Helmerich & Payne, Inc. (HP)

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Helmerich & Payne (HP)

Q1 2012 Earnings Call

January 31, 2012 11:00 am ET

Executives

Juan Pablo Tardio - Chief Financial Officer and Vice President

Hans Helmerich - Chief Executive Officer, President and Director

John W. Lindsay - Chief Operating Officer and Executive Vice President

Analysts

William Cornelius Conroy - Pritchard Capital Partners, LLC, Research Division

John M. Daniel - Simmons & Company International, Research Division

Waqar Syed - Goldman Sachs Group Inc., Research Division

Scott Gruber - Sanford C. Bernstein & Co., LLC., Research Division

Brad Handler - Crédit Suisse AG, Research Division

David Wilson - Howard Weil Incorporated, Research Division

James D. Crandell - Dahlman Rose & Company, LLC, Research Division

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

Robin E. Shoemaker - Citigroup Inc, Research Division

John Patrick Moore - Harpswell Capital Management, LLC

Presentation

Operator

Good day, everyone, and welcome to today's program. [Operator Instructions] Please note this call will be recorded. [Operator Instructions] It's now my pleasure to turn the call over to Juan Pablo Tardio, Vice President and CFO. Please go ahead, sir.

Juan Pablo Tardio

Thank you, and welcome, everyone, to Helmerich & Payne's Conference Call and Webcast corresponding to the first quarter of fiscal 2012. With us today are Hans Helmerich, Chairman and CEO; and John Lindsay, Executive Vice 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 to Hans Helmerich, Chairman and CEO. And after Hans, John Lindsay and I will make additional comments, and we'll then open the call for questions.

Hans Helmerich

Thanks, Juan Pablo. Good morning, everyone. As the company continues to grow, we hit 3 notable milestones for our most recent quarter. We recorded our all-time record level of income from continuing operations. We also reached our best-ever levels for revenue and rig activity for the last quarter.

On this call, we will detail some of the drivers that enabled this performance and walk through some of our expectations going forward into 2012, including some moderation in the second quarter as daily expenses returned to more expected levels from this quarter's significantly reduced number.

Before that discussion, let me comment for a moment just on the dire state of the natural gas market. Prices are plummeting. We see storage overflowing and an ample behind of pipe supply, so the question becomes how much downward pressure may this bring to bear upon the domestic land drilling market?

Clearly, a combination of these factors in previous cycles would have resulted in a predictable drop of the rig count. In fact, for decades, natural gas pricing was the single most important barometer for the overall rig count. Today, oil and liquids-rich gas have transformed the domestic drilling landscape. Oil-directed drilling has been on a steady march up, while dry gas drilling has lost ground.

And while the gas-directed count will even now most likely accelerate its decline trend, many expect any fall out to be partially or fully offset by displaced rigs being redirected to oil and liquids-rich targets. This transition that has been underway since the summer of 2008 and may well become more pronounced and impactful. It has been combined with the transition towards more complex well design and higher performance rig requirements.

We would expect higher-performing Tier 1 AC drive rigs will be best positioned to make the transition while older underperforming rigs will be more likely to be less sidelined, unable to secure the customer sponsorship to be mobilized and recast for other work. It has become type of a zero-sum game where oil and liquids-rich gas continues to gain over dry gas and where high-efficiency rigs continue to displace mechanical and SCR rigs.

We're fortunate to have a customer roster with substantial multiyear drilling inventory capable of shifting targets and taking advantage of strong oil prices. Also, we're well-positioned with the most modern and capable fleet in the industry and by having that historically small exposure in terms of rigs focused on dry gas. Less than 10% of our total active U.S. fleet is currently engaged in dry gas directed drilling on the spot market. Additional dry gas directed rigs are under term contracts. And we would anticipate some of those to transition to oil and liquids-rich targets over time as well.

We've been asked if some demand for new builds will be satisfied by higher-end dislocated rigs during 2012. Our focus will remain the same, because we are coming off such a robust order book from 2011 that totaled 71 fully contracted new builds. We continue to deliver 4 rigs each month on time and on budget. We have 40 orders remaining in the queue, approximately 30 to complete in fiscal 2012 and 10 slotted for 2013.

Some of our peers continue to have significant numbers of their announced 2012 new build programs without contracts. We would expect to see some of those deliveries delayed, and one would think their appetite for additional spec new builds would be suppressed. In the meantime, we are solving more for 2013 as we have all but 7 slots fully contracted and spoken for in calendar 2012. Notwithstanding the added uncertainty of depressed natural gas prices, we remain upbeat that our business model of delivering premium drilling services will remain a strong demand and provide us with attractive opportunities in 2012 and beyond.

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