Helmerich & Payne, Inc. (HP) Q1 2017 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to today's First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, you'll have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note, this call may be recorded. I'll be standing by should you need any assistance. And it is now my pleasure to turn the conference over to Mr. David Hardie, Manager of Investor Relations. Please go ahead sir.

Thank you, Savana. And welcome everyone to Helmerich & Payne's conference call and webcast corresponding to the first quarter of fiscal 2017. With us today are John Lindsay, President and CEO; and Juan Pablo Tardio, Vice President and CFO. John and Juan Pablo will be sharing some comments with us, after which we'll open the call for questions. As usual and as defined by the U.S. Private Securities Litigation Reform Act of 1995, 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 the GAAP reconciliation comments and calculations on the last page of today's press release. I'll now turn the call over to John Lindsay.

Thank you, Dave. Good morning, everyone and thank you again for joining us on the call. We're pleased with the improving outlook in the U.S. land market. The downturn has been a challenging two-year journey and H&P has been preparing for the opportunity this upturn presents. The company has seen significant increases in rig activity levels and market share over the last few months. I believe our people have responded in a remarkable fashion both in terms of the number of rigs activated and the value provided to customers and ultimately to shareholders. There are three main areas I'd like to turn your attention to this morning; first is the success we've had in reactivating FlexRigs. Our customers have added FlexRigs in all of the U.S. basins in which we work. Second, I will provide an update to our FlexRigs super-spec upgrade program and our progress in providing the right rig for our customer drilling program. Finally I'll discuss a timely CapEx increase which aligns with our outlook for the next two quarters and supports our ability to continue to build market share. First let's discuss our success in reactivating FlexRigs. Since the last earnings call on November 17 of '16 we have put 36 FlexRigs to work which is the equivalent to delivering a FlexRigs to active status every 47 hours. Of those rigs, 21 are in the spot market and 15 on term contract. Although spot pricing remains low, we are seeing some pricing improvements for high quality high performing AC drive rigs. The Permian led the way with 12 rigs, six each and the Eagle Ford and SCOOP and STACK play we had three in the Haynesville, two each in the Marcellus, Utica and Piceance basins and one a piece in the Niobrara, Woodbine and Texas Gulf Coast. From a FlexRig model perspective, 23 out of 36 were FlexRig 3s, two were FlexRig 4s, and 11 were FlexRig 5s. As we commented on the last call, we continue to have great demand for the FlexRig 3. It is workhorse of the fleet and delivers great value for the customer on single well and pad locations. Of these 36 rigs approximately two-third were classified as super-spec. We have also added 11 new customers since the last call and momentum has been building as a result of the performance our folks are delivering. Even with the high delivery cadence, we have maintained problem free startups. This means safe, efficient and reliable performance right out of the gate. And this is being rewarded as evidenced by the continued demand we are seeing from customers today for rig deliveries at least through the remainder of our second fiscal quarter of 2017. Our two most active basins today are the Permian and the SCOOP and STACK play. The Permian remains our most active operation and we have 60 rigs contracted coming off a low of 38 contracted rigs and at one point last summer we only had about 23 operating rigs. We have 62 idle FlexRigs in the area, 42 of which are 1500 horsepower and we expect to continue to have opportunities to grow our active fleet in the Permian. In the SCOOP and STACK today we have 27 rigs contracted coming off a low of 15 contracted rigs. We estimate that H&P has about 56% of the available 1500 horsepower AC rigs in U.S. land today providing more capacity than any of our competitors in the market. We currently have 139, 1500 horsepower AC FlexRigs under contract and 187 idle and available to go to work in the U.S. We have 20% market