Executives
Rich Bajenski – Director, IR
Bobby Parker – Chairman and CEO
Dave Mannon – President and COO
Kirk Brassfield – SVP and CFO
Analysts
James West - Barclays Capital
Steve Ferazani - Sidoti & Company
Mike Drickamer - Morgan Keegan
Andrew Coleman – UBS
John Keller – Johnson Rice & Company
Parker Drilling Company (PKD) Q2 2009 Earnings Call Transcript July 31, 2009 11:00 AM ET
Operator
Good morning ladies and gentlemen and thank you for standing by. And welcome to the Parker Drilling second quarter 2009 earnings release conference call. At this time all participants are in a listen-only mode and following the formal presentation instructions will be given for the question-and-answer session. (Operator instructions) And as a reminder this conference is being recorded today July 31, 2009.
At this time I would now like to turn the conference over to our host Mr. Richard Bajenski, Sir you may now begin the call.
Rich Bajenski
Thank you Craig and good morning and thank you all for joining the Parker Drilling’s second quarter 2009 conference call. This is Rich Bajenski, Director of Investor Relations. Joining me today are Bobby Parker, Chairman and Chief Executive Officer; Dave Mannon, President and Chief Operating Officer who is off-site and joining us by phone from another location; 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 and other factors addressed during this call, including changes in market conditions affecting our industry.
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 Web site for a definition of adjusted EBITDA and a reconciliation of this measure to the comparable GAAP measure, and for further information regarding non-routine items.
That being said here is Bobby Parker to begin our review. Bobby?
Bobby Parker
Thanks Rich and welcome to our conference call. Earlier today, we reported Parker Drilling’s 2009 second quarter results. The net result was income of $0.04 per share for the quarter. Excluding non-routine items, earnings per share for the quarter were $0.06 compared to $0.21 for the same period last year.
Market conditions have not changed appreciably since earlier in the year and it is reflected in our results. The downturn in the US drilling and tight financial market had noticeably impacted our barge drilling and rental tool business. Meanwhile our international operations and project management business have remained fairly consistent in their earnings contributions benefitting from programs with longer investment horizons in deeper commitment.
This business balance in geographic diversification is one of Parker's strength. It questions the effect of operating in a volatile industry. Another one of our strength is our customer relationships that are based on years of reliable performance, and that earn us consideration for work even during these lean times.
Most important strength is the talent and commitment of our employees whose hard work has delivered these reserves. Among the performance highlights of the second quarter are, year-to-year increases in second-quarter gross margins as a percent of revenues from international drilling in project management and services segment.
These two segments accounted for 47% of the total revenues in the second quarter, a better than breakeven gross margin from US barge drilling segment. This has us on track to achieve our operating objective of a breakeven or better cash flow for the business this year.
On schedule progress in the construction of the BP-owned liberty rig and our two Parker-owned arctic Alaska rigs. The rig components for the Liberty rig began to sea lift in early July and are now docked on sight and are starting commencing the demobilization of the equipment of the barges, two on North Slope side for assembly rig up and commissioning will take place.
The construction of the two Parker-owned and operated Alaska rigs rates continues on schedule. These rigs are expected to begin operation in late 2010 on a five-year contract for BP. While these are some of positives we can point to, the second quarter was a difficult and challenging period.
US drilling as measured by the rig count hit new lows for the current cycle. This directly impacted out US barge drilling and rental tools business for the quarter. The health of the world major economies remains uncertain and that outlook has impacted E&P spending program by almost every class of operators.
This has created some slack in redeploying rigs as they come of contract and has slowed the pace of project development work. And then the commodity price outlook, especially for natural gas remains uncertain. This has limited the willingness of many operators to commit capital to drilling and exploration programs.
Though I expect these challenges to remain with us for a while, I feel comfortable with how we are positioned in our markets and the outlook for operational, financial, and strategic performance.
Our strategic balance and geographic diversification have cushioned the impact of current market forces, our investment in safety, training, and technology have proven to be key factors and why are rigs get called on first when there is work to be done and why Parker is topmost in peoples mind when they consider taking on exploration and production work in complex remote and difficult environments.
In addition, we are in good financial conditions with a sound balance sheet and sufficient cash and expected cash flow to meet our investment commitment and forecasted cash needs. Kirk Brassfield will discuss our financial performance and expectations in just a few minutes. Before he does though, Dave Mannon will review some of the key operational highlights of the quarter. Dave?
