Parker Drilling Company (NYSE:PKD)
Q4 2011 Earnings Conference Call
February 23, 2012 11:00 AM ET
Richard Bajenski – Director, IR
Robert Parker – Executive Chairman
David Mannon – President and CEO
Kirk Brassfield – SVP and CFO
John Keller – Stephens
Georg Venturatos – Johnson Rice
Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Parker Drilling Fourth 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, Thursday, February 23, 2012.
I would now like to turn the conference over to Mr. Richard Bajenski. Please go ahead, sir.
Thank you, Camille. Good morning and thank you all in our audience for joining the Parker Drilling 2011 fourth quarter conference call. This is Richard Bajenski, Director of Investor Relations, and 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.
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?
Thanks, Richard, and welcome to our conference call. Earlier today, we reported our 2011 fourth quarter results. Dave Mannon and Kirk Brassfield will review our performance and outlook in a moment. Before they do, I have a few thoughts to share on current events that are shaping our business and may be of interest to investors.
Starting here in the US, I expect natural gas prices are a lot on people’s mind. New drilling techniques and a warm winter have led to high natural gas inventories and consequently a lot of pressure on gas prices. Meanwhile, escalating tensions in the Middle East have driven up the price of oil making it more attractive to drillers.
We’re all interested in the impact of a price below $3 per Mcf for natural gas and over $100 per barrel for oil we’ll have on the drilling in the US As I talked with customers and other industry participants, the general expectation is that rigs will continue to come down into our gas plays and many of them will go to work developing oil and wet gas resources.
While there is a wide range in opinions as to what this means for the rig count and many related businesses, the shift to oil to wet – some oil to wet gas or the wet gas particularly in the shale plates is expected to continue to be favorable for our rental tool business.
Advances in drilling techniques have led to longer well bores with equipment spending more time in the hole. Those trends continue to require an increasing amount of drill pipe and other tubulars and that means potentially more business for oil tools.
On the international front, we took notice when the International Energy Administration recently cut its forecast for global oil demand. Yet the IEA forecasts still project a year-over-year growth in global demand for oil, albeit, at a slower pace. Meeting rising demand is not getting any easier due to both geological and geopolitical reasons.
Already, we have seen major E&P companies stepping up, they are spending in 2012 including extensive exploration programs and deepwater, Arctic frontiers and other regions. So I expect Parker’s businesses worldwide should continue to benefit from these trends.
We are quite well-suited to serve the US land market for rental tools and in Gulf of Mexico large market as the US driven shifts to more oil and gas liquid targets. Internationally, we will continue to position our assets and markets where there our long-term drilling prospects and to apply technological services to work with the major international E&P companies as they open out new frontiers.
That concludes my remarks. I will now turn this over to Dave Manning to discuss our performance and outlook. Dave?
Thanks, Bobby. For the 2011 fourth quarter, we had solid growth in revenues producing 37% increase in operating gross margin and a 39% increase in adjusted EBITDA compared with 2000 fourth quarter.
Excluding the impact of the asset impairment and other non- routine items we had a significant improvement in net income and earnings per share. We also continue to surpass the industry in safety performance in 2011. Our total reportable incident rate was 40% better than the industry average reported by IADC.
Incident free operation continues to be our objective where we believe our safety performance contributes to our success. I also count among our accomplishments in 2011 the addition of several key individuals to our management team. Individuals with records of successful accomplishments now serving in key roles at Parker focused on operational excellence and growth.
Recently, we also updated our business segment structure to align more closely with these changes in organizational structure and management responsibilities and the strategic focus of the company. We have expanded our segment by one adding a US drilling segment represented primarily by our two rigs in Alaska. We have aligned our international operations more closely with the management structure we now have in place. Our previous three geographical regions are now to, Latin America and Eastern Hemisphere and each region now includes results from O&M contracts as well as from Parker’s international rig fleet.
Our technical service activities which primarily include our engagement in projects that have the potential to evolve into future O&M opportunities will also be reported as an individual segment. Our Rental Tools and US barge drilling segments remain unchanged.
