Good day, everyone, and welcome to Helmerich & Payne's Fourth Quarter Earnings Conference 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 maybe recorded. I'll be standing by, if you should need any assistance. It is now my pleasure to turn the program over to Mr. Dave Wilson, Director of Investor Relations. Please go ahead, sir.

Thank you, Erica, and welcome, everyone, to Helmerich & Payne's conference call and webcast for the fourth quarter and fiscal year ended 2018. With us today are John Lindsay, President and CEO; and Mark Smith, Vice President and CFO. John and Mark will be sharing some comments with us, after which we'll open the call for questions. Before we begin our prepared remarks, I’ll remind everyone that this call will include forward looking statements as defined under the securities laws. Such statements are based on current information and management’s expectations as of this date and are not guarantees of future performance. Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict. As such our actual outcomes and results could differ materially. You can learn more about these risks in our annual report on Form 10-K, our quarterly reports on Form 10-Q and other SEC filings. You should not place undue reliance on forward-looking statements, and we undertake no obligation to publicly update these forward-looking statements. We’ll also be making references to certain non-GAAP financial measures such as segment operating income and operating statistics. You may find the GAAP reconciliation comments and calculations in yesterday’s press release. With that said, I'll turn the call over to John Lindsay.

Thank you, Dave. Good morning, everyone, and thank you again for joining us on our fourth fiscal quarter earnings call. H&P’s leadership position and super-spec rigs contributed to another strong quarter of operational results. We expect to see additional demand for our company’s super-spec FlexRigs heading into our new fiscal year, particularly as customers push lateral length, pad drilling and an industry trend toward greater well complexity. In addition, our new lines of digital-technology-based solutions gained further traction during the quarter as more customers realized the value these solutions provide. I will focus my remarks on five main areas this morning. First, we believe the super-spec rig market in U.S. Land is fully utilized, and we still see indications that additional demand will continue even as oil prices have move lower. This robust demand is supportive of the increased pricing environment, and we are persistent in our pursuit of higher dayrates, as a result of the value proposition we deliver to our customers. We upgraded and converted 54 FlexRigs to super-spec during fiscal 2018. This brought the total number of super-spec FlexRigs in our U.S. Land fleet to 207, at the close of the fiscal year, and we believe we have over 40% of the active industry super-spec rigs. As stated earlier, we are seeing further demand for these rigs and expect to maintain an average upgrade or conversion cadence of 12 rigs per quarter for the next few quarters. Currently, we have the first and second fiscal 2019 quarters fully committed at this cadence and there are already a few commitments in the third fiscal quarter. The average length of term for these contracts is over two years in duration and rates are in the mid-$20,000 per day range. The incremental investment in these upgrades generates a good return…

Thanks, John. Today I will review our fiscal fourth quarter and full year 2018 operating results, provide guidance for the first quarter and full fiscal year 2019, and comment on our financial position. Let's start with highlights for the recently completed fourth quarter and fiscal year ended September 2018. The company's generated quarterly revenues of $697 million versus $649 million in the previous quarter, totaling $2.5 billion for the fiscal year. The quarterly increase in revenue is primarily due to those the increase in revenue days and average quarterly revenue per day in the U.S. Land segment. Direct operating costs remained relatively flat at $449 million for the fourth quarter versus $445 million for the previous quarter. Our impairments charge of $23 million, incurred in Q4, consisted of certain equipment view to the wind down of Ecuador operations, the write-down to scrap value or previously decommissioned rigs and the impairment of goodwill related to our TerraVici business line. General and administrative expenses totaled $53 million for the fourth quarter and $200 million for the fiscal year in line with our previous guidance on the July call. Our income tax provision from continuing operations for the fourth quarter includes discrete tax items of approximately $13.5 million related to state and international jurisdictions where we operate. Concluding this quarter's results, Helmerich & Payne earned $0.02 per diluted share versus a loss of $0.08 in the previous quarter. The fourth quarter was adversely impacted by $0.17 per share of select items as highlighted in our press release. Absent these items, the adjusted diluted earnings per share were $0.19 in the fourth quarter versus an adjusted loss of $0.01 during the third fiscal quarter. Earnings totaled $4.37 per diluted share for the full fiscal year 2018, of which select items accounted for $4.24 per…

[Operator Instructions] We'll go first to Byron Pope from Tudor, Pickering, Holt. Please go ahead.

