CALGARY, ALBERTA
This news release contains "forward-looking information and
statements" within the meaning of applicable securities laws. For a
full disclosure of the forward-looking information and statements
and the risks to which they are subject, see the "Cautionary
Statement Regarding Forward-Looking Information and Statements"
later in this news release.
Precision Drilling Trust ("Precision" or the "Trust") reported
net earnings of $22 million or $0.17 per diluted unit for the
quarter ended June 30, 2008, a decrease of $4 million or 15%
compared to $26 million or $0.20 per diluted unit in the second
quarter of 2007. The decrease in net earnings was primarily
attributable to higher year over year incentive compensation
expense accruals of $9 million as 2007 was in a $4 million expense
recovery position. The 2008 second quarter results were as
anticipated. Precision's strategy to diversify into the United
States drilling market generated strong revenue and earnings growth
and served to offset Canadian price weakness carried over from
2007. Customer pricing trends in Canada began to improve in 2008
due to strengthening industry fundamentals associated with higher
natural gas pricing. Precision's Canadian equipment activity in the
second quarter essentially held at prior year levels with stronger
customer demand in 2008 held at bay due to weather conditions.
For the six months ended June 30, 2008, net earnings were $128
million or $1.02 per diluted unit, a decrease of $56 million or 30%
compared to $184 million or $1.46 in the first half of 2007. The
decrease in net earnings was due to lower first quarter industry
demand and pricing for both operating segments in Canada and was
partially mitigated by new market growth. During the first half,
geographical diversification outside Canada strengthened as
drilling rig operating days grew by 374% over the first half of
2007 with 19 rigs operating in the United States and one rig in
Latin America as at June 30, 2008.
Revenue in the second quarter was 14% higher than the prior year
period at $139 million, increasing 18% in the Contract Drilling
Services segment and 6% in the Completion and Production Services
segment. Revenue in Precision's United States operation grew 17%
over the first quarter of 2008 and 198% over the same quarter in
the prior year. In Canada, Precision realized a slight decrease in
operating activity in the Contract Drilling Services segment while
activity in the Completion and Production Services segment was
moderately higher.
"Precision's strategy to deliver high-performance, high-value
services was demonstrated through accelerating our United States
organic growth and delivering three new-build rigs on time and
under budget, while continuing to enhance our Target Zero safety
program. Sustained strength in commodity pricing and commodity
supply tightness is already driving an increase in Canadian
activity which we see continuing to build through the second half
of 2008 and into 2009," said Kevin Neveu, Precision's Chief
Executive Officer.
SELECT FINANCIAL AND OPERATING INFORMATION
Three months ended Six months ended
June 30, June 30,
(Stated in thousands
of Canadian dollars,
except per diluted unit % %
amounts) 2008 2007 Change 2008 2007 Change
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Revenue $138,514 $122,005 14 $481,203 $532,547 (10)
Operating earnings(1) 22,047 27,074 (19) 146,285 205,253 (29)
Net earnings 21,739 25,722 (15) 128,005 183,789 (30)
Cash provided by
operations 200,458 229,073 (12) 257,765 385,371 (33)
Net capital spending 29,201 50,710 (42) 51,366 105,284 (51)
Distributions declared 49,045 56,591 (13) 98,091 128,273 (24)
Per diluted unit
information:
Net earnings 0.17 0.20 (15) 1.02 1.46 (30)
Distributions declared $ 0.39 $ 0.45 (13) $ 0.78 $ 1.02 (24)
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Contract Drilling Rig
Fleet
Operating days
(spud to release):
Canada 3,066 3,175 (3) 13,570 14,960 (9)
United States 1,227 352 249 2,243 499 349
International 54 - n/m 124 - n/m
Completion and Production
Service Rig Fleet
Operating hours in
Canada 55,631 52,680 6 167,626 185,091 (9)
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(1) Non-GAAP measure; see "NON-GAAP MEASURES AND RECONCILIATIONS".
n/m - calculation not meaningful
FINANCIAL POSITION AND RATIOS
(Stated in thousands of Canadian June 30, December 31, June 30,
dollars, except ratios) 2008 2007 2007
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Working capital $ 88,295 $ 140,374 $ 77,729
Working capital ratio 1.8 2.1 1.8
Long-term debt $ 104,948 $ 119,826 $ 51,937
Total assets $ 1,756,302 $ 1,763,477 $ 1,629,942
Long-term debt to long-term debt plus
equity ratio 0.07 0.08 0.04
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OVERVIEW
Precision's high-performance, high-value customer service
offering advanced since the first quarter of 2008 through
developments that included the following:
- Growth in the United States accelerated with seven rig moves
from Canada representing fleet expansion of 50%.
- The 2007 Super Series drilling rig build program is finished,
with three Super Single TM rigs commissioned for work in Alberta's
oil sands region.
- The 2008 Super Series 19 drilling rig build program is
comprised of ten Super Single TM rigs and nine Super Triple rigs.
Seven rigs are under long-term customer contracts with advanced
customer discussion or letters of intent on the remainder. Of the
seven contracted rigs, three are for the United States and four are
for the Canadian market.
- On July 18, 2008 Precision entered into an agreement to
acquire six service rigs from Rick's Well Servicing Ltd., a private
company, for approximately $16 million. The assets are positioned
in south-eastern Saskatchewan and south-western Manitoba and
strengthen Precision's capabilities in those oil regions.
- Precision has previously expressed continuing interest to
acquire Grey Wolf, Inc. ("Grey Wolf"), following the termination of
Grey Wolf's Merger Agreement with another party. Following the
termination of its Merger Agreement, Grey Wolf announced a review
of strategic alternatives to maximize shareholder value. Precision
respects the process Grey Wolf is undertaking and continues to
carry significant interest in an acquisition. Grey Wolf is the
fourth largest onshore drilling contractor in the United States
with a fleet of 122 drilling rigs.
Precision remains focused on customer service and earnings
margins. In the quarter the operating earnings margin was 16%
compared to 22% for the same period in 2007. Before the impact of
incentive compensation expense, margins held at prior year levels
due to high United States margins, internal manufacturing and
consumable supply distribution cost control and Precision's spot
market revenue discipline. Margins were supported by Precision's
highly variable operating cost structure and pricing discipline as
Precision had a limited amount of low day rate spot market
work.
In the Western Canada Sedimentary Basin ("WCSB"), Precision
experienced higher customer demand over the comparative year
quarter due to a significant improvement in the underlying
fundamentals of the oil and gas industry. Generally, drilling
programs by producers were established in the fourth quarter of
2007 amid modest natural gas fundamentals and general uncertainty
around Alberta's changing royalty structure. With the significant
improvement in natural gas pricing through the first six months of
2008, producers have begun to accelerate drilling plans but the
impact of spring break-up and wet weather delayed any significant
uplift in activity.
Average customer pricing for Precision's services in Canada
stabilized, down only 4% for drilling rigs and 5% for service rigs
from the second quarter of 2007. Pricing declines were attributable
to lower pricing entering the year as a result of the competitive
bidding environment and equipment availability from 2007. While
rates are down from the prior year, relative to the first quarter
of 2008, the average operating day rate for drilling rigs and well
servicing remained consistent when normalized for first quarter
winterization revenue.
Average customer pricing for Precision's operations in the
United States held strong as all drilling rigs are under term
contracts. An increasing active industry rig count and a rising
trend toward directional and horizontal drilling programs continued
to provide opportunities for high-performing, versatile drilling
rigs.
Early in 2008 Precision reentered the international onshore
drilling market with a one rig operation in Latin America and
realized 54 operating days in the second quarter. Precision
continued to evaluate global opportunities in select regions not
restricted by non-compete obligations and is positioning for global
markets in anticipation of the expiration of these provisions on
August 31, 2008.
