(Canadian dollars)
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 $82 million or $0.65 per diluted unit for the
quarter ended September 30, 2008, an increase of $10 million or 13%
compared to $73 million or $0.58 per diluted unit in the third
quarter of 2007. The increase marked the first time since the
fourth quarter of 2006 where net earnings were greater than the
comparable quarter for the prior year.
Third quarter net earnings increased over prior year due to
organic rig expansion in the United States and a rebound in
Canadian rig activity that led to margin growth in Precision's
contract drilling operations. During the quarter, the fleet was 29%
more active than the prior year comparative quarter as deployments
from Canada to active basins in the United States and higher
activity in Canada generated an increase of 2,440 operating
days.
"The noteworthy year over year safety, earnings and revenue
improvement reflects the exceptional execution and performance by
the people of Precision. Our U.S. expansion, pricing discipline in
Canada and activity improvements across all business units
contributed to this strong performance. Currently we are operating
28 rigs in the U.S., up from 12 at the beginning of the year, all
under term contracts. Our Canadian drilling fleet is currently at
220 rigs with operating days up 14% from last year. We will be
adding an additional 19 new builds to the Precision fleet, 17 of
which are under term customer contracts. The recent acquisition of
six well service rigs in Manitoba brings our well service fleet to
229 rigs," said Kevin Neveu, Precision's Chief Executive
Officer.
"Of specific note during the third quarter was the increase in
average drilling days per well and the exceptionally high level of
directional and horizontal wells. Approximately 70% of our rigs in
Canada and over 80% in the U.S. were drilling
directional/horizontal wells. These drilling trends coupled with
Precision's excellent safety record and strong margin performance
clearly demonstrate the success and customer recognition of our
high performance high value strategy.
"While we are cautious regarding the near term impact of the
global banking crisis and ensuing economic uncertainty, we remain
confident that organizational changes and cost reduction measures
we introduced late last year position us well for this
volatility.
"We are especially pleased to be a key provider of high
performance high value services to the rapidly emerging North
American shale gas story. We believe our intention to acquire Grey
Wolf will accelerate this strategy over the long-term, bringing
growth and diversification to Precision unitholders."
For the nine months ended September 30, 2008, net earnings were
$210 million or $1.67 per diluted unit, a decrease of $46 million
or 18% compared to $256 million or $2.04 in the equivalent period
of 2007. The decrease in net earnings was due to lower first
quarter industry demand and pricing for both operating segments in
Canada partially mitigated by United States expansion, the
emergence of international operations and stronger Canadian
activity in the third quarter. During the first nine months,
geographic diversification to United States natural gas resource
plays accelerated with 16 rigs deployed from Canada expanding the
fleet from 12 to 28. Precision's U.S. drilling rigs operated at
near 100% utilization and fleet growth led to a three and a half
fold operating day increase over the first nine months of 2007.
SELECT FINANCIAL AND OPERATING INFORMATION
(Stated in thousands Three months ended Nine months ended
of Canadian dollars, September 30, September 30,
except per diluted unit % %
amounts) 2008 2007 Change 2008 2007 Change
----------------------------------------------------------------------------
Revenue $ 285,639 $227,928 25.3 $ 766,842 $760,475 0.8
Operating earnings(1) 98,648 73,402 34.4 244,933 278,655 (12.1)
Earnings from
continuing operations 82,349 69,702 18.1 210,354 253,491 (17.0)
Net earnings 82,349 72,658 13.3 210,354 256,447 (18.0)
Cash provided by
operations 3,241 20,270 (84.0) 261,006 405,641 (35.7)
Net capital spending 73,578 39,653 85.6 124,944 144,937 (13.8)
Distributions declared 49,046 49,046 - 147,137 177,319 (17.0)
Per unit information:
Earnings from
continuing operations 0.65 0.55 18.2 1.67 2.02 (17.3)
Net earnings 0.65 0.58 12.1 1.67 2.04 (18.1)
Distributions declared $ 0.39 $ 0.39 - $ 1.17 $ 1.41 (17.0)
----------------------------------------------------------------------------
Contract Drilling Rig
Fleet 249 250 (0.4) 249 250 (0.4)
Operating days (spud
to release):
Canada 9,008 7,903 14.0 22,578 22,863 (1.2)
United States 1,868 533 250.5 4,111 1,032 298.4
International - - - 223 - n/m
Completion and
Production
Service Rig Fleet 229 239 (4.2) 229 239 (4.2)
Operating hours in
Canada 87,995 84,490 4.1 255,621 269,581 (5.2)
----------------------------------------------------------------------------
(1) Non-GAAP measure; see "NON-GAAP MEASURES AND RECONCILIATIONS".
n/m - calculation not meaningful
FINANCIAL POSITION AND RATIOS
(Stated in thousands of
Canadian dollars, except September 30, December 31, September 30,
ratios) 2008 2007 2007
----------------------------------------------------------------------------
Working capital $ 192,670 $ 140,374 $ 149,516
Working capital ratio 2.3 2.1 2.5
Long-term debt $ 231,784 $ 119,826 $ 123,773
Total assets $ 1,974,135 $ 1,763,477 $ 1,729,046
Long-term debt to
long-term debt plus
equity ratio 0.14 0.08 0.09
----------------------------------------------------------------------------
OVERVIEW
Precision's high performance high value customer service
offering advanced since the second quarter of 2008 through North
American and international developments that included the
following:
- On August 25, 2008 Precision announced that it had entered
into a definitive merger agreement with Grey Wolf, Inc. ("Grey
Wolf") pursuant to which, if approved by Grey Wolf shareholders,
Precision will acquire Grey Wolf. Grey Wolf is the fourth largest
onshore drilling contractor in the United States with a fleet of
122 drilling rigs and on a combined basis, Precision will be one of
the largest land drillers in North America with a combined drilling
rig fleet of 371 rigs. The combined Precision and Grey Wolf will
have land drilling operations in most conventional and
unconventional oil and gas basins in the lower 48 United States and
in Canada with an emerging presence in Mexico. The transaction will
enhance Precision's leadership position in the North American oil
field services sector and represents an important milestone in
Precision's long-term strategy for diversification beyond Canada.
The transaction will position Precision as the lead shale gas
driller in North America.
Under the terms of the agreement, Grey Wolf shareholders will
receive US$5.00 in cash and 0.1883 Precision trust units ("Units")
for each Grey Wolf common share, for aggregate consideration of
about US$1.12 billion in cash and about 42 million Units. Grey Wolf
shareholders will be able to elect to receive cash or Units subject
to proration.
