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Parker Drilling Company (NYSE:PKD)

Bank of America Merrill Lynch Leveraged Finance Conference

December 4, 2012, 10:50 AM ET

Executives

Kirk Brassfield - Chief Financial Officer

David Tucker – Treasurer

Analysts

Unidentified Analyst

Next we have Parker Drilling from Houston, Texas and from Parker we have Kirk Brassfield, who is their Chief Financial Officer and David Tucker is also with us who is their Treasurer, Kirk go ahead and take it away.

Kirk Brassfield

Alright, thank you Kelly and thanks to all of you for your interest in Parker Drilling. We definitely appreciate being here. I will have to tell you I’m keeping the water a little bit close. Last night was really windy, I was out eating that went about did my allergies in and I thought Houston was bad. But If I do have to take a drink periodically, I just want to apologize upfront.

Please pay attention to the forward looking statements. Obviously what we communicate today is as of today and please refer back to the 10-K, the 10-Q and the publicly filed documents that we have filed with the SEC.

This is the agenda what we’ll talk about. And really I’ll just go ahead and start off and give a little slight overview of each of the segments, and then I’ll go into a little more detail as we get into each segment of our business. Parker Drilling, we’re about $700 million revenue company made up of the rental tool business, (inaudible) round about $250 million and then the U.S. barge business, about a [$135] [ph] $100 million of revenue. U.S. drilling we’re going to talk more about this, this is our - primarily our two Alaska rigs that will be coming online and that will be about a $50 million a year revenue business.

We have our international drilling business, which has been the business, it’s been a little softer as of late and that typically gets you into $250 million to $300 million business, and then you have your technical services which is a little smaller. That’s where we provide the expertise that Parker has. We pride ourselves on our engineering technical abilities, we pride ourselves on being able to drill in very difficult domains and difficult drilling, as evidenced by the work we do is on Sakhalin, where we engineered and built a rig for Exxon, the largest land rig in the world and is working, just set another record of drilling horizontal extended ridge we call it, a 41,000 ft. We operate that rig for Exxon. They own it so it’s a great business model for a company our size that you build the rig, is very expensive rig. And then we get paid for building it and engineering it, and then we get paid to operate it. So it’s a nice model that we liked and let alone it gets you to the leading edge of technology. This one was one and we look to continue to do that, but we do pride ourselves on our engineering and our technical capabilities.

Just a little bit, summary of Parker around our competitive strength, we look very obviously first and foremost of everything we do is safety. We like to start meetings, every meeting we have in office or at location begins with safety. Training is a very key component of that. We go through extensive training with our personnel, not only related to safety but how to work a rig and how to run a rig and keep a rig safe and maintain the equipment.

Technology, I talked about, we tend to have bigger rigs. We drilled more complex locations, whether it’s in Kazakhstan, where we had very high sulfur content, very volatile wells. We were the first into Kazakhstan, we are the first western company, we’re in there ‘93 and have been in there ever since. And we’re involved in all the major consortiums that are drilling in Kazakhstan. In addition to Sakhalin, we’re the first ones into Russia. We did get out of Russia [suffering] [ph] Sakhalin Island but we were the first into Russia. So we tend to have a lot of firsts as going through our 79 year history as a company.

Performance, this is another attribute that we really work hard at with our customer. Very, very important, we sit down at the beginning of a well, we look at how they plan the well, we look at what their chart is and the performance, and the metrics they look to, to hit, to make this well cost efficient and get a return. And then we strive to meet that goal, we set out the end of a job and then map out with our customer where did you have blips, good or bad, how can we repeat the good stuff, how do we fix the, where we had the problem areas.

So we work very very closely with our customers, which we’ve seen customers are looking for. They see us as a partner, which is and we’re very big piece of that cost of that well, so it’s very very important that we sit there and show and indicate a high performance level. And your customers are willing to pay for that. That’s the other thing we look at when you’re doing the tough difficult wells, your customer requires a certain safety metric, which we have and you see the safety parameters, their IADC, where we outperform the IADC as a whole and that includes off-shore drillers, land drillers, U.S drillers, worldwide drilling and we have one of the best safety records. But you have to meet a customer’s expectations of safety. But if you’re going to work for an Exxon, if you’re going to work for a Chevron, you got to be able to perform on the safety side and then you got to be able to show performance on the operational side.

