Helmerich & Payne, Inc. (HP) Q3 2011 Earnings Report, Transcript and Summary

Good day, and welcome to this day's Helmerich & Payne Third Quarter Earnings Conference Call. [Operator Instructions] And I would now like to turn the call over to Vice President and CFO of Helmerich & Payne, Mr. Juan Pablo Tardio. Please go ahead, sir.

Thank you, and welcome, everyone. With us today are Hans Helmerich, President and CEO; John Lindsay, Executive Vice President and COO; and Mike Drickamer, Director of Investor Relations. As usual, all forward-looking statements made during this call are based on current expectations and assumptions that are subject to risks and uncertainties as discussed in the company's annual report on Form 10-K and quarterly reports on Form 10-Q. The company's actual results may differ materially from those indicated or implied by such forward-looking statements. We will also be making reference to certain non-GAAP financial measures such as segment operating income and operating statistics. You may find that the GAAP reconciliation comments and calculations on the last page of today's press release. I will now turn the call to Hans Helmerich, President and CEO. And after Hans, John Lindsay and I will make additional comments, and we'll then open the call for questions.

Thanks, Juan Pablo. Good morning, everyone. During the third quarter, we signed long-term contracts for 32 new builds, including today's announcement of 20 additional rig orders. Looking back, that represents the largest number of orders we have received in any single quarter, even when commodity prices were some-50% higher than they are currently. But even without record energy prices, capacity constraints are being addressed across a broad spectrum of the oilfield service industry. Large-scale efforts are already in full swing in the offshore drilling and pressure pumping space. On the land drilling side, demand is centered primarily on the shortage of available Tier 1 AC drive rigs. Today, we clearly are leading the way in what is shaping up as round 2 in the new-build replacement cycle. The market where older rigs, even those being refurbished with select new equipment, are simply now not well suited for the customer's more complex drilling requirements, and are steadily being replaced by high-performing, high-efficiency rigs. If in fact the 58 customer commitments we have announced so far this fiscal year reflect the market validation of our unique position, let me reflect briefly on some of the distinct advantages we bring to this new-build effort, and some differences that matter to customers and investors. I realize many of you on this call have toured our Greens Port facility and have seen firsthand our integrated manufacturing and how it differs from a more conventional approach widely employed by both land and offshore drilling markets. First, we've been improving and honing this process for over 10 years, prompting our assertion that we build a better rig for less. Our design and build effort starts with the end in mind. So safety is our first priority, followed by relentless focus on strong execution and performance in the field. We've stayed on task, benefiting from the same experienced folks, and avoiding the dislocations associated with a start, stop, here, now there approach. And yes, with unemployment being such a national concern, not to mention the debt ceiling fiasco, it's satisfying to know that we've helped provide hundreds of American manufacturing jobs as part of this effort. Even in the severe recent downturn, we rolled out and crewed up 14 new builds during a year that others canceled and stopped. The continuity has served us well. We shifted smoothly from between 1 and 2 rigs per month into a 3-rig-per-month cadence in January of this year. And beginning October 1, we'll step up the rate to 4 rigs per month. Even now, a large component at nearly all the other industry fleets we compete with have been fashioned by acquisitions and mergers. We hold a strong preference for organic growth, convinced it would be difficult to build brand strength on a hodgepodge of makes and models and vintage rigs. Early in our endeavor, the comment was made that our model of organic growth may be preferable, it just wasn't scalable. Well, now, more than 200-plus rigs later, the determination and hard work of our people have laid that objection to rest. And remember, this will not be our first rodeo of delivering rigs at a rate of 4 per month on time and on budget. Our approach continues to garner many advantages. Not only does it provide exceptional fleet uniformity, with all the intended benefits, it also accommodates extensive collaboration with our customers and suppliers for continued improvements and innovations. Innovation occurs in large and small ways, and is blamed through the organization from the floor hand to the lead project engineer. Most often, it is evolutionary and incremental. Our introduction of the FlexRig5 follows this approach by combining the learnings of our popular Flex 4 multi-well pad rig with the key performance drilling features of our flagship, FlexRig3, making it ideal for applications calling for drilling longer, lateral sections. The rig design is another example of our extensive collaboration with the customer's engineering and technical teams to address their drilling and development challenges. Of the new build announcements, the new FlexRig5 represents 11 of those new orders, with additional expressions of interest from other customers as they plan for expanded pad drilling applications. John is going to provide some additional color on the FlexRig5 in his comments. But finally, perhaps, the key advantage in our approach is a strong organizational orientation to consistent, repeatable field execution. I credit lots of hard work delivered from lots of people every day, who understand the value proposition of our improving performance in a safe and professional manner. All of these things, if done well, will provide us additional opportunities for growth and the creation of long-term value for our shareholders. With that, I'm going to turn the call back to Juan Pablo for some comments, and then John will follow up with his comments.

