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Edited Transcript of PKD earnings conference call or presentation 6-Nov-18 4:00pm GMT

Q3 2018 Parker Drilling Co Earnings Call

HOUSTON Nov 12, 2018 (Thomson StreetEvents) -- Edited Transcript of Parker Drilling Co earnings conference call or presentation Tuesday, November 6, 2018 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gary G. Rich

Parker Drilling Company - Chairman, President & CEO

* Michael W. Sumruld

Parker Drilling Company - Senior VP & CFO

* Nick Henley

Parker Drilling Company - IR Director

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Conference Call Participants

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* Daniel Joseph Burke

Johnson Rice & Company, L.L.C., Research Division - Senior Analyst

* Vivek Pal

Seaport Global Securities LLC, Research Division - MD of Fixed Income Strategy

* Walter Adams Chancellor

Macquarie Research - Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Parker Drilling Third Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Nick Henley, Investor Relations Director. Thank you. You may begin.

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Nick Henley, Parker Drilling Company - IR Director [2]

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Good morning, and thank you for joining today's conference call. With me today are Gary Rich, Chairman, President and CEO of Parker Drilling; and Mike Sumruld, Senior Vice President and Chief Financial Officer.

As a reminder, during this call, management may make statements regarding future expectations about the company's business, management's plans for future operations or similar matters. These statements are considered forward-looking statements within the meaning of U.S. securities laws and speak only as of the date of this call. The company's actual results could differ materially due to several important factors, including those described in the company's filings with the SEC. During this call, management will refer to non-GAAP financial measures. In accordance with Regulation G, the company has provided a reconciliation of these measures in its earnings release.

Before I turn the call over to Gary, I would like to preface by noting a change to our conference call format. As we mentioned in our second quarter earnings call, we are exploring options to address our debt maturities and improve our capital structure for the long-term benefit of the company. As part of that process, today, we also disclosed material nonpublic information that was shared under a time-limited nondisclosure agreement with one of our shareholders and was cleansed through a disclosure today. Because of this ongoing process and the additional information we have disclosed, we will limit our questions-and-answer session to matters pertaining only to our third quarter results and near-term expectations. I will now turn the call over to Gary Rich.

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Gary G. Rich, Parker Drilling Company - Chairman, President & CEO [3]

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Thank you, Nick, and good morning to everyone. Thank you for joining our third quarter conference call. The third quarter results reflect a continuation of managing through the protracted downturn in certain markets, while positioning Parker to address increasing customer demand in others.

During the quarter, our global Rental Tools Services business continued to improve, and we deployed additional CapEx towards quick payback opportunities, which we described in our second quarter conference call. This investment will continue in the fourth quarter as we see some strong customer demand in our Rental Tools Services markets.

In our drilling business, we are seeing stability in several markets, including the Kurdistan region of Iraq and Kazakhstan, while continuing to expand our O&M services as demonstrated by our recently awarded O&M contract for services offshore California. I'm extremely pleased to announce this award as it supports our commitment and strategy of expanding our Drilling Services business, while exercising capital discipline. This project also provides meaningful contract backlog and bolsters our U.S. (Lower 48) segment, which has struggled because of the challenging shallow water Gulf of Mexico market environment.

Before we get into the results for the quarter, I would like to address 2 topics, and then I'll turn the call over to Mike to give more context on the results, before concluding with some final remarks. First, as reported in our earnings press release, we have taken a pretax noncash impairment charge of $44 million in the third quarter related to our Gulf of Mexico and international barge assets. We adjusted the carrying value of these assets when we determined there was a low probability of near-term recovery in their respective markets. Activity in our barge business has historically had a high correlation to commodity prices. However, as oil prices have materially improved since their lows in 2016, demand for the barge rigs in these markets has not recovered due to a number of factors. In previous calls, I have outlined the challenges our clients face in the shallow water Gulf of Mexico market. Our larger customers continue to allocate resources to unconventional onshore plays in the U.S. where they have substantially larger volumes of wells to drill. And our pure-play shallow water Gulf of Mexico clients, which tend to be smaller operators, continue to have difficulty attracting capital in the current business environment. Similarly, our international barge business, which consists of 1 rig in the Caspian Sea, serves a niche market where customers are diverting their focus to land and deeper offshore projects.