On August 24, 2008 Precision entered into an arrangement to fund
the transaction and ongoing operating requirements through a US$1.6
billion debt structure as outlined in a commitment letter with four
lenders, the Royal Bank, the Toronto Dominion Bank, Deutsche Bank
and HSBC Bank.
The acquisition process for the transaction has progressed on
schedule with successful completion of key steps that include early
termination of the Hart-Scott-Rodino waiting period, determination
by the Committee on Foreign Investment in the United States
("CFIUS") that there are no unresolved national security concerns
and the receipt of prospective credit ratings from Moody's and
Standard & Poor's.
- On July 31, 2008 Precision closed the acquisition of 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 these oil regions.
Subsequent to closing, Precision moved an additional three service
rigs into these regions.
- August 31, 2008 marked the expiry of certain non-compete
obligations from a 2005 business divestiture that restricted
Precision's growth outside of North America and in certain business
lines. Through its international subsidiary Peritus International
Oilfield Services Ltd., Precision can now fully pursue global
contract drilling opportunities.
- Precision's organic growth in the United States accelerated
with nine rig moves from Canada during the third quarter
representing fleet expansion of 47%.
- The 2008 Super Series drilling rig build program is comprised
of ten Super Single rigs and nine Super Triple rigs, all are
committed to customers. Seventeen of these rigs are under signed
term customer contracts with letters of intent on the remaining two
rigs. Twelve rigs are for deployment to the United States, six for
Canada and one has been made available to a customer for
international deployment.
Precision's revenue in the third quarter of 2008 was 25% higher
than the prior year period at $286 million, increasing 33% in the
Contract Drilling Services segment and 7% in the Completion and
Production Services segment. Revenue in Precision's United States
operation grew by one half over the previous quarter and by over
two times the same quarter in the prior year. In Canada, Precision
realized a 14% increase in operating activity in the Contract
Drilling Services segment while service rig activity in the
Completion and Production Services segment increased 4%.
Precision's operating earnings in the third quarter of 2008 were
34% higher than the prior year period at $99 million, increasing
two percentage points to 35% of revenue. The improvement was
primarily attributable to strong margins in the United States
contract drilling division. Precision's operating segments in
Canada performed well and returned to margins comparable to a year
ago as internal manufacturing, maintenance and supply-chain
management contained operating costs at levels relatively in line
with prior year periods and customer pricing stabilized.
In the Western Canada Sedimentary Basin ("WCSB"), Precision
experienced higher customer demand over the comparative year
quarter due to the improvement in underlying cash flow fundamentals
for the oil and gas industry. With significant improvement in
natural gas pricing through the first nine months of 2008,
producers began to accelerate drilling plans in the second quarter
but the impact of spring break-up and wet weather delayed any
significant uplift in activity until the third quarter which was up
sharply over the prior year even though shallow gas drilling in
Alberta remained at lower levels. Customer demand in Canada
improved and Precision's operating days increased by 14% in the
quarter compared to the third quarter of 2007. Industry rig supply
fundamentals in Canada have also improved through a net reduction
in capacity. Precision reduced its Canadian drilling rig fleet by a
net 22 rigs or 9% as a result of deployments to the United States
and fourth quarter 2007 retirements partially offset by additions
to the fleet from the 2007 rig-build program.
For the third quarter of 2008, in both the Contract Drilling
Services segment and the service rig division of Precision's
Completion and Production Services segment, average daily or hourly
rig rates were essentially flat with prior year. With strengthened
fundamentals, higher demand in certain oil and natural gas markets,
and a scarce labour supply spot market pricing has firmed.
Precision continued to benefit from term contracts and strong
customer relationships that place a premium on safe, high
performance oilfield services.
Average customer pricing for Precision's operations in the
United States held strong in the quarter as all drilling rigs are
under term contracts. An increased active industry rig count and a
trend toward directional and horizontal drilling programs continued
to provide opportunities for Precision's versatile high performing
drilling rigs.
Precision continued on schedule with its 2008 capital
expenditure program estimated at $290 million with $75 million for
upgrade capital and $215 million for expansionary initiatives. Most
of the expansion capital spending is for the 2008 rig-build program
and Precision estimates that an additional $130 million will be
incurred during the first three quarters of 2009 to complete this
program.
Precision continued to invest in its high performance high value
strategy as energy commodity prices have reflected an underlying
tight supply of natural gas and oil. The third quarter of 2008
continued to support this rationale, as AECO natural gas spot
prices averaged $7.80 per MMBtu in the third quarter of 2008, an
increase of 50% over the third quarter 2007 average of $5.20 per
MMBtu. In the United States, Henry Hub natural gas spot prices
averaged US$9.06 per MMBtu in the third quarter of 2008, an
increase of 47% over the third quarter 2007 average of US$6.16 per
MMBtu. West Texas Intermediate crude oil averaged US$118.68 per
barrel during the quarter compared to US$75.31 per barrel in the
same period in 2007. As always, significant economic and weather
factors influence commodity prices and the one-year forward price
for North American natural gas improved and traded within a wide
range of about $7.50 to $13.00 on Canadian and U.S. exchanges in
the third quarter of 2008, compared to a range of about $6.50 to
$8.00 in the same quarter of 2007. On October 21, 2008 AECO spot
natural gas closed at $7.17 per MMBtu and West Texas Intermediate
spot closed at US$70.89 per barrel.
OUTLOOK
Looking ahead to the fourth quarter of 2008 and into 2009 the
unfolding global financial crisis has created a high degree of
uncertainty. While mindful of recent commodity price volatility and
its impact on industry spending, Precision's North American
oilfield service businesses carry positive momentum established
during the first half of 2008 through higher energy prices and an
increasing activity trend. The benefits of these factors were
demonstrated in third quarter performance and persist early into
the fourth quarter.
Rig bookings by customers for the 2008/2009 winter drilling
season in Canada remain ahead of year ago levels and Precision has
increased its personnel recruitment efforts and training for the
expected seasonal increase in drilling during the first quarter of
2009. In alignment with current customer demand and the impact of
last year's freeze on field labour rates, substantial hourly wage
rate increases were made to rig crews by the industry to start the
fourth quarter in Canada. These increases were made to ensure
competitiveness and to address an industry-wide labour shortage.
Precision expects to recoup these costs through customer pricing
adjustments effective October 1, 2008.
