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NEWS RELEASE Calgary, Alberta, Canada – October 21, 2010 (Canadian dollars except as indicated)
PRECISION DRILLING CORPORATION REPORTS 2010 THIRD QUARTER FINANCIAL RESULTS
This news release contains
“forward‐looking information and
statements” within the meaning of
applicable securities laws. For a full disclosure of the forward‐looking information and statements and the risks to which they are subject, see the “Cautionary Statement Regarding Forward‐Looking Information and Statements”
later
in this news release. Precision Drilling Corporation (“Precision” or the “Corporation”) reported net earnings of $61 million or $0.21 per diluted share for the three months ended September 30, 2010 compared to net earnings of $72 million or $0.25 per diluted share for the third quarter of 2009. The results for the third quarter of 2010 include a foreign exchange gain of $18 million while the third quarter of 2009 included a foreign exchange gain of $63 million. Revenue for the third quarter of 2010 totaled $359 million compared to $253 million for the same period of 2009. The increase in drilling activity both in Canada and in the United States in the third quarter of 2010 over the same period of 2009 led to the 42% increase in revenue. Earnings before interest, taxes, depreciation and amortization and
foreign exchange
(“EBITDA”) were $113 million for
the third quarter of 2010 compared
to EBITDA of $86 million for
the third quarter of 2009.
EBITDA is not a recognized
financial measure under Generally Accepted Accounting Principles ("GAAP") see "Non‐GAAP Measures" in this report. The increase in EBITDA between the two years is due to the increase in drilling activity. Revenue
for the
second quarter of 2010 was $262 million and EBITDA
totaled $59 million.
Third quarter 2010 revenue and EBITDA were higher than the second quarter of 2010 due to the seasonality of oilfield service activity in Canada known as “spring break‐up”
that takes place during the
second quarter. This is a
time in Canada
in which drilling rigs cannot change
locations due to road conditions and normally occurs
in March to June of each year. For
the nine months ended September
30, 2010, Precision reported net
earnings of $57 million or $0.20
per diluted share compared to net earnings of $187 million or $0.75 per diluted share for the same period of 2009. Revenue
for the nine months ended
September 30, 2010 was
$994 million compared to
$911 million for the corresponding
period of 2009. EBITDA totaled
$290 million for the nine months
ended September 30,
2010 compared to $314 million for the same period of 2009. Higher activity levels in 2010 were offset by lower average drilling revenue per day
in the Corporation’s operating areas. Results for the nine months ended September 30, 2010 include a foreign exchange gain of $12 million as compared to a foreign exchange gain of $105 million for the same period of 2009. Kevin Neveu, Precision’s President and Chief Executive Officer,
stated: “The strong
customer demand
for high performance rigs targeting oil has
led the rig count higher and continues to provide an encouraging outlook for Precision. Approximately 60% of Precision’s rigs working today are drilling for oil or natural gas liquids targets and approximately 80% are drilling complex horizontal or directional wells.”
PRECISION DRILLING CORPORATION
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“The third quarter of 2010
was the second consecutive quarter
which Precision realized improved
average revenue per day over the previous quarter in the United States. This confirms our previously stated view that the second quarter of 2010 represented
the bottom of Precision’s average dayrate
for this cycle. In addition,
third quarter EBITDA increased by 31% from prior year levels. These improvements are being driven by high customer demand for Precision’s Tier 1 and 2 rigs in both the United States and Canada and from the re‐establishment of oil drilling demand.” “In the United States, oil related activity has continued to strengthen. Precision’s average active rig count in the United States for the third quarter of 2010 was up 5% over the second quarter of the year and 76% over the same period in 2009. Precision’s active rig count in the United States is currently 99 and we expect it to stay at this level or increase modestly over the coming months. 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 natural gas liquids rich drilling activity. As demand for Tier 1‐Super Series and Tier 2 rigs remains strong, dayrates in the United States markets are continuing to modestly improve from previous quarters.” “Higher
than normal rainfall
through much of
the Western Canada Sedimentary Basin during
the
third quarter hampered drilling activity. Over the past few weeks, Precision has reactivated approximately 30 rigs sidelined due to poor weather conditions. Precision’s current active rig count in Canada is at 119 and, despite the wet weather, the average rig count of 82 for the third quarter of 2010 was 62% higher than the comparable quarter of 2009. Most of this
increase
is driven by unconventional horizontal drilling and completion techniques being applied to conventional
oil reservoirs in Western Canada
and we believe that the
remainder of 2010 activity
levels will exceed those achieved
in 2009. While in early
discussions with customers, the
Canadian 2011 winter drilling season
is expected to be at
least as busy as winter 2010.
We would expect there to be higher market dayrates because of this level of anticipated customer demand.” “Precision has seized market opportunities during 2010 which
includes the contracting and construction of nine new rigs that were announced last quarter. Five of these new‐rig builds are Super Singles of which two have been delivered on
time and on budget in Canada.
Of the remaining
three Super Single rigs,
two are expected
to be deployed in the United States and one in Canada. The other four new‐rig builds are Super Triple rigs with all four expected
to work in the United States.