In light of these challenges, we assessed the recoverability of these 2 asset groups and determined the carrying values were partially impaired. More detail on the impairment charge and our assessment is available in our third quarter 10-Q. While activity continues to be depressed in some markets, such as our barge business, I am encouraged by the market improvement in other key areas where we operate. We see opportunities for profitable growth in these markets as the industry continues to recover. Capturing these opportunities will require strategic investment and more financial flexibility than our current capital structure allows. Currently, a significant portion of our cash is directed towards interest payments, limiting our ability to invest in growth opportunities.

As we have discussed previously, we are actively exploring options to address our upcoming debt maturities and improve our capital structure so that we are well positioned for long-term growth across industry cycles, which brings me to my second topic. As part of this effort, we proactively engaged in discussions with one of our largest shareholders, which had agreed to review certain material nonpublic information under a time-limited nondisclosure agreement, or NDA, so that we can have more detailed conversations about our capital structure well ahead of our future debt maturities. The NDA has now expired.

And in accordance with our agreement and SEC requirements, we disclosed the information that was shared with the investor to the rest of the market. This effectively cleanses this shareholder of the material nonpublic information.

While we appreciate the efforts of our shareholder to offer capital structure solutions, we determined that the proposed terms were not the right solution for the company at this time and that it is prudent to evaluate other options that may be more favorable to all Parker stakeholders. In fact, we remain in active dialogue with other stakeholders regarding ways to strengthen our capital structure. And while these discussions continue, we have ample liquidity to continue serving our customers without interruption. The process of reviewing capital structure options takes time, and we are committed to getting this right and reaching the optimal outcome for our stakeholders. As a result of this effort, our G&A for the quarter was materially higher, largely due to professional fees, and we expect it to remain elevated in the fourth quarter as well.

At this point, I will hand the call over to Mike to discuss our third quarter results. After his closing, I will describe in more detail the materials that were disclosed today.

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Michael W. Sumruld, Parker Drilling Company - Senior VP & CFO [4]

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Thanks, Gary. For the 2018 third quarter, we reported revenues of $123.4 million, a net loss available to common shareholders of $71.9 million and adjusted EBITDA of $15 million or 12.1% of revenues. Our loss per share for the quarter was $7.70. Excluding the impairment loss, our loss per share for the quarter was $2.99.

In our International & Alaska Drilling segment, revenues were in line with our guidance, while we posted a small gross margin profit versus our original expectation of a $1 million to $3 million loss. Revenues in this segment decreased sequentially by 10.4% from $53.3 million to $47.8 million, primarily due to one of our rigs in Alaska completing work early in July and remaining on a reduced standby rate through the remainder of the quarter, which we referenced during our prior calls. Gross margin for the segment decreased to $250,000 from $5 million in the second quarter, driven primarily by the decline in Alaska revenues and partially offset by improvement in our Sakhalin Island and offshore Canada O&M projects. Third quarter rig utilization for the segment rose to 41% compared with 34% in the second quarter as we achieved higher overall volumes of rig activity.

The U.S. (Lower 48) Drilling segment also performed in line with our guidance. Business activity remains subdued with utilization for the third quarter roughly flat sequentially. Revenue for the third quarter was $4.5 million compared with $3.3 million in the second quarter and gross margin improved to a loss of $1.2 million versus a loss of $1.4 million in the second quarter. Third quarter revenues and gross margin primarily benefited from a favorable mix in barge drilling activity and the recent award of an O&M contract offshore California, which Gary highlighted earlier. We currently have 1 barge rig working, however, we expect overall average utilization for the fourth quarter will be consistent with the third quarter as activity remains sporadic in this difficult market environment.

Our Drilling Services contracted backlog increased to $238.9 million at the end of the third quarter compared with $215.5 million in the second quarter with most of the increase coming from our newly awarded California O&M project. Of the current backlog, 14.9% will be recognized in 2018 and 41.2% is projected in 2019.

Turning to the Rental Tools Services business. We continue to see growing demand as revenue in both the U.S. and international segments increased sequentially. In the U.S. Rental Tools segment, our capital investments made earlier in the year are paying off nicely as we saw a continuation of healthy demand in the U.S., despite rig count growth slowing in the quarter. Sequential revenue improvement of 21.1% outpaced the relatively flat U.S. rig count in the third quarter. Quarterly revenues increased to $50.9 million from $42.1 million in the previous quarter. The increase was due primarily to improving activity and share gain onshore U.S. as well as an increase in offshore Gulf of Mexico activity. Gross margin in the segment was $29 million, compared with $22.8 million in the second quarter and gross margin as a percent of revenues increased by 2.8 percentage points to 56.9% from 54.1% in the second quarter. This margin expansion was the result of broad-based improvement in volumes as well as lower incremental operating expenses.

