Parker Drilling Company (NYSE:PKD-OLD) Q1 2018 Results Earnings Conference Call May 2, 2018 11:00 AM ET
Nick Henley - Director of Investor Relations
Gary Rich - Chairman, President and Chief Executive Officer
Mike Sumruld - Senior Vice President and Chief Financial Officer
Paul Chambers - Barclays
Walt Chancellor - Macquarie
Greetings, and welcome to the Parker Drilling First Quarter 2018 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded.
It is now my pleasure to turn the call over to your host Nick Henley, Director of Investor Relations for Parker Drilling. Please go ahead, sir.
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 Mike Sumruld, Senior Vice President and Chief Financial Officer.
As a reminder, 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 within the Company's filings with the SEC. During this call, management will refer to non-GAAP financial measures. And accordance with Regulation G, the Company has provided a reconciliation of these measures in its earnings release.
I will now turn the call over to Gary Rich.
Thank you, Nick. Since our fourth quarter call, we have made some organizational changes to ensure our focus remains on strengthening the business.
Last month, we announced the appointment of Jon-Al Duplantier to the position of President, Rental Tools and Well Services. Jon-Al will ensure we apply all available resources efficiently and effectively to continue growing the rentals business.
I am pleased with the 2017 successes of our U.S. rentals team, delivering land based revenues that grew at two times the face of rig activity with sequential quarterly incremental margins of approximately $075. Additionally, our international rentals team has performed well in the face of a flat market to grow grows margin. Jon-Al and the entire rentals team intend to keep the momentum going.
To further augment this effort, Jason Geach, our previous Vice President of Investor Relations and Corporate Development will also be transitioning to play a key operational leadership role in our rentals business, reporting directly to Jon-Al. In so doing, we hope to leverage Jason's experience and knowledge to help build on the success of the rental tools business and further its growth.
Jennifer Simons, who formerly and very successfully started up and headed our Atlantic, Canada division will become our Vice President, General Counsel and Secretary. I'm excited to have Jennifer joining our company's leadership team.
With Jason's transitioning to his new role, I would like to introduce our new Investor Relations Director, Nick Henley, who introduced today's call. Nick has been with Parker for ten years and began his career in our Gulf of Mexico business. More recently, he worked as the Business Development Manager for our Arctic business unit. Given his extensive operations and business development experience within Parker, we're excited to have Nick heading up our Investor Relations efforts.
One more item I would like to address before discussing our first quarter results is our share price and our New York Stock Exchange listing notice. We are seeking shareholder approval to allow the Board of Directors to execute a reverse stock split to ensure we can meet the New York Stock Exchange listing requirements. As we believe, retaining our listing is in both the company's and our shareholders' best interests. Assuming our shareholders approve the reverse stock split during next week's Annual Meeting, we will have the means to address the exchanges requirements and continue our listing. Based on our proxy statement, a proposed reverse split show if implemented would be no less than one for five and no more than one for fifteen. This range gives us a degree of flexibility to meet the NYSE listing minimum requirement of $1 per share and adjust our stock price to current market conditions.
Yet to the value of the share price itself, we recognize the fundamental concern regarding the approaching maturity in early 2020 of our credit facility and of our August 2020 notes. We are considering various options to address both.
Additionally, we recognize that in contrast to many of our peers, we are in a substantially larger percentage of our revenues from international markets, which have not experienced the recoveries seen in the U.S.
Turning now to the first quarter, our results were down sequentially from the fourth quarter. This was primarily the result of two of our rigs going out contract and one going on a lower standby rate after having completed work toward the end of the prior quarter.
Looking at overall drilling services business, the U.S. lower 48 drilling segment was consistent with our guidance, both in terms of utilization and gross margin loss. Activity has ticked up recently as we currently have three rigs working, despite this level of activity, it is not enough for the business to generate positive gross margin and conditions in the bargeman business continue to be very challenging.
Our customer mix in this business includes those focus primarily on the shallow water Gulf of Mexico area which tend to be smaller companies. And those which participate in multiple U.S. basins which tend to be medium to large public companies. Well both customer types have communicated they have buyable return on capital prospects to drill in the inland waters and shallow water of the Gulf of Mexico, the larger customers are more focused on unconventional shale plays where they have substantially larger volumes of wells to drill and the smaller players seem to have difficulty attracting capital in the current business environment.