Dave Mannon
Thanks Bobby. I will start with international drilling. Our 31 rig international fleet was 68% utilized during the second quarter, compared to 76% in the 2008 second quarter, and 79% utilization in the 2009 first quarter. Currently, we are operating at 58% utilization.
In the Americas region, we operated at 82% utilization, with nine of ten rigs working during the second quarter. In the region, one great was idle and two rigs came up contracts during the quarter. Three rigs were scheduled to finish their work before year-end. Two of these have already been revenue-contracted for additional work.
We now have six of the ten rigs in the region working under term contracts, extending to 2010 or later. The Americas market is fairly active right now, including tenders for future work, driven in part by Mexico's desire to increase production. As a result, we expect to have good opportunities to redeploy our rigs as they become available.
In the Pacific, in the Asia-Pacific region we operated at 41% utilization, with five of the eight rigs in the region working during the second quarter. In the region three rigs were idle and two rigs came up contract during the quarter. Two rigs were scheduled to finish up their work before year-end. One of these recently secured a contract that will extend into 2010.
In addition, one rig that came up contract during the quarter has also obtained work that will extend in 2010. As a result, there are now three rigs in the region working under contracts that extend beyond year-end. There are several other opportunities in the regions and based on the volume of outstanding tenders our rig fleet has the potential for improved utilizations.
And the CIS/AME region our second-quarter utilization was 79% with 10 of 12 rigs working during the quarter. Two rigs were idle and three rigs came up contract during the quarter. Recently one previously idle rig has been contracted for work starting later this quarter and going into next year.
As a result, eight of the 12 rigs in the region are under contracts extending into 2010 or 2011. Rig 257, our arctic-class barge rig operating in the Caspian Sea is scheduled for a customer requested and customer funded overhaul, an upgrade during the quarter. This will affect our utilization and income for the time it is in the shipyard.
During its overhaul, it will receive a more powerful top drive and upgraded mud handling system and new controls that will allow it to operate in more challenging locations and on deeper and more difficult wells. Upon completion, it will return to service for an additional year-and-a-half of work.
We also have two Parker owned new build land rigs under construction for a five-year development drilling program for BP on the North Slope. The rigs are on scheduled for a sea lift in the summer of 2010 and should begin operating later that year. The principal activity in project management is on contract with Exxon Neftegas or ENL for the development of Russia’s Sakhalin Island resources.
The Yastreb rig is on-site and drilling in the Odoptu field. The rigs spurred in April successfully completing its hundred kilometer move and being outfitted with a larger mass to handle a more powerful top drive.
The Orlan platform completed its first phase of its development drilling program in March, is now in a scheduled warm stack condition, while the operator evaluates the field. We continue to work on the field study for ENL designing the drilling package for the Arkutun-Dagi platform offshore Sakhalin Island.
In addition, we are currently in discussion with BP on the O&M contract to operate the BP-owned liberty rate in Alaska. We hope to secure this work soon, which will cover the initial two years of drilling in the liberty field.
Now turning to the barge drilling business. Overall, utilization in the second quarter was 30% compared to 91% in last year's second quarter and 25% in the 2009 first quarter. Sequentially, the uptick in utilization was also matched with a modest increase in the average data rate for about 6%.
Our deep drilling fleet of ten barges was 36% utilized during the quarter at an average data rate of $33,500 per day. Only one of our three intermediate depths of barges and one of our two shallow workover barges worked during the quarter and not for the entire quarter.
Currently, we have five barges at work and expect to have a six under contract within a week. The average data rate for the fixed rigs is approximately $28,000 per day. Knowing that this is a volatile business and believing that operators would differentiate among the contractors, we made significant investments in the last four years to position Parker as a preferred contractor in this market. Even in these very difficult conditions, we are benefiting from that investment. And there is work to be done, operators more often then not make a Parker rig their first choice.
We have prepared to respond to work opportunities as they arrived by keeping our rigs warm stacked and work ready. At the same time, we have been able to significantly reduce our operating costs by cloistering our stacked rigs and instituting reduced work schedules. We have also lowered our front office and operation support cost through furloughs, work reductions, and cost management actions.
As a result, we had a better than breakeven gross margin in the business this quarter. Rental tool revenues declined 30% this quarter compared to the prior year second quarter. As expected, the steep decline in US land drilling, Quail tools primary market has had an impact this quarter.
The business has maintained its activity in the shale plays around our Williston, North Dakota, and Texarkana, Texas location, specifically, Bakken and Haynesville shale areas where drilling has been less affected by current conditions. We also have been supplying an increased amount of equipment to the Marcellus shale region and recently signed an agreement to use a local company site to store and inspect our equipment, allowing us to better serve this market.
