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PKD > SEC Filings for PKD > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for PARKER DRILLING CO /DE/

Form 10-Q for PARKER DRILLING CO /DE/


2-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

DISCLOSURE NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q contains statements that are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). All statements contained in this Form 10-Q, other than statements of historical facts, are forward-looking statements for purposes of these provisions, including any statements regarding:

stability of prices and demand for oil and natural gas;

levels of oil and natural gas exploration and production activities;

demand for contract drilling and drilling-related services and demand for rental tools;

our future operating results and profitability;

our future rig utilization, dayrates and rental tools activity;

entering into new, or extending existing, drilling contracts and our expectations concerning when our rigs will commence operations under such contracts;

growth through acquisitions of companies or assets;

organic growth of our operations;

construction or upgrades of rigs and expectations regarding when these rigs will commence operations;

capital expenditures for acquisition of rigs, construction of new rigs or major upgrades to existing rigs;

scheduled delivery, commissioning and subsequent operation of our AADU rigs under the terms of our agreement with BP Exploration (Alaska) Inc.;

entering into joint venture agreements;

the outcome of pending or future legal proceedings, investigations, tax assessments and other claims;

the availability of insurance coverage for pending or future claims;

the enforceability of contractual indemnification in relation to pending or future claims;

our future liquidity;

availability and sources of funds to refinance our debt and expectations of when debt will be reduced; and

compliance with covenants under our debt agreements.

In some cases, you can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "outlook," "may," "should," "will" and "would" or similar words. Forward-looking statements are based on certain assumptions and analyses made by our management in light of their experience and perception of historical trends, current conditions, expected future developments and other factors they believe are relevant. Although our management believes that their assumptions are reasonable based on information currently available, those assumptions are subject to significant risks and uncertainties, many of which are outside of our control.


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The following factors, as well as those factors set forth in Item 1A, "Risk Factors", in our Annual Report on Form 10-K for the year ended December 31, 2011, and any other cautionary language included in this Form 10-Q, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements:

worldwide economic and business conditions that adversely affect market conditions and/or the cost of doing business including Euro country failures and downgrades;

our inability to access the credit or bond markets;

U.S. credit market volatility resulting from the U.S. national debt and potential further downgrades of the U.S. credit rating;

the U.S. economy and the demand for natural gas;

low U.S. natural gas prices could adversely affect U.S. drilling and our barge rig and rental tools businesses;

worldwide demand for oil;

fluctuations in the market prices of oil and natural gas, including the inability or unwillingness of our customers to fund drilling programs in low price cycles;

imposition of unanticipated trade restrictions;

unanticipated operating hazards and uninsured risks;

political instability, terrorism or war;

governmental regulations, including changes in accounting rules or tax laws that may impact our ability to remit funds to the U.S., that adversely affect the cost of doing business;

changes in the tax laws that would allow double taxation on foreign sourced income;

the outcome of our investigation and the parallel investigations by the SEC and DOJ into possible violations of U.S. law, including the FCPA;

adverse environmental events;

adverse weather conditions;

global health concerns;

changes in the concentration of customer and supplier relationships;

ability of our customers and suppliers to obtain financing for their operations;

ability of our customers to fund drilling plans with low commodity prices;

unexpected cost increases for new construction and upgrade and refurbishment projects;

delays in obtaining components for capital projects and in ongoing operational maintenance and equipment certifications;

shortages of skilled labor;

unanticipated cancellation of contracts by customers or operators;

breakdown of equipment;

other operational problems including delays in start-up or commissioning of rigs;

changes in competition;

the effect of litigation and contingencies; and

other similar factors, some of which are discussed in our Annual Report on Form 10-K, elsewhere in this Form 10-Q and in our other reports and filings with the SEC.


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Each forward-looking statement speaks only as of the date of this Form 10-Q, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Before you decide to invest in our securities, you should be aware that the occurrence of the events described in these risk factors and elsewhere in this Form 10-Q could have a material adverse effect on our business, results of operations, financial condition and cash flows.


