PARKER DRILLING CO /DE/ - Quarter Report: 2007 March (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended MARCH 31, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

PARKER DRILLING COMPANY

Delaware		73-0618660
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
1401 Enclave Parkway, Suite 600, Houston, Texas		77077
(Address of principal executive offices)		(Zip code)

(281) 406-2000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Exchange Act Rule 12b-2.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of April 30, 2007, 111,627,107 common shares were outstanding.

 

 

TABLE OF CONTENTS

		Page
Part I. Financial Information			3
Item 1. Financial Statements			3
Consolidated Condensed Balance Sheets (Unaudited) March 31, 2007 and December 31, 2006			3
Consolidated Condensed Statements of Operations (Unaudited) Three Months Ended March 31, 2007 and 2006			4
Consolidated Condensed Statements of Cash Flows (Unaudited) Three Months Ended March 31, 2007 and 2006			5
Notes to the Unaudited Consolidated Condensed Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures about Market Risk			27
Item 4. Controls and Procedures			27
Part II. Other Information			27
Item 1. Legal Proceedings			27
Item 1A. Risk Factors			28
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities			28
Item 3. Defaults Upon Senior Securities			28
Item 4. Submission of Matters to a Vote of Security Holders			28
Item 5. Other Information			29
Item 6. Exhibits			29
Signatures			30
Officer Certifications
Section 302 Certification
Section 302 Certification
Section 906 Certification
Section 906 Certification

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PARKER DRILLING COMPANY AND SUBSIDIARIES

		March 31,				December 31,
		2007				2006
ASSETS
Current assets:
Cash and cash equivalents		$	74,124			$	92,203
Marketable securities			83,493				62,920
Accounts and notes receivable, net			123,229				112,359
Rig materials and supplies			15,957				15,000
Deferred costs			5,468				6,662
Deferred income taxes			17,307				17,307
Other current assets			25,348				11,123
Total current assets			344,926				317,574
Property, plant and equipment less accumulated depreciation and amortization of $583,849 at March 31, 2007 and $570,650 at December 31, 2006			471,077				435,473
Goodwill			100,315				100,315
Other noncurrent assets			38,445				47,939
Total assets		$	954,763			$	901,301
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	89,877			$	95,226
Accrued income taxes			22,569				6,677
Total current liabilities			112,446				101,903
Long-term debt			329,206				329,368
Other long-term liabilities			65,368				10,931
Long-term deferred tax liability			10,633				—
Contingencies (Note 9)			—				—
Stockholders’ equity:
Common stock			18,369				18,220
Capital in excess of par value			570,620				568,253
Accumulated deficit			(151,879	)			(127,374	)
Total stockholders’ equity			437,110				459,099
Total liabilities and stockholders’ equity		$	954,763			$	901,301

See accompanying notes to the unaudited consolidated condensed financial statements.

PARKER DRILLING COMPANY AND SUBSIDIARIES

		Three Months Ended March 31,
		2007				2006
Drilling and rental revenues:
U.S. drilling		$	61,624			$	40,253
International drilling			59,674				79,830
Rental tools			29,975				27,251
Total drilling and rental revenues			151,273				147,334
Drilling and rental operating expenses:
U.S. drilling			26,761				18,259
International drilling			45,783				62,575
Rental tools			11,163				10,470
Depreciation and amortization			18,059				16,957
Total drilling and rental operating expenses			101,766				108,261
Drilling and rental operating income			49,507				39,073
General and administration expense			(5,888	)			(5,702	)
Gain on disposition of assets, net			16,404				448
Total operating income			60,023				33,819
Other income and (expense):
Interest expense			(6,330	)			(9,101	)
Changes in fair value of derivative positions			(381	)			813
Interest income			1,784				1,406
Loss on extinguishment of debt			—				(2	)
Minority interest			(1,000	)			(964	)
Other			7				(17	)
Total other income and (expense)			(5,920	)			(7,865	)
Income before income taxes			54,103				25,954
Income tax expense:
Current			22,012				5,563
Deferred			2,097				8,933
Total income tax expense			24,109				14,496
Net income		$	29,994			$	11,458
Basic earnings per share:
Net income		$	0.28			$	0.11
Diluted earnings per share:
Net income		$	0.27			$	0.11
Number of common shares used in computing earnings per share:
Basic			107,743,870				104,469,893
Diluted			109,464,663				106,003,562

See accompanying notes to the unaudited consolidated condensed financial statements.