Our international and Alaska drilling segment revenues were down 7% sequentially, mostly due to 3 rigs I touched on earlier. The revenue declines for partially offset by a greater level of low margin reimbursable revenues. Gross margin was negatively impacted by the inactive rigs and by start-up expensesrelated to our rig in the Kurdistan region of Iraq. Partially offset by the fourth quarter inventory and asset related write-offs are selected drilling assets that did not repeat in the first quarter.
I have often spoken about our efforts to concentrate our assets into fewer geographic areas and to move a greater portion of our drilling business to the operations in management model. To that end, we work with our long term partner in Indonesia to convert our business into O&M arrangement. We believe this asset light strategy allows us to leverage our core capabilities while preserving capital for higher return opportunities and thereby achieving more favorable economics.
Turning to our U.S. rental tools business, revenues and gross margin declined due to the completion of projects in the deepwater Gulf of Mexico, partially offset by growing U.S. land activity. Revenues were down about 4% and gross margin was down roughly 17%.
Finally, our international rental tools business continued to exhibit quarter-on-quarter gross margin improvement as we were able to lower operating expenses even as we experienced a slight decrease in revenues. Overall, the first quarter was a challenge across most of our businesses.
I'll provide some additional thoughts on the outlook of the business after Mike's financial update. Mike?
Thanks, Gary. For the 2018 first quarter, we reported revenues of $109.7 million, a net loss available to common shareholders at $29.7 million or $0.21 per common share and adjusted EBITDA at $11.9 million or 11% revenues.
Now, I'll review our 2018 first core segment results compared sequentially to the 2107 fourth quarter. In our international and Alaska drilling segment, first quarter regularization was 33%, down from 40% in the fourth quarter. Revenues decreased by 7% from $60.6 million to $56.1 million. Excluding reimbursable which have a minimal impact on margins, segment revenues were down 13% from the fourth quarter.
Gross margin for the segment decreased 41% to $4.7 million from $8 million in the prior quarter. The main drivers for reduced revenues and lower gross margin were the impact of reduced activity in Alaska, Kazakhstan and Sakhalin Island, Russia, offset by the non-recurring inventory and asset related write offs in the fourth quarter that Gary previously highlighted.
In our U.S. lower 48 drilling segment, business conditions remained difficult as revenues, utilization and gross margin were effectively unchanged in the first quarter. Revenues were $1.4 million and gross margin with a $2.7 million loss. Our drilling services contracted backlog was up slightly to $246 million at the end of the first quarter compared with $241 million in the fourth quarter. Of the current backlog, 38% will be recognized in 2018 and 28% is projected in 2019.
In our U.S. rental tool segment, revenues decreased 4% to $34.7 million for the quarter from $36.3 million in the previous quarter. The decline in revenues was due to decreased offshore rental activity partially offset by increased land activity. Gross margin was $15.8 million compared with $19 million for the 2017 fourth quarter and gross margin as a percent of revenue decrease to 45% from 52% in the fourth quarter. This margin compression was a result of the shift in revenue mix from offshore to land activity and increased inspection repair expenses associated with return of offshore rental equipment.
In our international rental tool segment, revenues were down 2% to $17.5 million compared with $17.8 million in the fourth quarter. The decrease in revenues was mostly the result of lower activity in Europe and the timing of projects in the Middle East.
Gross margin with a gain of $360 which improved from an $11,000 gain in the prior quarter. This improvement gross margin was mainly due to lower operating expense.
Regarding other financial items, our first quarter G&A expense was $6.2 million, up from $5.1 million in the fourth quarter. This increase was mainly due to long term incentive plan adjustments made in the fourth quarter. We expect ongoing G&A expense in the second quarter to be around $7 million.
We reported a tax expense of $1.6 million in the first quarter on a pretax loss of $27.2 million. The reported tax expense reflects the mix of results in the jurisdictions in which we operate and our inability to recognize the benefits associated with certain losses as a result of our existing valuation allowance, our effective tax rate in a quarter was negative 6%.
For 2018, we still expect our effective tax rate to be between negative 5% and negative 15%. This is larger the result of non-cash valuation allowance that restrict our ability to recognize benefits associated with certain losses. We expect our 2018 cash taxes to be approximately $10 million.
Capital spending in the first quarter was $8.9 million. We anticipate 2018 capital expenditures to be approximately $60 million driven primarily by our rental tools business.
With regards to timing, the majority of our capital spending will occur in the second and third quarters of this year.
