Parker Drilling CEO Discusses Q1 2011 Results - Earnings Call Transcript

| About: Parker Drilling (PKD)

Parker Drilling Company (NYSE:PKD)

Q1 2011 Earnings Call

May 4, 2011 11:00 am ET


Richard Bajenski - Director of Investor Relations

Robert L. Parker Jr. - Executive Chairman

David C. Mannon - President and Chief Executive Officer

W. Kirk Brassfield - Senior Vice President and Chief Financial Officer


John Keller – Stephens Incorporated

Matt Beeby – Global Hunter Securities LLC

Daniel Burke – Johnson Rice & Company


Ladies and gentlemen, thank you for standing by. And welcome to the Parker Drilling First Quarter 2011 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, Wednesday, May 4th, 2011.

I would now like to turn the conference over to Mr. Richard Bajenski. Go ahead sir.

Richard Bajenski

Thank you, Joe. And welcome everybody, good morning. We thank you for joining the Parker Drilling first quarter 2011 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 for further information regarding non-routine items.

Having said that, here is Bobby Parker to begin our review. Bobby?

Robert L. Parker Jr.

Thanks, Rich and welcome to our conference call. Earlier today, we reported our 2011 first quarter results. Dave Mannon and Kirk Brassfield will review the operating and financial details and discussed our outlook in a moment. Before they do I thought, have a few thoughts to share on current events sort of shaping our business and maybe of interest to investors.

Today’s high oil prices should kick international activity into a higher gear the second half of this year and also into 2012. It’s also responsible for lot of the U.S. activity going on today. On rest in North Africa and the Middle East the patenting may well keep oil prices high and could deter activity in specific countries in those regions.

Turning to the deepwater Gulf of Mexico the slow return to activity with delayed permitting and increase regulations will be a factor in the growth of this business as it returns in time to a normal business. And in growth and international E&P spending is forecasted to rise the second half of this year when we discuss international activity one has to ask what areas are you in they’re certainly hot and cold areas of activity and we have those as well.

This concludes my remarks, now I will turn over to Dave Mannon, to discuss our operating performance and outlook. Dave?

David C. Mannon

Thanks, Bobby. The highlight of this past quarter was the continued record breaking results from our Rental Tools segment. The Quail team continues to do a superb job in managing their business. In addition to rental tools results, other highlights of the quarter include, increased rig fleet utilization and higher average dayrates for the Gulf of Mexico barge rig business, our higher average dayrates in each region of our international drilling operation.

The commencement of a relocation project for our customer owned Parker operated Yastreb rig taking it back to its original drilling site at the Chayvo Field on Sakhalin Island. In summary, the record of setting rental tool results, improvements of our Gulf of Mexico barge drilling business and additional project management activity this past quarter offsets lower utilization of our international operation.

Here is a look at each business in detail. Rental tool revenues increased 55% and segment gross margin increased 61% compared to the prior year's first quarter. The primary contributor was growth in the demand and in the U.S. land market for drill pipe as a result of the expanded increase in lateral drilling for both share resources and more conventional oil and gas reserves.

Our store locations are positioned to serve many of the most active markets and we continue to dynamically reposition our inventory to meet our customer needs and improve our utilization and earn favorable pricing. In addition, we took delivery of approximately $16 million of new rental tools inventory during the quarter to support the growing demand in this business.

The U.S. Gulf of Mexico barge drilling rig market continues to strengthen. Parker’s first quarter average fleet utilization at 57% its best first quarter utilization rates since 2008. For the first quarter of 2011, we had the equivalent of 7.5 barge rigs working compared with seven equivalent barge rigs working during the 2010 first quarter.

Our average fleet dayrate increased to $22,600 per day from 21,900 per day for last year’s first quarter, dayrates continue to improve. Our current fleet lined average dayrate is approximately $25,000 per day.

Based on industry information we estimate that there are 26 drilling rigs in the industry’s Gulf of Mexico barge rig fleet and at 24 of those are available to work. Of those 24, 22 are currently under contract including all 11 of Parker’s currently available rigs.

In the international drilling, our first quarter utilization rate was 44%. Last year’s first quarter comparable utilization rate was 68%. We had the equivalent of 12 rigs working during the 2011 first quarter compared with 18 equivalent rigs working during the 2010 first quarter.

