Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Doug Fears - Vice President and Chief Financial Officer

Hans Helmerich - President and Chief Executive Officer

John Lindsay - Executive Vice President, US and International Operations

Analysts

Pierre Connor - Capital One

Jason Ferguson - Merrill Lynch

John Daniel - Simmons and Company

Arun Jayaram - Credit Suisse

Mike Breard - Hodges Capital

Mike Drickamer - Morgan Keegan

Dan Boyd - Goldman Sachs

Doug Becker - Banc of America

Helmerich & Payne, Inc. (HP) Q3 2008 Earnings Call July 31, 2008 11:00 AM ET

Operator

Welcome to today’s teleconference. At this time, all participants are in a listen-only mode. (Operator instructions). This conference call is being recorded.

I will now turn the program over to Doug Fears, CFO. Please go ahead, sir.

Doug Fears - Vice President and Chief Financial Officer

Thank you, Heather and good morning, everyone. Welcome to Helmerich & Paynes’conference call and webcast to discuss the Company’s third quarter earnings. With us today are Hans Helmerich, President and CEO, Executive Vice President John Lindsay and Alan Orr, and Juan Pablo Tardio, Director of Investor Relations. As you know, much of the information provided today involves risks and uncertainties that could significantly impact expected results and that are discussed in our most recent 10-K. We will also be making reference to certain non-GAAP financial measures such as segment operating income and operating statistics. You may find the GAAP reconciliation comments and calculations on the last page of today's press release.

This morning Helmerich & Payne reported net income of $125.4 million or $0.18 per diluted share for its third quarter ended June 30, 2008 compared with net income of $115.4 million or $1.09 per diluted share during last year's third fiscal quarter. Included in this year's third quarter net income are $0.09 per share of after tax gains from the sale of portfolio securities and $0.40 per share from the sale of drilling equipment and insurance segment. As well as the charge equivalent to $0.07 per share from the in process research and development write-off corresponding to the previously announced acquisition of TerraVici Drilling Solutions.

Included in net income for the third quarter of fiscal 2007 were gains of $0.21 per share from portfolio and equipment sales and insurance settlements. As we’ve stated in the release all three of our drilling segments recorded improved results over the second fiscal quarter. John will give you more details, but the continued growth results primarily from newly constructed FlexRigs continuing to move to the field while utilization and average rig margins continued at high levels. Also as mentioned in the report the company announced signing the 18 long-term contracts for 18 new FlexRigs bringing to 50 the total number of new rig contracts announced for this fiscal year. John and Hans will touch more on the new build program and the current demand from the rigs. As a result of these orders our capital expenditure estimate for fiscal 2008 has moved up slightly to about $800 million, our capital budget for fiscal 2009 has not yet been completed.

During the third quarter we’ve sold 170,000 shares of our Schlumberger holdings and now on 967,500 shares of Schlumberger and 8 million shares of Atwood Oceanic. Our portfolio pre-tax market value currently is approximately $480 million. I would now like to turn the call over to Hans Helmerich, President and CEO and after Hans and John have made their comments, we will open the call up for questions. Hans?

Hans Helmerich - President and Chief Executive Officer

Thanks Doug. Good morning. The first nine months of our 2008 fiscal year have seen tremendous volatility in oil and gas prices. Since a year ago, oil prices have short of 88% before giving up 10% in the last month, natural gas prices were up a 111% over the same period so reasonably dropping by over 30%. The energy business is no stranger to price volatility. The last big runup in natural gas prices was followed by an industry rig building boom in 2005 and 2006. Some observers believe the industry is already kicked off another new build expansion this summer. Certainly the future level of natural gas pricing will influence the scale of new build opportunities. At the same time we have customers that have sponsored significant upgrades to their rig roster throughout a range of various gas pricing. We believe, this is part of a multi-year re-tooling effort that occurring in part because the new demand placed on the industry fleet exceeds it’s profile of largely older, less capable rigs.

