Parker Drilling Q3 2008 Earnings Call Transcript

Parker Drilling (PKD)

Q3 2008 Earnings Call

November 5, 200811:00 am ET

Executives

Richard Bajenski – Director of Investor Relations

David Tucker – Treasurer

Robert Parker, Jr. – Chairman, President, Chief Executive Officer

David Mannon – President, Chief Operating Officer

W. Kirk Brassfield – Senior Vice President, Chief Financial Officer

Analysts

Douglas Becker - Banc of America Securities

Gary Stromberg – Barclays Capital

Matthew Beeby – Morgan Keegan & Co., Inc.

Andrew Coleman – UBS

[David Griffith – Cobia Capital]

Presentation

Operator

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Parker Drilling third quarter 2008 conference call. (Operator instructions) At this time, I would like to turn the conference over to Richard Bajenski. Please go ahead sir.

Richard Bajenski

Thank you, Micia. Good morning and thank you all for joining Parker Drilling company’s third quarter conference call. This is Rich Bajenski, Director of Investor Relations and joining me today are Bobby Parker, Chairman and Chief Executive Officer, Dave Mannon, President and Chief Operating Officer, and Kirk Brassfield, Senior Vice President and Chief Financial Officer.

In the course of our comments today, we will make statements regarding management’s expectations for the company’s future performance that we believe will be informative and beneficial to our shareholders. These statements are considered forward-looking statements within the meaning of the securities act. Each forward-looking statement speaks only as of the date of this call and actual results may differ materially due to various factors we have referenced in our public filings, including a change of market conditions affecting our industry and other factors addressed during this call.

We will also refer to non-GAAP financial measures such as adjusted EBITDA and non-routine items. Please refer to the table in our current press release or on the company’s website for a definition of adjusted EBITDA and a reconciliation of these measures to the comparable GAAP measure and for further information.

With that being said, I will now turn the call over to Bobby Parker.

Robert Parker, Jr.

Thanks, Rich and welcome to our conference call. Today we reported our third quarter results, including net earnings per share of $0.16 on record revenues. Included in those results were $0.04 per share of non-operating matters, which Kirk will cover later. Excluding those, earnings per share were $0.20 compared with $0.20 for the same period in 2007.

International drilling revenues grew by 57% compared to the prior year’s third quarter as a result of higher day rates and utilization. Our worldwide utilization now stands at 80% and the majority of our international fleet is committed under long term contracts with 77% committed into 2009 and 50% committed into 2010.

Project management and services revenues increased by 15% compared to the third quarter of 2007. It reflects both the normal progression of the workload of the projects we had underway and an increase in the number of projects that we have been awarded. As announced earlier in the third quarter, we have had a number of historic accomplishments in our project management segment.

British Petroleum awarded Parker a new contract to construct, deliver, and commission a land based rig to drill ultra-extended reach offshore oils to the Liberty Field of the Alaska Beau ford Sea. The rig will be owned by BP and drilling is anticipated to start in 2010. The rig will be the world’s most sophisticated land rig, with advanced features enabling development in a safe, effective, and environmentally conscious matter.

Field development will occur via horizontal wells extending nearly two miles deep and as far as eight miles out beneath the sea floor. Some of the measured depths exceeding records set by the Parker built Yoscar rig for the Sakhalin 1 Consortium.

We also announced that we were awarded the feed, or front end engineering and design study, for the drilling package on the Octan Doggy Platform for the Sakhalin 1 Consortium offshore Sachman Island. This new contract is a direct result of our success with the engineering and design, construction and operations, and maintenance contracts for the Yoster rig as well as the O&M contract for the Orlan Platform, another Sakhalin 1 Consortium project operated by Exxon Neftegas.

Rental tools revenue grew by 30% to the prior year’s third quarter, continuing the momentum of the past several quarters. Our 2006 and 2007 investment in inventory and expansion of locations for Quail Tool, have allowed us to fully participate in the increased drilling activity in resource plays and ongoing drilling programs.

The revenue growth in international, project management, and rental tools more than offset the 21% decline in US drilling from prior year’s levels. As we have noted at the outset of the quarter, we expected some tempering of activity in what had been, up till then, a very active market. Utilization has come down and so have day rates.

