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Executives

Douglas Fears - Vice President and Chief Financial Officer

Hans Helmerich - President and Chief Executive Officer

John Lindsay - Executive Vice President

Alan Orr - Manager of Investor Relations

Juan Pablo Tardio - Manager of Investor Relations

Analysts

Pierre Conner - Capital One Southcoast

Mike Breard - Hodges Capital Management

Michael Drickamer - Morgan Keegan

Matt Conlan - Weeden & Company

Ian Macpherson - Simmons & Company International

Arun Jayaram - Credit Suisse

Dan Pickering - Tudor Pickering

Alan Laws - Merrill Lynch

Ian Macpherson - Simmons & Company

Helmerich & Payne, Inc. (HP) F4Q07 Earnings Call November 15, 2007 11:00 AM ET

Operator

Welcome to today's teleconference. At this time, all participants are in a listen-only mode. Later there will be an opportunity to ask questions during our Q&A session and please note this call is being recorded.

I'll now turn the program over to Mr. Doug Fears, Vice President and CFO of Helmerich & Payne. Please, begin sir.

Doug Fears

Thank you, Kevin and good morning everyone. Welcome to Helmerich & Payne's conference call and webcast to discuss the company's fourth quarter and fiscal year earnings.

With us today, as usual, are Hans Helmerich, President and CEO; Executive Vice President, John Lindsay and Alan Orr and Juan Pablo Tardio, Manager of Investor Relations.

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

Earlier today, Helmerich & Payne reported record net income of $449.3 million or $4.27 per diluted share for our fiscal year, just ended September 30. This compares with net income of $293.9 million or $2.77 per diluted share for last year. Included in our income figures are gains of $0.73 for 2007 which include portfolio sales, sales of drilling equipment and insurance settlements. Net income for 2006 included $0.16 per share from similar transactions.

For the fourth quarter of fiscal '07, we reported net income of $116.4 million or $1.10 per share compared with net income of $98.5 million or $0.93 per diluted share during last year's fourth quarter.

Included in these results from the sale of portfolio securities, drilling equipment and insurance settlements are $0.13 per share for the fourth quarter of '07 and $0.06 for the fourth quarter of '06. We are naturally, very encouraged and enthusiastic about these results.

The company's sequential increase in earnings was primarily driven by US land rig margin and rig activity increases as the company continues to deploy new rigs to the field at attractive day rates, margins and contract terms.

Average US land rig revenue per day rose by $265 over the previous quarter to $23,666 per rig day and our average cash margin averaged $12,221 per day for the fourth quarter, up by $439 per day, sequentially.

For this past fourth quarter, the company recorded 13,263 rig activity days, up 7% above the previous quarter. All of these statistics come when many contractors are reporting sequential net reductions in rig margins and activity. Hans and John will comment more about these encouraging statistics in just a minute.

Before they do, I'll touch on just a few other financial details. At September 30, the stock portfolio had a market value of $455 million. Currently, the market value of the portfolio is approximately $460 million, or an after-tax value of approximately $2.75 per Helmerich & Payne share.

Our capital expenditures for the September quarter totaled $213 million, bringing the total fiscal 2007 total to $894 million. At this time, we're estimating 2008 capital budget to be approximately $375 million.

Within the fourth quarter, depreciation total of $44.8 million is approximately $2.7 million of abandonment kind of year end clean-up charges. And, as you can tell, our effective tax rate for the year was 36.4% and we estimate that next year it will be between that number and 37%.

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

Hans Helmerich

Thanks, Doug. Good morning everybody. We're pleased to report the company's highest all-time year end results. This accomplishment is the third consecutive year of record-setting results and in some ways, more satisfying as it comes a year after the cycle peaked out in terms of day rate highs.

Why more satisfying? Because our strategy was never based on cyclical highs and rig scarcity where demand has to outstrip supply to make this an attractive business; where customers pay more for any available rig. We've long believed a more enduring approach is enabling customers to attain lower total well costs through the industry's safest, newest and most innovative land fleet.

We've been busy building that fleet at a rate of four rigs per month. And perhaps this year's most significant accomplishment is found less in the financials and more in the on-time, on-cost execution of that aggressive program. It would certainly be a credit to our guys to deliver daily on the entire value chain involved: the design, manufacturing, commissioning, training, and field performance. So, it's only fitting to recognize their dedication and contribution to the company's accomplishment.

