Parker Drilling's Management Reviews Delayed Completion of New Alaska Drilling Rigs and Increased Costs Result in Asset Impairment Charge (Transcript)

Jan.23.12 | About: Parker Drilling (PKD)

Parker Drilling Company (NYSE:PKD)

Special Call

January 17, 2012 10:00 am ET

Executives

Richard Bajenski – Director of Investor Relations

David C. Mannon President & Chief Executive Officer

W. Kirk Brassfield – Senior Vice President & Chief Financial Officer

Analyst

John Keller – Stephens Inc.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the corporate announcement conference call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) Today's conference is being recorded January 17, 2012.

I would now like to turn the conference over to Richard Bajenski, Director of Investor Relations. Please go ahead sir.

Richard Bajenski

Thank you, Elisha. Good morning and thank you all on our audience for joining us today as we review our recent announcement concerning the delayed completion of Parker's new advanced design Arctic Alaska Drilling Units or AADUs, and the impairment of those rigs capital cost.

This is Richard Bajenski, Director of Investor Relations. Joining me today on this call 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 of future events and 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 affecting the ongoing construction and future deployment of our AADUs.

We also refer to non-GAAP financial numbers such as EBITDA and other items. These items are referred to in the same context as they have been employed in our past financial reports and filings. Please keep these qualifying conditions in mind as we proceed. Dave Mannon, will begin our review. David?

David C. Mannon

Thank you, Richard. Earlier today we announced that there will be further delays in completion of our advanced design Arctic Alaska Drilling Units or AADU. This delay is to allow the company to modify the rigs to meet their design and functional requirements.

The need for the modifications was determined as a result of comprehensive safety, technical and operational reviews during the recent commissioning activities of these prototype rigs. The modification work will extend the commissioning activities and increase the rigs total cost.

When bringing any prototype to market, unknown issues arise, especially when working with a multitude of interlink systems. Although we’ve identified solutions to resolve the issues identified during commissioning, I do not have a revised readiness schedule to share with you at this time. We are in discussions with our customer BP concerning, among other things, a revised schedule. In addition, commissioning and testing work is ongoing. We will update you on our progress in the future including during our quarterly earnings conference call in late February.

We now expect the total cost of the rigs to be approximately $385 million, including capitalized interest. At these expenditure levels, we have determined that the total cost of the two rigs will exceed their projected cash flows. In order to adjust the rigs’ values to their estimated fair value, we intend to record a non-cash charge in the 2011 fourth quarter of approximately $171 million pre-tax, or $111 million after-tax. This will reduce 2011 after-tax earnings per share by approximately $0.95.

Successful innovation in drilling technology has been one of the hallmarks of Parker Drilling, particularly for applications in Arctic environments such as Heli-Hoist, rig design, and rig on wheels, which later led to self propelled rigs. These innovations greatly contributed to the development of Alaska’s Prudhoe Bay Field.

When we undertook the AADU project in 2008, we set out to bring advanced drilling technologies to the north slope of Alaska believing that the new rig design would provide improved drilling efficiency, operational consistency and enhanced safety. Converting the AADU concept into a functional rig has posed significant engineering and construction challenges.

We made efforts along the way to address these as they occurred. As the design evolved, we strengthened the design team, adding experienced resources. As the build schedule accelerated, we added support in critical trades and added work shifts.

As the construction and integration complexities grew, we expanded our Management team with a new role focused on our engineering projects in general and the AADU in particular and staffed it with a proven leader in the field. Despite these responses, the AADUs have not met their scheduling cost targets. However, we continue to expect them to meet their design and performance objectives.

In operational and strategic terms, we are looking forward to having these rigs in operation and validating our concepts of improved efficiency and safety in a demanding work environment on the North Slope.

Earlier this month, we received a letter from BP stating their belief that the delay constitutes a default under contract. We disagree that default is in effect under the contract. We are in discussions with BP concerning the contractual and operational issues related to the rigs. These discussions are continuing and ongoing.

While this project has commanded a lot of attention, particularly in addressing the current circumstances, we continue to execute Parker's business plan and the rest of our operations continue to perform inline with our expectations. I look forward to providing you an update on that progress and our results during our earnings call in late February.

As for 2012, we expect there to be no adverse impact to our net income as a result of the delayed operations of the AADU rigs. There will be an impact on interest expense as we continue to capitalize related interest cost, and once in operation, the rigs depreciation expense will reflect the reduced valuation. Kirk Brassfield will cover these and other financial aspects of the delay, the cost increase and the write-down. Kirk?

W. Kirk Brassfield

Thanks, Dave. I intend to cover the following, the basis for the impairment charge, the impact of the impairment charge on our 2011 fourth quarter and full-year results, some financial data regarding the AADU's impact on income in future periods and related impacts of the delay and the impairment on our financial condition including debt covenants and debt structure.