In our International Rental Tools segment, we again saw both sequential revenue and gross margin improvement due to continued demand for our tubular running services, particularly in the Middle East. Segment revenues were up 1.1% to $20.2 million compared with $19.9 million in the second quarter. Gross margin was $1.4 million, up from $591,000 in the prior quarter. This improvement in gross margin was mainly due to increases in revenue and lower incremental operating expenses as a result of gaining scale in core markets. This marks the fourth consecutive quarter of growing positive gross margin for this segment, a trend we expect to continue as markets rebound and we deliver strong customer service.

Regarding other financial items. Our third quarter G&A expense was $14.5 million, up from $8.3 million in the second quarter. As Gary stated earlier, this increase was primarily related to professional fees tied to our ongoing capital structure evaluation. We reported a tax expense of $2.4 million in the third quarter on a pretax loss of $68.6 million. The reported tax expense reflects the mix of results in the jurisdictions, in which we operate, and our inability to recognize benefits associated with certain losses as a result of our existing valuation allowances. Our effective tax rate in the quarter was negative 3.5%. For 2018, we still expect our effective tax rate to be between negative 5% and negative 15%. This is largely the result of noncash valuation allowances that restrict our ability to recognize benefits associated with certain losses. We expect our 2018 cash taxes to be approximately $8 million to $10 million with $7 million paid during the first 9 months of 2018.

Our capital spending in the third quarter was $19.5 million, totaling $52 million for the first 9 months of the year. As previously guided, we expect our 2018 capital expenditures will be approximately $75 million with capital spending primarily directed to quick payback opportunities in our U.S. and international rentals businesses.

Turning now to our balance sheet and cash flows. Total long-term debt outstanding at quarter-end was $579.3 million, which includes a principal amount of $585 million, less $5.7 million of unamortized debt issuance costs. Our net debt position at the end of the quarter was $503 million or 74.7% of net capitalization. We ended the quarter with a cash balance of $81.7 million, down $32.7 million from last quarter and $59.8 million from the prior year-end.

We made semiannual interest payments of $20.6 million in both the first and third quarters, totaling $41.2 million for the year. Total liquidity at the end of the quarter was $140.3 million consisting of $81.7 million in cash and $58.6 million available under our revolving credit facility. Available liquidity under our credit facility increased $6 million from the prior period.

That concludes the financial review. I'll turn it back to Gary for his final remarks. Gary?

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Gary G. Rich, Parker Drilling Company - Chairman, President & CEO [5]

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Thanks, Mike. Looking towards the fourth quarter, we expect our consolidated revenues and gross margin before G&A will improve slightly compared with the third quarter levels, primarily due to a continuation of strong performance in our Rental Tools segment and a slight increase in the Drilling Services activity. For the U.S. Rental Tools segment, we expect fourth quarter revenues and gross margin will be roughly flat compared with the third quarter as continued easing in U.S. land rig count growth and reductions in deepwater Gulf of Mexico projects temper our rental activity growth. In the International Rental Tools segment, we anticipate revenues will be relatively flat with the third quarter as gains in Latin America services will be offset by lower sales in the Middle East. However, gross margin is likely to show sequential gains due to this favorable mix in revenues and lower operating expenses.

For our U.S. (Lower 48) Drilling segment, we expect revenues and gross margin to remain in line with the third quarter due to continued stagnant utilization in the Gulf of Mexico market. With respect to the California O&M, we are still in the early stages of the project as the platform prepares for operations. We expect more meaningful financial contributions will occur once full operations get underway in early 2019.

In the International & Alaska Drilling segment, we anticipate that revenues will increase in the fourth quarter to a range between $54 million and $58 million, and the gross margin for this segment will improve to range between $1 million and $3 million. The main reason behind the increase in revenues and gross margin is due to rigs operating for the full quarter in the Kurdistan region of Iraq and Kazakhstan, where they did not in the third quarter.

Additionally, we continue to have very encouraging discussions with our clients in Alaska, and we feel there is a high probability for 1 rig to return to service as early as December, but no later than the first quarter of 2019. We also continue to market our second rig in Alaska as well and see promising signs for rig activation later in 2019 or early 2020.

