Parker Wellbore Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Chapter 11 Cases

Chapter 11 Cases

12 Months Ended

Dec. 31, 2018

Note 2 - Chapter 11 Cases

On the Petition Date, the Debtors filed the Plan and commenced the Chapter 11 Cases under title 11 of the Bankruptcy Code in the Bankruptcy Court. Since the commencement of the Chapter 11 Cases, the Debtors have continued to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

In addition to Parker Drilling, the U.S. subsidiaries included as debtors in the Chapter 11 Cases are 2M-TEK, Inc., Anachoreta, Inc., Pardril, Inc., Parker Aviation Inc., Parker Drilling Arctic Operating, LLC, Parker Drilling Company North America, Inc., Parker Drilling Company of Niger, Parker Drilling Company of Oklahoma, Incorporated, Parker Drilling Company of South America, Inc., Parker Drilling Management Services, Ltd., Parker Drilling Offshore Company, LLC, Parker Drilling Offshore USA, L.L.C., Parker North America Operations, LLC, Parker Technology, Inc., Parker Technology, L.L.C., Parker Tools, LLC, Parker-VSE, LLC, Quail Tools, L.P., and Quail USA, LLC. Since the commencement of the Chapter 11 Cases, the Debtors have continued to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

Restructuring Support Agreement

On December 12, 2018, prior to the commencement of the Chapter 11 Cases, the Debtors entered into a restructuring support agreement (as amended, the “RSA”) with certain significant holders (together, collectively, the “Consenting Stakeholders”) of (i) 7.50% Senior Notes due 2020 (the “7.50% Note Holders”) issued pursuant to the indenture dated July 30, 2013 (the “7.50% Notes”), by and among Parker Drilling, the subsidiary guarantors party thereto and Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”), (ii) 6.75% Senior Notes due 2022 (the “6.75% Note Holders”) issued pursuant to the indenture dated January 22, 2014 (the “6.75% Notes” and together with the 7.50% Notes, the “Senior Notes”), by and among Parker Drilling, the subsidiary guarantors party thereto and the Trustee, (iii) Parker Drilling’s existing common stock (the “Common Holders”) and (iv) Parker Drilling’s 7.25% Series A Mandatory Convertible Preferred Stock (the “Convertible Preferred Stock,” and such holders, the “Preferred Holders”) to support a restructuring (the “Restructuring”) on the terms set forth in the Plan.

On December 13, 2018, the Bankruptcy Court entered an order approving joint administration of the Chapter 11 Cases under the caption In re Parker Drilling Company, et al.

Pursuant to the terms of the RSA and the Plan, the Consenting Stakeholders and other holders of claims against or interests in the Debtors receive treatment under the Plan summarized as follows:


•	holders of claims arising from non-funded debt general unsecured obligations receive payment in full in cash as set forth in the Plan;

•

the 7.50% Note Holders receive their pro rata share of: (a) approximately 34.3 percent of the common stock (the “New Common Stock”) of Parker Drilling, as reorganized pursuant to and under the Plan (“Reorganized Parker”), subject to dilution; (b) approximately $92.6 million of a new second lien term loan of Reorganized Parker (the “New Second Lien Term Loan”); (c) the right to purchase approximately 24.3 percent of the New Common Stock to be issued pursuant to the terms of the Rights Offering (as defined in the RSA); and (d) cash sufficient to satisfy certain expenses owed to the Trustee (the “Trustee Expenses”), to the extent not otherwise paid by the Debtors;

•

the 6.75% Note Holders receive their pro rata share of: (a) approximately 62.9 percent of the New Common Stock, subject to dilution; (b) approximately $117.4 million of the New Second Lien Term Loan; (c) the right to purchase approximately 38.9 percent of the New Common Stock to be issued pursuant to the terms of the Rights Offering; and (d) cash sufficient to satisfy the Trustee Expenses, to the extent not otherwise paid by the Debtors;


•	the Preferred Holders receive their pro rata share of: (a) 1.1 percent of the New Common Stock, subject to dilution; (b) the right to purchase approximately 14.7 percent of the New Common Stock to be issued pursuant to the terms of the Rights Offering; and (c) 40.0 percent of the warrants to acquire an aggregate of 13.5 percent of the New Common Stock (the “New Warrants”); and


•	the Common Holders receive their Pro Rata share of: (a) 1.65 percent of the New Common Stock, subject to dilution; (b) the right to purchase approximately 22.1 percent of the New Common Stock to be issued pursuant to the terms of the Rights Offering; and (c) 60.0 percent of the New Warrants.

