process of projects that will survive lower prices and equipment and services that will be engaged to provide the best efficiencies.

As we mentioned in our previous call, the last time the industry experienced a correction of this magnitude that was in 2001 and 2002, then we saw 40% of our US land rigs become idle during the first quarter, before recovering to 84% utilization for the fiscal year.

Similar to that and other down cycles, we are hopeful that the speed and the severity of the current pull back will set up a self-correcting response that will usher in a cyclical improvement. While it is too early to call at this stage when that reset will occur, we are experiencing a purging effect that seems faster and more severe than many could have imagined just a few months ago. Still, as we come out of the winter months, we expect things will get worse before they get better.

The brunt of the pain will be borne by the industry's older legacy rigs. Their suitability was under scrutiny before the downturn and their competitive position will come under increasing pressure going forward.

When conditions improve, they will not only compete against other legacy assets, but against an available supply of high efficiency rigs, including idle FlexRigs. We take some consolation in that our fleet profile is not only the newest and most advanced, which should continue to provide best in class performance in the spot market, but it is also well-positioned, with more contracted revenue day protection than any time in our history. That buys us time.

We also derive a benefit from the remaining rig orders that continue to be delivered into the fall of this year. Those new rigs will absorb trained and experienced personnel from idle rigs and help maintain valuable continuity. We are in a strong position to wait out this storm. We will do what we have done in previous downturns: look for ways to improve our organization, to strengthen the brand, and prepare for opportunities for the company improving market conditions.

With that, I would like to have John make his comments.

John Lindsay

Good morning. As Hans discussed, most, if not all of our customers are suffering significant drilling budget reductions. In the rush of the pullback, rig releases have seemed to be indiscriminant. Best in class performing spot market rigs are being stacked. We believe this scenario will continue until operators gain visibility that the bottom is near.

The current market conditions are having varying effects on our three operating segments: US land, offshore and international. The following comments will cover some of the details.

In US land, as of today, 152 of 194 existing US land rigs are active, a 78% utilization rate. Only 41 of the 152 active rigs were currently operating in the spot market, including 27 FlexRigs. The remaining 111 active rigs, or 57% of the fleet, including 100 new builds, are under term contracts. The 42 rigs that are idle include 22 mobile and conventional rigs and 20 FlexRigs, five of which are early terminated new builds.

We averaged 177.4 active rigs during the first fiscal quarter, as compared to 178.1 during the previous quarter. In average, 10.1 rigs were idle during the first quarter of '09, as compared to 3.6 idle rigs on average during the previous quarter.

Average rig expenses per day increased by $375 to $12,246 during the first quarter. We announced in the last call that market conditions at the peak required a field labor increase, effective on October 1st of 2008. As a result of the current market downturn effective February 1st, field wages will revert to the September 30 pay levels, reducing our costs by approximately $600 a day. Given this reduction, we are hopeful that we can keep cost per rig day flat to slightly down, given other cost variables that tend to rise in this type of market transition.

Spot pricing began to deteriorate during the first fiscal quarter. Since the peak and through the end of January, average spot pricing for H&P rigs in the spot market has declined by approximately 14%. Currently, the H&P dayrate average for rigs in the spot market is approximately 11% lower than the H&P dayrate average for rigs under term contracts.

As we predicted on the last call, we ended the first fiscal quarter with 24 stacked rigs. That said, the market is significantly worse today than anticipated during our last earnings call in November. Looking forward, we could see our stacked rig count increased to over 60 rigs by March if the market continues in its current trend and doesn't improve.

Thus far, our offshore activity has not been affected by the slowdown, but we could see some impact in the third fiscal quarter, if oil and gas prices do not improve. For offshore operations during the first quarter, the average activity was unchanged at eight average rigs running through the quarter, and as of mid-January all nine rigs are receiving a rate.

The ninth rig is currently on a relatively low standby rate and is expected to commence operations in the Gulf of Mexico in the summer of 2009. The average rig margin for the second fiscal quarter is expected to remain at just over $20,000 per day. We currently expect three rigs to finish contract commitments by mid-third fiscal quarter. We may have two or three of those rigs remain idle for the remainder of the fiscal year. This is the first indication of softening in our offshore segment.

