| General |
1. General
| |
|
In the opinion of the management of Parker Drilling Company
(Parker Drilling), 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 June 30,
2011 and December 31, 2010, (2) the results of operations for the three and six month periods
ended June 30, 2011 and 2010, and (3) cash flows for the
six month periods ended June 30, 2011
and 2010. Results for the six month periods ended June 30, 2011 are not necessarily indicative
of the results that will be realized for the year ending December 31, 2011. The financial
statements should be read in conjunction with our Annual Report on Form 10-K for the year ended
December 31, 2010. |
| |
|
Nature of Operations — Parker Drilling together with its
subsidiaries (the Company), is a worldwide provider of rental tools, drilling services, and project
management services. Our rental tools subsidiary specializes in oil and gas drilling rental tools providing
high-quality, reliable equipment, such as drill pipe, heavy-weight drill pipe, tubing, high-torque connections,
blow out preventers and drill collars used for drilling, workover and production applications. |
| |
|
We provide contract drilling and drilling-related services. Our Gulf of Mexico barge drilling business
operates barge rigs in the shallow waters in and along the inland waterways of Louisiana and Texas. Our
barge rigs drill for natural gas, oil, and a combination of oil and natural gas. Our international
drilling business provides extensive experience and expertise in drilling geologically difficult wells and in
managing the logistical and technological challenges of operating in remote, harsh and ecologically sensitive areas.
At June 30, 2011, our marketable rig fleet consisted of 15 barge drilling rigs and 25 land rigs located in the United
States, the Americas, the Commonwealth of Independent States/Africa-Middle East (CIS/AME) and the Asia Pacific region.
In addition, as of June 30, 2011, we had sales contracts pending for three rigs classified in our consolidated condensed
balance sheet as assets held for sale. The sales are expected to be completed during 2011. |
| |
|
Our Project Management services include front–end engineering and design; engineering, procurement, construction,
and installation; operations and maintenance; and other project management services, such as labor, maintenance,
and logistics for operators who own their own drilling rigs. |
| |
|
Consolidation — The consolidated financial statements include the accounts of Parker Drilling
and subsidiaries in which we exercise control or have a controlling financial interest,
including entities, if any, in which the Company is allocated a majority of the entity’s losses
or returns, regardless of ownership percentage. If a subsidiary of Parker Drilling has a 50
percent interest in an entity but Parker Drilling’s interest in
the subsidiary or the entity does not meet the consolidation criteria
described above, then that interest is accounted for under the equity method. |
| |
|
Non-Controlling Interest — We apply the accounting standards related to noncontrolling
interests for ownership interests in our subsidiaries held by parties other than Parker
Drilling. We report noncontrolling interest as equity on the consolidated balance sheet and
report net income (loss) attributable to controlling interest and to noncontrolling interest
separately on the statement of operations. |
| |
|
Reclassifications — Certain reclassifications have been made to prior period amounts to conform
with the current period presentation. These reclassifications did not have a material effect on
our consolidated statement of operations, consolidated balance sheet or statement of cash flows. |
| |
|
Use of Estimates — The preparation of financial statements in accordance with accounting
policies generally accepted in the United States (U.S. GAAP) requires us to make estimates and
assumptions that affect our reported amounts of assets and liabilities, our disclosure of
contingent assets and liabilities at the date of the financial statements, and our revenue and
expenses during the periods reported. Estimates are used when accounting for certain items such
as legal or contractual liability accruals, mobilization and deferred mobilization, revenue and
cost accounting for projects that follow the percentage of completion method, self-insured
medical/dental plans, etc. Estimates are based on a number of
variables which may include third party valuations, historical
experience, where applicable, and assumptions that we believe are reasonable under the
circumstances. Due to the inherent uncertainty involved with estimates, actual results may
differ from management estimates. |
| |
|
Concentrations of Credit Risk — Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of trade receivables with a variety of national
and international oil and gas companies. We generally do not require collateral on our trade
receivables. |
| |
|
At June 30, 2011 and December 31, 2010, we had deposits in domestic banks in excess of federally
insured limits of approximately $16.9 million and $25.9 million, respectively. In addition, we
had deposits in foreign
banks, which were not insured at June 30, 2011 and December 31, 2010, of
$25.1 million and $31.1 million, respectively. |
| |
|
Our customer base consists of major, independent, national and international oil and gas companies and
integrated service providers. We depend on a limited number of significant customers. Our
largest customer, ExxonMobil, constituted 19.3 percent
of our year-to-date revenues as of June 30, 2011. |
| |
|
Construction Contract — For the periods
reported, our construction contract business included only the Liberty
drilling rig construction project for BP. In November 2010, our customer, BP, informed us that it was suspending construction on the project to review the rig’s engineering and design, including its
safety systems. The Liberty rig construction contract was a fixed fee and reimbursable contract
accounted for on a percentage of completion basis. As of June 30, 2011 and 2010 we had
recognized $334.2 million and $275.8 million in project-to-date revenues, respectively.