Thank you, Hans. As announced earlier today, the company reported $110 million in income from continuing operations for the third fiscal quarter, or $1.01 in diluted earnings per share. Included in the $1.01 are $0.03 of after-tax gains from the sale of portfolio securities and used equipment, partially offset by $0.02 of after-tax expenses that are unrelated to normal operations and that are attributable to the settlement of a lawsuit. Interest expense for the first 9 months of fiscal 2011 was $13.2 million, and we now expect the total for the fiscal year to be approximately $16 million. General and administrative expenses or G&A totaled $68.4 million during the first 9 months of the fiscal year. We now expect G&A to be approximately $95 million during fiscal 2011. Our income tax rate for continuing operations is at this point expected to be between 37% and 38% during the fourth fiscal quarter of 2011 and also during fiscal 2012. Total depreciation expense during the first 9 months of the fiscal year was $228.5 million and is now expected to total between $315 million and $320 million during the fiscal year. We reported $494 million of capital expenditures for the first 9 months of fiscal 2011 and are now reducing our capital expenditures estimate from $850 million to $800 million for the fiscal year. During the next few months, we will be working on an estimate for the company's fiscal 2012 capital expenditures budget. But at this time, it is expected to be similar to or greater than our mentioned estimate for fiscal 2011. As you might expect, the 58 new build FlexRigs that we have now announced during the first 10 months of this fiscal year, some of which are already active, will significantly contribute to future earnings. We estimate that once all of these 58 rigs are completed and operating under their current term contract, they will cumulatively have an annual impact on the company's net income of approximately $1.40 per share. Our investment portfolio, primarily comprised of 8 million shares of Atwood Oceanics and 967,500 shares of Schlumberger, recently had a pretax market value of approximately $490 million, and an after-tax value of approximately $310 million. I will now turn the call to John Lindsay. And after John's comments, we will open the call for questions

