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Parker Drilling Company (NYSE:PKD)

Barclay’s CEO Conference Call

September 6, 2012 11:45 am ET

Executives

Robert L. Parker Jr. – Executive Chairman, President and Chief Executive Officer

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

Unidentified Analyst

Okay. Welcome back everyone. Up next we are pleased to welcome back to CEO Energy Conference Parker Drilling. Parker is one of the leading providers of extended-reach-drilling, the global oil field market, and is a company with a leadership position and complex extended-reach-applications in harsh environments. Joining us today and speaking for the company will be Bobby Parker, Parker’s Executive Chairman, President and CEO.

Bobby joined the company in 1973 and has served as Chief Executive Officer from 1991 to 2009, and was appointed Chairman of the Board of Directors in 2006. Please let me welcome back Mr. Robert Parker Jr., to the CEO Energy Conference. Bobby?

Robert L. Parker Jr.

Thank you very much. Glad to be back. And good morning everyone, I appreciate your interest in Parker Drilling Company. Today with me I have Kirk Brassfield, our CFO; and also Rich Bajenski, down here our Director of IR, and then somewhere in the back of the room, back there Marc White, who runs our Rental Tool Division. And I’m glad to have all of you here for the presentation.

I’ll also comment to that our written quotation is available in the back of the room, and I will not be following that today, so take it with you to catch up with other segments of our company that I will not be covering.

I will start off today with forward-looking statement again, just to make sure you’re aware of this, and with our SEC filings, you’re aware of the risk statements and risk identifications that we have in there. I will go from there to quick look at our strategy for our company, obviously you can see across the top line what our strategy is, and then our competitive strength as listed down below is safety, which is primarily one of the strongest suits of our company. Training that ties into safety; technology, the things that we do around the world that we will talk about some, and then performance in terms of our drilling and value that we create for our customer and through our rental tool division, what we’re able to do again for our customers in those areas.

Talk about our business segments, just as a highlight very quickly. We have five business segments with rental tools, which I will talk about U.S. barge drilling business, which is doing very well right now. Our Alaska division is listed under U.S. drilling and I’m going to talk about that today. Our international drilling, I’ll give a quick update there and then technical services. Those are our general business segments that we report on our company and then down below there you can comment on what’s up and what the definition of what those segments are.

I’ll start with just brief update on international. International has still been a weak point for us. International has not recovered since the financial issues in late 2000s. We’re still working on getting the international utilization up, Kazakhstan in area that still is a issue for us, where we have nine rigs located and only two rigs working, and we talked about those selling rigs there and moving rigs out of the country to more active areas, and we’re continuing to pursue both of those but just continue to hamper our international utilization.

Our look forward there, just so that you’re aware of our utilization here for a while. You can see where it’s continuing to be weak and we actually don’t forecast much of improvement, in fact we have to forecast continued weakening into the first quarter next year still be aware of that. We have a new team on marketing they’re charged with turning this issue around addressing this issue.

We’re seeing a record number of tenders coming right now, so we are optimistic on this turning around sometime during 2013 and just as a warning here in the near term that we’re seeing further weakening, but don’t think we’re not addressing the issue but we certainly are through our efforts and through our tenders that we receive and respond to.

Today’s talk is going to be a little different. Outside of international, I’m going to talk about primarily Alaska, our AADU rigs for BP, and the status of those, and then our rental tool starts, a rental tool company, where we are there with the U.S. land drilling business.

So we’ll start with Alaska. The AADU Prudhoe Bay rigs for BP, there is a picture of them right taken last Tuesday upon the slope, and showed you what status there or what they look like right now in our yard, these rigs are still in rig up, and I’m going to cover that.

First, I want to make sure people are aware of where we’re talking about, so we’re going to go to Alaska here with the slide, and talk about Prudhoe Bay, which is the northern of the slope there shown in the orange color. The pipeline runs right up through there, and these rigs are really targeted for the main Prudhoe Bay operation for the BP side of the field, ConocoPhillips operates the other side of the field, this is oil, this is planned long-term drilling, so these rigs will have a lot of drilling to do once they get in the field and start working.

To the west of there or Alaska’s NPRA that’s a new area in Alaska that’s been opened up some by interior department recently, that will also take additional rigs to work in the NPRA, then the far left side offshore is a area where Shell is starting their drilling program hopefully very soon.

