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Parker Drilling Co (PKDC 18.18%)
Q4 2019 Earnings Call
Mar 4, 2020, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings, and welcome to the Parker Drilling Fourth Quarter Earnings Call. [Operator Instructions]
It is now my pleasure to introduce your host, Chief Financial Officer of Parker Drilling, Mike Sumruld. Thank you, Mr. Sumruld, you may begin.
Michael W. Sumruld -- Senior Vice President, Chief Financial Officer
Good morning, and thank you for joining today's conference call. As a reminder, during this conference call, I 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 US 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, I will refer to non-GAAP financial measures. The company has provided a reconciliation of these measures in the earnings release. Also due to the adoption of Fresh Start Accounting upon the company's emergence from Chapter 11, the consolidated financial results of the successor period beginning as of April 1, 2019, are not directly comparable to the consolidated financial results for predecessor periods prior to emergence. However information for certain components such as revenue and gross margin are materially similar across the two periods and will be combined when referenced on today's call as we believe this information is useful for investors to assess the company's operating performance and related trends.
Before getting into the business, let me highlight a couple of housekeeping items. First in regards to the Going-Dark transaction, the Board of Directors continues to deliberate the impact of the de-registration process. If this process proceeds reverse and forward stock splits will be executed based on a ratio selected by the Board to reduce the number of holders of record below 300, the threshold required by the SEC to file public reports. Even though, the company would not be subject to the reporting requirements under the Exchange Act going forward, our intent would be to make financial information available to remaining shareholders on a voluntary basis. We would also continue to prepare audited annual and unaudited quarterly financial statements as required under our first and second lien credit facilities. Lastly, we intend to maintain our existing internal controls and corporate governance framework for the benefit of all of our stakeholders, even though we would no longer be subject to requirements under the Sarbanes-Oxley Act or other listing standards.
Second, let me provide a brief update on our CEO search. As you're aware, Gary Rich, formally retired effective December 31, 2019. The Board has been diligently searching for a replacement, seeking experienced CEOs with strong industry ties, proven histories of delivering financial returns to shareholders and values aligned with the Parker culture, while we anticipate announcing a new CEO soon, the Board has prioritized finding the right person to lead Parker's future success.
Now turning to the business. At Parker, the well-being of our employees is always a central focus for us. We often face dynamic challenges to health, safety and security. Recently these dynamic challenges have included security concerns in the Middle East and the developing coronavirus outbreak. First and foremost, I'm happy to report that all Parker employees are safe. From a security perspective, we are between drilling contracts in the Kurdistan region of Iraq and our rentals activities in the southern part of Iraq have experienced minimal impact by increased tensions in the region. In fact, many of the anticipated protests and clashes have not materialized. Specific to the coronavirus situation, we have no employees in the areas where the outbreak has been most pronounced. And we have rerouted travel around the affected areas and have inactive travel restrictions to minimize the risk of exposure. Working alongside our customers, we will continue to take steps to keep our people safe, healthy and secure in the face of this developing issue.
From a macro perspective, although oil prices improved during the fourth quarter, finishing up over 30% for the year, the US land rig count declined substantially. As a matter of fact, US onshore rig count declines accelerated during the fourth quarter resulting in a sequential quarterly decrease in average rigs operating of 97 or 11%. We ended 2019 with 782 active US land rigs, which was a year-over-year decline of 277 rigs or 26%. This comes on the heels of investor pressure on EMPs to exhibit capital restrain and live within operating cash flows, and is exacerbated by the fact that the market continues to be oversupply given week 2019 demand growth.
Outside of the US and excluding Ukraine where there have been rig count reporting challenges, the average international rig count was roughly flat from the third quarter to the fourth quarter. However, the rig count improved approximately 40 rigs or 4% from the end of 2018 with the majority of that growth coming from Mexico, Iraq, the UAE and Kuwait. As will be highlighted shortly, these growth areas aligned well with our footprint and support the improved results of our international businesses throughout 2019.
