Helmerich & Payne, Inc. (HP)

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Helmerich & Payne Inc. (HP)

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

January 29, 2008 11:00 am ET

Executives

Doug Fears - EVP and CFO

Hans Helmerich - President and CEO

John Lindsay - EVP

Juan Pablo Tardio - Director of Investor Relations

Analysts

Waqar Syed - Tristone Capital

Mike Drickamer - Morgan Keegan & Co.

Arun Jayaram - Credit Suisse

Dan Boyd - Goldman Sachs

Angie Sedita - Macquarie Securities

John Daniel - Simmons & Company

Kevin Pollard - JPMorgan

Pierre Conner - Capital One

Mike Mazar - BMO Capital Markets

Andrew Coleman - UBS

Fred Russell - Frederick E Russell

Monroe Helm - CM Energy Partners

Monroe Helm - CM Energy Partners

Presentation

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.

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