PARKER DRILLING COMPANY AND SUBSIDIARIES

		Three Months Ended March 31,
		2007				2006
Cash flows from operating activities:
Net income		$	29,994			$	11,458
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			18,059				16,957
Gain on disposition of assets			(16,404	)			(448	)
Deferred income tax expense			2,097				8,933
Expenses not requiring cash			2,796				3,156
Change in operating assets and liabilities			(2,822	)			(4,375	)
Net cash provided by operating activities			33,720				35,681
Cash flows from investing activities:
Capital expenditures			(52,991	)			(35,940	)
Proceeds from the sale of assets			21,625				958
Purchase of marketable securities			(48,675	)			(43,550	)
Proceeds from sale of marketable securities			28,102				61,550
Net cash used in investing activities			(51,939	)			(16,982	)
Cash flows from financing activities:
Principal payments under debt obligations			—				—
Proceeds from common stock offering			—				99,947
Proceeds from stock options exercised			—				6,067
Excess tax benefit from stock based compensation			140				1,741
Net cash provided by financing activities			140				107,755
Net increase (decrease) in cash and cash equivalents			(18,079	)			126,454
Cash and cash equivalents at beginning of year			92,203				60,176
Cash and cash equivalents at end of period		$	74,124			$	186,630
Supplemental cash flow information:
Interest paid		$	2,164			$	3,314
Income taxes paid		$	3,052			$	2,487

See accompanying notes to the unaudited consolidated condensed financial statements.

PARKER DRILLING COMPANY AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1.		General — In the opinion of the management of Parker Drilling Company, the accompanying unaudited consolidated condensed financial statements reflect all adjustments (of a normally recurring nature) which are necessary for a fair presentation of (1) the financial position as of March 31, 2007 and December 31, 2006, (2) the results of operations for the three months ended March 31, 2007 and 2006, and (3) cash flows for the three months ended March 31, 2007 and 2006. Results for the three months ended March 31, 2007 are not necessarily indicative of the results that will be realized for the year ending December 31, 2007. The financial statements should be read in conjunction with our Form 10-K for the year ended December 31, 2006.
		Stock-Based Compensation —Total stock-based compensation expense recognized under SFAS No. 123R for the three months ended March 31, 2007 and 2006, was $1.8 million and $1.2 million respectively, of which $1.8 million and $1.1 million, respectively, was related to restricted stock plan expense. Stock-based compensation expense is included in our consolidated condensed income statement in “General and administration expense.” Unvested stock options at December 31, 2006 and March 31, 2007 were 8,334 and zero, respectively. Total unrecognized compensation cost related to stock options granted under our plans was approximately $1,200 at December 31, 2006 and zero at March 31, 2007. The Company had 3,238,800 outstanding and exercisable stock options as of March 31, 2007, the aggregate intrinsic value of which was $4.2 million, with a weighted average exercise price of $7.57. Unvested restricted stock awards at December 31, 2006 and March 31, 2007 were 1,556,485 shares and 2,167,498 shares, respectively. Total unrecognized compensation cost related to unamortized restricted stock awards was $4.8 million as of December 31, 2006 and $10.1 million as of March 31, 2007. There were 793,845 restricted shares granted (net of forfeitures) to certain officers and key employees during the three months ended March 31, 2007. The remaining unrecognized compensation cost related to unamortized restricted stock awards will be amortized over a weighted-average vesting period of approximately one year.
		During the three months ended March 31, 2006 the valuation assumptions used in our Black-Scholes option pricing model to estimate the fair value of stock options granted were 16.9 percent for expected volatility, .25 years expected term, 4.23 percent risk free interest rate and there was no expected dividend yield. There were no stock options granted in the first quarter of 2007.
		The tax benefit realized for the tax deductions from restricted stock vesting totaled $140,000 for the three months ended March 31, 2007, which has been reported as a financing cash inflow in the consolidated condensed statement of cash flows. No options were exercised for the three months ended March 31, 2007.
2.		Common Stock Offering – In January 2006, we issued 8,900,000 shares of common stock pursuant to a Free Writing Prospectus dated January 17, 2006 and a Prospectus Supplement dated January 18, 2006. On January 23, 2006, we realized $11.23 per share or a total of $99.9 million of net proceeds before expenses, but after underwriter discount, from the offering.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

3.