For the 2019 fourth quarter, we reported revenues of $156.3 million and adjusted EBITDA of $25.9 million or 16.6% of revenues. The net loss for the fourth quarter was $2.1 million or $0.14 per share. Compared to the 2019 third quarter, revenues decreased $3.8 million or 2.4% and adjusted EBITDA decreased $10.7 million or 29.4%. The adjusted EBITDA decline is largely due to the following factors which were highlighted on our third quarter call. First, and the most significant, US drilling activity declined negatively impacting our US rentals revenue and gross margin. Second, our Lower 48 Drilling segment was impacted by seasonally lower utilization and our California O&M project transitioning from the reactivation phase to ongoing P&A operations. And third, in the International & Alaska Drilling segment, our owned rig in Sakhalin transitioned to a reduced standby rate mid quarter and two of our rigs in Iraq were off contract for a full quarter, although, these were partially offset by activity increases in Mexico, Kazakhstan and Alaska.
Taking a closer look at each of our segments. In the US rental tools segment, quarterly revenues declined by 13.7% coming in at $42.5 million in the fourth quarter versus $49.3 million in the third quarter. This result was generally in line with the average 11% sequential decrease in US rig count combined with several deepwater Gulf of Mexico jobs that were completed during the quarter. There was lower land rental activity in several locations, with the largest impact from the Marcellus and Bakken basins. Shelf and deepwater rental activity was also lower as certain jobs were completed during the period. Partially offsetting these declines were higher revenues from the Permian and Eagle Ford basins. Gross margin in this segment was $17.6 billion in the fourth quarter compared with $23.7 million in the third quarter. Our gross margin as a percent of revenues was 41.3% in the fourth quarter versus 48.2% in the third quarter. This margin compression was primarily the result of the activity declines mentioned previously.
In our International Rental Tools segment, revenue came in at $25.1 million in the fourth quarter compared to $24.1 million in the third quarter, a 4.2% sequential improvement. The increase in revenue was mainly the result of higher rentals from our surface and tubulars product line in Guyana, the UAE and India. Gross margin in the fourth quarter was flat with the prior quarter at $3.9 million while gross margin as a percent of revenue was 15.5% in the fourth quarter compared to 15.9% in the third quarter. The flat earnings on improved revenue was a result of the overall mix of business in the quarter.
The US Lower 48 Drilling segment revenues came in at $9.7 million in the fourth quarter compared with $14.5 million in the third quarter. We saw seasonal declines in an already depressed in the waterway market, where utilization for our barge fleet was 14% in the fourth quarter, down from 21.1% in the third quarter. Also impacting the revenue was the transition of our California O&M project from the reactivation phase to ongoing P&A operations. The segment's gross margin was $119,000 in the fourth quarter versus $3.9 million in the third quarter, while gross margin as a percent of revenue was 1.2% in the fourth quarter versus 27.2% in the third quarter. The decline in gross margin was driven by both the reduced barge rig utilization and change in O&M activity.
In our International & Alaska Drilling segment, revenues were $79 million in the fourth quarter compared to $72.3 million in the third quarter, while gross margin was $10.7 million or 13.5% of revenue, compared to $11.1 million or 15.3% of revenue in the prior quarter. The increase in revenue was primarily due to higher reimbursable revenues from our Sakhalin O&M work, a full quarter of work for the Alaska O&M contract, higher utilization in Mexico and our barge rig in Kazakhstan returning to service on a standby rate. This was partially offset by our owned rig in Sakhalin going on a standby rate midway through the fourth quarter as well as lower activity in the Kurdistan region of Iraq after two rigs completed work at the end of July. For the fourth quarter, rig utilization was 50% compared to 45% in the third quarter. Gross margin contracted slightly as a result of the mix of activity highlighted.
