Helmerich & Payne, Inc.
Q1 2009 Earnings Call Transcript

Published: 29 Jan 2009

[Operator:]

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

[Doug Fears:]

Thank you, Megan, and good morning, everyone. Welcome to Helmerich & Payne's conference call and webcast to discuss the company's first quarter earnings. With us today are Hans Helmerich, President and CEO; Executive Vice President, John Lindsay; and Juan Pablo Tardio, Director of Investor Relations. As you know, most of the information provided today involves risk and uncertainties that could significantly impact expected results, and that are discussed in our most recent 10-K. We'll also be making reference to certain non-GAAP financial measures, such as segment operating income and operating statistics. You may find the GAAP reconciliation comments and calculations on the last page of today's press release. This morning, we did release that Helmerich & Payne Inc. reported record net income of $145.3 million, or $1.36 per diluted share from operating revenues of over $600 million for its first quarter ended December 31, 2008. That compares with net income of $107.8 million, or $1.02 per diluted share from operating revenues of approximately $456 million during last year's first fiscal quarter. Included in this year's first quarter net income is a penny per share of asset sales and insurance proceeds. Also included in this year's first quarter income are amounts paid as a result of early termination of term contracts. That number totaled $18 million pre-tax, or $0.11 per share after tax. These payments are a result of a combination of early termination for one new build, early termination of a term contract on a previously existing rig, and other types of early termination revenue. We expect to have additional early termination revenue this second quarter, but we prefer not to speculate on that amount at this point in time. In any case, what is important to remember is that our long-term contract cash flow is well protected. Before Hans and John make their comments, I would like to touch on a few financial details. As mentioned in the release, the company recently closed on a $105 million, 364-day unsecured bank credit facility. With this facility, the company has adequate liquidity, giving us a 2009 capital spending estimate that has been lowered to $850 million, $250 million of which was spent during the just completed first fiscal quarter. Much of the capital spending for the year relates to the new FlexRigs that are scheduled to be completed by the end of 2009. As of today, the company has approximately $160 million of total unused borrowing capacity in its bank facilities. As a result of approximately 56% of the company's US land potential revenue days working under term contracts for the remainder of fiscal 2009, and 42% during 2010, our projected need to draw on our credit lines will end during the September 2009 quarter. Substantial free cash flow will be generated beginning with the first fiscal quarter of 2010, which ends December 31, 2009. The company's debt to total capitalization ratio is currently 17%. Also, the company continues to hold large equity holdings in Atwood Oceanics and Schlumberger, totaling over $170 million of value. I will now turn the call over to Hans Helmerich, President and CEO. After Hans and John have made their comments, we will open the call to questions. Hans?

[Hans Helmerich:]

Thanks, Doug. While our first quarter earnings set record highs, they seem overshadowed by a rapidly deteriorating energy market. After peaking in October, rigs have been pushed to the sideline, as a result of a potent combination of plunging energy prices and credit markets in disarray. The resulting uncertainty has driven E&P capital spending budgets down, and slowed or shuttered a broad range of projects. The drilling industry today is reeling, caught up in a dynamic situation of rigs being idle until demand destruction slows and a pricing bottom materializes. At this stage, rigs across the board have been impacted, including an unprecedented number of FlexRigs. Once the smoke clears from this dramatic dial back, we anticipate the next stage will entail a sorting process of projects that will survive lower prices and equipment and services that will be engaged to provide the best efficiencies. As we mentioned in our previous call, the last time the industry experienced a correction of this magnitude that was in 2001 and 2002, then we saw 40% of our US land rigs become idle during the first quarter, before recovering to 84% utilization for the fiscal year. Similar to that and other down cycles, we are hopeful that the speed and the severity of the current pull back will set up a self-correcting response that will usher in a cyclical improvement. While it is too early to call at this stage when that reset will occur, we are experiencing a purging effect that seems faster and more severe than many could have imagined just a few months ago. Still, as we come out of the winter months, we expect things will get worse before they get better. The brunt of the pain will be borne by the industry's older legacy rigs. Their suitability was under scrutiny before the downturn and their competitive position will come under increasing pressure going forward. When conditions improve, they will not only compete against other legacy assets, but against an available supply of high efficiency rigs, including idle FlexRigs. We take some consolation in that our fleet profile is not only the newest and most advanced, which should continue to provide best in class performance in the spot market, but it is also well-positioned, with more contracted revenue day protection than any time in our history. That buys us time. We also derive a benefit from the remaining rig orders that continue to be delivered into the fall of this year. Those new rigs will absorb trained and experienced personnel from idle rigs and help maintain valuable continuity. We are in a strong position to wait out this storm. We will do what we have done in previous downturns

[John Lindsay:]

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

[Doug Fears:]

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

[Operator:]

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

[Waqar Syed:]

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

[Hans Helmerich:]

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

[Waqar Syed:]

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

[Hans Helmerich:]

Nine are.