Earnings Per Share (“EPS”)

		Three Months Ended March 31, 2007
		Income				Shares				Per-Share
		(Numerator)				(Denominator)				Amount
Basic EPS:
Net income		$	29,994,000				107,743,870			$	0.28
Effect of dilutive securities:
Stock options and restricted stock			—				1,720,792				—
Diluted EPS:
Net income		$	29,994,000				109,464,663			$	0.27

		Three Months Ended March 31, 2006
		Income				Shares				Per-Share
		(Numerator)				(Denominator)				Amount
Basic EPS:
Net income		$	11,458,000				104,469,893			$	0.11
Effect of dilutive securities:
Stock options and restricted stock			—				1,533,669				—
Diluted EPS:
Net income		$	11,458,000				106,003,562			$	0.11

Options to purchase 2,147,000 shares of common stock with exercise prices ranging from $8.88 to $12.19 per share were outstanding during the three months ended March 31, 2007, but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares. Options to purchase 524,000 shares of common stock with exercise prices ranging from $10.81 to $12.19 per share were outstanding during the three months ended March 31, 2006, but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

4.

Business Segments – The primary services we provide are as follows: U.S. drilling, international drilling and rental tools. Information regarding our operations by industry segment for the three months ended March 31, 2007 and 2006 is as follows:

		Three Months Ended March 31,
		2007				2006
		(Dollars in Thousands)
Drilling and rental revenues:
U.S. drilling		$	61,624			$	40,253
International drilling			59,674				79,830
Rental tools			29,975				27,251
Total drilling and rental revenues		$	151,273			$	147,334
Drilling and rental operating income:
U.S. drilling		$	27,474			$	16,937
International drilling			8,260				9,950
Rental tools			13,773				12,186
Total drilling and rental operating income			49,507				39,073
General and administration expense			(5,888	)			(5,702	)
Gain on disposition of assets, net			16,404				448
Total operating income			60,023				33,819
Interest expense			(6,330	)			(9,101	)
Changes in fair value of derivative positions			(381	)			813
Loss on extinguishment of debt			—				(2	)
Other			791				425
Income before income taxes		$	54,103			$	25,954

5.		Disposition of Assets – During the first quarter of 2007 we sold workover barge Rigs 9 and 26 for proceeds of approximately $20.5 million resulting in a recognized gain of $15.1 million. These two rigs were classified as assets held for sale as of December 31, 2006.
6.		Accounting for Uncertainty in Income Taxes – In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109” (“FIN 48”). This accounting statement prescribes financial statement recognition threshold and measurement criteria for tax positions taken or expected to be taken in tax returns.
		The Company adopted FIN 48 effective January 1, 2007. As a result, the Company has increased its liability by $54.5 million for unrecognized tax amounts related to various federal, state and international tax matters. Included in this amount is $35.1 million of tax positions, that, if recognized, would have impacted the Company’s effective tax rate. The recognition of this liability is required under FIN 48 because of the uncertainty regarding the ultimate outcome of certain tax positions. Although the Company’s position regarding the ultimate outcome of these matters is unchanged, the Company is now required to record a liability at a lower threshold across the Company’s worldwide operations. The Company has accounted for the entire $54.5 million as a reduction to the January 1, 2007 balance of retained earnings.
		Of the $54.5 million referred to above, $49 million is related to Kazakhstan. For a complete overview of this issue, see Kazakhstan Tax Claims in Note 10.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

		Accounting for Uncertainty in Income Taxes (continued)
		The Company has classified currency fluctuations, interest and penalties as a component of tax expense. On January 1, 2007, we recorded approximately $41.3 million for interest and penalties related to uncertain tax positions. During the three months ended March 31, 2007, the Company recognized an additional liability of approximately $1.9 million, comprising of currency fluctuations, interest and a release of a previously recognized liability. The Company does not expect that the unrecognized tax amounts will change significantly within the next twelve months.
		The Company conducts business globally and, as a result, the Company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business our returns are subject to examination by taxing authorities throughout the world.
7.		Income Tax Expense – Income tax expense was $24.1 million for the first quarter of 2007, as compared to income tax expense of $14.5 million for the first quarter of 2006. The $9.6 million increase in taxes was due primarily to the impact of the gain recognized upon the sale of the two workover barge rigs, the inclusion of FIN 48 (described in Note 6) and the increase in operating income primarily from U.S. operations.
8.		Long-Term Debt

