Yahoo Finance Parker Drilling Company (PKD) Q2 2019 Earnings Call Transcript
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Parker Drilling Company (NYSE: PKD)
Q2 2019 Earnings Call
Aug. 6, 2019, 11:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Greetings and welcome to the Parker Drilling 2nd Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the presentation. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Mr. Nick Henley. Thank you, Mr. Henley. 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 Executive Vice President and Chief Financial Officer. We are pleased to have the opportunity to speak with you today and look forward to sharing the results of our 2nd Quarter performance.
Due to the adoption of Fresh Start Accounting at the beginning of the quarter, related to the company's emergence from Chapter 11 bankruptcy, the consolidated financial results of the successor period beginning as of April 1st, 2019, are not directly comparable to the consolidated financial results for predecessor periods prior to the emergence. However, combined information for certain components of our results, such as revenue and gross margin, is materially similar across 2 periods, and therefore we will speak to these on today's call as we believe this information is useful for investors to assess the company's operating performance and related trends.
For more information regarding the consolidated financial results between the predecessor and successor period, we encourage you to review the financial information contained in our earning's release and our Form 10Q.
As a reminder, during this conference call, management may make statements regarding future expectation 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. Security's 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 FCC.
During this call, management will refer to non-gap 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 Rich -- President and Chief Executive Officer
Thank you, Nick, and good morning, everyone. Let me begin my remarks with a few comments on my recently announced decision to retire from my role as President, CEO, and director of Parker.
Over the past seven years, it has been my tremendous honor to lead Parker and work alongside some of the most talented and hardworking people in the industry. People who are dedicated to safely providing our customers with innovative, reliable, and efficient service. Although we encountered our fair share of industry headwinds, together we overcame them, strengthened our resolve, and bounced back stronger.
So with the company now on solid footing, and with robust prospects for the future, I've decided that the time is right for me to retire as Parker enters into the next chapter. As was mentioned in the press release, I will remain with the company for an interim period to support a smooth transition while the board conducts its search for a successor. In terms of our strategy and operations, we will continue to execute and serve our client's needs, just as we have for 85 years, and there will be no change or disruption to our ongoing work.
With the experience and insight of our management team, I have every confidence that we will further Parker's success through the transition period and beyond. With that said, let me now turn your attention to our performance in the 2nd Quarter.
I am pleased to report that we achieved excellent results, despite what remains a challenging market. In the 2nd Quarter, we delivered a net income of $4.6 million and EPS of $0.31 per share. We feel these results speak to the success of our turnaround efforts, and we are very confident that Parker is now on more solid ground and significantly better able to capture opportunities, as well as navigate any challenges that may arise.
The strategic changes we made were timely, as there remains a considerable amount of uncertainty in the market place, particularly with respect to North America fundamentals. In the U.S., many EMP companies are reducing their capex budgets, slowing drilling activity, and demonstrating a greater focus on shareholder returns, all while production continues to rise. Service pricing also remains challenging, due both to falling rig activity as well as excess capacity in the market place.
In contrast, the international markets appear to be strengthening and will likely continue to do so throughout the rest of the year and into 2020. There has been a good deal of positive EMP sentiment overseas, with tendering and drilling activity increasing. This healthier market environment is evidenced by our year over year improvement in revenues and growth margin, both in our international rental and drilling segments.
Turning now to our 2nd Quarter results, as anticipated, our consolidated quarterly revenue was down slightly from the 1st Quarter. However, when excluding the unusually high reimbursable revenue event of roughly $10 million, which we highlighted in the 1st Quarter, our 2nd Quarter consolidated revenue of $156 million was up 6%, just slightly below our guidance of a 7% to 9% sequential increase.
Adjusted EBITA in the 2nd Quarter came in at $37.8 million, compared to our first quarter adjusted EBITA of $28.4 million, a clear beat which exceeded our guidance. The sequential increase was driven by strong gains in both our drilling business and international rental segment, as well as lower G&A expense.
Taking a closer look at our business segment performance, in our U.S. rental tools segment, revenues were flat sequentially, in line with our guidance, while our gross margin compressed a bit. Results were primarily driven by an increase in offshore rental activity, offset by slightly lower land activity and less sales and repairs revenue. Overall, the U.S. rental tools business posted solid results, despite the 5% reduction in the U.S. rig count during the quarter. And the slight decline in our tubular utilization index from 87% in the 1st Quarter to 85.2% in the 2nd Quarter.
Our international rental tools segment exceeded guidance, with revenues up 5% sequentially and gross margin as a percent of revenue rising from 2.5% in the prior period to 13.2% in the 2nd Quarter. These strong results were driven by our increased web stock sales, as well as a lower overhead cost. Demand for our tubular renting services and proprietary casing running tools remain strong, and we are actively participating in new tenders within several different markets, which we feel quite optimistic about.