On overall, 30% increase in revenues compared to the prior year we grew our gross margins by $2.5 million. The impact on earnings of a revenue decline in US drilling and the timing of activity and project management and services, offset much of the benefit from the revenue growth at rental tools and international drilling.

Now, let me share my thoughts about our outlook before turning this segment over to Dave Mannon for his update on operations.

As far as the macro picture, we struggle with the impact of Parker and our industry from the credit crisis and lower commodity prices. Neither bode well for future activity, but predicting their impact is difficult. It seems that the negative impact will be mostly felt in land US and to a lesser extent international. Issues such as customer mix, including partners, geographical activity, production sharing agreement terms in international markets, and requirements to drill to hold acreage, all figure in. We continue to monitor our customer’s plans with these effects.

As evidenced by our latest contract with the Sakhalin 1 Consortium, E&P companies are increasingly looking to exploit remote and difficult fields as major finds become restricted to remote locations with harsh climate conditions and complex geological formations. Parker’s technology is enabling our customers to unlock these opportunities and we believe that our advanced drilling solution will become increasingly in demand as a result. We will continue to leverage our technical capabilities by seeking projects such as these to grow our project management business segment.

Our outlook for rental tools remains positive. We anticipate sustained performance from this segment. On land, preliminary forecast of operator spending in 2009 in North America indicate a continued shift towards unconventional resources and emerging shell plates. Our recent expansion initiative placing new stores in the most active US Shell plays, including the Williston, Haynesville, and Fayetteville shell plays allows us to take full advantage of these growing markets.

Given our customer base and expanded presence in the market, we expect our rental tools business to hold up. In addition, deep water E&P spending is expected to remain largely unchanged in 2009, which will continue to benefit Quail Tools.

Due to the long term focus of in country, national, and international oil companies, we do not expect our international drilling segment to be affected by the weakening global economy or the current decline in commodity prices, as discussed. At this time, accepting a prolonged global recession, we expect our international segment to continue to strengthen throughout 2009, although at a slower rate than 2008. For the remainder of 2008, our performance will fueled primarily by rental tools, international drilling, and project management segments. Our US drilling business is expected to experience weakness through the fourth quarter due to lower natural gas prices and spending constraints of our customers.

That concludes my old review. I believe the uncertainties in our market and in the economy in general, demonstrate the value of our strategy to leverage Parker’s technical capabilities and experience to develop platforms for growth, differentiate its traditional drilling business, and balance the company’s business mix. We remain focused on executing our plan and look forward to reporting our progress as we go forward.

I will now turn the call over to Dave Mannon to discuss operational highlights.

David Mannon

Thanks, Bobby. Turning to our US barge drilling segment, 82% utilization and steady rates in the Gulf of Mexico resulted in EBITDA of 22.9 million for the quarter. An update to our press release this morning, barge rate 21 received a commitment and will mobilize today, which increases our fleet utilization to 73%.

Let me give you some day rate and utilization numbers for the Gulf of Mexico. These averages are also on our website. Current average day rates for deep drilling barges is $44,200 a day, with the utilization of 80%. The intermediate fleet utilization is 67% with an average day rate of $28,900 per day. Average third quarter 2008 day rates for deep drilling was $44,300 a day with the utilization of 82%. And our immediate fleet day rigs were 80 average day rates were $32,800 a day and utilization of 100%.

In accordance with our strategic plan to provide our customers with a preferred fleet, deep barge rigs 51 completed scheduled refurbishment and upgrades and re-entered the fleet in October under contract. Barge rig 51 refurbishment program was reflected in our third quarter utilization. As rig 51 exited, deep barge rig 55 entered the shipyard for a similar scheduled refurbishment and upgrade, which will be reflected in our fourth quarter utilization.

While tools posted record EBITDA of $27.8 million in the third quarter despite about a half a million dollar hurricane impact, the largest year-over-year ship sales increases were seen in our new locations in Williston, North Dakota, which targets the Bacchen Shale play and Texarcana, Texas, which serves the eastern Barnett as well as the Haynesville, Fayetteville, and Woodford Shale Plays.

In our Latin America markets, nine of our ten rigs in the region are working. Rig 121 spud early in the third quarter after being transferred from Isle Status in Libya to a four year contract in northern Mexico, joining rig 122. All eight rigs in Mexico are under multi-year contracts and our success in this region is a prime example of our consolidation strategy to place available rigs in international regions where we already have established infrastructure, in order to maximize profitability.

