Helmerich & Payne, Inc. (HP)

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Helmerich & Payne (HP)

Q4 2012 Earnings Call

November 15, 2012 11:00 am ET

Executives

Juan Pablo Tardio - Chief Financial Officer and Vice President

Hans Christian Helmerich - Chairman of The Board and Chief Executive Officer

John W. Lindsay - President, Chief Operating Officer and Director

Analysts

Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Brad Handler - Jefferies & Company, Inc., Research Division

Novid Rassouli - Dahlman Rose & Company, LLC, Research Division

Presentation

Operator

Good day, everyone, and welcome to today's program. [Operator Instructions] Please note this call may be recorded. It is now my pleasure to turn the conference over to Juan Pablo Tardio, Vice President and CFO of Helmerich & Payne. You may begin.

Juan Pablo Tardio

Thank you, and welcome, everyone, to Helmerich & Payne's conference call and webcast corresponding to the fourth quarter and fiscal year end of 2012. With us today are Hans Helmerich, Chairman and CEO; and John Lindsay, President and COO.

As usual, and as defined by the U.S. Private Securities Litigation Reform Act of 1995, all forward-looking statements made during this call are based on current expectations and assumptions that are subject to risks and uncertainties as discussed in the company's annual report on Form 10-K and quarterly reports on Form 10-Q. The company's actual results may differ materially from those indicated or implied by such forward-looking statements.

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.

I will now turn the call over to Hans Helmerich. Hans?

Hans Christian Helmerich

Thank you, Juan Pablo. We are pleased to report record revenues and all-time high net income for our 2012 fiscal year. During a year that experienced substantial headwinds across the oilfield service sector in terms of volatile energy prices and a sharply declining gas-directed rig count, it's a nice tribute to our people and their dedication that allowed us to post several all-time high marks. For example, 2012 was also our best safety year ever as the company continues to achieve the lowest recordable injury rate by a wide margin as compared to the industry and our largest competitors. Additional manufacturing and operating performance achievements set new standards during 2012 and acted to further underscore the company's organizational competencies and competitive advantages.

Speaking of organizational competency, it's easy to focus on FlexRigs and the number side of the equation and overlook the primary role that our folks play in our continuing success. But in fact, this is very much a people business, and we are convinced that a strong culture is our most sustainable strategic advantage. We think of culture as the business of encouraging genuine buy-in, company-wide, of our shared values, touchstones such as integrity, safety, innovation, teamwork, then providing the framework and the systems with the tools to see those values translated into improved field performance and long-term value creation.

Our ability to recruit and retain the best people is a top priority to building on our success going forward. The proof shows up in lots of ways. Here's one interesting snapshot. At a recent company service award dinner, we recognized the loyalty of some of our long-service employees.

Listen to the totals regarding our on-the-ground experience. In 2012, we have 911 employees with 10 or more years with H&P; we have 198 with 20 years or more; and then 69 with 30 years or more. Those may be the numbers we're most proud of today.

Before I turn the call back over to Juan Pablo and then to John Lindsay, who, you will recall, was deservedly promoted to President at our last board meeting, let me first make some comments about the broader energy landscape as we head into 2013. The volatility in the energy prices during 2012 saw natural gas prices trade below $2 an Mcf before improving significantly. However, NGL prices sank and oil prices dropped to $77 before recovering back to a range of $85 to $100, with current pricing on the low end of that range. Our sense is that oil prices within that range will result in improved activity levels as customers begin to allocate their 2013 budget dollars.

It's hard for us to see natural gas price -- prices increasing enough to add much incremental drilling activity early in 2013. In addition to a cold winter, we'd have to see stubbornly high production levels ease off and actually decline and then gain a better understanding of the true scale that associated gas provides the market. Finally, it's difficult to pinpoint the scope of the well backlog overhang. We expect customers to be patient during the first half of 2013 to allow these issues to play out more fully and to see their impact on natural gas pricing.

In addition to the energy pricing environment, improved drilling efficiencies are receiving more attention as a growing factor in sorting out the future rig activity levels. Of course, drilling efficiency is a theme we've been focused on for over 10 years, and it comes as no surprise that more and more operators see the potential of executing their drilling programs faster and with fewer rigs. As we expected, the bar is being raised for what constitutes a suitable rig and that squeeze will continue.

We have not only aggressively repositioned our fleet to nearly 100% AC rig offering, but we've also delivered significantly better performance from those rigs. For instance, our footage per day has increased by over 50% from 2007 to 2012, while at the same time average well depth has increased by over 40%. As a result of the enhanced average cost per foot, we continue to drive a compelling value proposition for our customers. And while the rest of the industry has added AC drive rigs to their U.S. land fleets, our top 3 competitors, combined, have officially retired more rigs than they have built since January of 2009.

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