In our international segment, average international operating activity increased from 25 rigs during the fourth quarter to 26 rigs during the first fiscal quarter. Nevertheless, seven of the company's international land rigs are now idle and, as mentioned in the press release, additional rigs are expected to become idle during the current quarter.

As you know from our news release today, and press reports from other oil service peers, H&P and many other service providers in Venezuela are experiencing accounts receivable collection issues. We are working hard to get this situation resolved, and are hopeful we can get the operation back to normal in the near future.

We are going to do our best to continue our long relationship with PDVSA. However, as a result of the current situation, we expect additional rigs to become idle during the second fiscal quarter in Venezuela.

All 11 of the company's rigs in Venezuela were active during the first fiscal quarter. The accounts receivable collections from PDVSA have slowed considerably over the last few months. The receivable balance from PDVSA is approaching $100 million. Accordingly, we are ceasing operations on rigs as their drilling contracts expire.

Two of the company's 11 rigs in Venezuela have recently ceased operations and it is expected that further cessations will idle a total of five rigs in that country by the end of February 2009. Absent any improvements of receivable collections, the remaining rigs would probably become idle by the end of July of this year.

With all of these challenges, we would not be surprised to experience a 20% to 30% quarter-to-quarter decline in international average activity as we transition into the second quarter. Average margins per day may sequentially decline by 30% or more, given deteriorating conditions in the market during the second fiscal quarter.

One of the bright spots in our Latin American operation is the performance of the first three of seven new FlexRigs working today in Colombia and Argentina. The rigs have set most, if not all of the existing field records in the short time in operation. In the first three to six months, they have already reduced full well cycle times by 40%, as compared to the competition. The remaining four FlexRigs contracted for Argentina are not yet active as a result of mobilization delays. We anticipate one rig to begin operations in the second fiscal quarter, two rigs in the third and one rig in the fourth quarter.

In closing, there continue to be strong global influences that negatively impact the drilling business today. We believe H&P is well positioned for the long-term, with over 80% of our fleet consisting of FlexRigs and 57% of our fleet under term contracts.

But until short-term confidence is restored, and commodity prices and those prices stabilize at reasonable levels that will allow our customers to increase drilling budgets, rigs in the spot market will probably continue to be sidelined. Once the dust settles and operators begin to hydrate their fleets, stacked FlexRigs should be among the first to go back to work.

And now, I will turn the call back to Doug.

Doug Fears

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

Question-and-Answer Session

Operator

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

Waqar Syed - Tristone Capital

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

Hans Helmerich

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

Waqar Syed - Tristone Capital

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

Hans Helmerich

Nine are.

Waqar Syed - Tristone Capital

Nine rigs are, okay. And then in 2010?

Hans Helmerich

I think we, I think we drop. I think we got seven.

John Lindsay

I think we had 7.5, eight, yeah.

Waqar Syed - Tristone Capital

7.5 to eight rigs, okay. You've mentioned that you may be moving some employees from the rigs that are stacked to the new builds. Should we be assuming that the startup costs for the new builds are going to come down now?

Hans Helmerich

Well, you'll have less if any training costs are associated with those rigs. So, that's the savings that we expense on the front-end. So, yeah, that would be a positive.

Waqar Syed - Tristone Capital

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

Hans Helmerich

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

Waqar Syed - Tristone Capital

Sure, okay. And do you have any guidance for G&A and DD&A for the remainder of the year?

Hans Helmerich

Do you have any?

Doug Fears

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

Waqar Syed - Tristone Capital

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

Hans Helmerich

Thank you.

Operator

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

Mike Drickamer - Morgan Keegan & Co.

Hi. Good morning, guys.

Hans Helmerich

Good morning, Mike.

Mike Drickamer - Morgan Keegan & Co.

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

Hans Helmerich

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

Mike Drickamer - Morgan Keegan & Co.

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

Hans Helmerich

Yeah, that's right.

Mike Drickamer - Morgan Keegan & Co.

Okay. Hans, are any of these rigs being released because the E&P companies can't pay the bills or is it they don't want to pay the bills?

Hans Helmerich

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

Mike Drickamer - Morgan Keegan & Co.

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

Hans Helmerich

Well, let me step back and say, this is something that we watched over the years, and we've been down there over 50 years, and there have been some years with more anxiety associated with them than others.