John, I have a question for you. It seems as though the super-spec rigs are quickly becoming the standard in the U.S. Land rig market, much in the way that Helmerich and Payne led the way for AC drive rigs to become the industry standard and realize that you guys collect tons of data coming off the rigs in your center of excellence. And so, my question is, could you give some qualitative color on the extent to which the horizontal wells you're drilling for your customers today are making super-spec rigs must haves as opposed to nice haves? I mean, the fact that you guys have visibility well into the spring of next year with regard to upgrades suggests that, again, these types of rigs are becoming must haves. So just looking for some qualitative color there.

Sure, Byron. One of the things that you've heard us mention, probably over the last year or better, is the last thing we want to do is overbuild the super-spec fleet -- the capacity of the super-spec market. So one of the things that we have done is we've continued to monitor on a quarterly basis the super-spec rigs that we have and are they actually doing super-spec work. And pretty consistently quarter to quarter, we've seen anywhere from 85% to 90% of the wells that we're drilling actually require the capacities that a super-spec rig has. And so, I think that's a pretty good measure of demand. So a couple of the primary components are related to the depth of the well, the length of the lateral, whether the rig is pad drilling work or single-well work, and what kind of pressure that's required for the mud system -- the mud pumps to be able to effectively pump and the amount of setback capacity, all those sorts of things. So to answer your question, we are still seeing demand clearly by the amount of backlog that we have and the commitments we have through March.

And then, just a second very quick question. With regard to the different commercial models that you touched on, I'm assuming that the baseline today is most, if not all of your FlexRigs are on the standard dayrate type of model. But how do you see the emergence of these different models unfolding over the next couple of years?

Yes, it's a great point. As I've thought through -- you go back to when we very first started building FlexRigs, when the market figured it out and we were really able to create some adoption with customers. And if you remember, we weren't building any new rigs unless we had a three-year term contract that would provide a reasonable rate of return in excess of our cost of capital and getting 85% to 90% of our money back in the term of the contract. And that was -- while it had been done previously in our industry, it wasn't -- I don't think it was done nearly in as widespread of way. And so, I think that's where we are today. You just look at the performance metrics that I talked about. We worked 65 fewer rigs in 2018 and effectively drilled the same amount of footage. And so, the great news is we are providing great value for our customers. And so, our expectation is -- and like we did when we started the FlexRig program, is we're going to have customers that are partners in this. We have very, very strong partners, customers that we work with that have been partners for a long period of time. The fact of the matter is, what used to be a 20-day well or a 30-day well is now a 20-day well, or a 20-day well sometimes is a 15 or a 10-day well. And so, we obviously on a revenue basis are making less and less. So, we don't have all the models figured out, but what we do know is that today we do have a small mix of entering into different pricing models, whether it's performance, whether it's a lump sum, or other types of contracts. And so, we're going to continue to look at that. As we progress to the next year or two, I think we'll start to see a mix shift away from just the dayrate model.

Thank you. And we'll go next to the line of Tommy Moll from Stephens. Please go ahead.

John, you indicated there's continued upward pressure on dayrates given the full utilization in the super-spec market and characterized leading edge for an upgrade as still somewhere in the mid 20s. Going forward, do you think we're creeping mid toward the mid to high 20s? And given H&P's leadership in terms of the number of rigs that are eligible for upgrade on pretty modest CapEx requirements, should we expect price momentum to slow at some point as H&P continues to take market share before we end up in the high 20s new build zip code?

Well, Tommy, we don't think that we're going to see pricing that's going to reach the new-build economics area. I mean, I think the fact of the matter is, if you're really going to get a reasonable rate of return on the types of investments on these new -- what a new rig would cost today, $24, $24 million, you really need close to $30,000 a day. So, we're still several thousand dollars a day from that pricing point. And so, I don't think that that's where we're going to go. I do think that there is continued opportunity to push pricing. If you think about it in mid 20s, we still have some capacity to push it to the upper limits of that mid 20s. So, I think we're going to continue to push toward that leading edge. So, we'll start to see the average rate pushing more toward the leading edge rate as opposed to it being on the lower end of that mid 20s.

One follow-up. I wanted to dive down on the CapEx guide you gave for $650 to $680 million, with roughly 40% of that allocated to upgrades. If I assume 12 a quarter, the math comes out to about $5.5 million per, which seems reasonable. My first question is whether that's the correct logic underlying the budget and if you could confirm the willingness to flex that number given final upgrade decisions that are ultimately going to require contracts with customers upfront. And then second, I just wanted to ask for some more detail on the third portion of the budget allocated for reactivations and other bulk purchases. Mark, you gave us some helpful details on that in the transcript. I wonder if you could enlighten us a little more on those themes, in particular on the reactivation piece. Does that relate to the roughly 12 per quarter upgrades that you're thinking about, or is there something else that that would relate to?