Two of our AC drive rigs continue to operate in Algeria under contracts extending to 2010. In Asia/Pacific our effective utilization is 100%. In Indonesia, rig 252 spout in August after transferring from idle status in New Zealand and rig 231 is contracted to work to 2010. In New Zealand, both rigs in the country are working under a long term contract. Rig 226 in Papua, New Guinea, operated through the third quarter and is expected to work through the completion of its contract early next year. We are currently marketing the rig in multiple international locations.

In our CIS operations, our effective utilization is 100%, with all nine of our marketable rigs in the region working under long term contracts. We have had a long and successful history in operations in Kazakhstan, and our success in this region is another example of our effectiveness of our consolidation strategy.

In our Karachaganak field, Parker’s four land rigs are currently working under a long term contract. New build rig 269 spud in early August, joining the recently refurbished and upgraded rig 247 for a term contract in Kazakhstan’s Dungafield. Rig 257 continues to work under amended letter of agreement at a significantly higher day rate and is expected to execute a 3 year commitment before the end of the month.

We continue to market rig 270, our newly built international land rig, and are optimistic that this rig will be contracted during the first half of 2009. We also have two Parker owned new built land rigs under construction for a development drilling program for British Petroleum on the north slope of Alaska. This program is on schedule for sea lift in 2009 and rig up in late 2010. We believe the Alaskan market has significant long term growth potential that is well suited for our arctic operating experience and extended reach drilling expertise. These new builds will join BP Liberty Rig and solidify our presence in this region.

The BP Liberty project, now in its BPCI for construction and installation phase, is reflected in our project management and construction contract segments. This special purpose rig is being built for BP’s development of the Liberty Field on the north slope of Alaska. It is scheduled for deployment to Alaska in mid-2009 and to commence operations in early 2010.

Our project management contracts on Russia’s Sakhalin Island continue with Exxon Neftegas for the Astriff land rig and the Aforlon platform. In the third quarter we mobilized the Astriff rig per an EPCI contract with Exxon Neftegas, to build a new mass and procure equipment upgrades and move the rig 100 miles to the north to commence a second exploration and development project. Rig up on the new location is currently underway and the rig is expected to spud in the first quarter of 2009. In addition, we have begun work on designing the drilling package for the Actoon Doggy Platform Offshore Sakhalin Island.

Other ongoing O&M contracts include supplying personnel for 11 rigs in Kuwait and one platform in China. We are actively bidding additional design, construction, and operation contracts and anticipate adding projects to our growing project management business in the near future.

That’s it for our operations update. I will now turn the call over to Kirk Brassfield to discuss our financial results.

W. Kirk Brassfield

Thanks, Dave. For the third quarter of 2008, Parker Drilling reported net income of $18.6 million, or $0.16 per diluted shares on revenues of $227.5 million. This compares to a net income of $22.7 million or $0.20 per diluted share on revenues of $172.2 million for the third quarter of 2007.

There were two non routine items that affected this quarter’s results. One is the substantial cost of the continuing investigations by Parker and the Department of Justice into the practices of certain industry utilized custom agents. In the third quarter we incurred approximately $2.1 million pre-tax of legal and professional fees for these investigations and approximately $5.4 million year-to-date. These costs reduced third quarter earnings by approximately $0.01 per share.

In addition, we incurred a 2.4 million non-cash charge to tax expense for withholding taxes on intercompany transactions between our US company and certain of our foreign entities. This is in keeping with the requirements of FIN #48, which is accounting for uncertainty in income taxes. The impact of this is reflected in our third quarter reported tax rate of 52.1%. This higher than normal tax rate reduced earnings by approximately $0.03 per share.

Turning now to our operating results, US Drilling Operations reported gross margins of $22.9 million for the third quarter of 2008. Our third quarter margins were negatively impacted by 1.3 million by Hurricane’s Gustav and Ike. Margins were down 10.4 million from the third quarter of 2007 due to lower day rates and slightly less utilization when compared to a year ago.

Margins were down 4.3 million from the second quarter 2008 due to lower utilization, including the scheduled ship yard time for repair and upgrade of deep barge rig 51. Day rates were slightly up from the previous quarter. Our deep barge day rates have remained within a $1,500 range over the last four quarters.