Precision's 2008 rig-build program is on schedule to deliver 19
drillings rigs pursuant to term customer contracts over the next
nine months with up to four in the fourth quarter, six in the first
quarter of 2009, eight in the second and one rig in the third
quarter. These Super Series rigs will further expand Precision's
operations in the United States land drilling market and reinforce
high performance high value assets in Canada.
The autumn season in North America usually creates uncertainty
in natural gas markets as underground storage fills and pricing
softens. This year, fundamentals are reasonably firm with storage
marginally less than a year ago and commodity prices in the $6.00
to $8.00 range, comparable to prior year levels. The North American
land rig count drilling for natural gas has more than doubled in
the past seven years and production increases are positive over the
long term for the service sector given steep first year production
decline rates on many of these new wells.
Supply from producing U.S. land wells has been bolstered by
recent successful shale and tight gas drilling. Year-over-year
production response from shale gas plays such as the Barnett, Deep
Bossier and emerging plays such as the Marcellus and Canadian
shales, Montney and Horn River, give promise that continental
natural gas will continue to be part of the long-term energy
solution for North America.
The significant rise in production from these wells has been a
product of long section horizontal drilling combined with
multi-stage large fracturing processes. These wells are service
intensive and as a result expensive to drill, but strong initial
production rates facilitate early payouts for producers. From a
drillers perspective these wells also have a steep rate of
production decline in the first year of 50-80%, necessitating
additional drilling to replace rapidly depleting wells. The
complexity of these wells dictate the use of high performance rigs
with large capacity mud pumps, advanced drilling control systems
and high mobility capabilities. These rigs are often referred to as
"fit for purpose" as a significant percentage of the existing
industry rig fleet does not adequately address the need.
Precision's Super Series rigs and a large number of its
"traditional" rigs have been upgraded to these high performance
requirements.
Looking ahead to 2009, industry fundamentals for Canada are
supported by the recent strengthening of the U.S. dollar versus the
Canadian dollar, a reduced industry drilling rig count and natural
gas pricing in October 2008 that is up to 10% higher than a year
ago. Precision will continue to risk manage its business growth
through strong margin term contracts and existing operations with a
highly variable operating cost structure to match equipment
utilization.
The current state of the global banking system is an overriding
concern as access to capital through the debt and equity markets is
challenging. The liquidity and capital contraction is expected to
cause many producers of oil and natural gas to demonstrate renewed
focus on balance sheet discipline and to work within their existing
financing and cash flow means. Subject to the coming winter heating
season and demand levels for natural gas in North America, the
current economic slowdown could moderate energy consumption growth
and may result in lower producer spending for marginal oil and
natural gas programs.
For Precision, existing debt facilities provide access to about
$500 million of undrawn debt capacity and the tenure on the
facility was renewed for a new three year term in the second
quarter of 2008. In conjunction with the proposed acquisition of
Grey Wolf, Precision is planning to replace existing facilities
with a new debt structure of US$1.6 billion pursuant to firm
funding arrangements with four reputable lenders.
Precision's resolve to acquire Grey Wolf remains rooted in
strategy and will position the combined entity as one of the
largest North American drillers with an asset base that is
exceptionally well positioned in most of North America's promising
resource plays, especially shale gas. The acquisition will bring
significant benefit to Precision through immediate access to
customers, employees and a very well maintained fleet of deep
drilling rigs that round out Precision's predominantly shallow to
medium depth rated fleet. Combined, the companies will have
opportunity to leverage available rig capacity for international
deployment, to access a large and loyal list of North American
customers and to gain operational benefits by embracing optimal
internal safety, supply chain, rig manufacturing and upgrade, new
rig technology and human resource systems.
Precision's strategic focus is on global contract drilling
through United States expansion, international diversification
opportunities and complementary product line expansion. Precision's
strategy is centered 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 differentiation between
underperforming rigs and high performing, highly mobile,
well-designed rigs with exceptional crews continues to emerge.
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.
(Stated in Three months ended Nine months ended
thousands September 30, September 30,
of Canadian % %
dollars) 2008 2007 Change 2008 2007 Change
----------------------------------------------------------------------------
Revenue:
Contract Drilling
Services $212,567 $160,068 32.8 $547,938 $519,792 5.4
Completion and
Production Services 76,701 71,570 7.2 228,980 249,754 (8.3)
Inter-segment
eliminations (3,629) (3,710) 2.2 (10,076) (9,071) (11.1)
----------------------------------------------------------------------------
$285,639 $227,928 25.3 $766,842 $760,475 0.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating earnings:(1)
Contract Drilling
Services $81,486 $ 58,877 38.4 $206,062 $215,625 (4.4)
Completion and
Production Services 21,608 22,538 (4.1) 64,281 83,307 (22.8)
Corporate and other (4,446) (8,013) 44.5 (25,410) (20,277) (25.3)
----------------------------------------------------------------------------
$ 98,648 $ 73,402 34.4 $244,933 $278,655 (12.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Non-GAAP measure; see "NON-GAAP MEASURES AND RECONCILIATIONS".
Financial information for the three months ended September 30,
2008:
- Precision's financial position remained strong with working
capital of $193 million, long-term debt of $232 million and a
long-term debt to long-term debt plus equity ratio of 0.14.
- Revenue was $286 million, an increase of $58 million or 25%
from the prior year quarter due primarily to growth in the United
States and higher equipment utilization in Canada.
- General and administrative costs were $12 million, an amount
in-line with the prior year comparative.
- Operating earnings were $99 million, an increase of $25
million or 34% from the third quarter in 2007 or 35% of revenue,
compared to 32% in 2007.
- Capital expenditures for the purchase of property, plant and
equipment were $75 million, an increase of $35 million over the
same period in 2007. Capital spending for the third quarter of 2008
included $58 million on expansionary capital initiatives and $17
million on the upgrade of existing assets.
Financial information for the nine months ended September 30,
2008:
- Revenue was $767 million, an increase of $6 million or 1% from
the prior year period due primarily to growth in United States
drilling operations partially offset by lower rig utilization and
customer pricing in Precision's Canadian operations during the
first quarter of 2008.
- General and administrative costs were $49 million, an increase
of $11 million from the prior year due primarily to prior year
expense recoveries on the reversal of performance based long-term
incentive compensation plan obligations.
- Operating earnings were $245 million, a decrease of $34
million or 12% from the first nine months of 2007 or 32% of
revenue, compared to 37% in 2007. Operating margins were impacted
by revenue trends noted above and operating costs that were
contained at prior year levels in the Canadian Contract Drilling
Services segment and marginally higher in the Completion and
Production Services segment due to fuel and repair cost
escalations.