In the Americas region our 10 rig drilling fleet achieved 60% average utilization, a decline from the prior year’s first quarter utilization of 77%. This is due to having four idle rigs in Mexico, three stands last quarter of 2010. One of those rigs is now on contract for work in Colombia and has currently in transit. It is expected to commence drilling operation later this quarter.

The other three idle rigs are being marketed primarily in Mexico and Colombia. And all have some prospects of going to work in 2012 or sooner. In the CIS AME region our 11 rig drilling fleet operated at 27% average utilization, a decline from the prior year’s first quarter utilization of 64%.

During the quarter one rig had its contract extended into 2012. The two land rigs in Kazakhstan that are currently under contract were on full-day rig. Rig 257 or arctic-class barge rig located in the Caspian Sea was on a standby dayrate throughout the quarter and we expected to return so until, and we expect it to remain so until the operator asks for it to be moved to its drilling location.

The idle rigs in Kazakhstan are being actively marketed both for opportunities in Kazakhstan as well as markets within the region. In addition both of our rigs in Algeria are also being actively marketed primarily for applications within Algeria where we have had an increase in tender request.

In the Asia-Pacific region our five rig drilling fleet operated at 60% utilization less than the prior year’s first quarter utilization of 70% for the same five rig fleet. The two rigs currently idle in the region are both located in New Zealand. They are being actively marketed in both the New Zealand market as well as other areas in the region. We have a sales contract pending for each of the three held for sale rigs located in this region and are working on completing the sales transactions.

In summary, while our international rig fleet utilization declined in comparison with the prior year’s first quarter, our international drilling operation ended the quarter with the same number of rigs under contract as at the beginning of the period. Tender request activity in several of our markets is such that I believe there are work opportunities for many of our currently idle rigs. Lastly, our two newbuild arctic land rigs continue under construction and are scheduled for delivering to Alaska later this year.

Our project management and engineering service operations were active during the first quarter. We continued to provide services to Exxon NAFTA gas limited, the operator of the Sakhalin-1 project. Currently this involves the relocation of the Yastreb drilling rig maintaining the Orlan platform in a warm stack mode and providing engineering and procurement services for the construction of an offshore platform that will target the Arkutun-Dagi field. Earlier in the first quarter the Yastreb rig completed its most recent drilling campaign in the Odoptu field.

It is now in the process of moving 100 kilometers south to the Chayvo field for the new drilling program. You may recall that the Yastreb rig made the reverse journey in 2009. On that earlier move Parker managed the rig down and rig up, while a third party handled to move logistics. On this return trip Parker will be handling the entirety of the move which will provide incremental revenues and earnings for Parker during the move period.

The technical services provided to the Kuwait Drilling Company have grown to cover a fleet of 25 rigs up from an average of 21 rigs under the services agreement in the prior year’s first-quarter. In addition we are engaged in some early stage engineering projects that could lead to further project related opportunities for Parker in the years ahead. The sole project in the construction contracts segment was the Liberty rig project. Construction was suspended by our customer BP in the fourth quarter of 2010 and the construction contract in February of this year.

Looking ahead, our current business outlook is that the rental tools business should benefit from the continued growth of lateral drilling in the U.S. land market. The resumption of drilling in the deepwater Gulf of Mexico may provide some additional growth opportunities for this business yet this year. We expect to make further capital investments in this business to increase our growth potential.

We expect our Gulf of Mexico barge drilling business to maintain its fleet utilization around current levels and realize higher average day rates during the year. Higher market prices for oil and a growing interest in the deeper drilling prospects should support continued activity for this business.

International E&P spending is believed by many industry forecasters to be on the increase, should this occur in the regions we serve we would expect to have opportunities to increase our fleet utilization. For example the rig tender request are active in both the Colombian and Algerian markets.

However, given the lead time from tender award to drilling operation we are not expecting much impact in our international drilling business this year. The portfolio of our project management and engineering service segment is growing and is expected to generate relatively steady earnings with incremental contributions in 2011 from the Yastreb rig move project and other early stage engineering projects.

Our Liberty rig preservation activities are currently being performed under a pre-operations phase of the operation and maintenance agreement that will expire at the end of this month. We do not anticipate an extension of the agreement.

In addition we will continue to invest in our four strengths, safety, training, technology and performance. The four pillars of preferred drilling contractor. Our goal is to leverage these to differentiate the Parker brand to support our growth and create more value based offering for our customers.

