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Parker Drilling Co (NYSE:PKD)
Q3 2019 Earnings Call
Nov 6, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the Parker Drilling Third Quarter 2019 Earnings Call. [Operator Instructions].

It is now my pleasure to introduce your host, Nick Henley, Director of IR. Thank you. You may begin.

Nick Henley -- Director of Investor Relations

Good morning, and thank you for joining today's conference call. With me today are Gary Rich, 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 the 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 SEC. During this call, management will refer to non-GAAP financial measures. In accordance with Regulation G, the company has provided a reconciliation of these measures in the earnings release.

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

Gary G. Rich -- President and Chief Executive Officer

Thank you, Nick, and good morning, everyone. Before I begin, I'd like to highlight the appointment of our Investor Relations Director, Nick Henley to his new position as General Manager of our Canada Operations. Nick was instrumental in helping lead us through partners restructuring and is now moving north to lead our Canadian team, who have been successfully operating the Hibernia platform and preparing for the start of the Husky Energy O&M project. We thank Nick for his service and have absolute confidence that he will continue to succeed as he moves on to this new opportunity. Until we identify a replacement, the company's Investor Relations duties will be shared among current team members in order to facilitate a smooth transition.

Turning now to the business. Despite continued market weakness in the U.S., we posted strong gains in three of our four segments in the third quarter. We also executed several notable contract awards since the end of the second quarter, which I will expand upon later in the call.

Our efforts to reactivate owned rigs and our strategy of emphasizing more asset-light and capital-efficient projects has enabled Parker to continue its march to becoming a more return on capital focused company. In addition, we have taken further steps to strengthen our balance sheet. In September, we utilized our strong cash position to voluntarily pay down $35 million of debt in order to delever our balance sheet and put some of our excess capital to work, while providing significant interest savings going forward. Subsequent to the debt reduction, we also amended and extended our ABL, which Mike will discuss in greater detail later in the call. Both of these actions serve to strengthen our financial position and improve returns.

As we look at the overall market fundamentals today, there continues to be a high level of uncertainty and volatility, particularly regarding the North America land market. With capital discipline and spending restraint weighing on E&P spending, drilling activity has been slowing with North America rig count at the end of the third quarter down 17% year-over-year. This combined with the surplus of available capacity has driven additional pricing pressure as many U.S. operators struggled to meet their return objectives.

In contrast, the international market is exhibiting much more favorable conditions and activity is gaining momentum across multiple regions. While visibility remains somewhat cloudy due to global trade concerns and an uncertain demand outlook, fundamentals internationally are considerably more supportive than in the U.S. land market as tendering and drilling activity has been steadily increasing. Once again, we saw improvement in revenues and gross margin from both our international rental and drilling segments on a year-over-year and sequential basis. These trends correspond well with the international rig count, which was up 13% year-over-year.

Turning now to our third quarter results. Our consolidated quarterly revenue of $160 million was up 2.6% from the second quarter. Adjusted EBITDA in the third quarter came in ahead of expectations at $36.6 million. The primary drivers behind the sequential change in adjusted EBITDA came from higher barge utilization and favorable O&M activity in our U.S. Lower 48 drilling segment Significant activity increases in both the Arctic and Latin America regions of our International & Alaska drilling business and positive momentum across all product lines in our international rental business, offset by lower U.S. land activity for our U.S. rental segment.

Taking a closer look at each of our segments, our U.S. rental tools business was in line with our guidance as third quarter revenues and gross margin declined by 7% and 14.2% respectively compared to the second quarter. This was the result of a lower land rental activity, particularly in the Permian and lower shelf rental activity as certain jobs finished during the quarter. However, stronger deepwater results from completion work with key clients helped to partially offset these reductions and demonstrates the strength of our diversified market presence across the U.S.

Our international rental tools business was also in line with our guidance, with revenues up 8.6% sequentially and gross margin as a percent of revenue rising from 13.2% in the prior period of 15.9% in the third quarter. All three product lines within the international rental business, well construction, well intervention and surface and tubular posted sequential gains due to activity increases. We continue to participate in new tenders and to successfully gain new projects, focusing on building competitive scale. And although price pressure continues, we restrict our participation to those projects that are most economically favorable for us as a company.

Our US Lower 48 drilling business surpassed guidance with another solid performance in the third quarter. Revenues increased 16.1%, while gross margin as a percent of revenue also improved from 20.5% in the prior period to 27.2% in the third quarter. Although the Gulf of Mexico barge market remains relatively soft, the business posted improved utilization quarter-over-quarter, benefiting from a full periods contribution from the federal waters project we highlighted in our last call and additional activity under our California O&M project.