But we've got a long-term relationship down there and, to your question about where do you move those rigs out – First of all, we expect to get paid, we expect to resolve this situation and work through this. Secondly, you've heard me say those rigs are particularly well suited for Venezuela and it's a nice fit in terms of that market down there.

As you look back as well, this represents about 6% of the company's revenue, 3% of our net book value in terms of our long-term, long-lived assets. So, I don't want to minimize it, because it's something we are putting a lot of energy and effort in to.

But I just want to right size it a little bit. I guess another comment on that would be, we've reduced our exposure in Venezuela on an absolute basis over the years from 22 rigs to 11 rigs, and then as we had this growth ramp in the last several years, that has acted to also reduce the exposure we have down there.

So that just gives you a little more color, Mike, on our thoughts down there. What I would like to see, and what we all would, is that this thing moves forward, they get caught up, and we go back to work.

Mike Drickamer - Morgan Keegan & Co.

Okay. Hans, I guess last question on that topic then would be, one of your offshore drillers down there saw PDVSA taking over one of the rigs. Any concerns they may have with your rigs?

Hans Helmerich

I think the situation is different. As we mentioned, as you saw, these rigs have been without contract and so it gives us some more flexibility. And no, we haven't had any discussions like that where PDVSA has said they want to take over the rig.

Mike Drickamer - Morgan Keegan & Co.

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

Hans Helmerich

Thanks, Mike.

Operator

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

Arun Jayaram - Credit Suisse

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

John Lindsay

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

Arun Jayaram - Credit Suisse

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

John Lindsay

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

Arun Jayaram - Credit Suisse

Okay. Hans, in terms of PDVSA, you've outlined the worse case scenario if you do not get paid, more rigs would go idle. Is there anything that keeps you optimistic about potentially, firstly, getting paid for what they owe you and maintaining some level of utilization in country?

Hans Helmerich

Well, I think they faced declining production and maybe a little different than what has happened with different E&P companies there. I believe they recognize that they have a strategic partnership with oilfield service folks. This is very critical to their ongoing operations. So, there is a sense that it is a win-win, they need oilfield service industry there.

I think the other thing is that we have a long relationship; we have good communication with those folks. I think they have every intent of continuing to work and develop. They've got the best reserves in the ground of anybody in this hemisphere. So, I think those are the things that keep us optimistic. We've got a good organization down there, and it's recognized in terms of performance by PDVSA. So, there are things that longer-term, I think, make us optimistic.

Arun Jayaram - Credit Suisse

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

John Lindsay

It might be easier to talk about the area that's strong.

Arun Jayaram - Credit Suisse

Okay. Louisiana?

John Lindsay

East Texas is a strong market; the Haynesville is a strong market. Here recently, we have seen some softness that we hadn't seen prior in the Barnett and in the Piceance. Woodford still seems to be holding up pretty well. South Texas is holding it pretty well.

Again, most of our rigs in the Rockies are on term contracts commitments. So, I don't believe we've seen some of the slowdown that others may have seen. I know the Rockies have been pretty slow.

Arun Jayaram - Credit Suisse

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

John Lindsay

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

Arun Jayaram - Credit Suisse

All right, thanks, JL. Talk to you later.

John Lindsay

Thanks, Arun.

Operator

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

Dan Boyd - Goldman Sachs

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

Hans Helmerich

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

Dan Boyd - Goldman Sachs

Okay. And then also OXY announced today $58 million in rig contract termination payments in the fourth quarter; do you have any exposure to that or do you expect that from peers?

Hans Helmerich

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

Dan Boyd - Goldman Sachs

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

Hans Helmerich

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

Dan Boyd - Goldman Sachs

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

John Lindsay

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

Dan Boyd - Goldman Sachs

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

Hans Helmerich

Thanks.

John Lindsay

Thanks, Dan.

Operator

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

Angie Sedita - Macquarie Securities

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

Hans Helmerich

Yeah. That's right, Angie.

Angie Sedita - Macquarie Securities

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

Hans Helmerich

I think all of those are intact and we continue to see an average of three rigs a month go through that facility, and so I think that is steady ahead.

Angie Sedita - Macquarie Securities

Okay. So while 56% of the available rig days are on term contracts, on every contract there is an ability to have early termination, but for a sizable fee, correct?

