Seeking Alpha
Deep value, value, special situations, contrarian
Profile| Send Message|
( followers)  

Parker Drilling (NYSE:PKD) has been in the doldrums not just because drillers are down but also for some big legal fines. If new management can stick to what it is good at and oil prices climb, this could be a fantastic value stock.

Parker specializes in barge drilling, onshore drilling, and the tools that drillers need. Unlike Transocean (NYSE:RIG), Parker does not go way out into the ocean and drill miles under the earth's surface but sticks closer to the shore. Much of the company's operations are off the coast of Louisiana in the Gulf of Mexico. The second part of the business is selling tools that are needed in drilling. Think Weatherford (NYSE:WFT) and Baker Hughes (NYSE:BHI). A good recent article from Seeking Alpha talks about the latest earnings report and the company's $15.9 million fine and is provided in this link.

The drilling operation consists of deep barge rigs, intermediate barge rigs, and land rigs. Many of these rigs were originally built in the late 1970s and early 1980s. At around 25 years, they must be taken out of production and refurbished. An older deep barge rig that was used in the Gulf of Mexico is currently for sale at $13.5 million. This particular rig has a drawworks with 1,600 horsepower and one mud pump with 1,000 hp and another mud pump with 1,600 hp. The drawworks operate the drill and the mud pumps suck out the mud and water. Because this rig is smaller than Parker's eight other rigs, they are probably worth approximately $20 million a piece. Its Rig 257B operates in the Caspian Sea and has 3,000 hp drawworks and three 1,700 hp mud pumps and operates year round, sometimes in sub freezing conditions. This one is worth substantially more. Altogether, Parker's deep barge rigs are probably worth $260 million.

Its four intermediate barge rigs are all operating in the Gulf of Mexico. They drill around 15,000 feet and have smaller drawworks and mud pumps. These are probably worth around $7 million per rig to equal $28 million.

Its 27 land rigs operate globally, with most located in Kazakstan, Mexico, and Alaska. These rigs can reach depths anywhere from 13,000 feet to 35,000 feet. The drawworks average around 2,500 hp and most rigs have three mud pumps that average around 1,500 hp. The two newest rigs are in Alaska and leased to BP (NYSE:BP). On average, these are worth between $15 million and $20 million. I'll take the higher number because the two new rigs in Alaska are worth much more than average. The land rigs are probably worth $540 million.

So Parker's rigs are probably worth around $828 million. Its tools division had $246,900 in sales. At one times sales, this unit is worth $246,900. I've chosen a multiple of one because Weatherford is trading at a market cap of $10 billion and has $15 billion in sales and Baker Hughes has a market cap of $20 billion and $20 billion in sales.

So a sum of its parts looks something like this:

Assets
Rigs$828 million
Cash87 million
Receivables177 million
Inventory28 million
Tools business247 million
Total Assets$1.37 billion
Liabilities
Accounts payable$141 million
Debt479
Other43
Total Liabilities$663 million

Our net asset value would be $1.37 billion minus $663 million to get $707 million. Parker's market cap is $535 million. So you can see by looking at this, it is trading at a discount of $172 million or 32%.

As energy prices climb, so do the rates that drillers charge. It will take more than a sum of the parts calculation to get this stock moving. It will take some nice cash flows, higher oil prices, and management staying out of trouble. But value investors always like a nice margin of safety, which Parker possesses.

Source: Parker Drilling Value Proposition