PARKER DRILLING CO /DE/ - Quarter Report: 2009 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, 2009

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes o   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company 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, 2009, 116,062,287 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, 2009 and December 31, 2008			3
Consolidated Condensed Statements of Operations (Unaudited) Three Months Ended March 31, 2009 and 2008			4
Consolidated Condensed Statements of Cash Flows (Unaudited) Three Months Ended March 31, 2009 and 2008			5
Notes to the Unaudited Consolidated Condensed Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3. Quantitative and Qualitative Disclosures about Market Risk			30
Item 4. Controls and Procedures			30
Part II. Other Information			30
Item 1. Legal Proceedings			30
Item 1A. Risk Factors			30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31
Item 3. Defaults Upon Senior Securities			31
Item 4. Submission of Matters to a Vote of Security Holders			31
Item 5. Other Information			31
Item 6. Exhibits			31
Signatures			32
Officer Certifications
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PARKER DRILLING COMPANY AND SUBSIDIARIES

		March 31,				December 31,
		2009				2008
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	148,403			$	172,298
Accounts and notes receivable, net			182,333				186,164
Rig materials and supplies			30,201				30,241
Deferred costs			7,044				7,804
Deferred income taxes			9,735				9,735
Other tax assets			34,854				40,924
Other current assets			26,692				26,125
Total current assets			439,262				473,291
Property, plant and equipment less accumulated depreciation and amortization of $737,600 at March 31, 2009 and $712,688 at December 31, 2008			707,128				675,548
Deferred income taxes			25,852				22,956
Other noncurrent assets			33,060				33,925
Total assets		$	1,205,302			$	1,205,720
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	9,000			$	6,000
Accounts payable and accrued liabilities			135,276				140,398
Accrued income taxes			10,359				12,130
Total current liabilities			154,635				158,528
Long-term debt			437,464				435,394
Other long-term liabilities			19,342				21,396
Long-term deferred tax liability			7,133				8,230
Contingencies (Note 10)			—				—
Stockholders’ equity:
Noncontrolling interest			—				—
Common stock			19,351				18,910
Capital in excess of par value			621,570				619,561
Accumulated deficit			(54,193	)			(56,299	)
Total stockholders’ equity			586,728				582,172
Total liabilities and stockholders’ equity		$	1,205,302			$	1,205,720

See accompanying notes to the unaudited consolidated condensed financial statements.

PARKER DRILLING COMPANY AND SUBSIDIARIES

		Three Months Ended March 31,
		2009				2008
Revenues:
International Drilling		$	77,381			$	68,740
U.S. Drilling			9,856				45,888
Project Management and Engineering Services			32,054				19,179
Construction Contract			16,745				—
Rental Tools			37,889				39,471
Total revenues			173,925				173,278
Operating expenses:
International Drilling			49,777				52,621
U.S. Drilling			13,136				21,522
Project Management and Engineering Services			25,894				15,661
Construction Contract			15,914				—
Rental Tools			16,454				15,818
Depreciation and amortization			27,124				26,166
Total operating expenses			148,299				131,788
Total operating gross margin			25,626				41,490
General and administration expense			(13,060	)			(6,668	)
Gain on disposition of assets, net			78				579
Total operating income			12,644				35,401
Other income and (expense):
Interest expense			(8,066	)			(6,837	)
Interest income			286				368
Equity in loss of unconsolidated joint venture and related charges, net of tax			—				(1,105	)
Other			(12	)			60
Total other income and (expense)			(7,792	)			(7,514	)
Income before income taxes			4,852				27,887
Income tax (benefit) expense:
Current			6,738				(10,643	)
Deferred			(3,992	)			15,328
Total income tax (benefit) expense			2,746				4,685
Net income			2,106				23,202
Net income attributable to noncontrolling interest			—				—
Net income attributable to Parker Drilling		$	2,106			$	23,202
Basic earnings per share:
Net income		$	0.02			$	0.21
Diluted earnings per share:
Net income		$	0.02			$	0.21
Number of common shares used in computing earnings per share
Basic			112,260,517				110,546,311
Diluted			113,366,444				111,481,301

See accompanying notes to the unaudited consolidated condensed financial statements.

PARKER DRILLING COMPANY AND SUBSIDIARIES

		Three Months Ended March 31,
		2009				2008
Cash flows from operating activities:
Net income		$	2,106			$	23,202
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			27,124				26,166
Gain on disposition of assets			(78	)			(579	)
Equity loss in unconsolidated joint venture and related charges, net of tax			—				1,105
Deferred income tax expense			(3,992	)			15,328
Expenses not requiring cash			3,907				4,092
Change in accounts receivable			5,161				(12,485	)
Change in other assets			6,692				(5,626	)
Change in liabilities			(16,372	)			(35,282	)
Net cash provided by operating activities			24,548				15,921
Cash flows from investing activities:
Capital expenditures			(51,384	)			(43,159	)
Proceeds from the sale of assets			169				1,227
Proceeds from insurance settlements			—				951
Investment in unconsolidated joint venture			—				(5,000	)
Net cash used in investing activities			(51,215	)			(45,981	)
Cash flows from financing activities:
Proceeds from draw on revolver credit facility			4,000				15,000
Excess tax cost from stock based compensation			(1,228	)			(331	)
Net cash provided by financing activities			2,772				14,669
Net decrease in cash and cash equivalents			(23,895	)			(15,391	)
Cash and cash equivalents at beginning of year			172,298				60,124
Cash and cash equivalents at end of period		$	148,403			$	44,733
Supplemental cash flow information:
Interest paid		$	2,864			$	1,841
Income taxes paid		$	8,357			$	14,994