Starting with your second question first. Yes, the reactivation relates directly to the upgrade cadence. The other bit of that, the bulk purchases relate to what has been a very quickly expanding rig fleet count for us over the last couple of years, coupled with a rig fleet that is drilling a lot more complex well for our client and is running a lot harder. We, as I said, just in a couple years' time, we've gone from an average of two pumps per rig to nearly three. So, you can imagine the amount of capital spares one has to have on hand to be able to deal with any downtime or regular planned maintenance related to the various pieces of equipment. So there's a lot of stuff in there and other -- obviously as I called out in my prepared remarks, tubular has fit that bill, as well. I hope that answers your question. If not, come back with a follow-up. The first part of your question, I think your math is correct. We're not going to -- we have been averaging about 12 rigs per quarter. But as you know, that varies quarter to quarter, and that's really dependent purely on customer demand that we're meeting. We are able to really flex our capabilities up and down related to the client's need in our family of solutions, and we can come up with a skidding or walking package as appropriate. As we look over the planning horizon, our intention is to build out more walking rig capabilities so we have a more balanced fleet as we conclude the upgrade program. But as we move through the program, that will be dependent on direct customer discussions, because as we have said before, each and every upgrade that comes out is backed by a client contract.

Thank you. We'll go next to the line of Kurt Hallead from RBC. Please go ahead.

So John, very, very interesting commentary here on the commercial and pricing models, and I appreciate the added information you've kind of provided. So if I recall my early days in this business that land drillers at some point were on a turnkey kind of basis and footage drilled kind of basis, and I think that had kind of mixed results from a financial performance standpoint at the time. Just wondering if you can kind of give us some context on that and how you guys feel more -- maybe what makes you more confident about the opportunity maybe to switch commercial models and generate better financial returns [indiscernible] just a straight dayrate model?

Yes, Kurt. Yes, I have some...When I started with the company in '87 and in the '90s, we did a lot of footage and turnkey work, and so that's not what we're talking about. We're not talking about going back to a traditional footage, taking on more risk model or turnkey, although there could be some modified versions of that. Obviously, the types of wells we're drilling today and the efficiencies that we're seeing are much different than what we've ever seen in this industry before. And so, that's really what we're addressing. Unfortunately, I don't have an exact answer for you, but what I do know kind of relates what I said on the earlier question as it relates to partnerships. And as you partner with your customers and you come to realization that there's ways that both sides can win, because it's really not designed to be sides -- both parties can win, and that's what we're wanting to do. We're very pleased today that, as we've said, we're seeing much improved pricing. We have better margins. But as you fast forward to where we're going to be two or three years from now, if we don't change some modeling now, we're not going to be in a strong position as we would like and as our shareholders would expect us to be. So I know that's not a direct answer to your question. I don't necessarily see us going in a wide-scale turnkey-type operation, if that's what you're asking.

And then follow-up would be, maybe midyear going into third quarter, there's some discussion on varying land drilling conference calls that going into 2019 the expectation was E&P companies would effectively be resetting their budgets at the higher oil price levels than what they were set for 2018, and obviously you could set the stage for a very strong and robust demand for land drilling rigs. And now that we've kind of round tripped on oil prices, as you've indicated and we've all seen on the screens, if E&P companies keep the budgets set in the $50 to $60 range, how would you handicap the growth in overall drilling activity on a full-year basis in '19. You've already given us good guidance on the initial start of your fiscal year, but wondering how you would handicap it if we're still in a 50 to 60 budgeting environment.

Yes, it's interesting because obviously we've had a lot of conversations with various customers, and the feeling that I've gotten through that is whether it's 55 to 60 or whether it's up to 70, I think the budgets are going to remain pretty strong. The question, of course, is how much actual rig count growth do we see? And I think a portion of that is -- a function of an earlier question and some of the commentary that we have related to the replacement cycle and the number of legacy, much older rigs that are still out there working. And so, if the average lateral that today we think is around 8,000 feet, which is up from around 6,000 feet in 2015/2016 -- if that average lateral continues to trend higher, which we suspect that it will, and it goes to 8,500, goes to 9,000 feet, then you begin to put a lot of these older rigs, less capable rigs in a position where they just can't perform at same levels as a super-spec rig does. So I think our belief is that we're going to continue to see demand for super-spec. How that relates to the overall rig count growth is very hard to determine. But we sure don't see any customers that are readjusting budgets or readjusting rig count. We haven't seen any of that.