Hans Helmerich

Correct.

Angie Sedita - Macquarie Securities

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

Hans Helmerich

Thanks, Angie.

Operator

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

John Daniel - Simmons & Company

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

Doug Fears

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

John Daniel - Simmons & Company

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

John Lindsay

John, we actually have two Flex4s in Colombia.

John Daniel - Simmons & Company

Okay.

John Lindsay

They have been right at the longest has been out there five to six months and that is fairly shallow drilling and, again, that is one of the real bright spots, because their performance has been so good and that has really gotten a lot of folks' attention. We are encouraged that we think that will open up some opportunities for more growth, and not necessarily just Flex4s, but I think it opens us some opportunities for Flex3s.

John Daniel - Simmons & Company

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

Doug Fears

It's about 15% of that amount, of the 850. 15% to 20%.

John Daniel - Simmons & Company

Okay. All right. Thanks, guys.

Hans Helmerich

Thank you.

Operator

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

Kevin Pollard - JPMorgan

Thanks. Good morning.

Hans Helmerich

Good morning.

Kevin Pollard - JPMorgan

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

John Lindsay

It's really a combination, Kevin, of all. There is just going to be some conventional rigs, there is going to be some FlexRigs that are in the spot market. I mentioned in my comments about FlexRigs that are top performers in the field and those rigs are being released.

I mean it's just a situation where customers really need to spend within their cash flows. So, it really doesn't matter at that stage, but it's going to be all. There is potential that there could be other rigs that would have an early termination provision. That is always possible.

Kevin Pollard - JPMorgan

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

John Lindsay

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

Kevin Pollard - JPMorgan

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

John Lindsay

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

Hans Helmerich

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

Kevin Pollard - JPMorgan

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

Hans Helmerich

Well, our contracts are pretty clear and I think they are strong. We are willing to sit down and talk with customers. We do that all the time. We are looking for a win-win. In our situation, we've spent the money and we've made that commitment and so it's not like we have legacy rigs we're trading back and forth with.

I mean, we're in a situation where we spent the money and we are looking for the return on our investment. So, I think they understood that. And as you know Kevin, I mean it's a situation where just like that customer may have hedges he expects to stay in place. This kind of provides us a similar protection.

We have had, in earlier stages of our order book, times when the spot rate exceeded the contract rate. It's a cyclical business and that reverses itself. So, those are things I believe the customer understands and we just work through it.

Kevin Pollard - JPMorgan

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

Hans Helmerich

No. It gets back to what I said. I mean, we have worked with the customer to have a slot in our manufacturing line. We've identified that rig. We start to spend that money as soon as we sign up and so it really doesn't lend itself to what you are suggesting.

Again, I think some of our peers have different contractual setups on their new builds. They also have a large overhang of legacy fleets, legacy rigs that perhaps behooves them to use as a trading item. We aren't in that situation. So, I think it would just have us go forward with what we've done, which is to protect the currency and protect the value of those contracts.

Kevin Pollard - JPMorgan

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

Douglas Fears

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

Kevin Pollard - JPMorgan

Okay, thanks, guys.

Hans Helmerich

Thank you.

Operator

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

Pierre Conner - Capital One

Hi, gentlemen.

Hans Helmerich

Hi, Pierre.

Pierre Conner - Capital One

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

John Lindsay

Well, you can probably sum it up as being a mix. I mean, obviously, as we stack rigs in Venezuela, and you look at the rates on those rigs compared to some of the other rigs about pulls it down, and then there is also cost associated with going through that process. And again, a lot of uncertainty, and with the visibility that we have right now, I think that's really the best way to sum it up the way that I mentioned it.

Pierre Conner - Capital One

Okay.

John Lindsay

A lot of moving parts. It is really hard to nail one or two things down.

Pierre Conner - Capital One

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

John Lindsay

Yes, that is correct.

Pierre Conner - Capital One

Okay.

John Lindsay

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

Pierre Conner - Capital One

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

John Lindsay

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

Pierre Conner - Capital One

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

John Lindsay

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

Pierre Conner - Capital One

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

John Lindsay

Thanks, Pierre.

Operator

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

Mike Mazar - BMO Capital Markets

Good morning, guys.

