Parker Drilling Company Q2 2010 Earnings Call Transcript

Executives

Kirk Brassfield – SVP and CFO

Bobby Parker – Executive Chairman

David Mannon – President and CEO

Analysts

James West – Barclays Capital

David Smith – Johnson Rice

John Keller – Stephens Inc.

Eric Seeve – Golden Tree

Gary Stromberg – Barclays Capital

Steve Ferazani – Sidoti & Company

Parker Drilling Company (PKD) Q2 2010 Earnings Conference Call August 5, 2010 11:00 AM ET

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Parker Drilling Second Quarter 2010 Conference Call.

During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Thursday, August 5, 2010.

I would now like to turn the conference over to Mr. Kirk Brassfield. Please go ahead sir.

Kirk Brassfield

Thank you, Alicia. Good morning and thank you for joining the Parker Drilling second quarter 2010 conference call. This is Kirk Brassfield, Senior Vice President and Chief Financial Officer. Joining me today are Bobby Parker, Executive Chairman, and David Mannon, President and Chief Executive Officer.

Rich Bajenski, our Director of Investor Relations is currently recovering from recent surgery for a broken ankle. He expects to be back in the office next week to take your calls. We wish Rich a speedy recovery.

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 website 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.

Here is Bobby Parker to begin our review. Bobby?

Bobby Parker

Thanks, Kirk, and welcome to our conference call.

Earlier today, we reported our 2010 second quarter results. David Mannon and Kirk Brassfield will review the operating and financial details of our results in a moment.

Our current outlook for global E&P trends has been tempered by recent events, while we remain encourage by solid oil fundamentals and the rapid growth of onshore U.S. drilling, the expected increase in international E&P spending has been slower to materialized principally held up by instability in European and Central Asian financial markets.

Many operators who forecast through increased drilling budgets are now hesitant to commit drilling programs until a clear picture of the long-term stability of these regions emerges.

The impact of contract drilling has not been uniform across all of our international regions, but the overall effect has been a slow deceleration of drilling activities.

Growth in our project management business, which strives on programs with much longer term horizons, has contributed to more steady results. In the U.S., the rippling effects of the Macondo oil spill and the resulting moratorium on deepwater drilling are expected to add further pressure, if more rigs depart to go for Mexico for international waters. Also concerning is the ongoing discussion of increasing taxes in the U.S. on the risk and cost intensive business of energy exploration in the face of a tenuous global economic recovery.

While Parker is minimally affected by the deepwater drilling moratorium in the Gulf through our rental tool business, has others has previously stated, I personally believe the moratorium is an overreaction that does more harm than good. The economic impact to the region and in particular the smaller companies that serve the deepwater activity are devastating.

I am confident our industry will benefit from lessons learned and further improve our operational and safety practices and hope that the moratorium is lifted very soon.

The exception to the current global outlook is the strength in U.S. land drilling as it continues to be propelled by shale drilling particularly in the liquids rich fields. The unconventional high efficiency drilling methods used to develop these fields, such as directional and lateral wells has sustained and benefited many parts of the oil fuel service sector including Parker’s onshore rental tool businesses as demonstrated in our second quarter results.

Additionally, our barge drilling segment utilization has rebounded from last year’s comparable quarter also benefiting from oil directed drilling although the rates (ph) remain depressed. While we remain optimistic about the prospects of increasing levels of international expiration activity, I do expect it to come back a little bit more slowly.

And I’d like to turn the call over to Dave Mannon. Dave?

David Mannon

Thanks, Bobby. Before we get into the details of the quarter, allow me to address what is probably on the minds of many of our listeners and that is how we are impacted by the recent events in the Gulf of Mexico and to clarify our relationship with BP.

I can say that so far the blowout of the Macondo well and all that has happened subsequent to that event have had little direct impact on Parker’s barge fleet. Our barge rigs, which drill in waters less than 18 feet usually, operate in inland areas, marinas (ph) and shallow waters shielded by coastal barrier islands. Our operations in these areas have not been negatively impacted so far by any oil sleeks.

We did not have rigs that work in Federal waters at the time of the blowout nor did we have commitments to work in Federal waters and therefore, our barge business was not directly affected by any of the moratoria or the pause in Federal permitting that have taken place since then.

