(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.
Effective January 1, 2011, Precision Drilling Corporation
("Precision" or the "Corporation") began reporting its financial
results in accordance with International Financial Reporting
Standards ("IFRS"). Prior year comparative amounts have been
changed to reflect results as if Precision had always prepared its
financial results using IFRS. Please see additional discussion
regarding IFRS later in this news release.
Precision Drilling Corporation reported net earnings of $66
million or $0.23 per diluted share for the three months ended March
31, 2011 compared to net earnings of $57 million or $0.20 per
diluted share for the first quarter of 2010. Financing costs for
the first quarter 2011 were $43 million which included a one-time
charge of $27 million ($0.07 per diluted share) related to
Precision's repayment of the $175 million 10% senior unsecured
notes.
Revenue for the first quarter of 2011 totalled $525 million
compared to $373 million for the same period of 2010. Earnings
before interest, taxes, depreciation and amortization and foreign
exchange ("EBITDA") were $186 million for the first quarter of 2011
compared to $118 million for the first quarter of 2010 (see
"Financial Measures Reconciliations" in this news release). The
increase in drilling activity both in Canada and the United States,
coupled with higher dayrates in both markets in the first quarter
of 2011 over the same period of 2010, led to the 41% increase in
revenue and 58% increase in EBITDA.
Revenue for the fourth quarter of 2010 was $436 million and
EBITDA totalled $145 million. First quarter 2011 revenue and EBITDA
were higher than the fourth quarter of 2010 due to higher
utilization and revenue rates in the Canadian and United States
drilling operations as well as in Precision's other service
offerings. Average drilling rig revenue per day increased by
US$1,440 in Precision's United States operations and by $671 in the
Canadian operations in the first quarter of 2011 over the fourth
quarter of 2010.
Kevin Neveu, Precision's President and Chief Executive Officer,
stated: "A prolonged Canadian winter drilling season characterized
by the highest utilization since 2006 illustrated the persistent
industry shortage of Tier 1 drilling rigs. During the quarter,
Precision signed new build rig term contracts for seven additional
Tier 1 Super Series rigs for Canada; the majority of which our
customers tell us are headed for oil projects when they are
completed in late 2011 and early 2012. This brings our 2011 new
build rig program to 12 rigs with 11 scheduled to be deployed in
the Canadian market and one for the United States market.
Consequently, our capital budget has increased to $514 million for
2011 with an additional $81 million to be spent in 2012 to complete
the 2011 build program."
"Across North America, approximately 70% of Precision's rigs
working during the first quarter were drilling for oil or liquids
rich natural gas targets and over 80% were drilling complex
horizontal or directional wells. In the United States over the past
nine months, we have seen the strong oil and liquids rich natural
gas demand for Tier 1 and Tier 2 rigs continue to absorb rigs that
have been released as our customers reduce activity in dry gas
resource plays. Precision has redeployed approximately 25 rigs from
dry gas plays, such as the Barnett and Haynesville shales, to oil
and liquids rich plays such as the Eagle Ford and Permian Basin.
While the seven Precision new build rigs announced today are for
the Canadian market, Precision continues to see similar customer
demand in the United States for additional Tier 1 rigs and expects
this interest will result in new build rig contracts as the year
progresses. These 12 new build Tier 1 Super Series rigs contracted
since the beginning of the year confirms our customers' confidence
in the long term sustainability and growth of oil drilling in North
America."
"Precision's average active rig count in the United States for
the first quarter of 2011 was up three rigs over the fourth quarter
of 2010 and 29% over the same period in 2010. Precision's active
rig count in the United States is currently 107 and we expect it to
stay at this level or increase modestly over the coming months as
Precision's new build rigs enter the market. If low natural gas
prices persist, there is the potential for further regional
pullback in gas related activity; however, we would expect most of
these rigs to be absorbed by oil and liquids rich natural gas
drilling activity as we have seen to date. As demand for Super
Series and Tier 2 rigs remains strong, average dayrates in the
United States markets continue to modestly improve from previous
quarters."
"Canadian drilling activity during the first quarter was at
levels that haven't been reached for several years. Precision
averaged 139 rigs operating during the first quarter of 2011, up
from 106 rigs during the fourth quarter of 2010 and 113 rigs from
the 2010 first quarter. Most of this increase was driven by
unconventional horizontal drilling and completion techniques being
applied to oil reservoirs in Western Canada. Precision's current
active rig count in Canada is 34 as weather related spring break-up
began in late March. We believe that with the exception of the
traditional spring break-up reduction of activity, most of the oil
related drilling demand will continue into the second half of 2011,
which should lead to year-over-year increases in rig utilization
for Precision. Higher market dayrates are being realized in Canada
because of the strong demand for high performance drilling
assets."