Utilization for our international land operations in the third quarter of 2008 averaged 82% compared to 55% for the third quarter of 2007 and 75% in the second quarter of 2008. International land gross margins were $17.4 million for the third quarter of 2008, down 800,000 compared to the $18.2 million in the third quarter of 2007. Last year’s numbers benefitted from an adjustment to the African Mill East area of $2.8 million. Sequentially, from the second quarter of 2008, margins were $3.8 million higher due to a full quarter of utilization of rig 268 in Colombia, higher utilization of rigs in the Asia/Pacific area, and demobilization costs in our Libya operation during the second quarter.

International offshore gross margins of $11.2 million in the third quarter of 2008 were $7.8 million higher than the third quarter of 2007 and $3.5 million higher than the previous quarter. Higher margins were driven by a full quarter of utilization at a new rate on barge rig 257 in the Caspian Sea.

Rental tools reported record gross margins of $27.8 million for the quarter, which is a $3.4 million increase from the second quarter 2008 and a 33% increase over the third quarter of 2007.

Our project management and engineering services segment including construction income, reported gross margins of $3.7 million for the quarter, down 1.5 million from the second quarter 2008 and $500,000 from the third quarter 2007. Compared to the same quarter, results were down due to a significant amount of one time reimbursable items purchased for our Kuwait operations in the second quarter, lower margins on rig 262 while the rig was moving to a new location on Sakhalin Island a feed study from the Liberty Project being completed last quarter.

Instruction income recognized on a percentage of completion basis, was approximately the same as the previous quarter. Our cash balance of September 30, was $75.3 million, an increase of $15.2 million from the December 31, 2007.

Capital expenditures were $67.8 million for the third quarter and $157.3 million year-to-date. Included in the capital expenditure number is capitalized interest of $1.7 million for the quarter and $4.2 million year-to-date. Our capital expenditure estimate for the year remains in the $200 to $215 million range.

G&A expense increased to 9.3 for the quarter, included is the previously discussed $2.1 million of professional fees included related to the Department of Justice investigation.

Depreciation expense was $30.7 million for the third quarter, reflecting an increase of $2.5 million from the same quarter and $7.6 million from the prior year. Depreciated increased in 2008 due to our prior year capital spending on Ford new build rigs that were placed into service in 2008, the commencement of operation of rig 269 and increased investment in Quail Tools over the last two years. We expected depreciation for 2008 to approximate $120 million.

Excluding the non-routine tax items, we expect our effective tax rate for the year will approximate 42%.

As mentioned last quarter, in May we secured a new five-year $130 million credit facility consisting of an $80 million revolver and a $50 million term loan. The facility was secured to supplement the construction cost of two rigs for BP Alaska. At the end of the third quarter we had drawn down $50 million on the term loan and $10 million on the revolver. Term loan begins amortizing at $3 million per quarter in September 2009 until the facility matures in 2013. Subsequent to quarter end, we drew down $48 million or virtually all of the remaining portion of our revolver in mid-October due to concerns about current credit markets. This makes the current draw on our $130 million credit agreement as follows: $58 million on the revolver, $50 million on the term loan and $13 million in letter of credits leaving about $9 million undrawn.

Looking forward, we expect to see lower results in our U.S. drilling segment for the fourth quarter as customers continue to evaluate projects in light of the current credit challenges and declining commodity prices. We expect all other segments including rental tools to see steady to improving results through year end. Taking into account the current uncertainties in the market place, we expect Parker's full year normalized earnings per share to be in the $0.70 to $0.75 range. Regarding 2009, we're in the process of finalizing our 2009 budget and will provide a 2009 forecast at a later date.

Richard Bajenski

Thank you, Kirk. That completes our prepared statements for today's call. Operator, you may now begin taking questions from our listeners.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator instructions) Our first question comes from the line of Doug Becker from Banc of America Securities. Please go ahead.

Douglas Becker – Banc of America Securities

Thanks. Bobby, you mentioned that about 80% of your fleets contract is international fleets contract in 2009, I guess around 50 % in 2010. What type of cancellation provisions are in those contracts?

Robert Parker, Jr.

Doug, it varies. Some of them, they have full capability of having to pay what the contract would state. Others have early terms where they'll pay us an early term penalty and then of course our demobilization kicks in as well. So that'll vary across the board. Dave, you want to comment any further about anything specific lately.