The RSA contains certain covenants on the part of each of the Debtors and the Consenting Stakeholders, including certain limitations on the parties’ ability to pursue alternative transactions, commitments by the Consenting Stakeholders to vote in favor of the Plan and commitments of the Debtors and the Consenting Stakeholders to negotiate in good faith to finalize the documents and agreements governing the Plan. The RSA also provides for certain conditions to the obligations of the parties and for termination

upon the occurrence of certain events, including, without limitation, the failure to achieve certain milestones and certain breaches by the parties under the RSA.

Since the Petition Date, the Debtors have requested and received certain approvals and authorizations from the Bankruptcy Court. This relief, together with the proposed treatment under the Plan, provides that vendors and other unsecured creditors will be paid in full and in the ordinary course of business. All existing customer and vendor contracts are expected to remain in place and be serviced in the ordinary course of business.

On March 5, 2019, the Bankruptcy Court held a hearing to determine whether the Plan should be confirmed. On March 7, 2019, the Bankruptcy Court entered an order confirming the Plan. Although the Bankruptcy Court has confirmed the Plan, the Debtors have not yet consummated all of the transactions that are contemplated by the Plan. Rather, the Debtors intend to consummate these transactions, on or before the Plan’s effective date (the “Effective Date”). As set forth in the Plan, there are certain conditions precedent to the occurrence of the Effective Date, which must be satisfied or waived in accordance with the Plan in order for the Plan to become effective and the Debtors to emerge from the Chapter 11 Cases. On the Effective Date, the Debtors’ operations will, generally, no longer be governed by the Bankruptcy Court's oversight.

Debtor-in-Possession Financing

In connection with the Chapter 11 Cases, Bank of America, N.A. (“Bank of America”) and Deutsche Bank AG New York Branch (“DB”) agreed to provide the Debtors with a superpriority and priming asset-based debtor-in-possession credit facility (the “DIP Facility”) on the terms set forth in the Debtor-In-Possession Financing Term Sheet attached to the RSA (the “DIP Term Sheet”). On December 14, 2018, the Debtors, Bank of America and DB entered into a Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”), which provides for, among other things, the DIP Facility. The DIP Facility is comprised of an asset-based revolving loan facility in an aggregate principal amount of $50.0 million, subject to availability under the borrowing base thereunder, $20.0 million of which DIP Facility is available for the issuance of standby letters of credit. The borrowing base is equal to:


(1)	85.0 percent of the aggregate net amount of eligible domestic accounts receivable, plus


(2)	the lowest of:


(a)	90.0 percent of net book value of eligible rental equipment


(b)	60.0 percent of net equipment orderly liquidation value of eligible rental equipment; or


(c)	$37.5 million minus certain reserves, calculated as set forth in the DIP Credit Agreement.

The borrowing base under the DIP Facility was calculated to be $50.0 million at the time of effectiveness of the DIP Facility, which was reduced by $10.0 million of outstanding loans under the DIP Facility as of December 31, 2018 and accrued interest on the debtor-in-possession financing, resulting in availability under the DIP Facility of $40.0 million.