In addition, several of Quail tools key customers like Exxon Mobil, BP, and Chevron continues to drill through this market, including increases in their deepwater and international activity. Overall, demand for rental tools is down, discounts have increased, and tool inventory utilization has declined.
Quail tools has done a better than industry metrics and indicate based on their customer service orientation and their increasing geographic diversification. However, we expect some revenue and earnings weakness in the quarter, due to industry conditions with some support later in the year from new work on several deepwater drilling programs in the Gulf of Mexico.
The Liberty rigs we are building we are building for BP on a cost plus contract is all that is included in the construction contract segment. This purpose built rig is being constructed for BP's development where Liberty feels offshore from the North Slope of Alaska.
The rigs component built at a shipyard and Vancouver, Washington are now docked at site and offloading equipment at the operating base in Alaska. The sea lift was begun on July 1 and completed on schedule. The project plan calls for commissioning later this year and started operations in early 2010.
That is it for the operations update. I will remind you that you can find regular updates to our fleets on the Parker website in the investor relations sections. There you can track changes in the fleet utilization and contract status on a monthly basis.
I will now turn the call over to Kirk Brassfield to discuss our financial results.
Kirk Brassfield
Thanks Dave. For the second quarter of 2009, Parker Drilling reported net income of $4.4 million or $0.04 per diluted share on revenues of $221.8 million. There was one non-routine item that affected this quarter’s results. Excluding the non-routine item, Parker's 2009 second quarter diluted earnings per share were $0.06.
The comparable result for last year’s second quarter was $0.21 per diluted share. Last year's results have been restated as required by FASB Staff Position APB 14, Accounting for Convertible Debt Instruments that may be settled in cash upon conversion, which we adopted effective January 1 this year.
While revenues were up by 2% at year-to-year earnings per share failed compared to the prior year's second quarter, due primarily to downturn in the US market impacting our barge drilling in rental tools segments.
Our one non- routine item continues to be the ongoing parallel investigations by the DOJ and SEC into the utilization of the customization by some of our foreign operations, and an internal investigation regarding US economic sanctions, primarily relating to the Company's operations in the CIS, Africa Middle East regions.
In the second quarter of 2009, we incurred $4 million of expense relating to these investigations. Turning now to ongoing operations. Our international drilling segment achieved a 43% increase in gross margins on a 2% rise in revenues, with gross margin as a percent of revenues increasing to 38.3%.
Revenues rose to $79.3 million in 2009 second quarter from $77.9 million for the prior year. Compared with last year’s second quarter overall fleet utilization was lower at 68% versus 76%, and average data rates were higher. International drilling increased in gross margin and gross margin as a percent of revenues was primarily driven by improved results for rig 257, our arctic-class barge rig operated in the Caspian Sea and continued management of operating cost.
Project management and engineering services segment revenues declined by 17%, compared to the second quarter of 2008. The year-to-year decrease represents the impact of lower amounts of reimbursable’s in project revenues, which approximated 4.5 million decrease, as well as the completion of the couple of smaller O&M and engineering projects that contributed to the prior year results.
Nevertheless gross margin for the second quarter increased 32% and gross margin as a percent of revenues increased to 23.5%. Primarily, as a result of the reduced level of reimbursable’s on the projects underway. US barge drilling segment reported second-quarter revenues of $12.9 million in gross margin of $1.3 million. The decline in revenues and gross margin compared to the prior year second quarter are due to the sharp drop in rig activity in reduced average data rates.
In the second quarter of 2009, we had the equivalent of 4.6 rigs in service, while on last year’s second quarter we had 13.6. At the same time, average day rates declined by 23% to 29,800 per day this past quarter from 38,700 in the second quarter of 2008. Rental tools segment revenues declined 30%, compared to the prior year second quarter.
Lower overall demand has led to increased discounting affecting both revenues and earnings. Despite the decline in revenues, gross margins as a percent of revenues has been resilient at 54.7%. This is due to the benefits from cost management actions taken in the business, and the strength of its business model as Dave previously discussed.
Construction contract revenues represent the progress made on the BP-owned liberty reconstructing contract with income recognized on a percentage of completion basis. There was no significant change in depreciation expense compared to last year or the prior quarter. G&A expense increased to $11.1 million for the quarter, included here is the $4 million of non-routine expense and professional fees related to the investigations.
