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Parker Drilling Co. (NYSE:PKD)

UBS Global Energy & Gas Conference Call

May 24, 2012 00:55 am ET

Executives

Kirk Brassfield - SVP & CFO

Analysts

Angie Sedita - UBS

Angie Sedita - UBS

Alright. Our next presenter is Parker Drilling and speaking today is Kirk Brassfield, Senior Vice President and CFO of Parker Drilling, a position he was named to in 2005. From 2001 to 2005 he served as Vice President of Finance and Accounting and prior to that the Principal Accounting Officer and Corporate Controller since 1998 at Parker. Prior to joining Parker, he served in Finance positions, a number of positions with MAPCO. With that I will turn to Kirk.

Kirk Brassfield

Well, thank you Angie and it's good to be back and good to be here at the UBS conference and definitely good to see you again. We will go through or -- I should have asked. Yeah, that way. In your handout please read through the forward-looking statement and keep in mind that what we say today is as of today and refer back to the 10-K and the 10-Qs and the other filings that have recently been issued. Just briefly divert and go through just business strategy, our operations, our financial performance and talk a little bit about Parker and then hopefully have some time to answer some questions.

We are built into five segments. This is the Rental Tool segment, the US Barge business, the US Drilling, International and Technical Services. I think our Rental Tool business as many of you maybe aware is primarily is our Quail Tool company which has been very successful. I will talk more about that as we go through the presentation. The Barge business we've owned yet since 1996, both the Barge and Quail were acquired the same year in 1996 and we have 13 rigs, 11 which were currently marketing that are on the Barge side. US drilling is a new segment that we put out there. That's going to be where our two Alaska rigs. We will go in when they get to work and also has one land rig in the United States. The international drilling, Parker has been there in the International business since the 1950s. So, we’re well versed in operating there internationally.

We’re located in around the world in really two groups, Eastern hemisphere and the Western hemisphere, Mexico, Columbia, Algeria, Kazakhstan and then the Asia-Pacific area. Then the technical services is our engineering group. The key behind the technical services is we provide our engineering expertise in building technical, very high-tech type rigs. Looking at those type of big projects where the oil company, our customer looks down the rig. It’s a big project, one of a kind type rig. And a rig typically that’s not one that Parker would own.

We go and provide the technical expertise. We help manage the construction side of the project and then what we look toward in this business, is do the O&M and manage the drilling aspects of that rig.

A little bit on just the strategic profile. You can see our three strategies there and really these three strategies that we build off our four pillars of what we say of been the best drilling service provider. And that safety, training, technology and performance. Safety obviously is very, very important. Very key to any drilling contractor, particularly important to Parker when you work around the world, you go out and bid on projects. If you don’t meet a very stringent safety requirements, you will not be allowed to bid on a project. As you can see, this is for a worldwide for all drillers, both onshore and offshore. The average is in red and as you can see from -- we consistently outperform the average and we run it below one on a TRIR rate, so this is the published rate by IADC. So as you notice in the last presentation, just focus on the US side and it was land drillers, but this is one that covers all drillers.

Training, in order to be say one of the safest drilling providers, you obviously have to training. We have facilities both in New Iberia and we also have facility in Alaska. Technology talk a little bit about the technology side of the business already we put a lot of focus on the bigger, the higher tech and drilling in more difficult locations. The picture you see is the two Alaska rigs, obviously self and close because you work in the Arctic conditions and as you can tell from this, everything will be under a warm environment and while we are looking at it, we’ll talk a little more about the Alaska rigs when we come to that page.

The other key thing, this is very important for Parker. We looked very hard and track our performance, we look at what our operator, our customer goes out and looks at a well and tracks where they think the performance should be. We follow up with the actual result of how the drilling and how the performance curve for that drilling, that well and then we sit down with the customer after every well, sit there and walk through how well we performed, where we missed. And it is the lessons learned for us but also really show because we've outperformed. We’ve got lot with our rigs in like the Barge market where that's not a custom practice and we've upgraded our rigs to the part where we can prove that we are drilling at a much more efficient rate than when our competitors are.

The key thing about Parker, we are not a large company but we do look toward our diversity and our balance between our different aspects of our business. You see a little and that's why geography, the revenue split between the US and the international side of the business. Our revenue split by customer 44% is the major international companies, that is like the Exxons, the BPs, the Chevrons. And then you also have the integrated service companies, the work we perform with five rigs in Mexico is for Schlumber J. And then of course you have the National oil companies like Sonatrach in Nigeria and then the independents and regionals where you see more of that with from the Quail side of the business with the Apaches, the Brighams and some of the others – not Brigham anymore, but that sized company in the US side of the business.

