PARKER DRILLING CO /DE/ - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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(MARK ONE)

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

For The Quarterly Period Ended JUNE 30, 2004

OR

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

For the transition period from _________ to _________

Commission File Number 1-7573

PARKER DRILLING COMPANY
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(Exact name of registrant as specified in its charter)

Delaware 73-0618660
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

1401 Enclave Parkway, Suite 600, Houston, Texas 77077
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(Address of principal executive offices) (Zip code)

(281) 406-2000
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(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 [X] No [ ]

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

As of July 30, 2004, 94,416,860 common shares were outstanding.

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PARKER DRILLING COMPANY

INDEX

1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)

See accompanying notes to the unaudited consolidated
condensed financial statements.

2

PARKER DRILLING COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Thousands Except Per Share and Weighted Average Shares Outstanding)
(Unaudited)

See accompanying notes to the unaudited consolidated
condensed financial statements.

3

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

See accompanying notes to the unaudited consolidated
condensed financial statements.

4

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
"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
June 30, 2004 and December 31, 2003, (2) the results of operations for the
three and six months ended June 30, 2004 and 2003, and (3) cash flows for
the six months ended June 30, 2004 and 2003. Results for the six months
ended June 30, 2004 are not necessarily indicative of the results that will
be realized for the year ending December 31, 2004. The financial statements
should be read in conjunction with the Company's Form 10-K for the year
ended December 31, 2003.

Our independent registered public accounting firm has performed a review of
these interim financial statements in accordance with standards established
by the Public Company Accounting Oversight Board (United States). Pursuant
to Rule 436(c) under the Securities Act of 1933, their independent
registered public accounting firm's report of that review should not be
considered a report within the meaning of Section 7 and 11 of that Act, and
the independent registered public accounting firm liability under Section 11
does not extend to it.

Stock-Based Compensation - The Company's stock-based employee compensation
plans are accounted for under the recognition and measurement principles of
the Accounting Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. No stock-based
employee compensation cost related to stock options granted is reflected in
net loss, as all options granted under the plan had an exercise price equal
to the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of the Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions for the three and six months ended June 30, 2004 and 2003: no
dividend yield; expected volatility of 59.5% and 52.5%, respectively;
risk-free interest rate of 3.89% and 4.88%, respectively; and expected
lives of options, 5-7 years.

5

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

2. Earnings Per Share -

6

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

2. Earnings Per Share (continued)

As of June 30, 2004, the Company had outstanding $64,394,000 of 5.5%
Convertible Subordinated Notes which are convertible into 4,184,146 shares
of common stock at $15.39 per share. The notes have been outstanding since
their issuance in July 1997 but were not included in the computation of
diluted EPS because the assumed conversion of the notes would have had an
anti-dilutive effect on EPS. The 5.5% Convertible Subordinated Notes were
paid off on August 2, 2004. For the three and six months ended June 30,
2004, options to purchase 9,238,406 shares of common stock at prices ranging
from $1.96 to $12.19 per share, were outstanding but not included in the
computation of diluted EPS because the assumed exercise of the options would
have had an anti-dilutive effect on EPS due to the net loss incurred during
the period. For the three and six months ended June 30, 2003, options to
purchase 9,858,809 shares of common stock at prices ranging from $1.96 to
$12.19 per share, were outstanding but not included in the computation of
diluted EPS because the assumed exercise of the options would have had an
anti-dilutive effect on EPS due to the net loss incurred during the period.

3. Business Segments - The primary services the Company provides are as
follows: U.S. drilling, international drilling and rental tools.
Information regarding the Company's operations by industry segment for the
three and six months ended June 30, 2004 and 2003 is as follows:

7

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

4. Discontinued Operations - In June 2003, the Company's board of directors
approved a plan to sell its Latin America assets consisting of 17 land rigs
and related inventory and spare parts and its U.S. Gulf of Mexico offshore
assets consisting of seven jackup rigs and four platform rigs. One Latin
America land rig was sold in July 2003. At June 30, 2003, the net book value
of the assets to be sold exceeded the estimated fair value and as a result
an impairment charge including estimated sales expenses was recognized in
the amount of $54.0 million. At the time the board of directors approved
this plan, the Latin America land and U.S. Gulf of Mexico offshore
operations, whose assets are the subject of this plan of disposition, met
the requirements of discontinued operations under the provisions of SFAS No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets." As a
result, the consolidated financial statements were reclassified in June 2003
to present the Latin America operations and the U.S. jackup and platform
drilling operations as discontinued operations.