Thank you. And we'll take our next question from Jeffrey Campbell with Tuohy Brothers. Please go ahead.

First one is just kind of a quick one. Can you just advise us of how many upgradeable rigs you still have? I believe back in a September presentation you listed 76 rigs and 32% of those contracted at that time.

We have about 65 approximately rigs that are available for upgrade, and in our view that is about 60% of the industry's upgradeable inventory. And how many of those are active?

25

Yeah. So, 25 of the 65 are active.

Then, I'd just like to ask a little bit broader question. On this call you've already provided some really thoughtful color concerning pricing and changes in the industry. I wanted to bring the apps and these value-added services into the discussion. Do you -- you have this evolving model of the rig as a digital network with less human error. Do you see that as something that can further enhance revenue generation on the rig, or is it more about increasing utilization as you continue to build out and upgrade in fleet?

Yes, Jeff. That's a great question. Our intent is that those FlexApps, automation technology like AutoSlide, those are additional value streams that we would get an additional compensation. And again, it's back to how is the best way to structure that. I'm sure with every customer it'll be a little bit different. But the fact is we're investing real effort, real money and time into the development of these apps, into the development into our software, into our FlexRig operating system. And so as Mark said, I think our R&D budget is between $25 and $30 million. We're going to continue to have investments. Our hope is that we can continue to make acquisitions of technology-type companies. And again, the focus for those technologies is not just for the sake of the technology, but rather for the value-add that that technology can provide. And so, what we're trying to understand is how do we best provide another level of value for our customers? MOTIVE is a great example. We've seen for a long time at H&P, and other operators and drilling contractors have, as well, that the human directional driller on the rig, if he isn't the most effective he can destroy value proposition for the FlexRig. And so, having a bit guidance system that enhances that directional driller's capability is a big win, plus it delivers a higher level of wellbore quality, less torque velocity, which have even added benefits of overall performance of downhole drilling tools, ultimately to the overall quality of the wellbore. Through all of those, our intent is to receive a compensation that's related to the value proposition that we're providing. Some of that, like AutoSlide, is still to be determined. We have really early success that we've seen with the two customers that were in beta testing with. It's going really well. So, more to come on that, but our intent is to get an additional revenue stream.

Thank you. We'll go next to Brad Handler from Jefferies. Please go ahead.

Sorry about that. Sorry. Thanks, good morning. I had it on mute. Let's talk about CapEx some more, please. It was higher than I was expecting -- your budget for next year. And maybe you could accuse me of just not listening carefully enough; I think I could stand guilty of that. But let's talk about it a little bit. And maybe the perspective I'd love you to take is, although I'm hardly going to ask you to start talking about fiscal 2020, I'm curious to just understand what may come -- what may roll off versus what may stay or what may grow in terms of capital requirements. So for example, if you're building up your inventory of spares, presumably that's not -- there's a little bit of onetime-ishness within that, right? You sort of get it to a better place than it is. At the same time, if lateral lengths keep growing and the demands on your rigs keep growing, then your maintenance CapEx might continue to rise. And I'm not exactly clear about the reactivation concept. I guess I probably have made the mistake of thinking that the $3 to $8 million sort of incorporated reactivation expenses, and obviously it does not. So, presumably that stays, but does that get worse as you dig deeper and deeper in to your inventories as you continue to roll rigs out, say in 2020? So, I know there's a lot of moving pieces to that, but hopefully you can -- I can remind you of them and you can speak to that, but that would all be very helpful to hear.

Brad, please provide the prompts as we move along so make we sure to hit all your points. But as we said, we have 238 rigs working today and we have another 40 from one of the previous questions in the upgrade inventory that are currently idle. So, as we work through the upgrade inventory, one can get to a high 200 number of rigs that would work to your question in fiscal 2020. All things being equal at that point, assuming we have not moved to new-build pricing territory. We certainly would see a reduction in the capital expenditure levels, and, therefore, an increase in free cash flow. So if you could envision what we still believe is an accurate $750,000 to $1 million per active rig for maintenance CapEx per annum, you would have some other amount of fleet-wide spares. For example, you could layer on top of that. But that number, I could imagine it being somewhere from, I don't know, $275 to $350 million per year at a high 200 rig count flat state.

Okay. I get that. If we start to think about reactive -- one of the elements in my too-long question was whether reactivations do get more expensive as you're digging deeper into inventory. Is that a factor?

I think we've sort of crescendoed toward this $4 million I mentioned in the prepared comments. I don't really see it getting higher than that as we move through these remaining 40.