Also very important is the mix of between oil and gas. Obviously our rigs can drill for oil or gas, but primarily focused around the world is 80% oil, 20% gas. Most of our work overseas is for oil drilling and currently most of the work for the Barge business is drilling for oil and as you will know from listening to some of the US land drillers, you've also heard the most of what's being drilled in the US that benefits Quail is on the liquid side or the oil side.

And just a little bit more about the mix, you can see where the annual revenues and where the mix in the margins split between our different business units and this is really a very -- kind of key when you look at the mix that we do you have. If you look at the last two years, you think okay it has been driven by Quail and it has been driven by Quail and then over the last year, a little more upswing from the Barge business, but if you go back to 2009 you saw a complete different story. The US side of the business obviously was very negatively impacted by the economic situation around the world and you saw very large decrease in revenues and margin from both Quail and the Barge business.

But where did you see the upside? The international side of the business remained strong. So you saw the bulk of the margin and the bulk of the revenue in 2009 coming from that international business. As you go in 2010-2011 our international business, utilization dropped down and we will talk about some of the issues that have driven that number down but then you saw the Quail and you saw both and the Barge business both pick up quite substantially.

So the mix is very critical for maintaining consistent net profit which has been one of our goals I think. For those who may have listened to us five years ago. We wanted a business that would consistently generate net profit on the bottom line and that's what our mix of businesses allowed us to get to.

Just a quick picture of where we are in the world, to think you can look through this and I will be brief actually we will talk about each segment, but you can see the different parts of the world wrap, the key locations obviously with Quail and the US and the Barge business, Mexico, Alaska, and Columbia and then you also have Kazakhstan, Nigeria.

Talk a little bit about the rental tools business. This is just a hell of a business. It's been a great performer for us. Back in 1996, we bought Quail tools it was one location in New Iberia. We bought it from the family and there was the White family, the man who ran it was Bob White.

For those of you who are not from this part of the world, Bob White is Quail. So you get to the name, but it was $15 million EBITDA generator. If you look at 2011, it generated about $150 million of EBITDA and most a lot of that growth has been over the last five years. In 2005, we sat down with Quail and said it's time we've got to really start expanding.

In the previous five years, we moved them into Victoria, we moved them into Odessa, but then we started making our real moves so we moved in Texarkana, we moved into the Bakken and then we moved into West Virginia to Hanover, Pennsylvania area. So in the last five years, we ended up being in a very good place, so we moved into Texarkana. We remember the Mayor of the city was in there and had the little (inaudible) pretty big deal to have our new business coming in. And the Mayor said, I am not sure what you are here for in 2005. So much oil and gas around here and then of course the very next year Chesapeake announced to the Haynesville and from then on it just took off in that part of, in the Texarkana area.

Let alone what you covered in Southern Oklahoma and Western Arkansas. But the growth has been phenomenal for Quail and they do this by have a hand over customers, very focused on customer relationship, very focused on being in locations where they can service your customer, would be within a six hour time window.

If a customer calls up and has an issue in these tools, they want to get that tool quickly so they can show the result of the tool on the morning’s report. So we set them up so that we have, we are in a location, set up strategically that within six hours you can get to any kind of customer that you need and get to the major shale play.

As you can see we are located in all the shale areas. Our most active areas recently is you may well imagine would be our Williston, North Dakota store and also our Victoria store which interestingly Victoria after we moved in there probably seven years ago we are looking at Victoria going, do we shut this thing down or we keep it going. Thank goodness we kept that score in place and its now taking off with the Eagle Ford and then of course just the Odessa store with the Permian. They have growth and they continue to just heard Pioneer talking about, adding rigs in the Permian area. That’s an area where we will be able to continue to grow Quail rental tool side.

The key thing about Quail is an area; it does get a little bit slower. It’s a lot easier to move pipe than it is to move the drilling rig. So overnight, you can get a pipe from Marcellus area, which has not grown quite as quickly as the others into a North Dakota or into bring it back in to the Texas area.

So that is a very big plus for Quail and we’re making sure they have the tools available where the market demand is. The other positive about Quail when you look forward is the offshore market, particularly the deep offshore market. If you go back obviously in Macondo and since Macondo, there are very few offshore rigs working and that was about a 10% part of the business prior to Macondo.

We now are on four rigs, we have the opportunity to go to get on three or four or more, the remainder of the year. So you see that to start to escalate and see that growth coming back online as we go into the end of 2012 and into 2013.