As evidence of this increased tendering activity and optimism, I am pleased to announce we were awarded a new tubular renting services contract Ukraine during the 2nd Quarter, which will come online in the 3rd Quarter.
Our U.S. lower 48 drilling segment also posted both higher revenues and gross margins, which were in line with our guidance. Revenues nearly doubled, and adjusted EBITA increased from a loss of $700,000 in the 1st Quarter to a profit of $2.6 million in the 2nd Quarter. While the Gulf of Mexico barge market remains soft, we benefited from more revenue days in the 2nd Quarter.
Currently, we have 3 rigs operating, or 30% utilization, which reflects the retirement of the 3 rigs we previously announced, reducing our fleet total to 10. Our own end project, offshore California, had a full quarter's contribution. And with the rig activation phase nearing completion, we will be moving into an operations mode in the 3rd Quarter.
Finally, our international and Alaska drilling segment surpassed our guidance, with gross margin increasing 33% sequentially, despite an 11.2% reduction in revenues. This increase in profitability was a result of a shift in revenues toward more favorable, higher-margin activities, and away from the low margin reimbursable revenue event in the 1st Quarter. As an additional rig returned to service in Mexico, and activity increased in Sakhalin Island.
As a reminder, in addition to the two rigs that were operating in Mexico during the 2nd Quarter, we now have signed contracts for 2 additional rigs, previously under LOIs, that will commence drilling operations in the 3rd Quarter. We've also signed a long-term contract with Husky Energy, to operate and maintain its new platform project offshore Atlantic Canada once construction is complete. Our work scope involves technical support during construction and full O&M upon commissioning, which is expected to occur in 2022.
I will now turn the call over to Mike to discuss our 2nd Quarter results, and then I'll provide some additional commentary on our outlook before we open up for questions. Mike?
Michael W Sumruld -- Executive Vice President and Chief Financial Officer
Thanks, Gary. For the 2019 2nd Quarter, we reported revenues of $156 million, an adjusted EBITA of $37.8 million or 24% of revenues. Compared to the 2019 1st Quarter, revenues decreased $1.4 million or 1%, and adjusted EBITA increased $9.4 million or 33%.
As Gary mentioned earlier, although revenues contracted sequentially due to the unusually high reimbursables in the 1st Quarter, profitability improved. Particularly as a result of better performance from our drilling services business and international rental tools segments, while our U.S. rental tool segment continued to provide solid contributions.
In our U.S. rental tools segment, quarterly revenues were roughly flat, coming in at $52.9 million in the 2nd Quarter and $52.6 million in the 1st Quarter. This segment once again outperformed the change in U.S. rig count, a consistently quarterly pattern since the market bottomed in May 2016 and an indicator of continued share gains over the past 3 years.
While offshore Gulf of Mexico rental activity was up in the 2nd Quarter, revenues were offset by lower land activity and lower sales and repairs relative to the prior quarter. Gross margin in this segment was $27.7 million compared with $29 million in the 1st Quarter, and gross margin as a percent of revenues was 52.3% in the 2nd Quarter versus 55.1% in the 1st Quarter. This margin compression was primarily the result of changes in product and service mix.
In our international rental tools segment, we saw both sequential revenue and gross margin improvement. Segment revenues were $22.2 million in the 2nd Quarter compared with $21.1 million in the 1st Quarter. The increase in revenues was largely driven by higher whipstock sales, which had been delayed from the 1st Quarter, and improved well intervention services in Abu Dhabi. Gross margin was $2.9 million in the 2nd Quarter versus $534,000 in the prior quarter. The improvement in gross margin was mainly due to increased revenue and lower overhead cost.
Turning to our drilling services business, the U.S. Lower 48 drilling segment posted strong improvement in the 2nd Quarter. Revenues came in at $12.5 million compared with $6.5 million in the 1st Quarter. While the gross margin was a $2.6 million profit versus a $700,000 loss in the 1st Quarter.
The increase in revenues and gross margin was driven by both the full quarter contribution of the California O&M project, and an additional 100 revenue days from our barge fleet. With utilization of 15.6% in the 2nd Quarter compared to 4.6% in the 1st Quarter, factoring in the retirement of 3 rigs.
As Gary mentioned, we currently have 3 rigs working, and although the market remains soft, we are seeing some incremental improvement in both job opportunities and drilling permits.
In our international Alaska drilling segment, revenues were $68.5 million in the 2nd Quarter, compared with $77.1 million in the prior quarter. The decrease was primarily due to the unusually high level of reimbursable revenues in the 1st Quarter offset by higher activity in the 2nd Quarter. Excluding this high reimbursable event, revenues in the 2nd Quarter increased 2% sequentially reflecting positive momentum in the sector.
