Helmerich & Payne, Inc. (HP) Q1 2008 Earnings Report, Transcript and Summary

Good day and welcome to today's teleconference. At this time, all participants are in a listen only mode. Please note this call may be recorded. I will now turn the call over to Doug Fears. Please go ahead. Douglas E. Fears – Chief Financial Officer and Vice President: Thanks Kevin and good morning everyone. Welcome to Helmerich & Payne's conference call and web cast to discuss the company's first quarter earnings. With us today are Hans Helmerich, President and CEO, Executive Vice Presidents John Lindsay and Alan Orr, and Director of Investor Relations Juan Pablo Tardio. As usual, I want to remind you that much of the information provided today involves risk and uncertainties that could significantly impact expected results and discussed in our most recent intake. 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 on page nine of today's press release. This morning, Helmerich & Payne, Inc. reported net income of $107 million or $1.02 per diluted share for its first quarter ended December 31, 2007 compared with net income of $110.8 million or $1.06 per diluted share during last year's first fiscal quarter. Included in this year's first quarter net income are aftertax gains from insurance proceeds and the sale of drilling equipment of $0.03 per diluted share. Last year's first quarter net income included $0.16 per diluted share of gains from the sale of portfolio of securities and drilling equipment. The company's U.S. land operations were over 80% of our rigs reside continued to record sequential increases in segment operating income, rig activity, and profitability. Rig activity has measured by total revenue days per U.S. land rigs increased due to more new builds being deployed. Revenue per rig day also increased sequentially, and more importantly average daily rig margins increased over the previous quarter. Hans and John will provide more detail in just a moment about the statistics and the current status of all of our drilling operations. Here are few more financial details. At December 31, the company's stock portfolio had a market value of approximately $550 million. Currently, the market value of our portfolio is approximately $430 million, or an after-tax value of approximately $2.60 per Helmerich & Payne share. Our capital expenditures for the first quarter totaled approximately $150 million. Our estimate for this fiscal year's total capital spending has been revised to $620 million. Total long-term debt at the end of the quarter was $485 million making our debt- to-total capitalization ratio of 20%. Our effective tax rate of 36.6% for the first quarter is in line with our estimate for the entire year, which is 36.4 to 37%. General and administrative expenses increased during the first quarter mostly attributable to compensation related expenses. We expect G&A for the remainder of the fiscal year to be in the $13.4 million per quarter range. I'll now like to turn the call over to Hans Helmerich, President and CEO and after Hans and John have made their comments, we'll open the call for questions. Hans? Hans Helmerich – President and Chief Executive Officer: Thanks Doug. Thanks, Doug. Good morning everyone. We're pleased with the company's first quarter results including record operating income particularly in the midst of a softer land drilling market. John and I will make additional comments on the current conditions in a moment, but first let me mention several features of the additional new build orders we announced today of 11 FlexRigs which should be encouraging news for shareholders. First, this new order brings the number of new builds to 94, all of which will be under long-term contracts. In fact, five of these latest rigs anticipate five-year terms. It