Our company remains well positioned to lead in this effort. In the first expansion area around the company led the industry in terms of net additions with 67 announced new builds. Those familiar with the company or we recall that that growth was proceeded by a 50 rig campaign earlier in the decade where we introduced the industry’s first fast moving and high-efficiency rig, known as the FlexRig. That bit of history is useful and providing some contacts for today’s announcement of 18 additional new build orders. This announcement brings our fiscal 2007 and 2008 rig order total to 60. Perhaps more impressively, it means that 2008 with a quarter of our fiscal year remaining will be the strongest single year for our new build order book that it has ever secured, with 50 and counting, and a campaign that now stands ten years. We’ve retain several distinct advantages going forward one is the continuity of effort that we’ve sustained, we’ve a steady production of 3 or 4 rigs per month and 22 of 27 months. The difference representing months where we’ve produced 2 rigs. This is a tremendous advantage in keeping experienced people engaged, amazing organizational experience managing supply chain or related issues and providing a steady push for innovation and improvement. One example of pursuing innovation is our previously announced acquisition of TerraVici Drilling Solutions. Which is currently developing a patented system to enhance horizontally and directional drilling. This is modest and early investment once commercial will become a complementary technology to our FlexRig. Finally, the continued of effort allows for a seamless collaboration with our customers as they’ve remain very focused on improving efficiency and reducing their total well costs.

Exceeding the customers’ expectations and consistently delivering superior field results continues to drive record breaking demand for our FlexRigs. With that I’m going to ask John to make his comments.

John Lindsay – Executive Vice President, US and International Operations

Good morning. Today’s announcement of 18 additional new FlexRigs provides a fiscal year-to-date total of 50 new FlexRigs for H&P. keep in mind all 50 contracts are supported with at least a three year turn contracts. This is a clear signal of customer commitment to the FlexRig brand and the continuing strength as a retooling requirement in this business.

I will comment briefly on few important metrics of the activity and trends of our three operating segments and I’ll begin with an overview of the US land. Today we have 98% activity with the 177 out of the 181 rigs working up 11 rigs since the last webcast with an approximate average of 177 rigs working during the fourth fiscal quarter. Our currently active fleet of 177 rigs, 74 are in the spot market and the remaining 100 in pre-active rigs and which includes 92 new bills or under term contacts. So, 58% of the fleet is under term contract today. Average rig revenue per day for H&P and tier US land segment increased sequentially a $128 per day to $24,543. Although stock pricing has improved in the last few weeks and is expected to continue to improve for the quarter, we expect average rig revenues per day to remain relatively flat from quarter-to-quarter. Stock pricing improvements will be at least partially offset by the increasing number of previously ideal conventional rigs returning to the market at day rates that are low when compared to our US land fleet average which is heavily impacted by significantly higher fluctuate day rates.

Average rig margin for day for the third quarter increased by $507 to $13,365 and average rig expense per day decreased by $379 to $11,178. A future snapshot of the existing H&P US land fleet with term commitments revealed that approximately 55% and 38% of the segment’s potential revenue base corresponding to fiscal 2009 and 2010 respectively, our already contract is at attractive day rates. FlexRigs continue to deliver outstanding field performance, evidence by the signing of 33 new build FlexRigs with US lands during the last 90 days.

Now turning to our offshore operations where we had a very good quarter in the segment as a recent commencement and operations of two additional platform rigs in the Gulf of Mexico and one offshore Trinidad helped to increase average day rates. Margins and regularizations for the segment during the third quarter compared to the second quarter. Average rig margin per day increased by $8,063 to $20,128.

Average activity in the segment increased sequentially from 5.6 to 8 rigs during the quarter and as expected to remain at that level during the next two quarters. The average rig margin per day for the forth fiscal quarter is expected to remain in the low 20,000 range.

The last which is or ninth rig is currently contacted and expected to commence operations in the Gulf of Mexico in early to mid-calendar of 2009 at which time it’ll start to contribute to the segments’ operating income.