"Precision continues to seize market opportunities. During 2010,
we contracted and began construction of nine new rigs. Five of
these new build rigs are Super Singles, all of which have been
delivered. Three of these rigs are working in Canada and two in the
United States. Four rigs are Super Triples, three of which are
working in the United States while the remaining rig is expected to
be deployed in the United States by mid-year 2011."
"For 2011, Precision has contracted for the construction of
eight Super Single rigs for Canada, one Super Double rig for Canada
and three Super Triple rigs, one for the United States and two for
Canada. Several of these new contracts were consummated in the past
month as oil and liquids rich gas drilling demand remains strong.
The new build rig contracts for 2010 and 2011 have an average term
of over three years. Precision is continuing its high value focused
organic growth program as we believe there will be additional
opportunities for new build Super Series rigs which will provide
the High Performance, High Value service that meets and exceeds
customer requirements."
"Precision's Completion and Production Services group also had a
very strong quarter. Our service rig fleet worked 17% more hours
during the first quarter of 2011 as compared to the previous year
quarter. Oil related work is where the vast majority of the service
rig hours were achieved during the first quarter of 2011. The
segment generated EBITDA of $34 million during the first quarter of
2011, up 77% from last year. This gain was driven by an increase in
service rig utilization and average hourly rates as well as strong
results from the rentals division."
"During the first quarter, Precision completed the acquisition
of Drake Directional Drilling and Drake MWD Services. These two
companies, based in the United States, doubled our North American
directional drilling capacity and provide Precision with the
operational excellence of these two well-respected companies. With
the completion of our refinancing efforts, Precision has improved
its financial flexibility which will allow us to continue to
capitalize on potential opportunities as Precision looks toward
continuing to expand its drilling, directional drilling and
international presence during 2011", concluded Mr. Neveu.
SELECT FINANCIAL AND OPERATING INFORMATION
(stated in thousands of
Canadian dollars, except Three months ended March 31, %
per share amounts) 2011 2010 Change
----------------------------------------------------------------------------
Revenue $ 525,350 $ 373,136 40.8
EBITDA(1) 186,411 117,658 58.4
Net earnings 65,560 56,917 15.2
Cash provided by operations 92,165 20,624 346.9
Capital spending:
Upgrade capital expenditures 29,227 6,796 330.1
Expansion capital expenditures 35,573 687 5,078.0
Proceeds on sale (735) (1,153) (36.3)
----------------------------------------------------------------------------
Net capital spending 64,065 6,330 912.1
Net earnings - per share:
Basic 0.24 0.21 14.3
Diluted 0.23 0.20 15.0
Contract drilling rig fleet 359 351 2.3
Drilling rig utilization days:
Canada 12,542 10,205 22.9
United States 9,021 6,993 29.0
International 180 175 2.9
Service rig fleet 220 220 -
Service rig operating hours 96,148 82,169 17.0
----------------------------------------------------------------------------
(1) See "FINANCIAL MEASURES RECONCILIATIONS".
Revenue in the first quarter of 2011 was $152 million higher
than the prior year period. The increase was due to a
year-over-year increase in rates and utilization days in both
Canada and the United States. Revenue in Precision's Contract
Drilling Services segment increased by 40% while revenue increased
42% in the Completion and Production Services segment in the first
quarter of 2011 compared to the prior year quarter.
EBITDA margin (EBITDA as a percentage of revenue) was 35% for
the first quarter of 2011 compared to 32% for the same period in
2010. The increase in EBITDA margin was primarily attributable to
higher utilizations and higher average dayrates in both Canada and
the United States in the first quarter of 2011 versus the prior
year period. 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
support EBITDA margins.
To align with the management of the operating divisions,
Precision now considers the camp and catering division to be within
the Completion and Production Services segment. Prior period
numbers have been restated to reflect this change. In the Contract
Drilling Services segment, Precision currently owns 359 contract
drilling rigs, including 202 in Canada, 154 in the United States
and three rigs in international locations. Precision's Completion
and Production Services segment includes 200 service rigs, 20
snubbing units, 80 wastewater treatment units, 82 drilling and base
camps and a broad mix of rental equipment.
During the quarter, an average of 139 drilling rigs worked in
Canada and 102 worked in the United States and Mexico totalling an
average of 241 rigs. This compares with an average of 204 rigs
working in the fourth quarter of 2010 and 193 rigs in the first
quarter a year ago.
Precision's 2011 priorities are threefold:
1. 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.
2. Focus on North American organic growth. Precision's 2010 new
build rig program included nine rigs. Eight of those rigs are
complete and working with the remaining rig projected to be
completed and working by the end of the second quarter of 2011.
Precision's 2011 new build rig program currently stands at 12 rigs,
all of which are contracted and expected to be completed by
mid-2012.
