Parker Drilling Company (NYSE:PKD)
Q4 2010 Earnings Conference Call
February 23, 2011, 11:00 am ET
Richard Bajenski – IR
Bobby Parker – Executive Chairman
David Mannon – CEO
Kirk Brassfield – SVP and CFO
Tom Curran – Wells Fargo
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Parker Drilling Fourth Quarter 2010 Conference Call. During today’s presentation, all participants 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, Wednesday, February 23, 2011.
I would now like to turn the conference over to Richard Bajenski, Director of Investor Relations. Please go ahead sir.
Thank you operator and good morning to our audience and thank you for joining the Parker Drilling fourth quarter 2010 conference call. This is Rich Bajenski, Director of Investor Relations, joining me today are Bobby Parker; Executive Chairman, Dave Mannon; President and Chief Executive Officer, and Kirk Brassfield; Senior Vice President and Chief Financial Officer.
In the course of our comments today, we will make statements regarding management’s expectations for the Company’s future performance that we believe will be informative and beneficial to our shareholders. These statements are considered forward-looking statements within the meaning of the Securities Act. Each forward-looking statement speaks only as of the date of this call, and actual results may differ materially due to various factors we have referenced in our public filings 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 also for further information regarding non-routine items.
Here to us start off, is Bobby Parker to begin our review. Bobby?
Thanks Rich, and welcome to our conference call and good morning everybody. Earlier today, we reported our 2010 fourth quarter results. Dave Mannon and Kirk Brassfield will review the operating and financial details and discuss our outlook in a moment.
Before they do that, I have a few thoughts to share on current events that are shaping our business and we believe are of interest to our investors. A de facto [ph] or a moratorium on deep-water drilling in the Gulf of Mexico continued. Fortunately it has had little impact on Parker’s Gulf of Mexico barge drilling business or rental tools business. Barge drilling occurred mostly in state waters of Louisiana and Texas. Since the Macondo oil spill, both states have made revisions to the regulations and oversight practices.
Drillers like Parker have made adjustments to meet the change in regulations and permits continue to be processed and issued with no significant interruption. There appears to be little impact on the barge drilling market. The offshore drilling market that has certainly been affected, Gulf of Mexico drillers do rent equipment primarily landing strings and drill pipes. The stand still and deepwater drilling and the decline in shelf drilling have impacted what was a growing piece of business for our rental tools prior to the Macondo oil spill.
We believe that this initially led to about $1 million per month of lower revenues for rental tools. This impact has diminished as some equipment have moved with rigs that left the Gulf for jobs else where, or we have replaced it with other business. In the US, on land, the increase in lateral drilling, whether in new shale plays or is happening increasingly in conventional oil and gas fields has been a boom to rental tool equipment suppliers.
More lateral drilling is being done and the laterals are getting longer, require more pipe per well and keeping the pipe in the hole for longer periods of time. The net result has been more demand for rental tools. Internationally, we're all attentive to the events unfolding in North Africa.
Parker’s only assets in the region are in Algeria where we have two rigs currently stacked.
So far the safety of our people and the security of our assets or our opportunity for future work in Algeria do not appear to be threatened. The future of drilling in Kazakhstan remains caught up in the country's financial difficulties. We believe that this market has potential for Parker and we are exploring opportunities to improve the regions rig utilization in the short-term.
Lastly, in South America, we are encouraged by the growing EMP spending in Colombia and recent discoveries and plans for expanded EMP activity in Argentina. Some of the work in both these countries requires high horsepower rigs capable of drilling deep and also in remote and challenging locations, just what Parker rigs are designed for and our crews are experienced in.
Increasing demand in the region should be beneficial for Parker and while we do have a recent success to report. Earlier this month, we have signed a contract for new work in Colombia and will be mobilizing into Colombia a rig that was recently idled in Mexico. That concludes my remarks; I will now turn it over to Dave Mannon to discuss our operating performance and our outlook, Dave.
Thanks Bobby. The highlight of this past quarter was the performance of our rental tools segment which achieved new highs in revenues, EBITDA and gross margin as a percent of revenues which resulted in a record year for rental tools. The Quail team has done a superb job in the execution of their strategy and they have produced excellent returns on Parker investments and the people and resources that supported this achievement.
In addition to the rental tool results, other highlights of the quarter include our further increase in revenues and gross margin for our Gulf of Mexico barge drilling operation; these are our highest reported gross margins in the last two years.
A new contract to drill in Indonesia returning to service a rig that has been stacked recently, a one-year extension in the contract for Rig 257 our Caspian sea Arctic barge and setting a new extended reach drilling record, with our raft gas rig working for Exxon Neftegas Limited on Sakhalin Island. In summary a record setting rental tool results and improvement in our Gulf of Mexico barge drilling businesses this past quarter counter balanced the lower utilization in our international drilling operation.
