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Executives

Richard Bajenski - Director, IR

Bobby Parker - Executive Chairman

David Mannon - President and CEO

Kirk Brassfield - SVP and CFO

Analysts

Parker Drilling (PKD) Q2 2011 Earnings Call August 4, 2011 11:00 AM ET

Operator

Welcome to the Parker Drilling second quarter 2011 earnings conference call. (Operator Instructions) At this time, I'd like to turn the conference over to Richard Bajenski, Director of Investor Relations.

Richard Bajenski

Good morning and welcome to everyone to Parker Drilling second quarter conference call. This is Rich Bajenski, Director of Investor Relations. Joining me today are Bobby Parker, Executive Chairman, David 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. So 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.

Bobby Parker will begin our review. Bobby?

Bobby Parker

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

I believe that it's worth noting that the long-awaited upturn in international drilling has not yet arrived, if this is on the word drilling. What we have seen so far is an increase in international E&P spending and that should bode well for drilling contractors, though we're not there yet.

A lot of second quarter earning reports have said as much and is not a total no show. There are some industry blind sports in drilling, notably Latin America and the Middle East on land and pretty much all international areas offshore. So while a broad upturn in international drilling has not yet occurred, we do believe it is beginning to develop.

For a contractor like Parker, the slow to the well uptic and drilling has been frustrating. But we too are seeing signs of improvement. Our active rig count in Columbia and Mexico has grown, and our opportunities in Asia-Pacific have improved. We can expect a more wide-spread improvement when the increase in international E&P spending reaches into our markets.

We certainly are waiting on an increase in industry spending to stimulate drilling here in the U.S., with $90 to $100 oil and gas economic sweetened by a liquids content has been boosted by the benefits of lateral drilling and longer well bores. These have changed many aspects of drilling, including the rental tool industry.

What hasn't changed though is customer service, performance and safety remain critical components of success and we believe they will continue to differentiate players in the industry. As you will hear in our upcoming comments and well have read in our earnings press release, the inland waters Gulf of Mexico barge drilling business has strengthened. The industry had been all, but written off just a short time a while ago, and is now staging a renewal.

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

David Mannon

Thanks Bobby. The highlights for the second quarter were the progressive stronger operating and financial performance of our Rental segment and the continued dayrate momentum in our U.S. barge drilling business. The Quail team's execution is outstanding.

In addition, I wanted to commend the entire team of the barge drilling business for their performance. They delivered positive cash flow in the depth of the industry downturn in 2009, and we are now turning a solids earning report this morning. We have now established themselves in the barge business as a leading-contract driller in the Gulf of Mexico inland waters business segment.

Also in this quarter we had several projects underway in our project management portfolio. We made good progress on the move of the ENL-owned, Parker-operated, Yastreb rig on Sakhalin island, Russia and continued our participation in the Arkutun Dagi platform construction project.

In addition, we completed a recently awarded shipyard refurbishment project for Talisman Energy. The Talisman Energy-owned Coral Sea land rig is a purpose-built heli rig that was refurbished for upcoming work in Papua New Guinea. We are currently finalizing the details of a three year O&M contract for this rig. In summary, record setting rental tool results. Improvement in our Gulf of Mexico barge drilling business and additional project management activity offset the impact of continued low utilization in our international drilling operation.

Now here, let's look at how each business performed during the second quarter. For the seventh quarter in a row the rental tool segment continue to grow revenues and expand gross margin. Revenues increased 41% and the segment's gross margin increased 50% compared to the prior year's second quarter. Gross margin as a percent of revenue was 70%, exceeding the 66% for last year's second quarter.

These are outstanding results from a business that has done an excellent job of developing and executing a successful customer focus profitable growth strategy. To support the growth and demand we took delivery of approximately $14 million of new rental tool inventory during the second quarter. In addition, we continue to dynamically position our inventory among our seven strategic store locations to optimize our utilization and meet our customers need.

Parker's U.S. Gulf of Mexico barge drilling rig business continued to strengthen. Our 2011 second quarter average utilization of 81% is the best utilization rate this segment has realized since the second quarter of 2008. For the second quarter of 2011, we had the equivalent of 10.5 barge rigs working compared with 8.4 equivalent barge rigs working during the 2010 second quarter.