The customers' endorsement of FlexRig is in the end, a buy-in to those people that stand behind our outstanding fuel performance. We're occasionally asked how do, the current market conditions change your thinking.

Well, today, we're managing to the same challenges and opportunities we've talked about on these calls and elsewhere for a long time: deliver growth to shareholders by securing and executing on an aggressive order book; win the customer's trust by consistently and safely providing differentiated fuel results; take advantage of an ongoing retooling effort in an increasingly segmented industry still top-heavy with all of the less capable rigs; expand into additional drilling markets with more focus on expanding our international effort.

While this isn't an exhaustive list, it should be familiar to our regular listeners. Perhaps more notable, is what the list excludes, namely, we are not managing to the dilemma of carrying a large percentage of old, less capable rigs, while the customer increasingly votes in favor of high efficiency rig offerings.

This dilemma was reflected in recent public comments as our peers pondered the trade-offs between market share and price discipline. That sounds a little like the classic prisoner's dilemma with the logical best choice being price discipline, since after all, the market drives demand. Contractors have to fight against being reduced in a soft environment to engaging in a downward spiral of rig-on-rig price destruction.

Some industry observers are asking, why, are we not seeing more pricing discipline in a market with historically high rig counts. One reason is that truly differentiated performance has driven a segmented marketplace. We see on our end existing FlexRigs that have worked on the spot market this last quarter are 100% active and still commanding over $25,000 rig revenue per day on average, while competing rigs aggressively cut price and are still pushed to the sidelines.

Take a look at last year in terms of margins and activity by comparing the fourth quarter of fiscal 2007 to that of 2006. Our average rig margin per day, in the US land market has only declined by 8% to $12,221. This daily margin is now 40% greater than that of our four largest peers. Moreover, our quarterly average number of active rigs increased by 38% year-over-year, while that of our four largest peers combined experienced a net reduction of 14%. We passed the point where competitors can credibly position idle, old equipment as future operating leverage.

Back to the prisoner's dilemma, the next logical exercise in discipline is to cut up old industry rigs that are increasingly obsolete, ill suited for today's drilling demand and potentially, unsafe.

In strong up-cycles, the natural rate of attrition is artificially interrupted until supply comes back into some equilibrium. It turns out the capacity concerns surrounding new builds are being shouldered by the industry's oldest and least capable equipment, as they should be. Are there too many old rigs? That seems to be the question. But in any event, there are not too many new builds. They represent the customers' tool of choice for the future.

All of this reinforces our conviction in a retooling theme that continues to provide us attractive opportunities going forward. The new order of six FlexRigs we announced this morning further adds confirmation that even in a soft market, the customer supports the company's value proposition.

With that, I am going to ask John Lindsay to make his comments.

John Lindsay

Good morning. In the last call, we stated that the major theme in the US was how operators continue to find best value available in the FlexRig at premium pricing in spite of the plentiful number of very old rigs, idle and available in the market at lower rates. We believe that this remains the overwhelming theme today.

Our primary competitors are stacking excess of 200 rigs, while H&P customers continue to contract FlexRigs for the purpose of achieving lowest total cost per well and accelerated production by completing more wells per year.

Toward the end of my comments, I'll review a few trends that our customers face regarding the difficulty of drilling wells today that should continue to generate interest and additional FlexRigs. But first, I'll review our three operating segments made up of US land, offshore and international land.

A few important data points regarding US land. Today, we have 94% activity with 151 out of the 159 rigs working, up eight rigs since the last webcast. Our active rig count is up 35 rigs since the webcast a year ago. FlexRig continued to maintain 100% activity today with 121 operating.

With the latest announcement of six more new build FlexRigs, we now have 11 FlexRigs remaining in our current new build order book that will be completed by the third fiscal quarter of 2008. The eight stacked rigs are primarily designed for deeper well depths. They're 2,000 and 3,000 horsepower conventional rigs, and the market that these rigs target will probably remain soft. Therefore, we don't expect these rigs to contribute in the first fiscal quarter.

Of our currently active fleet of 151 rigs, 64 are in the spot market and the remaining 87 rigs, including 71 new builds, are under term contracts. About 50% of our potential revenue days for fiscal 2008 and 2009 are already under term contracts.

