Helmerich & Payne, Inc. (HP)

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Helmerich & Payne (HP)

Q2 2011 Earnings Call

April 28, 2011 11:00 am ET

Executives

Juan Tardio - Chief Financial Officer and Vice President

Hans Helmerich - Chief Executive Officer, President and Director

John Lindsay - Chief Operating Officer and Executive Vice President

Analysts

Scott Gruber - Sanford C. Bernstein & Co., Inc.

Michael Mazar - BMO Capital Markets Canada

Arun Jayaram - Crédit Suisse AG

Waqar Syed - Macquarie Research

Tom Curran - Wells Fargo Securities, LLC

Unknown Analyst -

Robin Shoemaker - Citigroup Inc

Presentation

Operator

Good day, and welcome to the Helmerich & Payne, Inc. Second Quarter Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. It is now my pleasure to turn the conference over to the Vice President and CFO of Helmerich & Payne, Ms. Juan Pablo Tardio. Please go ahead.

Juan Tardio

Thank you, Mark, and welcome, everyone. With us today, are Hans Helmerich, President and CEO; John Lindsay, Executive Vice President and COO; and Mike Drickamer, Director of Investor Relations. As usual, 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 to Hans Helmerich, President and CEO. And after Hans, John Lindsay and I will make additional comments, and we'll then open the call for questions. Hans?

Hans Helmerich

Thanks, Juan Pablo. Good morning. Well, our second quarter results were somewhat disappointing after such a strong first quarter, where U.S. Land average rig revenues were up and related expenses were down even beyond our own expectations at the time. While the revenue numbers we reported this morning were in line with our expectations, our expenses were driven higher by several factors. On this call, we will talk about those things and work through some of the noise around the numbers for the second quarter, discuss the clearly positive developments announced today and address some of the opportunities we see for the remainder of 2011.

During the quarter, we incurred pretax expenses of approximately $7 million, or $0.04 per share after tax. They were unrelated to normal operations. Juan Pablo will provide some additional information related to these charges and to other unexpected quarterly increases and G&A and income tax rate.

On the positive side today, we announced new contracts for 8 additional new builds, bringing to 14 the number of awards secured since our last quarterly call. On that call, we talked about a powerful trend of customers shifting their drilling targets to oil and gas liquid-rich plays. And importantly, they are employing unconventional drilling techniques to conventional reservoirs. Increasingly, well designs are becoming more complex and incorporating longer lateral sections. This trend towards greater drilling complexity is particularly well suited to the capabilities of the FlexRig and is reflected in the number of new orders and ongoing interest being expressed by our customers. The opportunity for additional new builds is also being driven by a resurgent energy cycle with increasing energy prices now in particular oil and natural gas liquid prices and the unfolding growth ramp of shale plays. Taken together, these 3 drivers: increasing well complexity, strong oil prices and a growing scale of drilling requirements of several shale plays should provide for continuing momentum.

Longer-term, this momentum could be enhanced or sustained by additional international activity and modestly higher natural gas prices leading to a time when the gas-directed rig count stabilizes or grows instead of declining. For now, the unrest in the Middle East and low natural gas prices push out the potential of these 2 factors in 2012 and beyond.

Currently, our focus remains on strong execution. Leading field performance paves the way for additional new build opportunities. Our field performance, measured by a reduced downtime and safety, is at an all-time high level. Once orders are secured, we must execute on our manufacturing efforts, ensuring those deliveries are on time and on budget. While that is easier said than done, it is an area in which our folks have consistently excelled. We're beginning to hear of other land rig construction projects that are being delayed and experiencing cost increases. That has not been our experience. In the last 12 months, we have led the industry in delivering 26 new builds on time and on budget. We are on track to continue that performance for the 19 scheduled deliveries for the remainder of calendar 2011. Our increasing cadence to 3 rigs per month beginning last January has gone smoothly and allowed us to respond in a timely manner to increase demand.

We're well positioned to play a lead role in what we have called for some time now, a replacement cycle. A market in which customers' more complex drilling requirements are being satisfied by efficient, high-performing land rigs.

I will now ask Juan Pablo to make some further comments before John provides his operational report. Juan Pablo?

Juan Tardio

Thank you, Hans. As announced earlier today, the company reported $99 million in income from continuing operations for the second fiscal quarter, or $0.91 in diluted earnings per share. Included in the $0.91 are $0.02 of after-tax gains from the sale of used equipment and $0.04 of after-tax charges that are unrelated to normal operations and are attributable to the settlement of a lawsuit and unrelated increases in litigation accruals. The mentioned charges, equivalent to $0.04 per share, impacted our direct operating expenses as reported in the U.S. Land segment by approximately $4.8 million and our direct operating expenses as reported in the Offshore segment by approximately $500,000. The mentioned charges also impacted our total interest expense by approximately $1.7 million.

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