Contract driller Helmerich & Payne Inc. has been repositioning its rig fleet or the last 10 years, well in advance of the shale revolution that has swept the oil and gas patch. Back then it wasn't known how well suited the firm's FlexRigs would be to horizontal drilling in the shales. As it turns out, they work quite well, H&P CEO Hans Helmerich told financial analysts during a fiscal fourth quarter earnings conference call.

"Because the shale revolution creates a new opportunity set, the increasingly complex drilling requirements are not well suited for the traditional rig refurbishment efforts where select new equipment is simply retrofitted to an old derrick and substructure," Helmerich said. "...[I]n the end, these refurbished rigs are unable to deliver to the higher performance standard."

According to data from Smith Bits, a Schlumberger company, H&P currently has the most horizontal and directional rigs operating onshore within the United States. For the week ending Nov. 18, H&P had 190 horizontal and directional rigs in operation, or 14% of the total number of horizontal and directional land rigs running in the United States. Rounding out the top five is Nabors Drilling (183 rigs), Patterson-UTI (143 rigs), Nomac (102 rigs) and Precision Drilling (74 rigs).

H&P management had been waiting for the drilling rig obsolescence curve to steepen. "We're finally seeing this now," Helmerich said, citing industry data that show more than 150 mechanical rigs have been retired by public contractors in the United States this year.

Helmerich said it has been high-grading its fleet as well. The fleet now features 90% H&P-designed FlexRigs, 83% of which are AC powered. (The first and second FlexRig generations were deployed by H&P in 1998 and 2001, respectively.)

Along with announcing earnings for the fiscal fourth quarter and year, H&P said it has agreed with three exploration and production companies to build and operate 17 additional FlexRigs. "These 17 rigs will be built under multi-year term contracts and are expected to generate attractive economic returns for the company," H&P said. "Including new builds announced [Thursday] and earlier this year, 47 contracted FlexRigs remain under construction and are currently being completed at the rate of approximately four per month. Once these rigs are completed, the company's global fleet is expected to include 284 FlexRigs."

Those rigs, new and old, will have plenty of work, according to Helmerich, as the shale energy future continues to unfold and producers chip away at their large drilling inventories. While gas-directed drilling is expected by Helmerich to decline, the lost business will be more than offset by oil- and liquids rich-directed drilling.

"After completely transforming the natural gas markets in this country over the last several years, this shale revolution has now fully engaged an increasing number of oil- and liquids-rich basins," he said. "With prospective areas being added to the list regularly, it's challenging, really, to grasp the sheer scope and scale of drillable inventory that is being added to customer backlogs. It represents literally years of drilling visibility, most of which is still in the early development phase.

"We were fortunate prior to the advent of this shale revolution to have already designed, manufactured and gained valuable operational experience with the FlexRigs."

H&P reported income from continuing operations of $434.7 million ($3.99/share) from operating revenues of $2.54 billion for its fiscal year ended Sept. 30, compared to $286.1 million ($2.66/share) from operating revenues of $1.88 billion during the year-ago period.

Income from continuing operations for the fourth quarter of fiscal 2011 was $121.5 million ($1.11/share) from operating revenues of $700.8 million, compared to $83.3 million (77 cents/share) from operating revenues of $559 million during the fourth fiscal quarter of 2010.