[Waqar Syed:]

Nine rigs are, okay. And then in 2010?

[Hans Helmerich:]

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

[John Lindsay:]

I think we had 7.5, eight, yeah.

[Waqar Syed:]

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

[Hans Helmerich:]

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

[Waqar Syed:]

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

[Hans Helmerich:]

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

[Waqar Syed:]

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

[Hans Helmerich:]

Do you have any?

[Doug Fears:]

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

[Waqar Syed:]

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

[Hans Helmerich:]

Thank you.

[Operator:]

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

[Mike Drickamer:]

Hi. Good morning, guys.

[Hans Helmerich:]

Good morning, Mike.

[Mike Drickamer:]

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

[Hans Helmerich:]

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

[Mike Drickamer:]

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

[Hans Helmerich:]

Yeah, that's right.

[Mike Drickamer:]

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

[Hans Helmerich:]

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

[Mike Drickamer:]

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

[Hans Helmerich:]

Well, let me step back and say, this is something that we watched over the years, and we've been down there over 50 years, and there have been some years with more anxiety associated with them than others. But we've got a long-term relationship down there and, to your question about where do you move those rigs out – First of all, we expect to get paid, we expect to resolve this situation and work through this. Secondly, you've heard me say those rigs are particularly well suited for Venezuela and it's a nice fit in terms of that market down there. As you look back as well, this represents about 6% of the company's revenue, 3% of our net book value in terms of our long-term, long-lived assets. So, I don't want to minimize it, because it's something we are putting a lot of energy and effort in to. But I just want to right size it a little bit. I guess another comment on that would be, we've reduced our exposure in Venezuela on an absolute basis over the years from 22 rigs to 11 rigs, and then as we had this growth ramp in the last several years, that has acted to also reduce the exposure we have down there. So that just gives you a little more color, Mike, on our thoughts down there. What I would like to see, and what we all would, is that this thing moves forward, they get caught up, and we go back to work.

[Mike Drickamer:]

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

[Hans Helmerich:]

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

[Mike Drickamer:]

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

[Hans Helmerich:]

Thanks, Mike.

[Operator:]

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

[Arun Jayaram:]

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

[John Lindsay:]

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

[Arun Jayaram:]

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

[John Lindsay:]

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

[Arun Jayaram:]

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

[Hans Helmerich:]

Well, I think they faced declining production and maybe a little different than what has happened with different E&P companies there. I believe they recognize that they have a strategic partnership with oilfield service folks. This is very critical to their ongoing operations. So, there is a sense that it is a win-win, they need oilfield service industry there. I think the other thing is that we have a long relationship; we have good communication with those folks. I think they have every intent of continuing to work and develop. They've got the best reserves in the ground of anybody in this hemisphere. So, I think those are the things that keep us optimistic. We've got a good organization down there, and it's recognized in terms of performance by PDVSA. So, there are things that longer-term, I think, make us optimistic.

[Arun Jayaram:]

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

[John Lindsay:]

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

[Arun Jayaram:]

Okay. Louisiana?

[John Lindsay:]

East Texas is a strong market; the Haynesville is a strong market. Here recently, we have seen some softness that we hadn't seen prior in the Barnett and in the Piceance. Woodford still seems to be holding up pretty well. South Texas is holding it pretty well. Again, most of our rigs in the Rockies are on term contracts commitments. So, I don't believe we've seen some of the slowdown that others may have seen. I know the Rockies have been pretty slow.

[Arun Jayaram:]

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

[John Lindsay:]

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

[Arun Jayaram:]

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

[John Lindsay:]

Thanks, Arun.

[Operator:]

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

[Dan Boyd:]

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

[Hans Helmerich:]

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

[Dan Boyd:]

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

[Hans Helmerich:]

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

[Dan Boyd:]

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

[Hans Helmerich:]

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

[Dan Boyd:]

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

[John Lindsay:]

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

[Dan Boyd:]

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

[Hans Helmerich:]

Thanks.

[John Lindsay:]

Thanks, Dan.

[Operator:]

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

[Angie Sedita:]

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

[Hans Helmerich:]

Yeah. That's right, Angie.

[Angie Sedita:]

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

[Hans Helmerich:]

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

[Angie Sedita:]

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

[Hans Helmerich:]

Correct.

[Angie Sedita:]

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

[Hans Helmerich:]

Thanks, Angie.

[Operator:]

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

[John Daniel:]

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

[Doug Fears:]

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

[John Daniel:]

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

[John Lindsay:]

John, we actually have two Flex4s in Colombia.

[John Daniel:]

Okay.

[John Lindsay:]

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

[John Daniel:]

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

[Doug Fears:]

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

[John Daniel:]

Okay. All right. Thanks, guys.

