Parker Drilling Company Q1 2008 Earnings Call Transcript

May.27.08 | About: Parker Drilling (PKD)

Parker Drilling Company (NYSE:PKD)

Q1 2008 Earnings Call

May 6, 2008 10:00 am ET

Executives

David Tucker – Treasurer & Director of Investor Relations

Robert L. Parker, Jr. – Chairman of the Board & Chief Executive Officer

David C. Mannon – President & Chief Operating Officer

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

Analysts

J. Michael Drickamer – Morgan Keegan

Steve Ferazani – Sidoti & Company

Operator

Welcome to the Parker Drilling first quarter 2008 conference call. (Operator Instructions) At this time I’d like to turn the conference over to David Tucker.

David Tucker

Thank you for joining Parker Drilling Company’s first quarter conference call. I’m David Tucker, Treasurer and Director of Investor Relations. Joining me today are Bobby Parker, Chairman and Chief Executive Officer, Dave Mannon, President and Chief Operating Officer and Kirk Brassfield, Senior Vice President and Chief Financial Officer.

In the course of our comments today we will make statements as to management’s future expectation of the company that we feel 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 presentation and actual results may differ materially due to various factors we have referenced in our public filings including a change in market conditions in our industry and other factors addressed during this call.

I’ll now turn the call over to Bobby Parker.

Robert L. Parker, Jr.

Welcome to our conference call. For the first quarter of 2008 we reported normalized earnings of $0.17 per share on revenues of $173 million and an EBITDA of $61 million. On our prior conference call we were asked a lot of questions about our Saudi Arabia joint venture and we were unable to give very specific answers at that time. Since that time, as you well know we have exited that venture by selling our 50% interest to our partner and the reason we were unable to provide adequate answers was because we were in the middle of those negotiations with both Saudi Aramco and with our JV partner so we are glad that has now been finalized and we have exited that contract and that relationship with Saudi Aramco and Saudi Arabia.

Now on with our worldwide fleet; our utilization currently stands at 82% right now. 74% of our international fleet is committed through 2008 and 68% is committed in to 2009. The majority of these rigs transitioned to new long term projects at higher dayrates during 2007. Even though overall contributions from our international segment were up significantly compared to a year ago the results were lower than expected due to higher costs in our Africa Middle East markets and the completion of drilling projects in Colombia. Most of these one-time events impacted our first quarter and we anticipated that new international contracts will result in increased revenues for our international operations throughout 2008.

The drilling barge segment of our US operations completed the first quarter with higher utilization and dayrates than we anticipated despite predictions of further softening. And, our Quail Tool segment continues to outperform. Going forward growth in 2008 will come primarily from our Quail Tools and international segments. The growth in these two areas will offset a moderate decline in the US inland barge market in the first half of 2008 when compared to the prior year’s record setting performance. We are encouraged by the recent increase in activity in this region and sustained dayrates for our deep barge rigs which indicated that the Gulf of Mexico transition zone could begin to see an improved market in the second half of the year.

We are also excited to announce today that a subsidiary of BP has issued a letter of intent to Parker for a drilling contract for two new built land rigs for a development drilling program on Alaska’s North Slope. The five year drilling contract with a five year option is expected to commence during the second half of 2010 following construction, commissioning and mobilization. Contracted revenues related to the five year term are anticipated to exceed $250 million. We feel that the Alaskan market is an excellent fit with our strategic plan with long term growth potential and a niche for our technological advanced capabilities. In peak companies are increasingly looking to explore remote and difficult fields as major finds become more restricted to complex geological formations and in harsh climate conditions.

Parker Drilling has long been at the forefront of this technology with record breaking performances for the Sakhalin I consortium and for numerous other Arctic extended reach and front tear exploration programs making Parker the most qualified partner for these projects. These rigs are designed to reduce the total well cost for the customer through faster well times and mobilization while reducing the environmental impact. Also true to our strategic plan to provide a fleet of advanced rigs preferred by our customers in all market conditions. We feel that projects such as these which exploit our technical capabilities and our customer preferred fleet will continue to be a driver of growth in 2008 and 2009.

That brings us to the first quarter overview. I will now turn the call over to Dave Mannon to discuss operational highlights.

David C. Mannon

Turning to our US operating segments, high utilization and steady dayrates in our deep barge operations in the Gulf of Mexico resulted in EBITDA of $24.4 million for the quarter. Let me give you some dayrate utilization rates for the Gulf of Mexico. Current average dayrates for deep drilling barges are $43,900 a day with a utilization of 100%, intermediates dayrates are $31,000 per day and 100% utilization. This compares to first quarter deep drilling barges were $44,800 a day dayrates and a 94% utilization, intermediates were $35,000 a day dayrates and a 50% utilization.