John Lindsay

Good morning.

Mike Mazar - BMO Capital Markets

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

John Lindsay

Yeah, it's just those aren't the same.

Mike Mazar - BMO Capital Markets

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

John Lindsay

No. Mike, that's a good question. We're talking about entirely different well profiles. Much shallower work with the Flex4 and the rigs that are stacked in Argentina are large rigs.

Mike Mazar - BMO Capital Markets

Sure.

John Lindsay

They are 2,000 and 3,000 horsepower rigs. So, no, I don't believe so. The operation that we are going to in Argentina with the . . . is a kind of work that is going to maintain activity.

Mike Mazar - BMO Capital Markets

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

John Lindsay

Okay.

Operator

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

Kevin Pollard - JPMorgan

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

Hans Helmerich

That is correct.

Kevin Pollard - JPMorgan

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

Hans Helmerich

Yes, there's no tail on that.

Kevin Pollard - JPMorgan

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

Hans Helmerich

Yeah. Thanks, Kevin.

Operator

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

Andrew Coleman - UBS

Thank you. Good morning, guys.

Hans Helmerich

Hi, Andrew.

Andrew Coleman - UBS

I had a couple of questions on, as you look at all these rigs coming to the market and I know this isn't something that you guys would view, but are you hearing any anecdotal points of some operators going more to, there were some hearing play turnkey contracts again?

John Lindsay

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

Andrew Coleman - UBS

Okay.

John Lindsay

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

Andrew Coleman - UBS

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

John Lindsay

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

Andrew Coleman - UBS

I mean, I have looked at some footage calculations that were out, and it showed that we are filling footage levels we have not reached since the 1980s. I am curious how you expect footage to decline in response to all the rigs coming off. Is it that more people will drill in shorter laterals? Is it just that, or do you think footage is going to stay on a similar trend that it has been on for the last 12 to 18 months?

John Lindsay

Well, I think the metric as rigs go down we'll have obviously less footage. I think the average rig today makes about the same amount of footage per year as they did previously and the same number of wells. The difference is they are actually making more footage, but the difference is the well count, because the wells, rather than being a straight 10,000 foot vertical whole, it is a 14,000 foot well with 4,000 foot of lateral.

So, you are going to see – it should be a direct response as rigs go down. Total footage is going to reduce, but I think on the per rig basis, the number probably won't change very much.

Andrew Coleman - UBS

Okay. And I can send you a report. I was just curious. It looks like gas footage is on similar to some levels on that the early 90s. Of course, oil has gone up so on oil rig basis for the last 20 years, but anyways, thank you.

John Lindsay

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

Andrew Coleman - UBS

Sure, you bet. Thank you.

Hans Helmerich

Thank you.

Operator

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

Mike Drickamer - Morgan Keegan & Co.

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

Doug Fears

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

Mike Drickamer - Morgan Keegan & Co.

Okay. The four new builds, so you have assume there is some time left on those contracts; is that correct?

Doug Fears

I'm sorry. When you say four new builds, what are you referring to?

Mike Drickamer - Morgan Keegan & Co.

The four that were early terminated.

Doug Fears

Yes. There is still term left on those contracts, yes.

Mike Drickamer - Morgan Keegan & Co.

Okay. All right guys. That is it for me. Thanks.

Doug Fears

Thank you.

Hans Helmerich

Thank you.

Operator

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

Fred Russell - Frederick E. Russell

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

Hans Helmerich

Fred, you recall, I have said, it's kind of early to see that reset take place right now. But, as you know, this is, I think, one of the concerns in the market – might the industry drill through, if you will, any softness? The way they talked about, and I think and, in fact, did in 2007 and clearly, that's not happening. I mean, we're seeing a very fast and dramatic kind of purging effect.

So, it takes a little bit of time. It's little bit like the Fed lowering the discount rate. It takes a little bit of time for that to work through the system and for it to show up in supply, but if you have the number of rigs go down, that we think will become clear over these next few weeks with conference calls of our whole peer group, I think that number will be pretty clear that it's going to have an impact on supply.