David Tucker

Yes. We have early term provisions in the majority of our contracts internationally and as Bobby stated it covers a demobilization fee plus a portion of the contract that they're trying to early term on.

Douglas Becker – Banc of America Securities

And have there been any suggestions from customers that (inaudible 00:28:18) contemplating at this point?

David Tucker

We haven't had any news on that, Doug. It appears to us that the international marketplace hasn't been affected by the current situation here in North America and in a way they're not that changes in the long-term and we'll just have to keep our ear to the ground, but we don't anticipate having any effect of that right now.

Robert Parker, Jr.

And Doug, this is Bobby, I'll add I think you read here lately where some oil companies, MP (ph 00:28:52) companies are relooking potential (ph 00:28:54) future projects because the costs there have ramped up lately and so the fact all these contracts are ongoing and ongoing programs, my guess is we won't see much change in those. The impact to us may be on projects that in the future may be a little later to start than they first anticipated as they try to re-price their service cost, etc., but that's when you reread here recently and like Dave said, we haven't seen signs internal yet of people wanting to cancel out of current contracts that are ongoing.

Douglas Becker – Banc of America Securities

Okay. Turning to the U.S. barge market, what's the thought process regarding potentially stacking rigs going forward? I mean what types of things would you need to see?

David Tucker

Well, we anticipate warm stacking two of our intermediate barges, interesting enough they're actually working right now, but we see that from a short-term standpoint, there's going to be softness in the market in the latter parts of November and December. Our 50 and 70 series rigs which are deep barge rigs have fairly good visibility through the end of the year. We do have some gaps specifically on a couple of rigs that are currently idle which is rig 72B and we have one in the shipyard. We brought 55 in the shipyard as I mentioned in the conference call segment. What the operators are telling us right now is that 2009 is frontloaded, meaning that we're cautiously optimistic that our contracts for debarge rigs will continue in the near-term 2009 market, but we believe that the shallower marker is soft right now and so that's why we're taking steps to warm stack these rigs once they come off contract.

Douglas Becker – Banc of America Securities

And the implications on costs of warm stacking?

David Tucker

The implications on cost is that you reduce your OpEx by about just between 90 to 95% meaning that you roll out the majority of your crews and you keep a small crew complement for maintenance. That's the difference between cold stacking a rig and warm stacking a rig. When you cold stack a rig, you basically turn the keys off and send everybody home. With a warm stack, you typically keep between four to six people on board the rig to constantly maintain your equipment and to turn equipment over on a daily or weekly cycle as part of our preventive maintenance program. So we would warm stack rigs in the event we perceive those rigs going back to work within about a three-month time table. If our perception is that it's going to be longer than that, then we would cold stack rigs.

And let me just add one additional item. We have spent over $100 million on our barge fleet in the last three and a half years with the confidence that during times like this, that our utilization can sustain the fleet through these soft times in comparison to our peer group, other people out there that have possibly older assets. So if you recall our core competency and safety training technology and performance and part of that technology side is we've spent a meaningful amount of capital to refurbish, repair and upgrade our fleet over the last three-and-a-half years and so we have confidence that our customers will prefer us over older equipment.

Douglas Becker – Banc of America Securities

Okay. And then a quick one for Kirk, what type of maintenance CapEx do you see in 2009?

W. Kirk Brassfield

What we see in 2009 would be which this does include Quail probably in the $70 million, $80 million range, and that is Quail plus our drilling rigs maintenance.

Douglas Becker – Banc of America Securities

Okay. Thank you very much.

David Tucker

Thanks, Doug.

Operator

Thank you. Our next question is from Gary Stromberg with Barclays Capital. Please go ahead.

Gary Stromberg – Barclays Capital

Hi. Good morning.

W. Kirk Brassfield

Hi. Gary, good morning.

Gary Stromberg – Barclays Capital

Just a follow up on that maintenance CapEx question, how much in addition to the $70 million to $80 million range are you required to spend, in other words the BP commitments and other commitments you have?

W. Kirk Brassfield

Yes, and I do want to perhaps say we have not gone through all of our budgeting. We are in the process of doing that now, but the BP, we are looking at $120 million during 2009, but that is the major commitment that we have outstanding in addition to our maintenance.