We also had improved utilization in our international operations where as expected average operating activity increased from 19.7 to 21.2 rigs. The company has sold two small conventional rigs in Ecuador during the current quarter bringing the total international rig count to 25. Today 25 of 25 rigs are active in international operations. In addition, two of the seven new FlexRigs for Latin America have been completed including one in the third quarter and one in the forth quarter and both are currently mobilizing. The first of these FlexRigs is expected to commence operations in the early in the first fiscal quarter of 2009. The remaining sectors scheduled to commence operations at the rate of one per month after that.

We expect an average of 24 to 25 active rigs for the duration of forth fiscal quarter and as expected average rig margins per day decreased to $13,071 from the second to the third fiscal quarter as a result of significant mobilization activity.

Average rig margins per day are expected to increase by 5% to 10% during the forth fiscal quarter now that 4 rigs that were mobilized from country to country have missed operations and are fully able to contribute to the bottom line.

In closing we’re very pleased that the duration of business. The retooling effort for land rigs should continue as our customers peruse more difficult wells employing horizontal and directional drilling to deliver better and more cost effective reservoir performance and shales and other unconventional place. A statistic from banker [Hughes] that reinforces this segment is following. The incremental rigs, paperwork since the start of 2008 in US land indicates 79% of the rigs are drilling horizontally and 97% of the incremental rigs are drilling horizontally, directionally or both. This increasing trend of more horizontal drilling and longer horizontal sections underlies our customers’ continued support and growing demand for H&P FlexRigs. With the demanding drilling requirements of today's rig fleet, the most efficient rig will win. Old rigs will be retired as the 30 plus year old legacy fleet is unable to satisfy operators’ desire to drill well efficiently, safely and in an environmentally friendly way.

And finally we would be remiss if we didn’t mention the importance of a strong field organization. In addition to the drilling demands placed upon the rigs quality personnel continue to be a strategically important advantage for H&P. And we believe we’ve best people in the business. Our success over the past six years growing roughly with advanced technology AC drive rigs is a result of the commitment of organizational excellence and executing on the value proposition to our customer.

And now I’ll turn the call back to Doug.

Doug Fears - Vice President and Chief Financial Officer

Thank you, John. And now, we would like to open the call to questions please.

Question-and-Answer Session

Operator

(Operator Instructions). We'll take our first question from Pierre Connor from Capital One. Please go ahead.

Pierre Connor

Good morning gentlemen.

Hans Helmerich

Good morning.

Pierre Connor

Congratulations on the additional orders. Good to see. I guess my first question it relates to that and in terms of the design that – customers are looking-forward there's more and more comment about specific, unique, etcetera. So wanted to just open it up and let you talk about if you've been pushing the envelope a little bit on designed and then in particular there’s been commentary about very unique designs for something like the Marcellus. So without giving away the competitive advantage to someone else might be designing something where do we go from here in terms of specif built rigs?

Hans Helmerich

Well, I'll take a shot at that, Pierre, and then John can add on. One advantage we have -- and it gets back to my comments about continuity -- we have been designing and making improvements in our product for ten years. And, so as we look at different areas and you mentioned some. Today we have the capability and I think as we look and I think as we take the Marsalis, we think it’s going to more than just one rig type but we think that we have designed enhancements already in-house that will address some of the challenges of that field. We also think that field will be suitable for some skid rig designs that we have lot of success with already so I think answering your question this way I think we are in very good shape with what we are able to do design wise and ready to go today for that effort.

Pierre Connor

And maybe if John was going to follow on with that it be hold in sort of what would be your interest you know I think that potentially on shore in Mexico it would be a fairly dramatic difference in types of rigs you know with somewhat coil tubing drilling capability built in and do you have an interest in pursuing that as well or with what you have in variations you can meet what you want.