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OVERVIEW AND OUTLOOK

Overview

Parker's operating results for the 2012 third quarter demonstrate the effects of our complementary business mix and geographic range. The continued growth in drilling activity in the Gulf of Mexico (GOM) benefitted both our U.S. Barge Drilling and Rental Tools segments, nearly offsetting the impact on the Rental Tools segment of the slowdown in U.S. land drilling. Similarly, while the overall utilization of our international rig fleet declined, the decline was moderated by increases in Mexico and Algeria offsetting lower utilization in Kazakhstan and Colombia.

As a result of slowing U.S. land activity and suppliers' additions of previously ordered drill pipe, our Rental Tools segment experienced more competitive pricing and lower utilization. It responded to the change in market conditions and remains a profitable business. The U.S. Barge Drilling segment increased revenues and gross margin as a result of strong fleet utilization and a higher average dayrate.

As expected, our international drilling operations experienced lower utilization for the Parker-owned rig fleet, while O&M contracts produced lower segment earnings on higher revenues, primarily due to the transition of contracts in Sakhalin Island, Russia. Combined, these led to reduced revenues and segment earnings for our International Drilling segment.

Preparation for the commencement of operations for our two Arctic Alaska Drilling Unit (AADU) rigs resulted in a gross margin loss for the U.S. Drilling segment. Though revenues will not be generated until each rig is operating, we have been incurring operating costs as we prepare the rigs for the customer. Additionally, since early in the third quarter of 2012, we began incurring depreciation expense and ceased capitalizing interest costs related to one rig when we presented it for acceptance testing early in the third quarter.

Outlook

The recent trend in U.S. land drilling is expected to lead to further reductions in demand for rental tools. Having cut back our purchases of tubular goods, we expect our inventory of rental tools, and that of the industry, will adjust to market conditions and this business will sustain its traditionally strong earnings and cash flow. In addition, we believe the growing fleet of deepwater drilling vessels in the GOM will continue to create additional business opportunities for our Rental Tools segment.

There is solid demand for drilling in the shallow waters of the U.S. GOM. We believe current and forecast prices for oil and natural gas liquids will continue to support demand in the GOM barge drilling market around current levels. Further development of deep gas plays in this area would provide additional growth opportunities.

Current contract terms and market conditions specific to our international markets are expected to result in further near-term declines in utilization for our international rig fleet and reduced levels of revenues and earnings from our O&M contract portfolio. While deployment opportunities for our international rig fleet take time to develop, our business development team has been working on a selection of rig tenders that could provide operational momentum for 2013 and later. In addition, we expect to make adjustments in the deployment of underutilized rigs in our international rig fleet to better reflect their long-term opportunities. Our O&M contracts on Sakhalin Island, Russia expired in the third quarter. We were successful in winning a new contract that adds a third rig management project to the two projects we managed previously under the expired contracts. The new consolidated contract replaces a significant portion, but not all, of the financial contribution of the expired contracts.

The U.S. Drilling segment is expected to report a gross margin loss during the remainder of 2012. While revenues are expected to be generated when each of our two AADU rigs begins operation, we have been incurring operating costs as we prepare the rigs for the customer. Additionally, we began incurring depreciation expense and cease capitalizing interest costs related to each rig as it is presented to the customer to begin the acceptance testing process.


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RESULTS OF OPERATIONS

Three Months Ended September 30, 2012 Compared with Three Months Ended September 30, 2011

Revenues decreased $11.3 million, or 6.4%, to $165.3 million for the three months ended September 30, 2012 compared with revenues of $176.6 million for the comparable 2011 period. Operating gross margin decreased $16.0 million, or 31.8%, to $34.0 million for the three months ended September 30, 2012 compared with operating gross margin of $50.0 million for the three months ended September 30, 2011. We recorded net income attributable to controlling interest of $10.9 million for the three months ended September 30, 2012 compared with $20.7 million for the three months ended September 30, 2011.