share of the U.S. land horizontal and directional drilling market with our closest competitor at 12%. We believe that our overall market share in US land has expanded to approximately 18% from 16% over the past few months. And we've been able to grow our market share from 15% since the peak of activity in 2014. Since the trough of the downturn in May of last year, we have more than doubled our number of active rigs to the current level that's close to 140 rigs. Putting that many rigs back to work successfully as a complex effort and involve many constituents. A significant element in our success is our workforce staffing effort. That team is been responsible for hiring previous employees for our reactivated rigs. We rehired over 1500 former field employees since May of last year and it shows in the morale of our people across the Board. Another group that contributed significantly is our customer account managers and contract management teams with the volume of rig activations they have all contributed to growing our business and expanding our customer base and market share. Those efforts have enabled adding 24 first time FlexRig users since the bottom of the cycle in May of last year. We want to thank everyone as a company for working together as a team to achieve these milestones. The second area I wanted to focus on is our ongoing effort to provide the right rig in our family of solutions for our customers. Our FlexRig design allows H&P to invest in our existing fleet to enhance rig capabilities that will benefit our customers in the areas that require well designs, which are more challenging and complex. H&P leads the industry with our fleet of AC drive super-spec rigs that have 7500 PSI circulating systems, multi-well pad capability, 1,500 horsepower draw-works rating and 750,000 pounds load. On our last call, we mentioned having approximately 80 of these rigs and as of today, we have approximately 100 super-spec rigs in the fleet. The industry's capacity to provide additional super-spec rigs in a timely and cost effective way appears to be limited today, with the existing industry rig fleet, which positions H&P very well for future expansion in this space. Should there be significant market demand for super-spec rigs going forward, H&P has the capability of providing approximately 270 super-spec FlexRigs to the market without requiring any new builds. Solely through upgrades where needed to our current FlexRigs 3 and FlexRigs 5 fleet. Our uniform base of existing FlexRigs leveraged by our experience and design and construction, enables us to invest in our fleet for the future in a scalable and cost-effective way. Finally, the last area I want to address before turning the call to Juan Pablo, is an increase in our CapEx which is driven by the improving market conditions and customer demand. Juan Pablo will go into more details in his remarks, but I want to underscore a few important points. A portion of this increase will be dedicated to super-spec upgrades to our FlexRigs fleet, which will enable us to continue to be able to respond quickly to customers in this tightening market. There are a couple of important factors driving this. First, as a result of the high demand for FlexRigs, we have contract commitments for a large portion of our super-spec capability and we want to make certain future deliveries are constrained. The upgrades include some of our standard super-spec features, the 7500 PSI circulating systems, third mud pump, control and data system enhancements, setback capacity and Flex3 pad capability. We continue to have incremental demand from customers for additional Flex3 skid systems. So we plan to increase our capacity to meet the significant demand from customers. Second we will be adding our first prototype walking system to an existing FlexRigs3. When this Flex3 with a walking system is complete, it will also have all of the standard super-spec upgrades similar to our super-spec capacity Flex3 and Flex5s that we have in the market today. We expect the first rig to be delivered in the current quarter and if there's demand from customers, we would plan to deliver a few more Flex3s with walking systems in 2017. These CapEx increases in upgrades to our fleet are examples of having great flexibility to invest in our uniform fleet of FlexRigs providing the right rig to meet customer needs and adding value to shareholders. And now I'll turn the call to Juan Pablo.