Just a little bit of a split of our business, revenues, we’ve been 50-50 and that’s been fairly consistent between U.S and the international locations. Customer type, seeing a little bit of a change here over the years, what you’re seeing now is a little bit more on the NOC side, which is the national oil companies, we work for Sonatrach, we’ve worked in the past for PEMEX, you’ve got (inaudible), so you got a little bit more of an influence coming in from who you work for on the customer side when you get into certain countries. You will work for the national oil companies. Obviously still first and foremost are the major oil companies, the Exxon, Chevron, that we work for, BP, and then you got your independents and regionals which is really where Quail comes into play the barge business, leading that pack would be Apache, Chesapeake, Continental, those types that you see in the U.S. area primarily.

And then there is the integrated service company, just another model you’re seeing more of, we work for Schlumberger in Mexico. We have 5 rigs working for them and they’ve been working for the last four years for Schlumberger, and we think that model will continue particularly in areas like Mexico as the major oil companies at least on land, you’re not seeing them come in as they’re not allowed to have a piece of the resource. So what you’re seeing are the Schlumberger, the Halliburton, the Baker Hughes come in and provide to serve the total package of services, which include drilling, then they contract with the driller to provide that piece.

Just another look at the revenue by segment and you will see, and I’ll talk more about each of the segment. But the revenue is still pretty strong on the international side, but our margins have decreased and I’ll talk a little more about some of the issues we faced on the international drilling side. Obviously, the rental tool in the U.S. side of the business continues to be strong and I’ll talk a little bit about that as we see strong for the year and a little softening in the fourth quarter.

You also see the mix of our business is in this, for a company our size and I know people do look at us and say why do you have such a mix for a $700 million company? But you do see there are different - the market - they react differently to the market. In 2009, obviously U.S. market was off the table, it was a very tough year, but international was a very strong year. So you had that mix where international drilling dominated our financials and help maintain where we could generate a net income, net profit at the end of the day. So what we’re looking at is how do we continue to generate revenue, cash so that we can move forward and grow as a company and continue to expand.

Just the locations around the world, (inaudible) as you can see we have 13 barge rigs in the U.S. We do have one land rig that is in Liberia. That is a new land rig that we’re looking to market. They’ll primarily be in international location. Now, we have the two rigs in Alaska that I’ll talk more about, and then we have 10 rigs in the Latin America area, and then 14 rigs in Eastern hemisphere and 4 O&M contracts.

And the O&M contracts are part of our International drilling segment that includes the Sakhalin, where we managed 2 rigs for Exxon. We also have a third rig that is in Korea being constructed and another platform that will be put out in Sakhalin Island. We’re providing the engineering related to the drilling piece of that platform which also has a production unit. And then once it gets moved up which we think at the end of 2013 and 2014, they’ll get moved to Sakhalin Island, put in place and then we’ll run the O&M on it. So I’ve additional revenues coming in from the third contract in Sakhalin Island, once we get into 2014.

Now, we also have a labor contract in Kuwait, O&M contract in China and one in Papua New Guinea.

The rental tool business, this has just been a great business. We bought this business in 1996, $15 million of EBITDA, it is now generating around $150 million of EBITDA and really it was a family owned business and the family really built that business off a singular model. We don’t get into fishing tools, we don’t get into labor intensive tools, we focus on rental equipment, so it’s very low cost from a labor perspective. That’s why you end up generating between 60% and 70% margins as you go through that business and then you can see through the numbers.

But over the years we really took off in 2004 and 2005 in building this and expanding the business. Going up into Texarkana into the Marcellus area, went into Evanston, Wyoming, branched that off into Williston, North Dakota, which obviously is in the Bakken, it’s been a very big play for us and we’ve also had the location down in South Texas and Victoria, which will take care of the Eagle Ford area. So it’s been a very big business, what we’ve seen 2009, which was a very tough year that was a tough year for the U.S, that’s the lowest margin year we’ve ever had for Quail and it was 55%. So it’s still generating good margin, still generated a nice revenue stream, even when the market was very difficult. Since then it’s expanded significantly with the horizontal drilling. When you’re doing vertical holes, as had been the case in the past, most of the time either your E&P company or your driller owned the pipe, when you got into horizontal plays, then they started looking more towards the rental tool company because we specialize in maintaining the equipment, the reliability of the pipe. We inspect every pipe once it comes in and we like to look at that as part of our key performance metrics and that’s why you continue having a strong customer base. That’s why it’s moved more and you see more activity in the rental tool side over the last three years is with the continued growth in the horizontal plays.