John Lindsay

This is John. You know we looked at coil tubing and think that there is application for coil tubing I think one of the things that we immediately see is the fact that we drill wells and with FlexRigs and more pressure it puts on other technologies and we have been very successful in doing that. If you just look at the rig types you know Flex Three has really been the workforce in our fleet since 2002 and customers continue to really be satisfied with Flex Three design at the 1,500 horse power rig and it drilled 18, 000 foot at times even 20,000 and 21,000 foot range. So it’s very adaptable to a wide depth range. And then of course Flex4s with the fast move packages, the skid capability, really captured another market share, if you will, for us. If you look at the 33 rigs in the last 90 days, a little over half of those are Flex3 and the other half are various combinations of Flex4s. In addition to that. We have casing running that we’re providing in some cases. We have air packages. We’ve got high mobility moving packages, skid capability, there’s a lot of different things that we’re doing. Kind of building on what Hans said, it’s been a continuous improvement on each of the different generations of rigs that we’ve put together.

Pierre Connor

No, I’m sorry, go ahead.

John Lindsay

I hope that answers your question.

Pierre Connor

It does. I mean I think the threes are well suited for something like Hainesville, fours for Marcellus and what I hear is that you’re obviously continuing to evaluate other potential to fit the purpose. One last one related to that. All my questions around this potential continued expansion. Is, I would anticipate there’s more and to that extent what becomes your constraint again on additional construction? Be it components, etcetera.

Hans Helmerich

Well, I think that the big driver Pierre, is having the market demand, I mean, when -- and not to try to circle back to a continuity theme, but typically but typically, the tradeoff in trying to have manufacturing continuity is you can either have the customer request the product and in our case all the rigs we’re talking about in our new builds are three year term. So we have that type of customer demand. Or typically the trade off is well you sell select and you determine your own output. Well, we’ve been able to achieve the continuity we spoke of even having customers sponsor under term contracts. Everything that we’re producing so that’s going to be the very first piece. And then we’ve demonstrated the capability of going to a four rig per month cadence. We have the capability of doing that. Again, it will be driven by what the market is telling us to do. You mentioned and I think it’s an area we excel in, supply chain management. I think we have a group of guys that just do an outstanding job and I think we’re in good shape in that regards. So that’s kind of our approach to it and our hope is to be able to keep the business model that allows us to have that kind of customer sponsorship.

Pierre Connor

Let some other guys get a chance. I appreciate very much.

Hans Helmerich

Thanks Pierre.

Operator

Our next question comes from John Daniel from Simmons and Company. Please go ahead.

John Daniel

Hi, guys. One question for you. It seems like your competitors are becoming more aggressive with their new build programs and many have announced three year contracts. Have you seen bidding get more competitive? And given that they are getting similar duration contracts, could we assume that customers view their rigs as similar quality as the FlexRig?

Hans Helmerich

Well I will let John throw into this as well. We would like to see it be more competitive. Because we have led in both term and day rate. And I am assuming, you’re right that there are folks signing three year deals, we know of cases. The customer feeds back to us gosh we have opportunities to do something in a two year term or a one year term. And we know that they’ve said to our competitors you’re going charge that day rate, we’ll just go to a FlexRig. I mean you have to bring in some lower number for us to be interested. Again, that’s anecdotal, John. But I think what pulse we have on this is we’re still leading that effort.

John Lindsay

And John, I would agree with what Hans said. I think in general, again, this is feedback we get from our customers, is that our competitors are usually willing to do a deal in less than three years and that’s one of the things that they comment on but in general most of our customers really don’t have a big concern with three year term contracts. In fact, we have a large portion of term contracts that are four year and in some cases even longer than four year and I think in addition to the term contract it’s the pricing. Our pricing is still substantially higher in lot of cases in our competition but there is no doubt that the competition is going down the new build path and I think that’s great for the industry and its great for H&P and we welcome the challenge. And the object is to continue to get better in that’s what we are seeing in our fleet.