Thank you, John. As reported this morning, the company had a net loss of approximately $35 million during the first quarter of fiscal 2017. Nevertheless, as John described, the ongoing U.S. land drilling market recovery has been providing exciting opportunities for the company to redeploy a large number of FlexRigs into the market. Following are some details on each of our three drilling segments. Our U.S. land drilling segment reported an operating loss of approximately $31 million during the first fiscal quarter. However, the number of revenue days increased by approximately 23% compared to the prior quarter resulting in an average of close to 106 rigs generating revenue days during the first fiscal quarter. On average approximately 73 of these rigs were under term contract and approximately 33 rigs worked in the spot market. Excluding the impact of early termination revenues, the average rig revenue per day declined by approximately 2% to $23,891 in the first fiscal quarter as a proportion of rigs working in the spot market increase significantly quarter to quarter. Excluding lawsuit settlement charges and adjustments to self insurance reserves, the average rig expense per day increased by about 13% to $15,064. A significant sequential increase in this average was expected as a result of a much lower proportion of rigs generating revenue days while on standby. The increase in the average however was further amplified by a larger than expected number of rigs that return to work during the last few months generating additional upfront startup expenses that were sold during the first fiscal quarter. To provide them conflict, a number of rigs generating revenue days increased from 102 to 138 since our last conference call in mid-November. As a result of these changes in daily revenue and expenses, the corresponding average of rig margin per day during the first fiscal quarter was $8,827. The segment generated approximately $9 million in revenues corresponding to early termination of long-term contracts during the first fiscal quarter. No early termination notices for rig in the U.S. land segment have been received or announced since last July but given prior notifications we expect to generate approximately $6 million during the second fiscal quarter and a total of over 25 million during several quarters thereafter in early termination revenues. Since the peak in late 2014, we have received early termination notifications for a total of 88 rigs under long-term contract and the segment. Total early termination revenues related to these 88 contracts are estimated at over $460 million. As of today our 350 available rigs in the U.S. land segment include approximately 140 rigs generating revenue and 210 idle rigs. Included in the 140 rigs generating revenue are 89 rigs under term contracts, 87 of which are generating revenue days. In addition, 51 rigs are currently active in the spot market for a total of 138 rigs generating revenue days in the second. Three, of the 138 rigs remain idle and on standby type day rates. Apparently those two rigs that are not generating revenue days include new build rigs that are waiting for the customer to be ready for delivery. Looking ahead to the second quarter of fiscal 2017, we expect a sequential increase and activity in the range of 30% to 35% in terms of revenue days. Excluding the impact of revenues corresponding to early terminated long-term contracts, we expect our average rig revenue per day to decline to approximately $22,400 primarily as a result of a higher proportion of rigs working in the spot market. Although spot pricing remains low, we expect to see average spot pricing for FlexRigs improve over the next few months as we are now seeing leading-edge day rates moving from the mid-teen to the high teens. The average rig expense per day level is expected to decrease to roughly $14,900. Although we expect this average expense level to eventually come down to more normalized level, the upfront rig startup expenses during this phase of the up-turn along with the caring cost is still over 200 idle and available AC drive FlexRigs are temporarily and unfavorably impacting the average. If we isolate rigs that remained active during the first fiscal quarter, their average expense level was still close to $13,000 per rig per day which is similar to overall levels experienced in more stable time period like 2013 and 2014. The segment currently has term contract commitments in place for an average of approximately 86 rigs during the second fiscal quarter, 75 rigs during the remaining two quarters of fiscal 2017, 44 rigs during fiscal 2018 and 17 rigs during fiscal 2019. These commitments include about 20 rigs that have been placed under term contract since last May with a pricing at slightly higher than spot market levels. Including these newly contracted rigs, the average daily rig margin for rigs that are under term contract has been declining from a $15,000 to $16,000 range to an expected range between $13,000 and $14,000 per day during the second fiscal quarter. Let me now transition to our offshore operations. Segment operating income increased to approximately $7 million. Total revenue days remained flat and the average rig margin per day increased by about 16% during the first fiscal quarter to $10,478 per day, excluding self-insurance reserve adjustments during the prior quarter. As we look at the second quarter of fiscal 2017, we expect quarterly revenue days to decline by approximately 10% as one of the seven offshore platform rigs that were generating revenue days during the prior quarter is expected to be released by the operator during the second fiscal quarter. The average rig margin per day is expected to increase to approximately $12,000 per day during the second fiscal quarter at five of the six rigs that are expected to continue to generate revenue days at the end of the quarter, will soon be working under operating day rates, while the remaining one rig is expected to continue under a standby-type bid rate. The management contracts on platform rigs contributed approximately $4 million to our offshore segment operating income during the quarter and are expected to generate around $3 million in operating income during each of the next two quarters. Moving on to our international land operations, this segment reported operating income of approximately $1 million during the first fiscal quarter. Excluding the impact from early contract termination revenue of approximately $5 million, the average rig margin per day decreased sequentially by approximately 16% to $8,883 per day. Revenue days also declined by approximately 16%, primarily as a result of an early termination notice related to five of our rigs under long-term contract in the segment. We expect early termination fees related to the notification to favorably impact our operating income in the near future. As a result of the recent early termination notice, we expect international land quarterly revenue days to decrease by approximately 38% during the second fiscal quarter. As of today, our international land segment has eight of the 38 rigs in this segment, generating revenue days, including five in Argentina, two in Columbia and one in Bahrain. Seven of these rigs are under long-term contracts and two of the seven are scheduled to roll off their term contract during this fiscal year. Excluding the impact of early termination revenue, the average rig margin per day is expected to decrease to approximately $5,000 per day, primarily as a result of a higher overhead expense per revenue day given the very low utilization rate in the segment. We will continue to manage overhead expenses while at the same time, remain mindful of the potential recovery in international markets, which may simply be lagging the recovery that we are now experiencing in the U.S. land market. When we combine all three of our drilling segments and exclude rigs with early termination, we currently have an average of approximately 86 rigs under term contracts expected to be active in fiscal 2017, 51 in fiscal 2018 and 22 in fiscal 2019. Let me now comment on corporate level of detail. As a result of improved market conditions in the U.S. land market, our fiscal 2017 CapEx is now estimated to be around $350 million, about 30% of which is expected to be related to maintenance CapEx and tubulars and the remainder mostly to upgrades of our existing fleet. Given the strength of our balance sheet, we continue to be in great position to sustain regular dividend levels along with ample flexibility to take advantage of opportunities going forward. The effective income tax rate on the loss for the first fiscal quarter was approximately 35%. The effective income tax rate for fiscal 2017 is at this point expected to be around 33% which is a reduction from our prior estimate of 36% due primarily to considerations related to foreign jurisdiction or tax benefit or operating losses are uncertain. With that, let me turn the call back to John.