In early 2004, the board of directors concurred with the Company's plan to
actively market certain of the Latin America land rigs in Mexico. As a
result, in early May 2004, a subsidiary of the Company was awarded two
contracts in Mexico that will utilize seven Latin America land rigs. Based
on this change in plan, the seven land rigs moving to Mexico have been
reclassified from discontinued operations to continuing operations effective
May 2004. The nine land rigs remaining in Latin America were reclassified
from discontinued operations to continuing operations effective June 30,
2004 as required by SFAS No. 144. The reclassification was made based on the
application of SFAS No. 144, which requires that unless assets classified as
discontinued operations are either sold or have a firm commitment for sale
within a one-year period, such assets should be reclassified to continuing
operations. SFAS No. 144 further requires that assets returned to continuing
operations be recorded at the lower of net book value or fair value, and
that net book value be adjusted by the depreciation that would have been
recognized as if the asset had remained classified as continuing operations.
Based on the foregoing, the Company recognized an impairment of $5.1 million
as a provision for reduction in carrying value of assets for the 16 Latin
America land rigs.

As of June 30, 2004 all U.S. Gulf of Mexico offshore assets remained
classified as discontinued operations. On August 2, 2004, the Company closed
on the sale of five jackups and four platform rigs realizing net proceeds of
approximately $40 million. Jackup rig 25 was excluded from this sale though
the purchaser obtained the exclusive right to purchase jackup rig 25 from
the period of September 1, 2004 through October 31, 2004, if it is not sold
prior to September 1, 2004. The Company has received an offer from a
prospective purchaser which is currently the subject of ongoing discussions.

On September 11, 2003, a malfunction caused one side of jackup rig 14 to
become partially submerged resulting in significant damage to the rig and
the drilling equipment. The Company received from its insurance underwriters
a total loss settlement of $27.0 million, of which $24.3 million was
received in March 2004 with the remaining $2.7 million received on April 8,
2004. The cost incurred to tow the rig to the port and pay for the damage
assessment approximated $4.0 million resulting in net insurance proceeds of
approximately $23.0 million. The net book value of jackup rig 14 was $17.7
million at March 31, 2004. In compliance with Generally Accepted Accounting
Principles ("GAAP"), the Company was required to recognize the gain from the
insurance proceeds in excess of the net book value of the asset. When
considered separately from the other U.S. Gulf of Mexico offshore disposal
group, this resulted in a gain of approximately $5.3 million from the
involuntary conversion of the jackup rig. After considering the impact of
the gain, the Company still believes that the overall valuation of the U.S.
Gulf of Mexico offshore group was unchanged from that determined on June 30,
2003, as previously discussed. As a result, the Company recognized an
additional impairment of $5.3 million during the first quarter of 2004.

8

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

4. Discontinued Operations (continued)

Analysis of Discontinued Operations

Assets Held for Sale - During the third quarter of 2004, the Company will
close on the sale of the land and buildings in New Iberia, Louisiana for a
net sales price of $6.4 million. The sales price of the land and buildings
resulted in an impairment of $3.4 million, which was recognized in the
December 31, 2003 consolidated financial statements. The Company will lease
back certain portions of the land and office building under a two-year
operating lease agreement.

5. Construction Contract - The Company has historically only constructed
drilling rigs for its own use. At the request of one of its significant
customers, the Company entered into a contract to design, construct,
mobilize and sell a specialized drilling rig to drill extended reach wells
to offshore producing zones from a land-based location on Sakhalin Island,
Russia, for an international consortium of oil and gas companies. The
Company also entered into a contract to subsequently operate the rig on
behalf of the consortium. The construction project was completed during the
third quarter of 2003 and the Company is currently operating the rig for the
customer. The total profit recognized under the design, construction,
mobilization and rig-up contract was $4.5 million, of which $2.0 million was
recognized in 2003 and $2.5 million during 2002.

6. Income Tax Expense - Income tax expense from operations consists of foreign
tax expense of $3.4 million for the second quarter of 2004 as compared to
foreign tax expense of $4.4 million for the second quarter of 2003. The
reduction in taxes was due to a tax rate change in China and a change in our
operating structure in Kuwait along with a decrease in activity in Latin
America and in Nigeria. For the first six months of 2004 and 2003 we
incurred a net loss, however, no additional deferred tax benefit was
recognized since the sum of our deferred tax assets, principally the net
operating loss carryforwards, exceeds the deferred tax liabilities,
principally the excess of tax depreciation over book depreciation. This
additional deferred tax asset was fully reserved through a valuation
allowance in both the second quarter of 2004 and 2003.