Let me spend a little time on one of these, safety. Safe is how we operate and our continual focus on being safe is one of the reasons why people choose to work at Parker, while our customers choose to hire our rigs and cruise and why others ask us to design and operate unique drilling solutions to their challenging drilling needs.

Our April year-to-date safety measure total recordable incident rate or TRIR of 0.54 is an improvement on our full year 2010 TRIR of 0.63 and significantly better than the industry average based on the latest statistics from IADC. Safety is a key requirement for tender pre-qualification. Well will continue to invest in the people, products and programs that can help us make a continued improvement in each of the four pillars for Parker and contribute to differentiating us in the drilling contractor market place.

I will now turn the call over to Kirk Brassfield to discuss our financial results.

W. Kirk Brassfield

Good morning. For the first quarter of 2011, Parker Drilling achieved a significant increase in EBITDA and operating income on a 1% decline in revenues, compared with the prior years first quarter. The decline in revenues was all due to the exploration of the Liberty rig construction contract otherwise revenues increased nearly 7% and EBITDA increased 24%.

There was one non-routine item this quarter, $0.7 million pretax of expense related to the ongoing U.S. regulatory investigations and Parker’s internal review regarding possible violations of the Foreign Corrupt Practices Act and other loss. Excluding this non-routine item, Parker earned $5.3 million in net income or $0.05 per diluted share. The comparable result for last years first quarter was $0.02 per diluted share.

Also we had an out of the ordinary $1.9 million expense in the 2011 first quarter in response to a new Columbia Equity Tax law that went into effect on January 1st, 2011. As a result of the new law, the entire expense is recognized at the beginning of the applicable tax period even though the payments will be made semi-annually over a four year period. The affect of this was to reduce 2011 first quarter after-tax earnings by approximately by $1.2 or $0.01 per diluted share.

Turning to ongoing operations, our Rental Tools segment revenues were $52.3 million. Segment gross margin was $34.2 million and segment gross margin as a percentage of revenues was 65%. These are record revenues and gross margin results for this business.

The growth of this business is attributable to the increasing use of lateral drilling in U.S. land drilling markets. Our continued investments in Rental Tools inventory and our ability to strategically position our products can best serve customer needs, meet market demand and improve pricing.

The U.S. Drilling segment reported first quarter revenues of $15.9 million and segment gross margin of $1.9 million. The increase in revenues was due to an increase in rig utilization and a higher fleet average day rate. While rig utilization improved, it was driven by increased work among the intermediate depth rigs and less work among the deeper depth portion of our fleet.

In addition, one of the deep barge rigs was employed on a work over contract during the period. These contributed to a decline in gross margin and average gross margin percent compared with the prior year.

Our International Drilling segment reported first quarter revenues of $42.4 million and segment gross margin of $7.6 million. The decline in revenues in segment gross margin compared with the 2010 first quarter reflects fewer rigs under contract during the quarter, offset somewhat by higher overall average day rates.

As rig activity declined, we reduced local and regional overhead expenses and have managed to tamper the impact of lower utilization on earnings. The 2011 first quarter also included lower revenues from Rig 257, our Caspian Sea arctic barge as they return to a standby rate during the quarter compared to being on a higher rate during the prior year’s first quarter when its refurbishment, overhaul and upgrade program was underway. In addition, the increased expense due to the New Colombian equity tax law impacted this segment’s gross margins.

Project Management and Engineering Services segment revenues were $35.9 million for the 2011 first quarter and gross margin was $6 million. Revenue additions came from the Yastreb rig relocation project, the Liberty rig maintenance contract and engineering work related to the Arkutun-Dagi platform rig construction and other early-stage projects.

The segments increased in gross margin and decline in gross margin as a percent of revenues is primarily due to the increased amount of reimbursables included in the current portfolio compared with the prior year’s first quarter.

Construction Contract revenues decreased $9.6 million and we reported a gross margin loss of $0.7 million related to work consolidated on delivery rigs. These results reflect the work on the project during the quarter.

G&A expense decreased to $6.9 million for the quarter compared with the prior-year first quarter expense of $10 million. This is primarily due to a lower legal and professional fees related to the DoJ, SEC and Parker investigations. Excluding these, G&A expense for the 2011 first quarter was $6.2 million, similar to adjusted G&A expense of $6.2 million for the 2010 first quarter. Interest expense was $5.9 million in the first quarter, below the prior year’s quarterly expense of $6.7 million due primarily to the higher amounts of capitalized interest.