We set records this past quarter for revenues and segment gross margin in the rental tools segment. The segment includes – the segment continues to grow as it responded to increased demand for rental tools in the US land market. A shift in rig count from dry gas to oil and liquid rich fields has also been a shift to longer well bores increasing the need for premium drill pipe and other tubular.
To meet the growing demand we still continue to shift inventory to active areas and to add to our inventories of tubulars, BOPs and other products. In the fourth quarter, we acquired an additional $7 million of inventory bringing our 2011 purchases to $62 million. We have additional pipe scheduled for delivery in early 2012 to meet the growth and customer needs and maintain service levels.
In addition, we are actively exploring expanding our international rental tools activity and most recently have appointed a manager and established a business unit to the lead this effort.
In the US Gulf of Mexico, our Barge Drilling business continued to benefit from improvements in day rates that more than offset the impact of lower utilization. In 2011, fourth quarter, we worked an average 8.6 rigs of the available 11, one less than last year’s fourth quarter average. We had a brief pause and deep gas drilling after an active summer with all three of our ultra deep drilling barge rigs being idle for a time in the fourth quarter. All three are currently working.
Our fourth quarter Gulf of Mexico Barge Drilling fleet average day rate was 27,700, up 32% from 21,000 per day in last year’s fourth quarter. This is a notable accomplishment considering that three of the rigs with a highest day rate potential were idle for some time during the period. Today, 10 of our 11 rigs were at work predominantly drilling for oil. With the 11th rig committed with a scheduled start up in early March.
Our current average day rate is $31,100 per day. We had to rigs working at over $40,000 per day. The shift to oil focused drilling for the barge rig fleet is not unique to Parker. Based on an industry information, over two-thirds of Barge Drilling today is targeted to oil specifically or has dual oil and gas plays primarily driven by the current price for oil and liquid content from these fields.
In our US drilling segment, we are in the process of commissioning the AADU. In January, we reported that this would take longer than expected as a result of modifications needed to meet the operational and safety objectives we desire. We made good progress on completing these modifications and currently are working with the customer to schedule acceptance testing.
Based on work requirements, we have identified and the progress we made so far we expect these rigs to be operational ready during the 2102 third quarter. The international drilling segment achieved higher revenues and earnings in the 2011, fourth quarter compared with 2010 fourth quarter. This was a result of the higher fleet average day rate on modestly lower utilization for international rig fleet and improved results from our O&M projects.
Our international rig fleet average utilization was 51% during the 2011 fourth quarter. The comparable utilization for last year’s fourth quarter was 54%. We have the equivalent of 13.3 rigs working during the 2011, fourth quarter compared with 13.9 during last year’s fourth quarter.
In the Latin America region, our 10 rig fleet achieved 80% average utilization, an increase from last year’s fourth quarter average utilization of 67%. A year-to-year improvement was primarily due to a successful redeployment of a rig from Mexico to Columbia early in 2011 and the re-engagement of a previously idle rig in Mexico. In this region, we have an idle land rig that we are currently tendering for projects in both Mexico and Colombia.
In the Eastern Hemisphere region, our 16 rig fleet operated at 33% average utilization compared with prior year’s fourth quarter equivalent average utilization of 45%. The two rigs contracted to work in Algeria began mobilizing in January and we’re not included as working in the fourth quarter utilization rate. They will be included in the utilization this quarter.
The decline in regional utilization since 2010 fourth quarter is the result of two rigs being idle since late 2010 and the recent completion of work by a third rig. We have to idle rigs in New Zealand and six idle rigs Kazakhstan. We continue to market idle rigs in country and for suitable applications in other markets.
The international drilling segment also includes result of drilling using customer owned rigs under O&M contracts. These projects include operating the extended reach, the o-strip and land rig and the offshore Orlan platform for Exxon Neftegas and their stock being more in project. Operating the Coral Sea Land rig for Talisman and Papua New Guinea. Managing a fleet of 25 land rigs for quite drilling company in Kuwait and most recently, providing a rig management team for a Chevron owned land rig drilling in China's Sichuan province.