Gary Stromberg – Barclays Capital

Okay, so at a bare minimum, it sounds like it could be $200 million.

W. Kirk Brassfield

Yes, I would use that number.

Gary Stromberg – Barclays Capital

Okay. And then secondly –

W. Kirk Brassfield

And then one thing I would want to mention Gary when you mention that, if you did note what I indicated in our other conference call script itself, we did go ahead and draw down on our revolver of $48 million and of course that revolver and those amounts were there to help fund the BP project, so currently we have about $125 of cash on hand and so we went ahead and drew down based just really in reaction and the concern in the credit market side to go ahead and draw that money down early.

Gary Stromberg – Barclays Capital

Okay, now that's helpful and that was my second question which was are there any maintenance covenants in that $130 million credit facility that you need to uphold?

W. Kirk Brassfield

No. We are in very good shape on any kind of covenants. We have no issues there.

Gary Stromberg – Barclays Capital

Okay.

Robert Parker, Jr.

Gary, this is Bobby. Obviously, our plan 2009 is to live within our means and we've got the commitments on BP. We're going to be careful with any other commitments going forward until we see our business pick back up in terms of cash flows. So, between cash on hand and anticipated cash flow in 2009, we're going to be very sticky with our CapEx and we certainly plan on just be conservative not having any market access to capital for a while here. So we plan on living within our means and that's the way we're going to be focused on during budget time right now.

Gary Stromberg – Barclays Capital

Okay, that's helpful. And then the 77% number, did you say that was commitments for international drilling?

Robert Parker, Jr.

Yes, yes.

Gary Stromberg – Barclays Capital

Is there a revenue number associated with that?

Robert Parker, Jr.

No.

Gary Stromberg – Barclays Capital

That's fair.

Robert Parker, Jr.

Gary, no.

Gary Stromberg – Barclays Capital

Okay, I hear that, I give it a try.

Robert Parker, Jr.

Good try.

Gary Stromberg – Barclays Capital

That is all I had, thanks.

David Tucker

Thanks.

Operator

Thank you. Our next question is from Matt Beeby with Morgan Keegan. Please go ask your question.

Matthew Beeby – Morgan Keegan & Co., Inc.

Good morning, guys.

David Tucker

Good morning.

W. Kirk Brassfield

Hello, Matt.

Matthew Beeby – Morgan Keegan & Co., Inc.

I wanted to talk to you about the rental tools; could you tell us what percent of that business is from deep water?

David Tucker

Yes, it's about 25% of our business is from deep water and the 75% is either shale or on-land business

Matthew Beeby – Morgan Keegan & Co., Inc.

So are margins in the 60% range going to be sustainable? Bobby, you kind of mentioned that you like the outlook for that business, is 60% kind of a good run rate or somewhere in that area?

Robert Parker, Jr.

Yes, Matt. We may fall a little under that, but I think overall Quail will hold their margins pretty well and one of the items that gives me some comfort is that while Dave correctly identified how much of deep water percentage-wise, that could be actually increasing next year. Several of Quail's customers had just obtained access recently to some of the deep water rigs and so we expect that part to grow in terms of their revenue next year and that has clearly been some of their higher margins, some of the deep water rentals that they do, such things as landing strings, so because of that little shift internally other revenue makeup, I would expect that their margins to hold pretty well next year. On land, if we commented it's really a tough view as to what's one of these resource plays will keep going and which one will slow down some, we've certainly read of the budget cuts as you have by some of the MP companies.

And depending on customer mix and then the geographic activity areas where Quail is, if we've seen any weakness so far, it's been in the Barnett area and yet in the other shale areas that we're involved in including the Rocky Mountain, normal drilling appears to be holding very well. And what I just alluded to the Gulf of Mexico, deep water is starting to actually increase.

Matthew Beeby – Morgan Keegan & Co., Inc.

Okay. Some of those MP CapEx curtailments, is that going to affect your expansion plans for the rental tools? You talked about I think Rockies, maybe Marcellus in coming years?

David Tucker

That's a good point. I mean the coming years, my crystal ball does not go out that far. What we had planned on doing is doing some expansion in 2009 into some of the areas that you just mentioned and more than likely we're going to take a very conservative approach on that. We have business right now up in the Marcellus shale, but we're serving that from a long distance standpoint through our Texarkana and also New Iberia offices. As far as expansion in other areas, we constantly look at that and we also are looking in the potential of expanding in the international markets.

