Parker Drilling's (PKD) CEO Gary Rich on Q4 2015 Results - Earnings Call Transcript

| About: Parker Drilling (PKD)

Parker Drilling Company (NYSE:PKD)

Q4 2015 Earnings Conference Call

February 18, 2016, 11:00 AM ET

Executives

Jason Geach - Vice President, Investor Relations and Corporate Development

Gary Rich - Chairman, President and Chief Executive Officer

Christopher Weber - Senior Vice President and Chief Financial Officer

Analysts

Byron Pope - Tudor, Pickering, Holt

Alex Nuta - Evercore ISI

Walt Chancellor - Macquarie

Ken Sill - Seaport Global Securities

James West - Evercore ISI

Operator

Ladies and gentlemen, welcome to the Parker Drilling fourth quarter 2015 earnings release conference call. As a reminder today's call is being recorded. And at this time, I'd like to turn the call over to Jason Geach. Please go ahead, sir.

Jason Geach

Thank you, operator. Good morning and thank you for joining today's conference call. Joining me today are Gary Rich, Chairman, President and CEO of Parker Drilling; and Chief Financial Officer, Chris Weber.

Let me remind everyone that during this conference call management may make statements regarding future expectations about the company's business, management's plans for future operations or similar matters. These statements are considered forward-looking statements within the meaning of U.S. Securities Laws, and speak only as of the date of this call.

The company's actual results could differ materially due to several important factors, including those described in the company's filings with the Securities and Exchange Commission. During this call, management will refer to non-GAAP financial measures and in accordance with Regulation G the company provides a reconciliation of these measures in its earnings release.

With that, I will now turn the call over to Gary Rich.

Gary Rich

Thank you, Jason, and thanks to everyone for joining us today for this update on Parker Drilling. I'll start with a review of recent activities, Chris will then discuss the fourth quarter's financial results in detail, after that I'll come back and share our outlook for our businesses.

Even though this continues to be a very tough environment, our fourth quarter operating results were slightly better than what we had anticipated, despite a 14% decline in revenues. Although, the revenues were lower across all of our segments, decrementals on our gross margins were better than expected, due to lower operating expenses.

Now, I would like to discuss our business segment performance. In our drilling service business we experienced lower utilization across all geographic market areas. In the U.S. Lower 48 Drilling segment our results were in line with our guidance, as we were able to more than offset a small decline in utilization with lower operating expenses.

In our International and Alaska drilling segment, our gross margin percentage was down about 250 basis points, as revenue declined 14%. Utilization decreased from 57% in the third quarter to 48%, due to rigs and rolled off contracts during the prior quarter in Latin America and in the Eastern Hemisphere. We also had lower project services revenues. We were able to partially offset these declines with lower operating expenses in the Eastern Hemisphere. Our O&M contracts in Alaska rigs continued to deliver stable results.

During the period, we made the decision to exit the Columbian drilling market. We have not been generating acceptable return to that market, as drilling in Columbia has slowed significantly in recent years. Operators face relatively high finding and development cost in an extremely lengthy permitting process.

We had three rigs deployed in that market. We will utilize some of the equipment from two of the rigs and we are bidding for work outside the country with the third rig. Our decision to not participate in the Columbia drilling market, does not impact our Rental Tools business in Columbia. Our drilling services backlog at December 31, 2015, was $291 million.

In our Rental Tool segment, the continuing decline in U.S. land drilling led to further reductions in demand and more price compression. The utilization index for our U.S. Rental Tools tubular goods fell to 42.8% for the 2015 fourth quarter, down from 48.1% for the prior quarter.

We were also able to partially offset steep declines in the U.S. land market with additional rentals in the Gulf of Mexico, which also helped minimize decremental margins in this segment. International Rental Tools revenues were lower, primarily due to lower activities in Middle East, driven by the reduced demand and project delays.

While 2015 was a challenging year for our industry, we successfully accomplished several initiatives aimed at navigating this difficult operating environment, including reducing costs, improving performance in our international Rental Tools business and generating free cash flow. The key takeaway is we are doing the right thing to manage through this market and our balance sheet remains strong with our yearend cash position of $134 million and liquidity of $322 million. By comparison, at the end of 2014 we had $178 million of liquidity.