Average rig revenue per day for H&P's entire US land segment increased sequentially by 1% or $265 per day. We expect average rig revenues per day to continue to increase for rigs under term contracts, while continuing to decrease for rigs in the spot market. This would result in relatively flat average rig revenues per day during the next few quarters.

The new FlexRigs continue to perform very well. Overall, fuel results have met our expectations and we see ample opportunity for improvement which we fully intend to capture going forward. We continue to have discussions with customers regarding construction of additional new FlexRig3 and FlexRig4s.

The six additional new builds announced today are FlexRig3’s, bringing our total FlexRig3 rig count to 59 by 2008. You may recall, we built the first 32 FlexRig3’s from 2002 to 2004. We continue to be pleased with the prospects ahead given our proven FlexRig performance.

Next, I'll cover quickly our offshore operations. Average activity and our offshore segment decreased sequentially by 11% to an average of 5.3 active rigs during the quarter and are expected to decrease to an average of five rigs during the current first fiscal quarter.

Five of H&P's nine platform rigs in our offshore segment are currently active. One is being mobilized to Trinidad and one rig is being prepared for work under a long-term contract. One of the five active rigs is Rig 201, which is now fully operational and as you may recall, Rig 201 was damaged by Hurricane Katrina in the fall of 2005.

Two platform rigs remain idle and are currently being marketed. Two potential customers have expressed interest in contracting each of these idle platform rigs and we're currently negotiating what appear to be good prospects for these rigs. In summary, by mid-year, we expect to have eight of nine rigs operating in the offshore segment. So overall, we're very encouraged by our offshore outlook.

Now, turning to our international land operation, we experienced another very good quarter and 100% year-over-year growth in operating income on the strength of very good day rates and activity during the year. We continue to view the market as being very robust for international activity, even with a slight softening in near-term activity.

Average international activity decreased sequentially by 9% to an average of 22 rigs during the quarter. Today, 22 of 27 rigs remain active in international operations and activity should remain at this level for the remainder of the first quarter.

As mentioned in the press release, there was an early termination fee of approximately $6 million, which favorably impacted the average rig revenue and margin by approximately $3,000 per day. Without the early term income, average day rates and margins were relatively flat sequentially and should hold steady at those levels during the first quarter of fiscal 2008.

Three of the five currently idle H&P rigs in South America have good work prospects that are currently under negotiation and should be reactivated early in the second fiscal quarter of 2008. However, several of the active H&P rigs in Ecuador may become idle in the second quarter of fiscal 2008, as E&P companies are in the process of trying to determine their future plans given the growing industry challenges in that country.

As we've mentioned in previous calls, the FlexRig3 working in Tunisia is setting new performance benchmarks in drilling and safety performance in North Africa. We remain encouraged that we'll see expansion of FlexRig activity in both Latin America and the Eastern Hemisphere.

In closing, a few comments related to the H&P edge and field performance and further growth. Perhaps this is best illustrated by listening to a few examples of the operator's technical drilling challenges for rigs today and why demand will continue to grow for rigs with advanced technology.

First, over 40% of all wells drilled in the US are directional and horizontal and that's up from 20% in 2002. The percentages are even higher in unconventional plays. An example is over 90% of all wells drilled in the Barnett Shale and the Piceance Basin, are directional and horizontal during 2007.

Horizontals and extended-reach horizontal wells require rig performance that is exceeding the capability of the old mechanical rig fleet. In general, more difficult reservoir characteristics and the ability to navigate more precisely in those reservoirs continue to be a challenge for old rigs.

In response, H&P customers employed FlexRigs on directional and horizontal wells 60% to 70% of the time. So, considering these technical challenges, it stands to reason that the industry has reached a tipping point, a segmentation in the market where proven advanced technology rigs continue to be additive to the fleet and old conventional less capable rigs are stacked.

H&P will continue to focus on the strategy of providing the best value to our customers by offering FlexRigs supported by the best personnel, best safety record and over 300 rig years of FlexRig experience. We expect to be able to continue to grow our fleet both in the US and international based on customer demands for FlexRigs.

So now, I'll turn it back to Doug.

Doug Fears

Thanks, John. We'd now like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions)

And we will go first to the site of Pierre Conner from Capital One Southcoast. Your line is open.

Pierre Conner - Capital One Southcoast

Good morning, gentlemen.