Precision initially estimated 2008 capital spending to be $370
million but now forecasts to spend $290 million, with $75 million
for upgrade capital and $215 million for expansion capital. The
remaining $80 million relates to expansion capital expected to be
carried forward to 2009 for a total estimated expansion capital
carry forward of $130 million. The deferral of capital to 2009 is
primarily the result of contracting out the partial construction of
five rigs and rig deliveries remain as planned. All 19 new Super
Series drillings rigs are expected to be contracted with customers
before completion. Up to five rigs from the 2008 program are
expected to be completed in 2008 with most of the remaining rigs in
the first half of 2009.
Financial and operational information for the three months ended
June 30, 2008:
- Precision maintained a strong financial position with working
capital of $88 million, long-term debt of $105 million and a
long-term debt to long-term debt plus equity ratio of 0.07.
- Revenue was $139 million, an increase of $17 million or 14%
from the prior year quarter due primarily to growth in the United
States.
- General and administrative costs were $17 million, an increase
of $7 million from the prior year due primarily to differences
associated with incentive compensation plan expenses and increased
professional fees. During 2007 declining financial performance led
Precision to recover previously recorded long-term performance
incentive accruals.
- Operating earnings were $22 million, a decrease of $5 million
or 19% from the second quarter in 2007 or 16% of revenue, compared
to 22% in 2007. Operating earnings margins were negatively impacted
by declines in customer pricing for most Canadian divisions,
differences associated with incentive compensation offset by growth
in the United States where margins were strong.
- Capital expenditures for the purchase of property, plant and
equipment were $31 million, a decrease of $21 million over the same
period in 2007. Capital spending for the second quarter of 2008
included $22 million on expansionary capital initiatives and $9
million on the upgrade of existing assets.
- During the quarter Precision moved five rigs from Canada to
the United States under term contracts. At the end of the quarter,
Precision had 19 drilling rigs in the United States, an increase of
seven from December 31, 2007.
Financial and operational information for the six months ended
June 30, 2008:
- Revenue was $481 million, a decrease of $51 million or 10%
from the prior year period due to lower activity levels in
Precision's Canadian operations during the first quarter and lower
customer pricing for most of Precision's services offset by growth
in the United States.
- General and administrative costs were $36 million, an increase
of $11 million from the prior year due primarily to differences
associated with incentive compensation plan expenses and increased
professional fees.
- Operating earnings were $146 million, a decrease of $59
million or 29% from the first half of 2007 or 30% of revenue,
compared to 39% in 2007. Operating earnings margins were negatively
impacted by declines in customer pricing for most Canadian
divisions and differences associated with incentive compensation
offset by growth in the United States where margins were
strong.
- Capital expenditures for the purchase of property, plant and
equipment were $55 million, a decrease of $54 million over the same
period in 2007. Capital spending for the first half of 2008
included $43 million on expansionary capital initiatives and $12
million on the upgrade of existing assets.
- During March 2008 Precision paid $55 million to a provincial
taxing authority, due to the reassessment of income taxes relating
to tax filing positions taken in prior periods. The reassessments
have been recorded as long-term receivables. The income tax related
portion of the reassessments is $36 million and was included in the
$300 million tax contingent liability note disclosed in the
December 31, 2007 financial statements. Precision is in the process
of challenging these reassessments.
The increase in natural gas and oil prices has raised
expectations for higher drilling activity in Canada and the United
States. AECO natural gas spot prices averaged $10.22 per MMBtu in
the second quarter of 2008, an increase of 44% over the second
quarter 2007 average of $7.09 per MMBtu. In the United States,
Henry Hub natural gas spot prices averaged US$11.37 per MMBtu in
the second quarter of 2008, an increase of 51% over the second
quarter 2007 average of US$7.51 per MMBtu. West Texas Intermediate
crude oil averaged US$124.29 per barrel during the quarter compared
to US$64.99 per barrel in the same period in 2007. The one-year
forward price for North American natural gas improved, trading in a
range of about $9.00 to $13.00 on Canadian and U.S. exchanges in
the second quarter of 2008, compared to a range of about $7.00 to
$9.00 in the same quarter of 2007.
OUTLOOK
For Precision in Canada, the second half of 2008 carries
opportunity for seasonally adjusted higher drilling and service
levels compared to the first six months of 2008. On July 11, 2008
U.S. natural gas underground storage inventories were 14% below the
prior year level and 2% lower than the five year average. Lower
storage levels have propelled natural gas prices in the spot and
forward markets to levels not seen since the Gulf of Mexico
hurricanes in 2005. This trend is positive since Canada exports
over half of its natural gas production to the United States and
Precision's oilfield service businesses are highly dependent on
associated customer economics.
The outlook indicators for 2008 have turned positive for the
WCSB. Favourable commodity prices have positively impacted the cash
flow of Precision's customers and should result in a more robust
drilling and servicing environment for the remainder of 2008 and
into 2009. While some already have, we expect many more customers
to revisit their capital programs in the coming months and adjust
their 2008 budgets with an upward bias. Active rig counts in
British Columbia and Saskatchewan are higher than prior year. While
Alberta remains at prior year levels, the most recent Alberta
government land sale generated a sharp increase in proceeds; an
early indicator that industry economics support higher well
licensing and drilling levels.
As activity rises, field labour will be a challenge for the
oilfield service industry. Precision activated its recruitment,
training and orientation processes in the second quarter and is
well positioned to attract and retain field personnel.
Precision continues geographic diversification to the United
States and international markets leveraging its Canadian reputation
for high-performance, high-value onshore drilling services for oil
and natural gas exploration and development. Precision's strategy
is focused on value-based high-performance services where customers
recognize and reward superior performance. This presents Precision
with significant opportunity to displace low performing rigs,
especially in technically demanding unconventional drilling
applications. A greater proportion of wells drilled in North
America are seeking unconventional oil and natural gas reserves and
due to the complexity of these programs, high performance drilling
rigs and services are required. The delineation between
underperforming rigs and high performing, highly mobile, well
designed rigs with exceptional crews continues to emerge.
Precision remains focused on United States expansion and the
August 31, 2008 expiry of non-compete provisions creates
international diversification opportunities. Precision's growth
strategy lies within its organic new rig construction program,
acquisition opportunities and leveraging its competitive strengths
in people, systems and equipment. As a drilling contractor
operating one of the world's largest and safest fleets, Precision
has a unique business model. A suite of complimentary well site
businesses, integrated system support and employee depth provides
Precision with a strong foundation for oilfield service sector
consolidation.
SEGMENTED FINANCIAL RESULTS
Precision's operations are reported in two segments. The
Contract Drilling Services segment includes the drilling rig, camp
and catering, oilfield supply, and manufacturing divisions. The
Completion and Production Services segment includes the service
rig, snubbing, rental, and wastewater treatment divisions.
Three months ended June 30,
%
(Stated in thousands of Canadian dollars) 2008 2007 Change
----------------------------------------------------------------------------
Revenue:
Contract Drilling Services $ 93,006 $ 78,829 18.0
Completion and Production
Services 47,559 44,978 5.7
Inter-segment eliminations (2,051) (1,802) (13.8)
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$ 138,514 $ 122,005 13.5
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Operating earnings:(1)
Contract Drilling Services $ 23,695 $ 24,013 (1.3)
Completion and Production
Services 8,808 8,954 (1.6)
Corporate and other (10,456) (5,893) (77.4)
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$ 22,047 $ 27,074 (18.6)
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(1) Non-GAAP measure; see "NON-GAAP MEASURES AND RECONCILIATIONS".
Six months ended June 30,
%
(Stated in thousands of Canadian dollars) 2008 2007 Change
----------------------------------------------------------------------------
Revenue:
Contract Drilling Services $ 335,371 $ 359,724 (6.8)
Completion and Production
Services 152,279 178,184 (14.5)
Inter-segment eliminations (6,447) (5,361) (20.3)
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$ 481,203 $ 532,547 (9.6)
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Operating earnings:(1)
Contract Drilling Services $ 124,576 $ 156,748 (20.5)
Completion and Production
Services 42,673 60,769 (29.8)
Corporate and other (20,964) (12,264) (70.9)
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$ 146,285 $ 205,253 (28.7)
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(1) Non-GAAP measure; see "NON-GAAP MEASURES AND RECONCILIATIONS".