Gross margin for the segment was $10.2 million during the quarter and $7.7 million in the 1st Quarter. The main drivers for the increased gross margin were the shift to higher-margin, more favorable revenues streams in the Arctic, as well as a higher volume of activity in Mexico. For the 2nd Quarter, rig utilization was 47% compared to 42% in the 1st Quarter.
Regarding other financial items, our G&A expense was $5.6 million in the 2nd Quarter compared with $8.1 million in the 1st Quarter. This decrease was primarily due to long-term incentive plan adjustments and other overhead related costs during the 2nd Quarter. Going forward, we expect full-year G&A to be between $27 million and $29 million.
We reported a tax expense of approximately $3.8 million in the 2nd Quarter, a pre-tax income of $8.4 million. The reported tax expense reflects the mix of results of in the jurisdictions in which we operate, our inability to recognize benefits associated with certain loses as a result of valuation allowances, and changes in uncertain tax previsions. We expect our 2019 cash taxes to be approximately $6 million to $10 million.
Our capital spending in the 2nd Quarter was $25.1 million, totaling $34.3 million through the first 6 months of the year. Approximately 80% of this spend was directed to our rentals business.
Turning now to our balance sheet and our cash flows. Total long-term debt outstanding at the end of the quarter was $211 million. We ended the quarter with a total cash balance of $141 million, including $2 million in restricted cash that is held in escrow for the remaining restructuring fees. This escrow account is expected to be closed by the end of the 3rd Quarter.
On an unrestricted basis, our cash balance was $139.1 million, while it was $127.8 million in the 1st Quarter. The increase of $11.3 million in our unrestricted cash during the quarter resulted from improving operational results and delayed capital spending, decreasing our net deposition to $72 million at the end of the quarter.
Total liquidity at the end of the quarter, excluding restricted cash, was $163.9 million, consisting of $139.1 million in unrestricted cash and $24.8 million available under our revolving credit facility.
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 3rd Quarter, we expect our consolidated revenues will decrease by $4 million to $6 million, and adjusted EBITA should decrease back to levels similar to that of the 1st Quarter. This decline is largely due to 3 items.
First, we have taken a conservative stance toward the U.S. land market, as EMPs tighten capex, even as we have outperformed the change in rig count since the bottom of the market in 2016. The second is a recognition of anticipated white space in one of our international drilling markets, which I will elaborate on momentarily. Lastly, we expect G&A to return to normal levels in the 3rd Quarter.
For the U.S. rental tools segment, we anticipate 3rd Quarter revenues and gross margin will contract at 9% to 12% sequentially due to expected lower activity brought on by a declining U.S. rig count. However, we remain confident in our ability to deliver strong performance, as previous investments in best in class equipment and our dedication to customer service provide the foundation of our position as an industry leader. Furthermore, our diversification in offshore markets, which continues to show signs of strain offers additional opportunities for growth.
In the international rental tools segment, we anticipate sequential improvements as we expand our services. 3rd Quarter revenues will be up 12% to 14%, and gross margin as a percentage of revenue will track in the low double digits due to newly awarded tubular renting services project in the Ukraine, as well as improved activity in certain Middle East and Asian markets.
For our U.S. Lower 48 drilling segment, we expect sequential revenue gains as barge utilization improves, driven by several projects which were delayed in the first half. However, gross margin will decline slightly as the California O&M project transitions from its reactivation phase to a steady state of operations.
In earlier communications, I have spoken about our company's concentrated efforts to grow our O&M drilling and capital-efficient business lines. And as I've specifically noted, areas where we have existing resources with a strong reputation, like the Gulf of Mexico, provide excellent opportunities for expanding our O&M footprint.
With that, I am pleased to announce we were recently awarded a technical services engineering project for a major Gulf of Mexico client. This project capitalizes on our offshore platform expertise and aligns with Parker's strategy of serving our clients in a capital-efficient manner. While the near-term proceeds of from this work will be modest, it has the potential to develop into long-term work providing substantial O&M upside for this segment in the future.
Before I move onto the next segment, I'd like to note that our teams along the Gulf Coast withstood Hurricane Barry, without incident to our personnel or equipment, and business was not meaningfully impacted. Let me take this opportunity to express our gratitude to all of the outstanding personnel who responded quickly to prepare for the storm and to our clients for their collaboration in helping us mitigate the impact.
Turning now to the international and Alaska drilling segment, we anticipate revenues and gross margin will decrease due to lower utilization of 2 rigs in Kurdistan and 1 in Mexico as they complete their contracts in the 3rd Quarter. This impact will be partially offset by the start-up of 2 rigs in Mexico during the quarter. Revenues should decrease between 6% to 8% compared to the 2nd Quarter, while gross margin for this segment will track lower as a result of lower revenues and rig demobilization cost in Kurdistan.