Thank you, Juan Pablo, and good morning. I will comment on the operational results for our 3 operating segments: U.S. land, offshore and international for the third fiscal quarter of '11 and the outlook for fourth fiscal quarter of 2011, and I'll also talk about a few trends that we're seeing in the business. Starting with the U.S. Land segment, operating income increased 8% sequentially during the third fiscal quarter, primarily as a result of taking delivery of 8 new FlexRigs with firm term contracts. And accordingly, operating income from the U.S. Land segment increased from $164 million to $177 million. Revenue days increased 6% to 18,912 days during the quarter with an average of 208 active rigs, including 135 rigs on term contracts and 73 in the spot market. Average rig revenue per day increased by $330 per day to $25,970. Average rig expense per day increased by $291 to $12,748 per day, and $189 a day of that $12,748 resulted from the settlement of a lawsuit, and is not related to normal operational expenses during the quarter. Average rig margin per day increased $39 per day sequentially to $13,222. H&P's U.S. Land fleet continues to benefit from growth in the unconventional resource plays. The FlexRig value proposition is enhanced with greater clarity of an industry undersupplied with high-performance AC drive rigs. With the announced long-term contracts supporting the construction of 20 additional FlexRigs, and including the 12 new-build commitments announced earlier this month, a total of 32 new-build contracts have been added since our last conference call in April. Along with the 20 new FlexRig commitments, we've signed a total of 77 long-term contracts in less than 18 months. Approximately 80% of these rigs are destined for shale plays. With these new commitments, our plans are to continue to deliver 3 rigs per month through September, and begin to deliver 4 rigs per month beginning in October of 2011. And including the 20 announced new builds, 42 remain under construction, 6 of the 42 are expected to be delivered during the remainder of fiscal 2011, and the remaining 36 are expected to be delivered during fiscal 2012. Considering a cadence of 4 rigs per month, 12 additional delivery slots remain in our fiscal year 2012 schedule. Hans has already made a few comments about the FlexRig5, and I would like to add the Flex 5 has preserved the key performance drilling features of our flagship, FlexRig3, and we've combined that with our bi-directional pad drilling system and a depth capacity greater than 24,000 feet of measured depths. Since 2006, H&P's U.S. Land operation has drilled in excess of 3,500 wells from over 500 pad locations with our Flex 4S multi-well pad drilling rigs. We've been committed to the belief that multi-well pad drilling will continue to gain traction for environmental reasons, as well as efficiency improvement. We also believe that extended-reach laterals will continue to increase in the lateral length as our customers desire as much access to the reservoir as economically possible for every wellbore they sink in the ground. The FlexRig5 captures that market segment, and should continue to have interest from customers as the unconventional plays are further exploited. Now the outlook remains bright for U.S. Land in the fourth fiscal quarter. We're scheduled to complete the construction of 10 contracted new-build FlexRigs during the quarter, with 4 of those rigs completed in July. Our U.S. Land total revenue days should increase by about 4% to 5% as compared to the third fiscal quarter. As of the day, we have 217 contracted rigs with H&P remaining the most active contractor in U.S. Land today. Of these 217 rigs, 141 are under term contracts, and 76 are in the spot market, including 73 FlexRigs. Our current term contract backlog includes an average of 141 rigs in the fourth fiscal quarter and an average of 126 rigs during fiscal 2012. While day rate growth continues to moderate, we expect improvement in our average term and spot rates such that the total average rig revenue per day is expected to increase between $200 and $300 per day as compared to the third fiscal quarter. As mentioned on the previous call, during high rig activity, the industry experiences cost pressures on both rig labor and maintenance and supply costs. Bearing in mind the historical perspective, we expect average operational rig expense per day to increase modestly due to general oil field inflation from a baseline cost per day of approximately $12,600. The majority of the cost increases should be contractually passed through to the customer. Now looking to our Offshore segment, where we experienced a very good quarter. Offshore segment operating income increased from the second to the third quarter by 12% to $12.5 million. Revenue days increased 3% to 638 days as we experienced more activity than previously expected. Average rig margin per day increased by $2,073 or 9% to $25,820 a day. Outlook for Offshore, as of today, the company's Offshore segment has 7 rigs active, and 2 rigs stacked. We expect Offshore revenue days for the fourth quarter to be roughly flat from third quarter levels, and average rig margin per day to decrease by 10% to 15%. Looking to our International segment, and as we discussed on our previous call, the outlook for international during the third quarter was not optimistic in terms of operating income. And accordingly, the international land operating income decreased by approximately $3 million sequentially. The primary factors driving the decrease were expenses related to winding down our operation in Mexico, downtime in Tunisia, as a result of the well-publicized civil unrest, and downtime in Argentina due to continued labor issues offset, and that was offset by increased activity in Ecuador as 2-stacked rig went back to work. Revenue days increased 1% from the second quarter to the third quarter, and average rig margin per day decreased by $1,753 a day or about 25% to $5,353 a day. As of today, the company's International Land segment has 18 active rigs and 6 rigs stacked, 5 rigs are active in Colombia, 4 in Ecuador, 4 in Argentina, 3 in Bahrain and 2 in Tunisia. Of the 6 stacked rigs, 5 are located in Argentina, and 1 is in Colombia. We expect International Land revenue days to sequentially increase by 10% to 15%, and average rig margin per day to increase by 20% to 25%. I mentioned on the last call that we've continued to be encouraged by the FlexRig performance in Bahrain, and we now have 3 rigs operating. Since then, we've signed a fourth FlexRig contract for Bahrain, and it should begin operations during the second fiscal quarter of 2012. While the growth engine for the company will remain in the U.S. Land segment, in the shorter term, the sentiment is not as positive as we would like for international operation. We believe the segment does have long-term growth potential as the unconventional shale plays spread worldwide, and FlexRigs gain traction internationally. However, we don't see that beginning to happen until late in 2012 at the earliest. In summary, the following trends are shaping the competitive landscape as a result of the unconventional resource and shale plays. To begin with, extended-reach laterals are progressively longer, and well complexity is increasing. Multi-well pad drilling is gaining acceptance in more areas. Our manufacturing or factory approach to drilling wells is required to most efficiently drill wells and move rigs. And last, technology solutions that provide safe, environmentally sound and efficient operations are required by contractors to be competitive. The ongoing dialogue with customers is encouraging regarding additional new build opportunities. H&P has a complete offering of FlexRig models to meet what the market demands with the FlexRig3, FlexRig4 and now, the FlexRig5. The Flex 5 represents an ongoing innovation effort of previous FlexRig generations aimed at targeting specific applications to satisfy market segment of extended reach, long lateral shale plays for multi-well pad drilling. Finally, we're in a great position today. H&P has built more new AC drive rigs than any contractor in the world, and we have the largest backlog of new rigs supported by firm term contracts. Our manufacturing effort and supply chain can provide new rig equipment at a 4-rig-per-month cadence, providing a clear competitive advantage. However, our greatest advantage is our people. Their innovative spirit, professionalism, customer service mindset and commitment to safety excellence is what truly defines our advantage. And now, I'll turn the call back to Juan Pablo.