Thank you, Juan Pablo. Before we open the call for questions, I want to reiterate a few points. There is optimism in the marketplace post OPEC meeting with stronger oil prices and an improving outlook we will continue to reactivate idle rigs out of our facilities safely, efficiently and cost-effectively. It is gratifying to see that many of the strategies we employ to prepare for this eventual increase in Japan are bearing fruit as we redeploy rigs to the field. Our fleet is particularly well-suited for the more technically challenging wells being drilled today. I think more importantly we have the people, the systems and the operational support structures in place to drive the highest levels of performance and reliability for our customers. And Savana we will now open the call for questions.

[Operator Instructions] And we’ll take our first question from Angie Sedita from UBS. Please go ahead. Your line is open.

Thanks. Good morning, guys. So John could you give us a little bit more color on your pricing commentary and maybe some thoughts about the pace of pricing as we go into 2017 and really good potentially in the year. And then second on the pricing side, do you expect it to remain very narrowly focused on the super-spec rigs or could it start the spread to other rig type?

Okay. Angie, what oil price are we going to have?

That's too much where it is today, it’s flat.

Okay. I think there's no doubt that we have some pricing power in the market now. I mean obviously we've all - I think everyone has been pleasantly surprised with how quickly things have moved and so it's been - it's been kind of hard to keep up with it quite frankly but there is pricing power - you know as well as I do it's pretty hard to see out past El Paso this quarter. We obviously have a lot of calls coming in and customers wanting rigs and - for February, March even some April deliveries. And so with that we would expect to see some continued pricing. I think the question if oil prices remain in this - in this range if you look at the rigs, they're very, very low rig count environment we had over the last year or previous this uptick has been a function of just really, really low oil prices obviously and customer spending with a cash flow. So with these new levels, the question is how many rigs does it take I think right now, it appears that we're on target as industry to potentially get to – we're almost at 700 so you would think that 800 is within our sides. And so I think again in that case it’s going to be tied and I think to your question on super-spec I do think that there is going to be pricing power on super-spec as you heard - we've even put a couple of Flex4s to work but I think clearly the majority of the focus is going to be on the higher end, higher spec rigs based on the types of wells that we see customers drilling today.

Okay. That's helpful. And then I guess, as a follow-up - just quickly on 800 rigs in our sites does that for 2017, the 800 could be in our side. And then second, in your prepared remarks you made comments on the industry's ability to upgrade the super-spec as being limited and maybe you can give us little more color there.

Well, on the limited, I think if you look at the inventory of rigs that are capable of being upgraded to how we define super-spec, there's only what they were still around 300, around 300 rigs and the majority half of that is, over half of that is H&P and then the other is made up of two or three maybe four contractors for the most part. So it's a pretty small group of players that have access at least what we think are the rigs that are going to be in the highest demand. So I think that's the part of the scarcity if you will even though obviously the rigs are there and they can't be upgraded. The 800 is really just looking at our rig count and understanding where we think we're going based on the commitments that we've had and maintaining an 18% to 20% market share and so that's kind of how we get to the 800 and again it's a function of what oil prices do and how the outlook is but right now it sure seems like there continues to be demand for those types of rigs.

All right. Thanks for the color and I'll turn it over.

All right. Angie thanks.

Thank you. And we'll take our next question from John Daniel with Simmons & Company. Please go ahead. Your line is open.

Guys, just two questions for me, on international, can you speak to any visibility that you might have for rig reactivations as you roll through the year?

John, we really don't have any positive outlook in that respect. I think you've heard several people say that and we've known this for several months that while we hit the bottom in U.S. land last summer, it may be this summer before we completely hit bottom in international. So we don't really have any insight. We have had a few bids that we participated in, but I don't know of anything that's coming out of that.

Okay. And then just appreciating the fact that you guys don't like to give guidance beyond the current quarter, but with what you know in terms of relative stability at this point on activity I am assuming and knowing that you're burdened with some overhead cost, is the cash margin guidance for current fiscal quarter is that representative of range at least as we go through the rest of this year barring a pickup in activity?

John this is Juan Pablo. I think that's the best guess that we would have at this point, but certainly many factors could influence that going forward and we'll try to keep folks informed us of any development there, but at this point it's just a starting point.

Okay. And then just the last one for me is on the walking system you put in, can you just provide some color? I'm assuming that XY capability and was this at the request of the customer or what prompted the initiative here to make the investment?

Well John it really hasn't been at the request of a customer. Obviously, there has been a lot of focus on the walking systems going back at least two years maybe even three years and we've commented several times that we have the capability to do it if it's something that we see the potential for growth and it's a prototype and we think that -- we think it will be a good rig, think it will be again another nice option to be able to provide to customers if the demand is there and I think that's really the question is what kind demand we're going to see out of it? Obviously at this stage I can say that the prototype and we have -- we do have a job for the first rig. We're not building at own spec, but if we see some demand, we'll build some additional. Again from our perspective, we talked about in our prepared remarks that in addition to that, we're also having high demand for Flex3s skid systems and I can tell you three or six months whether never guess that we would be getting to the end of our availability on our Flex3 skid system. So customers like the Flex3 skid system, the walking application obviously I think by definition is a bidirectional, omni-directional and so I think it'll be a good, a good addition as a fleet.

Okay. Thank you for your time.

And we will take our next question from Robin Shoemaker with KeyBanc Capital Markets. Please go ahead. Your line is open.

Okay, thank you. So John I wanted to just ask you about term contracts. You mentioned you have signed a good number here as your rigs have gone back to work. So how should we think about a term contract today compared to where we were in a couple of years ago when you were signing two, three year contracts obviously is different but could you speak to the duration and in some way to the premium that you would expect over spot to - for signing a term contract today.