But then -- I see your point. Then the Flex4s are just a different animal altogether if you move toward that set, right? Not necessarily in worse shape. It's just a different category of rig. Is that fair of me to think?

Yes, that's fair. And as John said in his prepared comments, we see marked opportunity for those separate and apart from the super-spec arena.

Yes, Brad. And I think we've talked about this. It may have been a question on the last call or we talked about it previously, and that is the FlexRig4s, because of all the effort we have in the upgrade program on super-spec, what we haven't really spent a lot of time on is looking at the Flex4s and you what else can we do with those to be even more competitive in the market than what we are right now. But to your point, those rigs are in no worse shape than the Flex3s that we're bringing out. As Mark said, a lot of these rigs have been stacked on average for four years, so we've maintained them very, very well. But a lot of that equipment that is equipment that needed to be used has been used on other rigs. There's no reason for that equipment to sit there and deteriorate; you want to use it.

That gives me a lot to think about. Maybe a shorter question from me on daily operating expense. You guys have been very consistent with laying out sort of the run rate in the high 13s versus where you're at. But as we think about OpEx through the course of fiscal '19, should that number be trending lower per day essentially because the average rig count continues to rise? Or does it hold because the reactivation pace continues to layer on top of it and self-insurance issues are what they are?

Brad, as we move through fiscal '19, I think we'll certainly have the upgrade and reactivation program keep us at the higher end of the range, but to the same point, as we move past that and into 2020, you will have an absence of reactivation costs, again assuming that flat-line rig count, which is a very clouded crystal ball looking out pretty far in time. Simultaneously, you have less in active rigs. So, yeah, I think you start moving from the 14,700 range closer to the 13,700 over a much longer planning horizon.

Thank you. And we'll take our final question from Scott Gruber from Citigroup. Please go ahead.

So, a couple final ones from me, just a house-keeping one. Mark, the step-up in the ETR for the year, would the increment largely be cash taxes?

Yes, state and foreign jurisdiction cash taxes.

Okay, got it. And then just coming back to the traction y'all seem to be getting on these alternative models, John, it sounds like you prefer a model that incorporates more bonus features moving versus moving back toward the pure footage or turnkey models that we've seen in the past. Is that the right way we should think about it?

Yes. I think it's a -- use a performance model as an example. The idea is for everyone to win. We want to continue to enhance our customers' efficiency, including wellbore quality, including wellbore placement, and doing that in a more autonomous, reliable fashion. I mean, FlexRigs are already the most reliable rig in the fleet as you look at performance over time. But as you add on these technology adders, there's even more reliability -- higher levels of reliability. So, the idea is not to -- like I said earlier, not to go into necessarily a turnkey model, but some sort of a performance model, a footage-type arrangement. We've even done lump sum-type things. But we just have to have it in a larger scale so we're protecting ourselves longer term as these well cycles get faster and faster.

Do you think it'll be easier to get paid in full and realize full value to the new technologies through these alternative models and through bonus features versus just getting paid incremental rate?

Well, if you think about the technologies that we're providing -- use AutoSlide as an example. And again, it's not fully commercial yet, but assuming that we can get there, we believe that's a technology that no one else really has. And so, if that's something that the customer wants that see value in, then there's a value proposition there for them to be receive and be willing to pay for. And so, I think it's a distinctive. It's distinctive and it's differentiating. And it's very much like what I described or at least tried to describe with where we were when we rolled out the FlexRigs to begin with. Part of the thing that was missed early on is that that AC drive technology was a differentiator and it wasn't just another rig. It actually had components that would drive higher levels of value. And we got paid for that. Again, as well cycles get faster and faster, it's harder and harder to get paid for that. And so, as we layer on additional technologies and capabilities, we've got to figure out ways to get paid for it. That's really kind of the simplicity of it. I'm really not in a position to share a whole lot about how we're going to do it. I think each customer has the potential to be slightly different, and that's fine, it's just as long as we're getting recognized and compensated for that.

Got it. We'll stay tuned. It's great to hear that you have [inaudible]. Appreciate it.

Thanks, Scott. I appreciate it. Okay. Erica, that was the last question?

Yes. I'd like to turn it back over to John Lindsay for closing remarks.

Okay, Erica. Thank you. So, everyone, thank you again for joining us this morning. As always, we're very appreciative to all of our folks at H&P for their efforts on focusing and driving value for our customers. We are optimistic about the future and optimistic that we can compete and perform during 2019. So, we're looking forward to it. Thank you all, and have a great day.

This does conclude today's call. Thank you for your participation on today's conference. Please feel free to disconnect your line, and have a wonderful day.