This week, we focus on Parker Drilling (PKD), a US-based company providing contract drilling, drilling-related services and rental tools for the oil and gas industry. Like many companies whose operations are intricately tied to oil and gas exploration and production companies, Parker Drilling has seen its profits decline in response to the decreasing price of oil. However, Parker’s astute management team has proactively reduced employee headcount and decreased its per month idle rig cost by as much as 33%, and increased its cash levels to their highest levels in five quarters. Almost unbelievably, Parker actually paid down $30M in debt in Q1 2015, following one of the worst oil crashes in modern history, with oil prices dropping almost 60% between June 2015 and January 2015. Equally impressive is the $495 million backlog that remained at the end of Q1 2015 for its Drilling Services business segment. Not only has Parker Drilling remained profitable, it appears to have actually improved its balance sheet. Given these many noteworthy achievements amid the current distress in the oil industry, we think the company is also likely to excel once oil prices stabilize and begin to cycle higher. Therefore, we see these 62 month, B1/B+ rated bonds from Parker Drilling, couponed at 7.5% and indicating an over 9% yield to maturity when discounted to a price of about 93, as a sound addition to our high yielding Fixed Income-1 and Fixed Income-2 global income portfolios.
About the Issuer
Founded in 1934, Houston-based Parker Drilling is an international provider of contract drilling and drilling-related services and rental tools. The company has three business segments – US Drilling, International & Alaska drilling and Rental Tools. Parker is among the most geographically experienced drilling contractors, currently operating in 23 countries. The company has extensive experience and expertise in drilling geographically difficult wells and in managing the logistical and technological challenges of operating in remote, harsh areas. Its rental tools business supplies premium equipment to exploration and production (E&P) companies, drilling contractors and service companies (both on land and offshore) in the United States and in select international markets.
Navigating the Biggest Oil Downturn in Recent History
With the dramatic decrease in oil prices, Parker Drilling has been able to weather the storm through its generation of income from its three different business units – US Drilling, International and Alaska Drilling and Rental Tools. Although revenues and gross margins have declined in the US Drilling Segment, mainly due to decreased or delayed activity from companies engaged in land and shallow water drilling, gross margins have improved in Rental Tools and International Drilling.
The company’s Rental Tools division has shown recent decreases domestically (in the U.S.), but has actually increased in the international markets. For U.S. Rental Tools in Q1 2015, gross margin declined to $21.3 million from $31.8 million, while International Rental Tools registered an increase in gross margin for the same period, growing from $7.5 million to $8 million. And Parker’s management remains optimistic regarding growth in the company’s International Rental Tools business. In his comments regarding the outlook for 2015 in the International Tools segment, CEO Gary Rich said “we expect our large presence in the Middle East and the improving operating performance of our business to lead to better results in 2015, when compared to 2014”. Indeed, Parker is pouring a majority of its projected 2015 capital expenditures into this segment, with 65% earmarked towards it Rental Tools segment.
Parker’s International & Alaska drilling segment also saw increases in Q1 2015, with gross margin increasing 41%, mainly due to two new projects in Abu Dhabi begun in Q4 2014. This follows an 8% revenue increase in Q4 2014 over Q3 2014. Although these international markets are not immune to the industry wide decline, Parker’s International and Alaska drilling operations are in markets that have been traditionally less volatile than the U.S. land drilling market.
Cutting Costs, Reducing Debt and Increasing Cash
In the midst of the turmoil generated by the rapid decline in oil prices, Parker Drilling has endured: cutting costs, reducing debt and increasing cash.
Parker Drilling has made excellent decisions to protect its balance sheet through rigorous control its operating expenses. It started with a 70% reduction of its field workforce in its US Barge Drilling business. In Q1 2015, the company made a 10% workforce reduction and management expects to be down by 13% by mid-2015. Parker also reduced its idle rig cost from $90-$120K per month, down to $80K per month, while still keeping these rigs operational and ready for service when needed.
Debt reduction has also been a target. In 2014, Parker Drilling reduced its debt by $39 million. More impressively, it reduced its debt an additional $30 million in Q1 2015 during the largest decline in oil in modern history. In fact, total debt has decreased in the past 12 months, registering 38% of assets on 3/31/2015 as opposed to 42% on 3/31/2014.