Hans Helmerich

And we’d love to see, John, all our competitors require a three year term, require full day rates. We think this is the part of the cycle where people willing to invest capital and new ideas back into business are to have some reward for doing that.

John Daniel

One follow up if I may. The contracts that you sign it is safe to assume that you get pass through for labor costs if they should rise over the term of the contract?

Hans Helmerich

Yes, we have inflationary protection both on labor and not only labor but also oil filled inflation, parts and supplies, which we call PPI index. And again, I think, we’re making a substantial investment and we’re protecting our investment from a margin perspective.

John Daniel

Thank you.

Hans Helmerich

Thank you.

Operator

We will take our next question from Arun Jayaram from Credit Suisse. Please go ahead.

Arun Jayaram

Hi, good morning guys. Hans, I was wondering if you could comment on what you’re seeing from the major oils, a customer group you’ve historically done very well with. We’ve seen some pretty interesting property transactions with BP and Exxon and Shell in North America, I just wanted comment on what you’re seeing from those customers?

Hans Helmerich

Well, I think that, you’re right they appear to be more interested in some of the domestic share on gas price and we take some encouragement from that, I can let John if there is anything more update than that, we haven’t I don’t think released customer list from this recent new build order. But it’s people that both majors and super independent that is continue to prefer the FlexRig. We still continue to have the concepts with majors and super majors that are contracting rigs in they are big customers of ours. But I think we are also continually encouraged by some of the smaller players that have begun to contract FlexRigs. And so we would expect that anywhere -- our current base of customers have some expansion opportunities that we’re going to be included in the mix.

Arun Jayaram

That’s helpful. And then John, I was just wondering if you could maybe elaborate on what are seeing in South America that you’re obviously adding some builds I believe for Oxey. But I was just wondering if you could comment what are seeing in Latin America and particular in Venezuela?

John Lindsay

I think Venezuela is just kind of more of the same, we have 11 rigs and it looks like the rigs are going to continue to be busy, there is obviously a demand for the services there, I don’t see its our fleet there. Receivables seem to be in good shape and its just kind of clicking along, things are going, I think, we are encouraged by Latin America in general and some growth opportunities. We’re moving FlexRigs in and they’re mobilizing now and there’s a lot of excitement in the organization to see the growth down there. But really it just seems like things are continuing on the same path that we had been on.

Arun Jayaram

Okay. And then, last question in order to achieve that four rig kind of per month cadence what kind of operational adjustments do you need to make in terms of your manufacturing capacity in order to achieve that?

John Lindsay

Well, we have and been at that pace and so there is really not big stride in terms of what you have to do on the ground to be able to go there. It gets back to what I mentioned earlier. We’re trying to be responsive to our customers and when we say the demand that would drive a four rig per month cadence, we would move there. So, I think from this is what I hear you asking you know are there certain hurdles that has to be over come to achieve that cadence and the answer is we have those well addressed.

Arun Jayaram

Okay, that’s fair. I appreciate it, thanks Hans.

Hans Helmerich

Thank you.

Operator

We will take our next question from Mike Breard of Hodges Capital. Please go ahead.

Michael Breard

That’s a great quarter. I wonder if you could just give us little more color on the [Teravicke]. Have they actually done test wells? Just maybe a little idea on what’s going on there?

Hans Helmerich

We are in a testing period its not commercial as you know Mike and so it’s going to be something we keep folks informed as we make progress. So as we look really to 2010 we are scheduled to achieve commerciality what we began to we’ll give everybody more color on what we have to do and frankly we kind of formulate on our own game plan.

Michael Breard

Ok thank you and one last question in the 18 rig that you just had ordered when will that be delivered I mean the last rig of the 18?

Juan Pablo

Mike, this is Juan Pablo. I believe our last rig at this point is scheduled to be delivered at the end of fiscal ‘09.

Michael Breard

Okay, thank you.