In June, the Louisiana Office of Conservation issued a state-wide order implementing new drilling and completion operational and safety requirements in light of the Macondo spill incident.

The principal action taken by Parker Drilling to meet the new requirements was to equip our marketed barge rigs with hydraulically operated blind shear rams in our BOP systems. Six of our marketed barge rigs were already equip with these rams as a result of our barge refurbishment and upgrade program, which began in 2006. As a result of our recent upgrade, all of our marketed barge rigs now are equipped with blind shear rams.

Additionally, we are proud to note that all of our Gulf of Mexico barge rig crews received well-controlled training that exceed state mandated requirements.

On the other hand, our rental tool business has had an important presence in the Gulf. Most recently, we had begun to see some rental tool equipment returned to our yard from this market. While we expect more of that for the near-term, the extent of our exposure is limited to the business we had in place, approximately 1 million of revenues per month.

Continued uncertainty about the future of the drilling in the Gulf could erode this base. Overtime, drillers will either return to drilling in the Gulf or relocate their projects overseas and we would seek to have our rental tool business follow them.

That’s the extent of our commercial exposure in the Gulf of Mexico.

We have an ongoing relationship with BP. We continue to work on installing the BP Liberty rig on the North Slope of Alaska. In 2009, Liberty related revenues accounted for approximately 25% of Parker’s revenues and today in 2010 that has amounted to 13% and has shown its revenue in our construction contract segment.

We also have two programs for future work for BP. These are the Liberty rig on O&M contract and two five-year drilling contracts that will employ two Parker-owned new built rigs currently under construction. Liberty rig O&M contract is to drill ultra extended reach wells to the offshore Liberty field from a land-based location. Extended reach drilling is a well-developed, proven field of practice. It has been done for years by us and others in locations around the globe.

We believe BP chose us for this project because of our track record of success, efficiency and safety. Our Liberty related work for BP will transition from current insulation activities to operational activities when BP directs us to do so. On an annualized basis, the O&M contract is expected to generate approximately 3% of our annual 2009 revenues.

The other project for development drilling in the Prudhoe Bay Field involves Parker delivering two new arctic land rigs in late 2011 pursuant to two five-year contracts with BP. These contracts have expected annual revenue potential of 6 to 7% of our annual 2009 revenues.

We have previously communicated the construction cost of these rigs will be between 230 and 245 million. We now believe we are in the upper end of that range.

As you can see, while these projects are important to Parker, none of them are crucial to our continued success. Our future would benefit from the successful completion of each of these, but it is not tied to any of them.

Though we are a company focused on a few businesses with certain products and selected geographical markets, we are a diverse company within those bounds. Issues that have risen in the Gulf of Mexico will impact us, but the overall success of Parker is not tied to just the Gulf of Mexico or our rental tool business in the Gulf or whether or not one customer goes ahead with a project in Alaska.

Our success is tied to adhering to our core principles of safety, training, technology and performance in each of our core operating segments. We are a global company and we offer a diversified portfolio of drilling related and rental tool services, which we feel is a key strength of our company.

Let me turn to our review of our second quarter business, in international drilling, the number of Parker rigs employed during the quarter was down sequentially. We are in a low period in some of our regions in which we work, which has made it difficult to re-contract rigs as they become available. We’ve had some success and we have contracted eight rigs since the beginning of the year.

In addition, we currently have a commitment for one rig in our negotiating continued work for four other rigs.

The U.S. Gulf of Mexico drilling market has stabilized. This has been primarily driven by all drilling programs and some conventional liquid rich gas drilling.

At Parker, irregularization has risen sequentially. As a result Parker leads the drilling barge market in terms of number of rigs marketed as well as under contract and we continue to operate with a positive cash flow.

Our rental tool business reported their third best quarter ever in terms of EBITDA. Primarily this is due to the increase in directional drilling in the U.S. land market driven by the growth in a liquid rich shale place.

In addition, we have grown our customer base during this time. By buying pipe during last year’s downturn, we are now able to better meet the growing demand as well as leverage the better pricing and produce increase margins for the business.

Project management business has expanded its portfolio of opportunities while executing its current work. We have been working on several interesting and challenging projects that involve engineering work this year and potential O&M work in the future.

That’s the overview. Here’s a more detailed analysis.