The following is an analysis of our operating results for the comparable quarters:

                                                         Three Months Ended September 30,
                                                        2012                          2011
                                                              (Dollars in Thousands)
Revenues:
Rental Tools                                   $  59,947           36 %      $  62,388           35 %
U.S. Barge Drilling                               33,142           20 %         28,895           17 %
U.S. Drilling                                         -             0 %             -             0 %
International Drilling                            68,503           42 %         79,591           45 %
Technical Services                                 3,709            2 %          5,715            3 %
Construction Contract                                 -             0 %             -             0 %

Total revenues                                   165,301          100 %        176,589          100 %

Operating gross margin:
Rental Tools gross margin excluding
depreciation and amortization                     38,068           64 %         43,706           70 %
U.S Barge Drilling gross margin excluding
depreciation and amortization                     15,885           48 %         11,361           39 %
U.S. Drilling gross margin excluding
depreciation and amortization                     (2,641 )        n/a             (601 )        n/a
International Drilling gross margin
excluding depreciation and amortization           12,584           18 %         21,919           28 %
Technical Services gross margin                      (79 )        n/a            1,162           20 %
Construction Contract gross margin                    -           n/a               -           n/a

Total operating gross margin excluding
depreciation and amortization                     63,817           39 %         77,547           44 %

Depreciation and amortization                    (29,779 )                     (27,581 )

Total operating gross margin                      34,038                        49,966
General and administrative expense                (8,905 )                      (8,630 )
Gain on disposition of assets, net                   606                           623

Total operating income                         $  25,739                     $  41,959


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Segment operating gross margins excluding depreciation and amortization, are computed as revenues less direct operating expenses, excluding depreciation and amortization expense, where applicable; segment operating gross margin percentages are computed as operating gross margin as a percent of revenues. The operating gross margin amounts and operating gross margin percentages should not be used as a substitute for those amounts reported under U.S. GAAP. However, we monitor our business segments based on several criteria, including operating gross margin. Management believes that this information is useful to our investors because it more accurately reflects cash generated by segment. Such operating gross margin amounts are reconciled to our most comparable U.S. GAAP measure as follows:

                                                U.S.
                                  Rental        Barge         U.S.          International       Technical       Construction
                                  Tools       Drilling      Drilling          Drilling          Services        Contract (2)
Three Months Ended September,
             2012                                                   (Dollars in Thousands)
Operating gross margin (1)       $ 27,032     $  11,042     $  (4,712 )    $           783     $      (107 )    $          -
Depreciation and amortization      11,036         4,843         2,071               11,801              28                 -

Operating gross margin
excluding depreciation and
amortization                     $ 38,068     $  15,885     $  (2,641 )    $        12,584     $       (79 )    $          -


      Three Months Ended
      September 30, 2011
Operating gross margin (1)       $ 33,389     $   6,732     $  (1,334 )    $        10,017     $     1,162      $          -
Depreciation and amortization      10,317         4,629           733               11,902              -                  -

Operating gross margin
excluding depreciation and
amortization                     $ 43,706     $  11,361     $    (601 )    $        21,919     $     1,162      $          -

(1) Operating gross margin is calculated as revenues less direct operating expenses, including depreciation and amortization expense.

(2) The Construction Contract segment does not incur depreciation and amortization.

Rental Tools

Rental Tools segment revenues decreased $2.5 million, or 4.0%, to $59.9 million for the third quarter of 2012 compared with $62.4 million for the third quarter of 2011. The decrease was driven primarily by a decrease in utilization and an increase in average discount rates resulting from the slowing U.S. land activity, and increased competition in certain key locations.

Rental Tools segment operating gross margin, excluding depreciation and amortization, decreased $5.6 million, or 12.8%, to $38.1 million for the third quarter of 2012 compared with $43.7 million for the third quarter of 2011. This was primarily due to the decrease in utilization and increase in discounts described above. Additionally, as utilization decreases length of time tools remain on each job has shortened, we experience an increase in costs of servicing and handling tools.