In the international markets, we continue to participate in a high volume of tenders and anticipate additional rigs will return to work in 2019. In fact, we are already recognizing positive results from our recent tendering activity. Earlier this quarter, we were selected as the preferred bidder and received a letter of intent through the provision of O&M services for another major offshore drilling project. Upon contract execution, this will mark the second offshore O&M contract we have received this year. As I mentioned earlier in the call, we expect our G&A expenses for the fourth quarter will continue to be elevated due to professional fees associated with our ongoing capital structure evaluation. Although this effort is taking time to complete, we are committed to ensuring the best possible outcome for all stakeholders. Excluding these incremental fees, we expect our full year 2018 adjusted EBITDA to come in around the top end of our previous guidance of $65 million to $75 million.

Now I'd like to turn to our recent disclosure, but before I go into detail, let me provide some context and background on the matter. The information we disclosed today was part of our ongoing review of options to address our capital structure and would refer you to our SEC filings so you may review the materials yourself. This is an effort to create financial flexibility and the foundation we need to seize future opportunities as our industry recovers and to execute Parker Drilling's broader strategy.

The goal of providing these materials to one of our largest shareholders was to describe our current situation in light of our capital constraints; the opportunities we see to grow the business, both the U.S. and emerging international market recoveries; and the path to achieving that goal. While we have significant liquidity and cash flow in the near term, under our current capital structure, we are simply unable to make the necessary long-term investments to participate in many of the growth opportunities we see on the horizon, and the financial projections we included in the cleanse materials reflect these constraints. Now I'd like to walk you through at a high-level some of the information that was disclosed in the cleanse materials. First, we shared our vision for Parker Drilling and both our near- and long-term strategies for the company. In the near term, we see opportunities to continue leveraging our global distribution network and strong reputation to capitalize on the growing demand for our Rental Tools Services. That means investing in new technology for our global rentals business, which has high returns and quick cash payback. We also see opportunities to leverage our U.S. Rental Tools infrastructure and our international success encased in running services to grow our emerging U.S. well services business. With respect to drilling services, we continue to evaluate and win opportunities to expand our global O&M service offering, such as recent wins offshore of California and offshore Canada. As conditions improve in markets where we have Parker-owned assets, we are positioning our rig fleet to earn new contracts and reactivate efficiently. Longer term, we know Parker has the necessary infrastructure, talented employee base and expertise in place to be a natural consolidator and to pursue both organic and inorganic investment opportunities. We are committed to being disciplined in evaluating opportunities and we'll prioritize the highest return prospects. However, achieving this vision for the future requires material investment, investment in reactivating and upgrading rigs, expanding and upgrading our rental tools fleet, further leveraging our global platform to improve scale and expand market share and enabling revenue pull-through opportunities across businesses and regions. At the same time, we also remain cautious over the near term given the continued uncertainty in the global macro environment. And the materials we've presented show that we do not expect the recovery to be uniform across our businesses and regions. For that reason, we need to maintain the flexibility to strategically invest in near-term growth opportunities, while positioning Parker for the long term. We believe both our drilling and rental businesses and know the complementary nature of both create revenue pull-through opportunities and serves a natural hedge in most industry cycles. As you know, our current capital structure includes $585 million in total debt with maturities in 2020 and 2022. The financial projections we've provided to the shareholder anticipate that this debt will continue to significantly constrain Parker's ability to invest in the business and capture some of the opportunities I have described.

For that reason, we continue to engage in active discussions with a number of stakeholders in an effort to build greater financial flexibility, putting us on a path to execute our strategy, achieve our vision and create long-term value for the company. So the materials that were disclosed today make it clear that Parker has many of the pieces in place to be a leading provider of drilling and rental services in the long term and many near-term opportunities to increase value for our stakeholders. However, some macroeconomic uncertainty remains and our current capital structure will not allow us to invest in many of these near-term and longer-term opportunities. Therefore, we continue to evaluate options to create the financial flexibility we need to execute both organic and inorganic investments in a recovering industry.

We are continuing to work with several stakeholders and importantly, we still have significant liquidity as we work toward a solution. In closing, I'd like to again thank our employees for their focus and unwavering dedication to our customers. I'm extremely proud of our efforts as a company to develop innovative, reliable and efficient ways to help our customers safely manage their costs and mitigate operating risks. That concludes my comments, operator. We are ready to take questions from the audience.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Vivek Pal from Seaport Global.