In 2010, second quarter utilization rate for our international rig plate was 55%. We had the equivalent of 17 rigs working on average during the 2010 second quarter compared to 21 equivalent rigs working during that 2009 second quarter, and 18 equivalent rigs working during the 2010 first quarter.

In the Americas region, we operated at 83% utilization. One rig in Mexico that had previously been idle went to work during the quarter on a well to well program. We are negotiating continued work for our four rigs that should allow operations to continue through late 2011.

In Asia Pacific region, we operated at 36% utilization for the second quarter. One rig in Indonesia completed its contract in late May. This rig has good prospects to return to work later this year.

We recently contracted a rig in Papua New Guinea that had previously been idle. Its initial term work will be for at least 12 months. We are in negotiations with a customer to take one rig later this year, directly after it completes its existing contract.

The CIS/AME region, our second quarter utilization was 50%. Both rigs in Algeria completed their contracts during the second quarter and we are actively marketing the rigs in country as well as other markets.

Rig 257, our arctic class barge rig operating in Caspian Sea has completed its refurbishment and upgrade program and recently returned to work. It was out of service at a reduced day rate throughout the second quarter.

In summary, our international drilling operation ended the second quarter with two last rigs working than in the beginning of the quarter. While current tender activity offers a promise that some contract opportunities will become available in late 2010 and into 2011, we expect our international rig fleet utilization will remain around current levels for the remainder of the year.

Now, turning to our Gulf of Mexico barge drilling business, second quarter utilization of our fleet was 65%. We had the equivalent of eight barge rigs working on average during 2010 second quarter compared with four equivalent barge rigs working during the 2009 second quarter.

The average barge day rate declined to 19,000, where the 2010 second quarter from 29,800 for the prior year second quarter. This is primarily due to the expiration in late 2009 of a 2008 term contract for a deep drilling rig and an increased in the number of lower day rate intermediate depth rigs working in the current quarter.

Based on our industry information, we estimate there are 15 barge rigs under contract today in the U.S. inland waters or the Gulf of Mexico. We are currently having seven barge rigs operating accounting for 47% of industry activity. Of those seven, five are drilling for oil, primarily, and two are drilling for gas.

We are optimistic about the outlook for this business. There is sufficient interest in inland waters to employ much of the industries current capacity. We are the leading contractor in the industry, accounting for half of the industry’s available fleet and we believe we are the preferred supplier offering safe and efficient barge rigs operated by well-trained and experienced crews.

In the near-term though, we need to be mindful that state permitting has slowed down and we are in the middle of hurricane season. Some operators will choose not to work during this time to avoid the potential for storm induced interruption and additional cost. As a result, shallow water drilling typically slows down in the third quarter.

Rental tool revenues increased notably this past quarter, compared to the prior year’s second quarter and the preceding quarter. The primary contributor has been growing demand in the U.S. land market and a reduction in the price discounting that accompany last year’s sharp decline in U.S. land drilling.

More recently, business has been improving both as a result of increased drilling activity and better pricing. The primary sources of the revenue gains include the increase in oil directed drilling as in the Bakken and drilling liquid rich shale place like Eagle Ford and the Haynesville.

In addition, our international business continues to grow. Our expectations for this business have improved as price discounting has diminished and increases in old directed drilling have tempered the effects of a wavering in the natural gas rig count.

We remain quite active in our project management and construction contract business during the second quarter. We continue to operate the Gaza Strip extended rich land rig for Exxon NAFTA gas operating in the Odoptu field offshore Sakhalin Island, Russia.

In June, Parker operated forlorn offshore platform transition from a ready stack mode with reduced crews to a higher day rate.

We continue to provide technical services to Kuwait drilling company for a fleet of 24 rigs. We continue to provide engineering and procurement services for offshore platform for Exxon Neftegas that will target the Arkutun-Dagi field offshore Sakhalin Island. Our Liberty rig installation is underway.

We have been active in bidding several other projects that include feed, EPCI, and O&M opportunities. These are in regions of present other engineering and operational challenges that fall within our technical capabilities.

That’s it for the operational update.

I’ll now turn the call over to Kirk Brassfield to financial results and outlook.

Kirk Brassfield

Thanks Dave. For the second quarter of 2010, Parker Drilling reported net income of $0.5 million on revenues of $156.5 million. There were several non-routine items that affected the quarter’s results. Excluding the non-routine items, Parker earned $4.9 million in net income, or $0.04 per diluted share.

