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Parker Drilling Company (NYSE:PKD)

Q1 2012 Earnings Call

May 2, 2012 11:00 am ET

Executives

Richard Bajenski - Director, IR

Bobby Parker - Chairman, President & CEO

Kirk Brassfield - SVP & CFO

Analysts

John Keller - Stephens Inc.

Daniel Burke - Johnson Rice

RJ Cruz - Trust Company of the West

Operator

Good morning ladies and gentlemen and thank you for standing by. And welcome to the Parker Drilling first quarter 2012 conference call. At this time all participants are in a listen-only mode. Following the presentation, there will be a question-and-answer session and instructions will be given at that time. (Operator Instructions) And as a reminder this call is being recorded today, May 2, 2012.

I would now like to turn the call over to Richard Bajenski. Please go ahead, sir.

Richard Bajenski

Thank you, Craig and good morning to all in our audience. Thank you for joining our conference call today. This is Richard Bajenski, Director of Investor Relations, and joining me today here at Parker are Bobby Parker, Chairman, CEO & President; 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 numbers, 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 2012 first quarter results. They were great results with increases in revenues, gross margins and gross margins percent for businesses serving the US land drilling market, US Gulf of Mexico market and the international market. I believe that we have more good results to come.

Kirk Brassfield and I will review our operational and financial performance in detail and an outlook in a moment. Beforehand though an update on some related items. First, is progress on our CEO search, that effort is underway and is being let by committee of the board. In the mean time, I have been very active in my role as interim CEO.

As I previously mentioned I will not be a place over CEO. In addition to being engaged in day-to-day operations of several projects, I am specifically focused on and expect to have completed or moving forward towards completion by the time we appoint a new CEO.

Number one, on my list is to get the Arctic Alaska Drilling Units or AADU rigs completed and working. Since stepping into this role I’ve been to Alaska twice, both times to meet with our customer BP and Anchorage and once to the North Slope for a firsthand look at rigs to discuss the completion plan for the rigs and to review our progress.

Everything appears to be on track to meet the objective we set out, when we reported our fourth quarter results. And it is to have the rigs operational ready to be turned over to BP for their acceptance testing during the 2012 third quarter. We currently are in discussion with BP to establish more specific dates.

I believe our AADU rigs will prove to be the right answer for the needs of this market and we’ll deliver a new level of safety, efficiency and consistency to the region. Also among my objectives is to reestablish momentum in our international rig fleet utilization which has been around 50% for 2012. While I am specifically focused on our idle rigs in Kazakhstan, I am mindful of the need to have a good forward plan for all of our rigs regardless of their utilization status today.

Regarding Kazakhstan, we have nine rigs in country with two currently working, for a number of reasons, political and economic. I have concerns about the long-term demand in Kazakhstan for the nine rigs we have there. Consequently, we are assessing all available options for these rigs including asset redeployment as well as potential asset sales. For example, we are currently evaluating several drilling tenders in Turkmenistan and Algeria, a suitable redeployment for some of the rigs. While it will time before any of these can be converted into operating results, my objective is to have a clear plan for these rigs and be acting on that plan.

Excluded among my objectives is to maintain the momentum in our business operation, the energy and our relationship with customers and the consistency in our communication with investors. I can assure everyone our corporate strategy and the direction of the company is unchanged and is fully supported by the board. It is understandable that there may be some uncertainty at this time. As a result the leadership team and I have stepped our communication and outreach to our employees, our customers and our shareholders.

We want everyone to understand that we expect to continue to conduct business in line with our shared strategy, objectives and goals. I am also very intent on maintaining our focus on working safe. At all level of the company, we are working diligently to keep everyone aware as a need to be watchful of their own safety as well as a safety of those that they work with and to assure that we don’t lose sight of this most important responsibility.

You have read in our earnings release and you will hear Kirk report it on our operations. All of our operations are doing well, several quite well. We are working to maintain net momentum to improve and grow our businesses. And for market trend, the US drilling market has been fairly robust. The shift by land operators from dry gas targets to oil and wet gas targets has had little impact on our rental tool business.