Excluding these, G&A expense verse $7.1 million, an increase due primarily to severance costs and a reduced allocation of cost to operating segments. Interest expense increased to $7.5 million in the second quarter, higher than the prior year second quarter, primarily driven by the third and the fourth quarter 2008 draws on our $130 million credit facility.
The facility was put in place in May 2008 to supplement the construction of two new build rigs committed to the BP Alaska. Prior to year-end 2008 with so much uncertainty in the market concerning lender's willingness or ability to fall through on their financing commitments, we chose to effectively draw down the full amounts of facility to assure that cash on hand would be on hand when needed.
Since then financial markets have calmed somewhat and we are likely to repay $20 million of the revolver balance in early June. As a result interest expense this quarter was 7% lower than it was in the first quarter. Included in interest expense is $1.3 million of non-cash interest expense related to the January 1, 2009 adoption of the required change in accounting method for convertible debt.
The effective tax rate for the quarter was 53.6%, based on current expectations the effective tax rate for 2009 would be in the 50% range. Our cash balance at June 30th was $94.6 million compared to $172.3 million at the end of 2008. The decline in cash balance primarily reflects funding the construction spending on our two newly built Alaska rigs and a $20 million partial repayment of our drawn revolver balance.
Capital expenditures were $42.6 million for the quarter and $94 million year-to-date. Included are, capitalized interest $1.3 million for the quarter and $2.5 million year-to-date, Alaska rig construction spending of $13.7 million this quarter and $31 million year-to-date and rental tool inventory purchases of $8.2 million in the second quarter and $25.5 million year-to-date.
As you can see we are in sound financial shape. At the end of the quarter, we had $427.6 million of debt outstanding and $94.6 million of cash and cash equivalents or a net debt position of $333 million. Our net debt to net capitalization ratio is a very manageable 36%. Of our debt outstanding, the $50 million term loan begins to amortize on September 30th at $3 million per quarter.
The remaining components of the company’s debt do not mature until 2012 and 2013. Our debt covenants contain two important financial test; a leverage ratio of debt-to-EBITDA and an interest coverage ratio. At June 30, 2009, our leverage ratio is estimated to be 1.8 times against the covenant maximum of four times.
Our interest coverage ratio is estimated to be 8.2 times against the covenant minimum of 2.5 times. Lastly, with our current $94.6 million of cash and cash equivalents, we are positioned to meet essentially all the remaining capital needs we expect for 2009.
Few words about the outlook. We remain cautious in our expectations for the rest of the year. Specifically, we expect the US Gulf of Mexico barge business to remain depressed. Today there are only 12 barge drilling rigs working in the US coastal waters. A year ago there were about 35. We are now in the midst of the hurricane season and that normally slows activity in the Gulf.
Though we expect to achieve a breakeven or better cash flow for 2009, it will not be because we need significant uptick in market-driven utilization. We expect our international rig utilization to hold at about the current rate in the short term. Meanwhile, the level of rig tenders is quite good and should lead to higher fleet utilization rates later this year.
Nevertheless, day rates on re-contracted rigs are coming down slightly and our challenge will be to match this lower cost and improved efficiency. Rig 257 moves into a Caspian shipyard for a scheduled upgrade during the fourth quarter. This rig has the highest day rate in our fleet and we will be without those revenues and earnings for the time it is our service.
The slow pace of US drilling will continue to hamper our rental tools business, added deepwater work and activity in some shale plays is expected to provide a partial offset to revenues and gross margin later in the year.
Based on the work we have in hand, we expect project management to continue to perform at current levels through the remainder of the year. While there is caution in our outlook and we believe it is warranted, we remain confident in the ability of our businesses to manage through these conditions.
To find opportunities to that business base on our technical capabilities and safety performance and control costs consistent with business conditions as we demonstrated through the first half.
As a result we expect our third-quarter revenues, earnings, and earnings per share to be in the low point for the year with moderate improvement in the fourth quarter. That concludes my part of our review.
We believe the results we can produce in 2009 in this most uncertain of times will demonstrate the value of the strategy to leverage Parker’s technical capabilities and experience to develop platforms for growth, to differentiate our drilling – traditional drilling business, and to diversify and balance the company's business mix. We remain focused on executing our plan and look forward to reporting our progress.
Rich Bajenski
Thank you Kirk that concludes our overview. Operator you may now begin taking questions from investors.
Question-and-Answer Session
Operator
(Operator instructions) And our first question comes from the line of James West with Barclays Capital. Please go ahead.
James West - Barclays Capital
Hi morning guys.
Bobby Parker
Hello James.
Dave Mannon
Hello James.