Hans Helmerich

Hi, Pierre.

Pierre Conner - Capital One Southcoast

I don't often throw this out, but congratulations on a great quarter.

John Lindsay

Thank you.

Hans Helmerich

Thanks.

Pierre Conner - Capital One Southcoast

John, first on the JP, you've given us some perspective on the amount of rigs that are on term for fiscal '08 and '09 and what expected margins could be for the term portion. And so, my question obviously is then, with the six additional, have you redone that? And/or directionally, obviously the percent on term is going up, but what does that do to those average margins there?

John Lindsay

It doesn't really impact them in a big way. We still have an expected 54% contracted during fiscal '08 and 46% during fiscal '09.

Pierre Conner - Capital One Southcoast

Okay and so this is not enough to change those estimated margins within the term portion of already contracted, correct?

John Lindsay

No. Not in a material way.

Pierre Conner - Capital One Southcoast

Got it, that's fine. Perfect. So, John, good work on the cost side in the yearend here. Just to make sure we get a heads-up going into the first quarter, sometimes there is a little extra accrual for workers' comp and such. Could you give us thoughts on where you see the average daily US domestic land operating costs going sequentially?

John Lindsay

Well, like you said, Pierre, our costs were down. And we mentioned that in the last call that we felt like we were beginning to get a little handle on costs and we were hoping for flat and possibly down. I think right now, I don't see any reason to expect the costs would be increasing. I think there is still an opportunity for us to at least, hold them flat in general. Does that answer your question?

Pierre Conner - Capital One Southcoast

Yes, absolutely. That's great. Gentlemen, I think earlier you're going to give us a delivery schedule when you expected the additional rigs that you've just been awarded to be delivered. And so my question is, relative to we hear a lot about a tightness in components and such, have you ordered the components that you need externally yet and what is the delivery issues associated with it, if any, relative to your commitment on delivery to the field?

Hans Helmerich

Peter, this is Hans. One of the things we've done I think very well, and our guys get credit for, is just managing that supply chain. And so, that's the other thing that's nice today, is that we don't have these long lead times that we have to put in front of our customers so we are going to be able to begin delivery and it will be in an orderly fashion that runs through the first part of April. And so, we're all set up to accommodate that new order.

Pierre Conner - Capital One Southcoast

Okay. So even with the tightness in the market for equipment, you're in good shape. And then the last one, Hans, back to you, I'm always interested in the potential for the international adoption of new Flex. And so, I'll be straight up. I think a competitor rig builder is out there with some commitments in Russia. Do you still feel there is opportunity in Russia remaining beyond what's sort of already been signed up with some others and where else is there still international opportunity?

Hans Helmerich

Well, we are still encouraged by the level of inquiry and then we have active bids in the works in several places, Pierre. One of them would be Russia and so that's a market we're still interested in.

And so, yes, I think that our thoughts haven't really changed. We think that the FlexRig technology is going to be attractive to customers, both NOCs and both our current roster of strong customers. And I think we'll be hearing more as we go forward into this year in terms of -- we mentioned, I think on a call or so ago that we didn't expect anything to really happen that would make an impact before mid '08, and I think that's still true.

And we still have to wait and hear, but we have several things going on, a lot more than we had six months ago or certainly a year ago. So don't get discouraged yet. We've been careful not to over-promise on the international markets because we know they take some more patience and at the same time, I think we'll see some encouragement there.

Pierre Conner - Capital One Southcoast

Okay. Alright, that's great. Maybe one more actually, and JP, you could -- is the number of term contracts that are rolling fairly evenly spaced during fiscal '08 or do we expect some more now, just sort of the trend in those rollovers?

Juan Pablo Tardio

Sure, Pierre. They're evenly spread out. We start the first fiscal quarter with an estimated average of 15.9 previously existing rigs on term. That goes to 13.4 for the second quarter, 9.7 for the third quarter and 7.7 for the fourth quarter. Those are just estimates at this point.

Pierre Conner - Capital One Southcoast

Excellent. Thank you. And thanks, Doug, for your narrowing down that estimated tax rate so tightly. I appreciate it.

Doug Fears

You bet. You're welcome.

Pierre Conner - Capital One Southcoast

Gentlemen, I will turn it back. Thank you very much.

Hans Helmerich

Thank you.