Operator

We will take our next question from Mike Drickamer of Morgan Keegan. Please go ahead.

Mike Drickamer

Hi, good morning guys. Great quarter.

Hans Helmerich

Thanks.

Mike Drickamer

With 32 rigs now still left to be delivered of the -- I guess 127 total, what are you guys quoting new customers as a lead time for ordering another rig right now?

Hans Helmerich

Well we are pausing because we are hesitating and give a lot of granularity with how competitive this is Mike in terms of saying well here are the slots that we have open and here because we have several conversations going on today and we know it’s a very competitive space. So, I think we are going to take a pass on giving you a whole lot of specifics on that.

Mike Drickamer

Can we say it least say 9-12 months?

Hans Helmerich

Yeah. I think if you wanted one in that time frame where we could make space for you in that time frame.

Mike Drickamer

I would appreciate that guys. Let’s go in another direction then. Looking at you know you guys start this new build program in 2005. First rigs I believe went into field in 2006. They should be rolling off contract here, I guess in 2009. Can you remind me how many of those rigs are going to roll off contract in 2009?

Hans Helmerich

Yes, beginning in our second fiscal quarter we’ll have three rig roll off and then in the following quarter Mike so the third quarter 8 and then end up the year with 9 coming off. So, 20 rigs in our fiscal ‘09 year.

Mike Drickamer

Okay. And then obviously does rigs were put on contract before we saw the big increase in rates in say the ‘06 and ‘07 time frame. If you look at where those rigs are priced relative to leading edge rates, how much of a differential there?

Hans Helmerich

Well, we are going to make the cases, there is large differential. You’re right. Your sense of that is correct. Those were bid at a time on the early end of this. And so, they would have room to go up. I’m going to let John give you if he wants to a better number of how much head room there is in a rollover for those contracts.

John Lindsay

Well, there is, it comes back to the original comment about the numbers and how much of it we want to share. There is a pretty large gap. One thing I do want to mention. The contract rate that we had at the time, today those contract rates are probable on average $2,500 a day higher as a result of what we’ve discussed all along which is we have cost protection we have cost passwords. That’s one thing to keep in mind. Those day rates are probably right at the $20,000 a day range today as opposed to being in some cases 21,000 as high teens. So, that’s part of the advantage to having the inflationary protection. So, there’s several thousand dollars difference you know where the market is today. And we’re 20, 25, 27, $28,000 a day. So, there’s an opportunity there.

Mike Drickamer

All right, guys. That’s going to be it from me. Thanks a lot.

John Lindsay

Thanks, Mike.

Operator

We’ll take our next question from Dan Boyd of Goldman Sachs. Please go ahead.

Dan Boyd

Hi, good morning. Just kind of building on that one of where margins on, are expand the most recent round of new builds, can you compared those to where some of the contracts you signed earlier this year. And can you confirm sounds like its maybe $3,000 or $4,000 below the peak you received on some new builds contracts maybe in ‘06?

Hans Helmerich

Good morning. Today’s is well; today’s pricing is very similar to what we would have seen in the peak on some of the new builds. It’s really difficult to nail it down, Dan, because we’re talking about a lot of different rigs, rig types, rig models, and customers have different requests. One of the things we’ve been pretty consistent on this, our returns, our in that high teens range. And we continue to see that. And so it’s rather that be dealing with day rates, probably prefer to stick to the returns.

Dan Boyd

Okay. Fair enough. Can you also talk, looks like you have 18 contracts here with, what is it, eight different customers. Are you seeing a different mix in the type of E&P company or the size of the E&P company that’s inquiring and willing to sign three year contracts?

Hans Helmerich

I mentioned I touched on it briefly earlier. We do still have that same solid base of customers whether they’ll be majors and large independents. But we have had a lot of interest from some smaller operators, and again, I think that’s encouraging because there seems to be kind of a light bulb if you will effect. People are starting to catch on to what we’ve been talking about in terms of the value proposition. You can pay more per day, which you can get lower total well cost and no wells delivered per year and so we’re encouraged by that and so if we have expanded our customer base and I would that we’ll continue to have opportunities to do that.

