Helmerich & Payne Earnings Call Insights: New Builds Details and Rig Pricing Dynamics

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

New Builds Details

James Crandell – Cowen Securities: My first question has to do with new builds and that has to do both in the U.S. and Canada, could you address number one with new-builds it seems you had a very strong market share over the course of the cycle and competitors are recognizing new-builds here this year and it seems on a very short-term basis, your market share has gone down, do you think that that’s due to competitors taking less of a day rate then you’re taking or is just by chance and you will reestablish a leading market share as we go forward?

Hans Helmerich – Chairman, President and CEO: First, we know very little bit about some of the points you bring up in terms of what the day rates are, length of the term, construction cost. But if you think about the rig market today it’s been flattish at best and it’s also oversupplied even in the AC Tier 1 segment where you have 85 idle AC rigs industry-wide. The real oversupply of course is in the SCR and mechanical rig markets, and those have the challenge of not becoming more and more obsolete. So, a large part of your fleet is made up of that type of rig and you’ve been losing market share and you have new builds that are sitting on the ground and you’re a motivated seller, in terms of place and new builds. Our situation is different than that and we can afford to be more patient and we can let the market develop. We’re not playing catch up or having to rebuild our fleet. We have no mechanical rigs as you know. We’re not marketing any SCR rigs, and as our margins show, we’re not discounting day rates today to buy up our activity and our new build cadence serves kind of two purposes. One, it gives us the optimality for capital spares, but it’s – provides us an ability to respond quickly where we can take those same spares and they become building blocks for new rigs. So, when you think about a rig cycle, typically you absorb some of that overhang or some of that capacity and then you begin to have customers interested in focusing on the type of rigs they want and that’s where we think we’ll see some attractive newbuild opportunities. So we’ve said before Jim that our toughest competition for newbuilds is our own, AC drive FlexRigs and we would expect those today as 22, we would expect those rigs to be taken up in an improving environment and then that would lend itself to additional opportunities for new-builds. So all this says that we should remain patient and we are comfortable with both where our market share is and then also keeping with our manufacturing cadence.

James Crandell – Cowen Securities: You think as operators look for rigs in the future for term capabilities that there is a marked preference in the eyes of many of them for the FlexRig6 versus FlexRig3 and that you’ll see new-builds because they really want the advanced capabilities of the FlexRig6?

Hans Helmerich – Chairman, President and CEO: I think you should be talking about the Flex5. I’m glad you have that anticipation. Yeah, I think that there, we are seeing the market shift to more and more pad capable rigs. We lead in that space and I think we are going to continue to see customers look for that. We said, we’ve talked about all of our pad capable rigs are AC drive. So certainly I think that is where the future goes and we are confident that we’re going to play leading role in that. I mean remember we’ve got 15% overall market share. We’ve seen and you mentioned it kind of in your question. We’ve seen our AC market share drop just from 40% to I think 38%. One point I suppose we had 100% of that market share. But if we can bring our 15% up – everyone else is losing market share, we’re gaining market share. If we can bring that 15% up, we can withstand and be patient if we have a few basis points of the overall AC share slip. But look, we’re going to be a big player in the improving cycle and the ongoing demand for new builds…

James Crandell – Cowen Securities: One last quick one, Hans. Could Helmerich & Payne be a player for new builds up in the Horn River? There seems to be a lot of optimism about drilling for in advance of L&G requirements there and certainly they need the type of rigs that you make. Is that a market that you are looking at closely in terms of entering?

Hans Helmerich – Chairman, President and CEO: I’ll let John speak more to that, but there a couple of markets that are developing and maybe early but still, I think, we’d be well suited for.

John W. Lindsay – EVP and COO: Jim, I think from a rig quality and type of rig and the application, there is a great match. You’ve heard us say before that we’re going to move rigs on a demand pull basis. We are not going to go and try to buy up some market. If we have customer sponsorship and some of our larger customers would want to sponsor us somewhere like Canada or elsewhere. Yeah, we have interest in that. So we’ll just see how it plays out.

James Crandell – Cowen Securities: You can be – John, you think you can be cost competitive in that market with new builds with transporting them up to Horn River?

John W. Lindsay – EVP and COO: No, I don’t think that there is any question that from a cost of manufacturing and then mobilization. We mobilize rigs long distances. We have Canadian contractors that mobilize rigs obviously to the U.S., but I think there are some tax implications that are beneficial for the Canadian contractors. I don’t know that for sure, but I think that is right. So, that’s obviously a disadvantage. I wouldn’t – I don’t want to leave you with the impression that this is at top of mind and we’re really aggressively pursuing that Canadian market. I mean, as you know there’s very good Canadian contractors that have done a very good job with that market.

Rig Pricing Dynamics

Kurt Hallead – RBC Capital Markets: So, I was hoping to get a little update on what the leading-edge pricing dynamics for the AC class rigs, both in terms of what the spot market dynamic is and then what you think the pricing dynamic is for these long-term contract commits that you’ve already discussed? Can you give us some indication on how these pricing dynamics have changed over the course of the past quarter?

John W. Lindsay – EVP and COO: Kurt, this is John. In general, I think, if you look at the last quarter and what we’re talking about going into the fourth quarter as our spot pricing, we’ve estimated it being down 2% to 3%, that shows the spot. When you say leading edge as you can imagine, we have different models of FlexRigs and so some are larger, some are smaller, so there’s a range there in general I would kind of frame it in a mid-20s type of ballpark, but again there us lot of range there depending on the operating area, is it winterized area is it non-winterized area, what’s the size of the equipment, but overall for us. The trend has been – has softened a little bit and it has since a year ago. But as we’ve said, I feel like we’ve held our own from that perspective, because of our performance. Did I answer your question, was there more color you wanted there?

Kurt Hallead – RBC Capital Markets: I think, I wasn’t quite sure on that leading edge in the mid-20s, is that for your contract dynamic or you’re still referring to spot pricing on that?

Hans Helmerich – Chairman, President and CEO: Well that’s spot pricing. Term contract pricing obviously is higher than that. As far as new-build pricing would be again it’s going to be dependent upon the operating area. So in some cases it’s going to be above mid-20s in some cases it’s going to be below mid-20s.

Kurt Hallead – RBC Capital Markets: In light of the general lack of sense of urgency for putting new rigs to work or the increased drilling efficiency however you want to put it. What’s your sense on how your customers are looking at spending plans in the second half of the year do you get a sense that given the recent bump you indicated in your press release, but with the recent bump in oil prices are you already getting an indication that E&P companies are going to increase their spend in the second half of the year versus the first half of the year?

Hans Helmerich – Chairman, President and CEO: Well. I think what we are hearing is the improvement in commodity prices has been off of plan and you know that they did a lot of their budgeting in the 80, 85 range and stress test that down to 70 to 75 and I think that’s the world they expected to see and now, we’re in a world where we have prices in excess of $100. So, I think what we’re hearing anecdotally from folks is that, hey that’s going to help, that’s going to make a difference, that’s going to drive cash flows, natural gas pricing is better than we had, budgeted as well and I think all of that moves, yes, into an emboldened outlook for the rest of this calendar year and then certainly, we’ll get some momentum going, assuming commodity prices hold, get some momentum going into ’14. So, I think that we’re hearing a more upbeat sense from our customers and discussions.

A Closer Look: Helmerich & Payne Earnings Cheat Sheet>>