7. Related Party - On February 27, 1995, the Company entered into a Split
Dollar Life Insurance Agreement with Robert L. Parker and the Robert L.
Parker and Catherine M. Parker Family Trust ("Trust") pursuant to which the
Company agreed to provide life insurance for Mr. and Mrs. Robert L. Parker
in the event of the death of Mr. and Mrs. Parker (the "Agreement"). The
initial Agreement provided that the Trust would acquire and own a life
insurance policy with a face amount of $13.2 million and that the Company
would pay the premiums, with the Trust having the obligation to reimburse
the Company from the proceeds of the policy, with interest from and after
January 1, 2000, at the one-year Treasury bill rate. The repayment of the
premiums was secured by an Assignment of Life Insurance Policy as Collateral
of same date as the Agreement. On October 14, 1996, the Agreement was
amended to provide that the interest accrual would be deferred until
February 28, 2003, in consideration for the Company's termination of a
separate life insurance policy on the life of Robert L. Parker. On April 19,
2000, the Agreement was amended and restated to replace the previous policy
with two policies, one for $8.0 million on the life of Robert L. Parker and
one for $7.7 million on the lives of both Mr. and Mrs. Parker. Mr. Robert L.
Parker Jr., the Company's CEO and son of Robert L. Parker is a one-third
beneficiary of the Trust.

9

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

7. Related Party (continued)

Due to the passage of the Sarbanes-Oxley Act of 2002 ("SOX"), additional
loans to executive officers and directors may be prohibited, although
continuance of loans in existence as of July 30, 2002, are allowed; provided
there is no modification to such loans. Because the advancement of
additional annual premiums by the Company may be considered a prohibited
loan under SOX, the Company elected to not advance the $0.6 million premium
that was due in December 2002 and 2003 pending further clarification from
the Securities and Exchange Commission ("SEC") as to whether or not split
dollar loans were intended to be prohibited by SOX. As of June 30, 2004, the
accrued amount of premiums by the Company was $4.7 million.

As of June 30, 2004, there has been no clarification from the SEC and none
is anticipated at this time. The Company and the Trust are engaged in
ongoing discussions to determine how the Company can meet its contractual
obligations to the Trust without violating SOX. Because a recent analysis of
the policies by a financial consultant has indicated that there is no
reasonable certainty that the value of the policies will be adequate for the
Company to recoup the full amount of premiums paid, during the second
quarter of 2004, the Company reduced the value of its asset by $1.5 million
to $3.2 million, which approximates the cash surrender value of the two
policies.

8. Contingency - As previously reported, although the Kazakhstan branch ("PKD
Kazakhstan") of Parker Drilling Company International Limited ("PDCIL")
prevailed on its appeal arising out of an audit assessment of approximately
$29.0 million by the Ministry of State Revenues of Kazakhstan ("MSR") based
on payments PKD Kazakhstan received from the operator to upgrade rig 257,
the Ministry of Finance of Kazakhstan ("MinFin") subsequently made a claim
for corporate income taxes based primarily on the disallowance of
depreciation of the full value of rig 257 in the income tax returns of PKD
Kazakhstan in 1999-2001. PKD Kazakhstan instituted legal proceedings to
challenge the validity of these claims by MinFin, which ultimately resulted
in the Supreme Court confirming the decision of the Astana City Court, which
earlier had ruled that approximately $7.7 million of the claims of MinFin
are valid and payable upon receipt of the re-issuance of the corrected
notice from the relevant taxing authority. However, the actual amount which
PKD Kazakhstan will ultimately be required to pay will be reduced by credits
available, which originally were estimated at approximately $5.0 million but
at this time are approximately $5.4 million, resulting in an amount payable
of approximately $2.3 million, which is fully reserved on the financial
books of the Company. While the disallowance of depreciation for the years
1999-2001 will result in a cash payment at this time, the judgment does
allow PKD Kazakhstan to depreciate the full value of rig 257 on its tax
returns beginning in 2002, which will reduce taxable income and taxes to be
paid in the future. In addition, the Company continues to pursue its
petition with the U.S. Treasury Department for Competent Authority review,
which is a tax treaty procedure to resolve disputes as to which country may
tax income covered under the treaty. The U.S. Treasury Department has
granted our petition and has initiated proceedings with the MSR which are
ongoing.