Thank you, John. And Josh, we will now open the call for questions, please.

[Operator Instructions] We will take our first question from the side of Robin Shoemaker with Citi.

So can you elaborate a little on the Flex 5? Does it have some kind of new skidding system for moving around a pad, or is it just a bigger rig with more lateral drilling capability?

Robin, this is John. The Flex 5 is -- we got our bilateral system that is designed to drill wells in kind of an x-y direction. And it's also designed to drill the much deeper laterals, as we've talked about on several calls. So we have a lot more setback capacity, a lot deeper drilling capability. You have a higher hook load. And I think, as Hans talked about in his comments, it's an evolutionary process, and the Flex 5 definitely targets a different market segment than, say, the Flex 3 or the Flex 4. So we're really building and capturing what we would consider an additional market.

Okay. Good. On the guidance about the average rig rate increase in the U.S., you said $200 to $300 gain in the fourth quarter and that you're experiencing some costs, so is that revenue gain being offset by cost increases? In other words, is that the gain being part of what your contract adjustments allow you in terms of cost pressures so the margin would be flat? I didn't quite get that part.

No, we think that -- at least we're hopeful that the $200 to $300 is going to -- in revenue, we're hopeful will also corresponding into a margin improvement, again, back to the expense per day. And we've kind of set this baseline. We feel like it's around $12,600 a day. Most of the increase from quarter-to-quarter, as you know, were non-operational type increases. So we're hopeful that we'll be able to keep our cost basis there. But if there are cost increases, we believe that we'll be able to pass most of those off to the customer contractual.

Okay. Just finally then, the figure that Juan Pablo gave of $1.40 per share EPS contribution, so you said 58 rigs, so that goes back to the beginning of the most recent FlexRig building program? Was that the point you're making?

This is Juan Pablo, Robin. In fiscal 2011, we've announced 58 new FlexRigs, and that's the number that I was making reference to. But you might recall that since March 2010, we've announced more than that, I believe 77.

Okay. Right. So since the beginning, I understand. Okay.

Our next question comes from the side of Scott Gruber with Bernstein. Scott Gruber - Sanford C. Bernstein & Co., Inc.: With the increase in the rate of FlexRig deliveries before per month this fall, I believe you will be at your maximum rate. As a leading provider of horizontal capable rigs with a long history of drilling complex wellbores, you clearly have the opportunity to take -- continue taking share in this market. So do you have any plans to expand your production capacity?

