Helmerich & Payne Earnings Call Insights: Market Opportunity and New Builds

Helmerich & Payne, Inc. (NYSE:HP) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Market Opportunity

Kurt Hallead – RBC Capital Markets Corp.: We have heard now from Schlumberger and Halliburton among others in expectation that the U.S. rig count will increase now about 100 to 150 between, low-point December to the end of March. I guess I am trying to gauge of that 100 to 150 what do you think the market opportunity is for Helmerich & Payne?

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Hans Helmerich – Chairman and CEO: Kurt, I will take a stab at that, this is Hans and then John can jump in as well. It’s hard to predict where that goes. I mentioned that things have started out in January a little bit slower than we thought they might have back in late November or early December. But we still believe those plans are intact and we will still see some increases rollout. But as you know from watching this business, it’s hard to – where you are going to be wrong on the upside or we are going to underestimate it. I think the point that I will make, then let John add is, we are not strapped to this overall rig count as a determining factor of how we do. I think we are going to be able in a subset of whatever the macro rig count does, continue to gain market share. I believe that as customers bring rigs back on their strong bias is going to be to bring AC drive rigs on for the better performance. So we would hope that it would prove out to be that we disproportionately gain by an improving rig count.

John W. Lindsay – President and COO: Kurt, this is John, I might add that so far, year-to-date, it’s been a little – the activity has been a little more sluggish than probably what we expected back towards the end of 2012. I mean, we’ve obviously picked up our rig count but it seems like it’s gone a little slower than at least what we expected and it seems to me if you said by the end of March, I think a 100 rigs would be pretty difficult to see by the end of March. I think it’s possible through mid-year. I think the other thing to keep in mind is the rigs that – consider what rigs are going to go back to work, if you talk about 100 rigs, you’ve got approximately 70 that are AC drive rigs, you would think those rigs would be the most likely candidates to go back to work first, and then at the same time we also have newbuild AC rigs that are being delivered, I don’t know exactly at what count, as Hans mentioned it that an estimation would be 75 for the year. So, maybe there is 30 or 35 for the first half of the year. So there is your 100 rigs, assuming that that’s going to happen.

Kurt Hallead – RBC Capital Markets Corp.: The follow-up, follow-up I have is when you indicated here, your average revenue per day progression being down 1% for the remaining nine months of 2013 relative to I guess where you exited December that excludes any near term idle rigs going back to work, so from that standpoint, based on what you know today as those new rigs come in and are contracted and the idle rigs go back at work, is there a risk that that down 1% becomes like down 3% to down 4%?

Hans Helmerich – Chairman and CEO: Kurt, first of all. I think the 1% for the rest of the year was directed to the term rig portion of the fleet. So, what we know is as we look closely at that those rigs under term have that type of small 1% diminishment. Then, stepping back, the part of it is the mix of the Flex 4s are going to come in slightly less than the 3s and 5s. So I think it’s a combination of that term and mix that led us to that prediction.

Kurt Hallead – RBC Capital Markets Corp.: But I guess and look, I mean I think that predicated what you guys indicated today about your relentless focus on costs control that’s only half of the equation, right? The other half we really got to focus on is cost and what we really need to focus on is margin per day, right? So maybe in that context on a margin per day basis what’s your perspective as the year progresses?

John W. Lindsay – President and COO: Kurt again on the term rate being down again it’s a function of the mix of the types of rigs. We haven’t seen up to this point any degradation in our pricing on Flex 3s based on what we have seen. So yes, I mean it’s possible. There is always pricing pressure out there. Even in strong markets, there is pricing pressure out there. Our position is pricing is going to be a function of performance and obviously we think we are doing a lot of things well on the performance side and we think we are going to continue to get better and so I think that’s what it’s going to be, a function of we – you say well if we bring in the 18 rigs that we have stacked today as an example. I think we could probably put those rigs to work at some deep discounted day rate but we choose not to do that. We prefer to work the rigs at what we think is a price that makes sense in the marketplace.

Kurt Hallead – RBC Capital Markets Corp.: If I just may finish out by saying you also indicated that you have your Flex4s going into the Permian, and essentially replacing conventional mechanical rigs. How does someone like myself assess that trend? It probably is accelerating, but where are we on that slope? How fast can those Flex 4s potentially displace mechanical rigs in a basin like the Permian? Aren’t there a number of E&P companies that’s still operate in the Permian that no matter how much you try to pitch their efficiency, we’ve heard them say, well, it all depends on the crew, it’s not the rig and we’re happy with the mechanical rigs. So how does someone from the outside try to assess that?

Hans Helmerich – Chairman and CEO: Paul, I think it’s been a steady march and we’ve heard exactly what you’ve said for a long time and the notion was that that the Permian was an area where that was going to be the last stand for the lower performing rigs. But in fact, you’ve seen us continue to ramp our AC drive rig count there. So, it’s hard to give you a sense of speed, but we’ve just seen a steady shift over to – and part of that shift coming over to AC has been that the well complexity in the Permian continues to increase and the well design lends itself better to our type of rig offering.