James West - Barclays Capital
Bobby or Dave, as your international land rigs roll-off contract and you are success in getting new contracts, could you characterize the magnitude of the day rate declines that you are seeing kind of where leading that rates are versus where they were maybe six months ago, and I know it probably varies by region, but maybe some color there?
Bobby Parker
James, I will start and let Dave add some color. Yes, it does, it certainly, let’s start with the fact it varies by region, certainly some areas are stronger than others, but in a general condition I would say that we are in a ten to possibly extreme 15% drop in some of the rates that we have seen where we have re-contracted the rigs.
Certainly, when we see that as we mentioned in our notes our challenge is to meet that with reduced cost and efficiencies, which we certainly work at. Then on top of that we look for what else can be gain out of these, if we are going to reduce the rate, can we get an extended contract or can we get some benefits for our side when we re-signed out even as it – it is lower rate.
Clearly with the rate run-up we had in the last couple of years, which you are familiar with, you know we have got some very nice international margins. So, if are going to, I guess the nice way of putting it, if we can get buy with a 10%, 15% rate reductions with the market we are operating in.
I won’t say we are happy, but certainly better than some of the other markets around the world. So, if Dave would you add some color?
Dave Mannon
I think Bobby covered it well. You know, we are seeing a fair amount of demand for tenders in the last quarter and if you compare those to the tenders that we had – request that we had this time last year it is up substantially. So, we see increase in demand in the CIS/AME, area also in the Latin American area, and also Asia-Pacific, so all three of our core markets we are starting to see some really robust tender activities.
James West - Barclays Capital
Okay, that is good. In the rental business, Quail, you mentioned several times, I think that discounting has increased, what levels of price discounting are you seeing today?
Bobby Parker
Dave do you want to answer that?
Dave Mannon
Yes. I'm not going to go through a specific discount that we are seeing, but what we have seen is a discount similar to what we saw back in the 2001, 2002 timeframe. In some cases they are a little bit more than that, but we are happy that are activity in the various regions in the United States are still showing a fair amount of utilization.
James West - Barclays Capital
Okay and then one for Kirk, if I can slip a third question in here. As you look at the third and the fourth quarter here clearly there is more pressure on earnings, do you think that the earnings level that you are going to be -- you have maintained profitability or should we expect break-even to blow that?
Kirk Brassfield
As Bobby had indicated, we intend to – we expect to maintain profitability in the third and the fourth quarter and as I noted, we have expected the third quarter to be more at the low point and then take back up in the fourth quarter.
James West - Barclays Capital
Okay that's all from me, thanks guys.
Bobby Parker
Thanks.
Kirk Brassfield
Thank you.
Operator
And our next question comes from the line of Steve Ferazani with Sidoti & Company. Please go ahead.
Steve Ferazani - Sidoti & Company
Hi good morning.
Kirk Brassfield
Good morning.
Steve Ferazani - Sidoti & Company
Just a couple of questions on the segment lines Dave, obviously there was significant revenue from the construction contract, is that the last of it and can you just give us an idea for modeling purposes what is left?
Dave Mannon
During the second quarter we had approximately $3.6 million from the construction and that is recognized on the percentage of completion basis, and so for the last half of the year, we expect similar amount probably close to $5 million more during that period and we also have, I think, you know one point we have projected maybe $9 million for the entire year, though we have recognized it was about 4 million or 5 million plus we may have one bonus that kicks in during this year, which could be an additional million to a million five. I would look at the 5 million for the last two quarters.
Steve Ferazani - Sidoti & Company
Okay. And then the project management, you talk about a little bit that the margin, your profitability held up, the revenue was down, was that due to the move with the Astra, but what is the thoughts on revenue on that line moving forward?
Dave Mannon
A lot of that Steve was the reimbursable's. And that was dropped in fact, sorry I think I noted there that quarter-to-quarter last year that it was a 4.5 million drop in the amount of reimbursable’s which is at a low, very low margin typically around 7% to 10%. That was the significant driver of that drop in revenues. And I think during the period we had about $7 million in reimbursable revenue during the current second quarter and I would expect that on a quarterly basis going forward.
Steve Ferazani - Sidoti & Company
Okay. And the last question was just on rig 257, you said goes in for upgrades Q4 how long is that in for and then the other question would be if Q3 is the bottom of profitability, how do you offset the loss of rig 257 into Q4?
Bobby Parker
Dave you want to start with the comment on the timing for 257 and we will come back to Kirk for the balance?