		March 31, 2007				December 31, 2006
		(Dollars in Thousands)
Senior Notes:
Interest rate floating (LIBOR + 4.75%), due 2010		$	100,000			$	100,000
Interest rate 9.625%, due 2013			229,206				229,368
Total debt			329,206				329,368
Less current portion			—				—
Total long-term debt		$	329,206			$	329,368

		Our current $40.0 million credit facility is available for general corporate purposes and to fund reimbursement obligations under letters of credit the banks issue on our behalf pursuant to this facility. Availability under the revolving credit facility is subject to a borrowing base limitation based on 85 percent of eligible receivables plus a value for eligible rental tools equipment. The credit facility calls for a borrowing base calculation only when the credit facility has outstanding loans, including letters of credit, totaling at least $25.0 million. As of March 31, 2007, there were $21.1 million in letters of credit outstanding and no loans. On March 1, 2006, an amendment was signed to eliminate the $25.0 million sub-limit for letters of credit and to give us the ability to prepay outstanding Senior Notes and Senior Floating Rate Notes without limitation concerning commitments under the credit facility.
9.		Derivative Instruments – We use derivative instruments to manage risks associated with interest rate fluctuations in connection with our $100.0 million Senior Floating Rate Notes. These derivative instruments, which consist of variable-to-fixed interest rate swaps, do not meet the hedge criteria in SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and are therefore not designated as hedges. Accordingly, the change in the fair value of the interest rate swaps is recognized currently in earnings.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

		Derivative Instruments (continued)
		As of March 31, 2007, we had the following derivative instruments outstanding related to our interest rate swaps, which are included in “Other current assets” and “Other noncurrent assets” as determined by their termination dates:

Effective		Termination	Notional					Floating		Fixed				Fair
Date		Date		Amount				Rate		Rate				Value
(Dollars in Thousands)
September 1, 2005		September 2, 2008		$	50,000			Three-month LIBOR plus 475 basis points			8.83	%		$	543
September 1, 2005		September 4, 2007		$	50,000			Three-month LIBOR plus 475 basis points			8.48	%			398
														$	941

10.		Contingencies
		Kazakhstan Tax Claims
		On October 12, 2005, the Kazakhstan Branch (“PKD Kazakhstan”) of Parker Drilling Company International Limited (“PDCIL”) received an Act of Tax Audit from the Ministry of Finance of Kazakhstan (“MinFin”) assessing PKD Kazakhstan an amount of KZT (Kazakhstan Tenge) 14.9 billion (approximately $115.1 million). Approximately KZT 7.5 billion or $58.3 million was assessed for import Value Added Tax (“VAT”), administrative fines and interest on equipment imported to perform the drilling contracts (the “VAT Assessment”) and approximately KZT 7.4 billion or $56.8 million for corporate income tax, individual income tax and social tax, administrative fines and interest in connection with the reimbursements received from the client for the upgrade of barge Rig 257 and other issues (the “Income Tax Assessment”).
		The VAT and Income Tax Assessment were both appealed to the Astana City Court and on April 6, 2006, the Astana City Court issued an opinion in favor of PKD Kazakhstan on the Income Tax Assessment and in favor of MinFin on the VAT Assessment, but reduced the amount of the VAT Assessment. MinFin and PKD Kazakhstan both appealed the decision of the Astana City Court to the Civil Panel of the Supreme Court of Kazakhstan. On May 24, 2006, the Civil Panel of the Supreme Court issued a decision upholding the ruling of the Astana City Court on the VAT Assessment. Consistent with its contractual obligations, on November 20, 2006, the client advanced the actual amount of the VAT Assessment and this amount has been remitted to MinFin. The client has also contractually agreed to reimburse PKD Kazakhstan for any incremental income taxes that PKD Kazakhstan incurs from the reimbursement of this VAT Assessment
		Contrary to two previous rulings on this precise issue, the May 24, 2006, ruling of the Civil Panel of the Supreme Court affirmed the Income Tax Assessment. PKD Kazakhstan immediately made application for a stay of execution of the ruling, based on the fact that the Supreme Court has decided this issue in favor of PKD Kazakhstan on two previous occasions and because the decision is inconsistent with the US-Kazakhstan tax treaty, and also requested that the five-member supervisory panel of the Supreme Court grant a supervisory review of the decision. On May 30, 2006, the Supreme Court granted a stay of execution of the decision pending a determination of the five-member panel of the Supreme Court whether or not to grant supervisory review of the decision.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