Total long term debt outstanding at quarter end was $578 million, which includes the principal amount the $585 million, less $7 million of an amortize debt issuance costs. Our net debt position with $467 million or 64% of net capitalization.
Turning to cash flow, we consumed $23 million of cash during the quarter and ended with a cash balance of $118 million. The majority of the decrease was due to the semi-annual interest payments of $21 million on our long term debt.
Total liquidity at the end of the quarter was $170.2 million consisting of $118.3 million in cash and $51.9 million available under our revolving credit facility. Available liquidity under our revolving credit facility increased $5.1 million since the end of the prior year.
That ends the financial review. I'll turn it back to Gary for comments on the outlook. Gary?
Thanks Mike. Looking at the second quarter, we expect both our revenues and gross margin to moderately increase from first quarter levels. For our U.S. lower 48 drilling segment, we expect utilization in the second quarter will improve slightly from the first quarter. As a result, we are projecting a gross margin loss between $1 million and $3 million.
We noted during our prior call, there was visibility on certain projects which would likely improve utilization for the second quarter. While we do expect some utilization improvements, we continue to experience a challenging price environment in limited contract opportunities. A brief uptick in permitting earlier in the year lacked follow through and Permian activities remain low for the quarter as many customers in this area continue to allocate their capital to unconventional basins and others struggle to attract capital necessary to execute drilling programs.
Our outlook is that further improvement in this business will likely be limited in the near to medium term. As a result, we are taking additional steps to deliver cash flow breakeven results in this segment.
In the international and Alaska drilling segment, we anticipate similar financial performance in the second quarter with revenues between $55 million and $65 million and gross margin in the mid-single-digits. For Alaska rigs, there's been no change to our outlook. We have one rig contracted to work through June and although there is the possibility for additional work later in the year is likely the rig will experience some downtime in 2018.
Internationally, we continue to feel more tenders in anticipated additional rigs or return to work in the second half of the year or early 2019. We still see uncertainty in Latin America. We're permuting issues in an upcoming election in Mexico have caused many of our customers to delay their drilling projects.
Gross margin will likely face pricing headwinds as many of the international markets remained weak, but significant ideal rig capacity competing for a limited number of opportunities.
In the U.S. rental tool segment, after the first quarter low, we anticipate incremental improvement, primarily in U.S. land activity with both revenues and gross margin increasing over the first quarter levels, well activity in deep water remains uncertain over the medium term.
For the international rental tool segment, we expect revenues to increase slightly in the second quarter, mostly due to an increase in well construction activity in the Middle East and Latin America. However, gross margin will likely remain flat due to a shift in revenue mix.
Based on our current projections, we believe our full-year 2018 gross margin, less G&A which is affectively adjusted EBITDA for our earnings release, will be in the range of $65 million to $75 million.
Generally, we continue to see activity in the U.S. landmark is supporting near term growth in our rental business. On the other hand, internationally E&P companies remained cautious with increased opportunities in tenders and progress, but limited current investment levels. So until a tipping point is reached that drives a broad based and meaningful investment cycle, we expect international conditions will remain challenging and pricing constrained.
As mentioned in previous calls, we diligently laid down rigs with the intent to ensure minimal capital is required to bring them back into service as the market recovers. And I do believe our team did a good job in this area. However, it is important to recognize that with the continuing deferral of activity, the risk of needing additional capital will increase as we return rigs to service. At present, we're allocating approximately 80% of our capital spend this year on our rental tools business.
Although we could potentially invest even more CapEx in the rental business today, we're electing to be prudent to preserve liquidity and maximize returns on capital. We also continue efforts to reduce cost and enhance efficiency that maximize financial flexibility to stay resilient and competitive in an uncertain market.
That concludes my comments. Operator, we are ready to take questions from the audience.
Thank you. We will now be conducting a question-and-answer session [Operator Instructions]. Our first question today is coming from Paul Chambers from Barclays. Your line is now live.
Yeah, thanks for taking my call. Gary, if I look at the kind of the bakers used in inland waters, rig count, it's - I guess last week it's five kind of as a proxy for the barge business. That's towards the higher end of what we've seen really since early 2015, so I just want to get a sense and compare that to your comments is it that the smaller operators are getting more aggressive on pricing relative to where you're bidding or what can you tell me on that?