Dan Boyd

Okay lastly, given the big build out in the US, can we assume that the international adding additional rigs at the new international it can might be on hold for a moment?

Hans Helmerich

You know, it’s not the approach we were taking And you’ve heard us say before Dan, and we’ve taken an approach that says we look that says we look at this as an opportunity set. And a year ago when there was a lot of investor interest in more international expansion we looked at domestic and international business opportunities as an opportunity set then. So, we have several active conversations going internationally today where people are interested in FlexRig technology. And we still have to see a larger footprint there. At the same time our strong buyers is going to be where the best returns and what makes the most sense from an investors perspective so that’s the balancing that we don’t really have a goal in terms of here’s the fleet split we want and we’re going to drive that fleet split kind of no matter what. And so it’s being responsive to the market. But just from your question, I wouldn’t want to leave the impression that we’re on hold there because we’ve got lots of active conversations working today.

Dan Boyd

It’s fair to characterize that the returns as similar in both markets, but maybe the risk profile of adding to the US fleet as being lower?

Hans Helmerich

I think that there is -- what are seeing is that both returns and risk is more attractive in the US today and I can give you an example comes Nebraska is an area that we have people on the ground very interested in that market should be an attractive long term market that clearly is risk has gone up and the returns have gone down and as business that work frankly we do not have do but we are open to hopefully improving over the years because it is a market that holds a lot of potential so it is that kind of trade off and we are trying to do the best we can in terms of how do you risk rate these countries and we are able to get the kind of returns that make sense. We have got the people and the experience of being in international markets and there is not a blocking position someone else has out there we are not invited to the table and given an opportunity to look at things. So, it gets down to that type of thing you hit on which is the risk reward.

Dan Boyd

I appreciate that.

Hans Helmerich

Thank you.

Operator

Our next question from Doug Becker of Banc of America. Please go ahead.

Doug Becker

Thanks. Hans, we are just hoping if you could look a little bit further out and do you anticipate seeing customer demand just to find expanding you manufacturing capacity beyond four rigs per month?

Hans Helmerich

Well, we believe Doug as you know and just kind of this multi year retooling campaign that is underway and we do not know how smooth or steady it will be but to your question you know we have looked at what is the right production cadence. What fits the best? And I was very proud of our guys and being able to run in that 2007 timeframe 12 consecutive months at four rigs per month. We did that on budget, we did it on budget or we did it on time we’re given better at this. So, kind of I hear your question being well, could you go to five? That’s something that we’d be willing to examine again based on what the customer demand is. As you’ve heard us say before, a large part of our brand leadership is the field execution, having the people, training them, making sure that when we hit the ground, we’re exceeding customer expectations. So, you can’t so just for the manufacturing end of it. You have to solve for the field end of it. And again kudos to our guys and how they have performed in that regard. Those are the moving parts to the question. But it’s something that we’re constantly under examination with.

Doug Becker

Is it fair to say that it does really feel and that’s the bigger constraint in then say in manufacturing in?

Hans Helmerich

Well, it’s fair to say that what we’re most sensitive to because we haven’t had problems in attracting crews and train in folks but that’s what we’re most to watchful of in terms of the formula we are talking about.

Doug Becker

Okay. And then, just a quick house keeping item mentioned that some of the legacy rigs will be returning how many you are expecting return to the market in the up coming quarter?

Hans Helmerich

We have four stack now, I would expect one, one of those four to return in this quarter.

Doug Becker

Okay. And then, kind of reconciling that with the revenue per day guidance, one legacy rig returning doesn’t seem like that would be enough to keep rates flat sequentially. Is there another moving part there that I’m missing?