This is Hans. I think what you've seen us do is be very methodical about our ramp-up. And as you know, that involves lots of moving parts and a supply chain management effort, as well as additional planning. So we've also taken the position of letting the market be the determining factor. So it's a demand-pull model, and that allows us to have all the rigs that we're talking about fully contracted. That's really in contrast to what our peers have done and their willingness to take a large part of what their intended capital spending and put that more on the spec basis versus having it contracted. So those are some of the considerations. Now if we're just cutting to can you guys go to 5 rigs, we don't have plans to do that now because we think that this move to 4 will accommodate the market demand we see. At the same time, it's never say never. And so I think we can be responsive going forward, but we know that 4 rigs is a doable number. It's a number we've done before, but it doesn't at this point mean that we have plans to go 5. Scott Gruber - Sanford C. Bernstein & Co., Inc.: But it sounds like if the demand pull materializes, it's definitely something you would consider?

It would definitely be something we consider. Scott Gruber - Sanford C. Bernstein & Co., Inc.: And then turning to Canada, is the market witnessing similar dynamics to the U.S. shift towards horizontal, shift towards liquid-rich plays, is that a market that's of interest to you to enter?

Scott, this is John. Historically, well, we haven't worked in Canada primarily due to the drilling seasons. I think it would be like any growth opportunity; we would approach it. If we've got customers that are interested in pulling us in on a demand basis and we could get the right terms and conditions and get a good return on our investment, then we'd definitely consider it. But at this stage of the game, it appears that, at least from our perspective, the U.S. is a place to be in North America, and I don't have any near visibility that we would be looking at Canada. Scott Gruber - Sanford C. Bernstein & Co., Inc.: Okay. And then one last on more of a macro question. Do you guys track your footage drilled on a per-day basis across your fleet? The reason I asked is that we hear a lot of drilling efficiency improvement quotes from the E&Ps but obviously, they're working in a variety of different basins. I'm just wondering what you're seeing in terms of efficiency improvement as an operator of a high-spec fleet that you're rather consistent in its fleet quality and operation through the cycle?

Yes, we do. We track our footage daily. We track our footage. It's really -- to look at it on a daily basis, there is a lot of factors that influence that day to day. But we do track it on a per year and a per rig basis, and there's no doubt that efficiencies have improved and have continued to go up. We've used the example before of drilling a 20,000-foot measured-depths well in the Bakken 2 years ago, 2.5 years ago. We're 45, 55 days. And today, commonly, we commonly can drill them in 15 to 17 days with an average of low 20s, and that's quite a performance improvement. But there's no doubt that, that's ongoing, and it's a function of rigs. It's a function of other downhole technologies and a lot of different things that go into play in achieving that performance. Scott Gruber - Sanford C. Bernstein & Co., Inc.: But do you have an annualized figure, even a rough figure, that would help us dimension that rate of improvement across your fleet?

Well, I could. I don't have it in front of me. Now that's something that we could take offline. We can talk about -- the other thing to consider is, as an example of 2008, we know as an industry that we're drilling a much larger percentage of wells horizontally today than we were in 2008, as an example. And so with that, there's a complexity factor that takes place, and not only complex in terms of what the drilling contractor sees, but also our customers that go in and drill in new basins and new areas, and they're changing the well profile. And it's really -- it's not a static number because in terms of the types of wells, as we've stressed, continued to stress, I can't think of anyone that's satisfied with -- if they're drilling a 4,000 or 5,000-foot lateral today, they're satisfied with that. They're pushing it to 6,000, and they're pushing it to 7,000, and so the bar is kind of moving all the time. But I think even with that considered, the efficiencies are still going up.

Our next question comes from the side of John Daniel with Simmons and Company. John Daniel - Simmons & Company International: Just a couple of questions for me. What I found interesting was how quickly the 20 new builds were signed given the earlier announcements of 12 rigs just about 3 or 4 weeks ago. Obviously, you're taking the cadence of 4 rigs per month that -- I mean, from a rate of change at this point with contract signings, can you give us any color there?