The increase in O&M operating results compared with 2010, fourth quarter was primarily driven by the 2011 edition of the Cora Sea project to the O&M portfolio and increased reimbursable associated with the Sakhalin Island activity.
For the technical services segment, the change in results for this past quarter compared with the prior year’s fourth quarter primarily reflects the completion in early 2011 of work on the Liberty project offset by contributions from other engineering projects. I am encouraged by the state of our operation and their performance potential and expect to see solid results in 2012 in line with that potential.
During the past several years, we invested in our rental tool business people, facilities and equipment to meet the surge and demand for premium drilled pipe and to provide premier customer service. I expect the demand to continue to grow as a result of the shift in US land drilling market away from dry gas targets to oil and the liquid rich targets and a continued increase in footage drilled due to longer laterals in the shale plays. We continue to be proactive in meeting customer needs and expect to add inventory in 2012 to meet the requirements.
In addition, the growing fleet of deep water drilling vessels in the Gulf of Mexico is a further source of opportunities for rental tool business. We continue to lead in the Gulf of Mexico Barge Drilling market drilling remains active in the shallow waters of the GOM and its more oil focused today than it’s traditionally been. For our Barge Drilling business, I expect this shift to oil focused drilling and the continue interest in deep gas play will provide ongoing support to drilling activity. I expect for US drilling operations to reflect our two new technology AAD use being commissioned and presented to work in 2012.
We have been transforming our international drilling activities focused on enhancing the deployment of assets we have in the field and on leveraging our drilling expertise through O&M contracts.
The long expected growth and international E&P spending appears to be taking hold and should provide support to our international drilling activities while we develop additional opportunities.
Much of the current work in our technical services segment will continue during most of this year. In addition, there were several early-stage engineering and development opportunities we are engaged on and I look forward to having some more to stay on our participation of these later this year.
I will now turn the call over to Kirk Brassfield to discuss our financial results.
Good morning. For the fourth quarter of 2011 Parker Drilling’s earnings adjusted to exclude non-routine items was $0.17 per share. Non-routine items include the non-cash asset impairment charge of 170 million pre-tax or 109.1 million after-tax and expenses associated with the ongoing US regulatory investigations in Parker’s internal review regarding possible violations of the Foreign Corrupt Practices Act and other laws.
The comparable result for last year’s fourth quarter was earnings of $0.01 per diluted share. Rental tools segment revenues were 63.9 million and segment gross margin was 43.9 million. Both revenues and gross margin our record results for this business.
The growth and performance of this business is attributable to the increasing use of lateral drilling in US land drilling markets, particularly in the oil and liquids rich shale plays. Our continued investments in rental tool inventory and our ability to position our products to best serve customer needs and meet market demand.
The US Barge Drilling segment reported fourth quarter revenues of 22.9 million and segment gross margin of 6.4 million. The significant year-to-year increase in fourth quarter revenues and gross margin is due to the higher average day rate we achieved despite a decline in utilization. US drilling segment recorded no revenues for the 2011 and 2010 fourth quarter. Expenses reported in each period are those associated with preparations being made to support the AADU rigs.
Our international drilling segment reported fourth quarter revenues of 89.2 million and segment gross margin of 23.6 million. Segment revenues and gross margins increased due to higher average fleet day rate in both the Latin America and Eastern Hemisphere regions offset somewhat by lower fleet utilization in the Eastern Hemisphere. The segment also benefited from the addition of the Coral Sea heli-rig project that began earlier in 2011 and the contribution from the Yastreb rig move project.
Technical service segment revenues were 5.1 million for the 2011, fourth quarter and segment gross margin was 800,000. Revenues are lower than in the 2010 fourth quarter, reflecting primarily completion in early 2011 of our activities related to the Liberty Project. This was offset by contributions from ongoing work related to the Berkut platform and other early stage engineering projects.