Yes Robin just in general, I mean obviously the term contracts are much different than what we entered into previously obviously back then we were building new rigs and we were getting great returns in three-year term contracts. This is really more about the customer I think in a few cases it's – we're getting – kind of ensuring we're getting a payback on some investments that we're making in rigs but more than anything it's focused – it's more focused on the customer and in particular areas. I think the average term is little over a year, it's not like we're locking into a long period of time. There is a premium you know it's it ranges up thousand dollars a day range but if that’s about all that we will really talk about that you have too many other questions other than that. Again it's a relatively small number if you look at it in context of what we've entered into with the overall working fleet and the capacity of additional rigs coming on. Again things have moved very, very quickly.

Okay, thanks. And so then on the - as they have moved quickly, what's happening in terms - could you describe your hiring initiatives. I know you had a policy or strategy of keeping your most experienced people during the downturn in and having them work at lower level positions. So as these rigs go back is that all working according to plan and do you see any possibility for upward pressure on wages in this very active period of hiring that you're going through?

Yes, that's a great question and it has worked out very much like we had planned. In my prepared remarks our folks have just done a great job. Our workforce staffing group has done excellent, they’re working overtime in bringing the existing or previous employees back on and also obviously beginning to hire some new employees so there's a lot of interviewing going on, a lot of process is there happening. We've been very, very pleased with it and I think we had a little over 80% of acceptance rate and very little turnover in the previous employees that we brought on. The ability to move people that have been bought back in position from floorhand to driller, driller to rig manager, rig manager to superintendent as you can imagine has a huge impact - positive impact on morale, everybody is excited about it including everybody here in Tulsa, it's been found to see and it's good to see rigs going back to work. So that part of it has worked out very well. Obviously there's a lot of demand for people. I'd like to think that H&P is in a great position. We've not had issues hiring in the past. I don't expect we'll have issues hiring today. We haven't had any increases in wages but I mean that's always something that we keep our eye on just make certain that we’re paying our folks competitively. We did not have wage reduction during the downturn. So obviously our employees are moving back up into their previous position after being bumped back are in fact getting a raise. They are getting an increase from what they have compensated. So that's obviously adding to the optimism of our folks.

Okay. Thanks a lot.

Thank you. We'll take our next question from Waqar Syed from Goldman Sachs. Please go ahead. Your line is open.

Thank you for taking my question. John when do you expect your OpEx in the US land to get back into that low 13,.000 kind of range?

Well Waqar that's a test, again I think go back to Juan Pablo's remarks, the rigs that are working obviously are working at that level. It's the impact of having as many rigs coming on as what we've had. That's a tough one to call. If you could tell me again how many more rigs we're going to put out next quarter and the quarter after that, we could probably begin to give you an estimate of that. But I think everyone and I know everyone around this table is surprised that how quickly things move and including 36 rigs back to work in less than 70 days is quite a number of rigs. So I really can't answer the question. Obviously we're focused on it. I think we're in a position to get it back down into that 13 range. I think the thing to keep in mind though too Waqar is that and I've said this before, I think you get lost on people because that's really experienced it but these rigs are working harder. Not only are we drilling wells faster, we're moving rigs more often. Tough pressures are higher expendables on 7500 PSI systems are more costly than 5,000 PSI obviously. And so for us to be able to keep our cost in the range that we have over time is really pretty impressive. So we have in fact lower cost from that perspective, but again it's a tough one to call. Juan Pablo do you have anything to add.

So let's say if the pace slows down to maybe picking up five to 10 rigs a quarter rather than like 30-plus would be get back to that level with that pace? Would we be able to absorb most of the incremental cost you get into that 13.5 kind of range?

Waqar this is Juan Pablo. I think that's a fair assumption of what happens also is that the activity continues to go up, the denominator grows and is able to absorb much of that. So there's a few moving pieces to that, but I think your comment is fair.

Waqar if you look back 2009 2010, it's very similar, the only difference then is we didn't have near as many idle rigs, but we didn't have near as larger fleet and on a percentage basis, we didn't nearly idle as many rigs. So you have to take that into account but clearly we got our cost back in line pretty quickly back then and I expect we'll do the same thing here.

No, in terms of tubulars and good pipe, do you have an inventory of 5.5 inch drill pipe? How much of, one of the customers requesting these days, do you hit a lot of phone customers with respect to using these bigger drill pipes and then if the need, if there is demand for that, would you be buying that? Would you be renting it?

We just 5.5 inch drill pipe for many, many years primarily offshore and in some international locations, we do have 5.5 inch drill pipe in the fleet. We have purchased some 5.5 over the last year. It's not a large inventory. There's not what I would consider a huge demand pool for 5.5. Most of its five inch pipe and there are still some customers that have been 4.5, but I think for the most part five inch is in demand. I think if 5.5 goes into demand and again we'll have to begin to order that and see what the supply chain looks like. I'm not really familiar with what the supply chain looks in that respect.

Would you have to make any changes to your top drives if the trend moves towards that or do you think your drives can handle that?

