Parker Drilling (NYSE:PKD)
Barclays Bank High Yield Bond and Syndicated Loan Conference Call
March 26, 2012 7:05 PM ET
David Tucker – Treasurer
Okay. Why don’t we get started with our next presenting company, we have Parker Drilling in the service space. And from Parker, we have David Tucker, Treasurer. David?
Yes, thank you Gary (ph). And thank you all for attending this conference. First of all, I’d like to address apologies from Kirk Brassfield, our CFO, who is unable to attend today because of some family health issues that arose late Friday. And so, this is actually one of his favorite conferences, so he’s disappointed, he’s not available. And you effectively have the beating today. So, I’m filling in.
First of all, please pay attention to the cautionary statement presented here and realize the uncertainties that are associated with our business. The agenda today, I’ll review our business strategies, look over our operations, and then, review some of the financial performance that we’ve had.
Before I step into the actual presentation though, I’d like to make a brief comment regarding the recent departure of our CEO and President Dave Mann, as some of you are probably aware earlier this month the board and Dave agreed to separate based on timing and execution issues regarding our strategic plan. The board is engaged in finding a successor, in the interim Bobby Parker Jr. has stepped in to the CEO and President’s role and will fulfill that role until such time as new CEO and President is appointed.
Our strategic profile, we have three points of main that we have on our strategy, achieve and maintain market leadership in select markets. Effectively you want to pick the right market with long-term visibility and growing those markets. We want to achieve execution excellence and exercise financial discipline. As many of you are aware, historically we had a very high debt to cap ratio, back in the early 2000s, high 76%, 77%, we’re now down to the low 40%.
Our business segments as you see here rental – are new and they are new as of the end of 2011. We have rental tools which looked at premium rental tools, it allows us a participation in the US resource plays and it also has high margins and we are associated in the US, in the Gulf of Mexico with some deep projects and then also international markets.
Our US Barge Drilling Segment, we are the leading barge driller in the Gulf of Mexico and we have attained that over the last few years with some investments of well over 100 million back in the ’05 to ’07 range. Our US drilling segment is set up to capture our Alaska operations which will begin later in 2012.
Our international drilling comprises the 26 land rigs that we own, our 26 rigs including one barge or two barge rigs. And it also incorporates our O&M contracts, which that’s a switch from previous segment presentation. So, we have our rigs plus that we own plus our customer owned rigs. And we are positioned in markets with long-term growth prospects.
Our technical services division applies Parker’s engineering technical expertise to E&P challenges. So, most of these projects are dealing with large, or major oil companies in very remote or difficult drilling situations where they bring in our technical expertise, our engineering department to help design executions for the – to fulfill these projects. Our competitive strengths are supported by the four pillars that we abide by Parker drilling. Those are safety, training, technology and performance.
As entailed in the safety graph, we are well below industry average safety statistics as measured by TRIR. Every meeting that we have begins, at Parker begins with a safety moment. We are – we feel that we are a leader, if not the leader, we’re among the leaders every year for the last 10 years in terms of our TRIR. And as safety program and safety statistics are very important when dealing with especially majors in drilling and for our major projects.
We have a comprehensive training program with multiple courses thought out of two facilities that we own, one is New Iberia, Louisiana and the other one in Alaska. We have technology – the technology piece is evidenced by the barge rigs that we have upgraded by some projects like Sakhalin Island and other services where we’re doing feed and technology services for E&P companies.
And then, we measure our performance. And we put this before our customers regardless of what it says, good or bad, and if it’s bad, then we apply our lessons learned technique to show improvement for the next wells that we drill for our customers.
We have a balance of revenue sources that helps grow throughout business cycles. As you can see on the left, our revenue by geography, our US operations are about 54% of our total revenue, international is 46%. Historically this graph would switch depending on the cycle. This graph is based on 2011 revenues. If we look back at 2008 or ’09, when our barge market – 2009 when our barge market was way down, it would be more weighted toward the international cycle. As international cycle increases then we would expect the international piece to pick up.
On the revenue by customer per tide (ph) you can see 44% from majors, 35% from independent, 12% from integrated services and 9% from national oil companies. Our largest customer is Exxon Mobile and different subsidiaries of theirs. If you look down at the – what I call the commodity mix meter, you can tell that most of our drilling in today’s market is for oil, 80% versus 20% for natural gas. And that’s what we would expect based on the commodity prices that we see today.
Our operations overview, looking at our business segments, we have our rental tools, which we have seven locations in the US. We rent premium drill pipe as well as other tubular items and some BOP well controlled related equipment.