[Hans Helmerich:]

Thank you.

[Operator:]

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

[Kevin Pollard:]

Thanks. Good morning.

[Hans Helmerich:]

Good morning.

[Kevin Pollard:]

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

[John Lindsay:]

It's really a combination, Kevin, of all. There is just going to be some conventional rigs, there is going to be some FlexRigs that are in the spot market. I mentioned in my comments about FlexRigs that are top performers in the field and those rigs are being released. I mean it's just a situation where customers really need to spend within their cash flows. So, it really doesn't matter at that stage, but it's going to be all. There is potential that there could be other rigs that would have an early termination provision. That is always possible.

[Kevin Pollard:]

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

[John Lindsay:]

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

[Kevin Pollard:]

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

[John Lindsay:]

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

[Hans Helmerich:]

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

[Kevin Pollard:]

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

[Hans Helmerich:]

Well, our contracts are pretty clear and I think they are strong. We are willing to sit down and talk with customers. We do that all the time. We are looking for a win-win. In our situation, we've spent the money and we've made that commitment and so it's not like we have legacy rigs we're trading back and forth with. I mean, we're in a situation where we spent the money and we are looking for the return on our investment. So, I think they understood that. And as you know Kevin, I mean it's a situation where just like that customer may have hedges he expects to stay in place. This kind of provides us a similar protection. We have had, in earlier stages of our order book, times when the spot rate exceeded the contract rate. It's a cyclical business and that reverses itself. So, those are things I believe the customer understands and we just work through it.

[Kevin Pollard:]

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

[Hans Helmerich:]

No. It gets back to what I said. I mean, we have worked with the customer to have a slot in our manufacturing line. We've identified that rig. We start to spend that money as soon as we sign up and so it really doesn't lend itself to what you are suggesting. Again, I think some of our peers have different contractual setups on their new builds. They also have a large overhang of legacy fleets, legacy rigs that perhaps behooves them to use as a trading item. We aren't in that situation. So, I think it would just have us go forward with what we've done, which is to protect the currency and protect the value of those contracts.

[Kevin Pollard:]

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

[Douglas Fears:]

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

[Kevin Pollard:]

Okay, thanks, guys.

[Hans Helmerich:]

Thank you.

[Operator:]

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

[Pierre Conner:]

Hi, gentlemen.

[Hans Helmerich:]

Hi, Pierre.

[Pierre Conner:]

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

[John Lindsay:]

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

[Pierre Conner:]

Okay.

[John Lindsay:]

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

[Pierre Conner:]

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

[John Lindsay:]

Yes, that is correct.

[Pierre Conner:]

Okay.

[John Lindsay:]

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

[Pierre Conner:]

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

[John Lindsay:]

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

[Pierre Conner:]

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

[John Lindsay:]

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

[Pierre Conner:]

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

[John Lindsay:]

Thanks, Pierre.

[Operator:]

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

[Mike Mazar:]

Good morning, guys.

[John Lindsay:]

Good morning.

[Mike Mazar:]

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

[John Lindsay:]

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

[Mike Mazar:]

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

[John Lindsay:]

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

[Mike Mazar:]

Sure.

[John Lindsay:]

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

[Mike Mazar:]

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

[John Lindsay:]

Okay.

[Operator:]

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

[Kevin Pollard:]

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

[Hans Helmerich:]

That is correct.

[Kevin Pollard:]

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

[Hans Helmerich:]

Yes, there's no tail on that.

[Kevin Pollard:]

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

[Hans Helmerich:]

Yeah. Thanks, Kevin.

[Operator:]

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

[Andrew Coleman:]

Thank you. Good morning, guys.

[Hans Helmerich:]

Hi, Andrew.

[Andrew Coleman:]

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

[John Lindsay:]

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

[Andrew Coleman:]

Okay.

[John Lindsay:]

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

[Andrew Coleman:]

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

[John Lindsay:]

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

[Andrew Coleman:]

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

[John Lindsay:]

Well, I think the metric as rigs go down we'll have obviously less footage. I think the average rig today makes about the same amount of footage per year as they did previously and the same number of wells. The difference is they are actually making more footage, but the difference is the well count, because the wells, rather than being a straight 10,000 foot vertical whole, it is a 14,000 foot well with 4,000 foot of lateral. So, you are going to see – it should be a direct response as rigs go down. Total footage is going to reduce, but I think on the per rig basis, the number probably won't change very much.

[Andrew Coleman:]

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

[John Lindsay:]

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

[Andrew Coleman:]

Sure, you bet. Thank you.

[Hans Helmerich:]

Thank you.

[Operator:]

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

[Mike Drickamer:]

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

[Doug Fears:]

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

[Mike Drickamer:]

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

[Doug Fears:]

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

[Mike Drickamer:]

The four that were early terminated.