3. Improve financial flexibility, which provides the financial
liquidity to be able to continue to seize opportunities to grow the
Corporation. In addition to North American organic growth,
Precision plans on pursuing both organic growth and acquisition
opportunities in the directional drilling and international
drilling arena during 2011. During the first quarter of 2011,
Precision repaid its $175 million 10% senior unsecured notes and
issued $200 million of senior unsecured notes with an eight year
term, bearing interest at 6.5% annually. Also, late in the first
quarter, Precision completed the acquisition of two directional
drilling companies in the United States. These companies typically
operate 10 to 14 directional drilling jobs, on a continuing
basis.
As previously disclosed in the 2010 Management's Discussion and
Analysis and in Note 25 to the December 31, 2010 financial
statements, certain Canadian tax authorities have reviewed prior
period transactions and on February 9, 2011, the Corporation
received a notice of reassessment from Canada Revenue Agency for
$216 million relating to a transaction that occurred in the 2005
tax year. As a result of the reassessment, Precision was required
to pay $108 million of the reassessed balance. Precision will
appeal this reassessment as it vigorously defends what it believes
to be a correct filing position related to this transaction. This
appeal process could be lengthy and the ultimate outcome of the
process is unknown.
Oil prices were higher and natural gas prices were lower during
the first quarter of 2011 compared with the year ago period. For
the first quarter of 2011, West Texas Intermediate crude oil
averaged US$94.11 per barrel during the quarter, 20% higher when
compared to US$78.58 per barrel in the same period in 2010. AECO
natural gas spot prices averaged $3.76 per MMBtu, 24% lower than
the first quarter 2010 average of $4.96 per MMBtu. In the United
States, Henry Hub natural gas spot prices averaged US$4.17 per
MMBtu in the first quarter of 2011, a decrease of 19% over the
first quarter 2010 average of US$5.12 per MMBtu.
Summary for the three months ended March 31, 2011:
- Precision refinanced its $175 million 10% senior unsecured
notes with $200 million 6.5% senior unsecured notes due in 2019
reducing future interest payments and extending the period of
repayment.
- Operating earnings were $123 million and 23% of revenue,
compared to $65 million and 18% of revenue in 2010. Operating
earnings were positively impacted by the increase in activity and
rates in all of Precision's service offerings in North America over
the same period in 2010.
- Financial charges were $43 million, an increase of $14 million
from the first quarter of 2010 due to the refinancing of a portion
of Precision's long-term debt which required the Corporation to
record a charge of $27 million for the make-whole premium under the
previously outstanding $175 million 10% senior unsecured notes.
- In November 2010, Precision designated its U.S. dollar
denominated long-term debt as a hedge against its net investment in
its United States operations. As a result, in the first quarter of
2011 the gain on translation of the U.S. denominated long-term debt
is recognized in comprehensive income while in the comparative
period it was recognized as an expense in the period. During the
first quarter, the Canadian dollar strengthened in relation to the
U.S. dollar giving rise to a foreign exchange loss of $3 million on
the net U.S. dollar denominated monetary position held in the
Canadian based operations.
- Capital expenditures for the purchase of property, plant and
equipment were $65 million in the first quarter, an increase of $57
million over the same period in 2010. Capital spending for the
first quarter of 2011 included $36 million for expansion capital
and $29 million for the maintenance and upgrade of existing
assets.
- Average revenue per utilization day for contract drilling rigs
increased in the first quarter of 2011 to US$20,864 from the prior
year first quarter of US$18,710 in the United States and increased
in Canada to $17,820 in the first quarter of 2011 from $15,511 for
the first quarter of 2010. The increase in revenue rates for the
first quarter in the United States reflects a greater proportion of
rigs working under term contracts, the pricing leverage of higher
overall industry utilization and increased turnkey revenue compared
to the prior year quarter partially offset by idle but contracted
rig revenue in 2010. In the United States, for the first quarter of
2011, 70% of Precision's working rigs were working under term
contract compared to 51% in the 2010 comparative period. For the
first quarter of 2010 revenue in the United States included US$4
million generated from idle but contracted rigs associated with
term customer contracts compared with none during the current
quarter. Turnkey revenue for the first quarter of 2011 was US$16
million compared with US$13 million in 2010. In Canada, contract
drilling rates have increased from the prior year comparative
period which is a reflection of higher rig activity and increased
demand for Precision's rigs. Within Precision's Completion and
Production Services segment, average hourly rates for service rigs
were $720 in the first quarter of 2011 compared to $640 in the
first quarter of 2010.