For the US Barge Drilling Segment, we have 13 barge rigs. We actively market 11 of those barge rigs. Two of those barge rigs would require some amount of cash to bring them up and fully operational. Of those 13 rigs, four are what we call intermediate depth rigs, and nine would be deep or ultra-deep. These rigs are not drilling out in deep water they’re drilling in 18 to 20 foot of water. They are ballasted down, they sink to the bottom and then they drill from there. And so, the depth is depending on the drilling capacity, be it 20,000 feet or more versus a 15,000 feet for the intermediate barge rigs.
Our US drilling segment is currently comprised of three rigs, two of those are the AADU or Alaska rigs that are currently being tested and commissioned in Alaska. Our international drilling is comprised of 26 rigs, 10 of those are in Latin America, 16 in the Eastern hemisphere and then we also have four O&M contracts that are part of the international segment as well.
Our technical services, is involved in drilling package design, so we get involved in design engineering, procurement, commissioning and installation of projects. These are usually – the goal here is for the technical service projects, to somehow feed our O&M projects. So, yeah, but major project that may last two to three years depending on the size of the project, at the end of that project, the rig is delivered. And then, as operational, the rig is owned by the customer, be it BP or Exxon or whoever. And then, we would hopefully then operate that under O&M contract where we operate the rig as if it’s our own and effectively has very little no capital cost other than working capital that we’re carrying for the project itself.
Our revenue mix is for 2011 our largest drilling segment was international drilling at 47%. Our rental tools, 35%, and US Barge Drilling only 14%, technical services 4%. If you look over at the gross margin graph, you can see the significant increase in the rental tools contribution from a percentage perspective then we also see a decline in our international drilling as well. That market peaked in ’08, ’09, it was carrying our company in ’09 when the US market fell off. And now you can see the trend or the international decrease somewhat. And now we see an increase in rental tools as well as our barge business.
Our rental tools segment, to look to the right, it shows the seven locations we have and when each of those segments were added to our mix. The home office is in New Iberia Louisiana, it services to Gulf Coast area and also deep water. From a deep water perspective, we expect that market to increase pretty well. Last year we only had two landing strings on contracts for the deep water, we expect to have four by mid-year this year and possibly a fifth one before year end.
In Victoria Texas, we serviced the Eagle Ford Shale in Odessa we do the Permian Basin. In Texas, Arkansas, we have the four shale plays there. And in Pennsylvania, we do the Marcellus and Utica Shale, Evanston, the Peons in Niobrara, and then in the Williston, we have the Bakken Shale. Our largest contributor, our largest contributors are really Williston and New Iberia at this point in time.
New Iberia services not only the Gulf Coast area but it also services some small pieces of international. From that perspective, about 5% of Quail Tools rental revenues were about international in 2011, 10% were offshore and then the rest were all in the US land perspective.
As you can tell by the operating results, the margins are quite nice. This is a great industry for Parker. We have a tremendous growth. We have over 150 million of EBITDA that we reported in 2011 with margins approaching the upper 60% range, so it’s been a very good business for us, since we purchased them back in November of ’96.
We are the leading provider of drilling barges in the Gulf of Mexico area. We are preferred contractor and we believe that and I think most of our competition will say that as well. We have 11 barges that are currently operating. We have 13 in our fleet, of those 11, there are 21 rigs operating in the market today. And there are only 27 rigs available. So, we have – we market 13 of 27 in the total market. Today we have 11 operating out of the 21 that are operating.
To reference that back to the boon, what was considered the primary of the barge market back in ’07, is that we’re well over 40 rigs marketed back then. So, that market definitely has shrunk. And so, now there is, 27, so, we’ve seen almost a third percent reduction in the fleet that’s being marketed. Therefore this market is performing very well today. And we would expect improvements over our 2011 results this year.
As you can see ’09 we just barely made any positive EBITDA. I believe we are the only barge drilling contractors that actually made positive EBITDA in 2009.
Going on to US Drilling. We have a new design that we built for Arctic class rigs and to be delivered to Alaska. In early January, we announced impairment to these rigs. We wrote off 170 million in terms of an, impairment. I’m here to say that those rigs now are being commissioned in testing, undergoing testing. We expect those rigs to be operating during the third quarter of this year. Our customer is anxious to get those rigs up there, as they have plans for those rigs coming up. And I would also add that, we’ve had management up talking with VP ensuring that everything is progressing as we would hope to meet these – the third quarter start-up of these particular rigs.
As you can see there are pictures of them there, and it has been quite cold up there this year, but they are up on the North Slope, they are undergoing testing. And like I said, we hope to have these up and running here shortly. The total cost of these rigs, as announced previously are – it’s going to be somewhere in the $385 million range, of that $385 million, be around $45 million is going to be capitalized interest.