Our rental tool inventory is fluid and is easily moved between markets as customer demand moves geographically. One of our strengths is that we can relocate drill pipe quickly. An important trend affecting drill pipe demand has been the increase in footage drilled due to the growth in wells drilled, the expanded use of lateral drillings in all types of formations, not just shale plays and the longer well bores of lateral wells.

Combined these have led to a need for more drill pipe in the fields concentrated in the oil and wet gas shale plays and also occurring more recently in conventional fields where lateral drilling has begun to take hold. The Gulf of Mexico shallow water barge market appears steady supported by a price of oil that makes drilling even small reservoirs a good cash flow decision.

In the international market prices for oil and natural gas had been a stimulus for exploration and development drilling activity. As this unfolds more broadly I expect it will continue to support growing demand for contract drilling services as well as a technical advice and expertise necessary to carry out these activities in more remote and challenging locations. On conclusion of my remarks, at this time I will turn this over to Kirk Brassfield to discuss our operating and financial performance. Kirk?

Kirk Brassfield

Thanks Bobby. For the 2012 first quarter we had solid growth in revenues producing a 67% increase in operating gross margin and a 81% increase in adjusted EBITDA compared with the 2011 first quarter. This led to a significant improvement in net income and earnings per share. For the quarter, Parker Drilling's earnings were $0.22 per diluted share. The comparable result for last year’s first quarter was earnings of $0.04 per share. We set records this past quarter for revenues and gross margin in the rental tools segment.

Revenues were $66.3 million and gross margin was $44.7 million. And gross margin as a percent of revenues increased to 67.4% from last year’s 65.3%. 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 wet gas shale plays, our continued investments in rental tools inventory and our ability to effectively position our products to best serve customer needs and meet market demand in a timely manner.

The expanded use of lateral drilling in both shale plays and increasingly in conventional fields have led to a rising demand for premium drill pipe to match the continued growth in footage drilled. To meet the increased demand we continue to add to our inventory of tubulars, PLPs and other products. In the first quarter we invested approximately $25 million in the rental tools business and we have additional pipes scheduled for delivery in the second quarter.

As a result of the added inventory, our tubular goods utilization level is trending back to normal, a condition that allows us to maintain our service level and grow our business. The US Barge Drilling segment reported first quarter revenues of $27.8 million, gross margin of $10.7 million and gross margin as a percent of revenue of 38.4%. All of these measures are significantly increased from the prior year’s first quarter.

The Barge Drilling business continued to benefit from increased utilization and higher day rates. Our 2012 first quarter average utilization was 75% compared with the 2011 first quarter utilization of 57%. Our first quarter fleet average day rate was 30,400, up 35% from the 22,600 per day in last year’s first quarter. Today all of our available 11 barge rigs are at work predominantly drilling for oil as is also true for most of the industry’s GOM barge drilling fleet.

Based on current industry information, over 80% of barge drilling is targeted to oil specifically or has dual oil and gas legs, primarily driven by the current price for the oil and liquids contents from these fields. The US Drilling segment recorded no revenues from the 2012 and 2011 first quarters. Expenses from the quarter in each period are those associated with preparations being made to support the AADU rigs.

As Bobby mentioned earlier we are in the process of commissioning the AADU rigs and working with our customer BP to schedule acceptance testing. Based on the work requirements we have identified and the progress we have made so far we expect the rigs to be operationally ready and turned over to BP for acceptance testing during this 2012 third quarter.

Our International Drilling segment reported first quarter revenues of $78.8 million, gross margin of $26.5 million and gross margin as a percent of revenue of 33.7%. Segment revenues, gross margins and gross margin percent improved due to the increased utilization and a higher average day rate from the Parker rig fleet and an increase in the number of O&M projects.

Revenue growth was reduced by the completion in late 2011 of the Sakhalin Island-Astra rig (inaudible) project, eliminating a significant amount of revenue from reimbursed project expense. Our international rig fleet average utilization was 58% during the 2012 first quarter, a comparable utilization for last year’s first quarter was 46%. We had the equivalent of 15 rigs working during the 2012 first quarter compared with 12 equivalent rigs during last year’s first quarter.