Well, it seems like, John, we had a big July last year, too. And then things slowed down corresponding with concerns of an economic downturn. And here we are today, we've got headlines that provide concern as well. So it's really hard for us to predict with much accuracy the new-build deal flow, if you will. I think the fact is we have lots of conversations going on, and we have current customers and new customers very interested. And so I know that's not putting a number on the table, but we take some encouragement from that. John Daniel - Simmons & Company International: Okay. Fair enough. Well, it's worth a try. Lots of chatter about opportunities in Argentina. John, can you just give us your thoughts about that market, and the 5 rigs that are stacked, is that a function of lack of appetite or those legacy rigs? Just some color there.

Well, the rigs that are stacked, John, in Argentina are all big rigs. They're 2,000 and 3,000-horsepower rigs, and there are some -- there is some potential there. It's not in the next quarter. We would have talked about it. I think in general, Argentina offers upside for us and for others. We've had challenges with the 4 Flex 4s that we have down there from the labor union and -- just labor union strikes and things like that. That happens to be in a different state and a different area and where you probably have heard about most of the upcoming possibilities in the different areas. So we have less concern about that. And I think there's opportunities for FlexRigs in Argentina, more FlexRigs probably more likely Flex 3s, larger FlexRigs. But again, I don't see that on the radar coming up in the next quarter or 2, but I think it's a possibility.

The next question comes from the side of Joe Hill with Tudor Pickering. Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc.: Just a little housekeeping. I remember the 205s on Perdido. And John, you talked about flat days quarter-on-quarter. Do you have any storm downtime built into that number?

No. No, we don't. Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc.: Okay. And then just thinking about the current trends in U.S. Land day rates and the moderation of increases that we've seen; the rig count obviously picked back up in the second quarter in terms of an average. What do you think is driving that? And what's the outlook for fiscal '12 look like in your estimation at this point in terms of increases?

Well, Joe, I think there's still some room to continue to push rates. I think when you look at in -- one perspective is to compare average rates today with average rates back in the peak of '08, and we're pretty well back there. We're getting close. And so that's one benchmark, and I'm just talking about the H&P average numbers. And so I think there's still some room to push. The fact of the matter is, if you look at natural gas prices and with all the excitement of the oil and liquid-rich plays, the low natural gas price still does play somewhat of a role in that dampening of the day rates. But again, I think we're going to continue to see some opportunities to increase, but there's no doubt that, at least from our perspective, it's moderated. But I think if you look at our margins and how our margins compare to others, I think we still feel pretty good about where we are. Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc.: Okay. John, if you think about the industry capacity in 2008 relative to today and the new builds that have been happening, and maybe the bifurcation in the market, and maybe we've been pushing some of the lower and conventional stuff out, what do you think about the industry's ability to address demand today relative to 2008? Is it improved? Is it not quite as good? And there's a lot of private company numbers in this type of analysis, but I just wanted your opinion on how we stood today relative to the prior peak.

A little bit of this goes back to the comment earlier about complexity of wells and efficiencies. I think a primary difference today versus 2008 is we are drilling, as an industry, a lot more wells horizontally, directionally. They're more challenging, and so there's a lot of rigs on the sideline today that are stacked that, at least in our view, aren't going to go back to work anytime soon because they're not capable of doing that work, which is why when you hear us talk about signing 77 rigs in less than 18 months, it's a result of that. It's kind of hard for me to compare because, again, the types of wells that we're drilling today are much different, much more difficult. I think in some sense, I think that the fleet is less qualified or less ready, if, in fact, the industry needed to pick up several hundred more rigs. Joe Hill - Tudor, Pickering, Holt & Co. Securities, Inc.: Okay. And that certainly supports your comment that maybe there's still some price left to push if we're not quite back to 2008 levels. And then finally, switching gears here. International has been, I don't know, more or less, limping along for the last 3 years with various different problems at any given point in time, whether it's Argentina or Venezuela or the Middle East. Are you guys thinking any differently about that business in terms of strategy? And can you kind of give us some insight as to what the original thought was behind getting into that, and whether or not that's played out, or whether this is something that you perceive as being a bigger portion of the company going forward?