In connection with the Chapter 11 Cases, (i) Bank of America and DB agreed to provide, on a committed basis, the Company with an exit financing asset-based revolving loan facility on the terms set forth in the Senior Secured Asset-Based Revolving Facility Summary of Terms and Conditions attached to the RSA (the “First Lien Exit Term Sheet”) and (ii) certain Consenting Stakeholders and/or their affiliates have agreed to provide, on a committed basis, the Company with a new second lien term loan facility on the terms set forth in the New Second Lien Loan Term Sheet attached to the RSA (the “Second Lien Exit Term Sheet”). The First Lien Exit Term Sheet provides for, among other things, an asset-based revolving credit facility in an aggregate principal amount of $50.0 million, which amount may be increased to an aggregate principal amount of $100.0 million in the event additional commitments are received from other lenders (the “First Lien Exit Facility”). A portion of the First Lien Exit Facility in the amount of $30.0 million (the “L/C Facility”) will be available for the issuance of standby and commercial letters of credit. Letters of credit outstanding under the DIP Facility may be rolled over and deemed outstanding under the L/C Facility. The Second Lien Exit Term Sheet provides for, among other things, a second lien term loan facility in an aggregate principal amount of $210.0 million (the “Second Lien Exit Facility”).

Backstop Commitment Agreement

On December 12, 2018, Parker entered into a Backstop Commitment Agreement (as amended and restated from time to time, the “Backstop Commitment Agreement”) with the Commitment Parties (as defined in the Backstop Commitment Agreement), pursuant to which the Commitment Parties agreed to backstop the Rights Offering. In accordance with the Plan and certain Rights Offering procedures (filed with the Bankruptcy Court on the Petition Date) , Parker will grant the 7.50% Note Holders, the 6.75% Note Holders, the Preferred Holders, and the Common Holders, including the Commitment Parties, the right to purchase shares of New Common Stock (the “Rights Offering Shares”) upon the closing of the transactions contemplated by the Backstop

Commitment Agreement for an aggregate purchase price of $95.0 million. Under the Backstop Commitment Agreement, the Commitment Parties agreed to purchase any Rights Offering Shares that are not duly subscribed for pursuant to the Rights Offering at the Per Share Purchase Price (as defined in the Backstop Commitment Agreement).

Under the Backstop Commitment Agreement, Parker has paid the Commitment Parties a cash put option premium of $7.6 million (the “Put Option Cash Premium”) and an advance for estimated professional fees of the Commitment Parties. If the closing of the Backstop Commitment Agreement occurs, the Put Option Cash Premium will be remitted to Parker in exchange for 3.4 percent of New Common Stock (the “Put Option Equity Premium”). In certain circumstances where the Backstop Commitment Agreement has been terminated or the transactions contemplated thereby are not consummated, the Commitment Parties will be entitled to keep the Put Option Cash Premium. The Put Option Cash Premium has been paid, and the Put Option Equity Premium shall be issued, in each case, to the Commitment Parties pro rata based on the amount of their respective backstop commitments.

The rights to purchase New Common Stock in the Rights Offering, any shares issued upon the exercise thereof, and all shares issued to the Commitment Parties in respect of their backstop commitments pursuant to the Put Option Equity Premium will be issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to section 1145 of the Bankruptcy Code. All shares issued to the Commitment Parties pursuant to the Backstop Commitment Agreement in respect of their respective commitments will be issued in reliance upon the exemption from registration under the Securities Act provided by Section 4(a)(2) thereof and/or Regulation D thereunder. As a condition to the closing of the transactions contemplated by the Backstop Commitment Agreement, Parker will enter into a registration rights agreement with the Commitment Parties desiring to be a party thereto requiring Parker to register the Commitment Parties’ securities under the Securities Act.

The Commitment Parties’ commitments to backstop the Rights Offering and the other transactions contemplated by the Backstop Commitment Agreement are conditioned upon satisfaction of all applicable conditions set forth in the Backstop Commitment Agreement. The issuances of New Common Stock pursuant to the Rights Offering and the Backstop Commitment Agreement are conditioned upon, among other things, the occurrence of the Effective Date.

Chapter 11 Accounting

The consolidated financial statements included herein have been prepared as if we were a going concern and in accordance with FASB ASC Topic No. 852 - Reorganizations.