PKD Kazakhstan has received a notice of an assessment of duties, taxes and
penalties in the amount of $6.0 million for failure to submit monthly duties
and taxes under the temporary import license for rig 257 from November 2003
through February 2004, based on the allegation of the Customs Control in
Mangistau that rig 257 is no longer under contract, exempting it from such
duties and taxes. PKD Kazakhstan has filed objections to this assessment and
has introduced documentation supporting its position that rig 257 remains
under contract and, therefore, remains exempt from duties and taxes. Despite
repeated requests to the court in Mangistau to address the merits of PKD
Kazakhstan's objections, the court had not done so until late July 2004. On
June 7, 2004, the court in Mangistau entered an order freezing the bank
accounts of PKD Kazakhstan and impounded rig 257 as security for payment of
the duties, taxes and penalties previously assessed. On July 28, 2004, PKD
Kazakhstan was granted approval to post a bond of $5.0 million which will
allow for the release of the bank accounts and rig 257. Management believes
that the assessments, including penalties, are in error because they do not
recognize the continuing obligations of the parties under the drilling
contract subsequent to the completion of drilling operations in November
2003. It is not certain at this time as to the period of time, if any, that
the rig was not under contract and, therefore, not exempt from duties.
Further, the Company has recently received confirmation that the parties
have agreed upon the terms for the contract to be extended for up to two
years, which provides further support to the Company's position that it has
remained exempt from duties throughout this period. Pending further
clarification no amounts have been accrued with respect to this recent
assessment.

10

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)

9. Parent, Guarantor, Non-Guarantor Consolidating Condensed Financial
Statements - Set forth on the following pages are the consolidating
condensed financial statements of the restricted subsidiaries and the
Company's subsidiaries which are not restricted by the Senior Notes. All of
the Company's Senior Notes are guaranteed by substantially all wholly-owned
subsidiaries of Parker Drilling. There are currently no restrictions on the
ability of the 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.

AralParker (a Kazakhstan closed joint stock company, owned 50 percent by
Parker Drilling International Limited and 50 percent by Aralnedra, CJSC),
Casuarina Limited (a wholly-owned captive insurance company) and Parker
Drilling Investment Company (a wholly-owned subsidiary) 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 June 30, 2004 and
December 31, 2003 and for the three and six months ended June 30, 2004 and
2003.

11

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

12

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

13

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

14

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

15

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

16

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

17

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

18

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

19

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders
Parker Drilling Company

We have reviewed the accompanying consolidated condensed balance sheets of
Parker Drilling Company and subsidiaries as of June 30, 2004 and 2003 and the
related consolidated condensed statements of operations for the three month and
six month periods ended June 30, 2004 and the consolidated condensed statements
of cash flows for the six month periods ended June 30, 2004 and 2003. These
interim financial statements are the responsibility of the Company's management.

We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated condensed interim financial
statements for them to be in conformity with accounting principles generally
accepted in the United States of America.

We previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet as of
December 31, 2003, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended (not presented
herein); and in our report (which contains an explanatory paragraph for a change
in accounting for goodwill and an explanatory paragraph for the revision of the
2002 and 2001 statements of operations related to reimbursable costs), dated
February 6, 2004, except for Note 17 as to which the date is March 5, 2004, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying consolidated
condensed balance sheet as of December 31, 2003, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.

/s/PricewaterhouseCoopers LLP
-----------------------------
PricewaterhouseCoopers LLP

Houston, Texas
August 6, 2004

20

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

In this Quarterly Report on Form 10-Q, the terms "Parker Drilling," "we," "us"
and "our" refer to Parker Drilling Company, its subsidiaries and the
consolidated joint venture, unless the context requires otherwise.

This Form 10-Q contains statements that are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
contained in this Form 10-Q, other than statements of historical facts, are
"forward-looking statements" for purposes of these provisions, including any
statements regarding:

* prices and demand for oil and natural gas,
* levels of oil and natural gas exploration and production activities,
* demand for contract drilling and drilling related services and demand for
rental tools,
* operating results, including our efforts to reduce costs and our projected
net loss from continuing operations,
* rig utilization, dayrates and rental tools activity,
* capital expenditures and investments in the acquisition and refurbishment
of rigs and equipment,
* reducing our debt, including our liquidity and the sources and
availability of funds to reduce our debt,
* sales of assets,
* formation of alliances with operators,
* the outcome of pending and future legal proceedings,
* recovery of insurance proceeds,
* maintenance of the borrowing base under our revolving credit facility, and
* expansion and growth of our operations.