In the Latin America region, our 10 rig fleets sustained its 80% average utilization, well above last year’s first quarter average utilization of 60%. The year-to-year improvement was primarily due to the successful redeployment of a rig from Mexico to Columbia early in 2011 and the reengagement 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 Columbia.

In the Eastern hemisphere region, our 16 rig fleets operate a 44% average utilization compared with the prior year’s first quarter equivalent average utilization of 38%. Two rigs contracted work in Algeria begin working or were mobilizing in the first quarter contributing to the improved utilization rig.

This benefit was partially offset by the completion of work in late 2011 by a rig in Indonesia. We had two rigs idle in New Zealand and six rigs idle in Kazakhstan that we continued to market in-country and for suitable applications in other markets.

The international drilling segment O&M projects produced lower revenues with higher gross margin dollars in 2012 first quarter compared with 2011 first quarter. This is primarily due to the completion in late 2011 of the [Astra] rig move on Sakhalin Island. This project had a significant amount of reimbursable expense that contributed to reported revenues but little to earnings. Otherwise, the addition of the [coral] rigs, the operations contract in Papua New Guinea and the China rig management contract adding to the revenues and earnings in the O&M portfolio.

Our technical service segment revenues were 3.7 million for the first quarter and gross margin was 200,000. Revenues are lower than the 2011 first quarter, reflecting primarily the completion in early 2011 of our activities related to Liberty Project in Alaska and the transition of the Sakhalin Island for crude platform project from its engineering phase to a less revenue-intensive construction over side phase. This was partially offset by contribution from other early stage engineering projects. The construction contract segment recorded no revenues or gross margin for the 2012 first quarter. Now the work on the Liberty Project has ceased.

G&A expense in the first quarter was 5.5 million compared with the prior year’s first quarter expense of 6.8 million. While both years include expenses related to the DOJ/SEC and Parker investigations, the amount for 2012 first quarter was quite small. Adjusted G&A expense for the 2011 first quarter was 6.1 million. A year-to-year decrease in G&A expense was primarily due to lower fees from professional services and reduced compensation expense.

Total interest cost in 2012 first quarter was 10.4 million with 8 million recorded as interest expense and 2.4 million being capitalized prior to the AADU rigs construction. In the prior year’s first quarter, total interest cost was 10.3 million with 5.9 million recorded as expense and 4.4 million was capitalized. Our effective tax rate for the quarter was 36%, well below the prior year’s first quarter rate of 50%. Contributing to the low rate in the 2012 first quarter was the 1.6 million discreet tax items. Otherwise our tax rate would have been approximately 40%. We expect our full-year tax rate to be around that level. Our cash balance at quarter end was 69 million compared to 97.9 million at the end of 2011. First quarter capital expenditures were 59.34 million, which included the Alaska rig construction spending of 26.9 million and expenditures of 25.1 million for our rental tools business.

At the end of the first quarter we had 478.2 million of debt outstanding or a net debt position of 409.3 million. Our net debt to net capitalization ratio of quarter-end was 41.7%. In April we issued 125 million of add-on notes to our senior secured notes and initiated a tender offer for our convertible senior notes due in July. Upon completion of the tender offer next week, we will have effectively refinance the convertibles and extend the debt maturities in 2018.

We believe our balance sheet is in good shape and that our operational performance and strategic balance and diversity can provide cash flows to allow us to continue to be successful and grow profitably.

That ends the operations and financial review. I will turn this back to Bobby for comments on the outlook and then we will take questions.

Bobby Parker

Thanks Kirk. I am encouraged by the recent performance of our operations. We had a very good first quarter with significant gains in several of our businesses and I expect current business trends, our commanding position, and other strategic strengths will continue solid performance from our operations. The shifting focus of U.S. land drilling from dry gas to oil and wet gas target is not expected to reverse the growth in footage drilled and the resultant increase in demand for premium-drilled pipe and other tubular products.

In addition to the drilling fleet and deep water drilling vessels in the Gulf of Mexico is expected to be a source of further opportunities from our rental tools business. We intend to invest further in our rental tools operation, in people, facilities and equipment to meet the growing demand and to continue to provide premier customer service.

The Gulf of Mexico barge drilling market remains active with oil and wet gas targets being the predominant focus. If market dry gas to oil remains around the current level, there should be good support for continued drilling in the shallow waters of the Gulf of Mexico. Further interest in developing deep gas plays in this area could provide some additional growth opportunities.