They gives you an idea of where these rigs will be and little bit about the state of Alaska. Working conditions in Alaska, you’re probably aware are very tough. Extremely cold winters, lot of wind, warm summers with mosquitoes, so these rigs has to be fully (inaudible) if they work 24x7 year around, where all the exploration rigs in Alaska only drill in the winter, these would be development drilling rigs work year around et cetera, no matter what’s conditions, you certainly get the extreme, 70 below winters with high winds 40, 50 miles, no winds and lot of blowing snow around up there. So there’s some of the tough working conditions on top of that you have the wild life as seen in a picture there, we’ve got bears over Alaska too and some of these bears get into the camps, which makes it little interesting, make sure you stay awake and keep your eyes open.

You’ve got black bears and that they’re furious and they may just look, avoid you more than anything else brown bears, which is a picture here of a brown bear is more they challenge you a little bit more and then lastly polar bears.

They’ll hunt you so and they were around the camps too and in the camp building, so from time to time. So and when you work outside on the rigs which is not often, you have polar bear watched just to make sure that your body don’t get eatened up, so it gets to be really interesting there, so besides the bears though and I want to go back on that picture again that picture was taken last Tuesday, I was up on the Slope Monday and last Monday afternoon and this is a brown bear (inaudible) bear walking across the (inaudible) in front of the rigs there. So it’s really interesting the wildlife you see up there.

And we talk about the contract these rigs were contracted in 2008 to be built for futile base for BP and for five year contracts with five year options. So that’s the underlying assumption here or the underlying contract. These are brand new state-of-the-art type rigs, I don’t know if many of you have heard Pete Miller talked in National Oilwell yesterday. These has a lot of the automations that he mentioned on the rigs that they build right now, lot of equipment here is National Oilwell. These rigs self move between drilling pads and then between well heads on to each pads.

And they’re also designed to get over any kind of well head to do work over work, these are the new top rigs that needed to be on the Slope right now. Most of the rigs on the North Slope are over vintage to back in 19, in the 1980 series and earlier 1990, so they need to retool and this is some of the efforts that are going through. These rigs were delayed, we had construction issues, some engineering issues and then rig-up issues on the Slope due to the factor of prototypes. All accounted for late deliveries and cost overruns that we've talked about frequently, the good news is we're coming to the end of this rig-up part and we’ll start operation soon that’s a big change for our cash flow these rigs have been taking cash and now they’ll be creating cash for us.

The first rig has gone through the acceptance testing for BP and now it's in the punch list to fix up, once it’s been verified if the items have been fixed the rig will go to work, we said sometime in the fourth quarter and we start as five year contract in generating revenue. The second rig follows behind that, they want to get the first rig up and going, before the second rig starts to see punch list or acceptance testing. Obviously, everything we found on the first rig, when issue is being addressed on the second rig.

Comment about economics the rigs will generate $250 million over the contract; $25 million per rig per year on revenue, gross margins are in the high 20% area or a total of two rig totals of $12 million to $15 million per year. A little or no earnings due to the high interest and depreciation, so this is something recapturing cash for a while, and after the first five years, we certainly have the chance to sit down with BP and hopefully renegotiate some rights at that time.

Our goal is to grow this market and obviously we want to avoid the construction and the delay and cost overall issues we had, but we're dedicated at this market and realize the needs to new rigs out in this market, so we're going to continue to push for that and then people wise, when I was on the Slope of this last trip, one of my job after becoming getting back in the CEO role is to get our relationship with BP back-up and going and it is great shape right now and essential BP greatly accept these rigs, they want these rigs, our people’s attitude on the Slope is really positive. Rig up crews are, they are ready to go to work and drill. These guys are up there, they’re not constructing people per se, even though they had to do a lot of that, they want to go to work. And I was really impressed with the enthusiasm, the passion to get these rigs out, and go to work and then show people what these rigs can really do in terms of safety, efficiency, that will be gained for BP on these wells, both moving between wells and drilling these wells.

There is lot to show that these rigs can do is like say state-of-the-art and I think this will create demands for more this kind of equipment out there. So I was really excited, the Parker passion really comes through with the crews, they are really proud of what you’re doing, and really want to show the world what all can be done up there. So again excited about that and glad to have this behind us and move forward and get these rigs on revenue.