Well, thanks for the question, Paul. Our Q1 average rig activity in that shallow water Gulf of Mexico was better than it was in Q4. And as I mentioned we expect to continue to increase or slight uptick in that activity in Q2 relative to Q1. And as I stated also, we have three rigs that are active today. So if you have a view of five that were in the market shows that three out of five or Parker rigs in that context.
The question is just how significant is the rig activity going to be going forward. And unfortunately I think this is one of the areas that I've been a little disappointed in not for our team and what they've done and what they've captured, because I think they've captured the great opportunities that are out there. But what we're seeing is dynamic where we had a lot of projects that have been on the table there were 40 days' worth of drilling activity that we expected in Q1 that didn't materialize.
And it was because of projects that got differ, they got cancelled at the last minute. And I think in a large number of those instances it's an issue of companies not getting partners and that fund projects to move forward. So we think we'll participate fine in the activity, we're very competitive and able to do it. I just don't know how much activity is going to be there.
Okay. Thanks for that. And then of follow-up, can you - add some clarity on kind of the change in the business relationship in Indonesia, is it - did you sell the rigs and you're getting a contractors or is any more clarity you can add on that arrangement?
Yeah, for a long time, we've said that Indonesia isn't a significant influence on our overall revenues and margin. And what we saw in this case was an opportunity to take two rigs that are very, very old rigs and effectively sell those and transfer ownership to the joint venture partner that we had there. And then on the back side, retain an O&M contractor or operations and management contract to continue to support that operation. It's a business model that we continue to feel is one of those right ways to go particularly in a lot of these international markets.
Okay. Great. Thanks for that.
Thank you. Our next question today is coming from Walt Chancellor from Macquarie. Your line is now live.
Hey, good morning.
Good morning, Walt.
Gary, you got pretty good visibility into leading edge demand for U.S. drilling just as a function of the rental tools business. Just curious about what you see in terms of potential further upside to the rig count here in the U.S. were up about 100 rigs year-to-date, do you think we could add another 100, what's your sense of the magnitude of the remaining growth out there, if crude stayed supported?
Good question. Well, I hesitate to pick a number of rig increase, but I do know that from the conversations we have with customers and their interest in bringing us on to additional rigs, there must be some additional demand out there for further rig increases for more today. I don't know how high that's going to go. But we're certainly seeing that from customer's discussions it has a tendency probably to go up higher rather than lower.
Okay. Fair enough. One side opinion on too much on that. And then the commentary on pricing one of your competitors in the international drilling market is out today or yesterday afternoon also positive comments about demand and drilling internationally. I guess maybe some slightly more constructive commentary on pricing though. The Mexico issue I understand some of the delays there but across these other markets, what are you seeing in terms of Kazakhstan and Kurdistan and why that difference, why are you still seeing that softer more competitive pricing market?
I like that dynamic in Kurdistan in particular is that you just got a very large number of vital rigs and so as customers go after the market to look for different drilling contractor to supply future activity, there's a lot of interest in trying to get your rig back to work. Now fortunately, we've got two of our three rigs there, so we're two thirds 66% utilized at the moment. And I think that's a real credit, because I don't think there's anybody else in that market that can argue that level of activity at this point. But nonetheless it still is a very competitive market from a pricing perspective.
We've had to work hard to defend our pricing in the face of others that are argued or offered lower prices than us in that Kurdistan market. And I think that's probably a situation that will play out a lot on other countries as well where you have excess rigs for the level of activity is ongoing right now.
Okay. Fair enough. And if you don't mind, also sharing dynamics in Kurdistan, what you're seeing there?
Kurdistan stands a little bit from market in we're down to one rig and that's operating right now. We've mentioned that we've got a rig that came off in Q4, there's a big reason why we have the delta from Q4 to Q1. But if we look forward towards the end of the year, I actually think that we're probably going to have three rigs probably operating in Kurdistan before we get to the end of the year. I feel very good about our team. I'm actually headed to Kurdistan here in a few weeks so.
All right. Well, thank you very much for all the color and safe travel, Gary.
Thank you. That concludes our question-and-answer session. I had to turn the floor back over to management for further closing comments.
That is our first quarter earnings call. Thank you for your time today and your interest in Parker Drilling. Please contact us if you have any questions regarding material covered in our earnings press release or during this conference call. Good bye and have a great day.
Thank you. This does conclude today's teleconference. You may disconnect you lines at this time and have a wonderful day. We thank you for your participation today.