Operator

We got our next question from the site of Mike Breard from Hodges Capital Management. Your line is open.

Mike Breard - Hodges Capital Management

Yes. That's an excellent quarter. I was just wondering the FlexRigs have been staying essentially, 100% active in the US. Is there excess demand? In other words, if you have two available, do you have three or four people that want rigs? And the reason I ask is, is there any chance that you might consider building rigs on spec if indeed there is excess demand?

Hans Helmerich

Well, we're trying to generate as much excess demand as we can, but we really like the model we have now and most folks on the call are familiar with, where we're asking for a three-year comp and very attractive financial returns.

One of the things that we were encouraged by is this latest announcement really fits that model so it's not a one-off contract. And your question is a fair one. But our preference is to continue to have opportunities to build and not to, at this point, think about spec building, because we really would encourage customers to get into our production queue.

Mike Breard - Hodges Capital Management

Okay. Thank you.

Operator

We'll take our next question from the site of Mike Drickamer with Morgan Keegan. Your line is open.

Michael Drickamer - Morgan Keegan

Hi. Good morning, guys.

Hans Helmerich

Hi, Mike.

Michael Drickamer - Morgan Keegan

Doug, I don't know who is exactly best to handle this or maybe it is for you. If you look at the 10 new rigs that were delivered during the quarter, what was the impact from those rigs on the average daily revenue and average daily margin? Did they have appreciable impact on the increases we saw sequentially?

Doug Fears

Yes, they did. Juan Pablo, you may want to address that.

Juan Pablo Tardio

Yes. I imagine, Mike, those rigs that were deployed during the quarter had significantly higher day rates than the average for the previously deployed rigs. So, as you expected, the average will continue to go up through mid fiscal '08, as it stands today.

Hans Helmerich

And that's for new builds that you're referring to.

Juan Pablo Tardio

Michael Drickamer - Morgan Keegan

If those 10 rigs had not been delivered, would the average daily revenue and margin actually have decreased in the quarter?

Juan Pablo Tardio

I am sure, Mike, I would have to run those numbers. I would be happy to visit about that offline.

Michael Drickamer - Morgan Keegan

Okay. The six new rigs that were delivered, I mean, even though the rest of the market has day rates falling, is it safe for us to assume that you're getting the comparable returns on these six new rigs as to the previous ones?

Juan Pablo Tardio

It is. The returns that we've had and talked about for our overall order book, these match and are very similar to those, Mike.

Michael Drickamer - Morgan Keegan

Okay. And then, Hans or John, I am not sure which one wants to take this. But if we look at the eight rigs you guys have idled now, they're in the 2,000 to 3,000 horse power range. Are there international opportunities for those rigs, either you guys working them internationally or selling them to somebody else to work internationally?

John Lindsay

Yes, Mike, I think there is an opportunity for that. We're looking at various options for those potential moves. Right now, just the beat market in general in the US is pretty soft. I think a few of those rigs will potentially go back to work in the second half of the year. And so, I see them as opportunities. But no, I think that there are opportunities to also look at those internationally.

Michael Drickamer - Morgan Keegan

Would those rigs be for sale if somebody came with a good offer?

John Lindsay

I would think anything is for sale if the price is right.

Michael Drickamer - Morgan Keegan

Okay. Thanks a lot, guys. I'll turn it back.

Operator

We'll take our next question from the site of Matt Conlan from Weeden & Company. Your line is open.

Matt Conlan - Weeden & Company

Hi, guys, great quarter. Including the six new contracts that you announced today, you have 11 rigs to be delivered in the future, including seven by the end of December. That implies that at least two of these new six rigs are going to be delivered this quarter, which is an alarmingly quick delivery.

I just wanted to ask if you had already ordered this equipment ahead of time or whether you are continuing a building program or starting to construct rigs on semi spec at this point, in your construction program.

Hans Helmerich

Don't be alarmed, Matt. Yes, there is a quick response, but we've talked before about when we've had such an aggressive order book. We have taken all of our capital spares out of that production line. So, if you needed a mast or a motor or an engine, we purposely squeezed out all of our capital spares as we were engaged in that effort.

So we have, as part of our supply chain, consideration for capital spares that are necessary. And the other thing we talked about last call is the value of the continuity of our manufacturing effort on several fronts in terms of people, in terms of shop, floor space, in terms of the learning that we continue to push.