The market for our deep drilling barges has good visibility in to the third quarter. Most of the softness is in the intermediate barge sector where we expect to see utilization gaps between contracts although we see continued firming in this market. Deep drilling dayrates remain higher than forecast and utilization was also higher than our competition in this market. In 2005 we set out with a strategy to be the preferred contractor regardless of market cycle. Our strategy focused on providing the four pillars of preferred contractor: safety; training; performance; and technology. Today our results are evidence this is the right strategy as we are currently at 100% utilization for our marketable fleet with 14 barge rigs working.

We are nearing completion on work on the front end engineering and design or fee study for BP Liberty project in Alaska and are long lead items for the construction of the rig. BP Alaska presented the projects to its corporate board for sanctioning in April and we expect a public announcement from our customer on the status of the project shortly. Parker’s unique experience with extended reach drilling rigs and operations in Arctic environments makes us the most qualified partner for the Liberty project. This is in addition to two ADU rigs Parker will build or design, build and own for Alaska operations.

Quail tools, our drilling and production well tool business continued its strong performance by posting EBITDA of $23.7 million beating the prior year period by 26%. In April the US Geological Survey reported that the Bakken formation in the Williston’s Basin of North Dakota and Montana could potentially have the largest recoverable oil resources in the lower 48 states with 3 to 4.3 billion barrels of oil. As directed by our strategic growth plan Quail Tools opened a satellite location in the Williston Basin two years ago. This facility has since expanded to a full storefront location due to the high activity in this market.

Our strategy was on the mark, expanding in to areas that have long term drilling and development prospects. With its diverse customer base ranging from independent to super majors and strategic locations in the most active oil and gas producing regions in North America, Quail Tools is a lower risk high margin strategy through which we can access active US resource plays and deep water projects in the Gulf of Mexico to which we otherwise would not be exposed through our drilling fleet. US drilling permits are on the rise throughout North America and solid fundamentals we continue to anticipate increased financial results from Quail for the remainder of the year.

In our Latin America market, seven of nine rigs are working. All seven are in Mexico under multiyear contracts and we see additional opportunities for work in this market. We have received a letter of intent for one of two available rigs in Colombia which is expected to mobilize during the second quarter for a one year program. And, the other rig is being marketed to other operators in the region as well as other international locations.

In our North Africa and Middle East markets, two of our new AC Drive rigs in Algeria are operating under contracts extending to 2010. Rig 121 in Libya was released in January by our customer who elected to pursue offshore opportunities. However, the rig is being marketed for multiple opportunities and we anticipate a new contract shortly. We sold our interest in our Saudi Arabia joint venture in April. As provided in the sale agreement we are providing crews for the four rigs now owned by the former joint venture partner at a cost basis until July 31st. If the former joint venture partner is not prepared to assume full operational control of the rigs on that date, then we would provide crews on a cost plus basis thereafter.

Our Asia Pacific market continues to experience some softness with five of eight land rigs working. As anticipated our customer in Papua New Guinea is winding down their operation and we expect that rig 226 may complete operations in mid summer and we are currently marketing the rig in multiple international locations. In Indonesia, rig 231 was awarded a two year contract extension in April at a more favorable dayrate and rig 253 has been awarded a six month contract with options. In New Zealand we have agreed to terms for two long term contract extensions for two of our three rigs in the country. Rig 206, a cold stack rig in Indonesia that had not operated for more than five years was sold during the quarter.

In our CIS Eurasia operations eight of our nine rigs currently in the region are working under long term contracts. In the Karachaganak field in Kazakhstan, Parker’s four land rigs are currently working under long term contract. Rig 247 was essentially rebuilt to a like new condition over the last year at a cost of around $19 million and spudded its first well on March 31.

It will be joined by rig 269 in the second quarter under a two-rig one-year contract for operations in Kazakhstan. Rig 269 currently in transit from the United States is one of our two newly designed 2,000 horsepower high efficiency class rigs which incorporate some of the most advanced features available in a global land rig market. Features include the plug-n-play adaptability allowing the operator to quickly and easily customize the rigs individual equipment in a fully automated drilling system featuring fuel efficient AC technology and variable frequency drive. These features along with our quick mobilization ability distinguish these rigs as among the most versatile, the most powerful and the safest of their kind in the industry. We anticipate finalizing an extension for existing contract for 257 drilling in the Caspian Sea at a substantially higher dayrate shortly.