Joe, this is Hans. I mean let's go back. We've been in the international markets for 52 years. And I guess I would push back a little bit on limping along. I mean you have to look at it in the context of the growth we've had in the North American market and the cycle that it's enjoyed and the resurgence that it's experiencing today. And so we're exactly where I think you would want us to be today. Looking forward, on international, we've been, I hope, very clear regarding our strategy that it is a rate-of-return-type calculation that has to compete with the opportunity cost and the things that we are seeing in the North American market. So we don't have an approach that says we have to have a certain footprint. We have to have a certain presence. We look at it as, we've been doing this a long time. We've got a good group of folks that can open up international countries or markets for us. We have, I think, the very best customer roster that is willing to sponsor us into international markets. But you don't have to look around very far to see the patience that's been required in our group to see those projects actually come to fruition, and then be profitable or worthwhile to pursue. So I think in hindsight, we would have changed some things. I wish the Mexico situation hadn't deteriorated so badly, and I think if there was a scenario, we could have built a presence there. But having said that, I'm not sure we would've played it a lot differently. And going forward, we're convinced that the type of drilling that will occur in international markets will be more complex, more challenging. It will have a shale component. All of those things are very favorable to us. We have customers that are convinced that we're the best partner to take into those markets. We've consistently said that that's a long march, and you have to be patient with it and you see it develop. But I don't think you'll see us overreach and try to just buy a beachhead or a presence in international markets without the rate of return that makes sense to our investors.

Our next question comes from the side of Tom Curran with Wells Fargo.

Hans or John, at your current manufacturing capacity of essentially 48 rigs a year, what roughly would you estimate, if you can give me a range, is your share of the industry's total current Tier 1 production capacity?

We have a lot of numbers on that. And I think that we started out, Tom, in kind of a 40% capture of the AC market. And I think today, when you look at the comparisons, and it's -- we've got a list that Juan Pablo can share with you on. I think it collects just about everybody who's announced a rig. But I think I'm thinking in kind of the terms of the big 3. We've had over 30% of the announced AC share today. And so one of the difficulties, I suppose, is making an apples-and-apples comparison. And that's complicated by, again, our contractual commitments versus spec build-outs. It's also complicated by when people talk about a new build rig, we like to make the distinction of AC drive. Our peers don't always make that distinction, and we know they're designating some of their dollars spent and refurbishments as new rigs. But in fact, they're not AC drives, and oftentimes, they're just what I said, refurbishments. So I'll let Juan Pablo or John add additional color, because I know they've done lots of analysis trying to track this, but I hope that helps.

Thank you, Hans. This is Juan Pablo. I'll just add that from the data that we can collect, we would expect capacity per year at this point to be somewhere between 100 and 200 high-technology rigs, and of course, we have a large proportion of that.

And Juan Pablo, is that for North America, or just the U.S.?

I'm thinking North America -- excuse me, I'm thinking the U.S. at this point.

Okay. That's helpful. And then with the 32 new-build awards that you won in the fiscal third quarter, could you give us some color on the specific markets they're headed into? And in particular, how many, if any, are going into the Permian?

Tom, this is John. There are some going into the Permian. I have looked at it on a -- if you consider the 77 that we've announced in just under 18 months, about 80% of those rigs went into 5 major areas, which are Eagle Ford, Cana, Woodford, Bakken, Permian and then the Fayetteville Shale. The Permian, it's got about 10% of our contracted rigs. And these last 32, I think they're maybe 1 or 2 in there, but not many.

Okay. That's helpful. The last one for me, since March 2010, over the course of securing those 77 upfront contracts, have you noticed any interesting, potentially meaningful shifts in the nature of the customers who have been awarding them too?

Well, we've had all along, really, since the downturn, we've commented on this for several quarters about how encouraged we were by a lot of new customers we were picking up. I think some of those new customers back then, today are ordering new build, so that's been positive. But yes, we've had some new customers come to us over the last few announcements, and we're pleased with that. We continue to have a larger percentage of our customer of new build awards being from majors and large independents. We still -- we're contracting rigs with the smaller guys, but as you can imagine on a numbers basis, it's probably 70% of the 77 are majors and large independents.