Dave Mannon
Sure, the timing for the shipyard program is approximately 45 days that is for home repair that be need to -- what we have known about for a material period of time we have been scheduling that into to get that replaced. Then it goes to an upgrade program, which should last approximately 60 days. During that period of time we are going to be getting some revenue associated with that. So just the loss of revenue is specifically in the -- when we are doing the home repair.
Kirk Brassfield
Steve just to give you a little more feel on numbers, for 257 during the fourth quarter, we are looking at an EBITDA decrease of approximately 6 million to 8 million from rig 257. As we noted in our call, we do have contracts that we have signed on international side, so we expect to see any increase on the international land side. And then also the deepwater work that we referred to on Quail will kick in, in the fourth quarter, likewise to increase Quail’s earnings from the third quarter and the second quarter.
Steve Ferazani - Sidoti & Company
That is very helpful. Thanks a lot everyone.
Bobby Parker
Thank you. Thanks for your interest.
Operator
And our next question comes from the line of Mike Drickamer with Morgan Keegan. Please go ahead.
Mike Drickamer - Morgan Keegan
Hi good morning guys.
Bobby Parker
Good morning.
Mike Drickamer - Morgan Keegan
Bob you went through a lot of achievements for the company here in the second quarter and really looked like it wasn't as bad as it could have been, given what was going in the market, what you think was the biggest bright spot for the company in the second quarter?
Bobby Parker
First of all it was a tough quarter. It is a tough environment out there. I'm proud of what we are doing given the situation, we are working in. International operations are still to me the -- one of the strong parts for us that we are able to keep the rigs working that we have and the day rate decreases when we renewed have not been a very great in some cases none.
So to me that steady increase, that steady business in the international drilling in the markets that we are positioned in principally Kazakhstan and Mexico still present, you know really good target you say pretty steady utilization.
As Dave noted in his comments we are seeing a little bit of uptick in the Far East to that should affect us later in terms of additional contracts. So, I guess international oil price is holding a 65 or $70 range after touching $35, has certainly been across the operators are seeing the curve across the correct ways for them, maybe not for us, but for them right now, were costs have been coming down and commodity prices are being up contrary to the last couple of years.
So, I think they are a little bit more bullish that they would start to spend a little bit more or at least not drop off like may be they planned. Certainly the other areas that Dave has gone for that we talked about is project management and that is a great thing for us to have right now, given the volatility of the business, these are long-term projects, we work on whether it is a (inaudible) Sakhalin or the Liberty rig for BP on the North Slope.
These are go projects for long-term and really utilized our expertise in that capital. So, the money we make of the -- both construction and certainly the O&M side thus there would be the -- in my view those two things be the highlight for the second quarter. And Kirk mentioned very well that you know what third-quarter looks to be our weakest that we are hoping certainly given what we know today that fourth quarter will bounce back even with 257 being down part of that time, and that is just giving the exact reasons that Kirk said there. So, you know kind of a rambling answer, but that is kind of the view I have right now, where we are headed and that is why in our comments we say we, while we are not happy with industry conditions we like how we are positioned.
Mike Drickamer - Morgan Keegan
Okay.
Kirk Brassfield
And if I just can add a couple of things to Bobby's comments. Even though the barge market in the US is certainly is not a bright spot. I am proud of our operational team in new Iberia, Louisiana area, they have a different strategy than our peer group. We have elected to warm stack our rigs instead of cold stack our rigs and we have more rigs than other folks have it the utilization market and they have ratcheted down our cost. So what we talked about in the first quarter call is, we wanted to have a breakeven or better and that is exactly what we have done for the second quarter.
Moving to Liberty, you know that is a huge epic contract for us with BP and Alaska that enables us to get a foothold back into Alaska, and this is a rig that has a serial number 001 on it, we designed it, we built it and we set sail on the day that we hit schedules with BP and we have now landed the rig on the satellite drilling location up in the North Slope Alaska, once again on schedule. So, I am proud of the construction efforts of our company and proud of those project management initiatives.
Mike Drickamer - Morgan Keegan
Looking at the rental tools segment revenues certainly decreased there, but I was pleasantly surprised that the operating margin as a percentage did not decrease that significantly from the first quarter? Are you able to maintain these margin percentage levels here?
Bobby Parker
Dave you want to start on this and then I will come back and comment more on rental tools?
Dave Mannon
Sure. The rental tool market in the United States as we have talked about, you know some of them have switched from the drilling to work over, we have also seen an increase in activity in our deep water, but clearly the land – I mean what has happened to the land market, land drilling market had effected our business and with that our customers have asked for a increase in their discounts and so that is also effected the results of our business.