Chris will now provide additional information about quarter, and then I'll return to offer some thoughts on the outlook for our business.

Christopher Weber

Thanks, Gary. For the fourth quarter we reported revenues of $148.7 million, adjusted EBITDA of $28.6 million or 19.2% of revenues and a net loss of $35.6 million or $0.29 per diluted share. Of this amount, $12.3 million or $0.10 per diluted share is related to various after-tax charges we outlined in our earnings release. Excluding these charges, the adjusted loss per share was $0.19.

I will start by segment review, with our drilling services business, where revenues declined 15.1% to $99 million in 2015 fourth quarter from $116.6 million in the third quarter. Gross margin decreased 24.6% to $20.5 million from $27.2 million, and gross margin as a percentage of revenues decreased to 20.7% from 23.3%. Revenues for reimbursable expenses decreased $1.7 million compared with the third quarter.

Regarding our drilling service as a business segment, U.S. Lower 48 Drilling reported fourth quarter revenues of $3.5 million, 41.7% lower than third quarter revenues of $6 million. This was due to lower activity, as our average fleet utilization decreased to 11% from 16% in the preceding quarter.

We had a gross margin loss of $2.2 million as compared with a $1.9 million loss in the prior quarter. Despite the decline in revenues, decremental margins were helped by lower operating expenses.

International and Alaska Drilling reported fourth quarter revenues of $95.5 million, a decrease of 13.7% from the third quarter's $110.7 million. Gross margin decreased 22.3% to $22.6 million from the prior quarter's $29.1 million. And gross margin as a percentage of revenues decreased to 23.7% compared with the prior quarter's 26.3%.

Excluding reimbursable revenues, our gross margin as a percentage of revenue was 29.7% as compared with 32.3% in the third quarter. The revenue decline is attributable to lower utilization in Colombia, Mexico and Kazakhstan. In addition, revenue from project services activities was lower due to the timing of certain project milestones.

Latin America utilization was 27% as compared with 44% in the third quarter. During the quarter, two rigs rolled off contract, one in Colombia and one in Mexico, and both were stack. Also in Latin America, operating expenses were negatively impacted by $1.3 million in inventory write-downs associated with our decision to exit the Colombia drilling services market.

In the Eastern Hemisphere, utilization was 54% as compared with 59% in the third quarter, as we had a full quarter impact at a rig that rolled off contracts in Kazakhstan in the third quarter. The lower revenue was partially offset by lower operating cost in Kazakhstan.

Now, I'll return to our Rental Tools business. Rental Tools reported revenues of $49.8 million in the fourth quarter, a 12.3% decrease from $56.8 million in the third quarter. Gross margin decreased to $13.8 million from $17.2 million. And gross margin as a percentage of revenues decline to 27.7% from 30.3%.

Revenues for U.S. Rental Tools decreased 10% to $28.7 million from $31.9 million. Gross margin declined to $13.1 million from $14.9 million. And gross margin as a percentage of revenues decreased to 45.6% from 46.7%.

The decline in revenue and margin are primarily due to lower drilling activity and pricing in the U.S. land markets. We did experience an increase in Gulf of Mexico Rental, and this increase along with lower operating expenses helped keep our gross margins relatively flat.

Revenues for international Rental Tools decreased 15.7% to $21 million compared with $24.9 million in the prior quarter. Gross margin decreased to $641,000 from $2.3 million. And gross margin as a percentage of revenues declined to 3.1% from 9.2%.

Revenue declines were partially offset by lower operating expenses. As Gary discussed, international revenues and margins were lower, primarily due to reduced demand and project delays in the Middle East.

Regarding other financial items. Fourth quarter G&A expense was $6.9 million, which is about $2 million lower than third quarter G&A of $8.9 million. The decrease was related to lower professional fees and employee benefit costs, most of which is not expected to repeat. As a result, we expect G&A expense in the first quarter of 2016 to be between $8.5 million and $9.5 million.

Our effective tax rate in the fourth quarter was 7%, which is lower than our 20% guidance due to discreet items as well as receiving no tax benefit from certain charges incurred during the quarter. Capital spending in the fourth quarter was $15.7 million. Our full year capital expenditures came in at $88.2 million, as we focused on minimizing our capital spend.