The next question comes from the side of Arun Jayaram with Credit Suisse. Arun Jayaram - Crédit Suisse AG: Just want to elaborate maybe on that last point. Historically, you guys have done very well with some of the super majors. And John, can you give us a sense of those 77 rigs you've announced over the past few quarters? How many of those were related to super majors such as Exxon? And have you seen any change in terms of behavior? Have you seen those guys as a customer group get more aggressive as highlighted by the fact that you announced, what, 32 new builds this month?

Yes, we've seen them get more aggressive. The number I gave, the 70%, I included majors and large independents, but they were -- and I don't know how it breaks out past that. But there's no doubt that they've shown some interest, and they're going to continue showing interest in new rigs.

Arun, one of the constraints, of course, we have is we're asked not to talk by name. Arun Jayaram - Crédit Suisse AG: Right. I'm just trying to get a sense of this, the majors according to the land rig newsletter data represent about 9% of the U.S. land market. But if that customer group was going to get more aggressive, then you could see that they would have a -- from a relatively low base, there'd be a lot of growth potential in terms of future demand, just given their low market share relative to the independents.

Right. And you know us well and our customer also over the years, and we've always been able to satisfy the high requirements of the majors and super majors in terms of safety and efficiency and those things. And then I mentioned just the scalability of our efforts. So all of those things work to our advantage if we see this developing trend for larger players coming back into North America wanting to increase their presence here. Arun Jayaram - Crédit Suisse AG: Okay. Let me just maybe ask one more question on that. So if you were going to say that over the recent few weeks, have the majors taken a larger percentage of these 32 new builds than versus the 77? Did you understand that question?

I would say slightly. Arun Jayaram - Crédit Suisse AG: Slightly. Okay, that's fair enough. I wanted to ask, I guess, a little bit of a follow up on the FlexRig5. What markets do you think this is best positioned for? And can you give us a sense of the construction cost, and can you build this -- these 1,500-horsepower rigs, 1,000-horsepower -- or just maybe a little more details on it.

I'll start with the markets. I really think that it's got an application in most of the basins that we drill in. And as you think about what we've talked about over the last several 3 or 4 quarters, where customers continue to push laterals, and then there continues to be more and more concerns in terms of environmental footprint and the ability to drill multiple wells, even if it's only 5 wells rather than, in some cases, where we've drilled as many as 20 wells on a pad. Even if it's 5 wells, you begin to eliminate a lot of surface disturbance issues, far fewer rig moves. You don't have trucks up and down the road. You're building less location. So I think it really has an application everywhere. Historically, for us, it has been in the Rockies and in Colorado. It's been in Wyoming. We've had -- we're doing some multi-well in the Bakken, in the Marcellus. But I think it's going to begin to trend into even some of the basins in Texas, areas that you typically wouldn't think that there would be multi-well pad drilling. So we're encouraged by that. And again, we're trying to address a need in the marketplace, and we think Flex 5 has a great potential. Arun Jayaram - Crédit Suisse AG: And just as maybe one final follow up, is the -- is it a new top drive you're using? And what makes the rig being able to drill so deep laterally versus the FlexRig3 or even the 4?

Well, obviously, you've got to have the torque requirements for the top drive, but it's a combination. It's not any one single thing. It's a combination. You got to have the top drive. You've got to have the horsepower, the mud pumps, setback capacity. All of those things have to be included. Arun Jayaram - Crédit Suisse AG: Okay. And are you building these in the 1,000-horsepower and 1,500-horsepower range? And can these be used in the Marcellus, just given the lighter truckloads and things like that?

Yes, we actually have one going to the Marcellus. So yes, there's really not any trucking issues associated with it, but it is a higher horsepower, a larger rig.

At this time, there are no further questions. So I'd like to turn the call back over to the speakers for closing remarks.

All right. Thank you, Josh, and thank you, everyone, for joining us, and have a good day.

This does conclude your teleconference. Thank you for your participation. You may now disconnect.