Now I’ll talk about the Rental Tools company. Quail Tools, we purchased Quail Tools in 1996 in November, so therefore we had build this company, commenced by the President lately, we bought this company. But we’ve done a lot of buildings since we’ve had it, sure we didn’t tell the previous owner Bob White that he didn’t build this company because he did.

And by the way Bob White there’s a reason this company is called Quail Tools that is where it gets his name. I want to (inaudible) on this family, 16 years later, after the acquisition of Quail Tools, the family that we bought this from in cash is still with us today and are working extremely hard to grow this business and are still very involved.

Now the founding father Bob White retired, but his sons and family members and team that he had in place when we bought the company have stayed in place. And they’re still there today and that’s very unusual for a public company to buy a family company for cash and still have the family members. They’re running it with the passion, and desire, and the know-how that they have.

I said lot about Quail Tools of the people and said a lot about our company too in a way, we’re heading into that relationship. Rental Tools, what they rent primarily is tubular, that’s drill pipe and other tubular items and blowout preventers choke manifold pressure handling equipment.

The key to this model that Quail has is that, no one is on location for Quail Tools, they have no crews that need to be on location when these items are used, therefore they keep their overhead low, they don’t have a lot of people who let go or hired during the ups and downs of the industry, so they are able to do this very well, and that model has worked very well for Quail.

So these are stayed with items are taken, turned to the operator, say here is the drill pipe, here is your blowout preventer, we’ll come pick it up, when it’s done, figure out what if there is any damage or wear and tear that we can build forward and then go on and it’s been a clean business model and I want to stress that that no one is on location.

The expansion of Quail Tools has to obviously with the unconventional shale plays. Quail now has seven locations around the U.S. seven stores and service centers that relate to the shale plays, all of them strategically located, so they are pretty much in the debt center of each of their plays, now that’s critical for Rental Tools business, we need the customers like to get reaction when they call, the reaction quickly, if they like that item brought out there within about a four hour time period is a rule of thumb, not much later, 24x7 live person on the phone, anytime day or night, anytime, holidays Quail has to be there, nobody to answer the phone we have, no one to send out and no one else is needed to connect your equipment they rent.

Their knowhow, their experience is very much valued by the customers they work for, so just because they need a certain choke manifold or BOP doesn’t mean that’s all the customer needs, they may need something other things to hook it up and make it go well and that’s what Quail note, of course the more they can rent, the better. Customer service, customer relationship is what drives the Rental Tools business. It’s a who do you know business and that personal relationship with the folks at Quail and the customers that they work for is extremely important.

And the quality of what they turn out, when they get a BOP or drill pipe back and we get those items back in, how we handle it, service it and have it checked out for the next operator, next job it was important. If you look at the horizontal drilling and the effect that’s had on Rental Tool companies have been more pipe rented through that, the contractor as in Parker Drilling is hesitant to use their own pipe because of the damage that did to pipe going through the term.

Rental Tools companies have a much easier time selecting on that, so they a lot of the Parker’s Rental Tools has been a real growth market for the Rental Tools companies and certainly Quail Tools to. And that’s something that they have really benefited from and the more of the horizontal drilling, whether it’s shale plays or just normal oil basins like Permian Basin where they’re doing more completions horizontally, the (inaudible) is focused for Quail Tools, so we continue that margins and growth, Quail consistently in the last few years has been EBITDA margins of 65% to 70% margins.

It’s a very high margin business, since we bought this company in 96 they’ve had an annual compounded growth rate of 14% for revenues and 13% for EBITDA, so we’ve been able to really continue to grow this company along with the management of the company.

One of the critical things, we look at and you see the U.S. rig count slowly pits falling off with the pricing certainly for natural gas and then the question about liquids and oil. So we’ve seen the weakening in the U.S. rig count the foot is drilled has stayed very strong, that’s something we track, this is the market really for Rental Tools how much footage drilled each year, this lags a few months, but watching the footage drill to us is more important in the specific rig count, both mean something but this the footage drilled is really critical. Now there is a current and oversupply of drill pipe in certain areas, drill pipe has a nine months lead time, seven to nine months lead time to order.

So, companies that first all business going on really well, order pipe is certainly we have and delivery is still coming in certainly we've cut off ordering new pipe right now for the U.S. land business as others do, this helps corrects itself in time and affected about 15% of the inventory each year as either damaged or worn out or odd and so it’s get retired, so I want you quit ordering this self corrects.

