August 21, 2004
Luc Mageau Bcomm (780) 473-1618
www.zackspro.com 155 North Wacker Drive l Chicago, IL 60606
Parker Drilling (PKD – NYSE) $3.36
Overview
Parker Drilling is a global drilling company providing drilling rigs, labor management, and rental tools to the energy industry. Parker's primary business segment is drilling rigs with21 in the United States Gulf of Mexico and 44 internationally.
The U.S. rig fleet operates in the transition zones and offshore waters in the Gulf of Mexico. The company's international rig fleet consists of barge rigs in the Caspian Sea, Mexico, and Nigeria and land rigs in 13 countries.
A subsidiary, Quail Tools, has four U.S. locations where it is a leading provider of specialized rental equipment for drilling and work-over operations. Office and yard locations include New Iberia, La., Victoria and Odessa, Texas and Evanston, Wyoming. The company has customers in over 53 countries to date, including major, independent and foreign-owned oil and gas companies in each country.
Company management has stated that its strategy is to increase rig utilization, particularly in international land markets, pay down debt from free cash flow, search for and seize new growth opportunities with minimal capital spending and maximize returns on U.S. assets. They also focus on industry dignity, and safety of its employees, with a TRIR less than 2, well below industry average.
NOTE: PKD’s fiscal year ends on December 31; all calendar references are to the fiscal year.
Positive Arguments / Strengths / Negative Arguments / Threats· Debt reduction focus ($18MM paydown in 2003 and $20MM in 2004)
· Subsidiary (Quail Tools) continues to drive company results, accounting for over ¼ of gross income, and gross margins over 50%
· GOM barge markets showing modest increases in dayrates and utilization
· Demand and dayrates exceed analyst expectations
· Potential gain from Mexico entry, and 2nd rig in Turkmenistan / · Higher than expected tax expenses
· Recent high seismic and drilling costs (from previously)
· Asset sale has taken longer than expected for discontinued operations, causing stock price fluctuation
· Production in the Gulf of Mexico subject to hurricanes and pipeline damages.
· High debt-leveraging, despite debt paydown
·
Analysts generally agree that the company has a promising looking future, and its recent debt pay down to reduce leverage definitely improved the company’s outlook. They also note that it is a leveraged company, and given the recent fluctuations in oil and gas, combined with an impending price correction, the company has significant risks. Its Quail Tools division adds significant value to the company, and is expected to be a main driver for future earnings.
Sales
[2003]A / [2004]E / [2005]E / 03 - 05 Growth / 04-05 GrowthDomestic Drilling / $68 / $79 / $85 / 25.00% / 7.59%
International Drilling / $192 / $214 / $267 / 39.06% / 24.77%
Rental Tools / $55 / $63 / $66 / 20.00% / 4.76%
Other / $7 / $0 / $0 / -100.00% / 0.00%
Total Revenue / $321 / $356 / $418 / 30.22% / 17.42%
The company has displayed good growth over the period from 2003 to 2005 (expected). However most of the growth in revenue has been due to the International drilling section. Particularly from 2004 to 2005, growth has been high. Rental tools have shown significant growth, with 20% from 2003 to 2005.
Please see the separately saved spreadsheet for more details.
Geographic Sales Breakdown:
The only breakdown given was domestic and international drilling. They are reflected as a percent of total revenue below.
[2003]A / [2004]E / [2005]EDomestic Drilling / 21.18% / 22.19% / 20.33%
International Drilling / 59.81% / 60.11% / 63.88%
Note that most of PKD’s revenue comes from International operations.
Margins
Sector Gross Margin
[2003]A / [2004]E / [2005]EDomestic Drilling / 28.97% / 32.15% / 31.53%
International Drilling / 31.15% / 32.29% / 33.11%
Rental Tools / 57.45% / 58.89% / 59.70%
Other / 28.57% / 0.00% / 0.00%
Company Wide Margins
[2003]A / [2004]E / [2005]E / Trend (up/down)Gross Margin / 35.20% / 36.99% / 36.99% / Stable
Operating margin / 7.76% / 12.50% / 15.93% / Increasing
Pretax Margin / -8.22% / -2.30% / 3.61% / Increasing
Net margin / -13.40% / -3.71% / 1.56% / Increasing
The company seems to be maintaining a relatively stable Gross margin. There is substantial growth in the other margins. This is due to the foreseen debt reduction, as well as a focus to limit operating expenses in each sector.