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, 2009 and December 31, 2008, (2) the results of operations for the three months ended March 31, 2009 and 2008, and (3) cash flows for the three months ended March 31, 2009 and 2008. Results for the three months ended March 31, 2009 are not necessarily indicative of the results that will be realized for the year ending December 31, 2009. The financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2008.
		Stock-Based Compensation – Total stock-based compensation expense recognized under SFAS No. 123R for the three month period ended March 31, 2009 and for the three month period ended March 31, 2008 was $1.8 million and $2.0 million, respectively, all of which was related to restricted stock plan expense. Stock-based compensation expense is included in our consolidated condensed income statement in both “General and administration expense” and “operating expense.” There were no unvested stock options at March 31, 2009. The Company had 290,300 outstanding and exercisable stock options as of March 31, 2009, the aggregate intrinsic value of which was negligible, with a weighted average exercise price of $2.88. Unvested restricted stock awards at December 31, 2008 and March 31, 2009 were 1,458,716 shares and 3,098,256 shares, respectively. In March 2009 there were 2,094,639 restricted shares granted that were related to the Company’s long term incentive plan which were earned over the previous three years. Total unrecognized compensation cost related to unamortized restricted stock awards was $3.8 million as of December 31, 2008 and $4.5 million as of March 31, 2009. There were 2,214,639 restricted shares granted to certain officers and key employees during the three month period ended March 31, 2009. The remaining unrecognized compensation cost related to unamortized restricted stock awards will be amortized over a weighted-average vesting period of approximately one year.
		The excess tax deduction realized for tax purposes from restricted stock vesting totaled $1.2 million for the three months ended March 31, 2009, which has been reported as a financing cash outflow in the consolidated condensed statement of cash flows.
		Convertible Senior Notes, including call options and warrants – In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Accounting Principles Board (“APB”) 14-1, “Accounting for Convertible Debt Instruments that May Be Settled in Cash upon Conversion (Including Partial Cash Settlement),” (“FSP APB 14-1”). The FSP requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), commonly referred to as Instrument C under EITF issue No. 90-19, “Convertible Bonds With Issuer Options to Settle for Cash upon Conversion,” be separated to account for the fair value of the debt and equity components as of the date of issuance to reflect the issuer’s non-convertible debt borrowing rate. The FSP is effective for financial periods beginning after December 15, 2008 and is applied retrospectively to all periods presented (retroactive restatement) pursuant to the guidance in SFAS 154, “Accounting Changes and Error Corrections.”

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

1.		General (continued)
		The adoption of the FSP on January 1, 2009 impacted the treatment of the Company’s 2.125 percent convertible senior notes due 2012, by reclassifying a portion of the of the convertible note balances to additional paid in capital for the estimated fair value of the conversion feature at the date of issuance and creating a discount on the convertible notes that will be amortized through interest expense over the life of the convertible notes. The Company’s non-convertible debt borrowing rate at the date of issuance (July 2007) was 7.25 percent and, accordingly, adoption of the FSP resulted in a significant increase in interest expense, and reduced net income and basic earnings per share in the Company’s consolidated condensed financial statements. Upon adoption, the Company restated its “Accumulated deficit” balance by approximately $6.8 million to reflect the additional interest expense from issuance on July 5, 2007 through December 31, 2008 and reduced “Convertible senior notes” by $19.7 million, reflecting the issuance of the notes at a discount and including amortization of the discount from the transaction date through the adoption date. The Company’s “Paid in capital” balance increased by $26.5 million, reflecting the equity portion of the initial transaction. A deferred tax asset provision of $10.6 million was also established upon initial adoption of the FSP with a corresponding reduction in “Paid in capital.” This provision was then reduced by $2.7 million with the offset to “Accumulated deficit” to reflect the benefit associated with the additional interest recorded from July 2007 to December 31, 2008. See the tables below for changes to the relevant 2008 financials.