The comparable result for last year’s second quarter was $0.06 per diluted share. Included in non-routine items are $4 million pretax of debt extinguishment led costs related to the portion of the company’s 9.58% Senior Notes which were redeemed in the quarter, $1.1 million pretax of the expense related to the ongoing Department of Justice and SEC investigations and Parker’s internal review regarding possible violations of the Foreign Corrupt Practices Act and other laws, and $1.1 million tax expense for an assessment related to a 2005 audit of Mexico.

Turning now to ongoing operations, our international drilling segment reported second quarter revenues of $52.9 million, and gross margins of $13.5 million. Compared to the 2009 second quarter, the decline in revenues and gross margin reflects fewer rigs under contract during the quarter, and the impact of having Rig 257, our Caspian barge rig on reduced day rate throughout the quarter as it underwent a scheduled overhaul and upgrade. This was partially offset by a higher average day rate in the Asia-Pacific and CIS/AME regions. Having Rig 257 on a lower day rate during this period reduced EBITDA by approximately $6.6 million.

US barge drilling segment reported second quarter revenues of $15.3 million, and gross margin of $1.8 million. The increases in revenues and gross margins compared to the prior year’s second quarter are due to the increased number of barges at work during the quarter, and lower operating costs somewhat offset by a lower average day rate.

As mentioned, the 2009 second quarter included one barge rig working on longer-term contract set at 2008 day rates.

The rental tool segment revenues were $41.4 million, gross margin was $27.1 million, and gross margin as a percentage of revenues was 66%. Compared to the 2009 second quarter or the immediately preceding 2010 first quarter, revenues, gross margin, and gross margin as a percent of revenues all rose.

The continued growth in revenues and earnings and the rise in gross margin as a percent of revenues were primarily due to having our stores strategically located with exposure to liquids rich shale plays. With the improvement in market conditions, price discounting has also eased, leveraging the growing demand with lower operating costs resulting in a very strong quarter for the rental tools.

Project management and engineering services segment revenues were $26.4 million for the 2010 second quarter, and gross margin was $4.7 million. The prior year second quarter results included project revenues associated with the relocation and upgrade of the Yastreb rigs. The absence of those revenues from the current period partially offset the contributions to revenue from the transition of the Orlan platform to a higher day rate than its prior status and the increased revenues from the Arkutun-Dagi project for which we are providing engineering and procurement services.

Construction contract revenues and income represent the progress in constructing the Liberty Rig, which is now undergoing installation activities on the North Slope.

G&A expense decreased to $6.7 million for the quarter, compared with the prior year’s second quarter expense of $11.1 million. This is primarily due to a significant reduction in the legal and professional fees related to the DoJ, SEC, Parker investigations. Excluding these costs, G&A expense for the 2010 second quarter was $5.9 million, compared with adjusted G&A expense of $7.1 million for the 2009 second quarter. Reductions in corporate costs have been the primary contributor to the lower adjusted G&A expense.

Interest expense was $7.4 million in the second quarter, below the prior year’s quarterly expense of $7.5 million, due primarily to the higher amounts of capitalized interest. Included in interest expense this past quarter is $1.3 million of noncash interest expense related to our convertible debt. The prior year’s second quarter interest expense also included $1.3 million for the same item.

Our cash balance at quarter-end was $49.8 million, compared to $108 million at the end of 2009. Capital expenditures were $71 million for the quarter and $129 million year-to-date. Included was capitalized interest of $3.3 million for the quarter and $5.8 million year-to-date. Also included Alaska rig reconstruction spending of $33.9 million for the quarter and $75.1 million year-to-date, rental tool inventory purchases of $16.5 million and $25.8 million year-to-date.

We believe we are in sound financial shape. At the end of the quarter, we had $451.1 million of debt outstanding and $49.8 million of cash and cash equivalents or a net debt position of $401.3 million.

Our total debt to capitalization ratio is a very manageable 43%. Our debt covenants contain two important financial tests, a leverage ratio of debt to EBITDA and an interest coverage ratio. At quarter-end, our leverage ratio is estimated to have been 3 times, against the covenant maximum of 4 times. Our interest coverage ratio is estimated to have been 5.6 times, against the covenant minimum of 2.5 times.