SEGMENT REVIEW OF CONTRACT DRILLING SERVICES
Three months ended June 30,
(Stated in thousands of Canadian dollars, %
except where indicated) 2008 2007 Change
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Revenue $ 93,006 $ 78,829 18.0
Expenses:
Operating 55,133 44,623 23.6
General and administrative 5,615 3,669 53.0
Depreciation 8,442 6,112 38.1
Foreign exchange 121 412 (70.6)
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Operating earnings(1) $ 23,695 $ 24,013 (1.3)
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Operating earnings as a percentage
of revenue 25.5% 30.5%
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Drilling rig revenue per operating
day in Canada $ 17,877 $ 18,656 (4.2)
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(1) Non-GAAP measure; see "NON-GAAP MEASURES AND RECONCILIATIONS".
Six months ended June 30,
(Stated in thousands of Canadian dollars, %
except where indicated) 2008 2007 Change
----------------------------------------------------------------------------
Revenue $ 335,371 $ 359,724 (6.8)
Expenses:
Operating 176,438 174,111 1.3
General and administrative 11,460 9,826 16.6
Depreciation 23,610 18,722 26.1
Foreign exchange (713) 317 (324.9)
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Operating earnings(1) $ 124,576 $ 156,748 (20.5)
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Operating earnings as a percentage
of revenue 37.1% 43.6%
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Drilling rig revenue per operating
day in Canada $ 18,428 $ 20,419 (9.8)
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(1) Non-GAAP measure; see "NON-GAAP MEASURES AND RECONCILIATIONS".
Canadian drilling statistics for the three month period ended June 30:
2008 2007
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Precision Industry(1) Precision Industry(1)
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Number of drilling rigs
(end of period) 228 886 242 878
Drilling rig operating days
(spud to release) 3,066 15,744 3,175 13,343
Drilling rig operating day
utilization 15% 19% 14% 17%
Number of wells drilled 413 1,568 411 1,677
Average days per well 7.4 10.0 7.7 8.0
Number of metres drilled
(000s) 602 2,444 572 2,295
Average metres per well 1,457 1,559 1,392 1,369
Average metres per day 196 155 180 172
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Canadian drilling statistics for the six month period ended June 30:
2008 2007
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Precision Industry(1) Precision Industry(1)
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Number of drilling rigs
(end of period) 228 886 242 878
Drilling rig operating days
(spud to release) 13,570 61,082 14,960 58,749
Drilling rig operating day
utilization 32% 38% 34% 38%
Number of wells drilled 1,863 6,694 2,139 7,638
Average days per well 7.3 9.1 7.0 7.7
Number of metres drilled
(000s) 2,548 9,234 2,714 9,680
Average metres per well 1,368 1,379 1,269 1,267
Average metres per day 188 151 181 165
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(1) Canadian Association of Oilwell Drilling Contractors ("CAODC") and
Precision - excludes non-CAODC rigs and non-reporting CAODC members.
In the Contract Drilling Services segment, revenue for the
second quarter increased by 18% to $93 million while operating
earnings decreased by 1% to $24 million compared to the same period
in 2007. Revenue growth in Precision's United States operation was
partially offset by lower pricing in Canadian operations. Activity
in the WCSB was at low levels as wet weather restricted access to
drilling locations.
For the second quarter, average drilling operating day rates for
Precision in Canada stabilized, declining 4% to $17,877 compared to
the second quarter of 2007 as low demand and high industry rig
capacity carried over from 2007 fostered a competitive pricing
market. The operating day rates in the comparative quarter of 2007
were stronger as rates carried forward from robust demand in
2006.
Drilling rig operating days, spud to rig release, in Canada
during the second quarter of 2008 were 3,066 a decrease of 3%
compared to 3,175 in 2007. Drilling rig activity for Precision in
the United States was 249% higher than the same quarter of 2007 as
the average number of rigs operating during the second quarter of
2008 was 17 compared to five in the prior year quarter. During the
quarter Precision's Latin America based drilling rig realized a
total of 54 operating days with completion of a second well.
During the second quarter, Precision's geographical
diversification outside Canada continued as five drilling rigs were
moved to the United States from Canada, all under term contracts.
The total number of Precision drilling rigs operating in the United
States at the end of the quarter was 19. During the quarter
Precision recorded 1,227 operating days in the United States which
represented a three-fold increase over the second quarter of 2007
and 211 more operating days than the first quarter of 2008.
Precision's United States based drilling rigs are all working under
term contracts and had a combined utilization rate including move
days near 100%. Drilling activity in the United States is not
subject to seasonal fluctuations to the same extent experienced in
Canada.
Precision's camp and catering division experienced activity
increases of 21% over the prior year second quarter with a greater
number of days realized from larger base camp activity.
Operating expenses were 59% of revenue for the quarter compared
to 57% for the prior year quarter. The increase was due to lower
revenue per operating day in all of Precision's Canadian divisions
without a corresponding drop in operating costs. On a per day
basis, operating costs for the drilling rig division in Canada were
5% higher than the prior year quarter primarily due to employee
benefit recoveries and repairs for preparing equipment in
anticipation of increased activity in the second half of the
year.
Depreciation in the Contract Drilling Services segment increased
from the prior year due to a higher cost base for working rigs and
activity growth in the United States.
SEGMENT REVIEW OF COMPLETION AND PRODUCTION SERVICES
Three months ended June 30,
(Stated in thousands of Canadian dollars, %
except where indicated) 2008 2007 Change
----------------------------------------------------------------------------
Revenue $ 47,559 $ 44,978 5.7
Expenses:
Operating 32,713 29,085 12.5
General and administrative 1,992 2,068 (3.7)
Depreciation 4,044 4,861 (16.8)
Foreign exchange 2 10 (80.0)
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Operating earnings (1) $ 8,808 $ 8,954 (1.6)
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Operating earnings as a percentage
of revenue 18.5% 19.9%
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Six months ended June 30,
(Stated in thousands of Canadian dollars, %
except where indicated) 2008 2007 Change
----------------------------------------------------------------------------
Revenue $ 152,279 $ 178,184 (14.5)
Expenses:
Operating 91,994 97,312 (5.5)
General and administrative 5,292 5,253 0.7
Depreciation 12,320 14,844 (17.0)
Foreign exchange - 6 (100.0)
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Operating earnings (1) $ 42,673 $ 60,769 (29.8)
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Operating earnings as a percentage
of revenue 28.0% 34.1%
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Three months ended June 30,
%
Well servicing statistics: 2008 2007 Change
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Number of service rigs (end of period) 223 238 (6.3)
Service rig operating hours 55,631 52,680 5.6
Service rig operating hour utilization 27% 24%
Service rig revenue per operating hour $ 649 $ 681 (4.7)
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Six months ended June 30,
%
Well servicing statistics: 2008 2007 Change
----------------------------------------------------------------------------
Number of service rigs (end of period) 223 238 (6.3)
Service rig operating hours 167,626 185,091 (9.4)
Service rig operating hour utilization 41% 43%
Service rig revenue per operating hour $712 $ 771 (7.7)
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(1) Non-GAAP measure; see "NON-GAAP MEASURES AND RECONCILIATIONS".
In the Completion and Production Services segment, revenue for
the second quarter increased 6% from 2007 to $48 million while
operating earnings remained consistent at $9 million. The increase
in revenue is attributed to an increase in industry activity,
particularly in oil producing regions, offset by a moderate
decrease in average service rates which occurred in the fourth
quarter of 2007 as a result of a competitive pricing
environment.
Service rig activity increased 6% from the prior year period,
with the fleet generating 55,631 operating hours in the second
quarter of 2008 compared with 52,680 hours in 2007 for utilization
of 27% and 24%, respectively. The increase was a result of higher
production work in oil producing regions in the WCSB and the
performance of completion work from wells drilled in the first
quarter of 2008. New well completions accounted for 20% of service
rig operating hours in the second quarter compared to 17% in the
same quarter in 2007.