US Barge business, you see the highs and the lows and the volatility of this business. Go back to 2007 and ’08; we saw a $130 million of EBITDA in 2007. You had about 46 rigs in the marketplace, 46 barges in the marketplace. You’re averaging well over $40,000 per day and then as you roll in 2008, you hit 2009 and went down to about two rigs working on $19,000 per day. The good news about this market is, the total rigs available on the marketplace have shrunk from about 46 number down to the 26 number and you’re starting to see the liquids and the oil go under play whereas we have 13 rigs that we own, two of those rigs we are not operating right now, they need some upgrade in maintenance but we are looking at 11 rigs today primarily on oil or liquids. Now, to get back up to those levels of 2007-2008 we do need an increase, we need the gas play to come back.

We don’t expect to see that probably next year, year and a half, two years because we probably need to get that [$5 gas] when you really see that spite back up to 2007-2008 levels. But the good news today is you are seeing in the oils and the liquids, so you are seeing the activity level, you are seeing the full use of all the rigs in the marketplace also we continue to drive that price with the 26 rigs in play.

US growing this [Primera] Alaska we’ve obviously had the issues which we communicated then and talk about and that we’ve significant delays on. We’re now on this project getting to where we actually have some communicator, we see passing these rigs for acceptance testing to BP in the third quarter. (inaudible) acceptance testing we have a five year contract for these two rigs total over the five years for the two rigs combined is $250 million. So you are looking about $50 million a year revenue.

So we do see the incoming in our side to get these things done and working. And so we do expect to pass these over as I mentioned in the third quarter were that final testing process by BP.

International drilling, this has been one of our core businesses for as I mentioned 60 years. Just past, just a couple of years when you look around the world and you saw that map, we've seen very, very strong results coming from Mexico and Columbian and that Western Hemisphere side of it.

So we do have some very big weaknesses that are very at the top of our strategic shortlist to get done, and that one of them is Kazakhstan. We have nine rigs in Kazakhstan, two are on contract and the other seven are all contract. They are very slow marketplace and if you go back to 2009, we are running the international group with over an 80% utilization and we generated close to $100 million of EBITDA.

You got it today for running about 48% utilization and the biggest number of rigs that are working is Kazakhstan, while things we are looking hard at is moving those rigs, moving some of those rigs that can't be moved obviously the barge rig will be in the Caspian. You got about four or five rigs that would make sense to look at move, we look at the economics and moving as moving a rig from Kazakhstan to other locations does get expensive.

We are also looking at other options, there will be a couple of the older rigs that we would look to possibly sale in country, so we do have two older smaller rigs that really don’t fit the footprint elsewhere. But in moving a rig, we do need a contract; we want to make sure we get it right when we get a return after the move and any capital that may be required.

There was a tender that just came out in Algeria and that is about a 35 to 40 rig tender that includes both workover and drilling and 1500 house power and 2000 house power type rigs which would fit the criteria of several of the rigs in Kazakhstan, so we are looking at that along with some other tenders, its also very, opportunities in Turkmenistan. We work in Turkmenistan before but first and foremost we will look to derisk our portfolio by reducing our exposure in Kazakhstan and moving forward, in other locations where we're going to increase our utilization.

Technical Services; I mentioned this briefly. This is our engineering group. And it's been a key component to us driving into the O&M contract. Now the O&M contracts that we have are included as part of the international business. We currently have a couple -- a the big ones is our Falkland Islands projects, where our engineering Technical Services group designed the rigs.

We put the rigs. We worked in the construction of the rigs. We moved those rigs to Falkland and put them to work, and now we manage them. The rigs we currently have there are the Yastreb rig, which is the biggest land rig in the world, which successfully drilled out a world record of extended reach drilling of over 40,000 feet.

And that all tied back to our ability of our engineering group to get the job upfront with Exxon, to perform on that, and then get the rig working. That's been a very, very important project to Exxon. One we're doing now is called the Berkut Project, which is also for Exxon. It's going to be a platform rig that's going to go to Falkland. It is in a shipyard in Korea.

We helped design the drilling package to that platform. Other parties, Worley Parsons, will do the production units. That should come out at the end of 2013, and move to Falkland, and we'll look for the O&M contract in 2014 and beyond.

Financial performance; you see the numbers. We've talked a lot about the different segments of the business. Obviously, 2009, '10 were down years, due primarily to the U.S. side of the business. As you can tell, we've been in an upswing going through the last of 2011 and the first quarter of 2012.

Quail Tools has been the driver of the last two years. As I mentioned, as you see on this previous slide, they continued in the first quarter of this year. They set another record for EBITDA. So it continues to grow and continues to perform. Obviously in those bad years, we'll show this slide, but they're not where we needed to be. We need a better return on capital.

That's primarily going back to the use of capital and the capital spend on Alaska that drove that ROC downward. And we can't have those kind of problems to occur. So we have to manage, do a better project management of big projects like that, to ensure that we do -- are going to get a return going forward. And as you see, that's picking back up as we continue to go through 2011 and '12.