The second quarter business environment contains signs that the expected second half improvements and marked conditions will be slow to develop. For international drilling, since beginning of the year, we’ve had mixed results extending contracts extended and getting new work for rigs coming off contracts.

Slower than expected conditions in some markets has led to a decline in fleet utilization. While we have tender responses and work discussions in progress, most of these prospects are for projects in late 2010 and into 2011. And, therefore, we do not expect to see our fleet utilization change much for the remainder of the year. We expect an increase in revenue since results in barge 257 is returning to work for the remainder of the year.

The Gulf of Mexico barge business has much improved from last year. Further improvements could occur as more drilling programs are developed with longer term horizons, and more deep gas drilling moves into shallower water. However, any improvement is only likely to occur after the peak of hurricane season has passed.

The rental tool business should continue to benefit from its expanded international placements and stable to rising demand from the US land drilling, supported by the increase in oil directed drilling particularly in the shale plays.

(Inaudible) Gulf of Mexico business will be impacted by the decline in offshore drilling programs, vis-à-vis effects of the Federal moratorium.

2010 project management and engineering services segment results will be determined by the progress in the Liberty and Arkutun-Dagi projects as well as other potential projects we have underway. The revenues and earnings for the construction contract segment will continue to phase out as the Liberty project transitions from installation toward operational status.

We believe that 2010 second half will reflect these factors, as well as the momentum of the trends we experienced in the second quarter. As always, there are some uncertainty in the outlook, particularly the near term impact of fallout from the Macondo well incident in the Gulf of Mexico.

Nevertheless, we believe we have the potential to produce improved earnings in the coming quarter, and improved earnings for the year. I look forward to reporting on our progress as the year develops.

That ends our review. I’ll now turn the call over to Alisha, we’ll begin to take questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Our first question is from the line of James West with Barclays Capital. Please go ahead.

James West – Barclays Capital

Hi, good morning, guys.

David Mannon

Good morning.

James West – Barclays Capital

Dave, with the two rigs you have in Algeria come off contract now, when do you make a decision whether you want to stay in Algeria or move those rigs elsewhere?

David Mannon

Good question, James. We’re currently evaluating that market. There is a considerable amount of activity from a tender perspective in the early part of 2011. And so, the question is, do we wait on those tenders and market those rigs in Algeria or do we move those elsewhere.

The other markets that we’re considering for those two rigs are Mexico and we’re also looking at opportunities in Iraq. So those are really the other two potential international areas that those rigs could move in. And so, it’s just really a question of timing. If we’re able to secure a margin in a market outside of Algeria that is either at or above what we could obtain in Algeria, then we will move those rigs.

James West – Barclays Capital

Okay. And you brought up Iraq, what’s the opportunity for Parker in Iraq? I guess you could move some rigs into the market. Would you build new rigs for the market? There’s clearly a major expansion that’s about to happen there. Kind of how do you see that unfolding? How do you see Parker being part of that?

David Mannon

Yes, I think that the rigs, the existing rigs that we would – we could and would bring into Iraq would be our newer constructed rigs, so those are the rigs in Algeria and we also have some rigs in Kazakhstan that are potential movement into Iraq. As far as new builds, we have been actively looking at the potential for new builds in Iraq. Those are faster moving 1500 horsepower rigs. But interesting enough, a lot of the lifting equipment is more sized to the 2000 horsepower marketplace.

James West – Barclays Capital

Okay. And then with respect to Iraq and what you’re seeing now, when do you think we would hear announcements or when do you expect to hear about awards for potential projects in Iraq that you have tendered for or bid on?

David Mannon

Once again, we have specifically tendered anything recently in Iraq. Those tenders are coming up here in the third and fourth quarter of this year. And so that would be a 2011 event.

James West – Barclays Capital

Okay. That’s very helpful and that’s all from me. Thanks Dave.

David Mannon

Thanks.

Operator

Your next question is from the line of David Smith with Johnson Rice. Please go ahead.

David Smith – Johnson Rice

Good morning, guys.

David Mannon

Good morning.

David Smith – Johnson Rice

A very nice quarter on Quail Tools. NOV recently commented on their call that that they’re seeing in pipe demand increasingly going to the rental tool companies and I was wondering how that squares with what you’re seeing?