Our capital expenditures in 2016 are expected to be about $50 million. About 65% of our planned capital spend is for Rental Tools and about 30% is for drilling operations, with the remainder going toward corporate needs. Most of the CapEx is for maintenance purposes with some capital allocated for select investments in our Rentals business. We ended the quarter with $134 million in cash, up from $104 million at the end of the third quarter and we generated free cash flow during the period.

Total debt outstanding at quarter end was $585 million and our net debt position was $451 million or 51% of net capitalization. Measured as a multiple of EBITDA, total debt was 3.9x to prior four quarters adjusted EBITDA, up from 3.1x at the end of third quarter.

Our liquidity at the end of the quarter was $322 million, including the $134 million cash balance and approximately $187 million available under our revolver. The revolver remains unused, aside from letters of credit.

Due to the decline in commodity prices, we, like many in our industry, have sought covenant relief on our revolver over the past year. We amended our credit agreement in September 2015 to allow for covenant relief through 2017. But the degree of covenant relief negotiated last year may not be enough later this year, as the commodity price environment and the E&P spending outlook has continued to worsen. Thus we have begun preliminary discussions with our lead bank regarding further covenant relief and flexibility.

That ends the financial review. I'll turn this back to Gary for comments on the outlook. Gary?

Gary Rich

Thanks, Chris. In closing, I would like to give you our thoughts regarding the first quarter outlook for each of our three segments. Before I do that, let me say that we expect higher decremental margins in the first quarter, as some of the anticipated reduction in revenue comes from the lower day rates for drillings rigs in Eastern Hemisphere and lower rentals in the Gulf of Mexico, as well as the increase in G&A, Chris discussed.

For our U.S. Lower 48 Drilling segment, we do not anticipate any material changes to activity levels at current commodity prices. And consequently, low barge utilization levels and day rates should persist. We anticipate gross margin for this segment will most likely show a loss of between $2 million and $4 million in the first quarter.

In our International and Alaska drilling segment, we expect first quarter rig utilization to be about 45%, down from 48% in the fourth quarter with much of the utilization decline coming from the Eastern Hemisphere. Please note, we have two fewer rigs in our fleet, after removing the two rigs in Columbia from the count.

We anticipate a rig in Kazakhstan will be stacked, and as a result we will have three out of our five rigs working in the country. We are in discussions with our customer in Kazakhstan to extend contract terms for these rigs at potentially lower day rates. Also, we anticipate a rig in Kazakhstan will be stacked.

Kazakhstan remains a challenging environment with low market utilization for rigs, due to the macro and geopolitical factors. We expect activity associated with our arctic class rigs, operating in Alaska, and our O&M work to remain stable in the first quarter. As a result of the anticipated lower utilization in pricing, we expect revenues for this segment will most likely be between $80 million and $85 million with EBITDA margins near 20%.

In the Rental Tools segment, revenue and margins are expected to be lower, as the U.S. fleet count continues to track lower during the quarter. In addition, we expect our Gulf of Mexico activity, which typically generates higher margin revenue, to be lower as customers release rigs or postpone drilling programs, resulting in fewer rentals of premium tubulars. Given these factors, first quarter Rental Tool margins are not expected to be as robust as the fourth quarter.

As Chris mentioned, we are budgeting for a $50 million capital expenditures program in 2016. This is a 40% reduction from our 2015 capital spending, as cash flow management remains our top priority. We have the flexibility to lower CapEx even further based on market conditions.

I'd like to acknowledge the continued effort of our Parker Drilling employees, who remain committed to delivering value to all of our stakeholders, whether it's cutting cost, operating safely or winning work during these difficult times, our team is meeting the challenges head on and will continue to do so in 2016. Their efforts are being commended.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first caller from Byron Pope with Tudor, Pickering, Holt.

Byron Pope

You guys have grown your presence in the Gulf of Mexico rentals business quite nicely so far this decade. I appreciate the Q1 guidance as it relates to the Gulf of Mexico rental revenues. I guess, what I'm curious about, Gary, is could you frame for us, as we see deepwater rigs [ph] negotiates, is that best metric to watch in terms of gauging the order of magnitude of the impact on your premium rentals business in the Gulf or just curious as to how to potentially frame it and think about that business, as we progress through 2016?

Gary Rich

One of those rigs and now that they're sold. You there?