U.S. Barge Drilling

U.S. Barge Drilling segment revenues increased $4.2 million, or 14.5%, to $33.1 million for the third quarter of 2012 compared with $28.9 million for the third quarter of 2011. The increase in revenues was primarily due to a higher average dayrate for the U.S. barge rig fleet. Our dayrates benefit from our ability to renegotiate day rates during multi-well contracts.

The U.S. Barge Drilling segment's operating gross margin, excluding depreciation and amortization, increased $4.5 million, or 39.5%, to $15.9 million for the third quarter of 2012 compared with $11.4 million for the third quarter of 2011. The increase in operating gross margin was mostly driven by the increase in average dayrates for the U.S. barge rig fleet as described above along with cost management, resulting in improved overhead costs.


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U.S. Drilling

As of September 30, 2012, the U.S. Drilling segment had not begun generating revenues. While revenues are expected to be generated when each of the two AADU rigs begins operation, we have been incurring operating costs as we prepare the rigs to go to work for the customer. Additionally, we began incurring depreciation expense and ceased capitalizing interest costs related to one of the rigs when it was presented to the customer to begin the acceptance testing process early in the third quarter.

Operating gross margin, excluding depreciation and amortization, was a loss of $2.6 million and $0.6 million for the three-month periods ended September 30, 2012 and 2011, respectively, and includes expenditures associated with re-entering the Alaskan market. The start-up costs include salaries and employee hiring-related expenditures, training and rental of facilities in Alaska to support our operations.

International Drilling

International Drilling segment revenues decreased $11.1 million, or 13.9%, to $68.5 million for the third quarter of 2012 compared with $79.6 million for the third quarter of 2011. The lower revenues are primarily due to a decline in drilling revenue generated by the operation of rigs that we own, partially offset by an increase in revenues from O&M contracts.

Revenues related to Parker-owned rigs decreased $12.1 million, or 23.5%, to $39.3 million for the third quarter of 2012 compared with $51.4 million for the third quarter of 2011. This was primarily due to lower rig utilization in our Eastern Hemisphere region where our arctic-class barge rig located in the Caspian Sea is at a zero standby rate, as well as lower utilization for our rigs located in the Latin America region. This was partially offset by the reactivation earlier this year of two previously idle rigs in the Eastern Hemisphere region.

O&M revenues increased $1.0 million, or 3.5%, to $29.2 million for the third quarter of 2012 compared with $28.2 million for the third quarter of 2011, primarily due to an increase in reimbursable costs resulting from the preparation of a rig for drilling and increased revenues related to a labor contract that commenced earlier this year. The increase in revenues was partially offset by a decrease in reimbursable costs related to a drilling rig relocation project in Sakhalin Island, Russia which commenced during the first quarter of 2011 and was completed prior to December 31, 2011. O&M projects included approximately $8.9 million and $8.8 million of reimbursable costs for the three-month periods ended September 30, 2012 and 2011, respectively, which added to revenues, but had little impact on operating margins.

International Drilling operating gross margin, excluding depreciation and amortization, decreased $9.3 million, or 42.5%, to $12.6 million during the third quarter of 2012 compared with $21.9 million for the third quarter of 2011. The decrease in operating gross margin was primarily due to the completion of a drilling rig relocation project discussed above, as well as lower utilization on Parker-owned rigs in the Eastern Hemisphere. This was partially offset by increases in margins in the Latin America region resulting from the rental of rig equipment, increased rig utilization, and lower operating costs.

Technical Services

Technical Services segment revenues decreased $2.0 million, or 35.1%, to $3.7 million for the third quarter of 2012 compared with $5.7 million for the third quarter of 2011. The decrease is primarily due to the completion of a pre-FEED project at the end of the second quarter of 2012, resulting in no revenue during the third quarter of 2012 compared to a full quarter of revenue during the third quarter of 2011 and transition of the Berkut platform project from its engineering phase to a less revenue-intensive construction oversight and assistance phase. Offsetting the revenue decrease was the recognition of revenue on a low margin pre-FEED contract that was completed at the beginning of the third quarter of 2012 and was accounted for under the completed contract method of revenue recognition.