Our debt position, about 44%, 43% debt-to-total cap, 300 million of senior unsecured. We flipped the convertible notes. We tendered for those. And we've now added to our senior unsecured for that 125 million. So that is now the senior unsecured notes due 2018, it's 425. And then we have a little bit of term note that's payable -- that we're paying down quarterly.

Our revolving credit facility comes due in 2013. So we'll look to refinance our revolving credit facility and our term -- (inaudible) probably over the next several months. You see the capital spending, it's been very high the last two years, primarily a result of our Alaska project. 2012 estimates, $170 million; $80 million of that is going to Quail; $55 million, which is primarily completion of the Alaska rigs.

And then you see maintenance capital, the rig maintenance capital of about 35 million. When you look past 2012, we will have additional pre-cash flow when the Alaska rigs are working and not spending money but making money. And so, we'll be looking where the best opportunities for that money is, maybe reducing debt, maybe growing the international fleet, building some new land rigs. But we'll look for that as we go into 2013.

And I'll just summarize real quickly, and I'll let you read some of this. But Bobby parker is here and maybe you may have read that our CEO left in February. Bobby Parker is back as interim CEO. And he's been tasked to do two major projects, and this is the company's major to-dos over the next several months. Get Alaska working, get it on payroll, and fix Kazakhstan. So I think if you look forward over the next few months, you'll start to see more communication as we move forward to fix sort of the two biggest overhangs on Parker as we move into the second half of 2012.

With that, Angie I'll take some questions.

Question-and-Answer Session

Unidentified Analyst

I can start it on this one. Quail, I thought was a very great business from the very beginning. It's always been a very good business. And I thought it'd always be a business that should be a larger part of Parker. Is there a validity to maybe besides the Kazakhstan rigs, selling some of the other rigs, potentially the international markets are continuing to feed money into Quail, given the returns, given the margins, given how consistent it has been through the cycle, or would you prefer to stay diversified between domestic and international markets?

Kirk Brassfield

Well, I'll answer that by saying our first priority is Quail. Every dollar that we're going spend need to go through that kind of analysis. You look short-term and you look long-term. Obviously, Quail has been a very substantial piece of that in not just the last three or four years but for many years. You consistently run at 65% margin, but we've also had very good success internationally too. We do have to fix some things.

Now to your point, when we look at Kazakhstan, their may yet -- do we move rigs or maybe we sell some of those rigs in place because when you're sitting there moving a rig that may cost you $5 million to $7 million to move, are you going to get a return on that $5 million to $7 million. So then you're looking at how do you reallocate those funds if you did that. So yes, that is part of the equation, whether it goes into Quail or other rigs.

The other thing about Quail, it's not just on the domestic side, we -- and I know you remember this, because we've heard it for years, we are looking very seriously at the international prospect. First, maybe it's hard to call Canada international, but for the rental tool, that is a very logical extension of Quail in the short-term, but also down South America where we have very big presence, which would be a use of some capital dollars.

Unidentified Analyst

Can you talk about Mexican activity? It's pretty (inaudible). Is there any comment that you can add to what's going on there?

Kirk Brassfield

Well, on the -- and you're talking more on the E&P side. We have not seen that or heard that yet on the ownership. Everything we hear is still is Pemex and [Mexico Orient] what's in the ground. From our perspective, though, that just allows us -- you still have [Shawn Bragise] in there, Halliburton and (inaudible) on a service provider model that we work for.

From a production -- from a (inaudible), what we're working in the Villa Hermosa has been very, very productive. Now, those are 2,000 and 3,000 horsepower rigs. Where they had more of the problem was up North, where they're only drilling with the smaller rigs, and they're getting less production, which didn't make it efficient to continue drilling, which Pemex shut down a couple years ago.

But what we're hearing from Pemex is we're a little concerned about the election going on this year. But they've come out and they're very active and said, we want to move forward, we need to move forward. We see more communication with them and the three big service providers. So we see more activity picking up there not only for our six rigs that we have there, continue to roll over, but also for maybe additional rigs both on the bigger side and the smaller side.

Unidentified Analyst

(inaudible)

Kirk Brassfield

We had not really looked at. We think our rigs may be are a little bigger for that kind of shale drilling. I think you're probably more fit in the 1,500, where we would have to have different type of rigs than what we are drilling for currently in Mexico. And really with the long-term visibility we have right now with Mexico rigs, we don't see any reason to move them north.

To your question, what I think we have for a little bit on the ownership side is maybe some of the offshore work. That's why you're hearing it on the offshore side but not on the land side, for maybe ownership going to -- transfer some of the ownership of some of the reserves to an E&P company.

Unidentified Analyst

Thanks so much for being here. (inaudible)

Kirk Brassfield

Thank. Thank you, Angie.

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