Our cash balance at quarter-end was $41.6 million compared to $51.4 million at the end of 2010. Capital expenditures were $50.7 million for the quarter, included our capitalized interest of $4.4 million, Alaska rig reconstruction spending of $26.1 million and rental tool purchases of $15.8 million.

At the end of the quarter, we had $471.3 million of debt outstanding or a net debt position of $429.7 million. Our net debt to net capitalization ratio at quarter-end was 42%. Subsequent to the end of the first quarter, we expanded the term loan facility by $50 million and used the proceeds to repay the amount outstanding on our revolving credit facility to purchase additional rental tool inventory and for other corporate purposes.

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 2.6 times against the covenant maximum of four times. Our interest coverage ratio was seven times against a covenant minimum of 2.5 times.

That ends the financial review. Joe, we are ready to take questions.

Question-and-Answer Session


Thank you, sir. (Operator Instructions) And our first question comes from the line of John Keller with Stephens Incorporated. Go ahead, sir

John Keller – Stephens Incorporated

Good morning, guys.

David C. Mannon

Good morning, John.

John Keller – Stephens Incorporated

Just a couple of questions on the barge market to start with. It sounds like things have improved very appreciably there. What are the kind of leading edge spot rates in the deep market and it seems to me also that the intermediate market has kind of closed the gap a little bit. Maybe if you can just talk about those two items?

David C. Mannon

Well John, just as a reference, we, I think do a pretty good job in trying to give the market place an average day rate. We don’t typically talk about specific rigs. What I didn’t talk about in the conference call is that our average right now is in the $25,000 range, which is considerably above what our 13-week average are on our website.

That having been said, we’re seeing a couple of rigs going to work in deep gas projects and those are materially above the average that I just gave you, mainly due to the complexity of those wells as well as just the competency of what the customer is asking for in that drilling operation.

As far as a market place in general, we think that the wind is at our backs today. That’s the term I’ve used within the last couple of months. And so we’re seeing hopeful increase in utilization and that’s been realized. We’ve got 11 of our rigs currently working and we’re quite happy about that from an industry perspective and the majority of rigs are also are utilized. And what tends to happen is that day rate tend to trend up upward as utilization starts to approach the 90% range, which from a fleet we’re there.

John Keller – Stephens Incorporated

Got it. And then on the margins, it sounds like there were some kind of items in the first quarter that drove your average margins down there. But particularly relative to the fourth quarter, it was up near to that 30% gross margin range for the segment. And that’s kind of if you think about on a normalized basis if I go back to kind of ’03, ’04, ’05 timeframe, 30% gross margins or slightly above that was kind of where you will run in before things got real floppy. Is that where we should think about gross margins kind of on a normalized basis going forward or is there upside to that?

W. Kirk Brassfield

Well, I think that that’s certainly where we’re at. Some of the, I guess, the downdraft and margins in the first quarter is that we had to go out and improve some of our labor rates internally. And so that certainly affected our margins in the first quarter. Going forward, some of our day rate increases have been reflective of those labor cost increases. And so our margins in the second quarter should expand. But I don’t see a material expansion of that going forward.

John Keller – Stephens Incorporated

Now, are you talking about kind a material expansion relative towards in the first quarter or say the fourth quarter where margins were higher?

David C. Mannon

Yeah, from the fourth quarter.

John Keller – Stephens Incorporated

Okay, perfect. That’s good for me guys. I’ll turn back.

David C. Mannon

Thanks, John.


And our next question comes from the line of Matt Beeby with Global Hunter Securities LLC. Go ahead sir.

Matt Beeby – Global Hunter Securities LLC

Good morning.

David C. Mannon

Good morning, Matt.

Matt Beeby – Global Hunter Securities LLC

Dave, you've talked about the unlikelihood of the Liberty Project now that O&M contract being renewed. Can you – is that back on the radar at some point in the future and maybe can you talk about any potential other impacts with your relationship with BP in Alaska?