In some cases, you can identify these statements by words that indicate future
events such as "anticipate," "believe," "could," "estimate," "expect," "intend,"
"outlook," "may," "should," "will" and "would" or similar words. Forward-looking
statements are based on certain assumptions and analyses made by our management
in light of their experience and perception of historical trends, current
conditions, expected future developments and other factors they believe are
relevant. Although our management believes that their assumptions are reasonable
based on information currently available, those assumptions are subject to
significant risks and uncertainties, many of which are outside of our control.
The following factors, as well as any other cautionary language in this Form
10-Q and other documents referenced herein, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements:

* worldwide economic and business conditions that adversely affect market
conditions and/or the cost of doing business,
* the pace of recovery in the U.S. economy and the demand for natural gas,
* fluctuations in the market prices of oil and gas,
* imposition of unanticipated trade restrictions and political instability,
* operating hazards and uninsured risks,
* political instability, terrorism or war,
* governmental regulations, including changes in tax laws or ability to
remit funds to the U.S., that adversely affect the cost of doing
business,
* adverse environmental events,
* adverse weather conditions,
* changes in concentration of customer and supplier relationships,
* unexpected cost increases for upgrade and refurbishment projects,
* unanticipated cancellation of contracts by operators,
* breakdown of equipment and other operational problems,
* changes in competition, and
* other similar factors (some of which are discussed in documents referred
to in this Form 10-Q).

Each forward-looking statement speaks only as of the date of this Form 10-Q,
and we undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
You should be aware that the occurrence of the events described above and
elsewhere in this Form 10-Q could have a material adverse effect on our
business, results of operations and financial condition.

21

OUTLOOK AND OVERVIEW

Market conditions for drilling operations have continued to improve since
early 2004, due to continued strong demand for oil and gas, high capacity
utilization and below normal inventories of oil and gas. As a result, rig
utilization and dayrates have continued to increase. We expect this trend to
continue at a modest rate during the remainder of 2004, although the drilling
market remains subject to volatility due to uncertainty over the current level
of energy prices and instability in the Middle East. We anticipate that activity
in our rental tools business will also continue to increase through the
remainder of 2004.

For the second quarter of 2004, we recognized a net loss of $13.5 million, due
primarily to three significant events. First, we obtained two significant
contracts in Mexico for seven of our Latin America land rigs (see following
paragraph) that we had previously classified as discontinued operations in June
2003. Due to the contracts for these seven rigs and the lack of a firm
commitment to sell the remaining nine rigs in Latin America, Generally Accepted
Accounting Principles ("GAAP") requires that such assets be reclassified to
continuing operations at the lower of net book value or fair value. The net book
value is adjusted by including the depreciation that would have been recognized
if the asset had been continuously classified as held and used. Accordingly, we
recognized an impairment of approximately $5.1 million as a provision for
reduction in carrying value of assets on all 16 Latin America land rigs. Second,
the Nigerian tax authorities assessed additional Value Added Tax ("VAT") for
which we accrued an expense of $2.3 million. We are in discussions with the
Nigerian authorities and expect to fund this amount in the third quarter. Third,
we accrued severance expense of $1.4 million due to the departure of our chief
operating officer. This accrual included severance payment, expensing of stock
options and other benefits to be provided per his employment contract.

During the first six months of 2004 we were awarded three contracts in Mexico.
The first contract is a two-year contract for barge rig 53 awarded by Petroleos
Mexicanos S.A. ("Pemex"), the state-owned oil company of Mexico, to work in the
inland waters of the state of Tabasco. The barge rig commenced operations in
early June. In addition, on May 6, 2004, we announced the award of a five-rig,
27-well contract for land drilling services in southern Mexico. The contract is
part of an integrated services contract awarded to Halliburton de Mexico, a
subsidiary of Halliburton, by Pemex. We were also awarded a contract for two
additional land rigs by Halliburton. The contracts with Halliburton are expected
to last approximately two years under the initial terms. The contracts include
options for additional wells.

On August 2, 2004 we closed on the sale of five jackup rigs and four platform
rigs classified as discontinued operations as of June 30, 2004, realizing net
proceeds of approximately $40 million. Jackup rig 25 was not included in the
sale, although the purchaser retained an option to acquire this rig if not sold
prior to the option period. The option is effective for the period beginning
September 1, 2004 through October 31, 2004. We have received an offer from a
prospective purchaser for jackup rig 25, which is currently the subject of
ongoing discussions. We do not expect a loss on the sale of these assets. All
proceeds will be used to pay down debt.