There remains the possibility for one of the Kurdistan rigs to return to work before year-end. And with active rigs to market for several tenders which we are currently fielding, we are encouraged by the opportunity to put both rigs back to work early in 2020.
With that, I'd like to provide some insight into our full-year guidance. Notwithstanding the uncertainty in the North America market and some positive momentum swings in certain international markets, we are maintaining our 2019 adjusted EBITA forecast range of $120 million to $130 million. At this time, we are also maintaining our forecast for full-year 2019 capital expenditures of approximately $80 million to $90 million, given the demand of certain markets and product lines.
However, as we previously emphasized, our priority is to maintain a strong cash balance and to be cautious in our spending, returning investments that offer both quick paybacks and an attractive return on capital. It's important to note that we also have a measure of flexibility in adjusting our spending levels in response to market conditions through the year and will do so as needed.
On our last earnings call, we forecasted positive cashflows for the second half of the year. However, some of the capex we'd planned to incur in the 2nd Quarter was pushed into the 3rd and 4th Quarters. Consequently, our unrestricted cash grew in the 2nd Quarter by $11.3 million when we had anticipated a small reduction in cash. Given that capex was pushed out, we now expect a net cash outflow in the second half of the year, but overall positive cash flow for the last 3 quarters of 2019.
So with a recovery under way in the international and offshore markets, as well our dominant market position in U.S. rentals, we remain confident in our ability to successfully deliver positive long-term cash flow and return on capital.
In closing, I'd like to, again, to thank our employees for their focus, commitment to safety, and unwavering dedication to our customers. We have come a long way together, and I am confident that Parker is better positioned than it has ever been to adapt to future challenges and to thrive in the pursuit of future growth and higher returns.
...
That concludes my comments. Operator, we are ready to take questions from the audience.
Questions and Answers:
Operator
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaking equipment, it may be necessary to pick up your handset before pressing the star keys.
Our first question comes from Jason Wangler of Imperial Capital. Please proceed with your question.
Jason Wangler -- Imperial Capital -- Analyst
Good morning. I wanted to ask -- you just were mentioning around the capex budget and kind of the outlook, with what you've seen kind of changing here in the domestic market and really just getting kind of worse overall, does that change the capex spend as far as the breakdown between domestic and international? Or are you pretty committed to the program you have in place? And maybe if you could just give a breakdown of domestic versus the international spending this year? I'd just be curious to kind of see where that's at.
Gary G Rich -- President and Chief Executive Officer
Jason, this is Gary. I certainly anticipate us taking into consideration the market as we continue to evaluate that capex spend going forward. And to the extent that the North America market softens as anticipated, we clearly don't anticipate spending the same level of capex in 2020 as we were spending in 2019. And as you're well aware, because of the mix of business that we have in the U.S. versus international, that will mean that you'll likely see a larger percentage of our overall spend in 2020 that would go toward the international market as opposed to the domestic.
But we're very mindful of where activity levels are and remain committed to a cashflow positive result.
Jason Wangler -- Imperial Capital -- Analyst
Okay. And obviously, the cash built up further, and as you mentioned, you know, to be pretty decent in the second half, and so your cash balance is pretty solid. You've got the second lean still out there, and I think you have a month or so left with a pretty good call provision. Obviously, the market's not helping us at all there. But could you maybe just talk about your options there and how you're thinking about the balance sheet as you move forward?
Michael W Sumruld -- Executive Vice President and Chief Financial Officer
Sure, Jason. This is Mike, and yeah, we've got actually about 2 months left before that call prevision kicks in at a fairly high rate. We continue to look at options in the marketplace. As you said, though, it's, unfortunately, a real challenge at the moment, especially given our size and so forth. It's going to be a challenge.
But we continue to look at that as well as our capital structure in general, and the various options that go along with it. And that's probably really about all I can say at the moment.
Jason Wangler -- Imperial Capital -- Analyst
Okay. I appreciate it and thanks for the color.
Michael W Sumruld -- Executive Vice President and Chief Financial Officer
Thank you.
Operator
Once again ladies and gentlemen, if you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Once again, it is *1 to ask a question. One moment please, while we poll for questions.
There are no further questions at this time. I'd like to turn the call back to management for closing comments.
Gary G Rich -- President and Chief Executive Officer
Thank you, Erin. That ends our 2nd Quarter earnings call. Thank you for your time today and your interest in Parker Drilling. Please contact us if you have any questions regarding the material covered in our earnings press release or during this conference call. Goodbye, and have a great day.
...
Operator
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.
Duration: 30 minutes
Call participants:
Nick Henley -- Director of Investor Relations
Gary G Rich -- President and Chief Executive Officer
Michael W Sumruld -- Executive Vice President and Chief Financial Officer
Jason Wangler -- Imperial Capital -- Analyst
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