- Capital expenditures for the purchase of property, plant and
equipment were $130 million, a decrease of $19 million over the
same period in 2007. Capital spending for the first nine months of
2008 included $101 million on expansionary capital initiatives and
$29 million on the upgrade of existing assets.
- During March 2008 Precision paid $55 million to a provincial
taxing authority for 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 contingent tax liability note disclosed in the
December 31, 2007 financial statements. Precision is in the process
of challenging these reassessments.
SEGMENT REVIEW OF CONTRACT DRILLING SERVICES
(Stated in thousands Three months ended Nine months ended
of Canadian dollars, September 30, September 30,
except where % %
indicated) 2008 2007 Change 2008 2007 Change
----------------------------------------------------------------------------
Revenue $ 212,567 $160,068 32.8 $ 547,938 $519,792 5.4
Expenses:
Operating 112,121 85,951 30.4 288,559 260,062 11.0
General and
administrative 5,850 3,805 53.7 17,310 13,631 27.0
Depreciation 15,207 10,490 45.0 38,817 29,212 32.9
Foreign exchange (2,097) 945 n/m (2,810) 1,262 n/m
----------------------------------------------------------------------------
Operating earnings(1) $ 81,486 $ 58,877 38.4 $ 206,062 $215,625 (4.4)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating earnings as
a percentage of
revenue 38.3% 36.8% 37.6% 41.5%
----------------------------------------------------------------------------
Drilling rig revenue
per operating
day in Canada $ 17,062 $17,112 (0.3) $ 17,883 $ 19,276 (7.2)
----------------------------------------------------------------------------
(1) Non-GAAP measure; see "NON-GAAP MEASURES AND RECONCILIATIONS".
n/m - calculation not meaningful
Canadian drilling statistics for the three month periods ended September 30:
2008 2007
----------------------------------------------------------------------------
Precision Industry(1) Precision Industry(1)
----------------------------------------------------------------------------
Number of drilling
rigs (end of period) 220 879 242 887
Drilling rig operating
days (spud to release) 9,008 38,898 7,903 31,371
Drilling rig operating
day utilization 44% 48% 36% 39%
Number of wells drilled 1,444 5,270 1,455 5,488
Average days per well 6.2 7.4 5.4 5.7
Number of metres
drilled (000s) 1,786 6,826 1,592 6,293
Average metres per well 1,237 1,295 1,094 1,147
Average metres per day 198 175 201 201
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Canadian drilling statistics for the nine month periods ended September 30:
2008 2007
----------------------------------------------------------------------------
Precision Industry(1) Precision Industry(1)
----------------------------------------------------------------------------
Number of drilling
rigs (end of period) 220 879 242 887
Drilling rig operating
days (spud to release) 22,578 99,980 22,863 90,120
Drilling rig operating
day utilization 36% 41% 35% 38%
Number of wells drilled 3,307 11,964 3,594 13,126
Average days per well 6.8 8.4 6.4 6.9
Number of metres
drilled (000s) 4,334 16,060 4,305 15,973
Average metres per well 1,310 1,342 1,198 1,217
Average metres per day 192 161 188 177
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 third
quarter increased by 33% to $213 million while operating earnings
increased by 38% to $81 million compared to the same period in
2007. The increase is the combined result of revenue growth in
Precision's United States operations and increased activity in
Canadian operations.
For the third quarter average drilling operating day rates for
Precision in Canada remained almost unchanged from the same quarter
of 2007 at $17,062. After removing the effects of winterization
revenue, average drilling rates for Precision have stabilized
through 2008 and remain relatively unchanged from the first
quarter. During the quarter in Canada approximately 37% of
operating days came from rigs under term or payout contracts
compared to 25% in 2007. In the United States contract drilling
operating rates continue to be strong as all drilling rigs are
working under term or payout contracts.
Drilling rig operating days in Canada, spud to rig release,
during the third quarter of 2008 were 9,008 an increase of 14%
compared to 7,903 in 2007. Drilling rig operating days for
Precision in the United States were 1,868 an increase of 250% over
the third quarter of 2007 as the average number of rigs operating
during the third quarter of 2008 was 25 compared to seven in the
prior year quarter. Precision's Latin America based drilling rig
was racked and did not operate during the third quarter as work
under that contract had terminated.
Precision's geographic diversification outside Canada continues
as nine drilling rigs were moved to the United States from Canada
during the quarter, all under term contracts. The total number of
Precision drilling rigs operating in the United States at the end
of the quarter was 28. 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 an activity
increase of 77% over the prior year third quarter with a greater
number of days realized from larger base camp activity and
increased industry activity.
Operating expenses in the segment were 53% of revenue for the
quarter compared to 54% for the prior year quarter. On a per day
basis, operating costs for the Contract Drilling division in Canada
were in-line with the prior year.
Depreciation in the Contract Drilling Services segment in the
third quarter of 2008 was 45% higher than the prior year period due
to a 29% increase in activity and an increased capital asset
base.
SEGMENT REVIEW OF COMPLETION AND PRODUCTION SERVICES
Three months ended Nine months ended
(Stated in thousands September 30, September 30,
of Canadian dollars, % %
except where indicated) 2008 2007 Change 2008 2007 Change
----------------------------------------------------------------------------
Revenue $ 76,701 $ 71,570 7.2 $ 228,980 $249,754 (8.3)
Expenses:
Operating 45,831 40,956 11.9 137,825 138,268 (0.3)
General and
administrative 2,643 1,940 36.2 7,935 7,193 10.3
Depreciation 6,623 6,129 8.1 18,943 20,973 (9.7)
Foreign exchange (4) 7 n/m (4) 13 n/m
----------------------------------------------------------------------------
Operating earnings(1) $ 21,608 $ 22,538 (4.1) $ 64,281 $ 83,307 (22.8)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating earnings
as a percentage of
revenue 28.2% 31.5% 28.1% 33.4%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
Well servicing % %
statistics: 2008 2007 Change 2008 2007 Change
----------------------------------------------------------------------------
Number of
service rigs
(end of period) 229 239 (4.2) 229 239 (4.2)
Service rig operating hours 87,995 84,490 4.1 255,621 269,581 (5.2)
Service rig operating hour
utilization 42% 38% 41% 42%
Service rig revenue per
operating hour $ 675 $ 679 (0.6) $ 699 $ 742 (5.8)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Non-GAAP measure; see "NON-GAAP MEASURES AND RECONCILIATIONS".
n/m - calculation not meaningful
In the Completion and Production Services segment, revenue for
the third quarter increased 7% from 2007 to $77 million while
operating earnings was down 4% to $22 million. The increase in
revenue is attributed to the acquisition of six service rigs during
the quarter and an increase in industry activity from strong
commodity prices. Operating rates per hour were in-line with the
comparative quarter from the prior year.