Frederick Russell - Frederick E. Russell

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

Hans Helmerich

Yeah, I think that's a good question and an important point. You don't have to go back too long, in mid-2008, where things looked so strong and by that time over the year, there were already over 100 new builds announced, and there was a reasonable chance if that had continued to ramp up, we would have had several hundred new builds follow.

In fact, that didn't happen, and we think that some of the new builds that were announced by the industry will go away or move to the right, or be canceled. And so, I guess one of the silver linings in all of this is, when you look at the 2,000 plus rigs that are out there, they were not too long ago working. We would guess fewer than 350 of those are high efficiency rigs.

Now, we will probably add something around 100 rigs to that count. The point being, we have the largest proportion of those, and so, in a market that's still dominated by older legacy equipment, the supply and availability of high efficiency rigs is not that great and we forestalled, increased capacity into that segment.

So, in some ways that puts us in a strong position as we go forward, and we don't think longer-term and I'm talking longer-term now, but we don't think the retooling effort required or necessary in this industry is over, and so we think there will be opportunities there as well.

Frederick Russell - Frederick E. Russell

Thank you.

Hans Helmerich

Thank you.

Doug Fears

Thanks, Fred.

Operator

Next, Phillip (inaudible) with Bank of America. Your line is open.

Unidentified Analyst

Good morning, guys.

Hans Helmerich

Good morning.

John Lindsay

Good morning.

Unidentified Analyst

What's the total value on the remaining PDVSA contracts which you intend to complete, and what kind of thinking is behind completing them, versus stopping the work down?

John Lindsay

Well, I think it's a contractual issue. We have an obligation contractually to finish up on the well and so, that's the thinking.

Unidentified Analyst

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

John Lindsay

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

Juan Pablo Tardio

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

Unidentified Analyst

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

Hans Helmerich

No, we haven't. It was the quick turnaround as the peak of $145 plus oil price that went down so precipitously. So, yeah, I think it is a result of that quick transition, but I think it's been more difficult than in years past.

Unidentified Analyst

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

Doug Fears

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

Unidentified Analyst

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

Doug Fears

Well, we do not have that number with us right now.

Unidentified Analyst

Okay. All right. Thanks, guys.

Hans Helmerich

Thank you.

Operator

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

Monroe Helm - CM Energy Partners

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

Hans Helmerich

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

Monroe Helm - CM Energy Partners

Okay. Second question is, it seems like in this downturn, different from the '01-'02 downturn, is the fact that because the banking industry is in such trouble, a lot of these E&P companies reprise shareholder credit line to be introduced and almost commodity prices down, the reserves might be down because of year end reevaluations.

Are you hearing that as an issue and links from your rigs down and what are your thoughts on that being an impediment to an upturn, once the commodity prices bottom?

Hans Helmerich

Well, I think your question captures an important point, and that is, you not only have the huge fall in commodity prices, but you have the credit market situation and it raises, as I said, in a couple of ways. One is just the availability of credit in the face of falling prices, and then two, is just the uncertainty that that injects into customers' thinking and it kind of has them leapfrog ahead of potential problems.

So, I think their actions in terms of idling rigs becomes more, in our mind, draconian or dramatic than it otherwise would have, absent the uncertainty surrounding what is going on in the credit market. So, what we would hope is that you get some better visibility on where commodity prices are going to be and where they go, and then maybe as demand destruction kind of adds, and we get a better sense of some stability out there.

The collective sense is real biased, but I think the collective sense is, gosh, prices are too low now and they don't relate to incremental units in terms of cost of additional production. So, I think time will help and time will bring a certain stability, and that is what we are playing out.

Monroe Helm - CM Energy Partners

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

Hans Helmerich

Well, I think the legacy rigs out there are going to be very challenged and you have a couple of things that differ from '86. One, you don't have the segmentation in the industry, where you have clearly a group, albeit a smaller group, of smaller, high efficiency rigs that are out performing.

So, you have that kind of separation and distinctiveness that you did not have in '86. And then you have legacy rigs that have benefited from a great run over the last several years, and now they are going to be tested in a way they haven't been tested before.

Monroe Helm - CM Energy Partners

Okay. Thanks again for your comments.

Hans Helmerich

Thank you.

Operator

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

Doug Fears

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

Operator

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

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Source: Helmerich & Payne Inc. F1Q09 (Qtr End 12/31/2008) Earnings Call Transcript
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