Service rig revenue per operating hour decreased slightly over
the prior year as rates declined in 2007 due to reduced demand
resulting in a more competitive pricing environment.
Higher variable operating expenses and lower revenue rates led
to an increase in operating expenses as a percent of revenue from
65% in the second quarter of 2007 to 69% for the same period in
2008. On a per operating hour basis, costs for the service rig
division increased 3% over the same quarter in 2007 primarily due
to the rising cost of fuel.
Depreciation in the Completion and Production Services segment
in the second quarter of 2008 was 17% lower than the prior year
period due to losses on disposal of equipment in 2007.
SEGMENT REVIEW OF CORPORATE AND OTHER
Corporate and other expenses increased by 77% to $10 million in
the second quarter of 2008 compared to $6 million in the same
period of 2007. The increase was primarily due to the difference in
employee incentive compensation expense and increased professional
fees. In 2007, as a result of financial performance, Precision
recorded a recovery of long-term incentive accruals expensed in
prior periods.
OTHER ITEMS
Net interest expense of $2 million for the first quarter of 2008
was in line with the prior year.
The Trust's effective tax rate on earnings before income taxes
for the second quarter of 2008 was negative 9% compared to positive
8%, before rate reductions, for the same period in 2007. The income
tax recovery is primarily a result of estimated higher income to be
distributed to unitholders, not subject to tax in the Trust. The
effective tax rate for the six month periods ended June 30, 2008
and June 30, 2007 was 10%. Compared to a corporate tax rate, the
low effective tax rate is primarily the result of the income trust
structure shifting all or a portion of the income tax burden of the
Trust to its unitholders.
LIQUIDITY AND CAPITAL RESOURCES
Precision's liquidity and solvency position remained strong as
long-term debt exceeded working capital by only $17 million as at
June 30, 2008 compared to working capital exceeding long-term debt
by $21 million as at December 31, 2007. The change in financial
position primarily resulted from cash payments associated with
prior period income tax reassessments of $55 million and lower
operating earnings partially offset by reduced distributions and
lower capital spending.
During the first half of 2008 Precision generated cash from
continuing operations of $258 million. The cash was used to
purchase property, plant and equipment net of disposal proceeds and
related non-cash working capital of $48 million, make cash
distributions to unitholders of $118 million, net repayment of
long-term debt of $15 million, repay bank indebtedness of $14
million and pay assessed income taxes and interest of $55 million
leaving a cash balance of $7 million.
The first six months of 2008 were further highlighted by the
following financial developments:
- The Trust declared monthly distributions to unitholders of
$0.13 per diluted unit for aggregate distributions declared of $98
million or $0.78 per diluted unit.
- Long-term debt decreased by $15 million from December 31, 2007
to $105 million for a long-term debt to long-term debt plus equity
ratio of 0.07.
- Working capital decreased $52 million during the six months to
$88 million as Precision realized lower activity and corresponding
operating results in the first half of 2008 compared to 2007 year
end and certain income tax liabilities.
DISTRIBUTIONS
Upon conversion to an income trust effective November 7, 2005
the Trust adopted a policy of making monthly distributions to
holders of Trust units and holders of exchangeable LP units
("unitholders"). Precision has a legal entity structure whereby the
trust entity, Precision Drilling Trust, effectively must flow its
taxable income to unitholders pursuant to its Declaration of Trust.
Distributions, including special distributions, may be declared in
cash or "in-kind" or a combination of both and reduced, increased
or suspended entirely depending on the operations of Precision, the
performance of its assets, or legislative changes in tax laws. The
actual cash flow available for distribution to unitholders is a
function of numerous factors, including the Trust's: financial
performance; debt covenants and obligations; working capital
requirements; upgrade and expansion capital expenditure
requirements for the purchase of property, plant and equipment; and
number of units outstanding.
In June 2007 the Government of Canada's Bill C-52 Budget
Implementation Act 2007 was enacted and included legislative
provisions that impose a tax on certain distributions from publicly
traded specified investment flow-through ("SIFT") trusts at a rate
equal to the applicable federal corporate tax rate plus a
provincial SIFT tax factor. After the enactment of federal tax rate
reductions in December 2007, the combined SIFT tax will be 29.5% in
2011, reducing to 25% in 2012. Precision will be a SIFT trust on
the earlier of January 1, 2011 or the first day after it exceeds
the normal growth guidelines announced by the federal Department of
Finance on December 15, 2006.
Key factors for consideration in determining actual cash flow
available for distribution, in an historical context, are disclosed
within the consolidated statements of cash flow. In calculating
distributable cash Precision makes the following adjustments to
cash provided by continuing operations:
- Deducts the purchase of property, plant and equipment for
upgrade capital as the minimum reinvestment required to maintain
current operating capacity;
- Deducts the purchase of property, plant and equipment for
expansion initiatives to grow capacity;
- Adds the proceeds on the sale of property, plant and equipment
capital which are incidental transactions occurring within the
normal course of operations; and
- Deducts long-term incentive plan changes as an unfunded
liability resulting from the operating activities in the current
period with payments beginning March 2009.
A quarterly two-year reconciliation of distributable cash from continuing
operations follows:
(Stated in thousands of
Canadian dollars, except per
diluted unit amounts) 2007 2008
----------------------------------------------------------------------------
Quarters ended September 30 December 31 March 31 June 30
----------------------------------------------------------------------------
Cash provided by continuing
operations $ 20,270 $ 78,474 $ 57,307 $200,458
Deduct:
Purchase of property, plant
and equipment for upgrade
capital (10,544) (9,241) (2,814) (8,864)
Purchase of property plant and
equipment for expansion
initiatives (30,382) (28,264) (20,654) (22,480)
Add:
Proceeds on the sale of
property, plant and
equipment 1,273 1,236 1,303 2,143
----------------------------------------------------------------------------
Standardized distributable
cash(1) (19,383) 42,205 35,142 171,257
Unfunded long-term incentive
plan compensation 3,685 (1,817) 469 (2,166)
----------------------------------------------------------------------------
Distributable cash from
continuing operations(1) $ (15,698) $ 40,388 $ 35,611 $169,091
----------------------------------------------------------------------------
Cash distributions declared $ 49,046 $ 69,166 $ 49,046 $ 49,045
----------------------------------------------------------------------------
Per diluted unit information:
Cash distributions declared $ 0.39 $ 0.55 $ 0.39 $ 0.39
Standardized distributable
cash(1) $ (0.15) $ 0.33 $ 0.28 $ 1.36
Distributable cash from
continuing operations(1) $ (0.12) $ 0.32 $ 0.28 $ 1.34
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2006 2007
----------------------------------------------------------------------------
Quarters ended September 30 December 31 March 31 June 30
----------------------------------------------------------------------------
Cash provided by continuing
operations $ 74,952 $ 154,233 $156,298 $229,073
Deduct:
Purchase of property, plant
and equipment for upgrade
capital (24,503) (26,122) (17,583) (8,602)
Purchase of property plant and
equipment for expansion
initiatives (55,876) (46,211) (38,119) (44,238)
Add:
Proceeds on the sale of
property, plant and equipment 4,251 3,742 1,128 2,130
----------------------------------------------------------------------------
Standardized distributable
cash(1) (1,176) 85,642 101,724 178,363
Unfunded long-term incentive
plan compensation (5,262) (10,192) 2,461 4,167
----------------------------------------------------------------------------
Distributable cash from
continuing operations (1) $ (6,438) $ 75,450 $104,185 $182,530
----------------------------------------------------------------------------
Cash distributions declared $ 116,785 $ 116,912 $ 71,682 $ 56,591
----------------------------------------------------------------------------
Per diluted unit information:
Cash distributions declared $ 0.93 $ 0.93 $ 0.57 $ 0.45
Standardized distributable
cash(1) $ (0.01) $ 0.68 $ 0.81 $ 1.42
Distributable cash from
continuing operations(1) $ (0.05) $ 0.60 $ 0.83 $ 1.45
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Non-GAAP measure; see "NON-GAAP MEASURES AND RECONCILIATIONS".