Here is a look at each business in detail. Rental tool revenues increased 96% and segment gross margin increased 137% compared to the prior year's fourth quarter. The primary contributor was growth in the demands in the US land market spurred by the widespread increase in lateral drilling of shale resources and the growing application of lateral drilling to exploit more conventional oil and gas reservoirs.
Our store locations are positioned to serve one or more of the current active shale plays including the Bakken served by the Williston, North Dakota store, the Niobrara served by our Evanston, Wyoming store, the Eagle Ford served both by our Odessa and Victoria stores, the Marcellus served by our satellite operation in Mt. Morris West Virginia and the Haynesville, Fayetteville, Woodford and Barnett field served by our Texarkana store.
We've made timely investments in prior periods to grow our rental tool inventory in anticipation of the expanding market demand. Now by strategically relocating inventory to meet customer needs as they develop, we have been able to leverage our investments to capture more market opportunities, and the US, Gulf of Mexico barge drilling market continues to improve.
Our fourth quarter results were the highest revenue and gross margin we have recorded in two years. In addition, our average day rates increased 9% year-on-year to 21,000 per day from 19,300 per day. Parker's fourth-quarter average rig fleet utilization was 73%. We have the equivalent of 9.5 barge rigs working during this 2010 fourth quarter, compared with 7.7 equivalent barge rigs during the 2009 fourth-quarter.
Based on industry information, we estimate there are 17 barge drilling rigs working today in the US land, our US inland waters of the Gulf of Mexico. We currently have seven barges that work and an eighth barge is in the shipyard being upgraded and preparation for going to work later this quarter on a new multi-month deep well drilling contract.
In international drilling; our fourth quarter utilization rate was 46%, in last year's fourth quarter it was 64%. We have the equivalent of 14 rigs working during the 2010 fourth quarter compared with 20 equivalent rigs working during the 2009 fourth quarter. In the America’s region, our 10 rig drilling fleet achieved 67% average utilization, a decline from the prior year’s fourth utilization of 80%.
This is primarily due to a shift in the areas of growth in the region, slower growth in Mexico, accelerating growth in Columbia. There has been idle time between contracts as we redeploy some of our rigs. During the quarter, one rig in Mexico which has been working on a well-to-well basis was between contracts not working at the end of the fourth quarter.
Two rigs previously on contract in Mexico are currently being tendered for work both in Mexico and Columbia, we recently contracted one of those rigs in Columbia for work that will extend into early 2012. In the CIS/AME region, our 11 rig drilling fleet operated at 33% average utilization, a decline from the prior year’s fourth quarter utilization of 68%.
The two land rigs in Kazakhstan that are under contract were on reduced rates during most of the fourth quarter as they awaited direction from the operator KPO to commence drilling. They have since gone to work at a full day rig.
One rig released in September was demobilized and then stacked during the quarter. The operator of Rig 257, our arctic-class barge rig located in the Caspian Sea exercised a one year option extending the rigs current contract into 2012. The rig completed its refurbishment, overhaul and upgrade program in the third quarter.
While awaiting a move assignment from the operator, the rig was iced in at a non drilling location. The rig will be on standby rate until it can be moved to its drilling location which we expect to occur in the second quarter. Both of our rigs in Algeria remained idle in the fourth quarter. We have been marketing the rigs in country and while no contracts have resulted, tendering in the Algerian market was more active in the fourth quarter than earlier in the year.
In the Asia Pacific region, our eight rig drilling fleet operated at 45% utilization, about the same as the prior year’s fourth quarter utilization of 46%. One rig that was previously idle was awarded a contract in Indonesia and began working during the fourth quarter. One rig in New Zealand completed its contract work during the quarter has been actively marketed.
Three other rigs in the region have been removed from the marketed rig fleet and are being offered for sale. In summary, our international drilling operation ended the fourth quarter with two fewer rigs working than in the beginning of the quarter. Lastly, our two new build Arctic land rigs are undergoing construction in Vancouver Washington and are scheduled for delivery to Alaska later this year.
Our project management and engineering service operations were active during the fourth quarter. We continued to provide services to Exxon Neftegas Limited, the operator of the Sakhalin-1 project including the managing the Yastreb rig in Orlan platform and providing engineering and procurement services for the construction of an offshore platform that will target the Arkutun-Dagi field.
The Orlan platform completed its work over program during the fourth quarter and has moved to a warm stack condition. In December, the Yastreb set a new industry record for measured depth reaching 40,502 feet all done incident free. While we enjoy the bragging rights to go with such an achievement, what is more important is that setting the record resulted from having engineered, constructed, and operated the rig that is delivering unmatched performance for its client.
The technical services provided to the Kuwait Drilling Company covered a fleet of 23 rigs up from an average of 14 rigs under the services agreement in the prior year’s fourth quarter. The sole project in the construction contract segment is a Liberty rig.