So, yes, there is a balancing of having and being prepared and again, we face the same thing today. Even after this, what we think is a nice contract we have several conversations going with additional builds, so we have got to be prepared for it. But I think we're doing that in a very balanced way.

The intention is not to preorder or have a lot of what would be considered by some spec rigs on sidelines. That's not the case, but it's a very thoughtful, managed process. And I think the big driver is the need we're going to have for capital spares going forward. So, it gives us some flexibility in that regard and I think it's the right approach.

Matt Conlan - Weeden & Company

Let me put it another way. If somebody came to you today and asked you for two new rigs, when could they be delivered?

Hans Helmerich

It would depend a little bit upon rig type and --.

Matt Conlan - Weeden & Company

FlexRig3.

John Lindsay

That would be either March/April time frame.

Matt Conlan - Weeden & Company

That's terrific. Great assembly line you've got going there. Okay, terrific.

Hans Helmerich

If I may, one clarification just to make sure that the numbers are interpreted correctly. The seven rigs that we expect to deploy during this first fiscal quarter include three rigs that have already been deployed. So, we only have four of the 11 rigs being deployed this quarter. The other seven will be deployed in calendar 2008.

Matt Conlan - Weeden & Company

Okay. I guess --.

Hans Helmerich

We can talk about that offline but I just wanted to clarify.

Matt Conlan - Weeden & Company

Okay. Yes. I guess I misread that then.

Hans Helmerich

Alright.

Matt Conlan - Weeden & Company

Okay. Thanks.

Operator

We'll take our next question from the site of Ian Macpherson from Simmons & Company. Your line is open.

Ian Macpherson - Simmons & Company International

Hi. Good morning and congratulations.

Hans Helmerich

Thank you.

Ian Macpherson - Simmons & Company International

Hi. I guess, Hans, I'd be curious to know if your capital costs for the FlexRig3s are pretty static or if you see them trending higher or lower on the margin with your most recent [comp] here?

Hans Helmerich

What we're seeing is some overall moderating of upward price pressure. Heretofore, we've been fighting the oil field inflation and price cost pressures just by becoming more efficient in our manufacturing efforts. So we pay a lot of attention to man-hour per ton and gaining production efficiencies.

And so, that's all to I have say to your question. These most recent ones really reflect that average costs for Flex3 that we've been talking about. And to remind folks, we've said the overall order book is a little bit over $15 million. The Flex4s and Flex3s are different models. One is a little less expensive than the other and we really haven't given much more granularity than that. But to give some comfort, yes, we're seeing flat costs as we go forward on this most recent order.

Ian Macpherson - Simmons & Company International

Okay. That's helpful. And then if I may ask, could you frame that capital requirement with what you might be spending on international-deployed FlexRigs if they were to arrive?

Hans Helmerich

Well, I am not sure I am following except to say, we do have bids in international work that would give us opportunities to build new into that. But maybe I am not following your question.

Ian Macpherson - Simmons & Company International

I guess typically, we think of international land rigs requiring a lot more capital investment just because of all the redundant capabilities and just ancillary equipment around it. So I am wondering if we should think about international contract opportunities entailing significantly higher cost per rig than what you're spending in the US?

Hans Helmerich

Okay. I am sorry. Yes. I think that there are issues that are particular to those markets. So some would require camps and that's true even in the US where we might have winterization package, might not have or we would have other requirements that customers would spec out internationally.

So those would all, of course, be add-ons. You have mobilization increases as well. So, yes, those would all, depending on what the customer wanted, would be an add-on to those averages that I mentioned.

Ian Macpherson - Simmons & Company International

Okay. Thanks. I'll hop off.

Hans Helmerich

Thank you.

Operator

(Operator Instructions)

And we'll go next to the site of Arun Jayaram from Credit Suisse.

Arun Jayaram - Credit Suisse

Good morning, guys. Good results.

Hans Helmerich

Thank you, Arun.

Arun Jayaram - Credit Suisse

I wondered if you could comment. Your rig count is up about 40 rigs on a year-over-year basis in terms of work. Can you comment a little about the geographic distribution of your rigs and what geographic markets in the US are you seeing the most incremental demand?

Hans Helmerich

Arun, probably the largest demand we've seen has been in the Rockies, continues to be in the Rockies and the Piceance. We see demand in the Barnett. In general, the unconventionals, there continues to be a lot of demand from our customers.

