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Helmerich & Payne, Inc. (NYSE:HP)

F4Q07 Earnings Call

November 15, 2007 11:00 a.m. ET

Executives

Douglas Fears - Vice President andChief 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

Operator

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

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

Doug Fears

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

With us today, as usual, are Hans Helmerich, President andCEO; 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 todayinvolves risks and uncertainties that could significantly impact expectedresults and these are discussed in our most recent 10K. We'll also be makingreference to certain non-GAAP financial measures such as segment operating incomeand operating statistics and you can find these GAAP reconciliation commentsand calculations on page nine of today's press release.

Earlier today, Helmerich & Payne reported record netincome of $449.3 million or $4.27 per diluted share for our fiscal year, justended September 30. This compares with net income of $293.9 million or $2.77per 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 andinsurance settlements. Net income for 2006 included $0.16 per share fromsimilar transactions.

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

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

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

Average US land rig revenue per day rose by $265 over theprevious 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 13,263rig activity days, up 7% above the previous quarter. All of these statisticscome when many contractors are reporting sequential net reductions in rigmargins and activity. Hans and John will comment more about these encouragingstatistics in just a minute.

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

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

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

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

Hans Helmerich

Thanks, Doug. Good morning everybody. We're pleased toreport the company's highest all-time year end results. This accomplishment isthe third consecutive year of record-setting results and in some ways, moresatisfying as it comes a year after the cycle peaked out in terms of day ratehighs.

Why more satisfying? Because our strategy was never based oncyclical highs and rig scarcity where demand has to outstrip supply to makethis an attractive business; where customers pay more for any available rig. We'velong believed a more enduring approach is enabling customers to attain lowertotal well costs through the industry's safest, newest and most innovative landfleet.

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

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

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

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

This dilemma was reflected in recent public comments as ourpeers pondered the trade-offs between market share and price discipline. Thatsounds a little like the classic prisoner's dilemma with the logical bestchoice being price discipline, since after all, the market drives demand. Contractorshave to fight against being reduced in a soft environment to engaging in adownward spiral of rig-on-rig price destruction.

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

Take a look at last year in terms of margins and activity bycomparing the fourth quarter of fiscal 2007 to that of 2006. Our average rigmargin per day, in the USland 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 averagenumber of active rigs increased by 38% year-over-year, while that of our fourlargest peers combined experienced a net reduction of 14%. We passed the pointwhere competitors can credibly position idle, old equipment as future operatingleverage.

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

In strong up-cycles, the natural rate of attrition isartificially interrupted until supply comes back into some equilibrium. Itturns out the capacity concerns surrounding new builds are being shouldered bythe industry's oldest and least capable equipment, as they should be. Are theretoo many old rigs? That seems to be the question. But in any event, there arenot too many new builds. They represent the customers' tool of choice for thefuture.

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

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

John Lindsay

Good morning. In the last call, we stated that the majortheme in the USwas how operators continue to find best value available in the FlexRig atpremium pricing in spite of the plentiful number of very old rigs, idle andavailable in the market at lower rates. We believe that this remains theoverwhelming theme today.

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

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

A few important data points regarding US land. Today, wehave 94% activity with 151 out of the 159 rigs working, up eight rigs since thelast 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 willbe completed by the third fiscal quarter of 2008. The eight stacked rigs areprimarily designed for deeper well depths. They're 2,000 and 3,000 horsepowerconventional rigs, and the market that these rigs target will probably remainsoft. Therefore, we don't expect these rigs to contribute in the first fiscalquarter.

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

Average rig revenue per day for H&P's entire US landsegment increased sequentially by 1% or $265 per day. We expect average rigrevenues per day to continue to increase for rigs under term contracts, whilecontinuing to decrease for rigs in the spot market. This would result inrelatively 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 improvementwhich we fully intend to capture going forward. We continue to have discussionswith 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 builtthe first 32 FlexRig3’s from 2002 to 2004. We continue to be pleased with theprospects ahead given our proven FlexRig performance.

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

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

Two platform rigs remain idle and are currently beingmarketed. Two potential customers have expressed interest in contracting eachof these idle platform rigs and we're currently negotiating what appear to be goodprospects for these rigs. In summary, by mid-year, we expect to have eight ofnine rigs operating in the offshore segment. So overall, we're very encouragedby our offshore outlook.

Now, turning to our international land operation, weexperienced another very good quarter and 100% year-over-year growth inoperating income on the strength of very good day rates and activity during theyear. We continue to view the market as being very robust for internationalactivity, 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 activein international operations and activity should remain at this level for theremainder of the first quarter.

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

Three of the five currently idle H&P rigs in South America have good work prospects that are currently undernegotiation and should be reactivated early in the second fiscal quarter of2008. However, several of the active H&P rigs in Ecuador may become idle inthe second quarter of fiscal 2008, as E&P companies are in the process oftrying to determine their future plans given the growing industry challenges inthat country.

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

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

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

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

In response, H&P customers employed FlexRigs ondirectional and horizontal wells 60% to 70% of the time. So, considering thesetechnical challenges, it stands to reason that the industry has reached atipping point, a segmentation in the market where proven advanced technologyrigs continue to be additive to the fleet and old conventional less capablerigs are stacked.