We’ve seen specific areas in the country where pricing has come under pressure either Williston Basin, the Bakken area is because people send a lot of pipe up there certain other areas have not been affected yet, but there is an effect with a flattening of the rig count et cetera. But this is when you find that how good you are. This is when you find out your relationships, the reputation you have with the customer, and as they slowdown their work, you keep your market share, gain market share, and this is again when you have to prove yourself.

Business is real easy when everything is picking up. Other things that Quail is able to do obviously is the offshore, they have an offshore market we’ll talk about international about 5% of the revenues has come from international and in work over where it also offsets a slowdown in drilling, at any time drillings slows down work over fix up, as they say work over for ever.

Couple of other comments on equipment, as I mentioned Quail rent surface BOP’s not subsurface, they are going to be some change in requirements potentially out there, where operators will require original equipment manufactured parts only OEM Quail hold a line up of the BOPs as OEM right now and so they’re picking that business from folks who is BOP stacks are not certified for OEM and that could help Quail going forward as well. And it’s another item they do, they started work for Exxon many years ago, when the family started the business and Exxon has always demanded OEM, so this is something they are set up in very good shape for.

Coming back to deepwater again, Quail has a good business with casing handling tools and also completion strings, these are items heavy weight drill pipes that actually holds these casing down. If you’re in 9000 foot water and the operator wants to run the casing in hold, they better have something to hold and onto run it down to that depth and then (inaudible) on either line or the string at the bottom, where it’s going to be set submitted and then unscrew the pipe and bring it back up. Sounds simple it’s it’s the critical part though.

You don’t want to drop the casing, this is high string drill pipe that never torques, and they never want to drill with it. They want all the string in holding these extremely heavy loads of casing.

So that is another item for Quail Tools that they have in the deepwater business, it has been very good for them. And that’s one of the CapEx items you’ll have next year going forward is a cut off drill pipe items (inaudible) they’ll go into the Casing Tools and casing strings excuse me on the strings to add to that, because of the deepwater activity shortly to go from Mexico in terms of the shelf and in terms of the deepwater has picked up and have lost some of the land business and then along with Quails International. Quail would like to have a place International location, probably built on a place Parker is now and so we’re hopeful to find something this next year to start international operations with the plays there.

Last comments on Quail was they they’re people like Parker people they bleed Quail Tools, they live Quail Tools, 24x7 is most dedicated marketing and service organization, I’ve ever seen. They are in contact with our customers daily, they know their customers well and this is what drive when they order or not order equipment and how they service their customers. And this is a, hats off to the way they run their business and the way they react to their customers. And you talk about our service business, you talk about Quail Tools they are an absolute fantastic service business.

I’m going to have Kirk Brassfield come up and comment briefly on our capital structure. And I want to thank you all again and I mention to you again the presentations, the normal presentations are available in the back of the room, Kirk.

W. Kirk Brassfield

Thank you, Bobby. And if you are looking through the presentation, some of the financial information is on slide 14 and 15 that I’ll be referring to. And really, when you look at Parker Drilling, if you look at business segments that Bobby talked about, you have the international drilling, you have the Rental Tools, you have the barge, and you have a U.S. drilling through the Alaska.

And when you look at that you see a mix and you see, you see that and what we’ve been seeing in the last two, three years since the 2009 crisis is really a focus in the growth on the U.S. side. The EBITDA has grown substantially as you’ve seen through Quail. But more importantly, we didn’t talk a much about this yet, but the barge business, if you look at the barge business history, you go back to 2007, the barge business generate $130 million of the EBITDA.

That was in a very strong gas price market, and you saw a very significant push there on the barge side in drilling. When you hit 2009, you saw a very huge change were it dropped down to about $1 million, so a very volatile industry. The thing I’d point out now is we’ve seen since that point, we’re now working a 11 old 11 rigs that we’re marketing, in the barge segment. The total marketplace in 2007 was about 46 barge rigs, now down to 26 barge rigs. We have 13 rigs, 11 that we’re marketing and two that need to have some work done on before they become marketing, but what we are seeing and what we have seen during this past year is increasing average day rates, increased every quarter and we do have a information on our site which shows that tracking of those barge rigs into average price.