David Mannon

Yes, certainly. As I mentioned in the call today earlier in the comments, we had made a substantial amount of inventory adds in 2009 that we took delivery on in the early part of 2010, we’re actually in hindsight very happy that we did that that proactive purchase, because it enabled us to place pipe in markets that some of our competitors had run out of.

And so we’re able to, one, increase our market share; and second, increase our customer base. We’re still seeing additional activity and so we’re through the 2010 we have been buying additional pipe to serve that market. And, quite frankly, I see that continuing into the latter part of 2010 and into 2011. So there is still a shortage of pipe from a rental tool perspective in a lot of the markets that we have are active in specifically in the Eagle Ford and in the Haynesville and in the Bakken Shale.

David Smith – Johnson Rice

Good color, thank you.

David Mannon

Thanks.

David Smith – Johnson Rice

Following up on Quail, you mentioned that price discounting has eased. Can you provide some color on how that discounting has deferred from the end of the quarter versus the start of the quarter and maybe where we are today?

David Mannon

Well, I would say, we just started at the beginning of the year. We’re up in the kind of the mid-60 range. Currently, we’re down into the kind of the mid-30 or in mid-30 to high-30 range. So, we’ve had a considerable reduction in our discounts. Most of that is driven by our new customers, a lot of our new customers we’ve been able to add at a lower discount, so that’s kind of an average discount over kind of our full customer base.

As I’ve mentioned previously, some of some of our larger customers, we don’t have that much of a differential in discount because our discounts didn’t expand in 009.

David Smith – Johnson Rice

Okay, thank you. And last question, I saw a nice uptick in the utilization of the barge market. Not an improvement in pricing, but getting past hurricane season, assuming permanent activity remains strong, how should we think about your ability to push pricing later on if activity picks back up?

David Mannon

Well, there are a total of 26 barge rigs that are actively marketed in the U.S. inland water space. Currently, we have – the industry has 15 working, of that we have seven currently working.

From an investment perspective, what you would need to see is that that 15 would need to raise into that kind of the high 10’s (ph), low 20 range for us to really start getting some traction on our day rates. So, sure we’re pleased with the utilization of our rig fleet. We’re currently almost 50% from the industry perspective utilized. We’re very happy about that, what that tells me is that our customers value our performance and our safety more than maybe our peer group and that’s a good thing.

But having said that, we need to have our peer group also go back to where, so that we can raise our prices.

Operator

The next question is from the line of John Keller with Stephens Inc. Please go ahead.

John Keller – Stephens Inc.

This question is really for Kirk. You run through the impact or sensitivities around barge 257. I kind of missed some of those. I was wondering if you could go back over those again. You talked about the EBITDA impact and kind of revenue impact. Actually we expect to get that coming back.

Kirk Brassfield

Yes, (inaudible). Yes, Shawn (ph). I talked about – mentioned that compared to the second quarter of 2009, the current quarter had impact of about 6.6 million in EBITDA.

And if I can look going forward, you might be thinking maybe not full, think 5 to 6 million going forward would be what we’ve seen positively come out.

David Mannon

Yes, just let me add to that John. We did a considerable amount of upgrade work at the request of our customer. During the upgrade program, which originally wasn’t scheduled and so that cost is being reimbursed to us, which will be then amortized over the life of the contract.

John Keller – Stephens Inc.

Okay. So, that’s actually going to help pretty significantly contribute to kind of keeping the international business flattish to up as you move to the back half of the year.

Kirk Brassfield

Yes, when you think about the second quarter you’d see that pushing this up.

John Keller – Stephens Inc.

Okay. And then I wanted to hit on Mexico real fast. I mean you had talked about moving an additional rig into that market potentially or two and I guess that’s in a bit of contrast to maybe where the industry is thinking at least in the near term given the uncertainties with PMAX (ph) and I think your larger customer there on their call recently had some pretty less favorable outlook for the Mexican drilling market. I was just wondering, if you can kind of comment on where you are in that market and where your four rigs – I mean how close are you to signing contracts on those and what you see as a go forward on that.

David Mannon

Sure. First of all, let me differentiate between the business that we do in Mexico and the business that has been recently commented on by some of the IPM providers in Mexico.

So, our business is predominantly deep well and some gas drilling, but all of it is in excess of 15,000 feet. Whereas the recent communication from the IPM providers, where specifically in the (inaudible) area and in other areas that have relatively shallow oil wells. So, those are in the kind of 5 to 6,000 foot range.