Now wrapping up the full year 2019. We reported $629.8 million of revenue and adjusted EBITDA of $128.6 million or 20.4% of revenue. Coming in near the top end of our adjusted EBITDA guidance range of $120 million to $130 million. In 2018, we reported revenue of $480.8 million and adjusted EBITDA of $78.1 million or 16.2% of revenue. All fourt of our segments reported significant year-over-year improvement in both revenue and gross margin. For US rentals, revenue and gross margin in 2019 improved $20.8 million and $5.3 million respectively compared to 2018. Revenue improved almost 12% despite the average US rig count declining by approximately 9% over the same period. These results are reflective of the unwavering focus we have on our customers, an exceptional operational execution, combined with consistent investment in the latest technology tools.
Our International Rental Tools segment revenue and gross margin improved $13.3 million and $7.3 million respectively, compared to 2018, driven by all three product lines. Well construction continued its growth across the Middle East and Mexico, while our well intervention product line improved primarily in the UAE. Our surface and tubulars business saw revenue grow across Mexico and the Netherlands. Our overall drilling business saw a meaningful year-over-year improvement as total revenue increased approximately 50% from these segments.
In our International & Alaska Drilling segment, revenue increased in 2019 by $83.3 million or 39%. Our gross margin improved $25.6 million or 181%. The year-over-year improvements were primarily driven by increases from our Arctic and Latin America regions as drilling activity for both customer and company-owned rigs was higher on Sakhalin Island, rig 272 in Alaska operated for full year, a new O&M contract on the North Slope of Alaska was added in late 2019 and utilization improved significantly in Mexico, where we went from only one rig working for two quarters in 2018 to having four rigs contracted as we exited 2019. This segment also benefited from the addition of the Husky O&M contract of the East Coast of Canada which is generating earnings while in the construction phase, but will ramp up significantly when drilling operations begin in 2022.
For the US Lower 48 Drilling segment, the addition of an O&M project off the coast of California and improved utilization helped increased revenue and gross margin by $31.6 million and $13.9 million respectively compared to 2018. Given the number of awards and extension signed in 2019, our O&M backlog has grown over 250% from $176 million at the end of 2018 to $627 million at the end of 2019. This is a true testament to our teams hard work and focus on delivering on our capital efficient strategy.
Regarding other financial items, our G&A expense was $6.4 million in the fourth quarter compared to $6 million in the third quarter. And for 2019, G&A was $26.1 million, an increase of $1.6 million from 2018. The annual increase was driven primarily by compensation expense. We reported a tax expense of $2.3 million in the fourth quarter on a pre-tax income of $203,000, and an expense of $11.8 million for the full year 2019 on a pre-tax loss of $72 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.
Our capital spending in the fourth quarter was $24.4 million, totaling $80.3 million for the full year. Approximately 86% of this full year spend was directed to our rentals business. For our US Rental segment revenue grew almost 12% despite a 9% average rig count decline. In our International Rental segment revenue improved over $13 million or 17% and delivered 55% incremental margins.
Turning now to our balance sheet and cash flows. Total long-term debt outstanding at the end of the year was $178 million resulting in a leverage ratio of 1.4 times our trailing 12 months adjusted EBITDA. We ended the year with a total cash balance of $105 million and total liquidity of $135.9 million, inclusive of $30.9 million available from our credit facility.
Now looking forward to 2020. US land rig count is currently projected to be relatively flat throughout the year, while the US offshore average rig count is expected to be up approximately 10% from 2019 to 2020. With that said, the onshore rig count continues to be very volatile and subject to continuous revision, especially against the current supply and demand outlook and investor pressures on EMP capital discipline and cash flow generation. International average annual rig count is currently projected to be up around 3% with improvement mainly coming from Mexico, the UAE, Iraq and Egypt. Again, we believe this generally bodes well for Parker.