Arun Jayaram - Credit Suisse

Okay. And how big of a position do you have now in the Rockies in and the Barnett?

Hans Helmerich

In Piceance, we're around 20 rigs. In the Rockies, overall we're in the 40’s.

John Lindsay

40’s.

Hans Helmerich

40 range. And in the Barnett, I think we're in the 20 range, 25 range there, somewhere in that ballpark.

Arun Jayaram - Credit Suisse

Okay. And can you give us a sense of where these six rigs are going?

Hans Helmerich

In the US?

Arun Jayaram - Credit Suisse

Okay.

Hans Helmerich

We can't right now. And that now they're US based, we're really excited about the opportunity and --

Arun Jayaram - Credit Suisse

Okay. Moving the line a little bit, in terms of your quarterly results, your average rig margins offshore more than doubled, sequentially up about $10,000. Can you give us a sense of what that increase related to and is that a sustainable margin going forward? It went from $8,500 a rig to 18.8, offshore.

Juan Pablo Tardio

Well, I think the way to look at offshore is right now Arun, is that we've re-shifted some of the way we report in those segments as you read and so, those numbers are a little clear shifting. But as we go through the first fiscal quarter you might expect a slight decline in operating income and a decline in margin per day.

As we go through the rest of the year, through the rest of the fiscal year, we do expect some significant improvement and hope to be able to attain operating income levels for that segment that are perhaps, even higher than those that we saw in fiscal year 2006.

Arun Jayaram - Credit Suisse

That's helpful. And last question, John, in your prepared remarks you mentioned that you anticipated margins being flattish for several quarters going forward with some of the spot work being offset by higher margins from the new builds. Would that imply that margins stick around this 12.2 margin level for quarters to come?

John Lindsay

Yes, Arun, that's what we are saying. Again, it's a function of new rigs coming on and spot markets at higher margins, and then the spot pricing declining. And of course, we can't predict how much the spot market will decline. There is still further pricing pressure there but that's what we estimate right now.

Arun Jayaram - Credit Suisse

Okay. That's helpful, guys. Thanks.

John Lindsay

Thank you.

Operator

We'll take our next question from the site of Dan Pickering from Tudor Pickering. Your line is open.

Dan Pickering - Tudor Pickering

Good morning, guys.

Hans Helmerich

Good morning, Dan.

Dan Pickering - Tudor Pickering

I just wanted to simplify the new builds, just briefly. Can you explain a little bit why either you or the customer doesn't really want to talk about where the rigs are going and is that a competitive issue or are you displacing other rigs? What's the dynamic behind, the mum is the word here?

John Lindsay

I think it's pretty typical for a customer not to want lots of information out there and we share some of that. And then, this news is recent and so I think there may be more to be said later about it. But part of not giving the geographic details is I think it's easier to back into who it might be.

Dan Pickering - Tudor Pickering

Okay. I understand. Will somewhere poke around a little bit just to try to understand better, will all of these rigs go to the same place geographically? In other words, is it a cluster of rigs for you?

Hans Helmerich

Not necessarily, Dan. That's still to be determined but not necessarily in the exact same location or same area.

Dan Pickering - Tudor Pickering

Okay, Hans and again, I am just trying to understand the customer's philosophy here. Will these be rigs to start up new drilling programs or will it be essentially replacing other rigs, capitalizing on the efficiency issues that you guys talk about?

John Lindsay

Well, again, I don't know all the inside details. What I understand is that I think it's a classification of what we've seen where more difficult drilling is being seen and operators have greater needs and the older conventional rigs are not able to do some of that drilling.

From what I understand, I think is it's a replacement of some -- I don't know that it's necessarily a growth. I really don't know those details. I do know at least there are some rigs that are being replaced.

Dan Pickering - Tudor Pickering

Okay, great.  And then switching gears, your $375 million capital budget, roughly how much of that is maintenance?

Doug Fears

About $150 million, Dan.

Dan Pickering - Tudor Pickering

Okay. And that $150 million that incorporates the offshore, the international and the domestic rigs, correct?

Doug Fears

That is correct.

Dan Pickering - Tudor Pickering

So, roughly $150 million. So the incremental $225 million then is the new build program that you've laid out to date?