The construction contract segment reported – recorded no revenue or segment gross margin for the 2011, fourth quarter now that work on the Liberty project has seized. G&A expense in the fourth quarter was 7.9 million compared with the prior year’s fourth quarter expense of 6.7 million.
Both years include expenses related to the DOJ/SEC and Parker investigations. Excluding these expenses, adjusted G&A for the 2011 fourth quarter was 7.4 million compared with similarly adjusted G&A expense of 6.2 million for the 2010 fourth quarter. This increase was primarily due to higher fees for professional services.
Total interest cost in 2011 fourth quarter was 10.5 million with 5.4 million recorded as interest expense and 5.1 million capitalized to AADU construction project. In the prior year fourth quarter, total interest cost was 10.3 with 6.3 recorded as an expense and 4 million being capitalized. Our cash balance at quarter end was 97.9 million compared to 51.4 million at the end of 2010.
2012 capital expenditures were 190.4 million which included Alaska rig construction spending of 72.8 million, rental tool purchases of 61.5 million and capitalized interest of 19.3 million. At the end of the fourth quarter we had 482.7 million of debt outstanding or a net debt position of 384.9. Our net debt to net capitalization ratio at quarter end was 41.4%. That is a financial review.
Operator, we’re ready to take questions from the audience.
Thank you, sir. (Operator Instructions) Our first question is from the line of John Keller with Stephens. Please go ahead.
John Keller – Stephens
Hey guys. Good morning.
John Keller – Stephens
Just want – a couple questions on the international segment, I guess, is Kazak rigs obviously haven’t worked in a while and kind of what’s the outlook for those rigs. I guess we are hearing some positive chatter out Kazakhstan just kind of at macro level. And then also the prospect for the five rigs rolling off contract in Mexico, maybe it’s only four, that they are rolling off in Q2, what is the continuity there.
John, we’ve certainly talked about Kazakhstan in the past and that’s the softest area of our utilization on an international basis. We have tendered those rigs in other areas. We’ve mentioned that in the past and we are also just looking at the possibility of redeploying those rigs outside of that area. So we are certainly trying to get those rigs back to work. I think it’s relatively limited within Kazakhstan to get those rigs to work this year. We are looking at both Russia and Turkmenistan as potential other areas and also we are considering tendering those rigs outside the CIS.
As far as Mexico is concerned, we are currently working under a 50 well contract with the Schlumberger. We have been advised by Schlumberger that we still have a number of wells to do which should take us through the majority of this year with work on that. At some point in this year we will be re-tendering those works for additional work. Just the feedback we’ve gotten from Pemac is that there certainly interested in this field. This is an oilfield that we have been drilling for the last three and a half years and in the remarks back from Pemac is that they are interested in continuing with the oil development program.
John Keller – Stephens
Okay. So I guess from the structure of the contract, it sounds like while you have contracted I’m looking at the fleet utilization report that you’ll put out, it looks like they are rolling off in Q2, but what you’re saying the workflow on those is going to keep them contracted longer than that?
Yes. We have been advised that there are additional wells to be drilled with that 50-well program. Some of those wells are being drilled by us and some of the wells have been drilled by a period contractor. And so, with Schlumberger’s advice, there is an additional amount of wells that need to be finished. That they want Parker to finish before those rigs – before that new tranche of wells is tendered sometime later this year. So, we have pretty good visibility for work throughout 2012 for those units.
John Keller – Stephens
Good. And then I just – maybe this is a technicality to queue here, but on the two Alaska rigs units, you mentioned that they are ready to go in Q3. Is there some risk to those actually getting put to work in Q3 or do you expect them to be earning rate?
That’s a good question. I was recently up in Alaska, John and I was up in dead horse looking at our rigs and evaluating the amount of work that we still have left to do to get those rigs teed-up for acceptance which is earlier than the third quarter. And then and one of the observations that I’ve made is that I didn’t see any idol drilling rigs in anybody else’s yard. So it’s a very active season in Alaska.