Byron Pope

I missed the first part of yours I think --

Gary Rich

So as you acknowledged, we get pretty high revenues for rig on those and now that there are so few rigs that are operating in the Gulf of Mexico, it's hard to say you can just use the change in rig count and extrapolate that, because it depends on whether its one of our rigs or a rig that one of our competitors might be on. So you can get disproportionate mix in the effect of revenue that is coming down from quarter-to-quarter.

I don't know how to describe it or give you a better indication, but I think that's a challenge that we'll all face. We still feel pretty good about our position though. And I don't want to send a message that we're any way concerned about the position we have there. We think we'll do well and maintain our market share.

Byron Pope

And is it fair to think that even if rigs aren't -- deepwater rigs in the Gulf are turning to the right, as long as your tubulars are on them, you're still getting compensated, is that fair?

Gary Rich

That's often the case, not always the case. And of course, operators are very astute as to what's driving continued expenses on their part. So they are not afraid to send -- get back into shore if rigs aren't turning to the right.

Byron Pope

And then for the international rental business, second question for me, just how do you think about the prospects for bore well construction related rental items as opposed to surface and tubulars, again, on the international rental side?

Gary Rich

Well, fortunately we are in a position that there is lots of customers that are welcoming our attention. I think that probably is because they are liking to have more competitors right now rather than fewer. And so that's given us some opportunities on well bore construction site that we're quite enthused about. And I feel pretty optimistic, we picked up not a huge contract, but a fairly sizable contract not too long ago in the Middle East that we're quite excited about, we will soon begin executing on.

Operator

And we'll go next to James West with Evercore ISI.

Alex Nuta

This is Alex on for James. So I guess starting with the liquidity position, why not use some of that cash on hand to buyback some of the notes and then use the credit facility just to run the business?

Gary Rich

When we did our amendment on the credit facility back in the fall, part of the amendment has a restriction on buying back our bonds in the other market.

Alex Nuta

And then, I guess, same with liquidity, are you guys seeing any interesting opportunities in the international market to go and potentially spend some of their [indiscernible]?

Gary Rich

Well, we certainly see from an organic point of view, opportunities on the rental business, even at the $50 million CapEx number that we put up there as a marker. And we actually anticipate there's still some component of that as growth CapEx on international rental tools, so there's that opportunity. The things beyond that, we'll just have to wait and see how the market plays out. We're not opposed to it, but I think a lot has to be -- a lot of people have to get their minds together before something other than that happens.

Alex Nuta

And, is there, I guess, on international rentals, any change that long-term plus-20% margin target?

Christopher Weber

Well, no. My objective still is there, but I think the challenge is forecasting how the international market is going to play out over the next several quarters. But long-term, I remain very optimistic and I shouldn't even say long-term, medium-term, I still feel very optimistic that that's achievable for us on the international rental business.

Operator

We'll go next to Walt Chancellor with Macquarie.

Walt Chancellor

I guess, to just to start with Chris, at that $50 million CapEx, and apologies if you hit on this in the prepared remarks I missed it, but would you expect to be free cash flow positive or around free cash flow positive as you all see the world this year?

Christopher Weber

We're not giving guidance on the free cash flow number for the year. But we're working hard to put ourselves in the best position to try to achieve that.

Gary Rich

We still have this management objective we've given to ourselves of doing everything we can to be free cash flow positive. It's going to be tough in 2016 now.

Walt Chancellor

And then I guess shifting to the backlog, and if you mention this and I missed it, apologies. How much of that drilling backlog is falling into 2016? I know, previously, it had been about 58% of a bigger backlog. But if you had any update there that would be helpful.

Gary Rich

Good question. We're kind of looking at each other. I think it's around 59%, I seem to recall from the latest figures that I saw, but --

Christopher Weber

68%.

Gary Rich

68%.

Operator

And we'll go to Ken Sill with Seaport Global Securities.

Ken Sill

I was wondering if you could, on the rental business you gave us an idea on what you're expecting in the Gulf of Mexico, which is going to be a tough market, could you give us an idea of what the split in the U.S. is between on and offshore? And how you guys see the onshore segment doing?