Going Concern

Weak industry conditions have negatively impacted our results of operations and cash flows and may continue to do so in the future. In order to decrease the Company’s level of indebtedness and maintain the Company’s liquidity at levels sufficient to meet its commitments, the Company undertook a number of actions, including minimizing capital expenditures and further reducing its recurring operating expenses. The Company believes that even after taking these actions, it would not have sufficient liquidity to satisfy its debt service obligations, meet other financial obligations and comply with its debt covenants. As a result, the Debtors filed petitions for reorganization under Chapter 11 of the Bankruptcy Code.

Industry conditions and the risks and uncertainties associated with the Chapter 11 proceedings, raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles which contemplate the continuation of the Company as a going concern. The Chapter 11 reorganization plan supports our going concern assessment.

Pre-petition restructuring charges

Any expenses, gains and losses that are realized or incurred before the Petition Date and in relation to the Chapter 11 Cases are recorded under pre-petition restructuring charges on our consolidated statements of operations.

Pre-petition restructuring charges were $21.8 million for the year ended December 31, 2018, which primarily consisted of professional fees related to the Chapter 11 Cases.

Reorganization items

Any expenses, gains and losses that are realized or incurred subsequent to and as a direct result of the Chapter 11 Cases are recorded under reorganization items on our consolidated statements of operations.

Reorganization items were $9.8 million for the year ended December 31, 2018, which consisted of:



Dollars in thousands	December 31, 2018
6.75% Senior Notes, due July 2022 - unamortized debt issuance costs	$	3,775
7.50% Senior Notes, due August 2020 - unamortized debt issuance costs	1,580
2015 Secured Credit Agreement - unamortized debt issuance costs	1,208
Professional fees	2,251
DIP facility costs	975
Reorganization items	$	9,789

Debtor in possession financing

Amounts borrowed against the DIP Facility as of December 31, 2018 were $10.0 million.

Liabilities subject to compromise

Pre-petition unsecured and under-secured obligations that may be impacted by the Chapter 11 Cases have been classified as liabilities subject to compromise on our consolidated balance sheet. These liabilities are reported at the amounts expected to be allowed as claims by the Bankruptcy Court, although they may be settled for less.

Liabilities subject to compromise as of December 31, 2018 were $601.0 million, which consisted of:



Dollars in thousands	December 31, 2018
6.75% Senior Notes, due July 2022	$	360,000
7.50% Senior Notes, due August 2020	225,000
Accrued interest on Senior Notes	15,996
Liabilities subject to compromise	$	600,996

The principal balance on the 6.75% Notes and 7.50% Notes of $360.0 million and $225.0 million has been reclassed from long-term debt to liabilities subject to compromise as of December 31, 2018. See also Note 6 - Debt for further details.

Accrued interest on the 6.75% Notes and 7.50% Notes was also reclassed from accrued liabilities to liabilities subject to compromise as of December 31, 2018. Contractual interest expense on our Senior Notes amounts to $41.2 million for the year ended December 31, 2018 which is in excess of $39.1 million included in interest expense on the consolidated statements of operations because the Company has discontinued accruing interest on the Petition Date in accordance with FASB ASC Topic No. 852 - Reorganizations. We have not made any interest payments on our 6.75% Notes or 7.50% Notes since the commencement of the Chapter 11 Cases.

Convertible preferred stock dividend

We have not declared or made any cash dividend payments on our 7.25% Series A Mandatory Convertible Preferred Stock since the commencement of the Chapter 11 Cases. We may issue additional equity securities which may dilute current equity interests.