Balance Sheet

										Restated
		December 31, 2008				Adjustments				December 31, 2008
ASSETS
Deferred income taxes			30,867				(7,911	)			22,956
Total assets		$	1,213,631							$	1,205,720
LIABILITIES AND STOCKHOLDERS’ EQUITY
Long-term debt			455,073				(19,679	)			435,394
Capital in excess of par value			603,731				15,830				619,561
Accumulated deficit			(52,237	)			(4,062	)			(56,299	)
Total liabilities and stockholders’ equity		$	1,213,631							$	1,205,720

Statement of Operations

										Restated
		Three months ended								Three months ended
		March 31, 2008				Adjustments				March 31, 2008
Other income and (expense):
Interest expense			(5,690	)			(1,147	)			(6,837	)
Income tax (benefit) expense:
Deferred			15,789				(461	)			15,328
Net income		$	23,888							$	23,202

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

1.		General (continued)
		The maturity date of the notes (July 15, 2012) is the expected life of the liability due to the current market value of the Company’s stock which is significantly lower than the note conversion price of $13.85 per share. The 7.25 percent cost of non-convertible debt was calculated for use in our decision model at the time that the convertible notes were issued in July 2007. Using 7.25 percent, the fair value of the notes was calculated to be $98.5 million and the discount on the notes $26.5 million. Interest expense for the first quarter of 2009 was increased by $1.2 million to reflect the fair value increment calculated as the amortization of the debt discount, using the effective interest rate method. In addition, $0.7 million of interest expense was recognized during the current quarter for the contractual interest coupon on these convertible notes.
		Property, Plant, and Equipment - In the first quarter 2009, we implemented a change in accounting estimate to more accurately reflect the useful life of some of the long-lived assets in our U.S. Drilling and International Drilling segments. This resulted in an approximate $4 million reduction in depreciation expense in the first quarter 2009, or $.04 per share. We extended the useful lives of these long-lived assets based on our review of their service lives, technological improvements in the assets, and recent changes to our refurbishment and maintenance practices which helped to extend the lives.
		Non-Controlling Interest — In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidating Financial Statements” (“SFAS No. 160”). SFAS No. 160 provides enhanced guidance related to the disclosure of information regarding noncontrolling interests in a subsidiary and their effect on the company. This Statement, together with the IASB’s IAS 27, “Consolidated and Separate Financial Statements,” concludes a joint effort by the FASB and IASB to improve the accounting for and reporting of noncontrolling interests in consolidated financial statements and promotes international convergence of accounting standards. For the Company, SFAS No. 160 is effective January 1, 2009. The Company did not apply the disclosure provisions of SFAS No. 160 as the information regarding noncontrolling interests in a subsidiary is immaterial to the consolidated condensed financial statements.
		Construction Contract – Historically the Company has primarily constructed drilling rigs for its own use. In some instances, however, the Company enters into contracts to design, construct, deliver and commission a rig for a major customer. In 2008, we were awarded a cost reimbursable, fixed fee contract to construct, deliver and commission a rig for extended-reach drilling work in Alaska. Total cost of the construction phase is currently expected to be approximately $215 million. The Company recognizes revenues received and costs incurred related to its construction contract on a gross basis and income for the related fees on a percentage of completion basis using the cost-to-cost method. Construction costs in excess of funds received from the customer are accumulated and reported as part of other current assets. At March 31, 2009, a net liability (progress payments less construction costs) of $0.5 million is included in other current liabilities.
		Cash and Cash Equivalents – For purposes of the balance sheet and the statement of cash flows, the Company considers cash equivalents to be all highly liquid investment instruments that have a remaining maturity of three months or less at the date of purchase.

2.

Earnings Per Share (“EPS”)

		Three Months Ended March 31, 2009
		Income				Shares				Per-Share
		(Numerator)				(Denominator)				Amount
Basic EPS:
Net income		$	2,106,000				112,260,517			$	0.02
Effect of dilutive securities:
Stock options and restricted stock							1,105,927			$	—
Diluted EPS:
Net income		$	2,106,000				113,366,444			$	0.02

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

2.

Earnings Per Share (“EPS”) (continued)

		Three Months Ended March 31, 2008
		Income				Shares				Per-Share
		(Numerator)				(Denominator)				Amount
Basic EPS:
Net income		$	23,202,000				110,546,311			$	0.21
Effect of dilutive securities:
Stock options and restricted stock							934,990			$	—
Diluted EPS:
Net income		$	23,202,000				111,481,301			$	0.21

All stock options outstanding during the three months ended March 31, 2008, were included in the computation of diluted EPS as the options’ exercise prices were less than the average market price of the common shares. Options to purchase 265,360 shares of common stock with exercise prices ranging from $2.24 to $4.20 per share were outstanding during the three months ended March 31, 2009, 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 and would have been anti-dilutive.

3.