The reports back from our customer is that they need these rigs for their 2013 production and so we anticipate these rigs going to work once they finish their acceptance testing but still we are in discussions with the customer on specific timetable of that. The timetable that I provided within my comments for the third quarter I think that’s a very realistic timetable right now.
John Keller – Stephens
Okay. Great guys. I’ll turn it back. Thanks.
(Operator Instructions) Our next question is from the line of Georg Venturatos with Johnson Rice. Please go ahead.
Georg Venturatos – Johnson Rice
Good morning, guys.
Good morning, Georg.
Georg Venturatos – Johnson Rice
I just wanted to speak briefly about the rental tool side. Obviously you maintain a positive outlook there. We have seen kind of that utilization trend down slightly over the last few months. Should we attribute that largely to capacity adds or is there some impact from the dry gas shift and I guess on top of that, looking ahead, as you will likely continue to add capacity there, should we expect those rates to kind of remain similar to what we’ve seen over the last few months?
Good question. So the utilization I think you are referring to is our utilization on rental tools. So I’ll actually talk also about utilization of the US land rig fleet to. So first our utilization, we have taken a substantial amount of inventory over the last two quarters of which we have deployed the majority of that out into our – into the field. But the utilization flatness really is more of a reflection of just the amount of inventory that we’ve received and is now still waiting to go out to our rig locations. We’re confident as I said in the call earlier about adding additional inventory. We have additional inventory coming in and the first and second quarter of this year.
So we are still bullish on the market for the North American operation. We’ve seen a substantial shift from gas to oil related type projects. To granulate the US fleet, you know we don’t focus on the macro number. What we focus on is the granulated number of how many horizontal rigs are currently working today. That’s the market that we are focused on. And that rig count is still continuing to either slightly increase or maintain so we should see a substantial amount of rigs shifting from gas to oil. We are going to those projects.
So one of our customers announced recently that they are going to curtail their gas drilling and what they also said in that same press releases that they’re going ramp-up their oil drilling and so that we are pretty active with that customer today. And so we’ve seen a substantial amount of shift from gas to oil. I think that will continue to occur in 2012 but right now we are still confident that we can add top end to our revenue this year just based on the amount of work that our customers told us they are going to go.
In addition, there is a fairly substantial amount of Gulf of Mexico activity, especially in deepwater we’re anticipating. We have two strings that are currently working in the Gulf of Mexico. We anticipate somewhere between four to five strings are going to be put to work over the next quarter to quarter and a half as these rigs either re-contract or enter the Gulf of Mexico for work.
Georg Venturatos – Johnson Rice
Great, appreciate it. And then just looking ahead some of the initial CapEx budget plans for 2012, obviously we will see continued spend in rental tools; we know some incremental capital will be headed toward the Alaska rigs. But just with the understanding that you do have the convert maturing in July, how do you look out to ‘12 in terms of capital spending?
George, this is Kirk Brassfield, in 2012, we’re looking at total capital budget approximating 170 million. So, that will be a little bit lower than what we spend in 2011. And quayle will be in that 70 million plus range and then we will also probably spend in that mid-30 range to complete the AADU Project.
And the remaining part of that is our maintenance that we’ve discussed in the past and maintain our rigs and so that’s pretty much the 170 million. We have some money in there also to deploy rigs to new contracts in the world today.
Georg Venturatos – Johnson Rice
Perfect. I appreciate the answers guys. That’s it for me. Thanks.
Thank you. And that does conclude the question-and-answer session. I would now like to turn the call back over to Mr. Bajenski for closing remarks.
I want to thank all those who have joined us today for this update on Parker Drilling. We appreciate your time and efforts. We wish you a good day and look forward to updating you on our activities as we go through the remaining part of this quarter. Have a good day.
Ladies and gentlemen, this concludes the Parker Drilling first quarter 2011 conference call. You may now disconnect. Thank you for using ACT Conferencing.
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