		Contingencies (continued)
		The Supreme Court repeatedly postponed a decision on the issue of supervisory review, which postponement was apparently granted to allow the Competent Authority from the U.S. and Kazakhstan to address this matter. Competent Authority review is a tax treaty procedure to resolve disputes as to which country may tax income covered under the treaty. In response to the petition initiated by PKD Kazakhstan and pursuant to the Mutual Agreement Procedures of the U.S.-Kazakhstan Tax Treaty, the Competent Authority of the U.S. IRS Treaty Division and MinFin held meetings in Astana, Kazakhstan, on March 21 and 22, 2007, to address the treaty issues. The respective Competent Authorities were unable to achieve mutual agreement as to which country may tax the income in issue under the tax treaty.
		On April 12, 2007, the Supreme Court determined that the May 24, 2006, ruling of the Supreme Court should be reviewed by a five member supervisory panel of the Supreme Court because there was doubt as to the lawfulness and validity of the May 24, 2006 ruling. In its ruling sending the case to the supervisory panel, the Supreme Court cited examples of how the May 24, 2006, ruling had wrongfully applied certain provisions of the Kazakhstan Tax Code, had relied upon irrelevant evidence and had not taken into account the double taxation provisions of the US-Kazakhstan Tax Treaty. Based on previous rulings of the Supreme Court in favor of PKD Kazakhstan, the recent ruling subjecting the latest Supreme Court decision to supervisory review and the provisions of the tax treaty, the Company has a substantial basis to believe the May 24, 2006, decision will not be upheld.
		The accounting treatment of this pending tax matter under the new FIN 48 interpretation is addressed in Note 6.
		Bangladesh Claim
		In September 2005, a subsidiary of the Company was served with a lawsuit filed in the 152nd District Court of Harris County State of Texas on behalf of numerous citizens of Bangladesh claiming $250 million in damages due to various types of property damage and personal injuries (none involving loss of life) arising as a result of two blowouts that occurred in Bangladesh in January and June 2005, although only the June 2005 blowout involved the Company. This case was dismissed against the subsidiary of the Company based on forum non conveniens, a legal defense raised by the subsidiary claiming that Houston, Texas, is not the appropriate location for this suit to be filed. The plaintiffs have appealed this dismissal; however the Company believes the plaintiffs’ prospects of being successful on appeal is remote.
		Asbestos-Related Claims
		In August 2004, the Company was notified that certain of its subsidiaries have been named, along with other defendants, in several complaints that have been filed in the Circuit Courts of the State of Mississippi by several hundred persons that allege that they were employed by some of the named defendants between approximately 1965 and 1986. The complaints name as defendants numerous other companies that are not affiliated with the Company, including companies that allegedly manufactured drilling related products containing asbestos that are the subject of the complaints.
		The complaints allege that the Company’s subsidiaries and other drilling contractors used asbestos-containing products in offshore drilling operations, land-based drilling operations and in drilling structures, drilling rigs, vessels and other equipment and assert claims based on, among other things, negligence and strict liability and claims under the Jones Act and that the Plaintiffs are entitled to monetary damages. Based on the report of the special master, these complaints have been severed and venue of the claims transferred to the county in which the plaintiff resides or the county in which the cause of action allegedly accrued. Subsequent to the filing of amended complaints, Parker has joined with other co-defendants in filing motions to compel discovery to determine what plaintiffs have an employment relationship with which defendant, including whether or not any plaintiffs have an employment relationship with subsidiaries of the Company. Out of 528 amended single-plaintiff complaints filed to date, eleven plaintiffs have identified Parker Drilling or one of its affiliates as a defendant.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