International drilling, we try to be a key player in selective markets for our international operations. For example, Kazakhstan, at one point in time was our key market for us. And it’s met all the criteria that we had for entering a market, long-term visibility in terms of market potential and a place where multiple rigs could be in and worked.
Our operations – currently we have 26 rigs. We only have 48% utilization in 2011. In the fourth quarter, it was 51%. Today it is 58%. We’ve had two rigs go to work in Algeria recently. So, that’s helped the utilization. The other thing that’s changed with our segment reporting is now they’re international segment also includes our O&M contracts. So, that’s helped our results as well.
Our international fleet is comprised of mostly 2,000 and 3,000 horsepower rigs, we’re not in the 1,000 or 1,500 horsepower rigs, so we actually operate larger rigs and therefore they’re little more difficult to move a lot of times. They’re not the flex rigs that are easy to move or 1,000 to 1,250 horsepower rigs or 750 horsepower rigs.
Our utilization peak recently as you see was 83% back in 2008. One of our key strategies for growth is to focus from an O&M perspective, we want to focus on complex projects where Parker can come in and work. And then, we can expand our O&M portfolio which is a very low capital intensive market for us.
Technical services, the picture you see here is the Orlan platform. It’s out in the Sakhalin of Sakhalin Islands there. We have an, unique operating strength here. We have a large engineering department. We’re engaged in some early feed and EPCI studies for customers. Under marketing today, we have – we’re working on the – what was formally referred to as the (inaudible) which is now renamed the Berkut platform it is being constructed in Korea. We’re in-charge of the drilling package of that, that rig will be delivered probably like ’13, early ’14.
That’s one project that we’re on we have two other projects that we’re in the early feed study phase of, waiting for commissioning from our customers in terms of how those will progress in the future. Working on technical services allows us to really stay in the latest technology that’s going on in the drilling business. And we hopefully, as I mentioned earlier, it leads into some O&M contracts for us.
Looking at the world map and kind of walking through our operations here. In Alaska, just starting up – the upper left in Alaska, we have two drilling rigs those are undergoing the commissioning phase. As mentioned earlier, we expect them to begin working in the third quarter of this year.
In the US, we have 13 barge rigs plus one land rig that’s currently in New Iberia. Those 13 barge rigs we have 11 of 13 operating today are 85% utilization rates are higher than they were in the fourth quarter. And continue to go that way. We have the seven rental tool locations for Quail Tools that service all the major shale plays. In Latin America we have seven rigs in Mexico, five of those seven rigs are operating, five of them for Schlumber J, two of them are stacked, one of those stacked is a barge rig that has not worked for couple of years and we look at different opportunities for that rig. It is not a rig that we would bring back to the Gulf of Mexico to work in our US barge market though.
The other rig is being bid within Mexico and Columbia, and we would expect it to go to work sometime this year, as it has many opportunities at this point in time. We have three – all three of our rigs in Columbia are operating at this time. They work for Ecopetrol in Sub Colsa (ph).
Shifting over to the Eastern Hemisphere, looking – we have 15 land rigs and one barge rig. The one barge rig is the Arctic drilling barge that’s in the Caspian Sea that works for EMKI. That rig is currently finishing up a contract there. And we also have two rigs operating in Kazakhstan for KPO. And we have I think it’s – we have three of nine rigs operating in Kazakhstan. So, we have six rigs that are stacked, two of those are older smaller rigs that we probably rationalize or sell to a local company.
The other four we are bidding elsewhere. We would look at transporting those rigs to either Turkmenistan, Russia, there is a large contract that’s being bid in Algeria as well, we would look at moving the 2,000 horsepower rigs there, as well as, potentially even to Columbia or Mexico as well. Those moves are rather costly, so we would have to look at what those would cost in light of different projects so we can work those rigs on. For example, I think a rig moved to Columbia is probably going to be in the probably $8 million to $9 million range, so it’s not – that would be by far and away the longest move and the most costly. But the other moves are probably, Algeria is still going to be $4 million to $6 million.
In Algeria we do have both of our rigs working those, we find contracts, I think either late in third quarter or early fourth quarter of last year. There was a delay on getting the sites ready. One of those rigs is operating the other one is either operating or getting ready to operate very soon. It is on location.
Shifting over to the Far East, we have two rigs in Indonesia, one of those rigs is operating, one stacked. Indonesia is a market that’s kind of up and down. You have one to two rigs operating maybe 60% to 75% utilization average for the year depending on the market.
In New Guinea we have one of our rigs where two to six operating, it is working for Talisman and in addition, we have an O&M contract for the Coral Sea rig, which is also owned by Talisman and we work for – work that rig and operate in New Guinea as well. And then, we have two rigs in New Zealand that are currently stacked that historically have done a lot of work, geothermal work from Muddy River power supply – power sources for New Zealand.