Business Segments – The five primary services we provide are as follows: International Drilling, U.S. Drilling, Project Management and Engineering Services, Construction Contract and Rental Tools. In the first quarter of 2008, the Company created a new segment called Project Management and Engineering Services by combining our labor, operations and maintenance and engineering services contracts which had been previously reported in our U.S. Drilling or International Drilling segments. The new segment was created in anticipation of the significant expansion of these projects and services and senior management’s resultant separate performance assessment and resource allocation for this segment. The new segment operations, unlike our U.S. and International Drilling and Rental Tools operations, generally require little or no capital expenditures, and therefore have different performance assessment and resource needs. The Company anticipates further growth of this segment of our business and reviews and assesses its performance separately. In the second quarter of 2008, the Company created a new segment called Construction Contract to reflect the Company’s Engineering, Procurement, Construction and Installation contract (“EPCI”). The Construction Contract segment income (fees) is accounted for on a percentage of completion basis using the cost-to-cost method. Revenues received and costs incurred related to the contract are recorded on a gross basis.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

3.		Business Segments (continued)
		Information regarding our operations by industry segment for the three months ended March 31, 2009 and 2008 is as follows:

		Three Months Ended March 31,
		2009				2008
		(Dollars in Thousands)
Revenues:
International Drilling		$	77,381			$	68,740
U.S. Drilling			9,856				45,888
Project Management and Engineering Services			32,054				19,179
Construction Contract			16,745				—
Rental Tools			37,889				39,471
Total revenues		$	173,925			$	173,278
Operating margin:
International Drilling		$	15,912			$	5,759
U.S. Drilling			(10,458	)			15,673
Project Management and Engineering Services			6,160				3,518
Construction Contract			831				—
Rental Tools			13,181				16,540
Total operating margin			25,626				41,490
General and administration expense			(13,060	)			(6,668	)
Gain on disposition of assets, net			78				579
Total operating income			12,644				35,401
Interest expense			(8,066	)			(6,837	)
Other			274				(677	)
Income before income taxes		$	4,852			$	27,887

4.		Disposition of Assets – Asset dispositions in the first three months of 2008 included the sale of Rig 206 in Indonesia, which we sold at our net book value and miscellaneous equipment that resulted in a recognized gain of $0.6 million. In the first three months of 2009 asset dispositions consisted primarily of the sale of miscellaneous equipment, resulting in an immaterial recognized gain.
5.		Accounting for Uncertainty in Income Taxes – FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. During March 2008, the Company resolved the pending tax case with the Kazakhstan Ministry of Finance by paying the reduced interest assessment related to tax payments made in 2007 (see Note 8 - Kazakhstan Tax Case), and we accordingly reduced the previously recorded accruals based on the final resolution of this matter. During March 2009, the Company recognized $0.7 million of expense related to certain intercompany transactions between our U.S. companies and foreign affiliates. As of March 31, 2009, the Company had a remaining liability for unrecognized tax benefits of $12.3 million primarily related to foreign operations.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

6.		Income Tax Expense – Income tax expense was $2.7 million for the first quarter of 2009.
7.		Saudi Arabia Joint Venture – On April 9, 2008, a subsidiary of Parker executed an agreement (“Sale Agreement”) to sell its 50 percent share interest in Al-Rushaid Parker Drilling Co. Ltd. (“ARPD”) to an affiliate of the Al Rushaid subsidiary that owned the remaining 50 percent interest. The terms of the Sale Agreement provided for a $2.0 million payment to Parker’s subsidiary as consideration for the 50 percent share interest of the Parker subsidiary and partial repayment of investments and advances of the Parker subsidiary to ARPD, including a $5.0 million advance in January 2008. During the first quarter of 2008, the Parker subsidiary made the decision to terminate any future funding to ARPD, and accordingly, the Company did not record equity in losses of ARPD in the first quarter of 2008. We recognized a $1.1 million loss, net of income taxes, in the first quarter of 2008 primarily as a result of nonrecoverable costs, as per the terms of the Sale Agreement, incurred by the Parker affiliate to support ARPD operations during the current quarter. The Parker subsidiary received the $2.0 million on April 15, 2008 in full settlement of the Company’s investment in and advances to ARPD.
		The Sale Agreement obligates the resulting Saudi shareholders to indemnify the Parker subsidiary and its affiliates from claims arising out of or related to the operations of ARPD, including the drilling contracts between ARPD and Saudi Aramco, ARPD’s bank loans and vendors providing goods or services to ARPD. Each party has agreed to waive any claims that it may have against the other party arising out of the business of ARPD on or before the closing date, and subject to the formal transfer of the shares the Parker subsidiary has agreed to disclaim any remaining rights with respect to the unpaid portion of shareholder loans and payables owed by ARPD to the Parker subsidiary. The formal transfer of shares was approved by the Saudi Arabian authorities in July 2008.
		The agreement also provides that there are no restrictions on Parker or any of its affiliates with regard to competing with ARPD in the future, including in Saudi Arabia.
9.		Kazakhstan Tax Case - On October 12, 2005, the Kazakhstan Branch (“PKD Kazakhstan”) of Parker Drilling’s subsidiary, 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 $125.8 million). Approximately KZT7.5 billion or $63.3 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 KZT7.4 billion or $62.5 million for corporate income tax, individual income tax and social tax, administrative fines and interest in connection with the reimbursements received by PDCIL from a client for the upgrade of Barge Rig 257 and other issues related to PKD Kazakhstan’s operations in the Republic of Kazakhstan (the “Income Tax Assessment”).
		On May 24, 2006, the Supreme Court of the Republic of Kazakhstan (“SCK”) issued a decision upholding 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 administrative fines related to the VAT Assessment are being appealed by the client who is contractually responsible to reimburse PKD Kazakhstan for any administrative fines ultimately assessed. 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.
		After multiple appeals to the SCK and two meetings of the U.S. Competent Authorities under the Mutual Agreement Procedure of the U.S.- Kazakhstan Tax Treaty, the SCK ultimately upheld the Income Tax Assessment and on December 12, 2007, PKD Kazakhstan paid the principal tax portion of the Income Tax Assessment, net of estimated taxes previously paid. After a further appeal against the interest portion of the notice of assessment, on February 25, 2008, the Atyrau Economic Court issued a ruling that interest on the income tax assessed should accrue from the October 12, 2005 assessment date as opposed to the original assessment in 2001, which resulted in a revised interest assessment by the Atyrau Tax Committee of approximately US$13 million, which was paid by PKD Kazakhstan on March 14, 2008, in final resolution of this matter.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