		Contingencies (continued)
		The subsidiaries named in these asbestos-related lawsuits intend to defend themselves vigorously and, based on the information available to the Company at this time, the Company does not expect the outcome to have a material adverse effect on its financial condition, results of operations or cash flows; however, there can be no assurance as to the ultimate outcome of these lawsuits.
11.		Recent Accounting Pronouncements –
		In September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS 157 is effective for fiscal years beginning after November 15, 2007 (i.e., the beginning of the Company’s fiscal year 2008). The Company is currently evaluating the impact of SFAS 157 on its Consolidated Financial Statements.
		In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities-Including an Amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 allows certain financial assets and liabilities to be recognized, at the Company’s election, at fair market value, with any gains or losses for the period recorded in the statement of income. This gives a company the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The statement is effective for fiscal years beginning after November 15, 2007. The Company has not determined the impact on its Consolidated Financial Statements, if any, of the adoption of SFAS No. 159.
12.		Parent, Guarantor, Non-Guarantor Unaudited Consolidating Condensed Financial Statements – Set forth on the following pages are the unaudited consolidating condensed financial statements of (i) Parker Drilling, (ii) our restricted subsidiaries that are guarantors of the Senior Notes and (iii) our restricted and unrestricted subsidiaries that are not guarantors of the Senior Notes. All of our Senior Notes are guaranteed by substantially all of the restricted subsidiaries of Parker Drilling. There are currently no restrictions on the ability of the restricted subsidiaries to transfer funds to Parker Drilling in the form of cash dividends, loans or advances. Parker Drilling is a holding company with no operations, other than through its subsidiaries.
		The non-guarantor subsidiaries are AralParker (a Kazakhstan closed joint stock company, owned 80 percent by Parker Drilling (Kazakstan), Ltd. and 20 percent by Aralnedra, CJSC), Casuarina Limited (a wholly-owned captive insurance company), KDN Drilling Limited, Mallard Drilling of South America, Inc., Mallard Drilling of Venezuela, Inc., Parker Drilling Investment Company, Parker Drilling (Nigeria) Limited, Parker Drilling Company (Bolivia) S.A., Parker Drilling Company Kuwait Limited, Parker Drilling Company Limited (Bahamas), Parker Drilling Company of New Zealand Limited, Parker Drilling Company of Sakhalin, Parker Drilling de Mexico, S. de R.L. de C.V., Parker Drilling International of New Zealand Limited, Parker Drilling Tengiz, Ltd., PD Servicios Integrales, S. de R.L. de C.V., PKD Sales Corporation, Parker SMNG Drilling Limited Liability Company (owned 50 percent by Parker Drilling Company International, LLC), Parker Drilling Asia Pacific, LLC, Parker Drilling Kazakhstan B.V., Parker Drilling Netherlands B.V., Parker Drilling International B.V., Parker Drilling Offshore B.V., Parker Drilling Overseas B.V., Parker Drilling Russia B.V., Parker Drilling Dutch B.V., Parker Drilling AME Limited, Parker Drillsource, LLC, Parker 3source, LLC, Parker Enex, LLC, Parker Hungary Rig Holdings Limited Liability Company, Parker 5272, LLC, Parker Drilling Spain Rig Services S.L., Parker Cyprus Leasing Limited, Parker Cyprus Ventures Limited, PD International Holdings C.V., PD Dutch Holdings C.V., PD Offshore Holdings C.V. and PD Selective Holdings, C.V. We are providing unaudited consolidating condensed financial information of the parent, Parker Drilling, the guarantor subsidiaries, and the non-guarantor subsidiaries as of March 31, 2007 and December 31, 2006 and for the three months ended March 31, 2007 and 2006. The condensed consolidating financial statements present investments in both consolidated and unconsolidated subsidiaries using the equity method of accounting.

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
(Dollars in Thousands)