Bobby Parker
And I will add some just. You know, we early in the year, we knew Quail was going to have a slower year, we didn’t feel like it will quite slow down to this level so clearly the decline in US rig count has effected Quail’s business in terms of their overall EBITDA a bit more than we thought and we are really proud of their margins too just like Dave about their business model of not having a lot of people and sending equipment out to the site, without crews and getting them back that way, it really proves to – I guess proves itself out in these difficult times, you know we are still helpful with the deepwater.
And we talked about here for a couple of quarters in a row now, where Quail has got deepwater activity coming up with major customers that has been slower to start due to availability of getting access to these rigs that their major customers are waiting on. And I think, you know that is why we are somewhat optimistic that fourth quarter will bounce back and be a stronger quarter for Quail when those operations start.
You know when Dave talked about in his operations update, you know the Marcellus’ is good for us, we are expanding there and certainly Haynesville and Bakken has stayed by and large on track compared to the rest of the US drilling and then spots like (inaudible) and Colorado where Exxon is actually adding rigs where Quail does a bit in the (inaudible) those are sort of the bright things that Quail has accomplished and it continues to send equipment overseas. So, you know we are proud of their margins, we are disappointed or thought that we would hold that better and overall EDITDA this year, we told people. So we are really hoping for a nice bounce back in the fourth quarter. We do not expect much difference in the third quarter, we commented on.
Mike Drickamer - Morgan Keegan
Alright guys, all things considered, nice quarter. Thanks a lot.
Bobby Parker
I agree with the all things considered. Thanks.
Rich Bajenski
This is Rich Bajenski I have been informed that we have one more caller on the queue. We will take that call and then we will release you to rest of your day. Operator we will take that call.
Operator
Certainly. Our final question does come from the line of Andrew Coleman with UBS. Please go ahead at this time.
Andrew Coleman – UBS
Hey good morning folks I had a couple of quick questions here. Looking at the barge business, what is the activity mix between the work over and the intermediate deep water, what accounted for the strength in utilization and for those intermediate and deep rigs versus work over’s?
Bobby Parker
Dave you want to start?
Dave Mannon
Sure. The deep rigs mainly focus on deep gas, as well as oil prospects and so we have seen some good activity in the deeper mix in comparison to the intermediate and work over, we had one rig working in a work over for partial part of the second quarter, but the remaining rigs were all drilling on deep prospects.
Andrew Coleman – UBS
Okay. So there is continuation of activities from the first quarter?
Bobby Parker
Yes kept that it in there.
Andrew Coleman – UBS
And then thinking about warm stack cost what do those run and what shall we be factoring in to our day rig cost for warm stacking into the fleet?
Bobby Parker
Dave you want to keep going here?
Dave Mannon
Sure. Our warm stack cost, you know what we have talked about in the past, we like to keep you know breakeven in the, kind of the three to four rig range right now and going forward we have got a contract that is going to roll-off here in the next say 50 to 60 day, so we are going to need to keep four to five rigs working to kind of get to a breakeven point. From a specific cost standpoint, we are kind of looking in that $3,000 to $4,000 day range.
Andrew Coleman – UBS
Okay.
Bobby Parker
I will comment. I think and Dave hit on it earlier. I am really proud to how our barge management and operation folks have responded to this market and our decision to warm stack and as creatively as possible with the lowest cost possible, but keeping -- really protecting the investment that we put in these rigs over the last 3 to 4 years, so that we don't do -- that process moves that part of that investment.
So I like what we are doing, and our goal as we talked about is to be breakeven cash flow or better through the year and we will make adjustments to stay there according to what the market does. We are a little bit hopeful coming out of hurricane season late October that -- you nice and really normal gas prices go, but normally in the winter we see a bump in gas prices and we are kind of helpful, we would like to see some kind of an uptick in utilization, but in our conference notes we are really telling people to expect, you know I feel like slow market for the barge business for the rest of this year.
Andrew Coleman – UBS
Okay, so then -- just by reading into that then you would not find that any additional barges would kind of leave the market to go elsewhere?
Bobby Parker
No. As of the barges that we currently have in the US are not really the type of barges that you would export into the international arena and I would take the exception except to Mexico. There may be an opportunity in Mexico or some of our barges, but clearly the barges that are in the United States are specifically designed to navigate through the coastal areas of Louisiana and Texas.
Andrew Coleman – UBS
Okay. Great and the last question I had was looking at the tax rate, I think you touched on it earlier, but how long should we think about that 50% tax rate kind of continuing?