So now we are getting back up, where we will be in that $45 million, $50 million range of EBITDA for that kind of market. So it’s been a nice turn around but we are still missing one item there which is the natural gas price.

And that’s what we had in 2007, but we are seeing significant oil drilling and liquids drilling in that marketplace and continue to even through a period that is easily a little slower period which is August and September when you traditionally have Hurricanes or seen steady 100% utilization.

Bobby talked about the Real Tools that has been the other street over the last year and a half and when Bobby talked about that one thing we can’t point is when you look at that going back when we bought Quail, they had $15 million of EBITDA. Last year the reported EBITDA was approximately $155 million, so you see the growth that has occurred in that business which is expanding from two locations to the seven locations during that time and I think Bobby mentioned the growth that’s occurred there.

That has been a very strong provider, obviously the weak point is we talked about the international side in 2009 the reason we have that the different businesses international was the strength of the Parker name.

That is where the bulk of the EBITDA was generated and that the three businesses work up very nicely from the strategic point of view that they work on different cycles.

So that has been a very much of plus as it shifted around now where the U.S. side of the business has been the strength, when you look at the capital structure of Parker we are in I think that’s on slide 15, we are in a very strong position, we’ve done very well in managing our debt over the last six years and reducing it down to that low 40% debt to total cap. We have $425 million in 9 1/8% senior notes, and we have just under $50 million of term notes, that’s part of our revolving credit facility which comes due in May of 2013, so that term note will be paid down as we get to that point.

We’re looking hard and we’re renewing the revolving credit facility, they would be very similar size wise to the one we had now, currently, we have $80 million revolver as part of that facility, and we had $250 million term notes that were available under that revolving credit facility, I think we’d still be in that total $180 million range as we look toward refinancing or renewing that facility.

One thing I do want to talk about is capital, if you look at 2012 on that sheet, we estimate, we’ll spend about $170 million, one thing as Bobby talked about, we’re reducing the spend to our rental tools segment, I think as he noted on that page and shows about $70 million, we had been estimating $70 million to $80 million for 2012, we have bought that down by $10 million and then so that’s reflected, the other big piece that we have as part of that 2012 is $65 million, which is major projects, almost all of that relates to the Alaska rigs.

Now look forward to 2013, when we get in 2013 I would expect that we will have about $60 million for Quail, our Rental Tools segment and then we will obviously not have the $60 million and $65 million we spend on the Alaska rigs, so that will give us some free cash flow going forward, not only where we’d not be spending that $60 million to $65 million on Alaska, but we’re also be generating $12 million to $15 million of EBITDA from those projects as they go online. So that would be a nice changes, so we look ahead, we would have Quail plus our maintenance capital on our drilling rigs of about $30 million, which gets you to the total $92 million to $100 million and after that we will be looking about how to grow the company and how to expand with major projects but we do plan on staying within the cash flow that we expect to generate in 2013. So, I just want to really give you a quick rundown of our financial position, I believe that we have a break out session if you have any questions.

Question-and-Answer-Session

Unidentified Analyst

(inaudible)

W. Kirk Brassfield

Okay.

Unidentified Analyst

Thank you, I kick things off. I think you’ve touched on the Kazakhstan that are, Kazakhstan rigs that are idle right now, may be if could just update us on where you are in the process of evaluating, what you might do with those units?

Robert L. Parker Jr.

Sure [Jack]. We are in the process as I mentioned on Kazakhstan, which we had a nine rigs working there, obviously, if we can get more work there we will, but our dedication is to reduce our footprint or get out, I'm sure we're working various lines at the same time selling oil, selling part, moving various rigs to other markets, and we have nothing to announce right now but we're continuing to work that full speed ahead, it’s been a while that we've been in this situation there, so we're really working this hard to affect this one way and others who will have less rigs in Kazakhstan and certainly as they go elsewhere, they would, our plans is obviously for them to go to work in better markets. Some of the rigs are suitable for sale, some of them are we'd like to move out and keep and all that’s been on what's on the table and what's the best value we can bring from any transaction there for Kazakhstan, so that’s the best I can give you right now.

Unidentified Analyst

Okay, great. Management will be available in the Liberty 3 breakout room for further questions. Thank you, gentlemen.

Robert L. Parker Jr.

Great. Thank you.

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