The quarterly distributable cash calculation over the past two
years demonstrates the wide variances from quarter to quarter and
highlights the need to consider seasonal and economic conditions
for cumulative quarters to assess performance and the
reasonableness of distributions.
For the quarter ended June 30, 2008 cash provided by operations
was $200 million, a decrease of $29 million from the 2007 second
quarter. The decrease was due primarily to the reduction in
operating earnings in the current quarter compared to the prior
year and a lower cash realization of non-cash working capital
balances of $25 million.
The Canadian drilling industry is subject to seasonality with
activity and earnings peaking during the winter months in the
fourth and first quarters. As temperatures rise in the spring, the
ground thaws and becomes unstable. Government road bans can
restrict activity at any time but are most typical for spring
break-up during the second quarter before equipment is able to move
for summer drilling programs. As a result, in combination with
economic cycles, Precision's operating and financial results can
vary significantly by quarter. Working capital is typically at its
highest level at the end of the first quarter when accounts
receivable increases from winter activity and tends to be at its
lowest during the second quarter. The change in the non-cash
working capital balance has a direct impact on cash provided by
operations.
Six months Six months Year
ended ended ended
(Stated in thousands of June 30, 2008 June 30, 2007 December 31,
Canadian dollars) 2007
----------------------------------------------------------------------------
Cash provided by continuing
operations (A) $ 257,765 $ 385,371 $ 484,115
----------------------------------------------------------------------------
Net earnings (B) $ 128,005 $ 183,789 $ 345,776
----------------------------------------------------------------------------
Distributions declared � $ 98,091 $ 128,273 $ 276,667
----------------------------------------------------------------------------
Excess of cash provided by
continuing operations over
distributions declared (A-C) $ 159,674 $ 257,098 $ 207,448
----------------------------------------------------------------------------
Excess of net earnings from
operating activities over
distributions declared (B-C) $ 29,914 $ 55,516 $ 69,109
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Trust maintained a strong financial position and had
sufficient debt facilities to manage short-term funding needs as
well as planned equipment additions. Part of the debt management
strategy involves retaining sufficient funds from available
distributable cash to finance upgrade capital expenditures as well
as working capital needs. Planned asset growth will generally be
financed through existing debt facilities or cash retained from
continuing operations. Precision renewed its $700 million
three-year revolving syndicated loan facility during the second
quarter. Tenure has been renewed for most of the facility and
certain pricing terms were amended. A $150 million accordion clause
was added, enabling Precision to increase the size of the facility
under certain conditions.
Periodically, Precision enters into cash generating transactions
that are outside the normal course of operations and, while such
transactions increase the cash available for distribution,
Precision does not rely on these sources of cash for
distributions.
QUARTERLY FINANCIAL SUMMARY
(Stated in thousands of
Canadian dollars, except
per diluted unit amounts)
2007 2008
----------------------------------------------------------------------------
Quarters ended September 30 December 31 March 31 June 30
----------------------------------------------------------------------------
Revenue $ 227,928 $ 248,726 $ 342,689 $138,514
Operating earnings(1) 73,402 77,696 124,238 22,047
Earnings from continuing
operations 69,702 89,329 106,266 21,739
Per diluted unit 0.55 0.71 0.84 0.17
Net earnings 72,658 89,329 106,266 21,739
Per diluted unit 0.58 0.71 0.84 0.17
Cash provided by continuing
operations 20,270 78,474 57,307 200,458
Distributions declared $ 49,046 $ 99,348 $ 49,046 $ 49,045
----------------------------------------------------------------------------
2006 2007
----------------------------------------------------------------------------
Quarters ended September 30 December 31 March 31 June 30
----------------------------------------------------------------------------
Revenue $ 349,558 $ 328,049 $ 410,542 $ 122,005
Operating earnings(1) 142,431 132,396 178,179 27,074
Earnings from continuing
operations 133,552 126,474 158,067 25,722
Per diluted unit 1.06 1.01 1.26 0.20
Net earnings 139,667 127,436 158,067 25,722
Per diluted unit 1.11 1.01 1.26 0.20
Cash provided by
continuing operations 74,952 154,233 156,298 229,073
Distributions declared $ 116,785 $ 141,435 $ 71,682 $ 56,591
----------------------------------------------------------------------------
(1) Non-GAAP measure;see "NON-GAAP MEASURES AND RECONCILIATIONS".
NON-GAAP MEASURES AND RECONCILIATIONS
Precision uses both Generally Accepted Accounting Principles
("GAAP") and non-GAAP measures to assess performance and believes
the non-GAAP measures provide useful supplemental information to
investors. Following are the non-GAAP measures Precision uses in
assessing performance:
- Operating Earnings: Management believes that in addition to
net earnings, operating earnings as reported in the Consolidated
Statements of Earnings and Deficit is a useful supplemental measure
as it provides an indication of the results generated by
Precision's principal business activities prior to consideration of
how those activities are financed or how the results are taxed.
- Standardized Distributable Cash, Distributable Cash from
Continuing Operations, Standardized Distributable Cash per Diluted
Unit and Distributable Cash from Continuing Operations per Diluted
Unit: Management believes that in addition to cash provided by
continuing operations, standardized distributable cash and
distributable cash from continuing operations are useful
supplemental measures. They provide an indication of the funds
available for distribution to unitholders after consideration of
the impacts of capital expenditures and long-term unfunded
contractual operational obligations.
Precision's method of calculating these non-GAAP measures may
differ from other entities and, accordingly, may not be comparable
to measures used by other entities. Investors should be cautioned,
however, that these measures should not be construed as an
alternative to measures determined in accordance with GAAP as an
indicator of Precision's performance.
CHANGES IN ACCOUNTING POLICIES
Effective January 1, 2008 the Trust adopted new Canadian
accounting standards relating to inventories (Section 3031) and
capital disclosures (Section 1535). Section 3031 requires
inventories to be measured at the lower of cost or net realizable
value and the reversal of previously recorded write downs to
realizable value when the circumstances that caused the write down
no longer exist. This new standard did not have a material impact
on the Trust's financial statements for the period ended June 30,
2008. Section 1535 requires the Trust to provide additional
quantitative and qualitative information regarding its objectives,
policies and processes for managing its capital.
Effective for fiscal years starting on or after January 1, 2011,
Canadian Publicly Accountable Enterprises must report financial
information using International Financial Reporting Standards
("IFRS"). During the six month period ended June 30, 2008 Precision
has initiated the transition process with an identification and
assessment of the primary differences that would have an impact on
Precision and has commenced the planning for the conversion.
Although many elements of Canadian GAAP and IFRS are similar,
Precision expects its transition to IFRS to take considerable
effort.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed to provide
reasonable assurance that information required to be disclosed in
reports filed with, or submitted to, securities regulatory
authorities is recorded, processed, summarized and reported within
the time periods specified under Canadian and United States
securities laws. The information is accumulated and communicated to
management, including the principal executive officer and principal
financial and accounting officer, to allow timely decisions
regarding required disclosure.
As of June 30, 2008 an evaluation was carried out, under the
supervision of and with the participation of management, including
the principal executive officer and principal financial and
accounting officer, of the effectiveness of Precision's disclosure
controls and procedures as defined under the rules adopted by the
Canadian securities regulatory authorities and by the United States
Securities and Exchange Commission. Based on that evaluation, the
principal executive officer and principal financial and accounting
officer concluded that the design and operation of Precision's
disclosure controls and procedures were effective as at June 30,
2008.
During the quarter ended June 30, 2008 there have been no
changes in internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect,
Precision's internal control over financial reporting.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND
STATEMENTS
Certain statements contained in this report, including
statements that contain words such as "could", "should", "can",
"anticipate", "expect", "believe", "will", "may" and similar
expressions and statements relating to matters that are not
historical facts constitute "forward-looking information" within
the meaning of applicable Canadian securities legislation and
"forward-looking statements" within the meaning of the "safe
harbor" provisions of the United States Private Securities
Litigation Reform Act of 1995 (collectively "forward-looking
information and statements").