Service rig activity increased 4% from the prior year period,
with the fleet generating 87,995 operating hours in the third
quarter of 2008 compared with 84,490 hours in 2007 for utilization
of 42% and 38%, respectively. The increase was a result of the
acquisition of six service rigs, 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 32% of service rig operating hours in the
third quarter compared to 30% in the same quarter in 2007.
Operating expenses in the segment were 60% of revenue for the
quarter compared to 57% for the prior year quarter. On a per hour
basis, operating costs for the service rig division were 4% higher
due to fuel and other direct costs.
Depreciation in the Completion and Production Services segment
in the third quarter of 2008 was 8% higher than the prior year
period due to a 4% increase in activity and an increased capital
asset base.
SEGMENT REVIEW OF CORPORATE AND OTHER
Corporate and other expenses decreased by 45% to $4 million in
the third quarter of 2008 compared to $8 million in the same period
of 2007. The decrease was primarily due to the one-time costs,
associated with hiring the new Chief Executive Officer, incurred in
the third quarter of 2007 offset by the difference in employee
incentive compensation expense and the revaluation of unit based
long-term compensation expense. 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 third quarter of 2008
was in-line with the prior year.
The Trust's effective tax rate on earnings before income taxes
for the third quarter of 2008 was 15% compared to 3%, before rate
reductions, for the same period in 2007. The effective tax rate for
the nine month periods ended September 30, 2008 and 2007 was 12%
and 8% respectively. The increase in the effective tax rate for the
quarter and the nine month period is a result of increased earnings
in Precision's United States operations. 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 with
long-term debt exceeding working capital by only $39 million as at
September 30, 2008 compared to working capital exceeding long-term
debt by $21 million as at December 31, 2007.
During the first nine months of 2008 Precision generated cash
from continuing operations of $261 million. The cash was used to
purchase property, plant and equipment net of disposal proceeds and
related non-cash working capital of $114 million, complete a
business acquisition for $16 million, make cash distributions to
unitholders of $167 million, repay bank indebtedness of $14 million
and pay assessed income taxes and interest of $55 million and when
combined with a net draw on long-term debt facilities of $112
million resulted in a cash balance of $7 million.
The first nine 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 $147
million or $1.17 per diluted unit.
- Long-term debt increased by $112 million from December 31,
2007 to $232 million for a long-term debt to long-term debt plus
equity ratio of 0.14.
- Working capital increased $52 million to $193 million as
Precision realized higher activity leading into September 30, 2008
compared to the 2007 year end.
On August 24, 2008 Precision entered into an arrangement to fund
the acquisition of Grey Wolf and ongoing operating requirements
through a US$1.6 billion debt structure as outlined in a commitment
letter with four lenders, the Royal Bank, the Toronto Dominion
Bank, Deutsche Bank and HSBC Bank. The new debt structure will
replace existing debt facilities.
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. With enacted federal tax rate
reductions the combined SIFT tax will be 29.5% in 2008, 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 December 31 March 31 June 30 September 30
----------------------------------------------------------------------------
Cash provided by
continuing operations $ 78,474 $ 57,307 $ 200,458 $ 3,241
Deduct:
Purchase of property, plant
and equipment for
upgrade capital (9,241) (2,814) (8,864) (17,270)
Purchase of property plant
and equipment for
expansion initiatives (28,264) (20,654) (22,480) (58,187)
Add:
Proceeds on the sale of
property, plant and
equipment 1,236 1,303 2,143 1,879
----------------------------------------------------------------------------
Standardized distributable
cash(1) 42,205 35,142 171,257 (70,337)
Unfunded long-term incentive
plan compensation (1,817) 469 (2,166) 93
----------------------------------------------------------------------------
Distributable cash from
continuing operations(1) $ 40,388 $ 35,611 $ 169,091 $ (70,244)
----------------------------------------------------------------------------
Cash distributions declared $ 69,166 $ 49,046 $ 49,045 $ 49,046
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per diluted unit information:
Cash distributions declared $ 0.55 $ 0.39 $ 0.39 $ 0.39
Standardized distributable
cash(1) $ 0.33 $ 0.28 $ 1.36 $ (0.56)
Distributable cash from
continuing operations(1) $ 0.32 $ 0.28 $ 1.34 $ (0.56)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2006 2007
----------------------------------------------------------------------------
Quarters ended December 31 March 31 June 30 September 30
----------------------------------------------------------------------------
Cash provided by continuing
operations $154,233 $156,298 $ 229,073 $ 20,270
Deduct:
Purchase of property, plant
and equipment for
upgrade capital (26,122) (17,583) (8,602) (10,544)
Purchase of property plant
and equipment for
expansion initiatives (46,211) (38,119) (44,238) (30,382)
Add:
Proceeds on the sale of
property, plant and
equipment 3,742 1,128 2,130 1,273
----------------------------------------------------------------------------
Standardized distributable
cash(1) 85,642 101,724 178,363 (19,383)
Unfunded long-term incentive
plan compensation (10,192) 2,461 4,167 3,685
----------------------------------------------------------------------------
Distributable cash from
continuing operations(1) $ 75,450 $104,185 $ 182,530 $ (15,698)
----------------------------------------------------------------------------
Cash distributions declared $116,912 $ 71,682 $ 56,591 $ 49,046
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per diluted unit information:
Cash distributions declared $ 0.93 $ 0.57 $ 0.45 $ 0.39
Standardized distributable
cash(1) $ 0.68 $ 0.81 $ 1.42 $ (0.15)
Distributable cash from
continuing operations(1) $ 0.60 $ 0.83 $ 1.45 $ (0.12)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 September 30, 2008 cash provided by
operations was $3 million, a decrease of $17 million from the 2007
third quarter. The decrease was due primarily to an increase in the
non-cash working capital balance of $48 million offset by an
increase in operating earnings in the current quarter compared to
the prior year.
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.