also extends to 30% the portion of the order book secured after the U.S. land cycle peak in the fall of 2006, including the 17 new build and now so far in our 2008 fiscal year. In terms of market mix, seven of the eleven rigs are scheduled to be deployed in international markets allowing us to build on the FlexRigs attractiveness outside the U.S. In terms of customer mix, the remaining four are split between two independents, Quicksilver Resources and Carrizo Oil & Gas. The FlexRig is becoming the tool of choice among independents, super-independents, and majors. Taken together with the six new builds we announced on our last call, this most recent order allows us to continue our manufacturing efforts through the 2008 calendar year. We spoke on our last call to the value of the continuity of this effort. What do we expect for additional orders in 2008? We are looking back on how orders have come in, it's been difficult to predict. Moreover, it's hard to foresee the level of demand and new orders that we’ve experienced so far this year continuing at this pace. Our revised CapEx estimate that Doug mentioned of $620 million for this year captures the capital required to complete 22 FlexRigs during fiscal year 2008 and three during fiscal 2009. Of the 22 rigs mentioned, one represents the replacement of the FlexRig 2 damaged last year. The new CapEx estimate also includes maintenance capital, tubulars, offshore projects, capital spares for a growing fleet, and some forward purchasing for long lean time items in anticipation of additional new build orders. We believe the potential for further new build will continue in both domestic and international markets. International markets only have a handful of new builds, but consider even after the domestic industries, sizable capacity and during the past two years new builds constitute only 20% of the U.S. rig fleet. Further, only 10% are AC powered. These high-performing rigs have sidelined 100sof older, less capable rigs. The discredited argument that these conventional rigs were the equal to high efficiency rigs is now being taken up by the proposition that newer rigs maybe fine, but they are more suitable for more difficult drilling, and supposedly represent overkill for the majority of vertical well requirements. Well, this thinking too will fall on the wrong side of history and be overcome by powerful trends of performance and efficiency. It is said that facts are stubborn things, but all of this will take time to play out, and that’s good news and can be seen in the much reduced new bill pace for the industry in 2008, where we expect to see only one-third of last year’s industry supply response. With that said, we harbor no illusions about the competitive nature of this business. Some downward pricing pressure still exists across all the segments. We saw average rig revenue per day for the quarter fall sequentially about 2% for rigs in the U.S. land spot market. We would like to believe that this will continue to flatten, but we also know that commodity prices represent perhaps the most important dull weather for improving conditions. Heightened concerns for the potential impact of an economic slowdown adds to the uncertainty. Still, we are well-positioned to cope with future choppiness in our markets, as well as pursue additional retooling opportunities reflected in our most recent additional new rig order. Today’s results encourage us to stay the course. To continue to extend our brand leadership through a combination of strong field execution, innovative design and manufacturing capabilities, to pursue opportunities both in domestic and international markets, and to partner with the customer to reduce his well costs, through safety and efficiency. With that, I will turn the call over to John Lindsey.