The U.S. Gulf of Mexico barge market continues to improve. Our second quarter
U.S. barge rig utilization averaged 60 percent, an increase from 56 percent in
the first quarter of 2004. As of July 31, 2004, all of our deep barges are under
contract as they have been throughout the majority of 2004 and we are
experiencing an average utilization rate for all U.S. barge rigs of 70 percent,
one of the highest rates reported since 2001. In addition, in order to penetrate
the ultra-deep U.S. Gulf of Mexico shelf market, we are in the process of
upgrading barge rig 76, for approximately $3.0 million. This upgrade will enable
barge rig 76 to drill in depths ranging from 25,000 to 30,000 feet. The upgrade
should be completed by the end of the third quarter.

The Commonwealth of Independent States (former Soviet Union, referred to
herein as "CIS"), our leading market of international land operations,
contributed to our increased utilization with the commencement of drilling
operations of a second rig in Turkmenistan under contract to Calik Enerji, A.S.
We have also experienced increased activity in our Asia Pacific region, with new
contracts in New Zealand and Indonesia. We continue to see increased bid
activity in this region and expect utilization to increase through the remainder
of 2004.

22

OUTLOOK AND OVERVIEW (continued)

Our international barge drilling operations have continued to experience
decreased activity since the end of 2003. Barge rig 257 in the Caspian Sea has
been stacked since January 2004. The Company has recently received confirmation
that the contract with its previous customer has been extended for up to two
years. We expect the barge rig to begin drilling activity during the fourth
quarter of 2004. International barge drilling in Nigeria continues to decline,
as of July 31, 2004, we have no rigs earning revenue. Rig 75 was recently moved
to location for its five-year inspection, and we are in discussions with Shell
to extend the current contract which terminated in July 2004. Rig 73 completed
its final well early in the second quarter of 2004 and was returned to port
where it is currently stacked. Rig 72 remains stacked as it was for most of
2003. Rig 74 was accessed by inspectors in April 2004 to assess damage, from
which surveyors determined significant damage to the rig. We are in ongoing
discussions with underwriters and we anticipate that the loss will be ultimately
covered by insurance. Despite the potential for rig 257 and the additional
international barge rig in Mexico, we expect international barge drilling
operations to decline in 2004 as compared to 2003 due primarily to a lack of
drilling activity in Nigeria.

While our rental tools utilization rate during the second quarter did not
increase over our near record first quarter, we anticipate that revenues and
operating income in our rental tools business will continue to increase in 2004
due primarily to improved drilling market conditions, especially for deep water
drilling in the U.S. Gulf of Mexico and the Rocky Mountain area serviced by our
newest facility in Evanston, Wyoming.

As previously reported, on September 11, 2003, a malfunction on jackup rig 14
resulted in significant damage to the rig and the loss of certain drilling
equipment overboard. During March and April 2004, we received $27.0 million in
insurance proceeds in settlement of the damages to jackup rig 14. The funds
received were used to pay down indebtedness as further discussed in Note 4 of
the notes to the unaudited consolidated condensed financial statements.

As of June 30, 2004, we had approximately $131.8 million of liquidity. This
liquidity was comprised of $42.3 million of cash on hand, $39.5 million of
availability under the revolving credit facility and $50.0 million of
availability under the delayed draw term loan facility (which may only be used
to repay the 5.5% Convertible Subordinated Notes due August 2, 2004).

On August 2, 2004, we paid the remaining balance of $64.4 million for the 5.5%
Convertible Subordinated Notes. Funds used for this payment included the draw
down of $50.0 million on the delay draw term loan on July 30, 2004, plus cash
on hand of $14.4 million. After this transaction, $100.0 million was outstanding
on the term loan. On August 2, 2004, after receipt of the proceeds from the
sale of the five jackups and four platform rigs, the term loan was reduced by
$25.0 million.

We remain committed to reducing debt by $200 million as soon as reasonably
possible. As of August 2, 2004, we have reduced our debt by $103.5 million,
$85.2 million of which has occurred during 2004, and our outstanding debt
balance is currently $486.4 million, compared to the balance as of December 31,
2003, of $571.6 million and a balance of $589.9 million when we established our
goal.

During our second quarter conference call with investors, management confirmed
its previously released earnings guidance based on the trends indicated above.
The combined result of the anticipated debt reduction and improved utilization
is expected to result in a net loss in diluted earnings per share for 2004 of
$0.20 to $0.30 including non-routine expenses of $10.3 million. The non-routine
items include the items noted in paragraph two of the Outlook and Overview
section plus the provision for reduction in carrying value of assets relating to
the split dollar life insurance policies, see Note 7 to the notes to the
unaudited consolidated condensed financial statements. We are projecting to
return to profitability during the third quarter of 2004.

