Good day, everyone, and welcome to today's Fiscal Third Quarter 2019 Earnings Conference Call for Helmerich & Payne. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note, this call may be recorded. [Operator Instructions] It is now my pleasure to turn today's program over to Dave Wilson, Director of Investor Relations. Please go ahead, sir.

Thank you, Tony, and welcome everyone to Helmerich & Payne's conference call and webcast for the third quarter of fiscal 2019. With us today are John Lindsay, President and CEO; and Mark Smith, Vice President and CFO. Both 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 our other SEC filings. You should not place undue reliance on forward-looking statements as we undertake no obligation to publicly update these forward-looking statements. During the call, we also make reference to certain non-GAAP financial measures such as segment operating income and operating statistics. You will find the GAAP reconciliation comments and calculations in yesterday's press release. With that said, I'll now turn the call over to John Lindsay.

Thank you, Dave, and good morning, everyone. I will address several topics today. First, I will talk about industry dynamics, our results and utilization. Next, I’ll discuss how our leadership position in the U.S. unconventional basins with our flex rigs and software solutions is allowing us to gain more traction in international markets. And lastly, I’ll discuss the momentum we’re seeing with our customers, who are early adopters of our next generation technology. The industry saw further softening in U.S. drilling activity, resulting from crude oil price volatility and tightening drilling budgets. Notwithstanding these challenges, H&P produced solid operating results and maintained flex rig super spec utilization at close to 90% during the quarter. Our expectation of the company’s rig count reaching the bottom during the quarter turned out to be premature. The effects of the industry emphasis on disciplined capital spending continues to reverberate throughout the oil field services sector. As such, H&P exited the quarter in the U.S. with 214 active rigs, which was slightly below the low end of our guidance range. Even with the lower than expected activity in U.S., H&P still performed well, generated $250 million in operating cash flow for the quarter. We see further softening during our fourth fiscal quarter as our guidance would indicate. And while we’re hesitant to make another prediction, our sentiment now is that we should start to see some improvement around the time customers recalibrate during the final calendar quarter of the year and began to plan for activity in 2020. And looking at our last 30 rig releases, more than 80% were associated with a project completion or a budget related reduction. They were not related to pricing. We continue to win bids in the open market, however, there is a high level of churn in our…

Thanks, John. Today, I will review our fiscal third quarter 2019 operating results, provide guidance for the fourth quarter, update full fiscal year 2019 guidance as appropriate and comment on our financial position. Let's start with highlights for the recently completed third quarter. The company generated quarterly revenues $688 million versus $721 million in the previous quarter. The quarterly decrease in revenue is primarily due to a decrease in the average number of rigs working in the U.S. land segments as expected. Total direct operating costs incurred were $445 million for the third quarter versus $443 million for the previous quarter. The increase is primarily is attributable to higher than expected self-insurance expenses in the U.S. land, despite the decrease in revenue days. Also contributing was a write down of certain inventories and materials and supplies which flowed through OpEx and was related to decommission and drilling equipment and spares which were on a separate line item in the income statement and which I will now describe in more detail. During the third fiscal quarter a detailed assessment of our flex rig four asset group was performed. The end objective of this assessment was to maximize the utilization and enhance the margins of the domestic and international flex rig four asset groups. In June 2019, this assessment concluded that marketing a smaller fleet of these two asset groups will provide the most optimal economic outcome. As such we have downsized the number of domestic and international flex rig for drilling rigs marketed to customers from 71 rigs to 20 in the U.S. and from 10 rigs to 8 internationally. Major components from the decommissioned rigs were added to capitals spares for our rig fleet, following this downsizing process a detailed study was then performed to identify the appropriate quantities of…

Great. Thank you. [Operator Instructions] We'll take our first question from Brad Handler with Jefferies. Please go ahead. Your line is open.

Thanks very much, good morning. And thanks as always, for the detail. I guess, I can't help but queue in a little bit John on your, you sniffed out a little bit of optimism for 2020 I guess or 2020 preparation. So maybe we could ask you to expand on that. The obviously that would sort of buck, what might be considered a normal seasonal trend of operators kind of backing off because of budget exhaustion. But I imagine you're thinking there is a guide path the guide path that they've already set to be more conservative with it. But again, if you could expand on that, please that would be helpful.