Good morning. We are pleased with the operational and safety performance the company has been able to achieve during the quarter. Drilling performance and rig uptime have been catalysts for many achievements. The offshore and international segments are under some transition during the second fiscal quarter with the mobilizations of three offshore rigs, and four existing international land rigs. This should act as a spring board for a strong third quarter in each segment. The U.S. land segment should continue to demonstrate strong results and contribute over 80% of total segment operating income in the second quarter as in the first quarter. The uncertainty in the market continues to be natural gas prices, the direction of rig activity, and the magnitude of downward pricing pressure on day rates. I will give you some details of the activity and trends as we discuss our three operating segments, and first of all, we will have an overview of US land. Today we have 93% activity with 156 out of 167 rigs working, up 5 working rigs since the last webcast. Our active rig count is of 32 rigs or 26% since the webcast a year ago. All 128 existing FlexRigs are contracted today. With the latest announcement of four more new build FlexRigs, we now have 7 FlexRigs remaining in our current new build order book for U.S. land that will be completed by the end of the third fiscal quarter of 2008. The 11 idle rigs are primarily designed for deeper well depth. They are 2000 and 3000 horsepower conventional rigs, and the market that these rigs target has remained soft and therefore we don’t expect these rigs to contribute in the second fiscal quarter. Of our currently active fleet of 156 rigs, 60 are in the spot market and the remaining 96 active rigs, including 79 new builds, are under term contracts. About 55% of our potential revenue days for fiscal 2008 and just under 50% for 2009 are under term contracts. Average rig revenue per day in H&P’s entire U.S. land segment increased sequentially $340 per day to $24,006. We expect average rig revenues per day to continue to increase for rigs under term contracts while continuing to decrease for rigs in the spot market. This should result in relatively flat average rig revenues per day during the next few quarters. Average expense per day decreased by $550 from quarter-to-quarter as a result of training cost reduction, maintenance and supplies, and other expenses. As a result of the revenue increase, and expense per day decrease, average margin per day increased by $890 as compared to previous quarter. FlexRigs continue to deliver outstanding field performance, resulting in better safety results and drilling times which provide best value for our customers. The marketing effort is an important part of our strategy as discussions with new and existing customers regarding the value proposition of FlexRigs continue to generate interest. The four additional new builds announced today are the Flex 4S design. Carrizo Oil & Gas and Quicksilver resources will be utilizing these rigs in the Barnett Shale to drill horizontal and directional wells. A powerful trend continues in the Barnett Shale and other unconventional plays to utilize directional and horizontal drilling. One of the key advantages of the FlexRig 4S, in addition to the AC drive technology, is the ability to drill multiple wells from a single pad and move from well to well in a matter of hours, resulting in more wells and less surface disturbance, fewer environmental issues, noise reduction, friendly use in urban areas and less impact to surrounding communities. Next, we will have an overview of the offshore operations and as expected for the quarter, average activity in our offshore segment decreased sequentially 5.3 to 5 active rigs out of a total of 9 available rigs. As we reported in the last call, in addition to the five active platform rigs, one rig is being mobilized to Trinidad. This rig is now not expected to contribute to the second fiscal quarter, but should contribute in the third quarter. We were also successful in contracting the remaining two idle platform rigs, and they are currently waiting to mobilize and should be active toward the end of the second fiscal quarter. The ninth rig is contracted and expected to commence operations in the Gulf of Mexico in early-to-mid-calendar 2009, and is currently in the shipyard undergoing upgrades. In summary, we expect to have eight of nine rigs active in the offshore segment during the third fiscal quarter. We expect margins per day to be slightly improved for the second fiscal quarter, and up 40-60% for the third quarter. The highlight of the international segment is the announcement of seven letters of intent for new FlexRigs. We continue to view the international market as being very robust, even with the slight softening and near term activity caused by the slowdown in Ecuador. Today 19 of 27 rigs are active in international operations. Activity should improve with the mobilization of two existing rigs to Argentina, and two rigs to Colombia. All four rigs are expected to begin operations during the next few months, but will probably not contribute to the second fiscal quarter earnings. As discussed in the last call, Ecuador has experienced a slowing in activity. Two rigs are active today, two rigs are moving to Colombia and the remaining four rigs in Ecuador remain idle. Two of the idle rigs have prospects but we do not expect these to contribute to earnings in the second fiscal quarter. We anticipate an average of approximately 20 working rigs during the current quarter with margins and expenses similar to the first fiscal quarter. We estimate the third fiscal quarter should average approximately 23 rigs working with similar margins and expenses as the first and second quarter. In closing, the announcement of 17 new builds during the last two earnings calls best illustrates the continued customer support for FlexRigs both in the U.S. and international markets. We have much to be thankful for regarding the current and potential future demand for FlexRigs. H&P’s focus will remain on enhancing the value proposition to our customers. Our rigs are supported by the best personnel, best safety record and over 300 rig years of FlexRig experience. I will turn the call back to Doug.

