Helmerich & Payne Inc. (HP), a contract drilling company, announced a new deal under which the company will build and operate 7 additional FlexRigs. The contracts were awarded by four exploration and production companies, whose names and other conditions of the deal were not disclosed. Constructed under multi-year term contracts, the rigs will be operational in the U.S. with attractive dayrates and economic returns.
 
Under the new agreement, the first of the additional 7 rigs has been moved to the Eagle Ford shale. By January 2011, the remaining 6 rigs will be delivered at a rate of approximately one per month.
 
Helmerich’s proprietary FlexRig design makes the rigs move faster than conventional rigs, drills quicker and more efficiently and allows for a safer operating environment. As such, these are better suited for the new demands of the exploration business and, therefore, command higher dayrates and utilization than rigs from other land drillers. Since March 2005, the company has committed to put up 150 new FlexRigs at an estimated total cost of about $2.4 billion.
 
As of July 6, 2010, Helmerich’s existing fleet consisted of 215 U.S. land rigs (about 170 are active ones), 28 international land rigs (excluding the 11 nationalized rigs in Venezuela) and 9 offshore platform rigs. Of the active land rigs, 116 rigs are under term contracts, out of which 4 FlexRigs are pending due to customer’s request for a delayed delivery.
 
Helmerich has 45 idle rigs, of which only 10 are FlexRigs. However, 9 FlexRigs have already been contracted and are expected to be operational over the next eight weeks. Moreover, Helmerich has plans to complete another 8 new H&P-designed and operated FlexRigs by the end of January 2011. With the completion of these commitments, the global land fleet of the company will comprise a total of 200 FlexRigs.
 
These multi-year term contracts made management optimistic about the customers’ increasing confidence in Helmerich’s expertise in building and operating new FlexRigs at lucrative dayrates and conditions. Management also clarified that the 11 rigs that were seized by the Venezuelan government were conventional rigs and not a part of the company’s global FlexRig fleet. These contracts will not likely impact the company’s previously announced fiscal 2010 capital expenditures forecast of $350 million.
 
Helmerich & Payne is a major land and offshore drilling contractor in the western hemisphere, having an efficient drilling fleet with major work contracts from well capitalized and large independent oil companies. The company is currently rated at Zacks #3 Rank (Hold), implying that the stock will likely perform in line with the broader U.S. equity market over the next one-to-three months. This is supported by our long-term Neutral recommendation.
 
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