Going forward what we’ve seen in this quarter, and really at the end of the third quarter we are starting to see a little bit of pricing pressure. The industry has kind of built up the inventory, you saw that the discounts they work off the price book and then you’re giving discounts from that price book. Seeing a little bit of pressure, we saw in the fourth quarter as our margins came down from the high 60’s down to I think third quarter was like 64%. And then most of that is attributable to the discounts. We’re still seeing the activity level, I think you look forward we believe it will be flattish going into the first quarter and maybe the second quarter. But we do see it coming back out of that as you get to the latter half of the year. But with the U.S. market we do see that rig count kind of staying pretty flat, as you move forward.

Likewise, and so you know we counter that, one thing you do which is self correcting is you do go through and you can reduce your capital spend. This inventory replenishes, you let the inventory levels fall down, back down a little bit and then we’ll start getting back more active on the capital side but next year – this year we looked it has been probably around 65 million in capital for Quail, we see that coming down below that amount going in 2013, then as we see the market pick up towards the middle part of the year. One positive that we do see from that market that is the growth part of the market is the off shore drilling market. Obviously, after Macondo, you saw very little activity in the deep water. So, one of the things we’re starting to see now, the permits are coming out, you’re seeing the growth in the deep water and so we will have some capital more focused on that segment as it grows forth and expands.

Barge drilling, this has been got a little more volatility to it. You see that ski run there going down from 2008, 2009, but the key thing about the people we have running that business, managed the cost, managed the receipts. And when the market just dropped off the table, we went from working 10 or 11 rigs in November, December of 2008 to working one rig in the first quarter. That’s how quickly it changed when the gas price came down quite significantly. But when you had that go forward they have been building back from that point, we made money that year, we were one of the few that actually made EBITDA. We had $1 million EBITDA, we’ve been growing that ever since. The other big change from where we were 5, 6 years ago in that market place, there are 25 barge rigs in the market. We have 13 of those of which we market 11, so we have over half the rig, in the market place.

In the heights of the market in 2007 and 2008 when we generated 130 million EBITDA in this market. The market place had 46 barge rigs. The rest of those rigs have been cold sacked, we don’t see them coming out in the market, so you don’t need as a robust of market going forward to keep raising the day rate. And therefore, we’ve seen a continual increase if you go out on our websites, we show the barges, we show an average quarter day rate, where you have seen it increase every quarter, we’re up to about 33,000 per day in the heights of the market, we were 46,000 average for our fleet in 2007 and 2008.

Now, what you did have that we don’t have what you had 5, 6 years ago, we don’t have is the high price for international gas. That will be the big driver with in the future and you can get that price up over 5, which I don’t think will occur this year, but when you get it up you will be able to use 3 of our rigs in the deep gas place, where we can drill 20,000 to 30,000 feet and that’s where they get the full value for those 3 rigs. Right now, all of our rigs are drilling primarily for oil or liquid. So they are working down in shallower water at a lower day rate by keeping busy as we’re working 10 of 11 rigs today.

Alaska, has been a problem area for us for two years, three years. One rig will go to work this year and so it’s coming out of IAT. We expect it, we’ll start generating revenues, and we’ll have full year revenues and margins for 2013. The second rig will go into testing with the customer, the 1st of January. It’s an identical rig to the first one, we spent the last quarter going through a punch lift, the thing the customer looked for. When we made the corrections on one rig, we also corrected it on the second rig, so we expect testing by the customer and then pretty well to go much quicker. So we expect to have that rig, second rig up and working and generating revenue and it will be quite a relief to have the rigs in Alaska generating revenues that is pending. But when you think about how much we spend on those two rigs the last 2 to 3 years, we feel cash flowed that part of a huge capital when you are talking $350 million to build those two rigs. So, that was a big drain we still were able to build those rigs fund Quail. So, we’re generating nice cash over those period to be able to do that.