		March 31, 2007
		Parent				Guarantor				Non-Guarantor				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	41,390			$	18,657			$	14,077			$	—			$	74,124
Marketable securities			81,500				1,993				—				—				83,493
Accounts and notes receivable, net			62,209				159,619				37,349				(135,948	)			123,229
Rig materials and supplies			—				8,062				7,895				—				15,957
Deferred costs			—				4,401				1,067				—				5,468
Other current assets			17,862				23,199				1,540				54				42,655
Total current assets			202,961				215,931				61,928				(135,894	)			344,926
Property, plant and equipment, net			134				375,358				95,463				122				471,077
Assets held for sale			—				—				—				—				—
Goodwill			—				100,315				—				—				100,315
Investment in subsidiaries and intercompany advances			657,164				899,593				6,311				(1,563,068	)			—
Other noncurrent assets			5,838				21,820				10,787				—				38,445
Total assets		$	866,097			$	1,613,017			$	174,489			$	(1,698,840	)		$	954,763
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	52,749			$	178,311			$	43,919			$	(185,102	)		$	89,877
Accrued income taxes			620				21,445				504				—				22,569
Total current liabilities			53,369				199,756				44,423				(185,102	)			112,446
Long-term debt			329,206				—				—				—				329,206
Other long-term liabilities			(28,171	)			85,008				8,531				—				65,368
Long-term deferred tax liability			—				10,633				—				—				10,633
Intercompany payables			74,583				577,255				31,520				(683,358	)			—
Stockholders’ equity:
Common stock			18,369				39,899				21,153				(61,052	)			18,369
Capital in excess of par value			570,620				1,022,780				68,926				(1,091,706	)			570,620
Retained earnings (accumulated deficit)			(151,879	)			(322,314	)			(64	)			322,378				(151,879	)
Total stockholders’ equity			437,110				740,365				90,015				(830,380	)			437,110
Total liabilities and stockholders’ equity		$	866,097			$	1,613,017			$	174,489			$	(1,698,840	)		$	954,763

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
(Dollars in Thousands)

		December 31, 2006
		Parent				Guarantor				Non-Guarantor				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	60,029			$	14,367			$	17,807			$	—			$	92,203
Marketable securities			60,920				2,000				—				—				62,920
Accounts and notes receivable, net			53,844				143,905				33,625				(119,015	)			112,359
Rig materials and supplies			—				7,173				7,827				—				15,000
Deferred costs			—				6,321				341				—				6,662
Other current assets			18,105				8,969				1,319				37				28,430
Total current assets			192,898				182,735				60,919				(118,978	)			317,574
Property, plant and equipment, net			134				354,356				80,861				122				435,473
Assets held for sale			—				4,828				—				—				4,828
Goodwill			—				100,315				—				—				100,315
Investment in subsidiaries and intercompany advances			694,050				846,800				(8,053	)			(1,532,797	)			—
Other noncurrent assets			18,043				19,774				5,294				—				43,111
Total assets		$	905,125			$	1,508,808			$	139,021			$	(1,651,653	)		$	901,301
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	44,667			$	175,092			$	44,611			$	(169,144	)		$	95,226
Accrued income taxes			(10,514	)			17,039				152				—				6,677
Total current liabilities			34,153				192,131				44,763				(169,144	)			101,903
Long-term debt			329,368				—				—				—				329,368
Other long-term liabilities			1,596				9,030				265				40				10,931
Intercompany payables			80,909				544,250				37,219				(662,378	)			—
Stockholders’ equity:
Common stock			18,220				39,899				21,251				(61,150	)			18,220
Capital in excess of par value			568,253				1,013,736				34,526				(1,048,262	)			568,253
Retained earnings (accumulated deficit)			(127,374	)			(290,238	)			997				289,241				(127,374	)
Total stockholders’ equity			459,099				763,397				56,774				(820,171	)			459,099
Total liabilities and stockholders’ equity		$	905,125			$	1,508,808			$	139,021			$	(1,651,653	)		$	901,301

		Three months ended March 31, 2007
		Parent				Guarantor				Non-Guarantor				Eliminations				Consolidated
Drilling and rental revenues		$	—			$	138,138			$	19,842			$	(6,707	)		$	151,273
Drilling and rental operating expenses			—				73,574				16,840				(6,707	)			83,707
Depreciation and amortization			—				17,021				1,038				—				18,059
Drilling and rental operating income			—				47,543				1,964				—				49,507
General and administration expense (1)			(41	)			(5,786	)			(61	)			—				(5,888	)
Gain (loss) on disposition of assets, net			—				16,424				(20	)			—				16,404
Total operating income (loss)			(41	)			58,181				1,883				—				60,023
Other income and (expense):
Interest expense			(7,521	)			(11,796	)			(236	)			13,223				(6,330	)
Changes in fair value of derivative positions			(381	)			—				—				—				(381	)
Interest income			12,122				2,098				787				(13,223	)			1,784
Loss on extinguishment of debt			—				—				—				—				—
Minority interest			—				—				(1,000	)			—				(1,000	)
Other			—				(6	)			13				—				7
Equity in net earnings of subsidiaries			39,559				—				—				(39,559	)			—
Total other income and (expense)			43,779				(9,704	)			(436	)			(39,559	)			(5,920	)
Income (loss) before income taxes			43,738				48,477				1,447				(39,559	)			54,103
Income tax expense (benefit):
Current			13,332				8,059				621				—				22,012
Deferred			412				1,416				269				—				2,097
Income tax expense			13,744				9,475				890				—				24,109
Net income (loss)		$	29,994			$	39,002			$	557			$	(39,559	)		$	29,994

(1)

All field operations general and administration expenses are included in operating expenses.