9.

Long-Term Debt

		March 31,				December 31,
		2009				2008
		(Dollars in Thousands)
Convertible Senior Notes payable in July 2012 with coupon rate at 2.125% payable semi-annually in January and July, net of unamortized discount of $18,447 at March 31, 2009 and $19,679 at December 31, 2008		$	106,553			$	105,321
Senior Notes payable in October 2013 with coupon rate at 9.625% payable semi-annually in April and October net of unamortized premium of $2,911at March 31, 2009 and $3,073 at December 31, 2008			227,911				228,073
Term Note with amortization beginning September 30, 2009 at equal installments of $3.0 million per quarter			50,000				50,000
Revolving Credit Facility with interest at prime, plus an applicable margin or LIBOR, plus an applicable margin			62,000				58,000
Total debt			446,464				441,394
Less current portion			9,000				6,000
Total long-term debt		$	437,464			$	435,394

		In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Accounting Principles Board (“APB”) 14-1, “Accounting for Convertible Debt Instruments that May Be Settled in Cash upon Conversion (Including Partial Cash Settlement),” (“FSP APB 14-1”). The FSP requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), commonly referred to as Instrument C under EITF issue No. 90-19, “Convertible Bonds With Issuer Options to Settle for Cash upon Conversion,” be separated to account for the fair value of the debt and equity components as of the date of issuance to reflect the issuer’s non-convertible debt borrowing rate. The FSP is effective for financial periods beginning after December 15, 2008 and is applied retrospectively to all periods presented (retroactive restatement) pursuant to the guidance in SFAS 154, “Accounting Changes and Error Corrections” (see Note 1).
		On May 15, 2008 we entered into a new Credit Agreement (“2008 Credit Facility”) with a five year senior secured $80.0 million revolving credit facility (“Revolving Credit Facility) and a senior secured term loan facility (“Term Loan Facility”) of up to $50.0 million. The obligations of the Company under the 2008 Credit Facility are guaranteed by substantially all of the Company’s domestic subsidiaries, except for domestic subsidiaries owned by foreign subsidiaries and certain immaterial subsidiaries, each of which has executed a guaranty. The 2008 Credit Facility contains customary affirmative and negative covenants such as minimum ratios for consolidated leverage, consolidated interest coverage and consolidated senior secured leverage.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

9.		Long-Term Debt (continued)
		The 2008 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. Revolving loans are available under the 2008 Credit Facility subject to a borrowing base calculation based on a percentage of eligible accounts receivable, certain specified barge drilling rigs and eligible rental equipment of the Company and its subsidiary guarantors. As of March 31, 2009, there were $17.7 million in letters of credit outstanding, $50.0 million outstanding on the Term Loan Facility and $62.0 million outstanding on the Revolving Credit Facility. As of March 31, 2009, the amount drawn represents nearly 100 percent of the capacity of the Revolving Credit Facility. The Term Loan will begin amortizing on September 30, 2009 at equal installments of $3.0 million per quarter. On January 30, 2009, Lehman Commercial Paper, Inc. assigned its obligations under the 2008 Credit Facility to Trustmark National Bank. Upon assignment, Trustmark National Bank fully funded Lehman Commercial Paper, Inc.’s commitments, including an additional $4.0 million that Lehman Commercial Paper, Inc. did not fund in October 2008, therefore, increasing our borrowings under the Revolving Credit Facility to $62.0 million. The Company expects to use the drawn amounts over the next twelve months to fund construction of two new rigs for work in Alaska. As of March 31, 2009 the Company is in compliance with all covenants.
10.		Contingencies
		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. The court dismissed the case on the basis that Houston, Texas, is not the appropriate location for this suit to be filed. The plaintiffs appealed this dismissal. The Court of Appeals affirmed the dismissal which is now final because the plaintiffs failed to lodge an appeal with the Supreme Court within the required time period. No amounts were accrued at March 31, 2009.
		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 Drilling 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 Parker Drilling. Out of 668 amended single-plaintiff complaints filed to date, sixteen (16) plaintiffs have identified Parker Drilling or one of its affiliates as a defendant. Discovery is proceeding in groups of 60 and none of the plaintiff complaints naming Parker are included in the first 60 (Group I). The initial discovery of Group I resulted in certain dismissals with prejudice, two dismissals without prejudice and two withdraws from Group I, leaving only 40 plaintiffs remaining in Group I. Selection of Discovery Group II was completed on April 21, 2008. Out of the 60 plaintiffs selected, Parker Drilling was named in one suit in which the plaintiff claims that during 1973 he earned $587.40 while working for a former subsidiary of a company Parker Drilling acquired in 1996.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