Nine months ended Nine months ended Year ended
(stated in thousands September 30, September 30, December 31,
of Canadian dollars) 2008 2007 2007
----------------------------------------------------------------------------
Cash provided by
continuing operations (A) $ 261,006 $ 405,641 $ 484,115
----------------------------------------------------------------------------
Net earnings (B) $ 210,354 $ 256,447 $ 345,776
----------------------------------------------------------------------------
Distributions declared � $ 147,137 $ 177,319 $ 276,667
----------------------------------------------------------------------------
Excess of cash provided by
continuing operations over
distributions declared (A-C) $ 113,869 $ 228,322 $ 207,448
----------------------------------------------------------------------------
Excess of net earnings from
operating activities over
distributions declared (B-C) $ 63,217 $ 79,128 $ 69,109
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Trust has maintained a strong financial position and has
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 of 2008. 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 December 31 March 31 June 30 September 30
----------------------------------------------------------------------------
Revenue $ 248,726 $ 342,689 $ 138,514 $ 285,639
Operating earnings(1) 77,696 124,238 22,047 98,648
Earnings from
continuing operations 89,329 106,266 21,739 82,349
Per diluted unit 0.71 0.84 0.17 0.65
Net earnings 89,329 106,266 21,739 82,349
Per diluted unit 0.71 0.84 0.17 0.65
Cash provided by
continuing operations 78,474 57,307 200,458 3,241
Distributions declared $ 99,348 $ 49,046 $ 49,045 $ 49,046
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2006 2007
----------------------------------------------------------------------------
Quarters ended December 31 March 31 June 30 September 30
----------------------------------------------------------------------------
Revenue 328,049 $ 410,542 $ 122,005 $ 227,928
Operating earnings(1) 132,396 178,179 27,074 73,402
Earnings from
continuing operations 126,474 158,067 25,722 69,702
Per diluted unit 1.01 1.26 0.20 0.55
Net earnings 127,436 158,067 25,722 72,658
Per diluted unit 1.01 1.26 0.20 0.58
Cash provided by
continuing operations 154,233 156,298 229,073 20,270
Distributions declared $ 141,435 $ 71,682 $ 56,591 $ 49,046
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 derived from information
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.
The following table provides a reconciliation of net earnings
under GAAP as disclosed in the Consolidated Statements of Earnings
and Deficit to operating earnings.
Three months ended Nine months ended
(Stated in thousands of September 30, September 30,
Canadian dollars) 2008 2007 2008 2007
----------------------------------------------------------------------------
Net earnings $ 82,349 $ 72,658 $ 210,354 $ 256,447
Add (deduct):
Gain on disposal of
discontinued operations - (2,956) - (2,956)
Income taxes 14,011 2,136 28,008 19,558
Interest:
Long-term debt 2,367 1,623 6,711 5,802
Other 12 25 111 83
Income (91) (84) (251) (279)
----------------------------------------------------------------------------
Operating earnings $ 98,648 $ 73,402 $ 244,933 $ 278,655
----------------------------------------------------------------------------
----------------------------------------------------------------------------
- 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 September
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 nine month period ended September 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 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 September 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
September 30, 2008.
During the quarter ended September 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", "estimate", "propose", "plan", "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, but are not limited to: plans to replace existing
facilities with a new debt structure of US$1.6 billion pursuant to
a commitment letter with four lenders; the anticipated closing and
potential impact and benefits of the Grey Wolf transaction; the
opportunities stemming from a focus on global contract drilling
through United States expansion, international diversification
opportunities and complementary product line expansion; that new
drilling rigs are expected to be contracted with customers before
completion; the timing of completion of rigs in the 2008 rig build
program; that Precision will have opportunities from increased
industry rig counts and trend toward directional and horizontal
drilling programs; that improved commodity prices are expected to
alleviate downward pricing pressure; that an increase in labour
rates will address labour shortage issues; the impact of shale gas
drilling in Canada and the United States; that unconventional
drilling applications will require high performance drilling rigs;
that continental natural gas will continue to be part of the
long-term energy solution for North America; these wells also have
a steep rate of production decline in the first year of 50-80%,
necessitating additional drilling to replace rapidly depleting
wells; the timing and results of international diversification
opportunities; that planned asset growth will generally be financed
through existing debt facilities or cash retained from continuing
operations; and statements as to seasonal and weather conditions
affecting the Canadian oil and natural gas industry and the demand
for Precision's services all of which are stated under the headings
"Overview" and "Outlook" of this report.
These forward-looking information and 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 seasonal and 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; failure to receive approval of the
proposed acquisition of Grey Wolf by the shareholders of Grey Wolf
and satisfaction of various other conditions to the completion of
the acquisition; failure to realize anticipated synergies; 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. Readers are therefore cautioned not to place undue
reliance on such forward-looking information and statements. 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)
September 30, December 31,
(Stated in thousands of Canadian dollars) 2008 2007
----------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,649 $ -
Accounts receivable 326,019 256,616
Income tax recoverable 3,274 5,952
Inventory 8,599 9,255
----------------------------------------------------------------------------
344,541 271,823
Income tax recoverable (note 4) 58,055 -
Property, plant and equipment, net of
accumulated depreciation 1,285,584 1,210,587
Intangibles, net of accumulated amortization 1,376 318
Goodwill 284,579 280,749
----------------------------------------------------------------------------
$ 1,974,135 $ 1,763,477
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities:
Bank indebtedness $ - $ 14,115
Accounts payable and accrued liabilities 135,522 80,864
Distributions payable 16,349 36,470
----------------------------------------------------------------------------
151,871 131,449
Long-term compensation plans 7,116 13,896
Long-term debt 231,784 119,826
Future income taxes 202,783 181,633
----------------------------------------------------------------------------
593,554 446,804
----------------------------------------------------------------------------
Contingencies and Commitments (notes 9 and 10)
Unitholders' equity:
Unitholders' capital 1,442,476 1,442,476
Contributed surplus 998 307
Deficit (62,893) (126,110)
----------------------------------------------------------------------------
1,380,581 1,316,673
----------------------------------------------------------------------------
$ 1,974,135 $ 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
Canadian dollars,