And so those activity, that activity in (inaudible) was a relatively nominal production per well, whereas the activity for the wells that we drill is a substantially higher production rates once they’re completed.

So, what we’re seeing and what we’ve – just the conversation that we’ve had with

PEMEX is that the activity in the deeper horizon that enable them to produce at higher flow rate are going to be the focus for the land drillers in the future. Now, I will say that the rigs in Algeria, the potential for moving those is not in 2010, it would be a 2011 event. But we see that there is still opportunities for deep oil drilling based upon some of the conversations we have had in the local area.

Operator

The next question is from the line of Eric Seeve with Golden Tree.

Eric Seeve – Golden Tree

I have got two questions. The first is regarding capital spending requirements. Specific for the rental tools business, what do you anticipate CapEx will be for this year and beyond this year, what’s a reasonable number for investors to assume?

David Mannon

What we are looking for this year will be a total of around $43 million, $45 million for the rental tool business and just to add to that, that’s higher than we have had from a run rate in the past and that’s consistent with just the activity level that we are seeing in the liquid rich areas of the United States. So the demand for pipe has generated us to go out and increase our CapEx in that area.

Eric Seeve – Golden Tree

And going forward is there a need to buy new equipment that’s suitable for these areas and that’s why it’s high this year and will it probably reduce going forward or is this just a good run rate?

David Mannon

Our run rate in the past has been kind of in that $35 million range. We think that that’s still a good run rate. That having been said we are already focused on 2011 capital spending and so we are in the process of looking at that right now. But clearly, our customers are telling us that demand is continuing to increase in those three areas that I have just mentioned.

Eric Seeve – Golden Tree

My other question is with respect to the international drilling business. If you look at the international rig count as BHI tracks it for the price of oil, it looks like demand has been improving throughout the year and you would expect it to continue to be improving given the oil price. That said, your utilization levels are quite low and it sounds like you don’t think they are going to get any better. Is that a function of just the geographies that you happen to be in or is there – are you seeing more competition in terms of supply out there or are there just more rigs now than there had been, which is keeping utilization depressed? Can you give us just a little more color on that?

David Mannon

Let me just granulate some of our areas and I think that will help answer the question. The Americas are of Mexico and Columbia, all of our land rigs are working. So we have 100% utilization there. If you move across over in Asia Pacific, we have really the actively marketed rigs, we have those working except for one in New Zealand and one in Indonesia, which we think that more than likely we can put the one in Indonesia back to work sometime this year. The one in New Zealand more than likely will stay idle just because of the geothermal activity there is such that that we don’t think that rig will work the remaining part of this year. Although we think that the prospect of it working next year is high.

So really the area that has given us a pause from an utilization perspective is in Kazakhstan and in Algeria. And Algeria, we have some internal issues with our customer that has caused them to take a pause in their activity level, which I reported on in the past.

So therefore that market, I think is still going to be active but they are just – 2010 has given us a pause in the activity level. Now in Kazakhstan, we thought that we are going to see an increase in activity by this time with our idle rigs and mainly because of some of the issues with the European market as well as just local issues within Kazakhstan, the tenders that we have, have actively bid upon have just not been awarded to anybody and so we’re really actively bidding these and the marketplace still looks to be good but we’ve just seen a lot of delays and actually work being awarded there.

So I don’t think there is anything systematically going on in Kazakhstan that’s going to cause drilling to stop but it’s just we’re just having a pause which I think will pick back up in 2011.

Eric Seeve – Golden Tree

Thank you very much, that’s helpful, and can you just give a little more color on you mentioned that issue in Algeria with your key customer, is that an issue you’ve had with them in terms of being compensated for your assets in the region or is it.

David Mannon

No, what that is the leadership of our customer has been replaced. And they’ve gotten a completely new top-level organization and they’re just I guess it was unfortunate that we had rigs that we’re rolling over on contracts right in the middle of all of this. And so therefore even though there is a lot of money to be spent from a drilling perspective that we were optimistic that our contracts were going to be rolled over because of this reorganization within our client they decided not to do anything until they understood the business and so they think that that’s going to take them at least six to eight months to get something done so that’s really a 2000, that’s why I say its 2011 event.

Operator

Your next question is from the line of Gary Stromberg with Barclays Capital. Please go ahead.