Matthew Beeby – Morgan Keegan & Co., Inc.

Okay. And then one real quick one, where are you guys marketing the 270?

David Tucker

We're currently marketing that in our CIS area as well as our Latin American operation and I can't say that we have anything extremely hot on that right now. As Bobby mentioned in the previous question, some of the new projects are being watched very closed by E&P companies whereas the projects that are already ongoing seems to be continuing to press forward. So there's a little bit of a nervousness in the marketplace for new projects and so we're cautiously optimistic that we can get this rig to work and one of those two areas in the first half of 2009.

Robert Parker, Jr.

And Matt, just carrying on what Dave said and Dave alluded to in his script comments and that was we really would like to continue bundling our rigs in certain geographical areas, so our goal clearly on 270 is to put it in an area we already are working now and so we've sort of turned down some one-rail jobs in what would be single-rig countries so that we could fold 270 into existing operations somewhere clear we'll get more profits and more benefit out of doing that than we would if went and started up a single-rig country just to get the rig to work. So we are trying to plan ahead and we'd love to fold it into one of our large operations internationally.

Matthew Beeby – Morgan Keegan & Co., Inc.

And that be under maybe a two-, three-, four-year contract?

David Tucker

Yes, we would be certainly looking for some type of longer term commitment for that rig, absolutely.

Matthew Beeby – Morgan Keegan & Co., Inc.

Okay, that's all I have. Thanks, guys.

David Tucker

Thank you, Matt.

Operator

Thank you. (Operator Instructions) One moment please for our next question. And our next question is from Andrew Coleman with UBS. Please go ahead.

Andrew Coleman – UBS

Good morning, folks.

David Tucker

Good morning.

Robert Parker, Jr.

Good morning, Andrew.

Andrew Coleman – UBS

Hey, I had a quick question for you on the tax rates. You mentioned it was 52% there in the quarter? How can you move your rigs around internationally? They kind of optimize that tax rate?

W. Kirk Brassfield

That's a real good question. Well, what we're really at now I think I mentioned where we're looking to get to this year was 42%. Obviously, our 52% was negatively impacted by the $2.4 million. So when we move the rigs around, we obviously take that into account as we're looking, we're looking at the country it has been in and where it's going to and which rig makes the most sense from a beneficial point of view. So we go through that analysis and that's part of the cost study when you're looking at a return.

Andrew Coleman – UBS

Okay.

W. Kirk Brassfield

Okay.

Andrew Coleman – UBS

And then, I just want to clarify something, I didn't catch in the opening remarks on your rig, was it 225 in New Guinea, that's working through year end and is it going to roll to a new contract or is it–

David Tucker

It's 226 in Papua New Guinea, Andrew, and currently we're on a well that does not have any commitment thereafter, so the Papua New Guinea market has been kind of a frustratingly short-term market for us and our operator there tends to make decisions towards the end of the well program, so right now, we don't have a commitment for that rig after. But something could change in the early part of 2009, but we just don't have visibility with that right now. So that's why we're currently marketing that rig both in Papua New Guinea and also other regions of Asia Pacific specifically in Indonesia.

Andrew Coleman – UBS

Okay, great. Then lastly if I heard you correctly, there's going to be a total of three rigs there on Liberty, includes the two new builds that will be going up to the slope next summer?

David Tucker

Yes, as a clarification, there'll be three rigs going to Alaska. One rig is called the BP Liberty rig which is the rig that’s going to be owned by BP and we're currently constructing that for them and then we'll roll to operation and maintenance contract thereafter. The other two rigs will be owned by Parker Drilling and those rigs will also be working in the general North Slope area although not specifically connected to the Liberty Project.

Andrew Coleman – UBS

Okay, all right. Thank you.

David Tucker

You bet.

Richard Bajenski

Operator, we'll take one further question?

Operator

Thank you. The next question is from David Griffith from Cobia Capital (ph 00:44:12). Please go ahead.

[David Griffith – Cobia Capital]

Hi, guys. How are you?

David Tucker

Good morning.