except per unit amounts) Three months ended Nine months ended
September 30, September 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Revenue $ 285,639 $ 227,928 $ 766,842 $ 760,475
Expenses:
Operating 154,323 123,197 416,308 389,259
General and administrative 12,496 12,663 48,793 37,492
Depreciation and
amortization 22,798 17,535 60,559 53,045
Foreign exchange (2,626) 1,131 (3,751) 2,024
Interest:
Long-term debt 2,367 1,623 6,711 5,802
Other 12 25 111 83
Income (91) (84) (251) (279)
----------------------------------------------------------------------------
Earnings from continuing
operations before
income taxes 96,360 71,838 238,362 273,049
Income taxes: (note 4)
Current 2,121 (3) 6,818 (3,650)
Future 11,890 2,139 21,190 23,208
----------------------------------------------------------------------------
14,011 2,136 28,008 19,558
----------------------------------------------------------------------------
Earnings from continuing
operations 82,349 69,702 210,354 253,491
Gain on disposal of
discontinued operations,
net of tax - 2,956 - 2,956
----------------------------------------------------------------------------
Net earnings and
comprehensive earnings 82,349 72,658 210,354 256,447
Deficit, beginning of period (96,196) (139,703) (126,110) (195,219)
Distributions declared (49,046) (49,046) (147,137) (177,319)
----------------------------------------------------------------------------
Deficit, end of period $ (62,893) $ (116,091) $ (62,893) $ (116,091)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings per unit from
continuing operations:
Basic $ 0.65 $ 0.55 $ 1.67 $ 2.02
Diluted $ 0.65 $ 0.55 $ 1.67 $ 2.02
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings per unit:
Basic $ 0.65 $ 0.58 $ 1.67 $ 2.04
Diluted $ 0.65 $ 0.58 $ 1.67 $ 2.04
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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) 125,794 125,758 125,785 125,758
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
Three months ended Nine months ended
(Stated in thousands of September 30, September 30,
Canadian dollars) 2008 2007 2008 2007
----------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Net earnings $ 82,349 $ 69,702 $ 210,354 $ 253,491
Adjustments and other items
not involving cash:
Long-term compensation plans 93 (3,685) 1,790 (10,313)
Depreciation
and amortization 22,798 17,535 60,559 53,045
Future income taxes 11,890 2,139 21,190 23,208
Other (23) 3 (40) 8
Changes in non-cash working
capital balances (113,866) (65,424) (32,847) 86,202
----------------------------------------------------------------------------
3,241 20,270 261,006 405,641
Investments:
Business acquisitions
(note 7) (15,519) - (15,519) -
Purchase of property, plant
and equipment (75,457) (40,926) (130,269) (149,468)
Proceeds on sale of
property, plant and equipment 1,879 1,273 5,325 4,531
Changes in income tax
recoverable - (55,148) -
Proceeds on disposal of
discontinued operations - 2,956 - 2,956
Changes in non-cash working
capital balances 7,598 406 10,669 (9,708)
----------------------------------------------------------------------------
(81,499) (36,291) (184,942) (151,689)
Financing:
Distributions paid (49,046) (49,046) (167,258) (199,955)
Repayment of long-term debt - - (108,559) (95,753)
Increase in long-term debt 126,836 71,836 220,517 78,646
Repayment of bank
indebtedness - (6,653) (14,115) (36,774)
----------------------------------------------------------------------------
77,790 16,137 (69,415) (253,836)
Change in cash and cash
equivalents (468) 116 6,649 116
Cash and cash equivalents,
beginning of period 7,117 - - -
----------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 6,649 $ 116 $ 6,649 $ 116
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 September
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 13,522 154
----------------------------------------------------------------------------
Balance September 30, 2008 125,601,441 $ 1,440,697
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Exchangeable LP units Number Amount
----------------------------------------------------------------------------
Balance, December 31, 2007 170,005 $ 1,933
Redeemed on retraction of exchangeable LP units (13,522) (154)
----------------------------------------------------------------------------
Balance September 30, 2008 156,483 $ 1,779
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Summary Number Amount
----------------------------------------------------------------------------
Trust units 125,601,441 $ 1,440,697
Exchangeable LP units 156,483 1,779
----------------------------------------------------------------------------
Unitholders' capital 125,757,924 $ 1,442,476
----------------------------------------------------------------------------
----------------------------------------------------------------------------
4. 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 is as follows:
Three months ended Nine months ended
September 30, September 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Earnings from continuing operations
before income taxes $ 96,360 $ 71,838 $ 238,362 $ 273,049
Federal and provincial statutory
rates 30% 33% 30% 33%
----------------------------------------------------------------------------
Tax at statutory rates $ 28,908 $ 23,706 $ 71,509 $ 90,106
Adjusted for the effect of:
Non-deductible expenses (213) 50 (410) 455
Income to be distributed to
unitholders, not subject to tax in
the Trust (17,000) (21,468) (48,569) (68,544)
Other 2,316 (152) 5,478 (269)
----------------------------------------------------------------------------
Income tax expense before tax rate
reductions $ 14,011 $ 2,136 $ 28,008 $ 21,748
Reduction of future tax balances
due to enacted tax rate reductions - - - (2,190)
----------------------------------------------------------------------------
Income tax expense $ 14,011 $ 2,136 $ 28,008 $ 19,558
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Effective income tax rate before
enacted tax rate reductions 15% 3% 12% 8%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 deductions 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.
5. Long-Term Debt
During the nine months ended September 30, 2008, 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.
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 28,567 DTUs, including additional
DTUs issued in lieu of cash distributions and redeemed 21,994 DTUs
on employee resignations and employee withdrawals. As at September
30, 2008 $1.5 million is included in accounts payable and accrued
liabilities for outstanding DTUs. Included in net earnings for the
three months and nine months ended September 30, 2008 is an expense
recovery of $0.9 million (2007- $0.5 million) and an expense of
$0.2 million (2007- $0.6 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
September 30, 2008 $1.1 million is included in accounts payable and
accrued liabilities and $1.1 million in long-term incentive plan
payable for the 129,645 currently outstanding DTUs. Included in net
earnings for the three and nine months ended September 30, 2008 is
an expense recovery of $1.5 million (2007 $3.4 million expense) and
an expense of $1.0 million (2007- $3.4 million) 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 33,058
Issued as a result of distributions 1,188
----------------------------------------------------------------------------
Balance, September 30, 2008 52,526
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three months and nine months ended September 30, 2008
the Trust expensed $256,000 (2007 - $ nil) and $691,000 (2007 - $
nil) respectively as unit based compensation, with a corresponding
increase in contributed surplus.
7. Acquisition
On July 31, 2008, Precision acquired six service rigs and
related equipment from Rick's Well Servicing Ltd. ("RWS") a
privately owned well servicing company based in Virden, Manitoba.