The barge rig drilling market has recovered significantly and demand for the Parker operated rigs brought us to a near full utilization of our available rigs for the quarter. Based on the industry information, 23 of the markets 24 available rigs are working today. And all of Parker's 11 available rigs are employed, 9 of those 11 are on multi-well programs, ranging from 45 days to 1 year.

As a result, several of our Barge drilling rigs have assignments that should lead to continue work extending into 2012. This should provide support for continued strong utilization rates through the rest of the year. Longer duration well programs near full utilization and our operating performance have contributed to improved dayrates for Parker.

Our second quarter Gulf of Mexico barge drilling fleet average dayrate was $26,000, up 37% from $19,000 per day in last year's second quarter. And dayrates continued to improve. Our fleet average dayrate today is approximately $27,500, with three of our rigs earnings dayrates of $30,000 or more.

Turning to our international drilling segment. Second quarter average utilization rate was 46%, a modest increase from the preceding quarters 44%. Last year's second quarter comparable utilization rate was 61%. We had the equivalent of 12.4 rigs working during 2011 second quarter, an increase from an equivalent working rig count of 12 for the first quarter.

In the Americas region, our 10 rig drilling fleet achieved 67% average utilization, a sequential increase from the 60% average utilization in the first quarter. Though below last year's second quarter average utilization of 83%. The sequential improvement was due to redeployment to Columbia of a rig that had been idle in Mexico.

The year-to-year decline was due to reduction in activity in Mexico. However, one idle rig in Mexico last summer has since gone to work in Columbia. One rig idled in Mexico last fall, now is on contract in Mexico and will begin working this month. And the last of our available land rigs in the region is being marketed in Mexico and Columbia and has some prospect of going to work in 2012.

In the CIS/AME region, our 11 rig drilling fleet operated at 27% average utilization, unchanged from the prior quarter, and down from the prior year's second quarter average utilization of 49%. Though utilization is low, all three rigs working in the region are on contracts that extend into 2012. So we can expect this baseline activity for the remainder of the year.

In addition, one of the three rigs working, rig 257, our barge rig located in the Caspian Sea is preparing to move to a drilling location for a upcoming drilling assignment. The eight idle rigs in this region, six in Kazakhstan, and two in Algeria are being marketed for opportunities, both inside and outside the region.

In the Asia-Pacific region, our five rig drilling fleet operated at 55% average utilization. A sequential decline from 60% average utilization over prior quarter, and below prior year's second quarter average utilization of 58% for the same five rig fleet. The decline in utilization since the first quarter is a result of a short break between contracts for one of the rigs in Indonesia. That rig is expected to be back at work later this quarter. In addition to the two currently idle rigs in New Zealand are being actively marketed in New Zealand market as well as other areas in the region.

Moving on to Alaska, I am please to report that our two newbuild arctic land rigs began their journey to the North Slope in July, and are due to arrive in Prudhoe Bay later this month. After they are off loaded, they will be undergo final commissioning and we expect them to be ready for customer acceptance testing in the fourth quarter.

To summarize our international rig fleet utilization appears to have stabilized. After several quarters of decline in utilization, we ended the second quarter with the same number of rigs under contract as at the beginning of the quarter. And the contractual commitments for many of these run through the remainder of 2011.

Our project management and engineering service operations were active during the second quarter. We are more than midway through the move of the Yastreb rig. This is a significant project moving the worlds largest operating land rig across a 100 kilometers of terrain with little pre-existing infrastructure. The rig move began in the first quarter and will be completed over the next few months.

During the second quarter we completed the shipyard refurbishment of Talisman Energy-owned Coral Sea heli-rig that was in Indonesia and now has been transported to Papua New Guinea. We are currently finalizing a three-year O&M agreement with Talisman to operate the rig in PNG. This will provide us a larger operating base in Papua New Guinea, where we currently have a Parker-owned rig under contract to Talisman.

Looking ahead, our current business outlook is at current trends in the U.S. land drilling market, including growth and the active rig count and greater use of lateral drilling are expected to provide continued momentum for our renal tool business. We intend to continue invest in this business to support its growth potential.

Fleet utilization drilling commitments and dayrates have all improved in the Gulf of Mexico barge drilling business. I believe that market prices for oil and a growing interest in the drilling deeper oil and gas prospects in shallow water location should provide support for continued strength in this business.