- Average operating costs per utilization day for drilling rigs
increased in the first quarter of 2011 to US$13,537 from the prior
year first quarter of US$12,149 in the United States and increased
from $8,453 in 2010 to $8,740 in Canada. The cost increase in
Canada was primarily due to a labour rate increase that became
effective in the fourth quarter of 2010. In the United States, the
increase was due to a labour rate increase effective December 2010,
and higher repairs and maintenance. Within Precision's Completion
and Production Services segment, average hourly operating costs for
service rigs increased to $499 in the first quarter of 2011 as
compared to $470 in the first quarter of 2010 primarily due to a
labour cost increase which was recovered by a corresponding
increase in the revenue rate.
- General and administrative expenses were $35 million, an
increase of $9 million from the first quarter of 2010, primarily
because incentive compensation costs tied to the price of
Precision's common stock increased $8 million over the comparable
quarter in 2010.
OUTLOOK
Precision has a strong portfolio of long-term customer contracts
that provides a base level of activity and revenue. Precision
expects to have an average of approximately 110 rigs committed
under term contracts in North America in the second quarter of
2011, an average of 94 rigs contracted for the third quarter of
2011 and 76 for the fourth quarter of 2011. 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 2011, based on the current position, Precision currently has
an average of 36 rigs in Canada under term contract, 61 in the
United States and two in Mexico. Since the fourth quarter 2010
earnings release in February 2011, Precision has added term
contracts that increased the average for 2011 from 85 rigs to 95
rigs working under term contract and from 33 to 44 rigs under term
contract for 2012. For 2012, Precision currently has term contracts
in place for an average of 44 rigs, with 28 in Canada and 16 in the
United States and Mexico.
Capital expenditures are expected to be approximately $514
million for 2011, of which $65 million was expended during the
first quarter. The 2011 total includes $121 million for sustaining
and infrastructure expenditures and is based upon currently
anticipated activity levels for 2011. Additionally, $242 million is
slated for expansion capital and includes the cost to complete five
of the nine drilling rigs from the 2010 new build rig program and
12 additional new build rigs for 2011. The total capital
expenditures also include the cost to upgrade eight to twelve rigs
in 2011 and to purchase long lead time items for the Corporation's
capital inventory at an anticipated cost of $151 million. These
long lead time items include top drives, masts and engines, that
can be used for North American or international new build rig
opportunities and rig tier upgrades. Precision expects that the
$514 million will be split $442 million for the Contract Drilling
segment and $72 million for the Completion and Production Services
segment. An additional $81 million of capital expenditures is
expected to carry forward to 2012 to complete the 2011 new build
rig program.
Interest remains very strong for additional Tier 1 Super Series
rigs for the United States. Precision believes that customer
demand, specifically for the Bakken, Eagle Ford and Permian Basin,
will result in additional new build rig opportunities throughout
2011 and we continue to see attractive opportunities to upgrade
lower tier rigs. Oil plays in Canada, such as the Cardium and
Viking, will also provide additional opportunities for new build
rigs during the year.
To date in 2011, there has been substantially higher drilling
activity in Canada and the United States than in the prior year.
Precision believes that oil directed drilling demand will continue
to lead rig counts higher in North America. There is also increased
liquidity in the capital markets as well as higher oil commodity
prices which is providing some of Precision's customers with cash
flow to increase drilling programs. According to industry sources,
as at April 21, 2011, the United States active land drilling rig
count was up about 24% from the same period in the prior year while
the Canadian drilling rig count had increased about 30%. With the
year-over-year improvements in rig utilization, there have been
recent improvements in spot market dayrates charged to customers in
Canada and there continues to be modest improvements in average
dayrates in the United States. The improvements in dayrates in
Canada and the United States are expected to hold, and possibly
improve, for the remainder of 2011.
Natural gas production in the United States has remained strong
despite reduced drilling activity over the last two years. However
with the cold winter in North America, United States natural gas
storage levels as at the middle of April 2011 are near the
five-year average and 9% 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 liquids rich natural gas drilling
in areas like the Permian Basin, Bakken and Eagle Ford have been
strong and the United States oil rig count as at April 21, 2011 is
78% higher than it was a year ago. On average, Precision has more
equipment working in oil related plays than at any time in the last
20 years, while approximately 30% of Precision's 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, customer changes
in natural gas drilling plans are reflected in a decline in the rig
count targeting dry gas plays. 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 further reductions in natural gas directed
drilling would continue to be mostly offset by increases in oil and
liquids rich natural gas drilling.
Despite near term challenges, the future of the global oil and
gas industry remains promising. For Precision, 2011 represents an
opportunity to demonstrate our value to customers by providing High
Performance, High Value services that deliver low customer well
costs and strong margins to Precision.
As of January 1, 2011, Precision began reporting its financial
statements under IFRS and future financial statements will be
required to be prepared in compliance with IFRS as if Precision had
always followed these standards. Certain first-time adoption
elections were made which impact the opening balance sheet amounts
and those key first-time elections are discussed in the 2010 annual
Management's Discussion and Analysis. For the three month period
ended March 31, 2011, Precision is required to prepare
reconciliations from Canadian Generally Accepted Principles that
existed up to December 31, 2010 to IFRS balances and to provide a
greater amount of financial statement disclosures. As a result,
financial statements with related notes will be filed with
securities commissions at a later date.
CONSOLIDATED FINANCIAL RESULTS
(stated in thousands of
Canadian dollars, except Three months ended March 31, %
where indicated) 2011 2010 Change
----------------------------------------------------------------------------
Revenue $ 525,350 $ 373,136 40.8
Expenses:
Operating 304,325 229,672 32.5
General and administrative 34,614 25,806 34.1
----------------------------------------------------------------------------
EBITDA(1) 186,411 117,658 58.4
Depreciation 63,319 52,307 21.1
----------------------------------------------------------------------------
Operating earnings(1) 123,092 65,351 88.4
Finance charges 42,528 28,729 48.0
Foreign exchange 3,332 (19,752) n/m
----------------------------------------------------------------------------
Earnings before income taxes 77,232 56,374 37.0
Income taxes 11,672 (543) n/m
----------------------------------------------------------------------------
Net earnings $ 65,560 $ 56,917 15.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings per diluted share $ 0.23 $ 0.20 15.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) See "FINANCIAL MEASURES RECONCILIATIONS".
n/m calculation not meaningful.
SEGMENTED FINANCIAL RESULTS
To align with the management of the operating divisions,
Precision now considers the camp and catering division to be within
the Completion and Production Services segment. Precision views its
corporate segment as a support function that provides assistance to
more than one segment. Beginning with the current quarter Precision
has included United States based corporate costs, previously
included in Contract Drilling Services, in the Corporate and Other
segment. Prior period numbers have been restated to reflect these
changes. Precision's operations are reported in two segments; the
Contract Drilling Services segment includes the drilling rig,
directional drilling, oilfield supply and manufacturing divisions;
and the Completion and Production Services segment includes the
service rig, snubbing, rental, camp and catering and wastewater
treatment divisions.
(stated in thousands of Three months ended March 31, %
Canadian dollars) 2011 2010 Change
----------------------------------------------------------------------------
Revenue:
Contract Drilling Services $ 426,027 $ 304,820 39.8
Completion and Production Services 104,229 73,152 42.5
Inter-segment eliminations (4,906) (4,836) (1.4)
----------------------------------------------------------------------------
$ 525,350 $ 373,136 40.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
EBITDA:(1)
Contract Drilling Services $ 172,550 $ 112,856 52.9
Completion and Production Services 34,451 19,445 77.2
Corporate and other (20,590) (14,643) (40.6)
----------------------------------------------------------------------------
$ 186,411 $ 117,658 58.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) See "FINANCIAL MEASURES RECONCILIATIONS".
SEGMENT REVIEW OF CONTRACT DRILLING SERVICES
(stated in thousands of
Canadian dollars, except Three months ended March 31, %
where indicated) 2011 2010 Change
----------------------------------------------------------------------------
Revenue $ 426,027 $ 304,820 39.8
Expenses:
Operating 243,699 183,332 32.9
General and administrative 9,778 8,632 13.3
----------------------------------------------------------------------------
EBITDA(1) 172,550 112,856 52.9
Depreciation 54,527 43,605 25.0
----------------------------------------------------------------------------
Operating earnings(1) $ 118,023 $ 69,251 70.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating earnings as a percent of revenue 27.7% 22.7%
----------------------------------------------------------------------------
Drilling rig revenue per utilization
day in Canada $ 17,820 $ 15,511 14.9
----------------------------------------------------------------------------
Drilling rig revenue per utilization
day in the United States(2) US$ 20,864 US$ 18,710 11.5
----------------------------------------------------------------------------
(1) See "FINANCIAL MEASURES RECONCILIATIONS".
(2) Includes revenue from idle but contracted rig days and lump sum payouts.
Canadian onshore Three months ended March 31,
drilling statistics:(1) 2011 2010
----------------------------------------------------------------------------
Precision Industry(2) Precision Industry(2)
----------------------------------------------------------------------------
Number of drilling rigs
(end of period) 202 793 202 811
Drilling rig operating days
(spud to release) 11,127 47,462 9,111 38,399
Drilling rig operating day
utilization 61% 67% 50% 53%
Number of wells drilled 1,091 3,607 940 3,564
Average days per well 10.2 13.2 9.7 10.8
Number of metres drilled
(000s) 1,720 6,511 1,524 5,873
Average metres per well 1,577 1,805 1,621 1,648
Average metres per day 155 137 167 153
----------------------------------------------------------------------------
(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:(1) 2011 2010
----------------------------------------------------------------------------
Precision Industry(2) Precision Industry(2)
Average number of active
land rigs for quarter
ended:
March 31 100 1,695 78 1,300
----------------------------------------------------------------------------
(1) United States lower 48 operations only.
(2) Baker Hughes rig counts.
Contract Drilling Services segment revenue for the first quarter
of 2011 increased by 40% to $426 million and EBITDA increased by
53% to $173 million compared to the same period in 2010. The
increase in revenue and EBITDA was due to the higher drilling rig
activity and higher average rates per day for both Canada and the
United States.
Activity in North America was impacted by increased customer
demand for oil related drilling activity as a result of higher
global oil prices. In the first quarter, drilling rig revenue per
utilization day in Canada was up 15% over the prior year as a
result of increased rates for rigs working on well-to-well
contracts. During the quarter, 24% of Precision's utilization days
in Canada were generated from rigs under term contract compared
with 27% in 2010 while in the United States 70% of utilization days
were generated from rigs under term contract as compared to 51% in
the prior year period. As at the end of the quarter, Precision had
70 drilling rigs working under term contracts in the United States
and 37 in Canada.
Drilling rig utilization days in Canada (drilling days plus move
days) during the first quarter of 2011 were 12,542, an increase of
23% compared to 10,205 in 2010. Drilling rig utilization days for
Precision in the United States was 29% higher than the same quarter
of 2010 due to increased customer demand with the majority of
additional activity coming from oil and liquids rich natural gas
related plays. On average Precision had two rigs working in Mexico
during the first quarter of 2011 the same as the corresponding
quarter of 2010.
Contract Drilling Services operating costs were 57% of revenue
for the quarter which is three percentage points lower than the
prior year period. On a per day basis, operating costs for the
drilling rig division in Canada were above the prior year because
of an increase in crew wage expense effective October 2010.
Operating costs for the quarter in the United States on a per day
basis were up from the comparable period in 2010 due to a crew wage
increase effective December 2010 and higher repair and maintenance
costs.
Quarterly depreciation in the Contract Drilling Services segment
increased 25% 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 thousands of
Canadian dollars, except Three months ended March 31, %
where indicated) 2011 2010 Change
----------------------------------------------------------------------------
Revenue $ 104,229 $ 73,152 42.5
Expenses:
Operating 65,532 51,176 28.1
General and administrative 4,246 2,531 67.8
----------------------------------------------------------------------------
EBITDA(1) 34,451 19,445 77.2
Depreciation 7,071 6,677 5.9
----------------------------------------------------------------------------
Operating earnings(1) $ 27,380 $ 12,768 114.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating earnings as a percent of revenue 26.3% 17.5%
----------------------------------------------------------------------------
Well servicing statistics:(2)
Number of service rigs (end of period) 220 220 -
Service rig operating hours 96,148 82,169 17.0
Service rig operating hour utilization 48.6% 41.5%
Service rig revenue per operating hour $ 720 $ 640 12.5
----------------------------------------------------------------------------
(1) See "FINANCIAL MEASURES RECONCILIATIONS".
(2) Now includes snubbing services. Comparative numbers have been restated
to reflect this change.
Completion and Production Services segment revenue for the first
quarter increased by 42% from the first quarter of 2010 to $104
million and EBITDA increased by 77% to $34 million. The increase in
revenue and EBITDA is attributed to the increase in activity as
customers increased spending in response to higher oil and natural
gas liquids commodity prices.
Well servicing and snubbing activity increased 17% from the
prior year period, with the fleet generating 96,148 operating hours
in the first quarter of 2011 compared with 82,169 hours in the
prior year quarter for utilization of 49% and 41%, 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. Approximately
80% of the first quarter service rig activity was oil related. New
well completions were 25% higher than the prior year quarter and
accounted for 23% of service rig operating hours in the first
quarter compared to 22% in the same quarter in 2010. Precision's
camp and catering division benefited from a 500-man base camp in
Canada that is contracted until the third quarter of 2011 and a
175-man base camp in Canada that is contracted into 2012.
Average service rig revenue increased $80 per operating hour to
$720 from the prior year period due to higher rates driven by
increased demand for the services.
Operating costs as a percentage of revenue decreased to 63% in
the first quarter of 2011 from 70% in the same period of 2010 as
fixed costs spread over a higher activity base were partially
offset by higher crew wages in the service rig division. Operating
costs per service rig operating hour increased over the comparable
period in 2010 due primarily to higher wages, higher fuel prices
and higher repair and maintenance costs to prepare for increased
activity.
Depreciation in the Completion and Production Services segment
in the first quarter of 2011 was 6% higher than the prior year due
to higher equipment utilization. The well servicing operation uses
the unit of production method of calculating depreciation while the
other operating divisions within the Completion and Production
Services segment use the straight-line method.
SEGMENT REVIEW OF CORPORATE AND OTHER
Precision views its corporate segment as support functions that
provide assistance to more than one segment. Beginning with the
current quarter Precision has included United States based
corporate costs, which were previously in the Contract Drilling
Services segment, in the corporate segment and restated prior
period comparatives. The Corporate and other segment had an EBITDA
loss of $21 million for the first quarter of 2011, $6 million
higher than the prior year comparative period due to increased
costs associated with share based performance incentive plans.
OTHER ITEMS
Net financial charges were $43 million, an increase of $14
million from the first quarter of 2010 due to the refinancing of a
portion of Precision's long-term debt which required the
Corporation to record a charge of $27 million for the make-whole
premium under the previously outstanding $175 million senior
unsecured notes partially offset by lower amortization of debt
issue costs and long-term debt interest expense.
The Corporation had a foreign exchange loss of $3 million during
the first quarter of 2011 due to the strengthening of the Canadian
dollar versus the U.S. dollar and the impact on the net U.S. dollar
denominated monetary position in the Canadian dollar based
companies.
Precision's effective tax rate on earnings before income taxes
for the first quarter of 2011 was 15%.
LIQUIDITY AND CAPITAL RESOURCES
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 build rig programs require two
to five year term contracts in order to mitigate capital recovery
risk.
Liquidity remains sufficient as Precision had a cash balance of
$130 million and the US$550 million senior secured revolver
("Secured Facility") remains undrawn except for US$23 million in
outstanding letters of credit as at March 31, 2011. In addition to
the Secured Facility, Precision has available $40 million in
operating facilities which are used for working capital
management.
During March 2011, Precision issued $200 million aggregate
principal amount of 6.5% senior unsecured notes due 2019 in a
private placement. The net proceeds and cash on hand were in effect
used to repay the $175 million 10% senior unsecured notes. The
total repayment of approximately $204 million included the $175
million in principal, accrued interest and a make-whole premium.
The make-whole premium of $27 million was a charge to earnings in
the first quarter of 2011.
During November 2010, Precision closed an offering of US$650
million aggregate principal amount of 6.625% senior unsecured notes
due 2020 (the "Unsecured Notes") in a private placement. Net
proceeds from the Unsecured Notes offering were used to repay in
full the outstanding indebtedness under the Corporation's then
existing term loan A and term loan B credit facilities. At that
time, the outstanding balance under the term loan A credit facility
was approximately US$263 million and the outstanding balance under
the term loan B credit facility was approximately US$318 million.
In conjunction with the closing of the Unsecured Notes offering,
Precision terminated its existing secured credit facilities and
entered into the Secured Facility which expires in 2013. Subject to
certain conditions, the new Secured Facility may be increased by an
additional US$100 million.
As at March 31, 2011 and December 31, 2010 Precision had the
following long-term debt balances:
March 31, December 31,
2011 2010
----------------------------------------------------------------------------
Senior secured revolving credit facility $ - $ -
Unsecured senior notes:
6.625% senior notes (US$650 million) 631,670 646,490
6.5% senior notes 200,000 -
10.0% senior notes - 175,000
----------------------------------------------------------------------------
831,670 821,490
Less net unamortized debt issue costs (20,262) (16,996)
----------------------------------------------------------------------------
$ 811,408 $ 804,494
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at March 31, 2011, the Corporation was in compliance with the
covenants under the Secured Facility and expects to remain in
compliance with such covenants and have complete access to credit
lines during the remainder of 2011.
The current blended cash interest cost of Precision's debt is
approximately 6.6% compared to 7.3% as at December 31, 2010.
In November 2010 Precision designated its U.S. dollar
denominated long-term debt as a hedge of its investment in its
United States operations. To be accounted for as a hedge, the
foreign currency denominated long-term debt must be designated and
documented as such and must be effective at inception and on an
ongoing basis.
QUARTERLY FINANCIAL SUMMARY
(stated in thousands of
Canadian dollars, except
per share amounts)
2010 2011
----------------------------------------------------------------------------
Quarters ended March 31 June 30 September 30 December 31 March 31
----------------------------------------------------------------------------
Revenue $ 373,136 $ 261,828 $ 359,152 $ 435,537 $ 525,350
EBITDA(1) 117,658 60,125 112,607 144,518 186,411
Net earnings
(loss): 56,917 (69,417) 56,285 (250) 65,560
Per basic share 0.21 (0.25) 0.21 - 0.24
Per diluted share 0.20 (0.25) 0.20 - 0.23
Funds provided by
operations(1) 101,548 42,170 98,081 132,607 152,774
Cash provided by
operations 20,624 142,004 67,575 75,192 92,165
----------------------------------------------------------------------------
(1) See "FINANCIAL MEASURES RECONCILIATIONS".
FINANCIAL MEASURES RECONCILIATIONS
Precision uses certain measures that are not defined terms under
IFRS to assess performance and believes these measures provide
useful supplemental information to investors. The following are the
measures Precision uses in assessing performance.
EBITDA
Management believes that in addition to net earnings, EBITDA, as
derived from information reported in the Consolidated Statements of
Income, 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 or how depreciation and amortization charges affect
results.
The following table provides a reconciliation of net earnings
under IFRS to EBITDA.
(stated in thousands of Three months ended March 31,
Canadian dollars) 2011 2010
----------------------------------------------------------------------------
EBITDA $ 186,411 $ 117,658
Add (deduct):
Depreciation and amortization (63,319) (52,307)
Foreign exchange gain (loss) (3,332) 19,752
Finance charges (42,528) (28,729)
Income taxes (11,672) 543
----------------------------------------------------------------------------
Net earnings $ 65,560 $ 56,917
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating Earnings
Management believes that in addition to net earnings, operating
earnings as reported in the Consolidated Statements of Income 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.
The following table provides a reconciliation of net earnings
under IFRS, to operating earnings.
(stated in thousands of Three months ended March 31,
Canadian dollars) 2011 2010
----------------------------------------------------------------------------
Operating earnings $ 123,092 $ 65,351
Add (deduct):
Foreign exchange gain (loss) (3,332) 19,752
Finance charges (42,528) (28,729)
Income taxes (11,672) 543
----------------------------------------------------------------------------
Net earnings $ 65,560 $ 56,917
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Funds Provided by Operations
Management believes that in addition to cash provided by
operations, funds provided by operations as reported in the
Consolidated Statements of Cash Flow is a useful supplemental
measure as it provides an indication of the funds generated by
Precision's principal business activities prior to consideration of
working capital, which is primarily made up of highly liquid
balances.
The following table provides a reconciliation of funds provided
by operations to cash provided by operations.
(stated in thousands of Three months ended March 31,
Canadian dollars) 2011 2010
----------------------------------------------------------------------------
Funds provided by operations $ 152,774 $ 101,548
Deduct:
Changes in non-cash working
capital balances (60,609) (80,924)
----------------------------------------------------------------------------
Cash provided by operations $ 92,165 $ 20,624
----------------------------------------------------------------------------
----------------------------------------------------------------------------
TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS
(IFRS)
Precision is reporting its financial results in accordance with
IFRS from January 1, 2011, the changeover date set by the Canadian
Accounting Standards Board (AcSB). IFRS compliant comparative
financial information for one year from the effective date is
required.
For the quarter ended March 31, 2010 Precision has restated the
operating results as if it had always prepared financial results in
accordance with IFRS. As a result of componentization of capital
assets and applying different depreciation rates to the different
components under IFRS, partially offset by the write-down of
certain assets to fair market value, depreciation expense for the
first quarter of 2010 has increased by $7 million over the amount
previously reported. In addition, Precision has a cash settled
share appreciation rights plan which was previously recorded based
on the intrinsic value method whereas IFRS requires the use of an
option pricing model. The difference in method resulted in an
increase to the stock based compensation expense reported in the
first quarter of 2010 of $1 million. Together these adjustments had
a net tax impact of reducing the deferred tax expense in the first
quarter of 2010 by $2 million.
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", "continue", "project", "appears", "potential" 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; customer demand for oil and liquids rich natural
gas drilling; active rig counts remaining stable or increasing; 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
liquids rich natural gas activity leading the way; North American
drilling activity levels will be higher in the second half of 2011
over the same period in 2010; amount, timing, and allocation 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; market dayrates will continue
to improve; the deployment of new build rigs and the location
thereof; Precision's financial flexibility and ability to
capitalize on acquisitions and growth opportunities; the outcome of
the tax reassessment and appeal process; Precision's expansion of
drilling, directional drilling and international presence; demand
for rig personnel and possibility of wage increases offset by
higher dayrates; the effectiveness of Precision's risk management
efforts; Precision's continued compliance with its financial
covenants and ability to access its credit lines; 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 liquids rich natural gas 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; availability of cash flow, debt and/or equity
sources to fund the Corporation's capital and operating
requirements, as needed; 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;
interpretation of tax filing position for prior period
transactions; 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.
FIRST QUARTER 2011 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
Tuesday, April 26, 2011.
The conference call dial in numbers are 1-877-240-9772 or
416-340-9531
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 May
3, 2011 by dialing 1-800-408-3053 or 905-694-9451, pass code
5064823.
About Precision
Precision is a leading provider of safe, High Performance, High
Value 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, directional drilling
services, 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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