Please see the separately saved spreadsheet for more details.
Earnings Per Share
Fiscal Year Ended Dec 31 / [Q2 2004]A / [Q3 2004]E / Qtr Growth / [Q4 2004]E / [Q1 2005]E / [Q2 2005]E / YOY GrowthDigest Average EPS / ($0.05) / $0.00 / 100.00% / $0.01 / $0.01 / $0.02 / 100.00%
Digest High EPS / ($0.03) / $0.00 / $0.02 / $0.01 / $0.02
Digest Low EPS / ($0.06) / ($0.01) / $0.00 / $0.01 / $0.02
Please see the separately saved spreadsheet for more details.
Target Price/Valuation
We had three target prices available to us. The lowest target value was given by [Lehman], which used a target price of $3.60. The highest target price was given by [Zacks], and [Jefferies] which both used a target price of $4.00
Please see the separately saved spreadsheet for more details.
Upcoming Events
EVENT
/DATE
Lehman Fixed Income Energy Conference / May 13, 2005CSFP OTC Roundtable / May 4, 2005
Third quarter results to be announced / November 3, 2004
Tender offer for 10 1/8% notes due 2009 / August 19, 2004
Sale of $150 million in floating notes due 2010 / August 18, 2004
Other Discussion/Capital Structure/Cash Flow/Solvency/Governance
The company has recently refinanced $38 million in debt; this has reduced its interest costs, but still leaves the company highly leveraged.
PKD has also been trying to sell off a significant portion of assets since last quarter. Analysts note that a major driver in the price, as well as target prices given are a result of this sale. The company could experience some difficulty if it does not sell these assets (from discontinued operations), or if they do not realize a good price for them (as may be the case with liquidations).
Long-Term Growth
Analysts note that a debt paydown of approximately $200 million that will be a result of asset sales and insurance proceeds will help the company grow, and free up significant cash flow for future growth. However, the asset sale that the company has expected, has not yet occurred, and may not occur at the price expected. This is only a short-term issue though, and long-term growth will no doubt be encouraged by this move. The company continues to grow, maintaining a steady gross margin, increasing revenues, and decreasing operating costs. This will be a main driving force for the EPS estimates given by analysts. Quail Tools has been a main factor in the increase in the company’s margins, and future success. The sector produces margins of over 50%, adding significant value to PKD in total. Utilization and day rates are expected to remain strong, and pending this, the company should maintain growing, and increasing revenues.
Individual Analyst Opinions
POSITIVE RATINGS
Lehman – Stock is rated Equal Weight 2 (Last updated 04/28/2004) Parker's top priority remains asset sales and reducing its high debt position. A partial asset sale, possibly several jackups, could occur in the 2Q and the company remains committed to a total of $200 MM in debt reduction. Operationally, Quail Tools continues to be a major driver of the company's results, adding over 25% of total gross income during the 1Q. Modest improvements from PKD over the remainder of 2004 are expected.
Zacks – Stock is rated Hold (Last updated 07/13/2004) Parker Drilling Company is expected to gain from exposure to profitable land drilling operations in the international market. The improved deep-water drilling environment in the GoM and the Rocky Mountain area is leading to additional earnings from the company’s rental tool business. However, the company has been consistently generating losses in the recent past and it appears to be some time until the company becomes profitable. Furthermore a high debt-to-capitalization ratio of 73% continues to be a cause of concern.
Jefferies – The stock is rated Hold (Last updated 04/28/2004) With current utilization of 100% and dayrates of approximately $20,500, PKD continues to exceed expectations. Even though the company has done a commendable job of reducing debt and improving its financial flexibility, the current discount to its peer group is justified given the Company’s high leverage, limited visibility in its international drilling operations, and uncertainty over its proposed asset sales. Furthermore, PKD’s stock price is expected to be driven by the success or failure of potential asset sales. After announcing its intention to sell assets over 18 months ago, PKD is well behind its original schedule for the proposed sales and is now behind its revised schedule.
Zacks Investment Research Page 2 www.zacks.com