Yes. We've had I don't know how many strengths we have out running right now with 5.5 either, 5.5 we own or 5.5 with the customers who entered. And know there's no upgrade - typically the upgrade that needs to be accomplished and it has to do with the wracking board on the mast but that's very small, very low-cost but we have plenty of horsepower capability and tour capability with the top graph we have.

And then second on international market these early terminations, could you tell us what was the rational for the customer or they reducing activity or they want to take advantage of the spot markets, are there some labor issues. Why do you think the customers terminated the contracts?

Well Waqar I can't speak to all the details. My suspicion is it has to do with the just international and general continuing to contract in activity. That's really I think what it's about I don't know of any other details associated with the other things that you mentioned.

Okay. And then just one final question for the second half of fiscal year 2017, did you mention $25 million in early termination revenues for U.S. land, is that right?

Can you repeat your question Waqar I missed the first part.

Yes, for the second half of '17 - fiscal year '17, did you mention that early termination revenues in the U.S. land could be $25 million or did I didn’t hear it correctly?

I think the assumption is in general correct but it goes beyond 2017. So we provided some reference for the second fiscal quarter and then after that meaning the second half of fiscal '17 and probably also continuing into 2018 we have a total of $25 million that would be distributed during the next following quarters.

Okay. During the next, you said what how many quarters?

I can't provide the exact details but several quarters.

Hi Waqar back on your question on international, our five rigs are not the only rigs that are – I mean it's an industry issue, it's not focused on individual rig types or performance anything related to that, it's just a general this part of the downturn in lower commodity prices.

Okay. Thank you very much.

We will take our next question from Timna Tanners of Bank of America. Please go ahead. Your line is open.

Hi, good morning guys. I get a lot of questions and I talk to investors about your dividend policy, so I just wanted to clarify, you do like CapEx obviously going up, perhaps some restocking needs. If in a given year you has cash generation later than your dividend payout, does that effectively look at the dividends or are you looking more on a long term basis of your normalized cash flow. Thanks.

We’ll look at it on a long-term basis. At this point for the foreseeable future the expectation is that, we will sustain the dividends level, we see no reason to change that at this point. There is many moving variables that impact the company's liquidity but our balance sheet and liquidity remained very strong and so that provides opportunities not only to continue to return cash to shareholders through the regular dividends but also to take advantage of any opportunities that make come our way.

Good, I wanted that clarification that’s really helpful. And another question I had was related to some of the feedback you get from your customers. In particular I was wondering if you could comment on the sensitivity to price and how that's changed perhaps or how you see that. And then also any observation that they may have on some rig ops lessons that could help on tamper the oversupply that we still see in the market? Thanks.

Timna, were you saying price as in day rate is that what you’re referencing?

Absolutely, so the concern being that as – as we start to back to some pricing power, what kind of perspective you expect to get, are they prepared to pay upward. So just general comments about how they are viewing their requirements and paying per services so that’s been kind of the mix bag from what we hear?

Right. I think it’s pretty straight-forward that cost of the rig is really small component of these total well cost. However it is a substantial impact on total well cost because of well cycle times. I don't get the impression that there's going to be a massive amount of pushback. The reality is we have many, many rigs that have continued to work on term contracts mid-20s high-20s type rates and they don't have any negative impact on total cost of a customer's well and in fact we don't hear anything about that. So clearly no one wants to pay any more than they have to, but I think in a tightening environment and an environment where contractors are needing to invest and the performance of their I think customers are going to be more than willing to pay.

Okay. Thank you.

And Timna, I think you had another question related to rig obsolescence. Was your question related to the industry in general or are you asking about H&P?

No, I was asking more about the industry in general because that's a scene that we also hear is to the extent that the oversupply that was daunted by perhaps in the industry is less than people believe because many of these rigs will never be, just wondering what you're hearing on that topic lately?

Yeah, I think that's a great point. If you go back to the peak in 2014 and there were over 1800 rigs running and about 900 or less probably 850 at that time were AC drive rigs and so that means the rest of the fleet was made up of legacy rigs, mechanical and SCR. And you can see today, I don't have it in front of me but I think mechanical rigs are what less than 20%, 16% and SCR rigs are 18% and AC drive rigs continue to capture market share at the peak in 14. AC rigs made up 41% of share today. AC rigs make up 66% and growing. And so yeah, I think there's definitely an obsolescence factor. Those rigs are designed why those rigs are 50 years old. A lot of those rigs were built in the 70s and 80s and it's going to be really challenging for those rigs to keep up particularly if you're looking to put a rig like that on these longer lateral wells and drill the wells in the times that we're drilling them today with FlexRigs that are just going to have a tough time competing.

Thank you, again.

We'll take our next question from Matthew Johnston of Instinet. Please go ahead. Your line is open.

Hi. Good morning. I wanted to hone in on some of the moving pieces around OpEx for the reactivated rigs in the U.S. land business, is that mostly labor, is it all labor that you're incurring upfront or are there any equipment upgrades that are being expensed in the P&L? And then you slightly connected to that, if we could get an update on what CapEx per rig looks like for the reactivated rigs that would be helpful?

