CALGARY, ALBERTA--(Marketwire - April 26, 2011) -
(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
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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)
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$ 525,350 $ 373,136 40.8
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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)
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$ 186,411 $ 117,658 58.4
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(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
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Revenue $ 426,027 $ 304,820 39.8
Expenses:
Operating 243,699 183,332 32.9
General and administrative 9,778 8,632 13.3
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EBITDA(1) 172,550 112,856 52.9
Depreciation 54,527 43,605 25.0
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Operating earnings(1) $ 118,023 $ 69,251 70.4
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Operating earnings as a percent of revenue 27.7% 22.7%
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Drilling rig revenue per utilization
day in Canada $ 17,820 $ 15,511 14.9
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Drilling rig revenue per utilization
day in the United States(2) US$ 20,864 US$ 18,710 11.5
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(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
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Precision Industry(2) Precision Industry(2)
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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
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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:(1) 2011 2010
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Precision Industry(2) Precision Industry(2)
Average number of active
land rigs for quarter
ended:
March 31 100 1,695 78 1,300
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(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
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Revenue $ 104,229 $ 73,152 42.5
Expenses:
Operating 65,532 51,176 28.1
General and administrative 4,246 2,531 67.8
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EBITDA(1) 34,451 19,445 77.2
Depreciation 7,071 6,677 5.9
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Operating earnings(1) $ 27,380 $ 12,768 114.4
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Operating earnings as a percent of revenue 26.3% 17.5%
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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
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(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
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Senior secured revolving credit facility $ - $ -
Unsecured senior notes:
6.625% senior notes (US$650 million) 631,670 646,490
6.5% senior notes 200,000 -
10.0% senior notes - 175,000
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831,670 821,490
Less net unamortized debt issue costs (20,262) (16,996)
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$ 811,408 $ 804,494
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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
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Quarters ended March 31 June 30 September 30 December 31 March 31
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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
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(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".
Contact Information:
David Wehlmann
Executive Vice President, Investor Relations
403.716.4575
403.716.4755
Precision Drilling Corporation
4200, 150 - 6th Avenue S.W.
Calgary, Alberta, Canada T2P 3Y7
www.precisiondrilling.com