The long expected growth and international E&P spending could lead to deployment opportunities for international rig fleet and to additional contracts for our O&M portfolio. These are longer term developments though such that any tender or contract win in the next few months are more likely to have the greatest impacts on 2013 results.

For the near-term, we will be focused on maintaining our current utilization through contract renewals or new contracts. Our rig 257, the Caspian Sea barge rig has completed its latest contracted work and the (inaudible) have been released. It is under consideration for a couple of projects. In our technical services segment, we expect most of our project activities to continue during the rest of the year. There are some early stage engineering and development projects that we are engaged in that could transform into more expansive involvement in the future.

That concludes my remarks. Operator we are ready to take questions from the audience.

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions) And our first question does come from the line of John Keller with Stephens Inc.

John Keller - Stephens Inc.

Bobby, I just like -- if you could elaborate maybe on 257 and the outlook for that rig, I think you kind of closed your remarks out with saying that it’d been released kind of where is that stand and what are the prospects going forward?

Bobby Parker

Hi John. We’re not allowed to say at this time. We’re in discussions with at least one customer now about potential future work, and that’s really as much as we can say at this time. Certainly we told people before that the future of the drilling program was on the well to well basis and our current customer decided to terminate the program at the end of its current contract. So we’re in discussions and when we have more information we will sure let you know.

John Keller - Stephens Inc.

Okay, sound good. And then maybe if we could just kind of turn to oil for second and the margins coming down a little bit in that business. What’s behind that? Is it really utilization issue as you’re continuing to move mobilized pipe from gassy or oily basins or you know how is the level of discounting in that business? Maybe just kind of elaborate a little bit on that and I think Kirk had mention that our utilization, kind of, started to turn back up to normalize levels?

Kirk Brassfield

Yes, John this is Kirk. Yeah, there has been, just from the discounting perspective, there has been, as we talked other the times, there is a little bit more pressure in the Williston area, but still well within our normal range. So you don’t see that come down from the fourth quarter, slightly I think in the fourth quarter we were probably around 60%, 67%, 68% are pressured a little bit. The other areas, we have not seen the same impact. So it’s been primarily going back to the Williston and North Dakota area.

John Keller - Stephens Inc.

And how about utilization, the utilization has sort of suffered in the first quarter as you reposition pipe or…?

Kirk Brassfield

I think a lot of it also had to do with the amount of pipe that we brought in during the first quarter and once you get the pipe in, you do have to go to a process to -- go through the testing and just checking of the pipe and then make sure that the customer is ready for that pipe. You have a little brief period from the time you receive it, from the time it goes out to a job.

So as you noted we did have that 25 million pipe come in during the first quarter. So some of that is just building back our inventories to that normal level, so that we can more adequately serve our customers and so we need potential new customers, which is what we are building to.

Bobby Parker

And John, this is Bobby. We are happy certainly with Quail in our results (inaudible) they have great quarter. We are always watching trends in US land drilling business especially where it’s headed, but our results, our customers tell us they’re going to be continue to be busy.

Of course, we are moving pipe around to the more of the oil areas that we talked about. Kirk’s comments about inventory levels is certainly Rental Tools folks like to have a little inventory around, so they can service new clients or when they get request from current customers they can respond.

And it’s always nice to think everything you have has been rented, but in reality this the best way to the business. So the normal area that we like to operate in is to have some pipe around to be able to service both new accounts and current customers. So we are happy with what we are seeing with Quail at this time.

Operator

(Operator Instructions) And our next question comes from the line of Daniel Burke with Johnson Rice.

Daniel Burke - Johnson Rice

I was wondering if you can give us an update on full year CapEx plans and if the deployment into the completion of the AADU’s and/or the plans for Quail had changed from previous; it look like you’ve spend a fair chunk of the annual Quail budget in your Q1?

Kirk Brassfield

Daniel this is Kirk; yes we are always front loaded on our capital, including Quail, and obviously the AADU. We are looking at – still looking at $170 million for the year and we would expect to have a comparable amount or just below what we saw in the first quarter coming in the second quarter. So we still have additional five coming in for Quail and we also will continue to spend on AADU in the same quarter.