I'm pleased to highlight that we were awarded another federal waters job during the third quarter and also executed the agreement for an engineering services study with a major Gulf of Mexico client. As a reminder, this project aligns with our capital efficient strategy. And while the near-term proceeds from the engineering services will be modest, it has the potential to develop into long-term service-oriented work, providing substantial upside for this segment in the future.

Finally, our International & Alaska drilling business also posted improved results with gross margin increasing by 8.5% sequentially in the third quarter. The improved results were largely driven by activity increases in our Sakhalin Island O&M project as well as rigs returning to service in both Mexico and Kazakhstan. These gains were partially offset by lower activity in the Kurdistan region of Iraq where two rigs completed their contracts in July.

During the third quarter, we signed an additional O&M contract with a new client on the North Slope of Alaska, where we also operate two of our own rigs. The O&M work began in mid-September and we are excited to have this project under our management and expand our services in the market. We also began drilling operations with two rigs in Mexico during the quarter, bringing our total to three active rigs. We continue to feel the number of tenders in the market and feel strongly about the opportunities to return additional rigs to service in Mexico. This market in particular has been a real bright spot as our activity has increased from one rig working in the fourth quarter of last year to 60% utilization in a healthy backlog.

I will now turn the call over to Mike to discuss our third quarter results. And then I'll provide some additional commentary on our outlook before we open the call to questions. Mike?

Michael W. Sumruld -- Senior Vice President, Chief Financial Officer

Thanks, Gary. For the 2019 third quarter, we reported revenues of $160 million and adjusted EBITDA of $36.6 million or 23% of revenues. Net income for the third quarter was $4 million or $0.27 per share. Compared to the 2019 second quarter, revenues increased $4.1 million or 3% and adjusted EBITDA decreased $1.2 million or 3%.

As Gary mentioned earlier, our revenues benefited from improved activity across three of our four segments and higher reimbursables, partially offset by activity declines in U.S. rentals. While the mix of business delivered sequentially higher revenue, overall margins were impacted by the decrease in U.S. rentals, our highest margin segment. In the U.S. rental tools segment, quarterly revenues declined by 7% coming in at $49.3 million in the third quarter versus $52.9 million in the second quarter. This result was in line with the average 7% sequential decline in U.S. rig count. There was lower land rental activity in several locations with the largest impact from the Permian Basin.

Shelf rental activity was also lower as certain jobs were completed during the period. Partially offsetting these declines were higher revenues from the Bakken, Marcellus and Powder River Basins as well as stronger deepwater activity resulting from completions work for some key clients. Gross margin in this segment was $23.7 million compared with $27.7 million in the second quarter, while gross margin as a percent of revenues was 48.2% in the third quarter versus 52.3% in the second quarter. This margin compression was primarily the result of changes in product mix and services.

In our International Rental Tools segment, we again saw sequential improvement in both revenue and gross margins as revenue came in at $24.1 million in the third quarter compared to $22.2 million in the second quarter. All three product lines rose sequentially. Well construction was up due to higher TRS revenue in Iraq. Well intervention was up due to fishing activity in the Middle East and whipstock sales in Ukraine, while surface and tubulars was up due to higher rentals in Mexico, the UK and Saudi Arabia. Gross margin was $3.8 million in the third quarter versus $2.9 million in the prior quarter, while gross margin as a percent of revenue was 15.9% in the third quarter compared to 13.2% in the second quarter. The expansion in gross margin was mainly due to an improved revenue mix and increased scale.

Turning to our Drilling Services business, the U.S. Lower 48 drilling segment posted solid improvement in the third quarter. Revenues came in at $14.5 million compared with $12.5 million in the second quarter. Although the market remains generally depressed, we had higher utilization from our barge fleet rising to an average of 21.2% in the third quarter from 15.6% in the second quarter largely due to a full quarters contribution from the federal waters project. And as Gary mentioned earlier, on the heels of this job, we were awarded a second project in federal waters with another client that has already begun. This segment also benefited from additional reactivation scope under our California O&M project. This segment's gross margin was $3.9 million versus $2.6 million in the second quarter, while gross margin as a percent of revenues was 27.2% in the third quarter versus 20.5% in the second quarter. The increase in gross margin was driven by both the additional revenue days for our barge fleet and O&M activity.

In our International & Alaska drilling segment, revenues were $72.3 million in the third quarter compared with $68.5 million in the second quarter, while gross margin was $11.1 million or 15.3% of revenue compared to $10.2 million or 14.9% of revenue in the prior quarter. The increase in revenue and gross margin was primarily due to higher reimbursable revenues from our Sakhalin O&M work, two rigs returning to service in Mexico and our barge rig in Kazakhstan returning to service on a standby rate. These were partially offset by lower activity in the Kurdistan region of Iraq after two rigs completed work at the end of July. For the third quarter, rig utilization was 45% compared to 47% in the second quarter.