In addition, our project management contracts on Sakhalin Island continue with ENL for Yastreb land rig and the Orlan platform. Recently we were awarded an EPCI contract with ENL to build a new mast and procure equipment upgrades for the Yastreb and preparation for moving this rig 100 miles to the north to commence a second exploration and development project. We are actively bidding additional fee work in this region and other international areas and anticipate adding projects in the near future.

That’s it for our operations update. I will now turn the call over to Kirk Brassfield to discuss our financial results.

W. Kirk Brassfield

For the first quarter of 2008 Parker Drilling reported net income for $23.9 million or $0.21 of diluted shares on revenues of $173.3 million. This compares to a net income of $30 million or $0.27 per diluted shares on revenues of $151 million for the first quarter of 2007. Non-routine items for the current quarter included income of $10.6 million relating to the final resolution and closure of our long standing Kazakhstan tax case. The benefit recognized this quarter relates to the interest portion of the tax. I would remind you that in December 2007 we recognized a $25.6 million benefit as resolution of the income tax portion of the case.

In addition, during the current quarter included was non-routine loss of $4.1 million relating to a tax valuation allowance on a net operating loss carry forward in Papua New Guinea and a loss of $1.1 million from our Saudi joint venture which we have now exited. Net income in the first quarter 2007 included net non-routine income of $0.05 per diluted share relating primarily to the gain on the sale of two work over barge rigs in January, 2007. Information relating to non-routine items and their impact on our reported results is available on our website.

US barge rig operations reported gross margins of $24.4 million for the first quarter of 2008. Margins were down 25% from the first quarter of 2007 due primarily to lower dayrates on average than a year ago. And, margins were down 20% from the fourth quarter due also to lower dayrates and slightly lower utilization. Though rates and utilization are down, both are higher than budget and higher than our competitors in the Gulf of Mexico barge segment.

Utilization for our international land operations in the first quarter 2008 averaged 72% compared to 63% for the first quarter of 2007 and 83% in the fourth quarter 2007. International land gross margins were $12.6 million for the first quarter of 2008 compared to $9.5 in the first quarter 2007 and $14.5 million for the fourth quarter 2007. Sequentially from the prior quarter international land margins were down due to both rigs in Colombia coming off contract, the release of one rig in Papua New Guinea in the fourth quarter and one rig in New Zealand ceasing operations. Increases were reflected in Mexico as three rigs began operations during the quarter. International offshore operations gross margins were up $800,000 from the fourth quarter due mostly to an adjustment in the prior quarter.

Quail Tools reported gross margins of $23.7 million for the quarter second only to the record $25 million reported in the prior quarter. Our project management and engineering services segment has been broken out from our international operations beginning this quarter. This segment currently includes the following operations. Two projects in Sakhalin Island for Exxon, that’s rig 262 and the Orlan platform, engineering work for the BP Liberty project in Alaska, supervisory and safety personnel operating 10 rigs in Kuwait for Kuwait Drilling Company and personnel in the South China Sea on a Conoco-Phillips platform. This segment is expected to continue to grow as a meaningful segment of our business in the years to come and thus the decision to separate the segment from a financial reporting perspective.

The balance for cash, cash equivalents and marketable securities as of March 31st was $44.7 million, a decrease of $15.4 million from 12/31. Capital expenditures were $43.2 million for the first quarter and included $1.2 million of capitalized interest. As a result of today’s announcement regarding the construction of two rigs for Alaska we are increasing our capital expenditure estimate for the year from between $200 to $215 million.

To supplement the construction cost of these two rigs we are in the process of finalizing an increase to our credit facility from $60 million to $130 million. The new facility will be comprised of an $80 million revolver and a $50 million term loan. Commitments from lenders to participate in the new credit facility are due today and funding is expected early next week. We expect no delays in securing this facility. In light of this increase in debt I would add that our stated goal to reduce our debt to cap ratio below 30% range remains intact though the ratio may increase temporarily due to this funding.

G&A expense was $6.7 million and depreciation expense $26.2 million for the first quarter. Excluding the Fin 48 amount for Kazakhstan and the valuation adjustment to Papua New Guinea taxes our effective tax rate for the quarter was approximately 39%. We expect that the effective tax rate will approximately 38% to 40% in 2008.