Sure. Well, I think, obviously, the feedback that we get from our customers, and of course, we like everyone, we digest all of the sell side commentary and try to keep up as much as we can with budget, the budgeting process. And I think we would all agree that, budgets were set in this $50 to $55 price range for ‘19. And more of the budget was spent more than 50% of budgets were spent in the first half of the year. And so you combine that with kind of the discussions that we're having with customers. And again, it's, we're not in the business of predicting what rig counts are, but that's kind of what we're seeing is towards the end of this quarter going into the next quarter, we see it feels like it's starting to kind of flatten out. I think, again, depending on what the budgets are for 2020 what oil price scenario is used. But if you were to assume that it's a 50 to 55. Again, that more than likely is going to require an increase in rig activity, in order to do get to the number of wells that need to be, need to be drilled. So that's kind of our view. And we backing it up a little bit with some of the customer conversations that we have. Obviously, we can't go into a lot of great detail there. But that's kind of our basis for our assumption.

Understood, understood, I guess I'll askyou to reach in even if it's, you can obviously swap away as you need to. But do you sense and this would obviously be akin to your customer strengths anyway. Do you sense that it continues to be IOC led, or at least very large E&P led in that respect, or is it even broader than that?

I don't think there's any doubt that there's some of the larger companies that have, have had budget capacity. But in terms of getting prepared, getting ready for 2020 calendar 2020. I think there's a wide range of customers that are looking at different opportunities. So I think it's more broad based than that.

That's encouraging obviously, if I may a shift and just maybe it's just an education thing. Mark, you talked about self insurance? I'm not exactly sure what to do with that, right? I mean, obviously, that's their choices that you make. And it just sounds like there were expenses incurred, that obviously, you don't generally have insurance for, but how volatile is that, should I be reading in that it just, there were incidents that needed to be addressed? And therefore, those are not considered to be sort of normal course of events? What do I do with that I guess?

Brad, thanks for the question. We have a large amount of retention that we managed internally before going to the insurance markets. And so there is some volatility, because as you alluded to, whenever any sort of incident arises, sometimes it's unpredictable as to the amount. And in addition, they can have a long duration in terms of eventual settlement. So you may know this through all three operating segments from quarter-to-quarter, we occasionally have adjustments, up and down related to our retention levels.

Fair enough, and so it's just, you obviously plan for that it was a little below your normal run rate expectations. Last quarter was obviously about it this quarter.

Again, it is hard to beyond a run rate we obviously work with an actuary to try to ascertain what that run rate should be, but actual events don't always unfold as planned.

And then I'll turn it back was it very concentrated the higher expenses was it very concentrated in one or two or three rigs? Is that how we might think of it?

No, it's really just with the scale that we have the number of rigs that we have operating in so many different regions of the country that, it can be lumpy.

Next, we'll move to Sean Meakim with JPMorgan. Please go ahead. Your line is open.

So John, first thing, how would you characterize the guy is that you gave for fiscal fourth quarter. So meaning, would you think that this is some of your fleet catching up with the rest of the lower 48 given your rigs have been fairly resilient. And the first half of the year you've taking share? As we've had more rigs come off, are you just kind of seeing a bit more of a catch up? Or what is the difference between the customer mix see if I can help us understand maybe how you're perceiving things differently than a few months ago?

As you know, looking at our data, I don't think we've lost any share if we have it's a very, very small amount. And I don't forecast necessarily losing any share going forward. Again, all we really have to face other than the public data is our internal communication with customer with customers. And again, keep in mind when I talk about churn, we have rigs released and rig often times before it ever hits the grass, re-contracted. And then of course, there are rigs that are coming out of the grass that have been re-contracted. And so there's just this consistent if you will of risk being released and going back to work. And this is just again, we try to give a broad range. Obviously, we gave a broad range for Q3, and we hit the bottom or just under the bottom of that range. Again, we've got a range here, it's just, it's just a function of where we're, we'll hit, again, our hope would be is it will hit in the middle, or will hit higher, but still got a long way to go in the quarter. I know, it's not a direct answer, but I sure don't see us losing any ground in any way. I think the super spec fleet is, is very well positioned. We've got very good performance going on, our people are doing an excellent job. So, I don't have any concerns there. I've mentioned in my prepared remarks related to the legacy rig fleet. I mean, those are those are real numbers. There are still, I mean, let's face it, there are still over 200, legacy rigs, drilling horizontal wells, and in some cases, they're drilling some of the more complex stuff. That's really a mismatch, it's a disconnect. And, we are seeing customers that are utilizing those type of rigs that are saying that they see an opportunity to improve. At the same time, the smaller companies, with smaller rigs, maybe less capable rigs, are also doing everything they can to keep rigs running. So you know what that means? They're pushing the price envelope, but when you start talking value proposition, it's, the lower day rate just doesn't win the day.