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Vivek Pal, Seaport Global Securities LLC, Research Division - MD of Fixed Income Strategy [2]

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Are you going to make the next coupon? Or you need to do something before the next interest payment?

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Michael W. Sumruld, Parker Drilling Company - Senior VP & CFO [3]

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This is Mike. Yes, our next coupon payments are in January and February of next year. Nothing stopping us at this moment from continuing to make those payments.

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Vivek Pal, Seaport Global Securities LLC, Research Division - MD of Fixed Income Strategy [4]

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And you mentioned your approach to your largest shareholder. Have you approached the bondholders? Because it seems like you're going to need them before the shareholders, right? I mean in order to kind of restructure the debt. Or they are the same investors, so it doesn't matter?

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Gary G. Rich, Parker Drilling Company - Chairman, President & CEO [5]

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Those are detailed matters that we're really not going to get into on this phone call. I appreciate the question, but we're just going to stay with we've engaged other stakeholders and continue to have discussions.

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Operator [6]

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Our next question is from Walt Chancellor from Macquarie.

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Walter Adams Chancellor, Macquarie Research - Analyst [7]

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Gary, I guess just to focus on some of the near-term operational outlook. In the materials you published this morning, they showed some optimism in near-term contracting for both Mexico and Kazakhstan. Just curious what you're seeing in those markets, tenders? Then -- and how you feel about those opportunities.

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Gary G. Rich, Parker Drilling Company - Chairman, President & CEO [8]

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Well, we certainly feel that Kazakhstan, we've got 2 rigs up now, and they'll be working for the full fourth quarter, which they weren't both working in the third quarter for the full quarter -- I mean, yes, third quarter for the full quarter. And in Mexico, we also see some projects that represent some promise and an increase for us on both the rig as well as the Rental Tools side.

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Walter Adams Chancellor, Macquarie Research - Analyst [9]

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Okay. And then to flip to Kurdistan, 2 rigs working there. I know that's been a tough market, but you still have 1 idle. It seems like we're seeing a bit of a push to your production in the export side of the region, solved some long-standing intractable issues there. What's the outlook on that market? Do you think it is achievable to get that third rig contracted in '19 or '20?

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Gary G. Rich, Parker Drilling Company - Chairman, President & CEO [10]

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We do see the opportunities there as well as further rigs to go to work in Kazakhstan as the market continues to pick up. We've mentioned that we've got these tenders that we're continuing to respond to, and we're optimistic about our opportunities for both Kurdistan and Kazakhstan.

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Walter Adams Chancellor, Macquarie Research - Analyst [11]

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Okay. And then just one for Mike on the G&A outlook. I know you mentioned elevated. Does that mean flat relative to Q3? And then how long are those extraprofessional fee is going to keep lingering on that line?

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Michael W. Sumruld, Parker Drilling Company - Senior VP & CFO [12]

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Yes, the last question is a good one. It will just depend on how long we continue to evaluate the various options that we're looking at. I would hope rather soon we would come to some conclusion, but we're still working through that. We haven't given specific guidance on G&A into the fourth quarter only that they'll continue to remain at elevated levels. A lot of it will just depend on the activity that we have in the particular quarter as we're looking at these options. So I wish I could give you a little bit better guidance, but at the moment, I can't give you anything more specific than that.

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Operator [13]

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Our next question is from Daniel Burke from Johnson Rice & Company.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [14]

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I just had a single question left. Could you address the -- U.S. Rentals continues to do well. But could you address the payback period you think you're achieving on your U.S. Rentals investments?

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Gary G. Rich, Parker Drilling Company - Chairman, President & CEO [15]

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Well, I don't want to get into too specific on it, Daniel, but let's say that it's definitely under 2-year time frame.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [16]

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Okay. All right. Well, that's good to hear. And I don't know if you weighed into this one, but any consideration of contemplating a more restrained capital program into 2020?

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Gary G. Rich, Parker Drilling Company - Chairman, President & CEO [17]

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Well, we constantly look at the capital program in light of what our resources are and the market as well. So we're not giving any guidance on '19 nor '20 at this point, and we'll just leave it at that.

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Operator [18]

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This concludes the question-and-answer session. I would like to turn the floor back to management for any closing comments.

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Nick Henley, Parker Drilling Company - IR Director [19]

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That ends our third quarter earnings call. Thank you for your time today and your interest in Parker Drilling. We wish you all a joyful holiday season and look forward to speaking with you again soon. Goodbye, and have a great day.

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Operator [20]

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This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.