Gary Rich

Well, offshore is roughly somewhere around at 25%-ish, kind of a number of our U.S. rental business. And as far as forecast for U.S. land, we're still seeking that. I wish I'd knew what that forecast was. Things are changing so rapidly. Clearly there's lot of downward pressure on the U.S. land activity right now.

Ken Sill

So I guess, going back to one of the prior questions, we just assume that the U.S. rental business is going to attract the overall rig count?

Gary Rich

I think our land business is very logical to use the rig count as an indicator activity for the rentals business on land. As Byron was asking earlier, that offshore can kind of skew that one way or the other, and it really depends on whether we're on the rig that goes down or we're not.

Ken Sill

And I guess some of these markets, like Kazakhstan, I can understand been difficult. It seems like the former Soviet Unions doing relatively well with low oil prices. What would you kind of gauge the probability of able to get those idle rigs in Kazakhstan back to work over the next year or is that really dependent on our oil prices?

Gary Rich

It's a very difficult question. A good question, but difficult for me to give you specifics in terms of answer. I think that commodity prices, if they were to change, let's say, move back into the $50-ish barrel range, and I think it's the high likelihood that those rigs would go back to work. But not knowing for sure what oil is going to be at in the year, I don't know. We do remain very positive about the business that we have in Russia as well as the activity in Alaska. Those seem to be fairly stable. And it ongoing, there are streams of revenue for us.

Ken Sill

Well, if you guys figure out what oil prices are going to be tomorrow, let me know?

Operator

And we'll take a follow up from James West with Evercore ISI.

James West

Two more, starting with the Latin America drilling. I guess, now that you guys have exited Columbia, I assume that should lead to a lower cost base and potentially the margin impact isn't terrible with the rigs rolling offs as you're only in Mexico now?

Christopher Weber

I mean, we're definitely obviously with the winding down our drilling operations there, we're reducing obviously variable cost component just with the rig count that did come down there in the quarter, and then we're going to be obviously addressing our kind of our local office cost in the country. We're still maintaining our rails presence there, so it's not like we exited Columbia completely, but on the drilling side we'll definitely be adjusting our cost structure there accordingly.

Gary Rich

We have already made quite a few adjustments in Columbia leading up to this decision, just because of the market environment and everything else, so I think that we're already well down the road in terms of making cost adjustments in Columbia.

Christopher Weber

Year-on-year there is significantly lower cost in Columbia projected for this year.

James West

And then on U.S. rentals, clearly utilization was up, I guess for the past two months in the fourth quarter. Are you guys just dealing market share as a function of your reputation or is there anything else going on in the landscape?

Christopher Weber

Well, there is no doubt that our reputation and the quality that the team pushed out for the customer marches right down the road with the value proposition that we offer and we try to focus on here in the U.S. I think that we're very pleased with the utilization we have seen, but I don't know that we're going to be able to avoid the further declines in rig activity we're seeing right now. Again, I go back as to couple of other questions earlier, asked about activity indicators, I think rig activity is going to be a reasonable indicator for U.S. rental business.

James West

And then finally on the barge business, is there a point where you guys just say enough is enough and the business as a whole isn't really worth the headache?

Christopher Weber

No, not really. You don't have to go back in the too far past to see the types of margins and cash flow that that business generated, is capable of generating. We have done some studies to try and understand really customer situation there in that shallow water Gulf of Mexico and based on that analysis that we've done, we feel like there is still some very good prospects for our customers and consequently for us as well.

So we've taken the approach of absolutely minimizing our expenses as much as we possibly can. I think the team has done a pretty good job at that. And we're also trying to make sure that the rigs are put to sleep in a way that they're able to bring -- we can bring them back online without an extraordinary amount of cost. And again, I think the team has done a very good job of that as well. So we're very excited to continue to support that business. And we've got it very close to cash flow breakeven right now.

Gary Rich

And it's a business at around $70 million of EBITDA in 2014, so there is a lot of ups and downs in it.

Operator

Again, ladies and gentlemen, that does conclude the Q&A portion of today's conference call. At this time, I'd like to turn it back over to Jason Geach for comments and closing remarks.

End of Q&A

Jason Geach

Thank you. That ends our call for today. I'd like to thank you for your time and your interest in Parker Drilling. If you have any questions about material covered in our announcement and this conference call, please contact us by telephone or email. Goodbye and have a great day.

Operator

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation. You may now disconnect.

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