Understood. And I appreciate that, that kind of leads to my other question. So far, you've elected to focus on value over volumes in this environment, right. And that's, that's been proven to be the right approach so far. But then as we get later in the year, and we see more rigs come off in the aggregate, and more of your peers are going to roll over decent sized portion of their contracts to, to new rates. At what point do you think that the market may force you to change how you approach that value over volume strategy?

Well, a couple of things. One would be, I don't know which rig, specifically you're talking about that are, that are rolling have already addressed but the legacy piece of it. But the value proposition is if rigs are delivering value, they're going to be hard pressed to be replaced by something that is given a $3000 or $4000 or $5000 a day discount, because all you have to do is save a couple of days, on a 15 to 20 day well. And you've more than paid back the discount on the, on the prices of the rig. So the fact of the matter is of the rigs that we've had released, and again, I addressed this in the prepared remarks it may not be clear, but 30 rigs that are released over 80% of those at the end of the budget, there was no negotiation, we could say, hey, tell you what, we'll give you the rig for free and they wouldn't have been able to keep the rig running. And more than likely it was a rig that was a spot market rig regardless of if it was a top performer. If it's the end of this program, it's going, it's going down and there was no rig coming in replacing it at a lower rate. And so I suspect that we'll continue to see that but once you get to this level of rig count that probably a lot gets it to that kind of breakeven of spending, essentially 100% of your budget for 2019. Then our view and what we're hearing from customers is that they're going to maintain that rig count. They're not going to continue to release. So I hear what you're saying, the super spec utilization is still close to 90%. With the numbers that we're describing it, we would think it would be in the mid-80s, 85%, 86%. But again, the value proposition is what really wins the day.

Next we'll move to Tommy Moll with Stephens, Inc. Please go ahead. Your line is open.

John, I wanted to start on auto slide. Good to hear the progress rolling it out and additional basins with plans for one more this quarter. You did highlight the disruptive aspect of the technology and how that can present an extension of the timeline for customer adoption? But to unpack that a little bit. Could you update us on how many rigs are now running auto slide and then going forward without putting trying to put numbers around it but just speaking generally. Is this a situation, like you see with a lot of technologies where somewhere down the road, we hit a tipping point. And enough customers have tried it and talked to one another and had good results that maybe there's a meaningful inflection higher?

Yes. That's true. I think, I've mentioned it previously in that. We saw very similar type trend with flex rigs in the early days, it was tough letting early on. And once customers began to see the value, then there was a push. And so today, we're on five rigs in those four basins. We could be on more rigs today. But again, we're being very purposeful and the way that we're rolling this out. And our hope would be at least the plan right now would be to double that by the end of this fiscal, the fourth fiscal quarter. As we continue to add a customer, and as we add additional rigs to current customers. So the rollout has been purposefully slow, because, again, we're doing something that's really never been done before. And a lot of what has to take place is proper change management, which means clear communications of the goals. And it's obviously very important that our customer has a clear vision of what they want to accomplish. And that's part of what I was addressing and again in my remarks. Where they want this reliability, they don't want to have a top 10%, 20%, 30% of their fleet, they want everybody to be performing on the drilling side in a similar fashion. And you can do that of course with automation. And so that's I think what's really the driver and this idea of having capital certainty. So as an example, you don't have 5%, 6%, 7%, 8% of your well that lie on the curve in the wrong part of the zone, right? And then you got those challenges that costs you money. So there's lots of advantages on that. There's risk, less risk as far as landing, and there's less risk as it relates to using the example of tripping. We've seen examples where we're tripping less, so you have less exposure to employees, because you're tripping less. You're just you're drilling ahead. So I agree. I think there, I think there will be a tipping point. It's kind of slow going right now. But we definitely have some very strong customer partnerships that are that are really working out very well right now.

Thanks, John. That's all very helpful. And shifting. Shifting gears. Mark, I wanted to circle back to a comment you made about decommissioning cost that we should anticipate for the flex fours. Is that something that's going to show up at some point in the daily operating costs in the model? And if you are able to comment maybe on timing or magnitude, I think it would help set everyone's expectations just for the OpEx. Although, we know in advance that it's coming.

Yes. Thanks for the question, Tommy. As you go from as you go from our normalized per today, figure of around 13.7, to the average expense says yes, in there you would see, I don't know roughly $100 per day, at least in this next fiscal quarter. There could be some trailing cost in the first fiscal quarter of 2020, just depends on we're still finalizing plans related to the exact, this is just another component tree on the decommissioning rigs. And, that'll also factory on the how much bleed over we have from quarter to quarter, but it should be nonetheless, transitory costs, and it totally winds down around the beginning of the calendar year.

