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Helmerich & Payne's CEO Discusses Q2 2012 Results - Earnings Call Transcript

We will also be making reference to certain non-GAAP financial measures such as segment's 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 Helmerich

Thanks, Juan Pablo. Good morning, everyone. As we discussed our quarterly results and update our outlook going forward this morning, we will tackle the issue of increased operating expenses. But first, it may be helpful to revisit a couple of things from our comments from our previous quarterly call in January. We posed this question then of how much downward pressure would plummeting natural gas prices, overflowing storage and growing production bring to bear upon the domestic land drilling market. We spoke of this transition of rigs being redirected from dry gas targets to oil and liquid-rich targets, suggesting then that the gas-directed rig count will even now likely accelerate this declining trend. Well, that has certainly occurred and we know how the rest of the winter and early spring was the warmest since 1895, and gas prices proceeded to fall to 10-year lows.

In response, customers have been more determined to rotate and redirect their rig rosters away from dry gas efforts. As we expected, higher performing Tier 1 AC drive rigs are best positioned to make the transition, but it won't be totally seamless as it drive some transitional expenses higher.

For those rigs under the contractors, very little impact from being redirected and transitioned. In fact, we're fortunate to have a very high percentage of our U.S. land active fleet, 67% currently under long-term contracts. That number remains strong over the next 2 quarters, with an average of 157 rigs under term contract. On the other hand, for rigs on the spot market, the transition at times can involve a new customer and a new basin and incur additional costs, which can include crew retention, some mobilization costs, and often, additional maintenance items. So if rig experiences some idle time between customers, costs incurred as we hold on to most of that crew and use the opportunity to perform needed maintenance on that rig. That said, while the accelerating rotation contributed to this quarter's surprisingly higher average daily cost, it was one of several factors. We expect that as we mentioned on our last call and then later updated cost to return to a range somewhere above the $13,200 per day number. That number increased to $13,826. But if you take a slightly broader perspective when comparing our first 6 months of fiscal 2012 with the last 6 months of fiscal 2011, average costs are up $244, a more modest increase and when you compare just the last 2 quarters.

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