10.		Contingencies (continued)
		Asbestos-Related Claims (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, the Company is unable to predict the ultimate outcome of these lawsuits. No amounts were accrued at March 31, 2009.
		Gulfco Site
		Several years ago the Company received an information request under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) designating Parker Drilling Offshore Corporation, a subsidiary of Parker Drilling as a potentially responsible party with respect to the Gulfco Marine Maintenance, Inc. Superfund Site in Freeport, Texas (EPA No. TX 055144539). The subsidiary responded to this request in 2003 with documents. In January 2008, the subsidiary received an administrative order to participate in an investigation of the site and a study of the remediation needs and alternatives. The EPA alleges that the subsidiary is successor to a party who owned the Gulfco site during the time when chemical releases took place there. Two other parties have been performing that work since mid-2005 under an earlier version of the same order. The subsidiary believes that it has a sufficient cause to decline participation under the order and has notified the EPA of that decision. Non-compliance with an EPA order absent sufficient cause for doing so can result in substantial penalties under CERCLA. The subsidiary is continuing to evaluate its relationship to the site and has conferred with the EPA and the other parties in an effort to resolve the matter. The Company has not yet estimated the amount or impact on our operations, financial position or cash flows of any costs related to the site. To date, the EPA and the other two parties have spent over $2.7 million studying and conducting initial remediation of the site. It is anticipated that an additional $1.3 million will be required to complete the remediation. Other costs (not yet quantified) such as interest and administrative overhead could be added to any action against the Company. Although we can provide no assurance as to the total amount necessary to finally resolve this matter, we currently anticipate that the total claim will not exceed $5 million and will be shared by all responsible parties. The Company does not believe it has any obligation with respect to the remediation of the property, and accordingly no accrual was made as of March 31, 2009.
		Customs Agent Investigation
		As previously disclosed, the Company received requests from the United States Department of Justice (“DOJ”) in July 2007 and the United States Securities and Exchange Commission (“SEC”) in January 2008 relating to the Company’s utilization of the services of a customs agent. In response to those requests, the Company is conducting an internal investigation. The DOJ and the SEC are conducting parallel investigations into possible violations of U.S. law by the Company, including the Foreign Corrupt Practices Act (the “FCPA”). In particular, the DOJ and the SEC are investigating the Company’s use of customs agents in certain countries in which the Company currently operates or formerly operated, including Kazakhstan and Nigeria. The Company is fully cooperating with the DOJ and SEC investigations. At this point, we are unable to predict the duration, scope or result of the DOJ or the SEC investigation or whether either agency will commence any legal action. If we are not in compliance with the FCPA and other laws governing the conduct of business with foreign government entities (including other United States laws and regulations as well as local laws), we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse impact on our business, results of operations, financial condition and liquidity.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

10.		Contingencies (continued)
		Economic Sanctions Compliance
		Our international operations are subject to laws and regulations restricting our international operations including activities involving restricted countries, organizations, entities and persons that have been identified as unlawful actors or that are subject to U.S. economic sanctions. Pursuant to an internal review, we have identified certain shipments of equipment and supplies that were routed through Iran as well as other activities that may have violated applicable U.S. laws and regulations. In addition, we have engaged in drilling wells in the Korpedje Field in Turkmenistan, from where natural gas may be exported by pipeline to Iran. We are currently reviewing these shipments, transactions and drilling activities to determine whether the timing, nature and extent of such activities or other conduct may have given rise to violations of these laws and regulations. Although we are unable to predict the scope or result of this internal review or its ultimate outcome, we have initiated voluntary disclosure of these potential compliance issues to the appropriate U.S. government agency. If we are not in compliance with export restrictions, U.S. economic sanctions or other laws and regulations that apply to our international operations, we may be subject to civil or criminal penalties and other remedial measures, which could have an adverse impact on our business, results of operations, financial condition and liquidity.
11.		Recent Accounting Pronouncements – In April 2009, the FASB issued FSP SFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” This FSP which amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to require publicly-traded companies, as defined in APB Opinion No. 28, “Interim Financial Reporting,” to provide disclosures on the fair value of financial instruments in interim financial statements. FSP SFAS 107-1 and APB 28-1 is effective for interim periods ending after June 15, 2009. We will adopt the new disclosure requirements in our June 30, 2009 financial statements.
12.		Parent, Guarantor, Non-Guarantor Unaudited Consolidating Condensed Financial Statements – Set forth on the following pages are the consolidating condensed financial statements of (i) Parker Drilling, (ii) its restricted subsidiaries that are guarantors of the Senior Notes, and Convertible Senior Notes (“the Notes”) and (iii) the restricted and unrestricted subsidiaries that are not guarantors of the Notes. The Notes are guaranteed by substantially all of the domestic 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. Separate financial statements for each guarantor company are not provided as the company complies with the exception to Rule 3-10(a)(1) of Regulation S-X, set forth in sub-paragraph (f) of such rule. All guarantor subsidiaries are directly or indirectly owned 100% by the parent company, all guarantees are full and unconditional and all guarantees are joint and several.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