Doug Fears

That is correct, new builds and some other capital projects that might have to do with international or offshore.

Dan Pickering - Tudor Pickering

Okay, great. Thank you.

John Lindsay

Thank you.

Operator

We'll take our next question from the side of Alan Laws from Merrill Lynch. Your line is open.

Alan Laws - Merrill Lynch

Good morning.

Hans Helmerich

Hi, Alan.

Alan Laws - Merrill Lynch

You're definitely setting the standard here in the land market. First question I had was, I'd like to ask about the quality issue which some of your competitors actually think is a debate still. Would you say that the recognition of the bifurcation of the market is growing?

Hans Helmerich

I think that we're seeing that and I think that it gives us some encouragement because we talk to potential new customers all the time and there is that recognition. And I think one of the best, most effective marketing efforts that occurs is when customer-to-customer operators are sharing just the success that they're having and that's a partnership we have with them. As the FlexRig becomes a catalyst to a lot of the efforts they put out, so when that operator-to-operator selling occurs, it's very positive for us.

Alan Laws - Merrill Lynch

Okay. Your early statement today was the challenges that older rigs are facing to compete even financially by cutting rigs. When you look at the presence and the expected domestically land rig market for 2008, how low do you think the spot margins are going to go for lower quality equipment, including your non-FlexRig equipment that you have out there today?

Hans Helmerich

Well, that's difficult to predict. And what I was saying in my --.

Alan Laws - Merrill Lynch

I will ask it this way. Do you think that there is significant further downside in it?

Hans Helmerich

I think that's what circles back to the notion of pricing discipline. We're the price leaders. We feel like we've continued to provide a certain umbrella type but maybe, more important is the segmentation that's taken on the business really does separate out and the market is recognizing, as it should. This happens in other industries. They're recognizing the higher value and higher quality on the upper end.

So I think what does happen is, if in the lack of some pricing discipline you do have rig-on-rig competition, which is typical in down cycles and it can drive price, the operator kind of steps to the sidelines and watches the prices get driven down. So I think that that's a concern because at some point, there is some potential contagion that runs upstream, I suppose. But I think that's a legitimate concern.

Alan Laws - Merrill Lynch

Okay. My last question had to do with -- I know you're not in the Canadian market, but there seems to be more announcement from Canadian contractors of bringing their fast moving or new configuration equipment into the market. Any thoughts there around added competition or are we talking about more of a niche situation?

Hans Helmerich

Well, that's a good question too. We're very watchful on just what the competition is and what the landscape looks like. And I think you're right, I think you're going to see some migration down but our sense is that we will continue to do well. I think those typically address a little shallower market opportunity. And so I am not sure I would call it niche, but it's a slightly different market opportunity and it's something that I think is important to watch going forward.

Alan Laws - Merrill Lynch

Alright, okay. Thank you very much for the answers. I appreciate it, guys.

Operator

And we have a follow-up question. This one is from the site of Mike Breard from Hodges Capital Management. Your line is open.

Mike Breard - Hodges Capital Management

Yes, just a quick question. Six new rigs, is that a brand new customer or somebody that's already using a FlexRig? And in general, are you seeing more people picking up your FlexRigs for the first time?

Hans Helmerich

Well, we're sure seeing interest in customers that would be first timers. But, Mike, we can't tell you if that's a new one or an old one in terms of a FlexRig customer.

Mike Breard - Hodges Capital Management

Okay. Thank you.

Operator

And we have another follow-up question. This one is from Ian Macpherson from Simmons & Company. Your line is open.

Ian Macpherson - Simmons & Company

I just have a quick follow-up. I don't know if I missed this, sorry if I did on the questions around the spot market. Did you provide where kind of the range of spot day rates were for the average of the past quarter and where they are today?

Juan Pablo Tardio

Yes, well, if you take the average for the H&P rigs that were in the spot market during our fourth fiscal quarter, I think that number is very close to 24,100 and we believe that that will slightly continue to decline as we've seen in previous quarters.

Ian Macpherson - Simmons & Company

Alright, thanks, JP.

Juan Pablo Tardio

Yes, sir.

Operator

I am showing no further questions at this time.

Doug Fears

Thank you very much. Have a good day.

Operator

This does conclude today's teleconference. Thank you for your participation. Have a great day. You may disconnect at any time.

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