Right. Thank you. That's all for me.

Great, thank you. Next, we'll move to Kurt Hallead with RBC. Please go ahead. Your line is open.

Hey, good morning, John. Mark, everybody. Thank you so much for the color commentary on what's going on the marketplace. Hey, John, just want to get a general sense, right. It sounds to me like the conversation you're having with the customer base. As indicated, is suggestive of, you have started to think about what you're going to need going into, going into 2020. The narrative also sounds very similar to what we've probably heard over the course of past 10 years in terms of the matter what the price point is on a less efficient rig. As you already mentioned, the value proposition for using, a super spec rig doesn't make sense in swapping. It seems like there's cost currents out there. So just want to really clarify, is the pricing pressure that you indicated? Is that solely coming at the lower end of the rig market? And secondarily, can you confirm that you haven't experienced any indications of some of your competitors starting to discount pricing on super spec rigs?

Well Kurt, as you know, you've been in this business for a long time. There's always a certain amount of pricing pressure that's going on but as well complexity as we have more complex wells, there's less of that, because they understand the value proposition. There's no doubt that on the lower end of the spectrum. There's a lot of, what we would call in the past hand-to-hand combat, fighting in the trenches. That's some tough pricing going on. But I think in general, the bigger players have, at least from our perspective, have held and have had some pretty strong pricing discipline. I mean, there's always exceptions everybody is going to have an exception here or there. Depending on whether a rig's performing or not performing or whatever, various situations. But I think in general, it's been a pretty disciplined market.

Appreciate that, maybe as a follow-up to it. To me, that sounds like based on your commentary that we're headed for another kind of wave of early terminations, whether it be in U.S. or international markets. Can you comment on that?

We sure haven't had any. I think any early termination payments we've received have been legacy type. And they've been very small. Again, I mentioned earlier, a lot of the rigs that we've had released were spot market rigs that, they were top performing rigs but they weren't on term, and the customer had to get down to certain rig count. So I don't expect that we're going to see any early terminations. Again, we're hoping that we're getting close to this rig count dropping out, and then hopefully getting prepared for '20.

Great, thanks. And maybe just one last one for Mark, gave very specific and detailed guidance by segment. One thing that was left out that kind of begs the question, which is, can you give us some general sense of what HP Tech gross margins could be, in that, with that $17 million and $18 million of revenue that you provided?

I think, if you, Kurt, I was kind of break that into two buckets. If you look at the run rate, we've had the last couple of quarters of HPT. And the MOTIVE, MagVAR and new burgeoning auto slide products. You could extrapolate that portion of HPT, they continue to have the same margin. But if you add to that the FlexApp the migration into Q4, that's a very high margin software application. And so you're just going to need to blend those together.

And next we'll move to Chris Voie with Wells Fargo. Please go ahead. Your line is open.

Just a follow up in the last question a little bit. I see that the prior quarter was not restated. Can you give a figure of how much revenue or sorry margin per day came out of the quarter with switch reflects that into HPT?

In the third quarter, it was still in U.S. Land. We said that was about $450 per day in revenue and that's pretty much full margin revenue.

And then switching gears. Just curious I'd like your commentary on this but. It seems like higher efficiency is kicking in the Permian finally especially the Delaware to some extent. Do you view that as much of a factor in terms of the rig count trending bit lower than you previously expected?

I don't really have a sense of the efficiency gain that you're that you're mentioning.

It just seems like the cycle times are starting to move there compared to other basins, but.

Well, I'm sure, I know the Delaware has some challenges as an example that you don't have an Midland Basin cycle times are faster. We like we always do we figure it out. And, and so I wouldn't be surprised to see the improvement. The other reason for improvement in that basin will be that I'm sure there's a much higher percentage of AC drive super spec rigs working in there today than there were a year ago. And that will make a difference as well. But, we over time as an industry, our customers working together with service providers, we figure out how to how to drill those more effectively. I think we have a lot more rigs working in the Delaware also. So that also helps to drive greater efficiencies.

Okay, that's helpful. Thank you. I'll turn it back.

All right. Thank you

Chris thanks and congratulations on your new responsibilities.

Thanks a lot.

And thank you. Next, we'll move to Scott Gruber with Citigroup. Please go ahead. Your line is open.

Yes. Good morning.

Good morning, Scott.

Mark, you highlighted the progress and overhead that you've made. But with rig count expectations for 2020 coming down here across the industry, are there additional overhead and support costs reduction opportunity that you're contemplating, is there an opportunity to get leaner and leverage technology more to reduce costs?