12.		Parent, Guarantor, Non-Guarantor Unaudited Consolidating Condensed Financial Statements (continued)
		AralParker (a Kazakhstan joint stock company, owned 100 percent by Parker Drilling (Kazakstan), LLC, Casuarina Limited (a wholly-owned captive insurance company), KDN Drilling Limited, Mallard Argentine Holdings, Ltd., 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 Kazakhstan B.V., Parker Drilling AME Limited, Parker Drilling Asia Pacific, LLC, PD International Holdings C.V.,PD Dutch Holdings C.V., PD Selective Holdings C.V., PD Offshore Holdings C.V., Parker Drilling Netherlands B.V., Parker Drilling Dutch B.V., Parker Hungary Rig Holdings Limited Liability Company, Parker Drilling Spain Rig Services, S L, Parker 3Source, LLC, Parker 5272, LLC, Parker Central Europe Rig Holdings Limited Liability Company, Parker Cyprus Leasing Limited, Parker Cyprus Ventures Limited, Parker Drilling International B.V., Parker Drilling Offshore B.V., Parker Drilling Offshore International, Inc., Parker Drilling Overseas B.V., Parker Drilling Russia B.V., Parker Drillsource, LLC, PD Labor Services, Ltd., PD Labor Sourcing, Ltd., and Parker Enex, LLC are all non-guarantor subsidiaries. The Company is providing consolidating condensed financial information of the parent, Parker Drilling, the guarantor subsidiaries, and the non-guarantor subsidiaries as of March 31, 2009 and December 31, 2008 and for the quarters ended March 31, 2009 and 2008. The consolidating condensed 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)
(Unaudited)

		March 31, 2009
		Parent				Guarantor				Non-Guarantor				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	85,826			$	7,466			$	55,111			$	—			$	148,403
Accounts and notes receivable, net			49,523				202,012				151,208				(220,410	)			182,333
Rig materials and supplies			—				10,989				19,212				—				30,201
Deferred costs			—				1,644				5,400				—				7,044
Deferred income taxes			9,735				—				—				—				9,735
Other tax assets			78,144				(41,820	)			(1,470	)			—				34,854
Other current assets			557				13,909				12,226				—				26,692
Total current assets			223,785				194,200				241,687				(220,410	)			439,262
Property, plant and equipment, net			79				497,575				209,351				123				707,128
Investment in subsidiaries and intercompany advances			910,363				938,810				(105	)			(1,849,068	)			—
Investment in and advances to unconsolidated joint venture			—				4,620				(4,620	)			—				—
Other noncurrent assets			34,141				17,531				7,240				—				58,912
Total assets		$	1,168,368			$	1,652,736			$	453,553			$	(2,069,355	)		$	1,205,302
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	9,000			$	—			$	—			$	—			$	9,000
Accounts payable and accrued liabilities			59,348				343,953				101,340				(369,365	)			135,276
Accrued income taxes			1,235				3,295				5,829				—				10,359
Total current liabilities			69,583				347,248				107,169				(369,365	)			154,635
Long-term debt			437,464				—				—				—				437,464
Other long-term liabilities			10				12,892				6,440				—				19,342
Long-term deferred tax liability			—				88				7,045				—				7,133
Intercompany payables			74,583				583,027				71,299				(728,909	)			—
Contingencies (Note 10)			—				—				—				—				—
Stockholders’ equity:
Common stock			19,351				39,899				21,153				(61,052	)			19,351
Capital in excess of par value			621,570				997,082				189,756				(1,186,838	)			621,570
Retained earnings (accumulated deficit)			(54,193	)			(327,500	)			50,691				276,809				(54,193	)
Total stockholders’ equity			586,728				709,481				261,600				(971,081	)			586,728
Total liabilities and stockholders’ equity		$	1,168,368			$	1,652,736			$	453,553			$	(2,069,355	)		$	1,205,302