International drillings, this is in a little slower area over the last couple of years, but sensing note, I did go out and read Barclay’s international drilling report that came out this morning and they projected for the international business of 9% capital spend growth increase over 2012. So, that is a record going forward in standing buying these companies on energy. They also projected overall worldwide to be a 7% increase so they are looking a little flattish to low down on the U.S. side and North America, but they are looking at the growth going forward in the international which we are looking to able to capitalize on, but in the last couple of years our big issue has been Kazakhstan. We have 9 rigs in Kazakhstan, currently we have three on contract, one will be moving to a location working for consortium with (inaudible) actually generating revenue in 2013. We also had the barge rig which is the big rig in the Caspian. We’re negotiating on a contract, put it back to work. It will not be at a full day rate drilling rate, but it will be on a standby rate to begin with, we expect that to begin generating revenues with a lower cost involved to self generate cash from that contract. So, I’ll forward the nine, but we still have issues there, we need the move rig, we are also looking at the opportunities as it is expensive to move rig out of Kazakhstan to another area. So, we may also look at whether it makes more sense to sell the rig, use the cash and then generate, so that it may better fare the market and then move the rigs directly from there with newer technology. So, we are looking at different options to reduce the exposure and to reduce final rigs in Kazakhstan.

Technical services I talked a little bit about once in a longer time, this have to do with the engineering side of the business. We are involved currently with the Exxon, so we have revenues being generated in Korea during the engineering side that will continue through the year. We also are looking at additional projects as there are around the world. So, we look for continued growth in this area? Those small margins and more of an engineering labor type contracts. Really, where we are on the financial performance, we’ll talk a lot about this individually see the nice increase in 2009 as we rebounded it from a poorer year in the U.S. Obviously in 2009, 2010 and 2011 we do focus on returns, doesn’t look like we focused very well. The law that had to do with our write off in Alaska when we took an impairment on the Alaska rig of a $170 million at the end of last year. So, obviously 2010 and 2011 have been impacted.

Strong financial position, we are very comfortable where we are from the debt perspective, but our overall goal we would like to fat down the low 30% range well within our debt covenants as you see here. We are in the process, we have revolving credit facility that comes newly and May of next year. We are looking to renew that this year, so that means we’ll soon will be renewing that. It will be on the same pipe terms $130 million, $80 million of revolving credit facility and then $50 million term note attached to that.

Capital spending, you can see the trend in the bulk of the arms which is the major projects for the last three years has been the amount of money spent on the Alaska rigs and as you look going forward we do have the 35 million that we typically have as maintenance capital for the rig. We typically spend $60 to $70 million it will be more at the low end or even in the 50s this year for Quail, but we will start the year lower if we see the market pick up from no part of the year, then we will probably increase the lid, but we’ll let the market dictate our capital for Quail and then we have a major project. So, right now we have a new CEO Gary Rich is on board. He came on board just two month ago. He is busy looking at all of our operations, looking where to grow the company. He came from Baker Hughes, a long-term veteran of Baker Hughes company international. So, we are looking to really focus on our strategy building, so as we go more into the early part of next year, you’ll probably hear more as we get to our by hearing conference call and later as the additional growth which he is very focused on is growing Parker, growing us to more than $700 million company and we will look to avenues that takes as he goes to his review.

Finally, and I will leave some time for questioning here. We focus on market leadership, we have done that around the world where we drive the consolidate rigs in certain markets whether in the international area or even in the U.S. we are a leader in the barge market and one of the leading rental tool companies also. Once again, we are going to really look hard on our performance, we’ve got to execute better. We need to eliminate the surprises that tend to come up in a smaller company and through that process with the new CEO that will be a focus point going forward.

And with that Kelly we’ll take questions.

Question and Answer Session

Unidentified Analyst

(inaudible) would be terrific candidates for that, is that something you thought about there or another part of the business.

Kirk Brassfield

Well, I have been seeing more of that actually about 5 years I kind of looked at that and then the rules were a little different then you really just couldn’t meet the requirement through drilling or a even a rental tool, but that is an avenue, I think that is one of the things we would look at as we go through the process that we’re going through now. That is one type of watch now we have whether it is getting some cash out some of the businesses that we do have to freeze in the rest of the business. So, I think that will be one of the items we may look at as we move forward. That is the only table.