Debtor Financial Statements

Following are the consolidated financial statements of the entities included in the Chapter 11 Cases:

PARKER DRILLING COMPANY (DEBTOR IN POSSESSION)

CONSOLIDATED BALANCE SHEET

(Dollars in Thousands)

(Unaudited)



	December 31,
	2018
ASSETS
Current assets:
Cash and cash equivalents	$	15,226
Restricted cash	10,389
Accounts and Notes Receivable, net of allowance for bad debts of $808 at December 31, 2018 ⁽¹⁾	223,296
Rig materials and supplies	1,650
Deferred costs	975
Other tax assets	183,356
Other current assets	18,329
Total current assets	453,221
Property, plant and equipment, net of accumulated depreciation of $526,166 at December 31, 2018	369,510
Intangible assets, net	4,821
Rig materials and supplies	7,036
Deferred income taxes	23,576
Intra-group advances	549,460
Investment in subsidiaries	893,550
Other non-current assets	1,452
Total assets	$	2,302,626
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Debtor in possession financing	$	10,000
Accounts payable ⁽²⁾	286,840
Accrued liabilities	28,184
Accrued income taxes	204,518
Total current liabilities	529,542
Other long-term liabilities ⁽³⁾	728,218
Long-term deferred tax liability	36,463
Total liabilities not subject to compromise	1,294,223
Liabilities subject to compromise	600,996
Total stockholders’ equity	407,407
Total liabilities and stockholders’ equity	$	2,302,626


(1)	Includes intra-group receivables in the amount of $174.7 million.


(2)	Includes intra-group payables in the amount of $213.2 million.


(3)	Includes intra-group liabilities in the amount of $314.6 million.

PARKER DRILLING COMPANY (DEBTOR IN POSSESSION)

CONSOLIDATED STATEMENT OF OPERATIONS

(Dollars in Thousands)

(Unaudited)



	Year Ended December 31, 2018
Revenues	$	203,585
Expenses:
Operating expenses	115,269
Depreciation and amortization	76,353
	191,622
Total operating gross margin (loss)	11,963
General and administrative expense	(23,539		)
Loss on impairment	(40,917		)
Gain (loss) on disposition of assets, net	(1,347		)
Pre-petition restructuring charges	(21,820		)
Reorganization items	(9,789		)
Total operating income (loss)	(85,449		)
Other income (expense):
Interest expense	(45,488		)
Interest income	1,152
Other	6
Equity in net earnings of subsidiaries	(33,040		)
Total other income (expense)	(77,370		)
Income (loss) before income taxes	(162,819		)
Income tax expense (benefit):
Current tax expense	1,517
Deferred tax expense (benefit)	1,361
Total income tax expense (benefit)	2,878
Net income (loss)	(165,697		)
Less: Convertible preferred stock dividend	2,719
Net income (loss) attributable to debtor entities	$	(168,416	)

PARKER DRILLING COMPANY (DEBTOR IN POSSESSION)

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)



	Year Ended December 31,
	2018
Cash flows from operating activities:
Net income (loss)	$	(165,697	)
Adjustments to reconcile net income (loss):
Depreciation and amortization	76,353
Gain (loss) on disposition of assets, net	1,347
Deferred tax expense (benefit)	1,361
Loss on impairment	40,917
Reorganization items	7,538
Expenses not requiring cash	4,224
Equity in net earnings of subsidiaries	33,040
Change in assets and liabilities:
Accounts and notes receivable	(2,189		)
Rig materials and supplies	(4,454		)
Other current assets	(41,564		)
Other non-current assets	2,586
Accounts payable and accrued liabilities	(559		)
Accrued income taxes	29,818
Net cash provided by (used in) operating activities	(17,279		)
Cash flows from investing activities:
Capital expenditures	(56,897		)
Proceeds from the sale of assets	87
Net cash provided by (used in) investing activities	(56,810		)
Cash flows from financing activities:
Proceeds from borrowing under DIP facility	10,000
Payment of DIP facility costs	(975		)
Convertible preferred stock dividend	(3,625		)
Payments of debt issuance costs	(1,443		)
Shares surrendered in lieu of tax	(251		)
Net cash provided by (used in) financing activities	3,706
Net increase (decrease) in cash and cash equivalents	(70,383		)
Cash, cash equivalents and restricted cash at beginning of period	95,998
Cash, cash equivalents and restricted cash at end of period	$	25,615