Regarding other financial items, our G&A expense was $6 million in the third quarter compared to $5.6 million in the second quarter. We expect full year G&A to be at the low end of our guidance at around $27 million. We reported tax expense of $5 million in the third quarter on pre-tax income of $9 million. The reported tax expense reflects the mix of results in the jurisdictions in which we operate and our inability to recognize benefits associated with certain losses as a result of valuation allowances. We expect our 2019 cash taxes to be approximately $8 million. Our capital spending in the third quarter was $21.7 million totaling $56 million for the first nine months of the year. Approximately 85% of this spend was directed to our rentals business.

Turning now to our balance sheet and cash flows. Total long-term debt outstanding at the end of the quarter was $177 million, reflecting the September prepayment of $35 million in principal on our term loan, resulting in a leverage ratio of 1.4 times our trailing 12 months adjusted EBITDA. We ended the quarter with a total cash balance of approximately $101 million and a net debt position of $76 million.

As Gary mentioned, we refinanced our ABL on October 8 with solid support from our lenders, Bank of America and Deutsche Bank. The key changes in the terms of the new ABL include a reduction in the rates applied to both borrowings and unused commitment fees, replacement of the minimum liquidity covenant with a minimum fixed charge coverage ratio test, changes to our borrowing base, creating a more conforming structure and an extension to October 2024. Total liquidity at the end of the quarter was $125.8 million consisting of $101.1 million in cash and $24.7 million available from our credit facility. Under the new ABL, the availability would have increased by $6.7 million.

That concludes the financial review. I'll turn it back to Gary for his final remarks. Gary?

Gary G. Rich -- President and Chief Executive Officer

Thanks, Mike. Looking toward the fourth quarter, we expect consolidated revenues will decrease by 5% to 10% and adjusted EBITDA should decrease by roughly 20% to 30%. This decline is largely due to three factors. First and the most significant is that we expect revenues and gross margin in the U.S. rentals business will be lower as the average U.S. land rig count is expected to decline further from the third to the fourth quarter. Second, we expect lower revenues and gross margin in our U.S. drilling segment due to lower barge utilization and in O&M project transitioning from reactivation to ongoing P&A operations. And third, we anticipate less activity in Sakhalin due to Rig 270 transitioning to a standby rate and the two rigs in Iraq being off contract for a full quarter, although these will be partially offset by activity increases in Mexico and Kazakhstan.

For U.S. rental tools, we expect this segment to decline largely due to lower activity, reflecting the lower U.S. rig count and the completion of certain deepwater projects. We anticipate that both revenues and gross margin will contract by roughly 14% to 18% sequentially. Despite the weakness in the U.S. land market, we remain well positioned to benefit from any upturn due to the best-in-class equipment, our dedication to customer service and our solid reputation as an industry leader that delivers innovative, cost-effective and reliable solutions.

In the International Rental Tools segment, we anticipate sequential improvements to continue as we expand our services. Fourth quarter revenues will be up 3% to 5% and gross margin as a percent of revenue will track in the mid-to-upper-teens due to newly awarded tubular running service projects in Ukraine and India as well as improved activity in Guiana.

For our U.S. Lower 48 drilling segment, we expect lower activity in the Gulf of Mexico as well as a full project transition to a steady state O&M operation. Because of this, our fourth quarter revenue will likely be sequentially down to roughly $10 million and gross margin will be in the $0.5 million range. We have one barge rig working today and expect a second to reactivate later this month.

And for our International & Alaska drilling segment, we anticipate that revenues will be roughly flat and gross margin will decrease by roughly $2 million to $3 million due to a full quarter of lower utilization in Iraq and Rig 270 going on standby. While this will be partially offset by increased activity in Mexico in Alaska, there will likely be a downside impact on our gross margin. Within the International & Alaska business, there are several new awards that will begin in the fourth quarter or shortly thereafter and it test to our team's hard work and performance. So let me briefly outline them now.

As I mentioned, Rig 270 is now on standby after having completed this contractual work, but the client has now extended the contract and is expected to resume drilling operations early in the second quarter of 2020. Although the Kurdistan region of Iraq will experience whitespace due to idle rigs in the fourth quarter, we recently won a contract with [Indecipherable] Energy for one of our rigs, which will commence in the first quarter of 2020. Furthermore, tendering activity in the region remains elevated and we are actively pursuing opportunities for additional work.