We have recognized the entire $11.7 million fixed fee margin on the contract. |
| |
|
The Liberty rig construction contract expired on February 8, 2011 prior to completion of the rig. Before expiration of the
construction contract, BP identified several areas of concern relating to design, construction and invoicing for which it asked us to provide
explanations and documentation, and we have done so. Although
we have provided BP with the requested information, we do not know when or how these issues will
be resolved with our client. At this point, construction on the rig is incomplete, and it
cannot be completed until BP determines to resume construction. |
| |
|
After expiration of the construction contract, the Company and BP continued activities to preserve and maintain the rig under the
“pre-operations” phase of our Operations and Maintenance
(O&M) contract, which was entered into in August 2009 and expired on June 30, 2011. A new consulting services agreement was reached between the
Company and BP effective July 1, 2011. Under the consulting services agreement, the Company is
assisting BP with technical support in a review of the rig’s design, the creation of a new
statement of requirements for the rig, and the transition of documentation and materials to BP. |
| |
|
Fair value measurements— For purposes of recording fair value adjustments for certain financial
and non-financial assets and liabilities, and determining fair value disclosures, we estimate
fair value at a price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants in the principal market for the asset or
liability. Our valuation technique requires inputs that we categorize using a three-level
hierarchy, from highest to lowest level of observable inputs, as follows: (1) unadjusted quoted
prices for identical assets or liabilities in active markets (“Level 1”), (2) direct or indirect
observable inputs, including quoted prices or other market data, for similar assets or
liabilities in active markets or identical assets or liabilities in less active markets (“Level
2”) and (3) unobservable inputs that require significant judgment for which there is little or
no market data (“Level 3”). When multiple input levels are required for a valuation, we
categorize the entire fair value measurement according to the lowest level of input that is
significant to the measurement even though we may have also utilized significant inputs that are
more readily observable. |
| |
|
Derivative Financial Instruments — We use derivative instruments to manage risks associated with
interest rate fluctuations in connection with our Credit Agreement (see Note 6). These
derivative instruments, which consist of variable-to-fixed interest rate swaps, are not
designated as hedges. Accordingly, the change in the fair value of the interest rate swaps is
recognized in earnings. |
| |
|
Property, Plant and Equipment — We account for depreciation of property, plant and equipment on
the straight line method over the estimated useful lives of the assets after provision for
salvage value. Depreciable lives for different categories of property, plant and equipment are
as follows: |
| |
|
|
|
Land drilling equipment
|
|
3 to 20 years |
|
Barge drilling equipment
|
|
3 to 20 years |
|
Drill pipe, rental tools and other
|
|
4 to 7 years |
|
Buildings and improvements
|
|
15 to 30 years
Management periodically evaluates the Company’s assets to determine whether their net carrying
values are in excess of their net realizable values. Management considers a number of factors
such as estimated future cash flows, appraisals and current market value analysis in determining net realizable value. Assets
are written down to fair value if the fair value is below the net carrying value. |
| |
|
Interest from external borrowings is capitalized on major projects until the assets are ready
for their intended use. Capitalized interest is added to the cost of the underlying asset and
is amortized over the useful lives of the assets in the same manner as the underlying assets.
Capitalized interest costs reduce net interest expense in the consolidated statement of
operations. During the three-months ended June 30, 2011 and June 30, 2010, we capitalized
interest costs related to the construction of rigs of $4.7 million and $3.3 million,
respectively. |
| |
|
Assets held for sale — We classify an asset as held for sale when the facts and circumstances
meet the required criteria for such classification, including the following: (a) we have
committed to a plan to sell the asset, (b) the asset is available for immediate sale, (c) we
have initiated actions to complete the sale, including locating a buyer, (d) the sale is
expected to be completed within one year, (e) the asset is being actively marketed at a price
that is reasonable relative to its fair value, and (f) the plan to sell is unlikely to be
subject to significant changes or termination. At June 30, 2011, we had net assets held for
sale of $5.3 million included in current assets. For further information, see Note 3. |
|