As Dave has outlined, the modifications required on the AADUs will increase the estimated cost of the rigs to approximately $385 million. This includes the actual expenditures on the rigs and the related capitalized interest. These rigs were subjected to a value impairment test, the first step of which was to compare their estimated cost at completion to their undiscounted projected cash flows.

A determination that the rigs estimated cost at completion exceeds the value of the projected cash flows, led us to the next step, estimating the rigs fair value based on a discounted cash flow projection using an appropriate discount rate and adjusting the rigs book value to fair value.

We determined that the AADUs cost to date, including capitalized interest, exceed the discounted value of the projected cash flows, and we intend to record a pre-tax non-cash charge in the 2011 fourth quarter of approximately $171 million or $111 million after-tax reducing earnings per share by approximately $0.95. This charge will primarily impact the balance sheet values or property plant equipment, construction in progress, shareholders equity and related tax accounts.

In addition, the impairment will reduce book depreciation for the rigs. Booked depreciation for the two rigs combined, based on the re-valued basis is expected to be between $12 million and $15 million annualized. We will continue to capitalize interest expense associated with the rigs until they are ready for use. Interest costs based on our current debt structure, approximates $40 million per year before capitalized interest.

Capitalize interest expense during 2011, averaged approximately $5 million per quarter. After impairing the rigs, capitalize interest should approximate $3 million per quarter after the December 31, 2011. A reduced amount of capitalized interest will have the effect of increasing amount of reported interest expense. When the rigs are ready for use, all associated interest costs will cease to be capitalized.

Operationally, we do not the expect the delay or the impairment to impact the rigs, expected future cash flow and EBITDA once they are drilling. The delay in impairment are not expected to impact our best structure or financial condition.

The financial measures included in our debt covenants, principally, a debt-to-EBITDA ratio and an interest coverage multiple, are not impacted by the impairment. Also we have a $125 million aggregate principal convertible senior note maturing in July this year. We do not believe the delay or the impairment will impact our options for dealing with this maturing debt.

That concludes my remarks, Dave has some closing comments.

David C. Mannon

Thank you, Kirk. When we announced the AADU contract in 2008, we were excited about the prospect of returning to Alaska. We had been among the leading contract drillers in that market, prior to our exit in late 1990s. Strategically, we believe AADU technology is right for the market.

It will provide improved drilling efficiency, operating consistency and enhanced safety in a very demanding drilling environment. We’re looking forward to the day when these rigs are drilling and our concept for improved performance and safety becomes reality. That concludes my comments, we will now take questions.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session (Operator Instructions). And our first question comes from the line of John Keller with Stephens Inc., please go ahead.

John Keller – Stephens Inc.

Hey, good morning guys.

David C. Mannon

Good morning John.

John Keller – Stephens Inc.

You mentioned that, I guess, BP was saying that this constitutes a default. I guess, What are the potential implications of that and how do you kind of assess that in your evaluation of the projected cash flows or kind of the structure of the contract going forward? I mean, is there a situation where the contract just gets is null and void altogether?

David C. Mannon

John, we don't believe that we are in default and so we're proceeding on with generating solutions to the issues that we discovered during commissioning and aligning our customer with the revised schedules that we will be able to spend a lot more time in discussing in the future.

John Keller – Stephens Inc.

Okay. And then, what [Ken] as you sit here today, obviously it sounds like its still pretty fluid in terms of when the rigs can are operational. But how much capital do you anticipate having to put into those rigs in 2012 to get them operational?

W. Kirk Brassfield

Yes John, this is Kirk. Based on the $385 million, we're looking at about $340 million as of the end of this year, so put us an additional $45 million including capitalized interest. So that’s just estimating about $38 million more plus the capitalized interest.

John Keller – Stephens Inc.

Okay, so, all right. And then just I may have missed this, did you say you don’t have a revised schedule yet on those rigs when they'll be running?

David C. Mannon

Well as just to take your comment events right now are fairly fluid and so we have a number of issues that we have recently discovered during the commissioning operation. We have solutions to those issues, but we, right now, are not providing a schedule mainly because of the fluidity of the situation with our customer, BP, and trying to align our redesign and modifications with their drilling program

John Keller – Stephens Inc.

Okay. Thank you, guys.

Operator

Thank you. (Operator Instructions) And I show no questions at this time, please continue with any closing remarks.

Richard Bajenski

Elisha, thank you, for coordinating our call. I want to express our appreciation for those of you who have joined us. To follow on this matter, as David has mentioned, we will update you with progress as we go forward. Have a good afternoon.

Operator

Ladies and gentlemen, this concludes the Corporate announcement conference. Thank you for your participation, you may now disconnect.

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