Matthew, this is Juan Pablo. As it relates to the OpEx, the start-up expenses, most of that is related to supplies and maintenance and so that is absorbed as an expenditure, anything that may be a capital investment of course is captured in our CapEx. So there are labor components as well, but they're not as significant as what I would refer to as M&S or maintenance or supply. On the CapEx level, per rig dollars in terms of upgrades etcetera that's a difficult one to answer because there are difficult types of, excuse me, there are different types of upgrades that are being performed on each rig in particular. So there is a wide range and in some cases there are several upgrades related to rig and some other cases there are just one piece that needs to be updated or refurbished and so it's a wide range. The other piece that is important to note that the upgrade CapEx is not only related to rigs that are currently not working and that are being upgraded to go back to work. It also relates to many of the rigs that are active and that are upgraded in many cases during a rig move or at some point during the operation. So lots of variables to consider there. No clean answer to the question.

Okay. Fair enough. And then just going back to the walking system prototype, for the Flex3, curious if you could provide some details on what the capital cost might look like for that endeavor?

Well Matthew we're at this stage with it being a prototype and it not being out we're not going to comment. We don't know the exact number. We do know that it's going to be a higher total investment than that an upgrade of a Flex3 with the skid system. But we will talk about that more in the future but I think at this stage of the game, it's best not to comment on any further. Again it's not only are we adding a walking system, but we're also doing all of the other upgrades to get the rig to a super-spec. So again, I don't have the total cost in front of me, but we will talk about it in the future.

Got it. Thanks guys. Appreciate it.

And we'll take our next question from Sean Meakim with JPMorgan. Please go ahead. Your line is open.

Hi guys. Thanks. So just one of it may be summarize a little bit of what we heard a couple different comments during the call, does it at times ramp faster than I think a lot of people were expecting through the holidays now start the year, you guys are clearly taking some market share. Your guidance for the quarter seems to imply pretty big deceleration in rig ads in February-March versus December and January and so I am just curious if your perception is that you don't just pulled forward their rig addition and at that pace is it going to slow pretty dramatically. Does it get closer to the mid year or do you have sufficient line suffice to say that, so we can continue the pretty healthy pace towards that 800 number that you mentioned earlier?

Well Sean based on what we think we'll go to work with our fleet that's how we get to the 800, if so and that's assuming we maintain similar market share. Again as I said earlier, it's very hard to see past the next couple of months and so clearly it could be that a 720 between a 700 and an 800 rig count is the rig count that is needed with the cash flow is going to be generated at those prices at the current oil prices and so that's the part that's kind of hard for us to see. We are preparing ourselves for a continued improvement in rig activity. We think we're prepared to do that, but obviously not clear if that's where the direction of the industry continues to go based on what we know. I think further what we've seen is if you look back to 2009, 2010, the industry put 700 rigs back to work in 12 months. I think if you look at the last six months here, I think we're kind of on a track for maybe 450 to 500 rigs. I think I've got that right. So we're just kind of making an educated guess at this stage but I think it's hard to see past the current quarter and so that's the reason why our numbers are presented the way they are.

Got it. Okay. That's fair enough. Thank you. And then just one last quick one. Coming out of a downturn, it seems like there is a significant shift in demand towards some of the premium drilling services, wearable has got a lot of attention moving away from some of the more conventional equipment. Are you seeing that on your rigs and over time could a trend like that influence the types of services that you want to be participating with respect to bundling that into your joint offering?

I haven't heard specifically on our rigs that Rotary steerable are increasing and we've had Rotary steerable on our rigs running pretty consistently over the last several years. I have not heard that the trend is increasing although I wouldn't be surprised to see that. As you know we have our own Rotary steerable tool. It's been very challenging to get traction bundling that with our services and offering it to customers, but I think in general, I wouldn't be surprised to Rotary excludable continuing to gain traction. At the same time, directional drillers with conventional downhole tools continue to get better and so and I obviously, the cost differential and sometimes there is an uptime or downtime differential with the Rotary with the higher technology tools. So obviously as the technology get better, the uptime gets better than I think you'll probably see additional traction, but again I apologize, I haven't seen that. So I don't know the details.

That's very helpful feedback. Thanks John.

All right Sean. Thank you.

Savanna, we probably have time for one last question.

All right. We'll take our last question from Brad Handler with Jefferies. Please go ahead. Your line is open.

Thanks for squeezing me in. Hi guys.

Good morning, Brad.

Maybe a couple of observations on my part and maybe I apologize a little in advance if it seems a little rhetorical, but I am really asking for your color and thoughts about it. The first is when you were idling rigs there we had a conversation we all had a conversation around putting money into them to prepare them to come out more easily or quickly presumably and less expensively. I guess in light of that is difficult for us to know how much of that you're seeing as you bring rigs back out, but are you comfortable that that still helped? Are you spending a lot less money now despite the OpEx numbers we see rising?