Our international land activity has stabilized. The growth in international spending by E&P companies provide a good reason to expect fundamental improvement in this business. Rig tender activity in regions, where we have rigs available has been good, yet contract awards have been slower to develop. In addition, we continue to further refine our rig deployment strategy to improve our current performance, and provide better results from our investment in these assets.

The portfolio of our project management and engineering service segment is growing. Recent award including the Yastreb rig move and the Coral Sea refurbishment and a follow-on O&M contract demonstrate a portion of the breadth of the opportunities that are available to us. We also have other early stage work going on that has prospects for us to make exciting projects down the road.

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

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

Kirk Brassfield

Thank Dave. For the second quarter of 2011, Parker Drilling reported earnings of $0.12 per share with a 10% increase in revenues, and a 52% increase in adjusted EBITDA after non-routine items compared with the prior year's second quarter. Excluding the impact of the recently expired Liberty rig construction contract, revenues rose 27% and adjusted EBITDA increased 46%.

There was one non-routine item in the second quarter, a $2.6 million pretax number 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 laws. Excluding this non-routine item Parker earned $15.9 million in net income or $0.14 per diluted share. The comparable result for last year's second quarter was $0.03 per diluted share.

Turning to ongoing operations, the rental tool segment revenues were $58.5 million, gross margin was $40.8 million and gross margin as a percentage of revenue was 70%. The strength of this business is attributable to the increasing use of lateral drilling in U.S. land drilling markets. Our continued investment in rental tool inventory and our ability to strategically position our products to best serve customer needs and meet market demand.

The U.S. drilling segment reported second quarter revenues of $26.1 million and gross margin of $9.2 million. The significant increase in revenues and gross margin is due to a higher average dayrate and an increase in rig utilization. Our international drilling segment reported second quarter revenues of $42.7 million and gross margin of $8.8 million. The decline in revenue in gross margin compared with the 2010 second quarter reflects fewer rigs under contract during the current quarter, offset by higher average dayrates in each region.

As rig activity declined, we reduced local and regional overhead expenses. And manage to temper the impact of lower utilization on earnings. Also included in the 2011 second quarter was a $2.3 million write-off of an unrecoverable debt VAP. Project management and engineering services segment revenues were $45.6 million from the 2011 second quarter and gross margin was $8 million.

Revenue additions came from the Yastreb rig relocation project and our work on the Talisman Energy-owned Coral Sea land rig refurbishment project. There were no construction contract revenues in the second quarter. The $1.5 million gross margin reflects the closeout of the Liberty rig construction project.

G&A expense in the second quarter was $8.1 million compared with the prior year's second quarter expense of $6.9 million. Both year second quarters expense included legal and professional fees related to the DOJ, SEC and Parker investigations. Excluding these cost adjusted G&A expense for the 2011 second quarter was $5.4 million, below the similarly adjusted G&A expense of $6.2 million for the 2010 second quarter. This reduction was primarily due to lower professional fees and compensation expense.

Interest expense was $5.8 million in the second quarter, below the prior year's quarterly expense of $7.4 due primarily to $1.4 million higher amount of capitalized interest. Our cash balance at quarter-end was $67.5 million compared to $51.4 million at the end of 2010. Capital expenditures were $48.7 million for the second quarter and included the Alaska rig construction spending of $29.4 million for the quarter. Project-to-date we have spend approximately $255 million and we expect an additional $15 million excluding capitalized interest.

Renal tool purchases were $13.6 million for the quarter and capitalized interest totaled $4.7 for the quarter. At the end of the second quarter, we had $491.7 million of debt outstanding or a net debt position of $424.2 million. Our net debt to net capitalization ratio at quarter-end was 41%. That ends our financial review. We are ready to take questions from the audience.

Question-and-Answer Session

Operator

(Operator Instructions)

Richard Bajenski

Well it looks like the earnings release schedule has got the people occupied at this time. We want to thank everybody for their participation in our call. And we look forward to reporting on Parker's further progress as we go forward. Thank you.

Operator

Ladies and gentlemen, this does conclude the Parker Drilling second quarter 2011 earnings conference call. Thank you very much for your participation. You may now disconnect.

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