23

RESULTS OF OPERATIONS

Three Months Ended June 30, 2004 Compared with Three Months Ended June 30, 2003

We recorded a net loss of $13.5 million for the three months ended June 30,
2004, including income of $2.5 million attributed to discontinued operations, as
compared to a net loss of $74.4 million for the three months ended June 30,
2003, which includes a loss of $58.0 million attributed to discontinued
operations. The loss from continuing operations for the current quarter was
$16.0 million compared to a loss of $16.4 million for the three months ended
June 30, 2003.

In June 2003, the board of directors approved a plan to sell the U.S. jackup
and platform drilling operations and the Latin America operations. In compliance
with GAAP, we reclassified the U.S. jackup and platform drilling rigs and the
Latin America land operations as discontinued operations in our statement of
operations, effective second quarter 2003. In early 2004, the board of directors
concurred with our plan to market the Latin America land rigs in Mexico. As a
result, in early May 2004, we were awarded a five-rig contract and a two-rig
contract in Mexico. The seven land rigs to fulfill these contracts have been
mobilized from the Latin America operations to Mexico. The seven land rigs were
reclassified from discontinued operations to continuing operations effective
May 1, 2004. The remaining nine land rigs in the Latin America region were
reclassified from discontinued operations to continuing operations effective
June 30, 2004 based on the GAAP requirement that if a discontinued asset is
either not disposed of or under a definitive agreement for sale within a one-
year period, such asset is required to return to continuing operations. It is
still our intent to sell these remaining nine rigs which we continue to actively
market. As of July 31, 2004, two of the nine Latin America rigs were under
contract. Five jackup and four platform drilling rigs were sold on August 2,
2004, for net proceeds of approximately $40 million. Reclassifications have been
made to reflect the Latin America operations from discontinued operations to
continuing operations for the three and six months ended June 30, 2004 and 2003.

24

RESULTS OF OPERATIONS (continued)

The analysis below reflects these reclassifications, beginning with an
analysis of the continuing operations followed by a discussion of discontinued
operations.

(1) Drilling and rental gross margins are computed as drilling and rental
revenues less direct drilling and rental operating expenses, excluding
depreciation and amortization expense; drilling and rental gross margin
percentages are computed as drilling and rental gross margin as a percent of
drilling and rental revenues. The gross margin amounts and gross margin
percentages should not be used as a substitute to those amounts reported
under GAAP. However, we monitor our business segments based on several
criteria, including drilling and rental gross margin. Management believes
that this information is useful to our investors because it more closely
tracks cash generated by segment. Such gross margin amounts are reconciled
to our most comparable GAAP measure as follows:

(2) Drilling and rental operating income - drilling and rental revenues less
direct drilling and rental operating expenses, including depreciation and
amortization expense.

25

RESULTS OF OPERATIONS (continued)

U.S. Drilling Segment

The U.S. drilling segment, consisting of 20 barge rigs, experienced
increases in both rig utilization and dayrates during the second quarter of
2004. As a result, revenues increased $2.6 million in the second quarter of 2004
as compared to the second quarter of 2003 despite the reduction of two barge
rigs in the U.S. drilling segment. Barge rig 18 was destroyed by a blowout
during the fourth quarter of 2003 and barge rig 53 was awarded a contract in
Mexico. Barge rig utilization increased from 55 percent in the second quarter of
2003 to 60 percent in the current quarter and dayrates increased approximately
14 percent. Though the anticipated increase in drilling activity due to high
commodity pricing has been slower than expected, we are encouraged by the
continuation of firm natural gas pricing fundamentals and steady interest in
shallow-water prospects. As noted above, during the second quarter of 2004 we
moved one deep drilling barge rig to the Mexican drilling market to drill in the
Macuspana Basin pursuant to a two-year contract with Pemex. After the move of
this rig, we have eight deep drilling barges, five intermediate drilling barges
and seven workover rigs in the U.S. Gulf of Mexico market.

Gross margins in the U.S. drilling segment increased $3.5 million. Gross
margins were positively impacted by higher utilization and dayrates. We have
continued to maintain tight control over our expenses and as a result operating
expenses decreased $0.9 million during the current quarter. Gross margin
percentage increased from 26 percent during the second quarter of 2003 to 39
percent during the current quarter.

