Helmerich & Payne (HP) Q2 2012 Earnings Call April 26, 2012 11:00 am ET Executives Juan Pablo Tardio - Chief Financial Officer and Vice President Hans Helmerich - Chief Executive Officer, President and Director
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.
Also beyond some transitional cost increases, we are seeing cost pressures on several fronts. Some higher costs are driven by the steady March of more complex and challenging drilling and faster cycle times. For example, from 2010 to 2010, our average footage per day increased over 10%. Already in 2012, we have seen average footage per day increase another 10%. So on one hand, our performance continues to improve, but at the same time, simply more is being demanded from the rig.We will manage the challenge in a manner that plays to our strengths. Our success is securing premium margins that's relied on consistently reducing the customer's well cycle time. So first, we will continue to focus on safety, delivering performance efficiencies and repeatability to the customer. We have found over the years that, that often requires additional investment and can incur additional cost. At the same time, that approach is not mutually exclusive to vigorously managing the cost side of our business to inform asset-management, purchasing and innovative cost management. In balancing both sides, better efficiencies will win the day and will remain our primary focus. Going forward, we expect the average daily costs to flatten and trend slightly lower as some of the transitional issues run their course. Only 3 of the 80 rigs we have in the spot market are drilling for dry gas, and only another 3 of the dry-gas-directed rigs under term roll off during the third quarter. Read the rest of this transcript for free on seekingalpha.com