Finally, we would like to give updated guidance for 2008 based on the following factors. We are pleased with the strength of our US barge market during the first quarter and anticipate that this market may be stronger than our original estimates. In the first quarter the strength of US barge market offset weaker than expected margins in our international business. The long term work is secured for the majority of our international rigs and we expect results to increase. Additionally, with our exit from the Saudi joint venture we are relieved from the losses the joint venture would have incurred this year. Based on these factors, we are confirming our annual EBITDA guidance of $275 million to $300 million and we are increasing our earnings per share guidance to $0.75 to $0.85 per share.

That completes our prepared statement and we will now turn the call over to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from J. Michael Drickamer – Morgan Keegan.

J. Michael Drickamer – Morgan Keegan

On the new rig [inaudible] in Alaska, pardon me if I missed it but did you guys discuss how much these rigs were going to cost to build?

David C. Mannon

These rigs will be $80 million apiece and as we stated today they are going to be going to work in 2010. We’re in the process of finalizing our design and will be constructing these rigs in the same yard that we constructed 269, 270, the yard up in Vancouver Washington. That yard also is doing the ENL work for us building the mast and associated equipment for the upgrade of the Yastreb rig and that yard is also going to be doing the Liberty construction modules. So, we have vetted that yard, spent a lot of time up there, employed a lot of our safety and project management capabilities in that yard and we’re confident that that yard can produce the state of the art rig that we have talked about.

J. Michael Drickamer – Morgan Keegan

So these are not fixed cost construction contracts to build those rigs but you’re pretty confident in that $80 million estimate, correct?

David C. Mannon

We are. We do have the ability to increase our dayrates depending on design changes that BP elects during this process.

J. Michael Drickamer – Morgan Keegan

Let’s talk about that for a second then, do you guys have cost escalators in to the contract over the five year term of the contracts so if your costs due increase you can recover those?

David C. Mannon

We do.

J. Michael Drickamer – Morgan Keegan

Then one more, rig 253 you talked about a new dayrate or a new contract for that rig, did it come with a higher dayrate and did you say what that was?

David C. Mannon

We haven’t stated what that was but yes, it came with a higher dayrate. That’s for a relatively short term, it’s a six month contract but that operator has asked for an extension.

Operator

Your next question comes from Steve Ferazani – Sidoti & Company.

Steve Ferazani – Sidoti & Company

On the international front it looked like you had about 27 rigs in Q1, what are you look at for yearend? Is that going to be 28 or 29? You’re adding what one or two in Kazakhstan?

David C. Mannon

We’re adding two, 247 in Kazakhstan and also 269 so that will be an additional two rigs. We did have a sale of 206 so that’s a negative on that side.

Steve Ferazani – Sidoti & Company

How many cold stack rigs do you have left and are you looking to sell any more?

David C. Mannon

We have four cold stack rigs and yes, we’re looking at rationalizing those potentially in 2008.

Steve Ferazani – Sidoti & Company

Oh the Quail side it looks like modestly down revenue in Q1 sequentially. Is that seasonality and what are you looking at as the year goes on?

David C. Mannon

We still think our 2008 earnings growth in Quail will be somewhere in the 15% range, maybe a little bit higher than that. We think that a lot of the, I guess what you call the softness in Quail, we don’t see. But clearly, in Q1 there’s some seasonality issues that we had to deal with especially in the deep water marketplace. Rigs that had promised to go to work didn’t go to work but they’re going to work today. So, we’re very optimistic for the rest of the remaining three quarters.

Steve Ferazani – Sidoti & Company

Back to the international for one more question, it looks like the expenses were much higher the last two quarters, is that almost all related to the Saudi joint venture? And, what should we look for moving forward?

David C. Mannon

We did have some expenses in relation to Saudi but that’s a balance sheet item. There’s three areas that we had some cost issues specifically in the stacking out of our rig 121 in Libya with the early termination of that contract. We had two rigs that went down in Colombia, one will be going back to work in mid June, the other one we’re currently bidding out right now. And then, the two rigs that we had in Algeria we had some increased costs mainly because we had some additional personnel on our rigs assisting with the startup operations which since then have been removed. We’ve gotten our training of our local crews up to a point where we don’t need these [inaudible] so those costs have gone down in to our budget op ex. Going forward those three items, you’re not going to see the cost going forward on those three items which is specifically Libya, Colombia, and Algeria.

Operator

Management there are no further questions at this time.

David Tucker

I would like to remind you that a replay of this call is available as noted in this morning’s release. Thank you again for your interest in Parker Drilling Company.

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