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
(Dollars in Thousands)

		Three Months Ended March 31, 2006
		Parent				Guarantor				Non-Guarantor				Eliminations				Consolidated
Drilling and rental revenues		$	—			$	117,746			$	42,680			$	(13,092	)		$	147,334
Drilling and rental operating expenses			—				63,181				41,215				(13,092	)			91,304
Depreciation and amortization			—				15,937				1,020				—				16,957
Drilling and rental operating income			—				38,628				445				—				39,073
General and administration expense(1)			(55	)			(5,638	)			(9	)			—				5,702
Gain on disposition of assets, net			—				401				47				—				448
Total operating income (loss)			(55	)			33,391				483				—				33,819
Other income and (expense):
Interest expense			(10,287	)			(11,796	)			(510	)			13,492				(9,101	)
Changes in fair value of derivative positions			813				—				—				—				813
Interest income			12,074				2,017				807				(13,492	)			1,406
Loss on extinguishment of debt			(2	)			—				—				—				(2	)
Minority interest			—				—				(964	)			—				(964	)
Other			—				(17	)			—				—				(17	)
Equity in net earnings of subsidiaries			18,943				—				—				(18,943	)			—
Total other income and (expense)			21,541				(9,796	)			(667	)			(18,943	)			(7,865	)
Income (loss) before income taxes			21,486				23,595				(184	)			(18,943	)			25,954
Income tax expense (benefit):
Current			744				3,011				1,808				—				5,563
Deferred			9,284				(290	)			(61	)			—				8,933
Income tax expense			10,028				2,721				1,747				—				14,496
Income (loss) from continuing operations			11,458				20,874				(1,931	)			(18,943	)			11,458
Discontinued operations			—				—				—				—				—
Net income (loss)		$	11,458			$	20,874			$	(1,931	)		$	(18,943	)		$	11,458

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)

		Three months ended March 31, 2007
		Parent				Guarantor				Non-Guarantor				Eliminations				Consolidated
Cash flows from operating activities:
Net income (loss)		$	29,994			$	39,002			$	557			$	(39,559	)		$	29,994
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			—				17,021				1,038				—				18,059
Amortization of debt issuance and premium			—																—
Loss on extinguishment of debt			—																—
Gain on disposition of assets			—				(16,424	)			20				—				(16,404	)
Deferred income tax expense (benefit)			412				1,416				269				—				2,097
Other			2,438				456				(98	)			—				2,796
Equity in net earnings of subsidiaries			(39,559	)			—				—				39,559				—
Change in assets and liabilities:			11,095				(42,625	)			28,708				—				(2,822	)
Net cash (used in) provided by operating activities			4,380				(1,154	)			30,494				—				33,720
Cash flows from investing activities:
Capital expenditures			—				(38,174	)			(14,817	)			—				(52,991	)
Investment in joint venture Proceeds from the sale of assets			—				20,969				656				—				21,625
Proceeds from insurance settlements							—												—
Purchase of marketable securities			(48,675	)			—												(48,675	)
Sale of marketable securities			28,102				—												28,102
Net cash used in investing activities			(20,573	)			(17,205	)			(14,161	)			—				(51,939	)
Cash flows from financing activities:
Principal payments under debt obligations			—																—
Proceeds from common stock offering			—																—
Proceeds from stock options exercised			—				—				—				—				—
Excess tax benefit from stock options exercised			140																140
Intercompany advances, net			(2,586	)			22,649				(20,063	)			—				—
Net cash used in financing activities			(2,446	)			22,649				(20,063	)			—				140
Net change in cash and cash equivalents			(18,639	)			4,290				(3,730	)			—				(18,079	)
Cash and cash equivalents at beginning of period			60,029				14,367				17,807				—				92,203
Cash and cash equivalents at end of period		$	41,390			$	18,657			$	14,077			$	—			$	74,124