Juan Pablo

Yes, Doug, this is Juan Pablo. From quarter to quarter, the change is going to be more than one. We had an average of -- I don’t recall the exact number seven or eight in the prior quarter now we are going to have number that significantly lower than that we expect in this quarter. So quarter to quarter the change will be significant.

Doug Becker

Got you. Okay, thank you.

Juan Pablo

Thank you.

Operator

(Operator Instructions). We will take a follow up question from Pierre Connor of Capital One. Please go ahead.

Pierre Connor

Actually gentlemen, Doug exactly asked the question which was just clarification on John’s commentary about additional rigs coming into the fleet, maybe to be more specific I don’t know if you would venture out as to an average number of rigs that you can see operating in this quarter?

Hans Helmerich

In this current quarter, I think we are going to average 177 rigs which is what we have running right now.

Pierre Connor

Okay.

Hans Helmerich

We should average about 177.

Pierre Connor

Okay. That helps with your comments on Doug’s question to explain it. Thanks very much gentlemen.

Operator

We will take our next question from Jason Ferguson of Merrill Lynch. Please go ahead.

Jason Ferguson

Hey, good morning.

Hans Helmerich

Good moring.

Jason Ferguson

Just one last follow up on the manufacturing capability, I think you established, you’re pretty confident doing four per month but is there any concern with your competitors talking now more confidently about AC rig systems and top drives that is you might run into possibly constraints on component parts?

Hans Helmerich

Well, that gets us back to our supply chain management and having a sense of where all those moving parts are and one of the things that we have are, and it gets back to kind of some of the themes we’ve struck on this call the continuity makes us a very attractive customer to those folks. And so we’ve -- I believe -- put ourselves in a good position going forward on that. But, I suppose hypothetically as we go further out and depending on the scope of this new built effort from the industry, and we don’t have a great feel for where that goes in ‘09. There are things that would give you encouragement. But we’ve just managed it over the years and we don’t have any reason to think we wouldn’t continue to do so.

Jason Ferguson

Okay. And then just one last question on kind of your outlook, kind of cost guidance for next quarter and that’s my last one.

Hans Helmerich

Jason, are you talking about operating costs?

Jason Ferguson

Yes, if you would break out kind of what the $400 sequential improvement and if you expect any inflation going into the fourth quarter?

Doug Fears

It was primarily maintenance and supply, three fourths of that was maintenance and supply cost. And that’s a hard number to predict quarter to quarter. If you just look at our costs per day, we were in that band. We were in that range that you would see if you just looked at it over the last six quarters. We were probably on the low end, if you will, of that band. And I would expect that going forward, we’re going to maintain our costs in that band. At the same time, I think we all need to recognize that as strong as the market is, we’ve not had a labor increase in over a year. So, I think there’s a potential that you could see a labor increase. But fortunately, there’s a cost pass through mechanism there. So, we should be protected on our margin. But I think there is a chance that that cost would go up. I think on the M&S side, the maintenance and supply side there’s back to supply chain we have an effective supply chain group and they do a good job and I think that we’ll be able to maintain our cost increases below what you would see oil field inflation because of that supply chain management.

Jason Ferguson

Okay.

Doug Fears

I think other things that was asked earlier about just the investment side on the rig andi think what we’ve been encouraged by is being able to bill the 127 rigs in an average cost range of $15.5 million. And that’s a fully cost at $15.5 million, I mean, it’s got the real five BOP and everything in it. And so, I think that’s also a real testimony to the engineering design and supply chain and everybody really doing a great job on this call, that’s the other cost side apart you were asking about.

Jason Ferguson

Yes, okay. Thanks a lot. I’ll turn it back.

Doug Fears

Thanks.

Hans Helmerich

Thank you.

Operator

(Operator Instructions). It appears that we have no further questions at this time.

Doug Fears

Thank you, Heather, and thank you everybody for joining us today. Have a good day.

Operator

This concludes today’s teleconference. You may disconnect at any time. Thank you and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Helmerich & Payne, Inc. Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts