Precision Drilling Corporation (TSX: PD) (NYSE: PDS) -
(Canadian dollars except as indicated)
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.
On June 1, 2010, as the result of a Plan of Arrangement approved
by the holders of trust units of Precision Drilling Trust (the
"Trust") and the holders of Class B limited partnership units of
Precision Drilling Limited Partnership on May 11, 2010 the Trust
converted from an open-ended income trust to a corporation,
"Precision Drilling Corporation". Precision Drilling Corporation as
the successor in interest to the Trust was accounted for as a
continuity of interest whereby the consolidated financial
statements for the three month and six month periods ended June 30,
2010 and comparables for the three month and six month periods
ended June 30, 2009 reflect the financial position, earning results
and cash flows as if Precision Drilling Corporation had always
carried on the business formerly carried on by the Trust.
Throughout this news release, references made to cash distributions
reflect the business of the Trust that occurred prior to conversion
from an open-ended income trust to a corporation.
Precision Drilling Corporation ("Precision" or the
"Corporation") reported a net loss of $67 million or $0.24 per
diluted share for the three months ended June 30, 2010 compared to
net earnings of $57 million or $0.22 per diluted share for the
second quarter of 2009. The results for the second quarter of 2010
include a foreign exchange loss of $26 million and finance charges
of $52 million which includes a non-cash charge of $24 million
related to the amendment of the Corporation's credit agreement
during the second quarter of 2010. During the second quarter of
2009, Precision recognized a foreign exchange gain of $74 million
and finance charges of $45 million.
Revenue for the second quarter of 2010 totaled $262 million
compared to $210 million for the same period of 2009. The increase
in drilling activity in the second quarter of 2010 over the same
period of 2009 led to the 25% increase in revenue. Earnings before
interest, taxes, depreciation and amortization and foreign exchange
("EBITDA") were $59 million for both the second quarter of 2010 and
2009. EBITDA is not a recognized financial measure under Generally
Accepted Accounting Principles ("GAAP") see "Non-GAAP Measures" in
this report. Flat EBITDA between the two years is due to the
increase in drilling activity being offset by lower average
drilling revenue per day in both the Canadian and United States
drilling markets.
Revenue for the first quarter of 2010 was $373 million and
EBITDA totaled $118 million. Second quarter 2010 revenue and EBITDA
were lower than first quarter 2010 due to the seasonality of
oilfield service activity in Canada known as "spring break-up".
This is a time in Canada where drilling rigs cannot change
locations due to road conditions and normally occurs in March to
June of each year.
For the six months ended June 30, 2010, Precision reported a net
loss of $5 million or $0.02 per diluted share compared to net
earnings of $115 million or $0.50 per diluted share for the same
period of 2009. Revenue for the first half of 2010 was $635 million
compared to $658 million for the corresponding period of 2009.
EBITDA totaled $177 million for the first half of 2010 compared to
$229 million in the first half of 2009. Higher activity levels in
2010 were offset by lower average drilling revenue per day in the
Corporation's operating areas. Results for the first half of 2010
include a foreign exchange loss of $6 million as compared to a gain
of $42 million for the first half of 2009.
Kevin Neveu, Precision's President and Chief Executive Officer
stated: "The strong rebound in North American drilling activity
began in mid 2009 and has continued through the second quarter of
this year. Despite the Canadian seasonal slowdown which has been
prolonged by heavy rains, I am encouraged by the strengthening in
customer demand."
"While Precision's activity levels bottomed during the second
quarter of 2009 and the spot market dayrates on our tier I and tier
II rigs have been improving sequentially from last year's lows, we
know it takes several quarters following an activity trough before
average dayrates and margins improve. We believe we are at or near
that bottom now."
"In the United States, activity levels continue to modestly
improve, with oil related activity leading the way. Precision's
average active rig count in the second quarter of 2010 was up 14%
over the first quarter of the year. Precision's active rig count is
currently 91 and we expect it to continue to slowly increase. If
low natural gas prices persist, there is the potential for a
pullback in gas related activity; however, we would expect most of
the pullback to be absorbed by oil and liquids rich drilling
activity. Dayrates in the United States drilling markets are
continuing to modestly improve from previous quarters."
"Persistent rainfall through much of the Western Canada
Sedimentary Basin has prevented a full return to expected summer
drilling levels. Nonetheless our current active rig count is at 77
compared to 51 in 2009. We currently expect to have close to 100
rigs working once the ground dries sufficiently to facilitate the
moving of the rigs. With unconventional horizontal oil drilling
techniques being applied to conventional oil reservoirs in Canada
we believe that the remainder of 2010 activity levels will exceed
those in 2009."
"Precision is poised to seize market opportunities and as such I
am pleased to announce that Precision has added seven rigs to its
2010 new rig build program bringing the current total to nine rigs.
This includes the two rigs we announced last quarter. Five of these
rigs are Super Single® rigs with three to be deployed in Canada and
two in the United States. The remaining four rigs are Super Triple
rigs with all four projected for work in the United States. Four of
these nine rigs have been contracted with an average contract term
just under three years. We expect to have the remaining rigs
contracted shortly as we are in advanced discussions and
negotiations for contracting the remaining five rigs for resource
plays such as the Marcellus, Bakken, Horn River and Eagle Ford with
three customers," concluded Mr. Neveu.
SELECT FINANCIAL AND OPERATING INFORMATION
(stated in Three months ended Six months ended
thousands of Canadian June 30, June 30,
dollars except per % %
share/unit amounts) 2010 2009 Change 2010 2009 Change
----------------------------------------------------------------------------
Revenue $ 261,828 $ 209,597 24.9 $ 634,964 $ 658,042 (3.5)
EBITDA(1) 58,994 59,260 (0.4) 177,397 228,647 (22.4)
Net earnings(loss) (66,547) 57,475 (215.8) (4,530) 114,892 (103.9)
Cash provided by
operations 142,004 212,554 (33.2) 162,628 414,150 (60.7)
Capital spending:
Upgrade capital
expenditures 14,595 4,040 261.3 21,391 17,800 20.2
Expansion capital
expenditures 7,089 86,283 (91.8) 7,776 147,445 (94.7)
Proceeds on sale (6,146) (1,887) 225.7 (7,299) (7,829) (6.8)
----------------------------------------------------------
Net capital spending 15,538 88,436 (82.4) 21,868 157,416 (86.1)
Distributions declared - - - - 6,408 (100.0)
Net earnings(loss)
per share/unit:
Basic (0.24) 0.23 (204.3) (0.02) 0.51 (103.9)
Diluted (0.24) 0.22 (209.1) (0.02) 0.50 (104.0)
Distributions
declared
per share/unit $ - $ - $ - $ 0.04 (100.0)
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Contract drilling
rig fleet 351 388 (9.5) 351 388 (9.5)
Drilling rig
utilization days:
Canada 3,684 2,499 47.4 13,889 9,981 39.2
United States 8,030 4,529 77.3 15,023 11,938 25.8
International 160 182 (12.1) 335 362 (7.5)
Service rig fleet 200 229 (12.7) 200 229 (12.7)
Service rig operating
hours 48,770 32,818 48.6 125,012 97,672 28.0
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(1) EBITDA is a non-GAAP measure. See "NON-GAAP MEASURES".
FINANCIAL POSITION AND RATIOS
(Stated in thousands
of Canadian dollars, June 30, December 31, June 30,
except ratios) 2010 2009 2009
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Working capital $ 343,533 $ 320,860 $ 253,663
Working capital ratio 3.4 3.5 2.6
Long-term debt(1) $ 703,004 $ 748,725 $ 868,933
Total long-term financial
liabilities $ 730,106 $ 775,418 $ 893,769
Total assets $4,194,948 $4,191,713 $4,521,430
Long-term debt to long-term
debt plus equity ratio(1) 0.21 0.22 0.24
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(1) Excludes current portion of long-term debt and is net of unamortized
debt issue costs
Revenue in the second quarter of 2010 was 25% higher than the
prior year period. The increase was due to a year-over-year
increase in utilization days in Canada and the United States
partially offset by lower average revenue per day in both market
areas. The mix of drilling rigs working under term contracts versus
well-to-well contracts put downward pressure on average pricing
during the quarter. Revenue in Precision's Contract Drilling
Services segment increased by 22% while revenue increased 47% in
the Canadian based Completion and Production Services segment in
the second quarter of 2010 compared to the prior year quarter.
EBITDA margin, calculated as EBITDA as a percentage of revenues,
was 23% for the second quarter of 2010 compared to 28% for the same
period in 2009. The five percentage point decline in EBITDA margin
was primarily attributable to lower market pricing for new work,
fewer idle but contracted rig days and a lower term contract mix.
Precision's term contract position with customers, a highly
variable operating cost structure and economies achieved through
vertical integration of the supply chain continue to limit margin
declines.
In the Contract Drilling Services segment, Precision currently
owns 351 contract drilling rigs, including 200 in Canada, 148 in
the United States and three rigs in international locations and 85
drilling rig camps. Precision's Completion and Production Services
segment includes 200 service rigs, 20 snubbing units, 79 water
treatment units and a broad mix of rental equipment.
During the quarter an average of 40 drilling rigs worked in
Canada (affected by spring break-up) and 90 in the United States
and Mexico totaling an average of 130 rigs working. This compares
with an average of 193 rigs working in the first quarter of 2010
and 79 rigs in the second quarter a year ago.
Precision's priorities for 2010 are threefold. The first is to
continue to deliver the high performance, high value level of
services that customers require to drill the technically
challenging wells of today's unconventional resource play
exploitation. Second, Precision continues to improve its balance
sheet, which provides financial flexibility and liquidity to be
able to seize market opportunities, our third priority. To that end
the second quarter has been successful. Precision repaid its Term B
debt by $78 million and reduced the overall effective interest rate
on its debt by 1.4 percent. Additionally, Precision increased its
2010 new rig build program to nine rigs. From the previously
announced capital expenditure plan of $122 million Precision is
planning an additional $106 million for new rigs and $16 million
for rig upgrades to increase capability for horizontal drilling.
Total capital spending for 2010 is now estimated at $189 million
with the remaining $55 million to be spent in 2011.
Drilling in Canada for 2010 to date is outpacing the drilling
activity of 2009. In the United States, the industry and Precision
have experienced improving utilization as customer spending has
increased due principally to higher oil prices.
Oil and natural gas prices during the second quarter of 2010
were higher than a year ago. For the second quarter of 2010 AECO
natural gas spot prices averaged $3.90 per MMBtu, 13% higher than
the second quarter 2009 average of $3.46 per MMBtu. In the United
States, Henry Hub natural gas spot prices averaged US$4.31 per
MMBtu in the second quarter of 2010 an increase of 16% over the
second quarter 2009 average of US$3.70 per MMBtu. West Texas
Intermediate crude oil averaged US$77.88 per barrel during the
quarter compared to US$59.69 per barrel in the same period in
2009.
Summary for the three months ended June 30, 2010:
- Precision continued to improve its balance sheet by amending
its credit agreement and reduced its debt by making a principal
repayment of US$74 million on June 30, 2010. Additionally, the
Corporation increased its revolving credit facility to US$410
million during the second quarter of 2010, an increase of US$150
million. As at June 30, 2010 Precision's debt to capitalization
ratio was 0.21 and Precision had a cash balance of $186 million and
in combination with its revolving credit facility and demand
operating lines, continued to carry ample liquidity.
- Operating earnings were $20 million, a decrease of $11 million
or 37% from the second quarter in 2009 and were 8% of revenue,
compared to 15% in 2009. Operating earnings margins per day were
negatively impacted by declines in customer pricing for most of
Precision's service offerings over the same period in 2009.
- Financial charges were $52 million, an increase of $7 million
due to the amortization of deferred financing costs resulting from
the amendment of the credit agreement and the early payment of debt
balances partially offset by lower interest costs due to the
reduction in long-term debt over the prior year period. The 2010
quarter includes $24 million of non-cash financing charges related
to the credit agreement amendment.
- The majority of Precision's credit facilities are denominated
in U.S. dollars. During the quarter the U.S. dollar strengthened in
relation to the Canadian dollar giving rise to an unrealized
translation loss which accounted for most of the $26 million
foreign exchange loss recognized in the quarter.
- Capital expenditures for the purchase of property, plant and
equipment were $22 million in the second quarter, a decrease of $69
million over the same period in 2009. Capital spending for the
second quarter of 2010 included $7 million on expansionary capital
initiatives and $15 million on the upgrade of existing assets.
- Average revenue per utilization day for contract drilling rigs
decreased in the second quarter of 2010 to US$18,733 from the prior
year second quarter of US$24,817 in the United States and decreased
in Canada from $18,335 in the second quarter of 2009 to $16,309 for
the second quarter of 2010. The decrease in revenue rates for the
second quarter in the United States reflects the reduction of rigs
working under term contracts, more rigs working under well-to-well
contracts and the mix of turnkey operations. These figures also
include US$2 million in revenue generated from idle but contracted
rigs associated with term customer contracts, a reduction of US$15
million compared to the prior year second quarter. In addition,
2009 included US$6 million in revenue for early contract
terminations. Turnkey revenue for the second quarter of 2010 was
US$20 million generated from 356 utilization days compared with
US$9 million from 142 days in 2009. Within Precision's Completion
and Production Services segment, average hourly rates for service
rigs were $588 in the second quarter of 2010 compared to $604 in
the second quarter of 2009.
- Average operating costs per day for drilling rigs decreased in
the second quarter of 2010 to US$12,626 from the prior year second
quarter of US$14,405 in the United States and from $10,685 to
$10,318 in Canada. The cost decrease in Canada was primarily due to
rig mix with a higher percentage of spot market work for the double
and single rigs which are lower cost rigs and a crew wage reduction
implemented on May 1, 2009. In the United States the decrease was
due to labour costs and a higher activity level. Within Precision's
Completion and Production Services segment, average hourly
operating costs for service rigs were $491 in the second quarter of
2010 as compared to $507 in the second quarter of 2009.
Summary for the six months ended June 30, 2010:
- Revenue was $635 million, a decrease of $23 million or 4% from
the prior year due to lower customer pricing partially offset by
higher activity.
- Operating earnings were $92 million, a decrease of $64 million
or 41% from 2009. Operating earnings were 15% of revenue, compared
to 24% in 2009.
- Capital expenditures for the purchase of property, plant and
equipment were $29 million in 2010, a decrease of $136 million over
the same period in 2009, and included $8 million on expansionary
capital initiatives and $21 million on the upgrade of existing
assets. During the first six months of 2009, 14 newly-built Super
Series drilling rigs were added to the fleet under long-term
customer contracts, seven in Canada and seven in the United
States.
- Financial charges were $81 million, a decrease of $3 million
from the prior year as reduced interest charges were offset by
increased amortization of deferred financing costs from the
repayment of debt.
- During the first half of the year Precision recorded a foreign
exchange loss of $6 million compared to a $42 million gain in 2009.
A significant component of these results relates to the translation
of Precision's U.S. dollar denominated credit facilities.
- General and administrative costs were $49 million which were
in-line with the prior year.
OUTLOOK
Precision has a strong portfolio of long-term customer contracts
that help mitigate the effects of lower dayrate spot market
contracts. Precision expects to have an average of approximately 82
rigs committed under term contract in North America in the third
quarter of 2010 and an average of 68 rigs contracted for the fourth
quarter of 2010. In Canada, term contracted rigs generate from 200
to 250 utilization days per rig year due to the seasonal nature of
well access whereas in the United States they generate about 350
utilization days per rig year in most regions.
For all of 2010, Precision expects to have an average of
approximately 78 rigs under term contract, with 41 rigs contracted
in the United States, 36 in Canada and 1 in Mexico. For 2011, based
on the current position, Precision expects to have an average of 24
rigs in Canada under term contract and 21 in the United States, for
a total of 45 for the full year. As noted earlier in this report,
Precision has recently added two term contracts for new build Super
Series rigs expected to go to work in 2010 and 2011.
Capital expenditures are expected to be approximately $189
million for 2010, with approximately $121 million for upgrade and
maintenance capital to existing equipment fleets and $68 million
for expansion capital. Capital expenditures for rig tier
improvements are included in upgrade capital. The expansion capital
program includes nine new build Super Series® rigs and additional
rental and water treatment equipment. New rig build expansion
capital of $55 million is estimated to be incurred in 2011 to
complete the 2010 rig build program.
The first half of 2010 experienced higher drilling activity in
Canada than the prior year and United States drilling activity
continues to make improvements. The demand for energy is rising as
the global economies are starting to improve and move out of the
bottom of the recession. There is also increased liquidity in the
capital markets as well as higher oil commodity prices which is
providing some of Precision's customers' liquidity to increase
drilling programs. The drilling sector in both Canada and the
United States is experiencing a period of year-over-year
improvements in utilization. According to industry sources, as at
July 16, 2010, the United States active land drilling rig count was
up about 76% from the same period in the prior year while the
Canadian drilling rig count had increased about 140%. Even with the
year-over-year improvements in rig utilization, there has been
virtually no change in spot market dayrates charged to customers in
Canada, and only modest improvements in dayrates in the United
States. As drilling rigs complete term contracts and move to lower
dayrate spot market contracts, Precision's average revenue per
working day will decline. The pace of average decline is slowing as
tier I and tier II asset class utilization continues to
improve.
Natural gas production in the United States has remained strong
despite reduced drilling activity over the last eighteen months.
United States natural gas storage levels are currently near the
upper range of the five-year average but slightly below storage
levels of a year ago. This also strongly influences Canadian
activity since Canada exports a significant portion of its natural
gas production to the United States. The increase in oil and
natural gas liquids drilling in areas like the Cardium, Bakken and
Eagle Ford have been strong and the United States oil rig count as
at July 16, 2010 is 138% higher than it was a year ago. Precision
has more equipment working in oil related plays than at any time in
the last 20 years; however, over half of Precision's current active
rig count is drilling for natural gas targets.
With high storage levels, consistent production and the view
that North America has an oversupply of natural gas, gas prices
have remained at relatively low levels. To date, there has been
little change in customers' natural gas drilling plans. If low
natural gas prices continue, Precision and the North American
drilling industry could see a further reduction in demand for
natural gas drilling. With the current demand for oil and liquids
rich natural gas drilling, Precision believes a reduction in gas
directed drilling would be offset by an increase in oil and gas
liquids rich drilling.
Despite near term challenges, the future of the global oil and
gas industry remains promising. For Precision, 2010 represents an
opportunity to demonstrate our value to customers through delivery
of high performance, high value services that deliver low customer
well costs and strong margins to Precision.
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 Six months ended
June 30, June 30,
(stated in thousands % %
of Canadian dollars) 2010 2009 Change 2010 2009 Change
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Revenue:
Contract Drilling
Services $ 226,241 $ 185,226 22.1 $ 539,702 $ 575,105 (6.2)
Completion and
Production
Services 37,548 25,590 46.7 101,030 88,565 14.1
Inter-segment
eliminations (1,961) (1,219) 60.9 (5,768) (5,628) 2.5
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$ 261,828 $ 209,597 24.9 $ 634,964 $ 658,042 (3.5)
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EBITDA:(1)
Contract Drilling
Services $ 63,197 $ 66,954 (5.6) $ 173,759 $ 222,449 (21.9)
Completion and
Production
Services 4,728 3,017 56.7 21,317 21,566 (1.2)
Corporate and other (8,931) (10,711) (16.6) (17,679) (15,368) 15.0
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$ 58,994 $ 59,260 (0.4) $ 177,397 $ 228,647 (22.4)
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(1) Non-GAAP measure. See "NON-GAAP MEASURES".
SEGMENT REVIEW OF CONTRACT DRILLING SERVICES
(stated in Three months ended Six months ended
thousands of Canadian June 30, June 30,
dollars, except % %
where noted) 2010 2009 Change 2010 2009 Change
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Revenue $ 226,241 $ 185,226 22.1 $ 539,702 $ 575,105 (6.2)
Expenses:
Operating 150,183 106,208 41.4 338,833 322,313 5.1
General and
administrative 12,861 12,064 6.6 27,110 30,343 (10.7)
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EBITDA(1) 63,197 66,954 (5.6) 173,759 222,449 (21.9)
Depreciation 33,603 23,434 43.4 72,053 61,397 17.4
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Operating
earnings(1) $ 29,594 $ 43,520 (32.0) $ 101,706 $ 161,052 (36.8)
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Operating earnings
as a percentage
of revenue 13.1% 23.5% 18.8% 28.0%
Drilling rig revenue
per utilization
day in Canada $ 16,309 $ 18,335 (11.0) $ 15,723 $ 18,487 (15.0)
Drilling rig revenue
per utilization
day in the United
States(2) US$ 18,733 US$ 24,817 (24.5)US$ 18,721 US$ 25,079 (25.4)
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(1) Non-GAAP measure. See "NON-GAAP MEASURES".
(2) Includes revenue from idle but contracted rig days and lump sum payouts.
Three months ended June 30,
Canadian onshore
drilling statistics:(1) 2010 2009
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Precision Industry(2) Precision Industry(2)
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Number of drilling rigs
(end of period) 200 806 226 868
Drilling rig operating days
(spud to release) 3,388 14,918 2,272 8,411
Drilling rig operating day
utilization 18% 20% 11% 11%
Number of wells drilled 317 1,160 256 766
Average days per well 10.7 12.9 8.9 11.0
Number of metres drilled (000s) 645 2,461 420 1,267
Average metres per well 2,035 2,122 1,642 1,653
Average metres per day 190 165 185 151
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Six months ended June 30,
Canadian onshore
drilling statistics:(1) 2010 2009
----------------------------------------------------------------------------
Precision Industry(2) Precision Industry(2)
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Number of drilling rigs
(end of period) 200 806 226 868
Drilling rig operating days
(spud to release) 12,499 53,314 8,871 36,568
Drilling rig operating day
utilization 34% 37% 22% 23%
Number of wells drilled 1,257 4,724 932 3,674
Average days per well 9.9 11.3 9.5 10.0
Number of metres drilled (000s) 2,169 8,334 1,430 5,270
Average metres per well 1,726 1,764 1,534 1,434
Average metres per day 174 156 161 144
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(1) Canadian operations only.
(2) Canadian Association of Oilwell Drilling Contractors ("CAODC") and
Precision - excludes non-CAODC rigs and non-reporting CAODC members.
United States onshore
drilling statistics:(3) 2010 2009
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Precision Industry(4) Precision Industry(4)
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Average number of active land rigs
for quarters ended:
March 31 78 1,297 82 1,287
June 30 88 1,464 50 885
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Year to date average 83 1,380 66 1,086
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(3) United States lower 48 operations only.
(4) Baker Hughes rig counts.
Contract Drilling Services segment revenue for the second
quarter of 2010 increased by 22% to $226 million while EBITDA
decreased by 6% to $63 million compared to the same period in 2009.
The increase in revenue was due to the higher drilling rig activity
in both Canada and the United States. The decrease in EBITDA was
due to lower average pricing in both the United States and Canada
which more than offset the increase in activity.
Activity in North America was impacted by increased customer
demand due to the improvement in global oil prices and, to a lesser
degree, modest improvements in North American natural gas prices.
Despite the increase in utilization rates, drilling rig revenue per
utilization day in Canada was down 11% over the prior year due to
declines in spot market dayrates year-over-year. During the
quarter, 38% of Precision's utilization days in Canada were
generated from rigs under term contract compared with 57% in 2009
while in the United States 49% of utilization days were generated
from rigs under term contract compared with 79% in 2009.
Proportionately lower utilization days from term contract rigs
resulted in lower average revenue per day in both Canada and the
United States. As at the end of the quarter in the United States
there were 44 drilling rigs working under term contracts and
another two rigs idle but contracted where Precision was receiving
the margin payment only.
Drilling rig utilization days (spud to rig release plus move
days) in Canada during the second quarter of 2010 were 3,684, an
increase of 47% compared to 2,499 in 2009. Drilling rig activity
for Precision in the United States was 77% higher than the same
quarter of 2009 due to the recovery of drilling rig activity which
began in the second quarter of 2009. Precision had two rigs working
in Mexico during both periods. Precision's camp and catering
division experienced an activity increase of 17% over the prior
year second quarter.
Contract Drilling Services operating costs were 66% of revenue
for the quarter compared to 57% for the prior year quarter. The
increase was due to the mix of rigs working as a higher proportion
of work was derived from competitive spot market activity. On a per
day basis, operating costs for the drilling rig division in Canada
were 3% lower than the prior year quarter due to a reduction in
crew wages and the differences in rig mix as 2010 had a higher
proportion of days from single and double rigs which typically
require less ancillary equipment. Operating costs for the quarter
in the United States on a per day basis were down from the
comparable period in 2009 due to a reduction in crew wages.
Quarterly depreciation in the Contract Drilling Services segment
increased 43% from the prior year due to the increase in activity
in both Canada and the United States. Both the United States and
Canadian contract drilling operations use the unit of production
method of calculating depreciation.
SEGMENT REVIEW OF COMPLETION AND PRODUCTION SERVICES
(stated in Three months ended Six months ended
thousands of Canadian June 30, June 30,
dollars, except % %
where noted) 2010 2009 Change 2010 2009 Change
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Revenue $ 37,548 $ 25,590 46.7 $ 101,030 $ 88,565 14.1
Expenses:
Operating 30,824 20,463 50.6 75,476 62,528 20.7
General and
administrative 1,996 2,110 (5.4) 4,237 4,471 (5.2)
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EBITDA(1) 4,728 3,017 56.7 21,317 21,566 (1.2)
Depreciation 4,552 3,698 23.1 10,553 8,691 21.4
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Operating
earnings(1) $ 176 $ (681) n/m $ 10,764 $ 12,875 (16.4)
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Operating earnings
as a percentage
of revenue 0.5% (2.7)% 10.7% 14.5%
Well servicing
statistics:
Number of service
rigs (end of period) 200 229 (12.7) 200 229 (12.7)
Service rig
operating hours 48,770 32,818 48.6 125,012 97,672 28.0
Service rig
operating hour
utilization 27% 16% 34% 24%
Service rig
revenue per
operating hour $ 588 $ 604 (2.6) $ 616 $ 689 (10.6)
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(1) Non-GAAP measure. See "NON-GAAP MEASURES".
n/m - calculation not meaningful
Completion and Production Services segment revenue for the
second quarter increased by 47% from 2009 to $38 million and EBITDA
increased by 57% to $5 million. The increase in revenue is
attributed to an increase in operating hours partially offset by
lower rates for services rendered and the increase in EBITDA is the
result of higher activity along with a decrease in variable
costs.
Service rig activity increased 49% from the prior year period,
with the service rig fleet generating 48,770 operating hours in the
second quarter of 2010 compared with 32,818 hours in the prior year
quarter for utilization of 27% and 16%, respectively. The increase
was a result of higher service rig demand for completions of new
wells along with production maintenance of existing wells, both
with an emphasis on oil wells. New well completions accounted for
13% of service rig operating hours in the second quarter compared
to 7% in the same quarter in 2009.
Average service revenue decreased $16 per operating hour to $588
from the prior year period due to the current pricing pressure in
the industry.
Lower revenue rates were offset by lower crew wages that
ultimately led to a slight increase in operating expenses as a
percent of revenue from 80% in the second quarter of 2009 to 82%
for the same period in 2010. Operating costs per operating hour
have decreased over the comparable period in 2009 due primarily to
lower wages, higher activity offsetting fixed costs and cost
reduction initiatives.
Depreciation in the Completion and Production Services segment
in the second quarter of 2010 was 23% higher than the prior year
due to higher equipment utilization.
SEGMENT REVIEW OF CORPORATE AND OTHER
Corporate and other expenses decreased by 17% to $9 million in
the second quarter of 2010 compared to $11 million in the same
period of 2009. The decrease was primarily due to the difference in
employee incentive compensation expense.
OTHER ITEMS
Net financial charges were $52 million for the second quarter of
2010 which was up from $45 million when compared to the prior year
quarter. The increase is attributable to the accelerated
amortization of non-cash deferred financing costs in the quarter
and costs associated with the secured credit agreement amendment
offset by a reduction in cash interest costs due to the significant
reduction in long-term debt.
The Corporation had a foreign exchange loss of $26 million
during the second quarter of 2010 due to the strengthening in the
United States dollar versus the Canadian dollar, as the majority of
the Corporation's credit facilities are denominated in United
States dollars.
The effective tax rate for 2010 is the result of income, capital
and state taxes incurred in a period of low pretax earnings while
the income tax recovery in 2009 was primarily a result of tax
deductions available in-line with taxable earnings.
LIQUIDITY AND CAPITAL RESOURCES
In June 2010, Precision converted to a corporation pursuant to a
Plan of Arrangement under the Business Corporations Act of Alberta.
Precision obtained approval for the conversion from its unitholders
in conjunction with its 2010 Annual and Special Meeting of
Unitholders held on May 11, 2010. An information circular and proxy
statement was mailed to unitholders in connection with the
meeting.
The oilfield services business is inherently cyclical in nature.
Precision employs a disciplined approach to minimize costs through
operational management practices and a variable cost structure, and
to maximize revenues through term contract positions with a focus
of maintaining a strong balance sheet. This operational discipline
provides Precision with the financial flexibility to capitalize on
strategic acquisitions and internal growth opportunities at all
points in the business cycle.
Operating within a highly variable cost structure, Precision's
maintenance capital expenditures are tightly governed by and highly
responsive to activity levels with additional cost savings leverage
provided through Precision's internal manufacturing and supply
divisions. Expansion capital for new rig build programs require 2 -
5 year term contracts in order to mitigate capital recovery risk.
To capitalize on market opportunities Precision increased its
anticipated capital expenditures by $67 million to a total of $189
million in 2010. The increase is primarily attributed to the 2010
nine new rig build program.
In managing foreign exchange risk, Precision endeavours to align
the currency of the majority of its debt obligations and capital
expenditures with the currency of the supporting operating cash
flows. Interest rate risk is partially managed through hedging
activities and by reducing debt.
During the second quarter of 2010 Precision used $41 million in
operating cash inflow combined with a $101 million increase in
non-cash working capital to fund $11 million in net capital
spending and $80 million in long-term debt reduction and financing
costs. Liquidity remains sufficient as Precision had a cash balance
of $186 million and the US$410 million revolver in its senior
secured credit facility ("Secured Facility") remains undrawn except
for $30 million in outstanding letters of credit as at June 30,
2010. In addition to the Secured Facility, Precision has available
$26 million in operating facilities (net of letters of credit of
$15 million) which is used for working capital management. During
the current quarter, working capital decreased by $50 million over
the first quarter of 2010 to $344 million.
On June 30, 2010, the Corporation amended the terms of the
Secured Facility to lower the LIBOR floor for the Term Loan B
facility to 1.75% from 3.25% and lower the LIBOR interest rate
margin on existing loans under the Term Loan B facility to 5% from
an average interest rate margin of 6.45%. The Secured facility was
also amended to provide for the payment in certain circumstances by
the Corporation to lenders under the Term Loan B facility of a fee
equal to 1% of the aggregate principal amount of loans subsequently
prepaid or re-priced under the Term Loan B facility on or prior to
June 30, 2011. In connection with the amendments to the Secured
Facility, non-consenting holders of US$74 million in loans under
the Term Loan B facility were repaid by the Corporation with cash
on hand. After the amendment the current blended cash interest cost
of Precision's debt is approximately 7.0%. Precision may consider
further voluntary long-term debt reduction as industry fundamentals
stabilize and operating cash flow forecasts become clearer. As at
June 30, 2010, approximately $629 million was outstanding under the
Secured Facility and $175 million was outstanding under the
unsecured facility.
During the second quarter of 2010 Precision amended the terms of
the Secured Facility to increase the size of the revolving credit
facility to US$410 million from US$260 million. In addition, a
subsidiary of Precision arranged a new secured operating facility
in the amount of US$15 million with a U.S. bank. Advances under
this facility are at the bank's prime lending rate.
As at June 30, 2010 the Corporation was in compliance with the
covenants under the Secured Facility. Precision expects to remain
in compliance with financial covenants under its Secured Facility
and have complete access to credit lines during 2010. The Secured
Facility contains customary covenants including three financial
covenants: a leverage ratio; interest coverage ratio; and fixed
charge coverage ratio.
During the first quarter of 2010, Precision amended certain
covenants and terms contained in the Secured Facility. These
amendments included an increase in the leverage ratio test from
3.00:1 to 3.50:1 through December 31, 2011, a decrease in the
interest coverage ratio test from 3.00:1 to 2.75:1 through December
31, 2011 and the removal of the restrictions on expansion related
capital expenditures (limitations on total capital expenditures
remained unchanged).
QUARTERLY FINANCIAL SUMMARY
(Stated in thousands of
Canadian dollars,
except per share/
unit amounts) 2009 2010
----------------------------------------------------------------------------
Quarters ended September 30 December 31 March 31 June 30
----------------------------------------------------------------------------
Revenue $ 253,337 $ 286,067 $ 373,136 $ 261,828
EBITDA(1) 85,739 92,615 118,403 58,994
Net earnings (loss): 71,696 (24,885) 62,017 (66,547)
Per basic share/unit 0.26 (0.09) 0.23 (0.24)
Per diluted share/unit 0.25 (0.09) 0.22 (0.24)
Cash provided by
continuing operations 19,948 70,631 20,624 142,004
Distributions
- declared $ - $ - $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2008 2009
----------------------------------------------------------------------------
Quarters ended September 30 December 31 March 31 June 30
----------------------------------------------------------------------------
Revenue $ 285,639 $ 335,049 $ 448,445 $ 209,597
EBITDA(1) 118,820 134,795 169,387 59,260
Net earnings: 82,349 92,376 57,417 57,475
Per basic share/unit 0.61 0.67 0.30 0.23
Per diluted share/unit 0.61 0.66 0.28 0.22
Cash provided by
continuing operations 3,241 82,904 201,596 212,554
Distributions
- declared $ 49,046 $ 77,551 $ 6,408 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Non-GAAP measure. See "NON-GAAP MEASURES".
NON-GAAP MEASURES
Precision uses certain measures that are not recognized under
Canadian generally accepted accounting principles to assess
performance and believes these non-GAAP measures provide useful
supplemental information to investors. Following are the non-GAAP
measures Precision uses in assessing performance.
EBITDA
Management believes that in addition to net earnings (loss),
EBITDA as derived from information reported in the Consolidated
Statements of Earnings (Loss) and Retained Earnings 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, the impact of
foreign exchange, how the results are taxed, how funds are invested
or how depreciation and amortization charges affect results.
The following table provides a reconciliation of net earnings
(loss) under GAAP, as disclosed in the Consolidated Statement of
Earnings (Loss) and Retained Earnings, to EBITDA.
Three months ended Six months ended
June 30, June 30,
(stated in thousands
of Canadian dollars) 2010 2009 2010 2009
----------------------------------------------------------------------------
EBITDA $ 58,994 $ 59,260 $ 177,397 $ 228,647
Add (deduct):
Depreciation and
amortization (39,354) (28,222) (84,988) (72,171)
Foreign exchange (26,085) 74,060 (6,333) 41,569
Finance charges (52,242) (44,881) (80,971) (83,551)
Income taxes (7,860) (2,742) (9,635) 398
----------------------------------------------------------------------------
Net earnings (loss) $ (66,547) $ 57,475 $ (4,530) $ 114,892
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating Earnings
Management believes that in addition to net earnings (loss),
operating earnings as reported in the Consolidated Statements of
Earnings (Loss) and Retained Earnings 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, the impact of foreign exchange
or how the results are taxed.
Three months ended Six months ended
June 30, June 30,
(stated in thousands
of Canadian dollars) 2010 2009 2010 2009
----------------------------------------------------------------------------
Operating earnings $ 19,640 $ 31,038 $ 92,409 $ 156,476
Add (deduct):
Foreign exchange (26,085) 74,060 (6,333) 41,569
Finance charges (52,242) (44,881) (80,971) (83,551)
Income taxes (7,860) (2,742) (9,635) 398
----------------------------------------------------------------------------
Net earnings (loss) $ (66,547) $ 57,475 $ (4,530) $ 114,892
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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, the following: global demand for
energy is rising; the rig count and utilization will continue to
increase; increased liquidity in capital markets and higher oil
commodity prices provide liquidity for customers to increase
drilling programs; United States activity levels will continue to
improve with oil and gas liquids rich activity leading the way;
amount and timing of capital expenditures; the potential for
further reduction in natural gas drilling and related activity; the
outcome of discussions regarding potential new build opportunities
for rigs; the marketability of upgraded rigs; the number of rigs
under term contract and the trend to move to spot market dayrates
upon expiry; a reduction in gas directed drilling would be offset
by an increase in oil and gas liquids rich drilling; and dayrate
levels.
These forward-looking information and statements are based on
certain assumptions and analysis made by the Corporation 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 Corporation'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 Corporation'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 contract drilling, well servicing and ancillary oilfield
services; capital market liquidity available to fund customer
drilling programs; the effects of seasonal and weather conditions
on operations and facilities; the existence of competitive
operating risks inherent in contract drilling, well servicing and
ancillary oilfield services; general economic, market or business
conditions; changes in laws or regulations; the availability of
qualified personnel, management or other key inputs; currency
exchange fluctuations; 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 Corporation will be realized or,
even if substantially realized, that they will have the expected
consequences to, or effects on, the Corporation 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 Corporation 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) 2010 2009
----------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 186,135 $ 130,799
Accounts receivable 267,326 283,899
Income tax recoverable 24,220 25,753
Inventory 9,427 9,008
----------------------------------------------------------------------------
487,108 449,459
Income tax recoverable 64,579 64,579
Property, plant and equipment, net of
accumulated depreciation 2,873,881 2,913,966
Intangibles 2,458 3,156
Goodwill 766,922 760,553
----------------------------------------------------------------------------
$ 4,194,948 $ 4,191,713
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 139,070 $ 128,376
Current portion of long-term debt (note 6) 4,505 223
----------------------------------------------------------------------------
143,575 128,599
Long-term liabilities 27,102 26,693
Long-term debt (note 6) 703,004 748,725
Future income taxes 714,946 703,195
----------------------------------------------------------------------------
1,588,627 1,607,212
----------------------------------------------------------------------------
Contingencies (note 10)
Shareholders' equity:
Shareholders' capital (note 3) 2,770,853 -
Unitholders' capital (note 3) - 2,770,708
Contributed surplus (note 3(c)) 7,202 4,063
Retained earnings 102,697 107,227
Accumulated other comprehensive loss (note 7) (274,431) (297,497)
----------------------------------------------------------------------------
2,606,321 2,584,501
----------------------------------------------------------------------------
$ 4,194,948 $ 4,191,713
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) AND RETAINED EARNINGS (UNAUDITED)
Three months ended Six months ended
June 30, June 30,
(stated in thousands of
Canadian dollars, except
per share amounts) 2010 2009 2010 2009
----------------------------------------------------------------------------
Revenue $ 261,828 $ 209,597 $ 634,964 $ 658,042
Expenses:
Operating 179,046 125,591 408,541 379,352
General and
administrative 23,788 24,746 49,026 50,043
Depreciation and
amortization 39,354 28,222 84,988 72,171
Foreign exchange 26,085 (74,060) 6,333 (41,569)
Finance charges (note 9) 52,242 44,881 80,971 83,551
----------------------------------------------------------------------------
Earnings (loss) before
income taxes (58,687) 60,217 5,105 114,494
Income taxes: (note 4)
Current 2,350 (497) 4,147 8,164
Future 5,510 3,239 5,488 (8,562)
----------------------------------------------------------------------------
7,860 2,742 9,635 (398)
----------------------------------------------------------------------------
Net earnings (loss) (66,547) 57,475 (4,530) 114,892
Retained earnings
(deficit), beginning of
period 169,244 2,941 107,227 (48,068)
Distributions declared - - - (6,408)
----------------------------------------------------------------------------
Retained earnings, end
of period $ 102,697 $ 60,416 $ 102,697 $ 60,416
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings (loss) per
share: (note 11)
Basic $ (0.24) $ 0.23 $ (0.02) $ 0.51
Diluted $ (0.24) $ 0.22 $ (0.02) $ 0.50
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Three months ended Six months ended
June 30, June 30,
(Stated in thousands
of Canadian dollars) 2010 2009 2010 2009
----------------------------------------------------------------------------
Net earnings (loss) $ (66,547) $ 57,475 $ (4,530) $ 114,892
Unrealized gain
(loss) recorded on
translation of
assets and
liabilities of
self-sustaining
operations in foreign
currency 76,474 (163,709) 23,066 (110,876)
----------------------------------------------------------------------------
Comprehensive income
(loss) $ 9,927 $ (106,234) $ 18,536 $ 4,016
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
Three months ended Six months ended
June 30, June 30,
(stated in thousands of
Canadian dollars) 2010 2009 2010 2009
----------------------------------------------------------------------------
Cash provided by (used
in):
Operations:
Net earnings (loss) $ (66,547) $ 57,475 $ (4,530) $ 114,892
Adjustments and other
items not involving
cash:
Long-term compensation
plans 1,233 652 5,805 (1,872)
Depreciation and
amortization 39,354 28,222 84,988 72,171
Future income taxes 5,510 3,239 5,488 (8,562)
Foreign exchange 26,143 (85,680) 7,797 (50,998)
Amortization of debt
issue costs (note 9) 32,724 16,782 42,779 23,063
Other 2,523 - 886 -
Changes in non-cash
working capital balances 101,064 191,864 19,415 265,456
----------------------------------------------------------------------------
142,004 212,554 162,628 414,150
Investments:
Purchase of property,
plant and equipment (21,684) (90,323) (29,167) (165,245)
Proceeds on sale of
property, plant and
equipment 6,146 1,887 7,299 7,829
Changes in non-cash
working capital balances 4,834 (9,513) 5,390 (21,888)
----------------------------------------------------------------------------
(10,704) (97,949) (16,478) (179,304)
Financing:
Repayment of long-term
debt (78,185) (518,499) (90,373) (881,038)
Debt issue costs (2,165) (6,201) (2,165) (20,954)
Re-purchase of trust
units (note 3) (6) - (6) -
Distributions paid - - - (27,233)
Increase in long-term
debt - 267,272 - 408,893
Issuance of trust units,
net of issue costs - 206,866 - 413,756
Change in non-cash
working capital balances - (1,269) - 431
----------------------------------------------------------------------------
(80,356) (51,831) (92,544) (106,145)
----------------------------------------------------------------------------
Effect of exchange rate
changes on cash and
cash equivalents 3,173 (12,628) 1,730 (10,233)
----------------------------------------------------------------------------
Increase in cash and cash
equivalents 54,117 50,146 55,336 118,468
Cash and cash
equivalents, beginning of
period 132,018 129,833 130,799 61,511
----------------------------------------------------------------------------
Cash and cash
equivalents, end of
period $ 186,135 $ 179,979 $ 186,135 $ 179,979
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Notes to Consolidated Financial Statements (UNAUDITED)
(Tabular amounts are stated in thousands of Canadian dollars except share
numbers)
1. Description of Business and Basis of Presentation
Precision Drilling Corporation ("Precision" or the
"Corporation") is a provider of contract drilling and completion
and production services primarily to oil and natural gas
exploration and production companies in Canada and the United
States.
On June 1, 2010 Precision Drilling Trust (the "Trust") completed
its conversion (the "Conversion") from an income trust to a
corporation pursuant to a Plan of Arrangement (the "Arrangement").
Pursuant to the Arrangement, Trust unitholders and Exchangeable LP
unitholders exchanged their Trust units and Exchangeable LP units
for common shares of Precision on a one-for-one basis.
The Conversion has been accounted for on a continuity of
interest basis and accordingly these interim financial statements
reflect the financial position, results of operations and cash
flows as if Precision had always carried on the business formerly
carried on by the Trust and 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, 2009. All references to
shares and shareholders in these financial statements pertain to
common shares and common shareholders subsequent to the Conversion
and units and unitholders prior to the Conversion. 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, 2009.
2. Seasonality of Operations
Precision has operations that are carried on in Canada which
represent approximately 39% (2009 - 37%) of consolidated total
assets as at June 30, 2010 and 52% (2009 - 43%) of consolidated
revenue for the six months ended June 30, 2010. The ability to move
heavy equipment in 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 Precision'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
Precision's slowest time in this region.
3. Shareholders' Capital
(a) Authorized - unlimited number of voting common shares
- unlimited number of preferred shares, issuable in series
(b) Issued:
Common shares Number Amount
----------------------------------------------------------------------------
Balance May 31, 2010 - $ -
Issued pursuant to the Arrangement 275,663,344 2,770,853
----------------------------------------------------------------------------
Balance June 30, 2010 275,663,344 $ 2,770,853
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following provides a continuity of Trust units and Exchangeable LP units
from January 1, 2010 up to the Conversion on June 1, 2010.
Trust units Number Amount
----------------------------------------------------------------------------
Balance December 31, 2009 275,516,778 $ 2,769,338
Issued on redemption of
non-management directors DSU's 28,586 154
Cancellation of units owned by
dissenting unitholders (840) (9)
----------------------------------------------------------------------------
Balance May 31, 2010 275,544,524 $ 2,769,483
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Exchangeable LP units Number Amount
----------------------------------------------------------------------------
Balance December 31, 2009
and May 31, 2010 118,820 $ 1,370
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Summary Number Amount
----------------------------------------------------------------------------
Trust units 275,544,524 $ 2,769,483
Exchangeable LP units 118,820 1,370
----------------------------------------------------------------------------
Unitholders' capital, May 31, 2010 275,663,344 $ 2,770,853
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Pursuant to the Arrangement, any unitholder of the Trust could
dissent and be paid the fair value of the units, being the trading
price of Trust units at the close of business on the last business
day prior to the Annual and Special Meeting of Unitholders on May
11, 2010. As a result a total of 840 units were repurchased for
cancellation for six thousand dollars, of which a discount of three
thousand dollars over the stated capital was credited to
contributed surplus.
(c) Contributed surplus
Amount
----------------------------------------------------------------------------
Balance December 31, 2009 $ 4,063
Share based compensation expense 3,290
Redemption of non-management directors DSU's (154)
Cancellation of units owned by dissenting unitholders 3
----------------------------------------------------------------------------
Balance June 30, 2010 $ 7,202
----------------------------------------------------------------------------
----------------------------------------------------------------------------
4. Income Taxes
Precision incurs taxes to the extent that there are certain
provincial capital taxes or state franchise taxes, as well as taxes
on any taxable income. Future income taxes arise from the
differences between the accounting and tax basis of Precision 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 ended June 30, Six months ended June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Earnings (loss)
before income taxes $ (58,687) $ 60,217 $ 5,105 $ 114,494
Federal and
provincial statutory
rates 28% 29% 28% 29%
----------------------------------------------------------------------------
Tax at statutory
rates $ (16,433) $ 17,463 $ 1,429 $ 33,203
Adjusted for the
effect of:
Non-deductible
expenses (2,401) (405) 464 4,728
Non-taxable capital
gains 1,248 (568) - (568)
Income taxed at lower
rates 18,791 (12,605) (1,982) (35,424)
Income to be
distributed to
unitholders, not
subject to tax
in the Trust - (879) - (2,323)
Other 6,655 (264) 9,724 (14)
----------------------------------------------------------------------------
Income tax expense
(reduction) $ 7,860 $ 2,742 $ 9,635 $ (398)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5. Bank Indebtedness
During the second quarter of 2010 a U.S. subsidiary of the
Corporation arranged a new US$15.0 million secured operating
facility with a U.S. bank. Advances under this facility are
available at the bank's prime lending rate.
In total the Corporation and its subsidiaries have $25.0 million
and US$15.0 million of secured operating facilities. Availability
of the $25.0 million facility was reduced by outstanding letters of
credit in the amount of $14.7 million at June 30, 2010.
6. Long-Term Debt
June 30, December 31,
2010 2009
----------------------------------------------------------------------------
Secured facility:
Term Loan A $ 287,330 $ 288,887
Term Loan B 342,008 422,097
Revolving credit facility - -
Unsecured senior notes 175,000 175,000
----------------------------------------------------------------------------
804,338 885,984
Less net unamortized debt issue costs (96,829) (137,036)
----------------------------------------------------------------------------
707,509 748,948
Less current portion (4,505) (223)
----------------------------------------------------------------------------
$ 703,004 $ 748,725
----------------------------------------------------------------------------
----------------------------------------------------------------------------
At June 30, 2010 the Term Loan A facility consists of a term A-1
facility denominated in U.S. dollars in the amount of US$253.0
million and a term A-2 facility denominated in Canadian dollars in
the amount of $19.0 million.
At June 30, 2010 the Term Loan B facility consists of a term
loan B-1 facility and a term loan B-2 facility denominated in U.S.
dollars in the amounts of US$274.3 million and US$48.1 million,
respectively.
During the second quarter of 2010, the terms of the secured
facility were amended to lower the LIBOR floor for the Term Loan B
facility to 1.75% from 3.25% and lower the LIBOR interest rate
margin on existing loans under the Term Loan B facility to 5% from
an average interest rate margin of 6.45%. The secured facility was
also amended to provide for the payment in certain circumstances by
Precision to lenders under the Term Loan B facility of a fee equal
to 1% of the aggregate principal amount of loans subsequently
prepaid or re-priced under the Term Loan B facility on or prior to
June 30, 2011. In connection with the amendments to the secured
facility, non-consenting holders of US$74.0 million in loans under
the Term Loan B facility were repaid. After the amendment the
current blended cash interest cost of Precision's debt is
approximately 7.0%.
In addition, the revolving credit facility lending capacity
increased by US$150.0 million to US$410.0 million and is available
to Precision to finance working capital needs and for general
corporate purposes. Availability of the revolving credit facility
was reduced at June 30, 2010 by outstanding letters of credit of
US$27.9 million.
During the first quarter of 2010 Precision amended certain
covenants and terms contained in the secured facility. These
amendments included an increase in the leverage ratio test from
3.00:1 to 3.50:1 through December 31, 2011, a decrease in the
interest coverage ratio test from 3.00:1 to 2.75:1 through December
31, 2011 and the removal of the restrictions on expansion related
capital expenditures (limitations on total capital expenditures
remained unchanged).
At June 30, 2010 mandatory principal repayments are as follows:
For the twelve month periods ended June 30,
----------------------------------------------------------------------------
2011 $ 4,505
2012 52,184
2013 73,273
2014 205,847
2015 351,862
Thereafter 116,667
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. Accumulated Other Comprehensive Loss
----------------------------------------------------------------------------
Balance, December 31, 2009 $(297,497)
Unrealized foreign currency translation gain 23,066
----------------------------------------------------------------------------
Balance, June 30, 2010 $(274,431)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8. Share Based Compensation Plans
The Conversion did not result in any significant changes to
Precision's share based compensation plans except that certain
elements of the plans that were based on the Trust's unit price
prior to the Conversion are now based on Precision's common share
price.
(a) Officers and Employees
During 2009 Precision introduced two new share based incentive
plans to replace the Performance Saving Plan and the Long-Term
Incentive Plan. Under the Restricted Share incentive plan shares
granted to eligible employees vest annually over a three year term.
Vested shares are automatically paid out in cash in the first
quarter of the year following vesting at a value determined by the
fair market value of the shares as at December 31 of the vesting
year. Under the Performance Share incentive plan shares granted to
eligible employees vest at the end of a three year term. Vested
shares are automatically paid out in cash in the first quarter
following the vested term at a value determined by the fair market
value of the shares at December 31 of the vesting year and based on
the number of performance shares held multiplied by a performance
factor that ranges from zero to two times. The performance factor
is based on Precision achieving a predetermined rate of return on
capital employed and share price performance compared to a peer
group over the three year period. As at June 30, 2010 $2.3 million
is included in accounts payable and $5.9 million in long-term
liabilities for the plans. Included in net earnings for the three
and six months ended June 30, 2010 is an expense of $0.7 million
(2009 - $0.3 million) and $3.5 million (2009 - $2.4 million),
respectively.
Notwithstanding that the Performance Savings Plan was replaced
in 2009, certain liabilities continue to exist as eligible
participants were able to elect to receive a portion of their
annual performance bonus in the form of deferred shares . All
deferred shares 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 receipt. A summary of the deferred shares outstanding
under this share based incentive plan is presented below:
Deferred Shares Outstanding
----------------------------------------------------------------------------
Balance, December 31, 2009 245,916
Redeemed on employee resignations and withdrawals (28,674)
----------------------------------------------------------------------------
Balance, June 30, 2010 217,242
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at June 30, 2010 $1.6 million is included in accounts payable
and accrued liabilities for outstanding deferred shares. Included
in net earnings for the three and six months ended June 30, 2010 is
an expense recovery of $0.1 million (2009 - $0.7 million expense)
and $0.2 million (2009 - $0.3 million expense), respectively.
Precision has a Unit Appreciation Rights ("UAR") plan. Under the
plan eligible participants were granted UAR's that entitle the
rights holder to receive cash payments calculated as the excess of
the market price per common share over the exercise price per UAR
on the exercise date. The UAR's vest over a period of 5 years and
expire 10 years from the date of grant. No amounts relating to the
UAR plan have been recorded as compensation expense or accrued
liability as at June 30, 2010 and 2009 as the intrinsic value of
the awards was nil.
(b) Executive
In 2007 Precision instituted a Deferred Signing Bonus Share Plan
for its Chief Executive Officer. Under the plan 178,336 notional
shares were granted on September 1, 2007. The shares are redeemable
one-third annually beginning September 1, 2008 and are settled for
cash based on the share trading price on redemption. As at June 30,
2010, $0.5 million is included in accounts payable and accrued
liabilities for the 68,250 outstanding shares. Included in net
earnings for the three months and six months ended June 30, 2010 is
an expense recovery of $51 thousand (2009 - $0.3 million expense)
and $40 thousand (2009 - $0.6 million expense recovery),
respectively.
(c) Non-management directors
Precision has a deferred share plan for non-management
directors. Under the plan fully vested deferred shares are granted
quarterly based upon an election by the non-management director to
receive all or a portion of their compensation in deferred shares.
These deferred shares are redeemable into an equal number of common
shares any time after the director's retirement. A summary of
deferred shares outstanding under this share based incentive plan
is presented below:
Number Outstanding
----------------------------------------------------------------------------
Balance, December 31, 2009 290,732
Granted 69,474
Redeemed (28,586)
----------------------------------------------------------------------------
Balance, June 30, 2010 331,620
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three and six months ended June 30, 2010 Precision
expensed $0.3 million (2009 - $0.3 million) and $0.5 million (2009
- $0.8 million), respectively, as unit based compensation, with a
corresponding increase in contributed surplus.
(d) Option plan:
Precision has a share option plan under which a combined total
of 10,303,253 options to purchase common shares are reserved to be
granted to employees. Of the amount reserved, 3,803,460 options
have been granted. Under this plan, the exercise price of each
option equals the fair market value of the option at the date of
grant determined by the weighted average trading price for the five
days preceding the grant. The options vest over a period of three
years from the date of grant as employees render continuous service
to Precision and have a term of seven years.
A summary of the status of the equity incentive plan as at June
30, 2010 is presented below:
Options Range of Weighted average Options
outstanding exercise price exercise price exercisable
----------------------------------------------------------------------------
Outstanding as
at December 31,
2009 1,787,700 $ 5.22 - 7.45 $ 5.66 -
Granted 1,874,260 7.58 - 8.59 8.40
Forfeitures (111,001) 5.25 - 8.59 6.14
----------------------------------------------------------------------------
Outstanding as
at June 30, 2010 3,550,959 $ 5.22 - 8.59 $ 7.18 566,487
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The weighted average fair value of the options granted during
2010 was $3.89 per option estimated on the grant date using the
Black-Scholes option pricing model with the following assumption:
average risk-free interest rate 2.2%, average expected life of four
years, expected forfeiture rate of 5% and expected volatility of
58%. Included in net earnings for the three and six months ended
June 30, 2010 is an expense of $1.6 million (2009 - $0.2 million)
and $2.8 million (2009 - $0.2 million), respectively.