Specific to the first quarter of 2020, we expect the US Rental Tools segment to remain relatively flat compared to the prior quarter, mirroring a US rig count that is leveling off. Our customer-focused approach in superior rental fleet in which we selectively invest in premium technologies in response to customer demand continues to keep us poised to capture share as opportunities emerge. We anticipate our International Rental Tools segment revenue to be down around 3% compared to the fourth quarter, due primarily to typical first quarter seasonality as projects ramp for the year in the Middle East and Latin America. We continue to win projects in the Middle East, the UK, and Latin America and expect year-over-year revenue and margin growth from this segment.
For our US Lower 48 Drilling segment, we expect a sequential drop in revenue due to operating a full quarter of P&A operations only on our O&M contract in California. So, we expect overall gross margin to be flat due to improved barge utilization. We are operating the only two active barge rigs in the market today. And for our International & Alaska Drilling segment, we anticipate that gross margin will be down $3 million to $5 million due to a full quarter of our owned rig in Sakhalin being on standby and typical first quarter labor and burden cost timing in Russia. We expect ongoing operations in Mexico and Kazakhstan to deliver first quarter results consistent with the fourth quarter, helping to offset some of the declines.
On the third quarter call, we highlighted several new awards for the company. Since that time, we have successfully been awarded additional work and signed a key extension and I'd like to share. In November, we extended the Sakhalin Island O&M project for five years, and in February began operating a second O&M rig in Alaska. Congratulations to our Arctic team for a lot of hard work and some great O&M wins. Further South in Mexico, we were awarded a three rig project which we staged in throughout 2020 starting late this quarter or early next. For this award, we are partnering with another well respected drilling contractor who will provide high quality equipment while Parker provides exceptional services. This is in addition to the four Parker owned rigs we currently have contracted there. Continuing to expand on our capital efficient opportunities our Lower 48 Drilling segment just signed a unique rig construction contract for P&A work in the Gulf of Mexico.
As we noted on our previous earnings call, we hope to provide the subsequent O&M work once construction is completed late this year. And for our International Rental Tools segment, we were awarded two new long-term contracts in the Middle East that will facilitate the continued margin expansion for this segment. In addition to these great wins, we continue to participate in several tenders that if awarded, would either put our equipment back to work or continue to expand our service oriented O&M business, both of which facilitate our capital efficient focus.
Looking at our full-year outlook. We currently forecast 2020 consolidated revenue to be at 4% to 6% compared to 2019. The US Rental Tools segment, which is our highest margin business is expected to decline over the same period, as average US rig count is projected to be down around 15%. We anticipate this decline will be more than offset by revenue improvement in the International Rentals and International & Alaska Drilling segments. However, given the mix of business, we project adjusted EBITDA will be relatively flat with 2019 between $120 million and $130 million. Although US rig count appears to be leveling off in line with the latest market expectation, a high level of uncertainty remains this -- early in the year. A significant shift in the expected US activity would likely have a material impact on our financial results. Similarly, we have seen recent downward revisions to global oil demand growth as a result of the coronavirus outbreak. The ultimate impact on overall demand is still unknown, and this too could have a significant impact on our financial results. We expect cash interest to be approximately $20 million and cash tax to be between $12 million and $15 million.
Lastly, we currently project our capital spending to be between $85 million and $95 million. Although this is slightly higher than 2019, we have identified several opportunities to expand our business, deliver long-term earnings growth and generate very positive returns on capital. Payback on these incremental investments are generally between 18 and 24 months. The Parker team is committed to being a return on capital focused company in doing so by providing innovative reliable and efficient solutions that help our customers mitigate their operational risk and minimize their cost, so they can deliver safe and profitable wells.
That concludes our general comments. Given the impending Going-Dark transaction, we will not be taking questions today. Going forward, our intent is to report quarterly results to our remaining shareholders and we will disclose that reporting process once it is finalized.
That ends our fourth 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 on our earnings, press release or during this conference call. Goodbye and have a great day.
Questions and Answers:
Duration: 23 minutes
Call participants:
Michael W. Sumruld -- Senior Vice President, Chief Financial Officer