David C. Mannon

Sure. I can’t step into BP’s thought process so Matt, so and I hope you appreciate that. So I don’t know what’s going to happen with Liberty going forward. What I can talk about is just what has been communicated to us from BP. And BP has decided that due to some of the uncertainties of the schedule and timing going forward that they’ve elected not to extend the O&M contract past the end of this month. The O&M contract was specifically for drilling operations and so, I think that that’s fairly consistent with their thought process.

We don’t foresee drilling operations happening in the near future. As far as our relationship with BP, we have certainly worked with them on this project. We are – there is a full review of the rig from a design and operation perspective, and also from a capability perspective. We’re a part of that review with them and so we’re assisting in that endeavor as we also have a separate project, the Alaska Arctic Drilling units, which are projects that are two rigs that we own. And we don’t see the connection between a Liberty and AADU, those are separate projects and actually in different business unit within the Alaska, within our customer help in Alaska.

Matt Beeby – Global Hunter Securities LLC

Okay, that’s very helpful. Thank you. Also to on the rental tool side, I think you mentioned $15 million or so in inventory was added. What are the expectations for 2Q that going to be more like the 30-plus or about even in 3Q, so how is that looking, are you guys seeing any kind of delays with deliverability or pricing pressure for giving supply of tubulars?

David C. Mannon

Well, as I’ve said in the past, we’ve been a very proactive in ordering tubulars and equipment before you actually need it and that is based on our relationship that we have with our customers throughout the United States. And so consistent with what we did back in 2009, for the 2010 capital, we ordered a material amount of inventory in the summer time of 2009. We did the same in 2010 in anticipation of expansion of rental demand in 2011.

So the first tranche, which is about $16 million was delivered on time to us by our vendor. We anticipate a similar amount in the second quarter and you should expect us to talk about additional inventory delivery in the third and fourth quarter this year.

So, we’ve been very, very consistent at adding to our inventory as the demand from our customer has been proactively anticipated, and then once this inventory comes into our rental storage, it immediately goes out to our customers.

Matt Beeby - Global Hunter Securities LLC

Okay. And just real quick follow to that one is that evenly spread throughout the quarter, is that one coming one big batch or how’s that working?

David C. Mannon

It was mostly delivered in the February timeframe at $16 million, and so I don’t think it was delivered on one particular day, but it was that’s a fair amount of inventory, but that was scattered throughout the February timeframe.

Matt Beeby - Global Hunter Securities LLC

Okay, that's helpful. Thanks Dave.


And our next question comes from the line of Daniel Burke with Johnson Rice & Company. Go ahead sir.

Daniel Burke – Johnson Rice & Company

Good morning guys.

David C. Mannon

Good morning, Daniel.

Daniel Burke – Johnson Rice & Company

Given the improvement in the domestic barge business, I was just wondering if you'll consider this year reactivating, I guess the remaining two barges, where if that something you wouldn’t envision considering this year.

David C. Mannon

Well, one of those barge rigs 55B we had done some work on that barge back in 2008 and beginning of 2009 that project was shelled due to the lower utilization of the fleet, and so that would be 55B could be reactivated with some capital infusion. We don’t anticipate that occurring this year unless, we are able to get some type of commitment from either one or two companies for some type of term work. Term work meaning, that not to term up rates, but just the term up a work commitment. What I hope I’m where hope happens is that I’m surprised sometime in the third or fourth quarter of this year, but right now we don’t have any present plans on activating that.

Daniel Burke – Johnson Rice & Company

Okay, great. And then, other one from me was on rig 257, just kind of unclear for me opening comments, do you still anticipate that that mobilization will take place here in Q2 or early Q3 or is that uncertain at this point?

David C. Mannon

Well, one again we are relying on our customer to activate that rig. And our customer is working with the local permitting officials as well as the government to put that rig back to work, and until that happens we are going to be on a standby rate. What we have been told by our customer is they anticipate that occurring in the second quarter. Whether or not that is realized is really depended upon a governmental sanction.

Daniel Burke – Johnson Rice & Company

Okay, great. I understand. Thanks, thanks for the comments.

David C. Mannon



And there are no further questions at this time. So, I’ll turn the call back to Mr. Bajenski. Go ahead sir.

Richard Bajenski

Thank you, Joe. And thank you all for joining us for this call on the first quarter results. We appreciate your interest in the company and wish you to have a good afternoon.


And ladies and gentlemen, that does conclude your call for today. Thank you for using ACT Conferencing. You may now disconnect.

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