New Builds

James Crandell – Dahlman Rose: Juan Pablo, how much – how many in your $800 million capital budget, how many newbuilds does that include?

Juan Pablo Tardio – VP and CFO: That includes 19 committed newbuilds to be delivered during the fiscal year Jim. The newbuild, if I may add to that, the $800 million includes about, between 50% and 60%, probably close to 55% of that includes funds for our newbuild program, and that includes the 19 rigs I mentioned, and also other funds for spare capitals to allow us to be well-prepared to respond to additional demand, not to have spare capital or capital spares for our existing fleet.

James Crandell – Dahlman Rose: When you talk about limited new construction for your own account without a contract to what magnitude would you be willing to do this in 2013?

Hans Helmerich – Chairman and CEO: Well Jim, this is Hans. You’ve heard me say, and we’ve talked about particularly coming off of, I think this is the first new order we’ve had since late spring of last year. As we manage going forward, we’re hoping and want to stay with a business model that has everything that we’ve built, which has been the case, be under term contract. At the same time, as we look forward and try to make plans and try to have this supply chain ready to respond we’ve thought well if you have a period where you’re no longer feeding that cadence would you be willing to bridge if you will with some rigs that you had built on your own account at a much reduced cadence. I think again, not our preference, but if we are asked would you, in fact, do that, yeah we would probably do that, but I believe we’re talking about a handful of rigs, half a dozen, dozen rigs. What I would expect to happen is that we would see customers stand – step up and all of those rigs would actually be spoken for. But that gives you a sense of scale of what we are thinking.

James Crandell – Dahlman Rose: To what extent and maybe John this is for you but if you look at Helmerich & Payne’s market share position AC drive rigs today its overall very strong but it does vary significantly by region where you have dominant positions in the Eagle Ford, very strong in the Bakken and some of the historical plays but say the Haynesville and the Marcellus domain too very relatively second tier market shares. To the extent we see a strong gas driven recovery and let’s just say the Haynesville and Marcellus are leading the way on the upside, to what extent do you expect Helmerich & Payne to build up to get to let’s just say with the normal market share or do you think the Company can be a leader in those markets or is the Company just sort of too far back in those markets right now?

John W. Lindsay – President and COO: Jim, in the Haynesville we were at least at one point in time we had 30 rigs – 28, 30 rigs working in the Haynesville. So we have been there and we didn’t move the rigs out, our customers actually moved those rigs and they transitioned them really pretty early in the cycle. Those rigs were mobilized to the Eagle Ford and the Permian and the Woodford pretty quickly when gas prices began to slow down. So I would expect a similar type ramp and we have been a very large – we have had large market share in both East Texas and Louisiana over the years and it’s been in line if not higher than our average market share. So that’s a really strong. area for us and we have a lot of experience. The Marcellus on the other hand, we were slow to go in and it was purposefully slow. The margins in the Marcellus for drilling contractors have been on the low end of the spectrum. If you look at the activity set in the Marcellus, it’s been heavily dominated by older mechanical rigs. Quite frankly, a lot of our longer-term customers haven’t had a lot of acreage up there. I think the other thing is, when there were the opportunities to get up there, in lot of cases, you had to mobilize — you had to take on a large portion, if not all the mobilization as a contractor to get the rigs up there and we just didn’t see that it made any sense. But I am seeing traction, we have – remember, I think maybe in the Utica today we are four, five rigs, we’ve got a handful of rigs in the Marcellus. We continue to see some interest from customers for the Marcellus. So I sure wouldn’t rule it out. I think, again, we’ve got a great rig and a great brand, and I think we are going to have the opportunity to grow in any of these basins. I think customers will sponsor us.

James Crandell – Dahlman Rose: One last quick one, Hans, do you see the international opportunities for Helmerich & Payne now as, let’s say, better than they were a year ago or two years ago? Is the outlook let’s say for, the desire for new AC drive rigs improving in enough markets, where you really see things crystallizing internationally over the next year or two?

Juan Pablo Tardio – VP and CFO: Jim, it’s a good question and you’re right in the way you frame it up. It depends on when you ask us how we feel about it. I think, as you know, we’ve been patient in regard to that market and we really want to see it be kind of a demand pull, we’ve got a great customer roster that’s capable of sponsoring us in international markets. I’m still overall bullish and think that you’ll see some traction of unconventional shales being pursued in international markets, but as you know lots in this thing. The last three or four years have been disappointing in that regard. Does ’13 look better? Yeah, I think today, we would say that we’re a little bit more upbeat about it and we are having more customer enquiries. All the while in the last couple or three years, we’ve increase the number FlexRigs that we’ve put into those markets and has been slow, but we would like to see that increase. So, I guess the reason I’m being hesitant is because it just takes longer to develop and you just have to have a lot of patients. I do think that we’re very capable of being in selective markets over there; we’re going to be very return focused. I’d like to think that when we’re talking over the next year you’ll see some improvement there.