[David Griffith – Cobia Capital]

Good morning. I just have a couple of quick questions. Just wondering if you guys had sort of conducted a post mortem on the exit of Saudi JB (ph 00:44:25) and I understand that you guys still had some people in country there helping them get the rigs up and operating, but just kind of wondering looking back on it, are those rigs all delivered and working now and when are you going to get your people out and looking back, do you think it was a good idea or are the rigs kind of up to par now (ph 00:44:53)?

Robert Parker, Jr.

David, I'll start on this and let Dave try and end here. First of all, we're completely out of Saudi Arabia. We have no people left and no ownership of any assets in Saudi. So that – we did leave people there after we sold our interest to help transfer the rigs operation capabilities what was in our partner, now the owner or the rigs. We have since gotten everyone out of there, and have no ownership left in Saudi; certainly doing a post-(inaudible 00:45:19) look back in terms of Saudi, the issues we ended up having – and we’ve talked about this, was our joint venture partner who had secured financing for the rigs, wanted to source the rigs also since they were paying for the rigs, and we had certainly a disagreement as to where the rigs would be sourced, and the rigs that were chosen and arrived, in our view, were not particularly well built, and we had to reconstruct all the rigs and we spent quite a bit more money than either one of us ever anticipated, and so between that and delays because of that, and getting rigs started up, it was not a very good project.

Our solution was to sell our 50% interest to our partner, so that they could go ahead and be full operator of the equipment, and that’s what we did. The lessons learned there would be obviously, have operational control under a joint venture going forward, and that’s something we would do if we look at any other potential joint venture.

The Saudi market itself is a difficult market. The rigs that they’re required to go in there for Ramco (ph 00:45:25) or have a lot of money in them, due to the respects that Ramco asked for, and then they are very, I guess you’d say, very difficult, in our view, to work for compared to many other operators, and that we feel like probably – I don’t know if we’ll be back in Saudi very soon. There’s other markets in that area that fit what we do better, so we will continue the Middle East strategy. We’d like to be in the Middle East, but I don’t think you’ll see us back in Saudi real soon. If we do, it will be under quite a different arrangement. That’s my comments; I’ll let Dave go forward here.

David Mannon

Yeah, and just to add to what Bobby said, what we did is we made a systematic evaluation of all of our crews in Saudi Arabia, and we had four rigs operating there at the time, we did provide about two, two and a half months worth of operation and maintenance after we sold those rigs to our partner. And during that period of time, we evaluated all of our personnel, and we transferred about 60% of our Ex-patriot (ph 00:47:34) personnel was transferred to other areas of the company, and the other 40% were either laid off by our partner, or they were absorbed into their operation. I think actually, the majority of them were not. And so I can’t give you any guidance about what those rigs are doing right now, because we don’t have anybody in place in Saudi Arabia right now.

[David Griffith – Cobia Capital]

And when I talked to you, maybe a couple months ago, you guys had said that you were working on lowering the tax rate, looking at the strategies to do that, I’m not sure if you’ve made any progress on that, I’m just wondering if you could update me on your current thoughts on that.

David Mannon

Yes, we’re still driving towards that. As you go through the process, we did have a couple of issues that did arise. One being this year, we do have what we call some trapped foreign tax credits; and what I mean by a trapped foreign tax credit, is we are not going to be able to take those credits this year due to some losses that had occurred in the past. Until you actually overcome those losses, and make it have accumulate dollar of income, those foreign tax credits get deferred. What has driven us up this quarter and this year, is because we’re not getting those foreign tax credits. We do expect that we would recoup those. At the moment, you make positive income for that international company, which has several operations in it; we will generate and be able to recognize those foreign tax credits. That’s what has really kept that rate higher and will keep it higher this year, and then as we get into next year, depending upon where the market ends up, and the impact on our operations, we would look to being able to recoup those foreign tax credits, either at the end of 2009 or 2010. That’s really been the driver of keeping the rate where I indicated up around the 42%. Once you get past that point, then you’d be able to see that rate come down toward that 35% effective tax rate.

[David Griffith – Cobia Capital]

Okay, thanks guys, I’ll turn it back.

Robert Parker, Jr.

Well thank you operator for working on our call for us today, I want to thank our audience for joining us, that concludes our call, and we appreciate your interest in parker drilling. Have a good day.

Operator

Tank you sir, ladies and gentlemen, this concludes the Parker Drilling third quarter, 2008 conference call. You may now disconnect and thank you for using ACT Teleconferencing.

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