Thanks John. We now want to open the call to questions please.

(Operator instructions). And we will go to the site of Ian McPherson. Please go ahead.

Good morning. Congratulations.

Thank you.

Hans, I think I captured that you were budgeting now for about 25 more new builds this year and going into early next year and you have 14 remaining contractually supported new builds and the other rigs that you are sort of building ahead of contracts, do you envision that being more towards the international side of the business or domestic or how do you see that split going forward?

Well, I don't think the math is quite that simple when we talk about some of the uses for the $620 million of revised CapEx. So we really are not trying to get in front of the scheduled rigs that we mentioned, but just as we look forward into what the opportunities might provide us, we would like to see some mix like we did on this last order of international and domestic, but we don't have specific projection for that.

Okay.

Ian, this is Juan Pablo, of the 25 that you mentioned do include 10 FlexRigs that have already been delivered through today in fiscal '08.

Got it. Thanks for clarifying that. Okay. I guess my follow up would, for John, I don’t know, if I missed this, if you’ve mentioned, do you expect your domestic revenues per day to stay pretty flat throughout the balance of the year. Did you indicate anything on the cost side and what you expect the cash margins to do as well?

Are you addressing the U.S. land portion?

Yes.

Yes. We expect our margins to maintain relatively flat, at least revenues to maintain relatively flat. I think there is going to continue to be cost pressures. We had a good quarter on costs, but there is a chance that it's still up slightly by a couple of 100 bucks, but again we’ve got a great focus on the cost effort. We’re going to try to achieve that same margin production that we’ve done in the last couple of quarters.

Okay. Thanks and nice quarter.

Thanks Ian

We will now go on to the site of Arun Jayaram. Please go ahead.

Good morning, guys. Nice result.

Thank you.

John, I was wondering, if you could maybe elaborate on some of the technical specs on some of the international rigs, new build you plan to deploy and just maybe comment on, maybe give us a range if you include spare parts, camps, completion tools, how much you plan to spend on a per rig basis?

Arun, we really are not in a position where we can give any details on the technical specs other than to say that they are FlexRigs and with that meaning they are AC drive, but we really cannot share anything in addition to that. On the cost side, we were looking at a cost that’s similar to what we’ve had here in the U.S. in the announcement that we have made previously.

But, are they going to include camps and such or just the cost similar to what you see in the U.S?

No, there is no camps included.

Okay. Fair enough. In the current quarter, you guys sighted rising labor cost, in Venezuela, cost for lower margins and I guess you guided the flat margin. Are those cost going to continue or what?

Well our expectation and we are hopeful that we’re going to be able to maintain the current cost structure that we just reported. Again when you take into account the number of rigs that are mobilizing in this current quarter, it's kind of hard to nail down the cost side as you can imagine. And, again we’re hoping, we are thinking it's going to be similar to the quarter that we are reporting now.

Okay. Last question is for Hans. Obviously, a very nice success with these LOIs in Latin America. I think you guys did participate also in the T N KB P tender and were not successful. I was just wondering if you could may be give us some comments about that. I think neighbors and weatherford were successful there and may be frame the bidding activity in your international opportunity set?

Sure, you are correct in the outcome of that Russian bid, and that's not the first one we've participated in and I think that on the technical side, our offering is still very attractive to the customer. It really got down to matter of price and they, I believe, took a price level that for us was clearly not attractive, and when we look at international work, we're going to be motivated by attractive returns. We don't really at this point consider loss leaders just to establish beachhead particularly in an environment of $90 plus oil. So, that's what caught us in that particular bid. Having said that, Russia is still a large market. I think it's going to be an attractive market over a long period of time that we would hope to participate in. We're also looking, as we've talk before, about North Africa, Indonesia, and there are other places in the Middle East that we're also interested in. So, I think we have a nice swatch of international opportunities that we're continuing to look at, and hopefully that will lead to additional opportunities.

Okay. And the final question, can you comment on which country these seven rigs are going to?

We are sworn to secrecy on that, so we can't give you anymore details we would like to, but we have been understandably by the customer not to share additional details.

Alright, thanks a lot guys. I'll turn it over.

Thank you.

We'll no go on to Alan Laws. Please go ahead.

Good morning guys.

Hi Alan.

I would like to say congratulations on the new orders too. It's pretty impressive actually. The first question is on international and you just sort of covered it a bit there on what the bid flow might look like for international, and then for the rigs that you've just inked, or got the LOI on, how long have you been working on this?

Well we’ve have said before Alan how and of course you know the face of international projects unfold more slowly. And so, this has been a several-month effort. We have other bids outstanding that represent months of work, as well. So that's just a feature of international work. In terms of bid flow, we continue to see international interest. I wouldn't say that it's overwhelming or so robust. I would say that it just is steady ahead, and we're encouraged by that. I'm trying to think if there was another part of your question?

No, I think that pretty much covers it. Go back to the domestic market, and your North American market share gains have been pretty impressive, and one of you could talk about your experience to date on penetrating the market service, primarily by the conventional rigs in the vertical drilling market. You eluded to in this your comments, suggesting that maybe you've already seen some gains here. I wondered if it's as impressive as the unconventional plays?