Kirk Brassfield
This is Kirk Andrew. 2009, I would expect going into 2010 and the primary reason behind that is the lower US taxable income, which does negatively impact your ability to take some of the foreign tax credits, limits you, so it does raise the tax rate and also just when you are in such a low level of income, it is very sensitive from a percentage point of view. Going in 2010, I would bring it back down to more comparable to the 2008 type level, you know in that lower 40% range to mid-40% range.
Andrew Coleman – UBS
Okay thank you, appreciate your time.
Bobby Parker
And Andrew that our – our little chuckling there is -- was designed the fact that this is frustrating to us, we are working very hard to get our tax rate down and with the business makes that we had today as Kirk accurately reflected on it seems to be a difficult process that nonetheless one we are still continuing to work on hard internally as how we are structured to get our tax rate down from where it is now. So, it is a frustration that we all feel and are now working on to correct. I wanted to add that to. Thanks
Andrew Coleman – UBS
Thank you.
Operator
And gentlemen we do have an additional question that does come from the line of John Keller with Johnson Rice & Company.
John Keller - Johnson Rice & Company
(Inaudible) as the market continued to weaken where do you see (inaudible) 2009 relative to OpEx numbers?
Kirk Brassfield
John would you we ask your question, we are breaking up here.
John Keller - Johnson Rice & Company
You originally talked about 10% to 15% decline in Quail, and that kind of shipped to 15 to 20, you know given what is going on in the market where do you see that math (inaudible) 2009?
Kirk Brassfield
John this is Kirk. What I would look at today is looking closer to that 30% may be a little bit above 30% drop in EBITDA. It is more towards 2009 and like I indicated the third-quarter would be the weakest and then we would see it pick back up some in the fourth quarter and at the end of the year we expect we would be around the 30% range.
John Keller - Johnson Rice & Company
And is weaker than we thought.
Kirk Brassfield
30% decrease from 2008.
John Keller - Johnson Rice & Company
Sure got it.
Kirk Brassfield
And that is weaker than we had expected really getting back to -- as Bobby and Dave both mentioned getting back to that impacting the discounts and there were some delays in some of the offshore work.
John Keller - Johnson Rice & Company
Okay got it. (inaudible).
Rich Bajenski
John this is Rich Bajenski, let me characterize that, again we are breaking up here, but I think the question was, what is the timing on the O&M contract for Liberty?
Kirk Brassfield
Yes first of fall, we mentioned in our note, we are in the stages of negotiation right now to hopefully sign the O&N contract with BP for Liberty and would love to be able to talk about that traction soon, but the start-up is -- it is a phase-in O&M contract when it starts and that is we will be paid for doing actual work for the rig up and commissioning at a lower level number of people, but once the rig actually spuds, which would be early second quarter maybe late first quarter of 2010, it is a huge commissioning project because of the size of rigs and the Sakhalin Island that is located on -- that when the actual two year drilling O&M contract would start. So I would start early second quarter and I would like Dave do jump in for any clarity here on the timing that he sees with Liberty.
Dave Mannon
Sure. Just to provide a little bit more granularity on that. We are currently offloading Liberty rig to the satellite drilling locations and once it is off and off loaded then it starts to rig out and so it is mostly a construction project. Once it gets all rigged up then it starts into a commissioning phase.
And during the commissioning phase it starts to phase from a construction into an operational. So the O&M contract starts to face in as well. Okay, but the full effect of the O&M contract does not start until as Bobby mentioned despite of the well which will be sometime in the late first quarter, second quarter, so we will be getting some O&M revenues during the commissioning phase, but it won't be the full revenues until the rig actually spuds.
John Keller - Johnson Rice & Company
Perfect, one more last one for more generally, and I guess about international activity, I think you said that you had some contracts in (inaudible)?
Dave Mannon
I think our utilization from a short-term will not be that affected in 2009, some of the contracts that we have tendered actually start in 2009, but the majority of those start in early part of 2010. So, I think what you are going to see is an improvement going forward in 2010 on utilization.
John Keller - Johnson Rice & Company
Perfect that is all I have, thanks guys.
Dave Mannon
Thanks John, appreciate it.
Rich Bajenski
And on behalf of the Parker team here, I want to thank all of you on the call for being with us through this time that ends the call and thank you for your interest in Parker.
Operator
Thank you. Ladies and gentlemen, this does conclude the Parker Drilling second quarter 2009 earnings release conference call. We do thank you for your participation on today's call. You may now disconnect your lines at this time.
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