In particular, forward-looking information and statements
include: new drilling rigs are expected to be contracted with
customers before completion; stronger than expected natural gas
prices in 2008 should positively impact customer cash flows and
provide incentive to drill and service oil and natural gas wells;
expected consummation of the agreement to acquire six service rigs;
estimates that $290 million of the total capital will be incurred
in 2008 with $130 million carried forward to 2009; as many as five
rigs from the 2008 program are expected to be completed in 2008
with the remaining rigs to be completed in 2009; opportunity in the
second half of 2008 for higher drilling and service levels; as
activity rises field labour will be a challenge for the oilfield
service industry; improvement in commodity prices is expected to
alleviate downward pricing pressure; sustained period of higher
prices required to instill enough producer confidence to increase
drilling activity; that unconventional drilling applications will
require high performance drilling rigs; expecting customers to
revisit their drilling programs in the second half and adjust their
2008 budgets with an upward bias; that industry economics support
higher well licensing and drilling levels; expiry of non-compete
provisions creates international diversification opportunities;
planned asset growth will generally be financed through existing
debt facilities or cash retained from continuing operations, all of
which are stated under the headings "Overview" and "Outlook" of
this report.
These statements include, but are not limited to, statements as
to seasonal and weather conditions affecting the Canadian oil and
natural gas industry and the demand for Precision's services. These
statements are based on certain assumptions and analysis made by
the Trust in light of its experience and its perception of
historical trends, current conditions and expected future
developments as well as other factors it believes are appropriate
in the circumstances. However, whether actual results, performance
or achievements will conform to the Trust's expectations and
predictions is subject to a number of known and unknown risks and
uncertainties which could cause actual results to differ materially
from the Trust's expectations. Such risks and uncertainties
include, but are not limited to: fluctuations in the price and
demand for oil and natural gas; fluctuations in the level of oil
and natural gas exploration and development activities;
fluctuations in the demand for well servicing, contract drilling
and ancillary oilfield services; the effects of weather conditions
on operations and facilities; the existence of competitive
operating risks inherent in well servicing, contract drilling and
ancillary oilfield services; general economic, market or business
conditions; changes in laws or regulations, including taxation,
environmental and currency regulations; the lack of availability of
qualified personnel or management; and other unforeseen conditions
which could impact the use of services supplied by Precision.
Consequently, all of the forward-looking information and
statements made in this report are qualified by these cautionary
statements and there can be no assurance that the actual results or
developments anticipated by the Trust will be realized or, even if
substantially realized, that they will have the expected
consequences to or effects on the Trust or its business or
operations. Except as may be required by law, the Trust assumes no
obligation to update publicly any such forward-looking information
and statements, whether as a result of new information, future
events or otherwise.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31,
(Stated in thousands of Canadian dollars) 2008 2007
----------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,117 $ -
Accounts receivable 173,658 256,616
Income tax recoverable 3,912 5,952
Inventory 8,301 9,255
----------------------------------------------------------------------------
192,988 271,823
Income tax recoverable (note 5) 58,055 -
Property, plant and equipment, net of
accumulated depreciation 1,224,238 1,210,587
Intangibles, net of accumulated
amortization 272 318
Goodwill 280,749 280,749
----------------------------------------------------------------------------
$ 1,756,302 $ 1,763,477
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities:
Bank indebtedness $ - $ 14,115
Accounts payable and accrued liabilities 88,344 80,864
Distributions payable 16,349 36,470
----------------------------------------------------------------------------
104,693 131,449
Long-term compensation plans 8,723 13,896
Long-term debt (note 4) 104,948 119,826
Future income taxes 190,916 181,633
----------------------------------------------------------------------------
409,280 446,804
----------------------------------------------------------------------------
Contingent Liability and Commitments (notes 8 and 9)
Unitholders' equity:
Unitholders' capital 1,442,476 1,442,476
Contributed surplus 742 307
Deficit (96,196) (126,110)
----------------------------------------------------------------------------
1,347,022 1,316,673
Subsequent event (note 11)
----------------------------------------------------------------------------
$ 1,756,302 $ 1,763,477
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Units outstanding (000s) 125,758 125,758
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF EARNINGS AND DEFICIT (UNAUDITED)
(Stated in thousands of Three months ended Six months ended
Canadian dollars, except per June 30, June 30,
unit amounts) 2008 2007 2008 2007
----------------------------------------------------------------------------
Revenue $ 138,514 $ 122,005 $ 481,203 $ 532,547
Expenses:
Operating 85,795 71,906 261,985 266,062
General and administrative 17,145 10,274 36,297 24,829
Depreciation and amortization 13,394 12,026 37,761 35,510
Foreign exchange 133 725 (1,125) 893
----------------------------------------------------------------------------
116,467 94,931 334,918 327,294
----------------------------------------------------------------------------
Operating earnings 22,047 27,074 146,285 205,253
Interest:
Long-term debt 2,109 1,649 4,344 4,179
Other 53 31 99 58
Income (75) (77) (160) (195)
----------------------------------------------------------------------------
Earnings from before income
taxes 19,960 25,471 142,002 201,211
Income taxes: (note 5)
Current 2,045 (3,967) 4,697 (3,647)
Future (3,824) 3,716 9,300 21,069
----------------------------------------------------------------------------
(1,779) (251) 13,997 17,422
----------------------------------------------------------------------------
Net earnings 21,739 25,722 128,005 183,789
Deficit, beginning of period (68,890) (108,834) (126,110) (195,219)
Distributions declared (49,045) (56,591) (98,091) (128,273)
----------------------------------------------------------------------------
Deficit, end of period $ (96,196) $ (139,703) $ (96,196) $ (139,703)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings per unit:
Basic $ 0.17 $ 0.20 $ 1.02 $ 1.46
Diluted $ 0.17 $ 0.20 $ 1.02 $ 1.46
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Units outstanding (000s) 125,758 125,758 125,758 125,758
Weighted average units
outstanding (000s) 125,758 125,758 125,758 125,758
Diluted units outstanding
(000s) 125,785 125,758 125,781 125,758
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
Three months ended Six months ended
(Stated in thousands of June 30, June 30,
Canadian dollars) 2008 2007 2008 2007
----------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Net earnings $ 21,739 $ 25,722 $ 128,005 $ 183,789
Adjustments and other items
not involving cash:
Long-term compensation plans 2,166 (4,167) 1,697 (6,628)
Depreciation and amortization 13,394 12,026 37,761 35,510
Future income taxes (3,824) 3,716 9,300 21,069
Other 5 5 (17) 5
Changes in non-cash working
capital balances 166,978 191,771 81,019 151,626
----------------------------------------------------------------------------
200,458 229,073 257,765 385,371
Investments:
Purchase of property, plant
and equipment (31,344) (52,840) (54,812) (108,542)
Proceeds on sale of property,
plant and equipment 2,143 2,130 3,446 3,258
Changes in income tax
recoverable 37 - (55,148) -
Changes in non-cash working
capital balances 3,975 (471) 3,071 (10,114)
----------------------------------------------------------------------------
(25,189) (51,181) (103,443) (115,398)
Financing:
Distributions paid (49,045) (64,136) (118,212) (150,909)
Repayment of long-term debt (108,559) (95,753) (108,559) (95,753)
Increase in long-term debt - - 93,681 6,810
Change in bank indebtedness (10,548) (18,003) (14,115) (30,121)
----------------------------------------------------------------------------
(168,152) (177,892) (147,205) (269,973)
Increase in cash and cash
equivalents 7,117 - 7,117 -
Cash and cash equivalents,
beginning of period - - - -
----------------------------------------------------------------------------
Cash and cash equivalents, end
of period $ 7,117 $ - $ 7,117 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Notes to Consolidated Financial Statements (UNAUDITED)
(Tabular amounts are stated in thousands of Canadian dollars except unit
numbers)
1. Basis of Presentation
These interim financial statements for Precision Drilling Trust
("Precision" or the "Trust") were prepared using accounting
policies and methods of their application consistent with those
used in the preparation of the Trust's consolidated audited
financial statements for the year ended December 31, 2007 except as
noted below. These interim financial statements conform in all
material respects to the requirements of generally accepted
accounting principles in Canada for annual financial statements
with the exception of certain note disclosures. As a result, these
interim financial statements should be read in conjunction with the
Trust's consolidated audited financial statements for the year
ended December 31, 2007.