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

		December 31, 2008
		Parent				Guarantor				Non-Guarantor				Eliminations				Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	111,324			$	9,741			$	51,233			$	—			$	172,298
Accounts and notes receivable, net			51,792				217,435				131,591				(214,654	)			186,164
Rig materials and supplies			—				11,518				18,723				—				30,241
Deferred costs			—				2,000				5,804				—				7,804
Deferred income taxes			9,735				—				—				—				9,735
Other tax assets			83,788				(41,008	)			(1,856	)			—				40,924
Other current assets			549				13,755				11,875				(54	)			26,125
Total current assets			257,188				213,441				217,370				(214,708	)			473,291
Property, plant and equipment, net			79				465,659				209,686				124				675,548
Investment in subsidiaries and intercompany advances			867,684				1,066,216				(88,992	)			(1,844,908	)			—
Investment in and advances to unconsolidated joint venture			—				4,620				(4,620	)			—				—
Other noncurrent assets			27,607				21,215				8,059				—				56,881
Total assets		$	1,152,558			$	1,771,151			$	341,503			$	(2,059,492	)		$	1,205,720
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	6,000			$	—			$	—			$	—			$	6,000
Accounts payable and accrued liabilities			53,859				337,464				100,305				(351,230	)			140,398
Accrued income taxes			540				4,861				6,729				—				12,130
Total current liabilities			60,399				342,325				107,034				(351,230	)			158,528
Long-term debt			435,394				—				—				—				435,394
Other long-term liabilities			10				14,351				7,035				—				21,396
Long-term deferred tax liability			—				1,237				6,993				—				8,230
Intercompany payables			74,583				583,027				71,299				(728,909	)			—
Contingencies (Note 10)			—				—				—				—				—
Stockholders’ equity:
Common stock			18,910				39,899				21,153				(61,052	)			18,910
Capital in excess of par value			619,561				1,045,727				141,112				(1,186,839	)			619,561
Retained earnings (accumulated deficit)			(56,299	)			(255,415	)			(13,123	)			268,538				(56,299	)
Total stockholders’ equity			582,172				830,211				149,142				(979,353	)			582,172
Total liabilities and stockholders’ equity		$	1,152,558			$	1,771,151			$	341,503			$	(2,059,492	)		$	1,205,720

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

		Three months ended March 31, 2009
		Parent				Guarantor				Non-Guarantor				Eliminations				Consolidated
Total revenues		$	—			$	122,322			$	80,229			$	(28,626	)		$	173,925
Operating expenses			—				86,883				62,918				(28,626	)			121,175
Depreciation and amortization			—				20,054				7,070				—				27,124
Total operating gross margin			—				15,385				10,241				—				25,626
General and administration expense (1)			(41	)			(12,995	)			(24	)			—				(13,060	)
Gain on disposition of assets, net			—				13				65				—				78
Total operating income (loss)			(41	)			2,403				10,282				—				12,644
Other income and (expense):
Interest expense			(8,882	)			(11,775	)			(103	)			12,694				(8,066	)
Interest income			10,705				1,657				618				(12,694	)			286
Other			(3	)			(21	)			12				—				(12	)
Equity in net earnings of subsidiaries			(8,271	)			—				—				8,271				—
Total other income and (expense)			(6,451	)			(10,139	)			527				8,271				(7,792	)
Income (benefit) before income taxes			(6,492	)			(7,736	)			10,809				8,271				4,852
Income tax expense (benefit):
Current			(504	)			3,161				4,081				—				6,738
Deferred			(8,094	)			4,051				51				—				(3,992	)
Total income tax expense (benefit)			(8,598	)			7,212				4,132				—				2,746
Net income (loss)		$	2,106			$	(14,948	)		$	6,677			$	8,271			$	2,106

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

		Three months ended March 31, 2008
		Parent				Guarantor				Non-Guarantor				Eliminations				Consolidated
Total revenues		$	—			$	128,682			$	65,905			$	(21,309	)		$	173,278
Operating expenses			1				74,363				52,567				(21,309	)			105,622
Depreciation and amortization			—				20,513				5,653				—				26,166
Total operating gross margin			(1	)			33,806				7,685				—				41,490
General and administration expense (1)			(80	)			(6,584	)			(4	)			—				(6,668	)
Gain (loss) on disposition of assets, net			—				582				(3	)			—				579
Total operating income (loss)			(81	)			27,804				7,678				—				35,401
Other income and (expense):
Interest expense			(8,021	)			(11,786	)			(80	)			13,050				(6,837	)
Interest income			10,689				1,925				804				(13,050	)			368
Equity in loss of unconsolidated joint venture, and related charges net of taxes			—				(1,105	)			—				—				(1,105	)
Other			—				10				50				—				60
Equity in net earnings of subsidiaries			32,223				—				—				(32,223	)			—
Total other income and (expense)			34,891				(10,956	)			774				(32,223	)			(7,514	)
Income (loss) before income taxes			34,810				16,848				8,452				(32,223	)			27,887
Income tax expense (benefit):
Current			(2,568	)			(11,191	)			3,116				—				(10,643	)
Deferred			14,176				838				314				—				15,328
Income tax expense (benefit)			11,608				(10,353	)			3,430				—				4,685
Net income (loss)		$	23,202			$	27,201			$	5,022			$	(32,223	)		$	23,202