As oil prices began their precipitous fall in 2014, Parker Drilling’s management had already begun to shore up the company’s balance sheet. At the end of Q1 2015, the results of these changes are clearly remarkable. Cash levels at the end of Q1 are at their highest levels in five quarters, and debt is at its lowest level in five quarters. Indeed, the company increased cash from $108 million on 12/31/2014 to $113 million on 3/31/2015. While an increase of $5 million may seem insignificant, when one considers the state of the oil industry at present time, any increase in cash should be viewed positively. The company also improved its liquidity in January 2015 by increasing its credit facility from $80 million to $200 million, giving it a total liquidity as of 3/31/2015 of $301 million.
It is extremely impressive that as oil prices bottomed out at $45 a barrel in January 2015, Parker Drilling managed a net profit of $3.22 million in Q1 2015. Even more striking is the comparison to Q1 2014, when the company registered a net loss of ($12.55) million when oil prices were well in excess of $100 a barrel. It is clear that the difficult cost cutting decisions made in the wake of the oil crash are yielding well-deserved results.
Parker Drilling also surprised analysts in Q1 2015, when it deftly exceeded the analysts’ consensus estimate of ($0.03) per share by $0.06, reporting $0.03 earnings per share.
For 2014, Parker Drilling had operating income of $120.220 million and interest expense of $44.265 million for an interest coverage ratio of 2.7x. In its most recent quarterly results, Parker Drilling had operating income of $15,871 million and interest expenses of $11.078 million for an interest coverage ratio of 1.43x. While we acknowledge this decrease in interest coverage, it is worth noting that Q1 saw oil prices drop to $45 a barrel, the lowest price in recent history. In spite of this decrease, we feel Parker Drilling has shown its ability to strategically respond to market changes indicated by its judicious cost cutting and debt reduction.
The default risk is Parker Drilling’s ability to perform. As oil prices were cut by almost 60% in six months, Parker Drilling was able to shore up its balance sheet, increasing cash and decreasing debt. It also made significant cost reductions that contributed to the company’s continued profitability, even in the face of the lowest oil prices in recent history. For these reasons, we feel these short-term bonds, currently yielding 9%, represent an excellent yield relative to the risks we can identify.
Parker Drilling’s operation success is significantly dependent on exploration and development activities of major, independent and national oil and natural gas companies. These activities are directly affected by the prices of oil and natural gas, which vary daily and can be highly volatile, as we have witnessed in the past year. While oil prices seem to have stabilized somewhat around $60 a barrel, it is unclear how long the oversupply of oil will last, or when prices will start to appreciate significantly. Parker Drilling’s management has made the needed, strategic changes within the company to position the company for long-term success and profitability, even in the current low-price oil environment.
A significant amount of Parker’s revenue is generated from one large client company, Exxon Neftegas Limited (ENL). In 2014, ENL made up 18.7% of total revenues and in Q1 2015, this amount was 22.9% of total consolidated revenues. The loss of business from ENL could materially affect the operations and profitability of Parker Drilling.
These Parker Drilling 2020 bonds appear to have similar risks and maturities to other bonds previously reviewed on this Bond-Yields.com blog, such as 9.15% Vanguard Natural Resources and 8% Kuwait Energy.
Summary and Conclusion
Parker Drilling has remained profitable and reduced debt during the worst oil crash in recent history. The company continues to scrupulously monitor and reduce operational costs as needed, with an eye to continue increasing profitability and growing domestic and international operations. We feel its ability to generate a profit, even at the lowest point of this oil recession, speaks to the company’s strength and determination. For these reasons, we think these relatively short-term, over 9% high yield bonds work well for our clients looking for higher cash flow, high yields, and diversification, and have targeted them for addition to our FX1 and FX2 global income portfolios
Issuer: Parker Drilling Co
Ratings: B1 / B+
Yield to Maturity: ~9.18%
Disclosure: Durig Capital and certain clients may have positions in Parker Drilling 2020 bonds.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients.
To know more about this Parker Drilling bond call our fixed income specialist at 971-327-8847