Effective January 1, 2008 the Trust adopted new Canadian
accounting standards relating to inventories (Section 3031) and
capital disclosures (Section 1535). Section 3031 requires
inventories to be measured at the lower of cost or net realizable
value and the reversal of previously recorded write downs to
realizable value when the circumstances that caused the write down
no longer exist. This new standard did not have a material impact
on the Trust's financial statements for the period ended June 30,
2008. Section 1535 requires the Trust to provide additional
quantitative and qualitative information regarding its objectives,
policies and processes for managing its capital.
In February 2008, the Canadian Institute of Chartered
Accountants issued Section 3064, goodwill and intangible assets,
replacing Section 3062, goodwill and other intangible assets and
Section 3450, research and development costs. The new Section
establishes standards for the recognition, measurement,
presentation and disclosure of goodwill and intangible assets. The
new Section will be applicable to the Trust on January 1, 2009. The
Trust is currently evaluating the impact of this new Section on its
consolidated financial statements.
2. Seasonality of Operations
The majority of the Trust's operations are carried on in Canada.
The ability to move heavy equipment in the Canadian oil and natural
gas fields is dependent on weather conditions. As warm weather
returns in the spring, the winter's frost comes out of the ground
rendering many secondary roads incapable of supporting the weight
of heavy equipment until they have thoroughly dried out. The
duration of this "spring break-up" has a direct impact on the
Trust's activity levels. In addition, many exploration and
production areas in northern Canada are accessible only in winter
months when the ground is frozen hard enough to support equipment.
The timing of freeze up and spring break-up affects the ability to
move equipment in and out of these areas. As a result, late March
through May is traditionally the Trust's slowest time.
3. Unitholders' Capital
(a) Authorized - unlimited number of voting Trust units
- unlimited number of voting exchangeable LP units
(b) Units issued:
Trust units Number Amount
----------------------------------------------------------------------------
Balance, December 31, 2007 125,587,919 $ 1,440,543
Issued on retraction of exchangeable LP units 9,498 108
----------------------------------------------------------------------------
Balance June 30, 2008 125,597,417 $ 1,440,651
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Exchangeable LP units Number Amount
----------------------------------------------------------------------------
Balance, December 31, 2007 170,005 $ 1,933
Redeemed on retraction of exchangeable LP units (9,498) (108)
----------------------------------------------------------------------------
Balance June 30, 2008 160,507 $1,825
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Summary Number Amount
----------------------------------------------------------------------------
Trust units 125,597,417 $ 1,440,651
Exchangeable LP units 160,507 1,825
----------------------------------------------------------------------------
Unitholders'capital 125,757,924 $ 1,442,476
----------------------------------------------------------------------------
----------------------------------------------------------------------------
4. Long-term Debt
During the quarter, Precision Drilling Corporation, a subsidiary
of the Trust, received approval from its lenders to extend the
maturity of the extendible revolving unsecured credit facility
until June 2011. In addition, a clause was added whereby the
facility may increase by $150 million and certain amendments were
made to pricing.
5. Income Taxes
Currently, the Trust incurs taxes to the extent that there are
certain provincial capital taxes, as well as taxes on any taxable
income, of its underlying subsidiaries. Future income taxes arise
from the differences between the accounting and tax basis of the
Trust's and its subsidiaries' assets and liabilities.
The provision for income taxes differs from that which would be
expected by applying statutory Canadian income tax rates. A
reconciliation of the difference at June 30 is as follows:
Three months Six months
ended June 30, ended June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Earnings before income taxes $ 19,960 $ 25,471 $ 142,002 $ 201,211
Federal and provincial
statutory rates 30% 33% 30% 33%
----------------------------------------------------------------------------
Tax at statutory rates $ 5,988 $ 8,406 $ 42,601 $ 66,400
Adjusted for the effect of:
Non-deductible expenses 29 (149) (197) 405
Income to be distributed to
unitholders, not subject to
tax in the Trust (8,685) (5,910) (31,569) (47,076)
Other 889 (408) 3,162 (117)
----------------------------------------------------------------------------
Income tax expense before tax
rate reductions $ (1,779) $ 1,939 $ 13,997 $ 19,612
Reduction of future tax balances
due to enacted tax rate reductions - (2,190) - (2,190)
----------------------------------------------------------------------------
Income tax expense $ (1,779) $ (251)$ 13,997 $ 17,422
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Effective income tax rate before
enacted tax rate reductions (9)% 8% 10% 10%
----------------------------------------------------------------------------
The Trust received notices of reassessment from a provincial
taxing authority related to certain subsidiaries' taxation years
ending in 2001 through 2004. As a result of the notices, the Trust
was required to pay $36.1 million in taxes and $19.1 million in
assessed interest during the first quarter of 2008 and $1.6 million
in taxes and $1.3 million in assessed interest in 2007. The
reassessments relate to the treatment of interest in certain
provincial tax filings. The Trust is in the process of challenging
these reassessments. It is anticipated that the dispute will not be
resolved within one year and the amount paid has been recorded as a
long-term receivable. No amounts related to the $58.1 million in
reassessments have been expensed.
6. Unit Based Compensation Plans
(a) Officers and Employees
Eligible participants of Precision's Performance Savings Plan
may elect to receive a portion of their annual performance bonus in
the form of deferred trust units ("DTUs"). These notional units are
redeemable in cash and are adjusted for each distribution to
unitholders by issuing additional DTUs based on the weighted
average trading price on the Toronto Stock Exchange for the five
days immediately following the ex-distribution date. All DTUs must
be redeemed within 60 days of ceasing to be an employee of
Precision or by the end of the second full calendar year after the
receipt of the DTUs.
During 2008 Precision issued 27,123 DTUs, including additional
DTUs issued in lieu of cash distributions and redeemed 17,239 DTUs
on employee resignations and employee withdrawals. As at June 30,
2008 $2.4 million is included in accounts payable and accrued
liabilities for outstanding DTUs. Included in net earnings for the
three months and six months ended June 30, 2008 is an expense of
$0.5 million (2007- $0.1 million expense recovery) and $1.1 million
(2007- $0.1 million expense recovery) respectively.
(b) Executive
In 2007 the Trust instituted a Deferred Signing Bonus Unit Plan
for its Chief Executive Officer. Under the plan 178,336 notional
DTUs were granted on September 1, 2007. The units are redeemable
one-third annually beginning September 1, 2008 and are settled for
cash based on the trust unit trading price on redemption. The
number of notional DTUs is adjusted for each distribution to
unitholders by issuing additional notional DTUs based on the
weighted average trading price on the Toronto Stock Exchange for
the five days immediately following the ex-distribution date. As at
June 30, 2008 $1.8 million is included in accounts payable and
accrued liabilities and $3.5 million in long-term incentive plan
payable for the 191,269 currently outstanding DTUs. Included in net
earnings for the three and six months ended June 30, 2008 is an
expense of $0.8 million (2007 - $ nil) and $ 2.5 million (2007- $
nil) respectively.