H&P will continue to focus on the strategy of providingthe best value to our customers by offering FlexRigs supported by the bestpersonnel, best safety record and over 300 rig years of FlexRig experience. Weexpect to be able to continue to grow our fleet both in the USand 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-AnswerSession

Operator

(Operator Instructions)

And we will go first to the site of Pierre Conner fromCapital 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 greatquarter.

John Lindsay

Thank you.

Hans Helmerich

Thanks.

Pierre Conner -Capital One Southcoast

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

John Lindsay

It doesn't really impact them in a big way. We still have anexpected 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 estimatedmargins 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 thecost side in the yearend here. Just to make sure we get a heads-up going intothe first quarter, sometimes there is a little extra accrual for workers' compand such. Could you give us thoughts on where you see the average daily USdomestic 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 likewe were beginning to get a little handle on costs and we were hoping for flatand possibly down. I think right now, I don't see any reason to expect thecosts would be increasing. I think there is still an opportunity for us to atleast, hold them flat in general. Does that answer your question?

Pierre Conner -Capital One Southcoast

Yes, absolutely. That's great. Gentlemen, I think earlieryou're going to give us a delivery schedule when you expected the additionalrigs that you've just been awarded to be delivered. And so my question is, relative to we hear a lot abouta tightness in components and such, have you ordered the components that youneed 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 thinkvery well, and our guys get credit for, is just managing that supply chain. Andso, that's the other thing that's nice today, is that we don't have these longlead times that we have to put in front of our customers so we are going to beable to begin delivery and it will be in an orderly fashion that runs throughthe first part of April. And so, we're all set up to accommodate that neworder.

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 alwaysinterested 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 commitmentsin Russia. Doyou still feel there is opportunity in Russiaremaining beyond what's sort of already been signed up with some others andwhere else is there still international opportunity?

Hans Helmerich

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

And so, yes, I think that our thoughts haven't reallychanged. We think that the FlexRig technology is going to be attractive tocustomers, both NOCs and both our current roster of strong customers. And Ithink we'll be hearing more as we go forward into this year in terms of -- wementioned, I think on a call or so ago that we didn't expect anything to reallyhappen 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 severalthings 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 theinternational markets because we know they take some more patience and at thesame time, I think we'll see some encouragement there.

Pierre Conner -Capital One Southcoast

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

Juan Pablo Tardio

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

Pierre Conner -Capital One Southcoast

Excellent. Thank you. And thanks, Doug, for your narrowingdown 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 fromHodges Capital Management. Your line is open.

Mike Breard - HodgesCapital Management

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

Hans Helmerich

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

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

Mike Breard - HodgesCapital Management

Okay. Thank you.

Operator

We'll take our next question from the site of Mike Drickamerwith 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 ormaybe it is for you. If you look at the 10 new rigs that were delivered duringthe quarter, what was the impact from those rigs on the average daily revenueand average daily margin? Did they have appreciable impact on the increases wesaw 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 duringthe quarter had significantly higher day rates than the average for thepreviously deployed rigs. So, as you expected, the average will continue to goup 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 averagedaily revenue and margin actually have decreased in the quarter?

Juan Pablo Tardio

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

Michael Drickamer -Morgan Keegan

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

Juan Pablo Tardio

It is. The returns that we've had and talked about for ouroverall 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 wantsto take this. But if we look at the eight rigs you guys have idled now, they'rein the 2,000 to 3,000 horse power range. Are there international opportunitiesfor those rigs, either you guys working them internationally or selling them tosomebody else to work internationally?

John Lindsay

Yes, Mike, I think there is an opportunity for that. We'relooking at various options for those potential moves. Right now, just the beatmarket in general in the USis pretty soft. I think a few of those rigs will potentially go back to work inthe second half of the year. And so, I see them as opportunities. But no, Ithink 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 goodoffer?

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 Conlanfrom Weeden & Company. Your line is open.

Matt Conlan - Weeden& Company

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

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

Hans Helmerich

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

So we have, as part of our supply chain, consideration forcapital spares that are necessary. And the other thing we talked about lastcall is the value of the continuity of our manufacturing effort on severalfronts in terms of people, in terms of shop, floor space, in terms of thelearning that we continue to push.

So, yes, there is a balancing of having and being prepared andagain, we face the same thing today. Even after this, what we think is a nicecontract we have several conversations going with additional builds, so we havegot 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 wouldbe considered by some spec rigs on sidelines. That's not the case, but it's avery thoughtful, managed process. And I think the big driver is the need we'regoing to have for capital spares going forward. So, it gives us someflexibility 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 andasked 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 numbersare interpreted correctly. The seven rigs that we expect to deploy during this firstfiscal quarter include three rigs that have already been deployed. So, we onlyhave four of the 11 rigs being deployed this quarter. The other seven will bedeployed 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 Macphersonfrom 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 capitalcosts for the FlexRig3s are pretty static or if you see them trending higher orlower on the margin with your most recent [comp] here?