In late September, we signed a contract for our barge rig in Kazakhstan to be on standby supporting primary drilling operations. And the revenue from this rig will partially offset some of the decline in the fourth quarter and provide additional backlog for 2020. Finally, as I mentioned earlier, we were recently awarded a new O&M contract on the North Slope of Alaska, yet another major O&M project that affirms our commitment to leveraging our expertise and market presence into more capital efficient projects.

With that, I'd now like to provide some insight on our full year guidance. We are maintaining our 2019 adjusted EBITDA forecast range of $120 million to $130 million. At this time, we are lowering our forecast for full year 2019 capital expenditures to roughly $80 million. Approximately 85% of this will be allocated to rentals with the remaining 15% supporting the reactivation of drilling assets.

As I've always emphasized, we remain judicious regarding our investments, seeking only opportunities that have the appropriate payback and return on capital. As such, we remain committed to generating long-term positive cash flow, which we have achieved since the emerging from restructuring. Once again, I'm proud of our team's commitment to safety, delivering quality service and innovative solutions, which make us a true trusted partner of our customers.

Michael W. Sumruld -- Senior Vice President, Chief Financial Officer

Operator, before we move to questions, I'd like to share some final thoughts. Gary, on behalf of our Board of Directors, the executive leadership team and all of our employees worldwide we'd like to extend our sincere appreciation for the leadership you've provided to Parker for more than seven years. As we all know, the last few years have been some of the most challenging in our industry's history, your leadership through this period provided us with much needed stability and direction. And as a result, we're a much stronger organization today. We wish you, Lisa and your entire family all the best.

Operator that concludes our comments. We are now ready to take questions from the audience.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is from Jason Wangler with Imperial Capital. Please proceed.

Jason Wangler -- Imperial Capital -- Analyst

Good morning, all.

Michael W. Sumruld -- Senior Vice President, Chief Financial Officer

Good morning.

Gary G. Rich -- President and Chief Executive Officer

How are you, Jason?

Jason Wangler -- Imperial Capital -- Analyst

I wanted to ask you, you kind of went through obviously a lot there and a lot going on, as far as you think about beyond fourth quarter, the capex budget and kind of getting ready for some of these projects, how do you kind of see the 2020 outlook in terms of where you're spending the money, I assume it's still going to stay kind of in the same areas, but also just kind of what kind of level of spend do you think you're going to be seeing as this activity start to pick up?

Gary G. Rich -- President and Chief Executive Officer

Well, Jason, we're still in the middle of our budgeting processes as is the case for our customers. So it's a little difficult to describe in much detail what's going to happen. As has been the case for the last several years, I would anticipate that the bulk of any capital we do spend is going to be primarily related to the rental side of the business and I don't anticipate that to change in 2020. As I also just pointed out a moment ago, we have a lot of really good opportunities for us as we enter into 2020 and we feel good about those. What we're less confident in is the just the uncertainty associated with U.S. land market right now.

Jason Wangler -- Imperial Capital -- Analyst

Okay. And maybe just secondly on the voluntary de-listing, I don't know if there is any update on timing or anything more you can really say at this point, but just be curious to kind of see where we are in the process and kind of the steps going forward as well?

Gary G. Rich -- President and Chief Executive Officer

There is no further update other than what we have provided in our most recent proxy release. We're still in the SEC review period. And we just let stand at the

Jason Wangler -- Imperial Capital -- Analyst

Okay. I appreciate it. Thank you.

Operator

We have reached the end of our question-and-answer session. I would like to turn the floor back over to management for closing remarks.

Nick Henley -- Director of Investor Relations

Thank you, operator. Before we finish today's call, I'd just like to share a few things, since this is expected to be my last conference call. Seven years ago, I participated in my first quarterly conference call actually for this quarter and much water has passed under the bridge since that first call. Above all else, I'm most grateful for our team and our determination to the depths of the deepest and longest industry correction to get up everyday looking for ways to be better than we were the day before.

We've maintained our focus on the client to ensure nothing wavered and our effort to help them mitigate their operational risks and minimize their investment when drilling oil and gas wells. We've leveraged our experience in drilling and rentals, shifting the balance of our revenue to become more capital efficient and are now well positioned to be a true return on capital company. Through all this change in industry turmoil, I'm pleased that we haven't lost what we referred to internally as our family oriented culture. I believe this culture and our esprit de corps has been and will continue to be a foundational strength allowing us to thrive in the future. Thank you to the shareholders, Board of Directors and fellow employees for allowing me to be a member of this team.

Michael W. Sumruld -- Senior Vice President, Chief Financial Officer

That ends our third 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. Goodbye, and have a great day.

Operator

[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

Nick Henley -- Director of Investor Relations

Gary G. Rich -- President and Chief Executive Officer

Michael W. Sumruld -- Senior Vice President, Chief Financial Officer

Jason Wangler -- Imperial Capital -- Analyst

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