In November, the client and owner of the rig BP, suspended construction while they go through an engineering and design review. The construction contract has expired and we are working with BP under our O&M agreement, operations and maintenance agreement, to preserve the rig while they conduct their review.
The O&M contract is set to expire at the end of May 2011. We are in discussions with BP about the next steps. Before Kirk steps in to provide a review of our financial performance, let me address our current business outlet. Growing demand and improved pricing in our US markets for rental tools and barge drilling were sources of revenue in gross margin increases in 2010.
Our project management business provided relatively steady results while international drilling activity experienced a decline in EMP spending and many of the markets we serve. Looking ahead, we believe that rental tool business should continue to benefit from continued growth in US drilling activity and the oil and liquid-rich shale play.
We expect to make further investments in this business which should contribute to our growth potential. We expect our Gulf of Mexico drilling business will continue to improve fleet utilization and will realize higher average day rate in 2011.
Low finding cost for oil and gas and established and manageable regulatory environment should support continued interest among operators to drill in this market. International EMP spending is predicted by many industry forecasters to increase in 2011. Should this occur, we expect an impact to our business later this year.
The portfolio of the project management and engineering services segment is expected to continue to generate steady revenues and earnings related to the current project we are managing and with the addition of the incremental revenues and earnings of 2011 from the Yastreb rig moving project. That summarizes our outlook.
Now, I will turn the call over to Kirk Brassfield to discuss our financial results.
Thanks Dave. For the fourth quarter of 2010, Parker Drilling achieved a significant increase in operating income on a 1% decline in revenues. The required payment of a contested tax assessment in Kazakhstan disclosed in December, and other non-routine items led to reported net loss of $13.4 million for the period.
Included in the non-routine items this quarter were $13.3 million of tax expense related to the previously mentioned tax assessment in Kazakhstan, $0.5 million pre-tax of expense related to the ongoing US regulatory investigations and Parker's internal review regarding possible violations of the Foreign Corrupt Practices Act and other laws, and a $2 million pre-tax reserve taken for the doubtful recovery of a customer receivables.
Excluding these non-routine items, Parker earned $1.5 million in net income or $0.01 per diluted share. The comparable results for the last the year fourth quarter was $0.00 per diluted share.
Turning to ongoing operations, our rental tools segment revenues were $49.3 million, segment gross margin was $32.8 million and segment gross margin as a percentage of revenues was 66% and a repeat of the third quarter, these are record results for this operation. This growth is attributable to improved conditions in US land drilling markets, our recent and timely investment in tubular inventory and our ability to strategically position our products to best serve customer needs and market demand.
In addition, as market improves so has pricing. Growth of our business on land has more than offset the impact from the decline of drilling activity in the Gulf of Mexico and fewer international placements. The US drilling segment reported fourth quarter revenues of $19.2 million and segment gross margin of $5.7 million.
The increase in revenues and gross margin is due to an increase in activity and a higher average day rate. In addition, we preserve many of the benefits of the cost management actions we took during the downturn in demand. Our international drilling segments reported fourth quarter revenues of $49.9 million and segment gross margin of $ 10.3 million. The decline in revenues in the segment gross margins compared with the 2009 fourth quarter reflect fewer rigs under contract during the quarter and a lower overall average day rate.
The 2010 fourth-quarter included higher revenues from Rig 257, our Caspian Sea Arctic Barge as they returned to a warm-stack rate during the quarter compared to being on lower rate for part of the prior year’s fourth quarter when it began a refurbishment, overhaul and upgrade program. In addition as rig activity has declined we have reduced local and regional overhead expenses and managed the overall impact of lower utilization on earnings.
Project Management and Engineering Services segment revenues, were $32.5 million for the 2010 fourth quarter and gross margin was $4.7 million. The Orlan platform earned a work over day rate for much of the period compared to a warm-stack rate in the prior year’s comparable period and the Yastreb rig on to higher revenues related to rig modifications and preparations for an upcoming rig move.
The segments declined in gross margin – gross margin as a percent of revenues, is primarily due to less margin contributions from other engineering projects.
Construction Contract revenues decreased to $22.4 million and we reported a gross margin of $0.9 million related to work completed on the Liberty Rig. This is a fixed fee reimbursable cost project accounted for on a percentage of completion basis with both revenues and margins reflecting work completed on the project. The construction phase of this project has been suspended.
G&A expense decreased to $6.7 million for the quarter compared with the prior year’s fourth-quarter expense of $11.5 million. This was primarily due to a significant reduction in the legal and professional fees related to the DoJ, SEC and Parker investigations.
