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WIKI ANALYSIS
Parker Drilling Company (NYSE: PKD) contracts out its drilling rigs and equipment to companiesexploring for oil and natural gas. By the end of 2006, most of the company's drilling rigs were concentrated offshore in the Gulf of Mexico, positioning the company to benefit from an increase in oil production at depths greater than 1000 feet.
As Parker Drilling operates on a contract basis, the company is exposed to unforeseen weather such as hurricanes, which have wreaked havoc in regions such as the Gulf of Mexico. Contracts with E&P companies often contain clauses that protect these customers from natural disasters, and Parker Drilling depends on weather forecasts to price and draft contracts.
The company has benefited from a worldwide increase in demand for energy, which has been driven by growing economies such as China. As demand for oil and natural gas has skyrocketed, so has the demand for drilling rigs. From 2004 to 2006, Parker Drilling increased revenues 6-fold and moved from being very unprofitable to a 56% net income margin.
Business Operations
Parker Drilling makes money by contracting out its drilling rigs and equipment. The company expanded its revenue rapidly from 2004 to 2006, increasing sales by over 500%. The company also went from a negative profit in 2004 to over 50% in net income margin in just 3 years.
| (000's) | 2004 | 2005 | 2006 |
| Operating Income | 23,867 | 115,123 | 143,362 |
| Net Income | -47,084 | 98,883 | 81,026 |
| % Net Income | -197% | 86% | 57% |
Parker Drilling breaks down its business into three segments:
United States barge and land drilling: The company has three land rigs within the U.S. and nineteen barge drilling rigs in the U.S. Gulf of Mexico.
International land drilling and offshore barge drilling: PKD owns eight land rigs in the Commonwealth of Independent States, nine in the Asia Pacific, three in Latin America, one in the Middle East, and one barge rig in the Caspian sea.
Drilling related rental tools: Parker Drilling contracts out not only its drilling services but also its equipment depending on the opportunity cost associated with company or second party use.
The chart below shows the revenue by operational business segment. In all but one case, the year on year growth in revenue has been positive. From 2004 to 2006, operating costs have nominally increased but have marginally decreased with respect to operational revenue growth, resulting in about a $120 million increase in operational income.
Key Trends and Forces
Weather Conditions Dictate Feasibility of Contracts
Parker Drilling makes money through contracts, which often hold clauses to protect clients from unforeseen climate changes. Additionally, the terms of these drilling contracts depend on the forecasted weather patterns of a given area. Thus, the variability of weather patterns and events such as hurricanes plays a major role in the the number of annual drilling contracts drafted and executed, which translates into an invariability on operational income through domestic and international drilling segments.
Benefits from Increased Natural Gas and Oil Prices
PKD generally benefits from higher natural gas and oil prices, as consumers have proven to be relatively inelastic to price increases and the world's appetite for energy is increasing (see China's Energy Appetite). Rising prices for these resources means:
- More contracts for Parker Drilling because of the increased number of oil processing companies contracting Parker Drilling to excavate, which stimulates operational revenue.
- Increased competition as companies find contract drilling to be financially lucrative. From 2004 to 2006, Parker Drilling’s established presence in international offshore and land drilling have allowed its revenues to grow exponentially despite increased competition.
Drilling in Ever-Deeper Waters
The company contracts out several offshore rigs in the Gulf of Mexico as well as the Caspian Sea. As the increasing demand for energy has bolstered higher prices for oil and natural gas, oil exploration and production companies are digging deeper in the ocean for oil. Parker Drilling is one of several companies with the tools and rigs needed for deepwater exploration.
Dynamic Environmental and Other Regulations
Environmental regulations with respect to standards associated with natural gas and oil drilling operations and transportation, can translate into higher fixed costs and limited access to potential markets. As the drilling industry itself requires significant physical capital investment, any tightening of environmental policy will have a significant impact on short term and long term revenues.
Competition
Parker Drilling is one of the two most actively employed international drilling companies. However, the oilwell service companies listed below have more diversifed operations than Parker and are also larger in terms of market capitalization.
Historically, there have been only a small number of corporations in the international drilling industry because of the remoteness of some drilling locations and complexity involved with drilling in deep water. However, with the advent of rising natural gas and oil prices, it is becoming more and more attractive for national companies to initiate drilling operations.
Some of the competitors within the domestic and international drilling services industry are:
- Transocean (RIG), as the name implies, is the biggest U.S. provider of rigs, platforms and services for offshore drilling. The company acquired Santa Fe International (GSF) in late November 2007, creating the second largest oilfield services company overall, behind only Schlumberger N.V. (SLB) (based on market capitalization). Given that GSF also specializes in offshore drilling, the company in effect doubled down on deepwater drilling.
- Diamond Offshore Drilling (DO) is a leader in the offshore drilling industry. DO owns one of the largest drilling fleets in the world, a total of 44 ships, including 30 semisubmersibles, 14 jack-ups and one drillship. DO contracts these rigs to “operators”, or oil companies to find new oil or gas deposits, or to prepare existing deposits for production.
Others include:
- Noble (NE) (INT)
- Hercules Offshore (HERO) (USA)
- Pride International (PDE) (INT)
References
- ↑ U.S. Department of the Interior, Minerals Management Sercice, Gulf of Mexico OCS Region, 2004, p. 12
- ↑ Pioneer Drilling Company Rig Fleet List
- ↑ Grey Wolf, Inc. Summary
- ↑ Nabors Industries Ltd Summary
- ↑ Patterson UTI Summary
- ↑ Helmerich & Payne Rig Fleet
- ↑
- ↑ Rowan Companies Land Rig Fleet
- ↑ Parker Drilling Fleet
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