9. Finance Charges
The following table provides a summary of the finance charges:
Three months ended June 30, Six months ended June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Interest:
Long-term debt $ 18,642 $ 28,151 $ 37,360 $ 60,569
Other 13 57 32 120
Income (134) (110) (197) (201)
Amortization of
debt issue costs 8,691 6,884 17,760 13,164
Accelerated amortization
of debt issue costs
from voluntary debt
repayments - - 986 -
Loss on settlement of
debt facilities 25,030 9,899 25,030 9,899
----------------------------------------------------------------------------
Finance charges $ 52,242 $ 44,881 $ 80,971 $ 83,551
----------------------------------------------------------------------------
----------------------------------------------------------------------------
10. Contingencies
The business and operations of Precision are complex and
Precision 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
Precision's interpretation of relevant tax legislation and
regulations. Precision'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 Precision's interpretation of the applicable
tax legislation and regulations, with the result that additional
taxes could be payable by Precision and the amount owed, with
estimated interest but without penalties, could be up to $410
million, including the estimated amount pertaining to the long-term
income tax recoverable.
11. Per Share Amounts
The following tables reconcile the net earnings and weighted
average shares outstanding used in computing basic and diluted
earnings per share:
Three months ended June 30, Six months ended June 30,
2010 2009 2010 2009
----------------------------------------------------------------------------
Net earnings (loss)
- basic $ (66,547) $ 57,475 $ (4,530) $ 114,892
Impact of assumed
conversion of
convertible debt,
net of tax - - - 1,723
----------------------------------------------------------------------------
Net earnings (loss)
- diluted $ (66,547) $ 57,475 $ (4,530) $ 116,615
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average
shares outstanding
- basic 275,651 242,573 275,643 211,861
Effect of rights
offering - 11,733 - 12,354
----------------------------------------------------------------------------
Weighted average
shares outstanding
- basic 275,651 254,306 275,643 224,215
Effect of common
share warrants - 5,344 - 2,672
Effect of share
options and other
equity compensation
plans - 172 - 124
Effect of convertible debt - - - 7,793
Effect of rights offering - 247 - 684
----------------------------------------------------------------------------
Weighted average
shares outstanding
- diluted 275,651 260,069 275,643 235,488
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three and six months ended June 30, 2010 the effect of
outstanding warrants, share options and other equity compensation
plans is anti-dilutive to the net loss per share.
12. Segmented Information
Precision operates primarily in Canada and the United States, 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 and Production Corporate Inter-segment
2010 Services Services and Other Eliminations Total
----------------------------------------------------------------------------
Revenue $ 226,241 $ 37,548 $ - $ (1,961) $ 261,828
Segment profit
(loss) 29,594 176 (10,130) - 19,640
Depreciation
and
amortization 33,603 4,552 1,199 - 39,354
Total assets 3,528,842 375,798 290,308 - 4,194,948
Goodwill 654,783 112,139 - - 766,922
Capital
expenditures 19,289 1,590 805 - 21,684
----------------------------------------------------------------------------
Three months Contract Completion
ended June 30, Drilling and Production Corporate Inter-segment
2009 Services Services and Other Eliminations Total
----------------------------------------------------------------------------
Revenue $ 185,226 $ 25,590 $ - $ (1,219) $ 209,597
Segment profit
(loss) 43,520 (681) (11,801) - 31,038
Depreciation
and
amortization 23,434 3,698 1,090 - 28,222
Total assets 3,899,840 393,367 228,223 - 4,521,430
Goodwill 701,140 112,139 - - 813,279
Capital
expenditures 88,529 97 1,697 - 90,323
----------------------------------------------------------------------------
Six months Contract Completion
ended June 30, Drilling and Production Corporate Inter-segment
2010 Services Services and Other Eliminations Total
----------------------------------------------------------------------------
Revenue $ 539,702 $ 101,030 $ - $ (5,768) $ 634,964
Segment profit
(loss) 101,706 10,764 (20,061) - 92,409
Depreciation
and
amortization 72,053 10,553 2,382 - 84,988
Total assets 3,528,842 375,798 290,308 - 4,194,948
Goodwill 654,783 112,139 - - 766,922
Capital
expenditures 24,674 2,633 1,860 - 29,167
----------------------------------------------------------------------------
Six months Contract Completion
ended June 30, Drilling and Production Corporate Inter-segment
2009 Services Services and Other Eliminations Total
----------------------------------------------------------------------------
Revenue $ 575,105 $ 88,565 $ - $ (5,628) $ 658,042
Segment profit
(loss) 161,052 12,875 (17,451) - 156,476
Depreciation
and
amortization 61,397 8,691 2,083 - 72,171
Total assets 3,899,840 393,367 228,223 - 4,521,430
Goodwill 701,140 112,139 - - 813,279
Capital
expenditures 159,907 521 4,817 - 165,245
----------------------------------------------------------------------------
A reconciliation of segment profit to earnings (loss) before income taxes
is as follows:
(Stated in Three months ended June 30, Six months ended June 30,
thousands of
Canadian dollars) 2010 2009 2010 2009
----------------------------------------------------------------------------
Total segment profit $ 19,640 $ 31,038 $ 92,409 $ 156,476
Add (deduct):
Foreign exchange (26,085) 74,060 (6,333) 41,569
Finance charges (52,242) (44,881) (80,971) (83,551)
----------------------------------------------------------------------------
Earnings (loss)
before income taxes $ (58,687) $ 60,217 $ 5,105 $ 114,494
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Precision's operations are carried on in the following geographic locations:
Three months
ended June 30, United Inter-segment
2010 Canada States International Elimination Total
----------------------------------------------------------------------------
Revenue $ 101,472 $ 154,663 $ 6,185 $ (492) $ 261,828
Total assets 1,629,812 2,502,375 62,761 - 4,194,948
----------------------------------------------------------------------------
Three months
ended June 30, United Inter-segment
2009 Canada States International Elimination Total
----------------------------------------------------------------------------
Revenue $ 73,884 $ 131,567 $ 5,337 $ (1,191) $ 209,597
Total assets 1,656,793 2,807,998 56,639 - 4,521,430
----------------------------------------------------------------------------
Six months
ended June 30, United Inter-segment
2010 Canada States International Elimination Total
----------------------------------------------------------------------------
Revenue $ 333,132 $ 290,757 $ 12,419 $ (1,344) $ 634,964
Total assets 1,629,812 2,502,375 62,761 - 4,194,948
----------------------------------------------------------------------------
Six months
ended June 30, United Inter-segment
2009 Canada States International Elimination Total
----------------------------------------------------------------------------
Revenue $ 284,297 $ 363,875 $ 12,479 $ (2,609) $ 658,042
Total assets 1,656,793 2,807,998 56,639 - 4,521,430
----------------------------------------------------------------------------
SECOND QUARTER 2010 EARNINGS CONFERENCE CALL AND WEBCAST
Precision Drilling Corporation has scheduled a conference call
and webcast to begin promptly at 12:00 noon MT (2:00 p.m. ET) on
Thursday, July 22, 2010.
The conference call dial in numbers are 1-866-223-7781 or
416-340-8018.
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
29, 2010 by dialing 1-800-408-3053 or 416-695-5800, pass code
3062581.
About Precision
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 is headquartered in Calgary, Alberta, Canada.
Precision is listed on the Toronto Stock Exchange under the trading
symbol "PD" and on the New York Stock Exchange under the trading
symbol "PDS".
Contacts: Precision Drilling Corporation David Wehlmann
Executive Vice President, Investor Relations (403) 716-4575 (403)
716-4755 (FAX) Precision Drilling Corporation 4200, 150 - 6th
Avenue S.W. Calgary, Alberta, Canada T2P 3Y7
www.precisiondrilling.com
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