Well, I did refer to that, and the point is that I think that the FlexRig continues to perform better and better, and when we see situations where we're competing in just vertical well type situations, the FlexRig again performs very well, and is gaining ground. I think the customer sees that at some point, the conventional rig, even with a good crew, even with everything they can kind of throw at the effort there is a technical limit of what they can achieve. When they launch the FlexRig, they are seeing incremental gains that are continuing and they are very encouraged by that and encouraged by the collaboration between H&P and the customer to push that performance further and further. And so really it just addresses the notion that while the non-conventional gas, more challenging gas drilling is very well suited for the FlexRig, we are not pigeonholed or limited just to that area of work. I think as the entire spectrum of work is available to us and I'll let John add to that if there is something he wants to mention.

Yeah Alan, you probably seen our presentations and where we talked about the best value proposition where we compare a conventional rig versus a Flex3 and this happens to be in East Texas. That's all the vertical work that goes back to 2002. If you look at, again it's not just in East Texas but there are several areas where we are drilling vertical holes with FlexRigs, and we're outperforming. To use that example, when we started there, the wells were being drilled in 21 days. That was the average of the 20 best wells. And today we're drilling those wells in an average of seven, eight or nine days, and again those are straight holes. Interestingly enough even in that field they are occasionally now beginning to do directional work and looking at horizontal work even in these much harder formations. You just can't get that done with a conventional rig and that's really what people are saying. So I agree with Hans, it's not just limited to directional. It just a lot of times becomes much more evident as you try to tap these older conventional rigs with some of this more directional harder, more torque related problems.

And more importantly your customer is acknowledging that. Is that fair?

Yes that's right and I think what we are encouraged by is that, it's a current customer base as well as new customers. And so again we’re going to continue that effort, and I think every quarter, every year, it seems there is more people that kind of get the message.

Alright, I think I'll leave it at that and re-queue up and let others ask some other questions. Thanks.

Thanks Alan.

We'll now go on to Doug Becker. Please go ahead.

Thanks, I just wanted to clarify the increase in CapEx. Is that solely related to the 11 new rigs that were announced or there are some other things included?

No Doug. There are some other things included and in my comments we talked a little bit about capital spares. We've got some international projects ongoing, tubulars, so yeah it’s a mix of things.

Okay. So so what's the rough average cost of the new rigs, I know for the Flex 3 and Flex 4, I think last time you were talking about something on average around $15 million. Is that still an accurate number?

That still is an accurate number.

Okay. And, I know you were talking about the new rigs coming in, I guess seven by the end, I guess over the next two quarter. Can we get a little more granularity on the upcoming quarter, the current quarter, just the delivery schedule?

I might let Juan Pablo handle the granularity.

We expect to deliver a total of seven new FlexRigs there in the second fiscal quarter.

And should we be assuming that's evenly spaced? It just seems like you have a little bit more available rigs than we were thinking.

You know, part of that is driven by rig type and how we schedule and kind of batch those together. And so there's a little more complexity to it then what you suggest. Just to give you a little more detail there, Doug, for fiscal year '08 the expectation for the 22 rigs that were mentioned is seven completed in the first fiscal quarter, seven in the second, five in the third, and three in the fourth.

Okay. And then maybe a question for John. Are you seeing a lot of rigs from Canada come down? I know there has been a handful but is that increasing or decreasing and what are your expectations there?

You know, personally I haven't seen then but I have heard that there's rigs coming down, at least right now I wouldn't classify it as a lot of rigs, but I do know that there's a few in the Barnett, there's a few of course, in the Rockies, and that just seems to make sense. And, you know, it’s not that we haven't assigned a lot of time to it. We recognized they are coming in and recognize the situation after going through in Canada and then looking for opportunities. So, I think it’s just going to be a part of the competitive landscape as we go forward and the best rigs are going to work.

You are well positioned there. Thank you very much.

Thanks Doug.

Thank you.