Hans Helmerich

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

And so, that's all to I have say to your question. These mostrecent ones really reflect that average costs for Flex3 that we've been talkingabout. 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 lessexpensive than the other and we really haven't given much more granularity thanthat. But to give some comfort, yes, we're seeing flat costs as we go forwardon this most recent order.

Ian Macpherson -Simmons & Company International

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

Hans Helmerich

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

Ian Macpherson -Simmons & Company International

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

Hans Helmerich

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

So those would all, of course, be add-ons. You havemobilization increases as well. So, yes, those would all, depending on what thecustomer 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 CreditSuisse.

Arun Jayaram - CreditSuisse

Good morning, guys. Good results.

Hans Helmerich

Thank you, Arun.

Arun Jayaram - CreditSuisse

I wondered if you could comment. Your rig count is up about40 rigs on a year-over-year basis in terms of work. Can you comment a littleabout the geographic distribution of your rigs and what geographic markets inthe US are youseeing the most incremental demand?

Hans Helmerich

Arun, probably the largest demand we've seen has been in theRockies, continues to be in the Rockiesand 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 - CreditSuisse

Okay. And how big of a position do you have now in the Rockiesin 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 - CreditSuisse

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

Hans Helmerich

In the US?

Arun Jayaram - CreditSuisse

Okay.

Hans Helmerich

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

Arun Jayaram - CreditSuisse

Okay. Moving the line a little bit, in terms of yourquarterly results, your average rig margins offshore more than doubled,sequentially up about $10,000. Can you give us a sense of what that increaserelated to and is that a sustainable margin going forward? It went from $8,500a 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 youread and so, those numbers are a little clear shifting. But as we go throughthe first fiscal quarter you might expect a slight decline in operating incomeand a decline in margin per day.

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

Arun Jayaram - CreditSuisse

That's helpful. And last question, John, in your preparedremarks you mentioned that you anticipated margins being flattish for severalquarters going forward with some of the spot work being offset by highermargins from the new builds. Would that imply that margins stick around this12.2 margin level for quarters to come?

John Lindsay

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

Arun Jayaram - CreditSuisse

Okay. That's helpful, guys. Thanks.

John Lindsay

Thank you.

Operator

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

Dan Pickering - TudorPickering

Good morning, guys.

Hans Helmerich

Good morning, Dan.

Dan Pickering - TudorPickering

I just wanted to simplify the new builds, just briefly. Canyou explain a little bit why either you or the customer doesn't really want totalk about where the rigs are going and is that a competitive issue or are youdisplacing 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 lotsof information out there and we share some of that. And then, this news isrecent and so I think there may be more to be said later about it. But part ofnot giving the geographic details is I think it's easier to back into who itmight be.

Dan Pickering - TudorPickering

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

Hans Helmerich

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

Dan Pickering - TudorPickering

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

John Lindsay

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

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

Dan Pickering - TudorPickering

Okay, great.  And thenswitching gears, your $375 million capital budget, roughly how much of that ismaintenance?

Doug Fears

About $150 million, Dan.

Dan Pickering - TudorPickering

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

Doug Fears

That is correct.

Dan Pickering - TudorPickering

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

Doug Fears

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

Dan Pickering - TudorPickering

Okay, great. Thank you.

John Lindsay

Thank you.

Operator

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

Alan Laws - MerrillLynch

Good morning.

Hans Helmerich

Hi, Alan.

Alan Laws - MerrillLynch

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

Hans Helmerich

I think that we're seeing that and I think that it gives ussome encouragement because we talk to potential new customers all the time andthere is that recognition. And I think one of the best, most effectivemarketing efforts that occurs is when customer-to-customer operators aresharing just the success that they're having and that's a partnership we havewith them. As the FlexRig becomes a catalyst to a lot of the efforts they putout, so when that operator-to-operator selling occurs, it's very positive forus.

Alan Laws - MerrillLynch

Okay. Your early statement today was the challenges thatolder rigs are facing to compete even financially by cutting rigs. When youlook 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 qualityequipment, including your non-FlexRig equipment that you have out there today?

Hans Helmerich

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

Alan Laws - MerrillLynch

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

Hans Helmerich

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

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

Alan Laws - MerrillLynch

Okay. My last question had to do with -- I know you're notin the Canadian market, but there seems to be more announcement from Canadiancontractors of bringing their fast moving or new configuration equipment intothe market. Any thoughts there around added competition or are we talking aboutmore of a niche situation?

Hans Helmerich

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

Alan Laws - MerrillLynch

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

Operator

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

Mike Breard - HodgesCapital Management

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

Hans Helmerich

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

Mike Breard - HodgesCapital Management

Okay. Thank you.

Operator

And we have another follow-up question. This one is from IanMacpherson 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 kindof the range of spot day rates were for the average of the past quarter andwhere they are today?

Juan Pablo Tardio

Yes, well, if you take the average for the H&P rigs thatwere in the spot market during our fourth fiscal quarter, I think that numberis very close to 24,100 and we believe that that will slightly continue todecline 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 foryour participation. Have a great day. You may disconnect at any time.

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