[Doug Fears:]

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

[Mike Drickamer:]

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

[Doug Fears:]

Thank you.

[Hans Helmerich:]

Thank you.

[Operator:]

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

[Fred Russell:]

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

[Hans Helmerich:]

Fred, you recall, I have said, it's kind of early to see that reset take place right now. But, as you know, this is, I think, one of the concerns in the market – might the industry drill through, if you will, any softness? The way they talked about, and I think and, in fact, did in 2007 and clearly, that's not happening. I mean, we're seeing a very fast and dramatic kind of purging effect. So, it takes a little bit of time. It's little bit like the Fed lowering the discount rate. It takes a little bit of time for that to work through the system and for it to show up in supply, but if you have the number of rigs go down, that we think will become clear over these next few weeks with conference calls of our whole peer group, I think that number will be pretty clear that it's going to have an impact on supply.

[Frederick Russell:]

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

[Hans Helmerich:]

Yeah, I think that's a good question and an important point. You don't have to go back too long, in mid-2008, where things looked so strong and by that time over the year, there were already over 100 new builds announced, and there was a reasonable chance if that had continued to ramp up, we would have had several hundred new builds follow. In fact, that didn't happen, and we think that some of the new builds that were announced by the industry will go away or move to the right, or be canceled. And so, I guess one of the silver linings in all of this is, when you look at the 2,000 plus rigs that are out there, they were not too long ago working. We would guess fewer than 350 of those are high efficiency rigs. Now, we will probably add something around 100 rigs to that count. The point being, we have the largest proportion of those, and so, in a market that's still dominated by older legacy equipment, the supply and availability of high efficiency rigs is not that great and we forestalled, increased capacity into that segment. So, in some ways that puts us in a strong position as we go forward, and we don't think longer-term and I'm talking longer-term now, but we don't think the retooling effort required or necessary in this industry is over, and so we think there will be opportunities there as well.

[Frederick Russell:]

Thank you.

[Hans Helmerich:]

Thank you.

[Doug Fears:]

Thanks, Fred.

[Operator:]

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

[Unidentified Analyst:]

Good morning, guys.

[Hans Helmerich:]

Good morning.

[John Lindsay:]

Good morning.

[Unidentified Analyst:]

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

[John Lindsay:]

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

[Unidentified Analyst:]

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

[John Lindsay:]

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

[Juan Pablo Tardio:]

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

[Unidentified Analyst:]

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

[Hans Helmerich:]

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

[Unidentified Analyst:]

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

[Doug Fears:]

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

[Unidentified Analyst:]

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

[Doug Fears:]

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

[Unidentified Analyst:]

Okay. All right. Thanks, guys.

[Hans Helmerich:]

Thank you.

[Operator:]

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

[Monroe Helm:]

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

[Hans Helmerich:]

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

[Monroe Helm:]

Okay. Second question is, it seems like in this downturn, different from the '01-'02 downturn, is the fact that because the banking industry is in such trouble, a lot of these E&P companies reprise shareholder credit line to be introduced and almost commodity prices down, the reserves might be down because of year end reevaluations. Are you hearing that as an issue and links from your rigs down and what are your thoughts on that being an impediment to an upturn, once the commodity prices bottom?

[Hans Helmerich:]

Well, I think your question captures an important point, and that is, you not only have the huge fall in commodity prices, but you have the credit market situation and it raises, as I said, in a couple of ways. One is just the availability of credit in the face of falling prices, and then two, is just the uncertainty that that injects into customers' thinking and it kind of has them leapfrog ahead of potential problems. So, I think their actions in terms of idling rigs becomes more, in our mind, draconian or dramatic than it otherwise would have, absent the uncertainty surrounding what is going on in the credit market. So, what we would hope is that you get some better visibility on where commodity prices are going to be and where they go, and then maybe as demand destruction kind of adds, and we get a better sense of some stability out there. The collective sense is real biased, but I think the collective sense is, gosh, prices are too low now and they don't relate to incremental units in terms of cost of additional production. So, I think time will help and time will bring a certain stability, and that is what we are playing out.

[Monroe Helm:]

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

[Hans Helmerich:]

Well, I think the legacy rigs out there are going to be very challenged and you have a couple of things that differ from '86. One, you don't have the segmentation in the industry, where you have clearly a group, albeit a smaller group, of smaller, high efficiency rigs that are out performing. So, you have that kind of separation and distinctiveness that you did not have in '86. And then you have legacy rigs that have benefited from a great run over the last several years, and now they are going to be tested in a way they haven't been tested before.

[Monroe Helm:]

Okay. Thanks again for your comments.

[Hans Helmerich:]

Thank you.

[Operator:]

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

[Doug Fears:]

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

[Operator:]

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