We'll now go on to Mike Drickamer. Please go ahead.

Hey good morning guys.

Hello.

Hi.

Alright I maybe stating the obvious here but your comments about the new FlexRig commitments today discussed that you see similar returns to what you've announced previously. Can I take that to mean that even though the industry has seen day rates falling. You haven't day rates falling on this flex rigs you're putting into service?

No, I think you're looking it correctly that we're able to continue with the economic model that you become used to in terms of attractive financial returns and the same goes with the level of terms contracts. And so, yeah, I think we're able just to forward that same model.

Okay. And then you talked about comparable returns. Are the returns internationally, materially different than the returns domestically?

No, not, really.

Okay. And then a last one, the international rigs, some of them could be on five year contracts. And what's the thinking behind the five year contract? Is that something that you guys wanted moving into that market, is that something the client wanted? What's going on there?

Well I think the client was interested in that and their mobilizing that effort. And so they see the visibility of lots of work. So they were interested and Mike we were happy to accommodate.

Okay, great guys. That’s it for me.

Thank you.

(Operator Instructions). We'll now go on to (Waqar Syed). Please go ahead.

Congratulations on the great quarter and on these new contracts. Doug, I've question on modelling side. You mentioned that international rigs are going to be mobilized in the fourth fiscal quarter. When do you expect them to be on the payroll and how would mobilization costs be treated the expensing and all? How's that treated?

Waqar, our mobilization policy on long term contracts like that to call for amortizing the profit or loss on mobilization over the life of the contract. So we'll see whatever financial gain we have there in mobilization, amortized over the life of those contracts. So, I think in terms of the timing of the -- we'll see that really just begin in the fourth quarter as I recall for those new rigs internationally. And as you might recall the international accounting is actually a month ahead, in other words our fiscal year ends, end of August internationally. We'll see some effect in the fourth quarter. Is that right, one probably just very little, and then we will see a good chunk of a start in the first quarter of '09.

Okay, great. And then John, could you share with us the experience of FlexRig for in the Sonora field in West Texas. I understand that you have the FlexRig force there competing against the very standard or mechanical rigs in a basin that you've not worked before. Now you've some experience working there. What is the experience so far going against standard rigs in kind of simple straightforward wells?

Well as you said Waqar it’s a new area for us. We put our first rig in the field in January of '07, and I think we had our fifth one there by mid year or so. So there's been a pretty steep learning curve, and the first rig that was delivered will make, I don't know the exact number, but it’s close to 400,000 feet of hole in the first year. If you take the average of the -- if you average -- if the rig would average what it averaged in the second half of the year it would be well over 400,00 feet of hole. So I think the rigs are competing well, and I think there is evidence of some of the older rigs not working in the field. So again, we're the new kid on the block and we're learning a lot of things. But I think overall the performance is going along pretty well. Does that answer you're question?

Yeah, it does. I think that’s all I have. Thank you very much.

Thank Waqar.

We'll now go on to Mark (Inaudible). Please go ahead.

Good morning gentlemen, again my congratulations. The additional CapEx, would you expect to, It would seem to me that you're going to need to have additional funding of somewhere between 115, 117 million, would you expect that to come from new debt or asset sales?

This is Doug. If, in fact, we have more need, we would have debt facility available and of course, portfolio sales to help supplement that.

So you haven't made a decision on which it would be then.

No, not yet.

Okay.

But more likely, we will just make room in our line of credit and then sell portfolio as we have in the past, just opportunistically.

Okay. Thank you.

We will now go on to Mike Breard. Please go ahead.

Yes, excellent quarter. You mentioned in Russia that you lost some jobs because of price on the new rigs. On the U.S. contracts that you have won, are you finding that you are able to win contracts even offering a higher price, because your rigs are just flat out better than the other people or is price major sticking point with the operator.