Unidentified Analyst

Thank you. With respect to the Alaska asset, so you have $350 million invested I think you said in the two of them. What kind of – can you give the rough sense of what kind of annual EBITDA you are expect to generate and how much capital expenditures on an ongoing basis there will be there.

Kirk Brassfield

Will be very little, probably you’ll spend a couple of million a year, but in the first 5 years typically capital wise on the new rigs is fairly low, so, that is pretty immaterial. Of the 350, we are now – the total contract for 5 years was $250 million, $30 million of revenue a year and we’re looking at about a 25% margin going forward. So, EBIDTA would generate nice, definitely when you go to the year-over-year, the cash flow will be very positive.

Unidentified Analyst

So, that is $50 million were for the two rigs and they are both up in cash fine?

Kirk Brassfield

Even both operating for the full year $50 million a year.

Unidentified Analyst

And a 25% EBITDA margin?

Kirk Brassfield

Yes.

Unidentified analyst

Okay.

Kirk Brassfield

Yes, keep in mind the $350 million, we did take a big impairment so, I think your net book value will be far less than that, but the tax, you don’t take an impairment. We will have some nice tax benefits for Quail to absorb some income elsewhere with $350 million of depreciation.

Unidentified Analyst

It is obviously (inaudible) plan, but it is a disappointing return on the capital spend, is that just a function or the cost overrun and all the issues there.

Kirk Brassfield

It is and that is why I am saying it will be focused on as you get him up and running and you could prove what you can do then we’ll be looking to maybe increase our return on that, through discussions with the customers so, we don’t need to go out and show these rigs for work and work reliably and that is what we fully expect. Now, we do have an option for 5 years after the first five year term which is set and then the DP has an option for another 5 years and that would be right if we would negotiate, but we will look even before the 5 years to where we can get a better return.

Unidentified Analyst

So, after five BP has an option for another 5 years.

Kirk Brassfield

Yes.

Unidentified Analyst

Okay, thank you. Just lastly, with respect to the CapEx life, thanks for giving us results on 13 with respect to the major projects that sounds like at this point it is kind of an unknown because of the new CEO is still getting his hand around things, but directionally would you expect it to be – it seems like we are already in December and if you have an announcement go ready with sea markets likely to be lower, is that a fair assumption or just?

Kirk Brassfield

I would – that is a fair assumption, yes.

Unidentified Analyst

Thanks a lot.

Kirk Brassfield

Thank you.

Unidentified Analyst

On the rental tool business, what kind of competitive dynamic in that business right now? It is very good margin, you said that they’ve come down a little bit, but are you seeing other people come into that business or is that still a pretty good business for you guys.

Kirk Brassfield

It is still a very good business, but it is competitive. You are seeing more pipe in the marketplace, so further to those areas that have been very busy like are Bakken. You’re seeing that pricing pressure and that is where you are seeing the discounts. The discounts are increasing some and that is where you are seeing it come down from the upper 60% margin down, thanks to the third quarter with 64%. So, that is probably related to the pricing pressure. Now, we are not seeing new players in the market place, we still compete. The key thing about Quail though is we have relationships with our customers. Exxon, Apache, Chesapeake they are our biggest customers, they are going to come towards, the good thing is we always have the last say. So, they come to us at the end of the day. If someone else comes in and bids a lower rate, they’ll come talk to us and that is where the pressures come in or getting that chance of keeping the business, but the pricing has been affected a little bit. So, I wish all my businesses were 64% margin.

Unidentified Analyst

What do you think kind of the sustainable margin is there, gross margin?

Kirk Brassfield

I still think that 60, if you went 10 years ago, we were t 60% to 62% was norm. If I think that range is still very reasonable and the abnormality was 2009 would have actually got down that 65%. And a quick one turned around and got back up and then 60’s in 2010 and then up even higher in 2011.

Unidentified Analyst

Okay.

Operator

And I think that’s all we have time for questions, so Kirk thank you very much for coming now. We appreciate your.

Kirk Brassfield

Well I appreciate your interests and I look forward to a good year in 2013.

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