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Operating gross margin for this segment was a nominal loss for the third quarter of 2012 compared with income of $1.2 million for the third quarter of 2011. The decrease is primarily the result of decreased operating gross margins on the construction oversight and assistance phase of the Berkut platform project and completion of a reimbursable pre-FEED engineering effort as described above. The Technical Services segment incurs minimal depreciation and amortization primarily related to office furniture and fixtures.

Other Financial Data

Gains on asset dispositions for both the third quarter of 2012 and 2011 was $0.6 million and was primarily the result of net gains on various asset sales during each period. We periodically sell equipment deemed to be excess, obsolete, or not currently required for operations.

Interest expense increased $2.6 million for the third quarter of 2012 compared with the third quarter of 2011 due to higher interest on the additional $125.0 million of 9.125% Notes, which have a higher interest rate than our 2.125% Notes that were repaid during the second and third quarters of 2012, and a $2.4 million decrease in interest capitalized on major projects, primarily resulting from a reduction in the value of the AADU rigs following an impairment charge recorded during the fourth quarter of 2011. The net increase is partially offset by a decrease in amortization of debt discount on the 2.125% Notes as they were tendered or matured during the second and third quarters of 2012 and an increase in the amortization of the debt premium related to the additional $125.0 million of 9.125% Notes. Interest income was not significant during each quarter.

We experienced a nominal increase in general and administration expense for the third quarter of 2012 compared with the third quarter of 2011.

Income tax expense was $6.7 million for the third quarter of 2012 as compared to $15.0 million for the third quarter of 2011. The decrease was driven primarily by a reduction in pre-tax earnings of $17.5 million for the third quarter of 2012 as compared to $35.7 million for the third quarter of 2011 and differences in the mix of our domestic and international pre-tax earnings and losses, as well as the mix of international tax jurisdictions in which we operate.


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Nine Months Ended September 30, 2012 Compared with Nine Months Ended September 30, 2011

Revenues increased $15.2 million, or 3.0%, to $520.8 million for the nine months ended September 30, 2012 compared with revenues of $505.6 million for the comparable 2011 period. Operating gross margin increased $22.5 million, or 20.1%, to $134.5 million for the nine months ended September 30, 2012 compared with operating gross margin of $112.0 million for the comparable 2011 period. We recorded net income attributable to controlling interest of $57.4 million for the nine months ended September 30, 2012 as compared with $39.7 million for the nine months ended September 30, 2011.

The following is an analysis of our operating results for the comparable periods:

                                                         Nine Months Ended September 30,
                                                        2012                        2011
                                                             (Dollars in Thousands)
Revenues:
Rental Tools                                    $ 191,233          37 %     $ 173,197          34 %
U.S. Barge Drilling                                94,269          18 %        70,876          14 %
U.S. Drilling                                          -            0 %            -            0 %
International Drilling                            224,176          43 %       229,250          45 %
Technical Services                                 11,117           2 %        22,619           5 %
Construction Contract                                  -            0 %         9,638           2 %

Total revenues                                    520,795         100 %       505,580         100 %

Operating gross margin:
Rental Tools gross margin excluding
depreciation and amortization                     125,172          65 %       118,658          69 %
U.S Barge Drilling gross margin excluding
depreciation and amortization                      41,081          44 %        22,236          31 %
U.S. Drilling gross margin excluding
depreciation and amortization                      (3,639 )       n/a          (1,026 )       n/a
International Drilling gross margin
excluding depreciation and amortization            57,329          26 %        49,323          22 %
Technical Services gross margin                       (90 )       n/a           4,518          20 %
Construction Contract gross margin                     -          n/a             771           8 %

Total operating gross margin excluding
depreciation and amortization                     219,853          42 %       194,480          38 %

Depreciation and amortization                     (85,357 )                   (82,511 )

Total operating gross margin                      134,496                     111,969
. . .
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