Well, I think, as I alluded to in the prepared comments, I think we're pretty well scaled in one respect, towards total support back office processes for the company. We've been able to leverage a bit to reduce G&A this year, even though we have as I mentioned, more rigs working then at this time last year. Nevertheless, there are various parts of the company that certainly can see some scaling up or down related to rig counts, one. Two, I mentioned our new initiatives to optimize working capital. And essentially, we implemented a world class ERP system just the last couple of years ago. And we are working on numerous process improvements, to really optimize that ERP system and automate many of our back office processes. And those have real business implications such as the working capital unlock we experienced this quarter with some recent, focused initiative. And then I guess thirdly as it as it relates to our district offices and our country offices internationally. We have various expansion and contraction obviously in the direct support. Those offices related to the number of rigs working.So we're is something we're continuously tweaking as we move through time and react to the business.

Got it and then just on the CapEx side. You highlighted potential maintenance, here in fiscal '20 it's 230 given your rig count expectations, and overall fiscal ‘20 CapEx, likely coming in below 300. Can you provide some more color on the potential gap in between the low 200s and the high 200s what your other initiative are contemplated? And how quickly could you flex down towards the lower end if your volume expectations are hit, but very pleased there's some pressure on cash flow.

Firstly, let me mention that the 230 rig count I quoted was the rig count literally as of today across all segments. So we think that a rig count hopefully will be higher, that's going to be part of it to begin with. Through the rest of this summer and complete our budgeting and return to you in November with our guidance for next year, we'll fill in some of those holes. But we always have issues, we're looking at related to various improvements and our rig capabilities. So we incur some special projects there and have historically year-over-year. And then also, as we continue to optimize and improve back office functions. We do encourage some IT spend and other corporate spend. And then we have legacy businesses, where we also have some CapEx spend such as our Tulsa real estate business, et cetera. So lots of potential variability, we're just at the beginning of the budgeting process. And we wanted to give some sort of indication related to that, in terms of rig count, because that maintenance CapEx is going to be the predominant part of fiscal 2020 CapEx, it will be directly correlated to that rig count.

And we'll next move to Marc Bianchi with Cowen. Please go ahead. Your line is open.

I wanted to switch over to international quickly to just get any update on the opportunity to deploy more super-spec rigs outside of the U.S. You have a couple that are going in Argentina now. Just wondering, if there's any new information to discuss on that front?

Sure Marc. I think Argentina, obviously we've got a strong position there. And have been encouraged that we've had these opportunities. And I think there are still opportunities to do more. Don't have anything signed up obviously yet. But I do think there's some opportunities to grow in Argentina. We continue to hear seems like there's a lot of momentum with IOCs that are looking to grow their further production there. So I think overall, it seems pretty encouraging. As far as outside of Argentina, the Middle East obviously holds some great promise, I think for us in the future. It's just hard to see it. We don't have clear visibility into when that time it would be. We've generally kind of cast it by saying when we begin to see unconventional resource plays, more horizontal drilling and international markets, and obviously, that's a great place for us to take our technology and our capabilities. So outside of Argentina don't have any real clear sight into anything other.

John thanks for that. And last one, just for Mark. On the tax rate guidance, you provided here for the fourth quarter seems perhaps a little bit high from what might be a normalized rate. Can you just give us some commentary and how you think about that for 2020, fiscal 2020 and beyond?

Yes, Marc, it's little high in Q4 again to the big loss in the difference that we incur in this quarter. So to get back to more of a normalized year-to-date rate. And then it should drift back down, again for fiscal ’20 and be somewhere between 21% statutory rate and 30% just dependent on the state and foreign taxes and the jurisdictions and where we operate.

Thanks very much appreciated.

Thank you.

Thank you.

Thank you. And at this time, I'll turn the call back over to Mr. John Lindsay, please go ahead, sir.

Okay, Tony, thank you. And thank you everyone for participating on our third quarter earnings call. To reinforce we believe we're very well positioned we have the flexibility and have a solid strategy for this changing industry outlook. The value proposition of the super spec flex rig the value or digital technologies and automation capabilities. Obviously well bore quality, pricing reliability. And finally a strong track record of financial discipline strong dividend policy with the flexibility to respond to market opportunities. And then finally, I just want to thank all of our people for their focus on actively care for teamwork and working with our customers daily work and driving high levels of customer service. Thank you again and have a great day.

Thank you. This does conclude today's conference. You may disconnect and have a great day.