Right, I think that's a great observation and a good question and I've asked a lot of folks around here and we have -- obviously there's data and there's things you can measure and then there's also some of the intangibles and listen I said in our first rodeo, we've gone through this before. We know what it felt like in '09 and '10 with far fewer FlexRigs and so it definitely has been an advantage for us. No way we would have been able to responded in the same fashion that we responded up to this point in terms of just sheer numbers of rigs. We've also had maintenance CapEx savings, the savings really go on and on. I think it would be great to have a summary which will be there one of these days where we can look back on it and say you know what, this is the value add ultimately that we had again. There is going to be something that are going to be intangible. It's kind of hard to measure the satisfaction of a customer when the rig comes out of the stack yard and moves in two days and drills the record well first rattle out the box and that just didn't happen back in '09 and '10. So I feel good about it that we've made a wise choice and again it was back to claiming more later and I think it's paying off for us. Anything Juan Pablo you want to add?

I think that covers it well. Thank you.

All right. Great. I really -- I do appreciate that a few that come out and I guess the second question is from a market share perspective, it's been interesting to watch because in the first few months of the recovery, you probably lost a little bit of share that you would gain through the course of time in the downturn. And then it seems like over the last few months, you've gotten a ton of it back and there was a period of time when you were and I know you were speaking in the beginning of December your Flex3 utilization was quite low even with skating systems that was down at 50% relative to Flex5 and the like and now Flex3s are coming back. And so I guess I am curious is this just a natural function of given where rates are, customers are going to use them or just going to grab the most capable rig even if they don't need it and then you drift into the next layer, which is the Flex3 system. Is that how you might characterize that lag and then catch up period from a market share perspective.

Well if you recall Brad, early in the cycle, we knew that back in November that the November -- October that the trough was May and things were improving, but if you recall the first operators that begin to put rigs to work were not really the traditionally H&P type customers. And so we were a little slow to respond and a lot of the wells quite frankly were not more challenging horizontal directional wells a lot of it was vertical work. And so I think that’s part of it. I think the other part we've tried to speak, it's hard to do it and it comes back to that intangible that I mentioned earlier. If you're a drilling manager or a drilling superintendent working for an operator then you are going to go out and contract a rig, the last thing you want to do is go contract one that’s going to show up on the first location and take 10 days to rig up and then have all kinds of downtime, not have the right people, not have the type of performance that you want. And so being able to do that time and time again for customers obviously improve the relationship and additional work with that customer but it also attracts other customers. Again we have 24 new customers since the trough that we picked up and a lot of those are picking FlexRigs because they've seen the performance that we've had in the field. So I think that's really what it is, whether it’s a Flex3 or whether it's a Flex5 and I think that's really what speaks to and of course we also have just more Flex3s available in the marketplace. And of course a lot of people have said over time and said some things negatively about those rigs I think but again I think you see the performance in the field today and those rigs are going to continue to go back to work. So that's a great observation. I appreciate that.

No problem. If it’s okay maybe I’ll squeeze in one more and maybe you can keep it short but I appreciate if you indulge me. Just coming back to the contracting maybe a little color on contracting strategy, I guess I understand you got a little bit of premium but I might have imagined you would be optimistic about getting much better day rates at some point not too far in the distant future. So I guess how far does - can you draw some of the parameters around when you would choose to contract for a year at this point, how much of the fleet you would be willing to do, what maybe drove some of the decisions to engage in those contract at this point.

Well again great question. Obviously you know that there is a lot of competitive challenges associated with us discussing our pricing strategy or what we're going to do from a spot market from a term contract perspective. I mean we have - we have some plans in place. We’ve been through many of these cycles and again this one moved very, very quickly and as we all know that there was so much negativity it was hard to believe. I think most people felt like well, just any minute you are going to see oil prices go back down and things start slowing down again. So we’re going to - I think we're going to go, take advantage going forward as far as better pricing and that's about all - that's about all I can say as far as additional details on it.

I understand that's perfectly reasonable. I appreciate that answer so thank you.

Thank you Brad, thank you everybody. We'll hand the call to John for a few closing comments.

Yes, if there is anyone there - hanging in there with us, I appreciate it. Thanks for being on the call with us. I just wanted to finish just by saying that the company has gone through really extensive efforts to enhance our organizational and system's health and while we aren't finished, I think we are making great strides and we're going to continue to improve. We are really pleased with our ability to respond to the increasing level of demand in the marketplace that we’ve seen and we believe that we are uniquely positioned to continue to gain incremental market share. Our competitive advantages remain in our people and our performance, technology, reliability and as we discussed our uniform FlexRigs fleet gives us many advantages. These advantages should allow us to continue to outpace our competitors and regain pricing power during this recovery especially as customer well designs become increasingly more complex and require higher spec AC drive rigs. So again thank you for your time today and have a great day. We'll see you at the next call. Thank you.

That concludes today's first quarter earnings call. Thank you for your participation. You may disconnect at any time and have a great day.