The acquisition represented all of the operating assets of RWS and
Precision will maintain and operate out of the RWS facility. The
operations of RWS will be included in the Completion and Production
Services segment. The acquisition has been accounted for by the
purchase method with the results of operations included in the
financial statements from the date of acquisition. The details of
the acquisition are as follows:
----------------------------------------------------------------------------
Net assets acquired at assigned values:
Working capital $ 19
Property, plant and equipment 10,542
Intangible assets 1,128
Goodwill 3,830
----------------------------------------------------------------------------
$ 15,519
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consideration:
Cash $ 15,519
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8. 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 need to
increase these levels to facilitate acquisition or expansionary
activities. As at September 30, 2008 and December 31, 2007 these
ratios were as follows:
September 30, December 31,
2008 2007
----------------------------------------------------------------------------
Long-term debt $ 231,784 $ 119,826
Unitholders' equity 1,380,581 1,316,673
----------------------------------------------------------------------------
Total capitalization $ 1,612,365 $ 1,436,499
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Long-term debt to long-term debt plus equity
ratio 0.14 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 less than
1:1.
There were no changes in the Trust's approach to capital
management during the quarter, however Precision has an acquisition
pending (see note 11) that will have an impact on
capitalization.
9. Contingencies
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 but without penalties, could be up to $390
million, including $58 million recorded as a long-term receivable
(see note 4).
The Trust, through the performance of its services, product
sales and business arrangements, is sometimes named as a defendant
in litigation. The outcome of such claims against the Trust is not
determinable at this time, however, their ultimate resolution is
not expected to have a material adverse effect on the Trust. The
Trust has been named in a derivative lawsuit in regards to its
proposed merger with Grey Wolf, Inc.. The lawsuit alleges the Trust
aided and abetted an alleged breach of fiduciary duty by the Grey
Wolf directors and seeks to enjoin the proposed merger and ask for
other relief including an award of attorneys' and experts' fees.
The Trust believes that this lawsuit is without merit and intends
to defend the lawsuit vigorously.
10. 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. At September 30,
2008, approximately US$15 million of the expenditures incurred
relating to this commitment had been recorded in the financial
statements and included in property, plant and equipment.
Depreciation will commence as the rigs are delivered and put in
service.
11. Potential Acquisition
On August 24, 2008 Precision entered into a definitive merger
agreement pursuant to which Precision will acquire Grey Wolf, Inc.
("Grey Wolf"). Under the terms of the agreement, Grey Wolf
shareholders will receive US$5.00 in cash and 0.1883 Precision
trust units for each Grey Wolf common share. On a fully diluted
basis aggregate consideration is estimated to be US$1.12 billion in
cash and 42.0 million trust units, assuming the Grey Wolf
convertible note holders elect to convert the outstanding notes to
Grey Wolf common shares prior to closing. Completion of the
transaction is subject to Grey Wolf shareholder approval and is
scheduled to close in the fourth quarter.
On August 24, 2008 Precision entered into an arrangement to fund
the Grey Wolf acquisition and ongoing operating requirements
through a US$1.6 billion debt structure as outlined in a commitment
letter with four lenders. The new debt structure will replace
existing debt facilities.
12. 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 Completion
ended Contract and Corporate Inter
September 30, Drilling Production and -segment
2008 Services Services Other Eliminations Total
----------------------------------------------------------------------------
Revenue $ 212,567 $ 76,701 $ - $ (3,629) $ 285,639
Segment
profit
(loss)(1) 81,486 21,608 (4,446) - 98,648
Depreciation
and
amortization 15,207 6,623 968 - 22,798
Total assets 1,426,832 473,308 73,995 - 1,974,135
Goodwill 172,440 112,139 - - 284,579
Capital
expenditures 68,435 6,066 956 - 75,457
----------------------------------------------------------------------------
Three months Completion
ended Contract and Corporate Inter
September 30, Drilling Production and -segment
2007 Services Services Other Eliminations Total
----------------------------------------------------------------------------
Revenue $ 160,068 $ 71,570 $ - $ (3,710) $ 227,928
Segment
profit
(loss)(1) 58,877 22,538 (8,013) - 73,402
Depreciation
and
amortization 10,490 6,129 916 - 17,535
Total assets 1,241,666 460,116 27,264 - 1,729,046
Goodwill 172,440 108,309 - - 280,749
Capital
expenditures 31,603 8,885 438 - 40,926
----------------------------------------------------------------------------
Nine months Completion
ended Contract and Corporate Inter
September 30, Drilling Production and -segment
2008 Services Services Other Eliminations Total
----------------------------------------------------------------------------
Revenue $ 547,938 $ 228,980 $ - $ (10,076) $ 766,842
Segment
profit
(loss)(1) 206,062 64,281 (25,410) - 244,933
Depreciation
and
amortization 38,817 18,943 2,799 - 60,559
Total assets 1,426,832 473,308 73,995 - 1,974,135
Goodwill 172,440 112,139 - - 284,579
Capital
expenditures 113,247 15,247 1,775 - 130,269
----------------------------------------------------------------------------
Nine months Completion
ended Contract and Corporate Inter
September 30, Drilling Production and -segment
2007 Services Services Other Eliminations Total
----------------------------------------------------------------------------
Revenue $ 519,792 $ 249,754 $ - $ (9,071) $ 760,475
Segment
profit
(loss)(1) 215,625 83,307 (20,277) - 278,655
Depreciation
and
amortization 29,212 20,973 2,860 - 53,045
Total assets 1,241,666 460,116 27,264 - 1,729,046
Goodwill 172,440 108,309 - - 280,749
Capital
expenditures 127,169 21,330 969 - 149,468
----------------------------------------------------------------------------
(1) Segment profit (loss) is defined as revenue less operating, general
and administrative, depreciation and amortization and foreign exchange
expenses.
A reconciliation of segment profit (loss) to earnings from continuing
operations before income taxes is as follows:
Three months ended Nine months ended
September 30, September 30,
(Stated in thousands of Canadian
dollars) 2008 2007 2008 2007
----------------------------------------------------------------------------
Total segment profit (loss) $ 98,648 $ 73,402 $ 244,933 $ 278,655
Add (deduct):
Interest:
Long-term debt (2,367) (1,623) (6,711) (5,802)
Other (12) (25) (111) (83)
Income 91 84 251 279
----------------------------------------------------------------------------
Earnings from continuing
operations before income taxes $ 96,360 $ 71,838 $ 238,362 $ 273,049
----------------------------------------------------------------------------
----------------------------------------------------------------------------
THIRD 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 Thursday, October 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
October 30, 2008 by dialing 1-800-408-3053 or 416-695-5800,
passcode 3272722#.
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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