(c) Non-management directors
In 2007 a deferred trust unit plan was established for
non-management directors. Under the plan fully vested deferred
trust units are granted quarterly based upon an election by the
non-management director to receive all or a portion of his or her
compensation in deferred trust units. Distributions to unitholders
declared by the Trust prior to redemption are reinvested into
additional deferred trust units on the date of distribution. These
deferred trust units are redeemable into an equal number of trust
units any time after the director's retirement. A summary of this
unit based incentive plan is presented below:
Number
Outstanding
----------------------------------------------------------------------------
Balance, December 31, 2007 18,280
Granted 17,104
Issued as a result of distributions 630
----------------------------------------------------------------------------
Balance, June 30, 2008 36,014
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three months and six months ended June 30, 2008 the
Trust expensed $240,000 (2007 - $ nil) and $435,000 (2007 - $ nil)
respectively as unit based compensation, with a corresponding
increase in contributed surplus.
7. Capital Management
The Trust's strategy is to carry a capital base to maintain
investor, creditor and market confidence and to sustain future
development of the business. The Trust seeks to maintain a balance
between the level of long-term debt and unitholders' equity to
ensure access to capital markets to fund growth and working capital
given the cyclical nature of the oilfield services sector. On an
historical basis, the Trust has maintained a conservative ratio of
long-term debt to long-term debt plus equity. The Trust may
occasionally need to increase these levels to facilitate
acquisition or expansionary activities. As at June 30, 2008 and
December 31, 2007 these ratios were as follows:
June 30, 2008 December 31, 2007
----------------------------------------------------------------------------
Long-term debt 104,948 119,826
Unitholders' equity 1,347,022 1,316,673
----------------------------------------------------------------------------
Total capitalization 1,451,970 1,436,499
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Long-term debt to long-term
debt plus equity ratio 0.07 0.08
----------------------------------------------------------------------------
----------------------------------------------------------------------------
On December 15, 2006 the Minister of Finance (Canada) issued
guidelines establishing "normal growth" limitations designed to
limit the ability of a trust to issue equity (including convertible
debentures or other equity substitutes) that exceeds certain
specified percentages of the market capitalization of a trust on
October 31, 2006. The normal growth limitation is cumulative in
nature to the extent not taken and for the year ended December 31,
2008 the Trust's normal growth limitation is approximately $2.4
billion. Precision will be a specified investment flow-through
("SIFT") trust, subject to the SIFT tax rules, on the earlier of
January 1, 2011 or the first day after it exceeds the normal growth
guidelines.
The Trust is bound by a debt covenant requiring the Trust to
maintain a ratio of total liabilities to total equity of 1:1. The
Trust monitors this ratio to ensure compliance.
There were no changes in the Trust's approach to capital
management during the quarter.
8. Contingent Liability
The business and operations of the Trust are complex and the
Trust has executed a number of significant financings, business
combinations, acquisitions and dispositions over the course of its
history. The computation of income taxes payable as a result of
these transactions involves many complex factors as well as the
Trust's interpretation of relevant tax legislation and regulations.
The Trust's management believes that the provision for income tax
is adequate and in accordance with generally accepted accounting
principles and applicable legislation and regulations. However,
there are a number of tax filing positions that can still be the
subject of review by taxation authorities who may successfully
challenge the Trust's interpretation of the applicable tax
legislation and regulations, with the result that additional tax
liabilities could be owed by the Trust and the amount owed, with
estimated interest, could be up to $380 million, before penalties,
including the $58 million recorded as a long-term receivable (see
note 5).
9. Commitments
Precision entered into a contract with a drilling rig
manufacturer to partially construct five Super Triple drilling rigs
for an estimated cost of US $75 million. The first drilling rig is
scheduled to be delivered in January 2009 with the remaining four
at various times later in the first half of 2009.
10. Segmented Information
The Trust operates primarily in Canada, in two segments;
Contract Drilling Services and Completion and Production Services.
Contract Drilling Services includes drilling rigs, procurement and
distribution of oilfield supplies, camp and catering services and
manufacture, sale, and repair of drilling equipment. Completion and
Production Services includes service rigs, snubbing units,
wastewater treatment units, and oilfield equipment rental.
Three months Contract Completion
ended June 30, Drilling & Production Corporate Inter-segment
2008 Services Services and Other Eliminations Total
----------------------------------------------------------------------------
Revenue $ 93,006 $ 47,559 $ - $ (2,051) $ 138,514
Operating
earnings 23,695 8,808 (10,456) - 22,047
Depreciation
and
amortization 8,442 4,044 908 - 13,394
Total assets 1,252,737 432,896 70,669 - 1,756,302
Goodwill 172,440 108,309 - - 280,749
Capital
expenditures 25,209 5,409 726 - 31,344
----------------------------------------------------------------------------
Three months Contract Completion
ended June 30, Drilling & Production Corporate Inter-segment
2007 Services Services and Other Eliminations Total
----------------------------------------------------------------------------
Revenue $ 78,829 $ 44,978 $ - $ (1,802) $ 122,005
Operating
earnings 24,013 8,954 (5,893) - 27,074
Depreciation
and
amortization 6,112 4,861 1,053 - 12,026
Total assets 1,150,676 447,310 31,956 - 1,629,942
Goodwill 172,440 108,309 - - 280,749
Capital
expenditures 45,670 7,001 169 - 52,840
----------------------------------------------------------------------------
Six months Contract Completion
ended June 30, Drilling & Production Corporate Inter-segment
2008 Services Services and Other Eliminations Total
----------------------------------------------------------------------------
Revenue $ 335,371 $ 152,279 $ - $ (6,447) $ 481,203
Operating
earnings 124,576 42,673 (20,964) - 146,285
Depreciation
and
amortization 23,610 12,320 1,831 - 37,761
Total assets 1,252,737 432,896 70,669 - 1,756,302
Goodwill 172,440 108,309 - - 280,749
Capital
expenditures 44,812 9,181 819 - 54,812
----------------------------------------------------------------------------
Six months Contract Completion
ended June 30, Drilling & Production Corporate Inter-segment
2007 Services Services and Other Eliminations Total
----------------------------------------------------------------------------
Revenue $ 359,724 $ 178,184 $ - $ (5,361) $ 532,547
Operating
earnings 156,748 60,769 (12,264) - 205,253
Depreciation
and
amortization 18,722 14,844 1,944 - 35,510
Total assets 1,150,676 447,310 31,956 - 1,629,942
Goodwill 172,440 108,309 - - 280,749
Capital
expenditures 95,566 12,445 531 - 108,542
----------------------------------------------------------------------------
11. Subsequent Event
On July 18, 2008 Precision Drilling Corporation, a subsidiary of
the Trust, entered into an agreement to acquire six service rigs
from Rick's Well Servicing Ltd., a private company, for
approximately $16 million.
SECOND QUARTER 2008 EARNINGS CONFERENCE CALL AND WEBCAST
Precision Drilling Trust ("Precision") has scheduled a
conference call and webcast to begin promptly at 12:00 Noon MT
(2:00 p.m. ET) on Wednesday, July 23, 2008.
The conference call dial in numbers are 1-866-223-7781 or
416-641-6140
A live webcast of the conference call will be accessible on
Precision's website at www.precisiondrilling.com by selecting
"Investor Centre", then "Webcasts". Shortly after the live webcast,
an archived version will be available for approximately 30
days.
An archived recording of the conference call will be available
approximately one hour after the completion of the call until July
30, 2008 by dialing 1-800-408-3053 or 416-695-5800, passcode
3265076#.
Precision is a leading provider of safe, high performance energy
services to the North American oil and gas industry. Precision
provides customers with access to an extensive fleet of contract
drilling rigs, service rigs, camps, snubbing units, wastewater
treatment units and rental equipment backed by a comprehensive mix
of technical support services and skilled, experienced
personnel.
Precision Drilling Trust is listed on the Toronto Stock Exchange
under the trading symbol "PD.UN" and on the New York Stock Exchange
under the trading symbol "PDS".
Contacts: Doug Strong, Chief Financial Officer of Precision
Drilling Corporation, Administrator of the Trust (403) 716-4500
(403) 264-0251 (FAX) Precision Drilling Trust 4200, 150 - 6th
Avenue S.W. Calgary, Alberta T2P 3Y7 Website:
www.precisiondrilling.com
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