International Drilling Segment

International drilling revenues increased $2.6 million during the current
quarter as compared to the second quarter of 2003. Our international land
drilling revenues increased $11.6 million partially offset by a decrease of $9.0
million in our international offshore drilling operations. The international
land drilling increase is primarily attributed to new drilling operations in
Turkmenistan, where the second rig of a two rig contract commenced operations in
March 2004; Bangladesh, where rig 255 continues to operate; and Sakhalin Island,
where we continue to provide drilling services under a labor and management
contract, all of which contributed to a $9.6 million increase in revenues during
the second quarter of 2004. In addition, one rig returned to drilling operations
in New Zealand and one Tengizchevroil ("TCO")-owned rig resumed operations in
late 2003 and worked through June 25, 2004. These two operations contributed
$3.2 million to the increase in revenues. Latin America operations experienced a
decrease in revenues of $2.5 million during the current quarter as compared to
2003. This decrease is primarily attributed to no rigs working in Bolivia during
2004 and the rig operating in Peru being placed on a reduced standby rate on
April 1, 2004. We expect the Peru rig to remain on the standby rate through the
remainder of 2004 and return to a full operating dayrate in mid 2005. Operating
expenses for the international land operations were consistent with the increase
in revenues. Gross margin percentage for the quarter ended June 30, 2004
increased to 35 percent from 24 percent as compared to the second quarter of
2003.

International offshore revenues decreased $9.0 million during the second
quarter of 2004 as compared to the second quarter of 2003. The decrease in
revenues is attributed equally to our Caspian Sea operation and our operations
in Nigeria. In the Caspian Sea, our arctic-class barge rig 257 completed its
initial four-year contract in November 2003 and was then demobilized to Bautino
in February 2004, where it is presently stacked pending further operations. We
have recently received confirmation that the contract has been extended for up
to two years. We anticipate that drilling operations will resume during the
fourth quarter of 2004. Our barge operations in Nigeria have been negatively
impacted by continued community unrest. Barge rig 74 has been evacuated since
sustaining substantial damage due to community unrest in March 2003, and
received a standby rate approximating 45 percent of the full dayrate until early
March 2004. For the second quarter of 2004 two of the four barge rigs were on
dayrates through May as compared to three barge rigs on full dayrate during the
second quarter of 2003. As previously noted, a deep drilling barge rig was moved
from the U.S. Gulf of Mexico market to the Mexican market to drill in the
Macuspana Basin. The barge rig began operations in June 2004 and contributed
revenues of $0.6 million for the second quarter of 2004. The significant
decrease in international offshore revenues negatively impacted our gross
margins for the current quarter. In addition, during the second quarter, the
Nigerian tax authorities assessed us additional Value Added Tax ("VAT"). We
accrued $2.3 million during the current quarter as a result of this assessment,
negatively impacting gross margin. Gross margin percentage for the second
quarter of 2004 was negative as compared to 24 percent for the second quarter of
2003. In addition to the reduction in revenues, the costs to retain limited
personnel to maintain barge rig 257 in its stacked condition will be
approximately $1.0 million per quarter.

26

RESULTS OF OPERATIONS (continued)

Rental Tools Segment

Rental Tools revenues increased $3.0 million to $16.7 million during the
second quarter of 2004 as compared to the second quarter of 2003. Revenues
increased $0.2 million from the New Iberia, Louisiana operations, $0.7 from the
Victoria, Texas operations, $1.1 million from the Odessa, Texas operations and
$1.0 million from operations in Evanston, Wyoming. The revenues increase was
driven by increased rental tools utilization, which increased 9 percent during
the current quarter compared to the second quarter of 2003. Rental tools gross
margins increased $1.9 million to $10.0 million for the current quarter as
compared to the second quarter of 2003. Gross margin percentage increased to 60
percent as compared to 59 percent for the second quarter of 2003, due to a 22
percent increase in revenues and only a 20 percent increase in operating
expenses. Direct costs increased during the current quarter due to higher costs
associated with repairing and maintaining tools, primarily at the New Iberia
location, and increased costs from tool dispositions, both of which are
primarily offset by billings to customers.

Other Financial Data

Depreciation and amortization expense decreased $3.0 million in the second
quarter of 2004 as compared to the comparable quarter of 2003. The decrease is
primarily attributable to the classification of the Latin America land rigs as
discontinued operations. While the rigs were classified as discontinued
operations no depreciation was recorded. Seven of these rigs were moved to
continuing operations in May 2004 at which time we resumed recording
depreciation. The remaining nine land rigs were moved to continuing operations
effective June 30, 2004 and we will resume recording depreciation in July 2004.
All 16 rigs recorded depreciation during the second quarter of 2003.

During the second quarter of 2004, we recognized $6.