Daniel Burke - Johnson Rice

Any change to the dollar amount needed to finish the AADU’s; I believe you guys have talked about mid $30 million as last update; I assume the total budget the same and that number haven’t moved?

Kirk Brassfield

Right now we are still looking at that number; so obviously as we proceed forward with as Bobby mentioned, we are talking with BP, we’ll obviously update the market if that number changes.

Daniel Burke - Johnson Rice

And then maybe last on from me, good to see the health of the Barge business. Anyway we could get an update on where rates stand today or are you still seeing the rate momentum that characterize the business you know over the last couple of quarters continue?

Kirk Brassfield

Yes, I believe we mentioned the average for the quarter was $30,400 for the first quarter. Today, at a one day look, we are about $31,500. And we are still working all 11 rigs.

Operator

And our next question does come from the line of RJ Cruz with Trust Company of the West.

RJ Cruz - Trust Company of the West

Can you provide an update on your search for current CEO?

Bobby Parker

Yes, it’s Bobby. There is not much to what we said earlier that as the Board Committee has initiated the search and its ongoing at this time and when we have a selection made, certainly now of that will be made, but until that time the search is ongoing and that's as much as I can add this time.

RJ Cruz - Trust Company of the West

Is there a timeline to complete that process?

Bobby Parker

No, there is not a specific timeline, it’s just finding the right candidate; right person is the most important thing. But there is not any specific timeline out there, but the search is certainly ongoing and moving forward.

RJ Cruz - Trust Company of the West

And then during your last event road show, you did talked about your conversations with BP, any updates in that regard and are you still thinking about putting those rigs to work in the third quarter. Is there any push back there?

Bobby Parker

There is nothing really new. We are still in discussions with BP; on my trip to the [Norfolk]. I certainly was impressed with the rigs and the people that are up there. As we publicly stated we are on-track to deliver these rigs after Parker’s commissioning of the rigs to BP for their acceptance testing in the third quarter this year. So no change, and everything I’ve sold when I was up there would led me to believe that we are on-track for that timeframe and so I hope that to-date and in the future as we get more progress certainly in our discussions with BP.

RJ Cruz - Trust Company of the West

And maybe last one from me is, as we see the rigs, the natural gas volume go down, I mean does that impact you in anyway or if your Quail business essentially agnostic between natural gas and oil?

Richard Bajenski

RJ this is Richard Bajenski, could you repeat the question, we had a difficult time hearing you here?

RJ Cruz - Trust Company of the West

Right, so I was saying that with respect to just the Quail tools business, and as you see the natural gas and rig count drop, I mean does that impact in anyway or is your business more agnostic between oil and gas rigs?

Bobby Parker

Yes, thank you very much for repeating that. The impact to Quail has been nothing financially; in fact continue to see returning good results. They certainly have been very fluid in moving inventory as needed between the let's say dry gas or gas drilling areas where rig counts have come off some, to the areas where oil or liquid rich drilling is occurring in some of the shale plays there. So Quail is able to move very quickly their drill pipes to wherever it’s needed in these areas.

I’ll also add that besides the shale plays the vertical drilling and excuse me, horizontal drilling in these areas has also gone to areas which are non-traditional shale plays and I’ll use the Permian Basin is a great example and all the oil field that has a lot of rig activity right now and so the new style horizontal drilling, or new completions has helped this area and increased the number of rigs there. That kind of thing for a Rental Tools company is wonderful.

So the impact we’ve seen in shifting inventory around and making sure that at Quail stays very close to the customers to make sure the pipe that they have is where it’s needed and that’s still -- so I would say no financial effect, but the effect is as far as where the pipe is located around the country.

Operator

And at this time, there are no further questions in the queue, I would like to turn the call back to over to Mr. Bajenski for any closing comments.

Richard Bajenski

Thank you Craig for assisting us in this call. And thank you all for listening to us today. We appreciate your interest in the company and we wish you all a safe and prosperous good day.

Operator

Thank you. Ladies and gentlemen that will conclude the conference for today. And do thank you for your participation. You may now disconnect your lines at this time.

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