Moving up from an O&M perspective, our two biggest O&M jobs are actually in the Sakhalin Island. And we operate the Yester (ph) rig which is a land rig that we designed and built back in the, I think the late 90s, early 2000. That rig holds the record for the longest horizontal depth well at like 40,502 feet, something like that. What it does, it drills out underneath the ocean, and it holds the – I think it has like seven out of the 10 longest wells drilled in terms of measurement.
That rig, along with the Orlan platform, which sits out, drilled back underneath what used to be or is a well zone where the wells go in and out, so they didn't want to put a platform out in the middle, so that’s why they built a land rig and go out, and then the platform rig from the other side coming back in as well.
The other O&M contract that we have is in Kuwait, where we provide mostly just supervisory labor services for I think 20 some odd rigs that we own there. And then, we have a few people that are actually working in China on a Chevron project as well, on an O&M basis. Both those contracts are relatively minor in terms of scale for us.
Our financial performance, operations are sound. As you can see, our operating results, we had a fairly good year in 2011. Our GOM, Gulf of Mexico barge business is picking up. Our rental tools are doing fantastic. And our international had somewhat of a down year. From (inaudible) perspective in the lower left, I believe we’re somewhere around in the mid 6% range when we adjust out the impairment that we took on the AD rigs. We continue to stay very, focused on cash flow. And we continue to try to reduce our debt to cap ratio.
From the debt perspective we have $300 million of nine notes, due 2018. We have a convertible note coming due in July of this year. And we then we have term loan, that is part of our revolver that’s $61 million. The convertible notes we’re looking at refinancing different opportunities today. And so, we would expect something in the not too distant future in terms of a refinancing for that and we’re looking at all different types of refinancing be it, convertibles or new high yield or an add-on to the existing high-yield debt.
Our capital spending, you can see, a lot of our CapEx in the last few years has been driven to the Alaska rigs. And so, next year we’re going to – we’re projecting to add a little bit more to our Quail, our rental tool operations up to about $80 million in CapEx. We’ll finish off the capital spend and get those AD new rigs, the Alaska rigs up and running by year end and during the third quarter.
Our goal from a debt to cap perspective is to be in the low 30% range, we’re currently at 41.4%, we weren’t helped by the impairments that we took. Net cash flow, we wanted to support our organic growth and then, we want to look at further opportunities.
What makes us part unique is kind of reviewing again and leaving enough time for some questions here. We want to achieve and maintain leadership in select markets. And once again, we want to be in places where the market is growing, we’re seeking long-term visibility for maintaining an operation there.
We want to grow through selective investments that have high return potential, that’s why I think you’ve seen us invest in the rental tool market in the last few years. We want to attain the execution excellence and exercise financial discipline, continually looking at ways to better serve our capital structure.
From an enterprise value perspective, this is the average stock price as of – for the month of February. And you can see we’re $1.255 million. We are structured for success we are a leading worldwide contract driller. We have a focused business strategy. We have reliable revenue sources that come through the cycles, one cycle of the international maybe strong or US maybe strong, our goal is to survive the cycles within each of those industries, be it geographic or commodity source, gas or oil. And we have maintained our financial discipline through this time.
With that, I think we’re open for questions.
So, you talked about potential, you know, but all time the convert maturing. Would the term loan and revolver be part of that refinancing or do you hit one first and then move on?
I think at this time, it looks like we’re probably going to hit one first and then move on to the revolver and credit agreement.
Okay. And then secondly, just on the barge market. Obviously utilization has picked up pretty materially. What type of capital is necessary to bring the last two rigs out, what does the decision process, or you’re more likely to scrap those vessels? And then, I guess number two is, is there more capacity coming into the market from either you or competitors that can hit the market?
From the capacity question there, there are no new rigs coming into the market from the barge perspective. And I don’t think I would support it at this point in time. From our perspective on the two rigs that are currently stacked, one rig has already had quite a bit of work done to it, that project was halted a few years back when the market – when the US market started going down back in ’09. That rig probably has maybe $5 million to $10 million remaining to put that rig back to work. The other rig would require more money, $15 million to $20 million at this point in time.
I think from a company perspective, I think we’re focused on getting our Alaska rigs out and running. And then, we’ll go back and we’ll look at other projects and decide from a financial perspective, which one makes the most sense for us to attack, you know, or we better spend our money on a barge rig or investing in Quail or doing an international piece or not. And one thing that I did fail to mention earlier was that we are definitely looking at expanding our rental tool operations to an international basis. We’ve hired a GM that’s what he is totally focused on is international expansion of our rental tool business.
All right, no other questions. Thank you for attending.
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