Well, I think swinging back to Russia for just a minute what we had hoped is that, that would be all new equipment and it ended up being kind of a mix bag and yes it was, in our thinking, driven by price. In this country, the price is certainly something that everybody is just focused on, but what we are trying as you know is to promote the notion that value trumps price and value is measured by the lowering of the well cost, a lower AFE. And so, I think the customer has bought in and support that thinking, and what they see is the efficiency, and the performance of the rig drives a lower overall well cost and so, the day rate price, and we don't want to suggest, it's not important, but it is viewed in that larger context.

Okay. And there is one quick question on overseas. Halliburton has just gotten the larger order from Pemex it cover somewhat 58 well. Are you finding that Halliburton and slummer Jays of the world are potentially good customers for your foreign rates or you’re still talking to the traditional customer?

We want them to share more money with us and I think that's been -- as those projects have come out of the gate, that's been -- the difficulty is how do you share in the value creation. So, I think some of the earlier projects -- the contractor and we haven't participated in those, the contractor has felt like they’ve gotten lesser value.

Okay. All right. Thank you.

Thank you.

We will now go onto (Byron) . Please go ahead.

Wanted to ask a question about how you think about returns on capital employed for the tax rate that goes into the U.S. market versus the ones you have the LOI force that we’re that we are working in Latin America. Is there a slight trade-off there given that you’ve got five-year terms? Five of the seven that are working in Latin America, just how do you think about trade-off there for future opportunities U.S. versus Latin America.

Well I am going to avoid talking about the specifics of that deal just because we have assured the operator that we will not, but in terms of how we look at return on capital for international work. One of the aspects of it is how it compares to the opportunity set that we have here in the U.S. and our sense is that we need to gravitate to where the returns on capital are the highest for our investors, and at the same time we believe that we won't exclude international work. So it seem as an overall opportunity set and we’re trying to find those deals. The other aspects that come into play are difficulty of operations, cost, geopolitical risk, contractual elements of the projects, so there are host of other things that we pay attention to

Fair enough. Since you started the new build program for the FlexRigs that have gone to work in the U.S. market, to the extent that any of those rigs have rolled off their original contracts, are you able to hold the pricing of those rigs flat as they roll off the initial terms and again, I am not sure if there are any instances where that has been the case since you have generally had three year term contract, but just curious, and day rates for resigning and FlexRigs relative to the original signings?

Byron, this is John. We've not had any of those rigs roll off of contract yet. So we haven't gone through that exercise yet.

And then, just last question relates to kind of you're handful of the larger rigs that serve the deeper market where there still seems to be some softness. What's your bidding strategy with regard to those rigs and do you just keep them on the sidelines or is there a kind of a day rate maintains where you'd like to put those rigs to work?

We'll what's interesting about that is there's really not much to bid on. And so, when you do have a bid on one of those projects as you can imagine, it's highly competitive, and there's a lot of contractors bidding on it. I will say that of the larger rigs that we have stacked several of those are, I mean, there are rigs that are favorites of some of our customers that drill in the area that we’ve drill for in the past. So, I think when the work comes back around those rigs, those rigs will go back work at a fair market day rate. Right now, we're just not seeing a lot of opportunities to even bid on that deep of work.

Thanks guys.

Thank you.

(Operator Instructions). We will now go on to Alan Laws. Please go ahead.

Hi, guys I had a follow up story. Can you talk a little bit about cost to, it seems to us that domestic costs are kind of moderating. Are you seeing kind of roll off of the start up costs of number of the rigs or are you actually seeing easing labour costs? What's going on there in the cost side?

In the U.S land piece, yes. Part of our cost reduction is the factor of putting fewer rigs out and the training cost piece of that has an effect. At least we haven't seen any reductions in labor costs. We haven't seen any labor increases either, but I just don't expect that we will see a labor cost reduction; it's still a very highly competitive environment for the best people. And, I wouldn't expect it to go down if anything, I would expect it to go up. But we're not forecasting that. We've had some success in lowering our maintenance and supply cost and that’s been the other, really the other piece of the reduction.

Okay great, thanks. Appreciate it.

And we currently have no questions.

Okay. Well we'd like to thank everybody for joining us today. Have a good day and good bye.