Excluding these cost, G&A expense from the 2010 fourth quarter was $6.2 million compared with the adjusted G&A expense of $8.5 million for 2009 fourth-quarter. Reductions in corporate costs have been the primary contributors to the lower adjusted G&A expense. Interest expense was $6.3 million in the fourth quarter, below the prior year’s quarterly expense of $6.8 million, due to the higher amounts of capitalized interest.
Our cash balance at year-end was $51.4 million compared to $108.8 million at the end of 2009. Capital expenditures were $37.6 million for the quarter and $219.2 million for all of 2010, included our capitalized interest of $4 million for the quarter and $13.5 million for 2010, the Alaska rig construction spending of $21.4 million in the quarter and $112.5 million in 2010 and rental tools capital purchases of $7.6 million in the quarter and $48.9 million in 2010.
At the end of the quarter, we had $472.9 million of debt outstanding and $51.4 million of cash or a net debt [ph] position of $421.4 million. Our net debt total capitalization ratio is a very manageable 42%. 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 was 2.8 times against the covenant of maximum of four times. Our interest coverage ratio was 6.5 times against the covenant of minimum of 2.5 times.
That ends the financial review, operator we are ready to take questions.
Thank you sir. We will now begin the question and answer session. (Operator instructions) And our first question comes from the line of Tom Curran with Wells Fargo, please go ahead.
Tom Curran – Wells Fargo
Good morning guys.
Good morning Tom.
Tom Curran – Wells Fargo
Dave could you provide us with an update on the O&M opportunities that are out there, where they are, the estimated size and then when some of them might be awarded?
Sure, as I mentioned in the call, we have an additional O&M opportunity with moving the Yestreb rig from Odoptu back to Chayvo. This was a – we did this year about a half ago. We moved it from Chayvo back to Odoptu and it was an incremental increase in our EBITDA for that portion of the work. We actually have an expanded scope at this time and so we anticipate having an incremental increase from that as well.
We don’t give – we don’t give a forecast from our – as far as our monetization of our project so you can look back in the history and find that incremental uplift off-line. As far as the additional projects, we have been tendering some projects in Australia; we have been awarded some initial design work right now that is not going to be material to our balance sheets.
So really in the second quarter of this year we should have some result for some of that tendering act and a design activity that we are currently pursuing but both of those projects are currently offshore – Australia.
We also have submitted a pre-qualification for a tender offshore – Congo for our project management work and we should hear results from that in the second quarter as well.
Tom Curran – Wells Fargo
Terrific. Do you still expect to be able – I can’t recall if it was one or two new awards per year that you expected to be able to win?
I’m still sticking to that; we hoped to be able to land of some of these projects in 2011. I also might add that our – the octane doggy projects which we were involved with the design of in 2010 is now moved to the construction phase and so we are sending a team of Parker personnel over to the shipyard in Korea to help facilitate the construction phase of that project.
The conclusion of the project is in 2013 which at that time we will be tendering for an O&M to operate that platform rig on top of the large iced-gravity based jacket that will – so it will be moved over to the Sakhalin-1 Project for Exxon Neftegas.
Tom Curran – Wells Fargo
That’s helpful, thanks for sharing all that color. Shifting gears to international drilling, when and where exactly might we next see you invest in new onshore assets before that division?
Well, I believe that we are at the bottom of the cycle right now. I think a lot of folks thought that the bottom of the cycle was midyear last year, that the bottom is – I guess is more U-shaped and its V-shaped, I think that just listening to the industry and talking to our customers. We believe that activity levels will start to increase from an EMP spending perspective in 2011 and so the auto rigs that we have currently will start going back to work later this year.
That having been said, I can't see any incremental increase from a spec build perspective. We haven’t spec build in the past and I don’t plan on spec building in the future and so right now we don't see any opportunity to add incrementally to our rig fleet until the market starts to accelerate.
Tom Curran – Wells Fargo
So, then can I infer that any incremental opportunities you might currently be or ultimately pursue as the upturn emerges, you are confident you would be able to meet them with your existing available rigs, even if that requires mobilizations to new markets?
Well no, what I'm saying is that we are not going to spec build into this – in this next cycle.
Tom Curran – Wells Fargo
So you need a contract upfront?
That having been said, if there's a customer that approaches us from a new-build perspective to satisfy a specific location and has a contract that enables us to have a payback within that contract period. Yes, we would put money to work on a new build program.
Tom Curran – Wells Fargo
Got it. That’s clear. Thanks. I will turn it back.
Thank you. (Operator’s instruction) One moment please.
Well, operator this is Rich Bajenski to the audience. Looks like we have satisfied the questions in people interested at this point of time, we certainly appreciate you spending part of your morning with us today and we look forward to having you back on the future calls. Have a good day.
Thank you ladies and gentlemen, this concludes the Parker Drilling fourth quarter 2010 conference call you may now disconnect. Thank you for using ACC conferencing.
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