All nine rigs have been
contracted with an average contract
term
of approximately three years.” “Looking
forward to 2011, Precision
is going to continue
its high value
focused organic growth program as we believe there will be ample opportunities for new‐build Super Series rigs which will continue to provide the High Performance High Value service that meets and exceeds customer requirements. Precision’s balance sheet is solid and provides the financial flexibility to capitalize on potential opportunities as Precision looks toward expanding its drilling, directional drilling and international presence during 2011”, concluded Mr. Neveu. SELECT FINANCIAL AND OPERATING INFORMATION
Three months ended September 30,
Nine months ended September 30,
(stated in thousands of Canadian dollars, except per share/ unit amounts)
2010 2009 %
Change
2010 2009 %
Change
Revenue $ 359,152 $ 253,337
41.8 $ 994,116 $ 911,379
9.1
EBITDA(1) 112,597 85,739
31.3 289,994 314,386
(7.8)
Net earnings 61,078
71,696 (14.8) 56,548 186,588
(69.7)
Cash provided by operations
67,575 19,948 238.8 230,203
434,098 (47.0)
Capital spending:
Upgrade capital expenditures 29,323
4,020 629.4 50,714
21,820 132.4
Expansion capital expenditures
6,463 10,178 (36.5) 14,239
157,623 (91.0)
Proceeds on sale (2,072)
(2,428) (14.7) (9,371)
(10,257) (8.6)
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Net capital spending 33,714
11,770 186.4 55,582 169,186
(67.1)
Distributions declared ‐ ‐
‐ ‐ 6,408 (100.0)
Net earnings ‐ per
share/unit:
Basic 0.22 0.26
(15.4) 0.21 0.77 (72.7)
Diluted 0.21 0.25 (16.0)
0.20 0.75 (73.3)
Distributions declared per
share/unit
$
‐
$
‐
$
‐
$
0.04
(100.0)
Contract drilling rig fleet
353 390 (9.5) 353
390 (9.5)
Drilling rig utilization days:
Canada 7,557 4,653 62.4
21,446 14,634 46.5
United States 8,512 4,835
76.0 23,535 16,773 40.3
International 145 176
(17.6) 480 538 (10.8)
Service rig fleet 200
229 (12.7) 200 229
(12.7)
Service rig operating hours
70,265 49,581 41.7 195,277
147,253
32.6 (1) Non‐GAAP measure. See “NON‐GAAP MEASURES”.
FINANCIAL POSITION AND RATIOS
(Stated in thousands of Canadian dollars, except ratios)
September 30,
2010 December 31, 2009
September 30, 2009
Working capital $ 392,057 $
320,860 $ 279,201
Working capital ratio 3.4
3.5 2.5
Long‐term debt(1) $ 679,291
$ 748,725 $ 795,560
Total long‐term financial liabilities
$ 704,802 $ 775,418 $
822,554
Total assets $ 4,188,496 $
4,191,713 $ 4,360,861
Long‐term debt to long‐term debt plus equity ratio(1)
0.21 0.22
0.23
(1) Excludes current portion of long‐term debt and is net of unamortized debt issue costs.
Revenue in the third quarter of 2010 was 42% higher than the prior year period. The increase was due to a year‐over‐year increase in utilization days both in Canada and the United States. The mix of drilling rigs working under term contracts and well‐to‐well contracts moved average pricing
slightly higher in
the United States during
the quarter over
the previous quarter. Revenue
in Precision's Contract Drilling Services
segment increased by 41% while
revenue increased 43% in
the Canadian based Completion
and Production Services segment in
the
third quarter of 2010 compared to the prior year quarter. EBITDA margin was 31% for the third quarter of 2010 compared to 34% for the same period in 2009. The three percentage point decline in EBITDA margin was primarily attributable to fewer idle but contracted rig days in the third
quarter of 2010 versus the
prior year period and a lower
term contract mix. Precision's term
contract position with customers, a
highly variable operating cost
structure and economies achieved
through
vertical integration of the supply chain continue to support EBITDA margins. In
the Contract Drilling Services
segment, Precision currently owns 353
contract drilling rigs, including 202
in Canada, 148 in
the United States and three rigs
in international
locations and 84 drilling
rig camps. Precision’s Completion
and Production Services segment
includes 200 service rigs, 20
snubbing units, 79 water
treatment units and a broad mix of rental equipment. During the quarter an average of 82 drilling rigs worked in Canada and 94 in the United States and Mexico totaling an average of 176 rigs working. This compares with an average of 130 rigs working in the second quarter of 2010 and 106 rigs in the third quarter a year ago.
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Precision’s priorities for 2010 are threefold.
The first
is to continue to deliver the High Performance High Value level
of services that customers require
to drill the technically challenging
wells of today’s
unconventional resource play exploitation.
Second, Precision continues to
improve its balance
sheet, which provides
financial flexibility and liquidity to
be able to seize market
opportunities, our third priority.
To that end, during
2010 Precision has repaid its
debt by $104 million and reduced
the overall effective interest rate
on its debt to approximately 7%.
Additionally, Precision’s 2010 new rig build program currently stands at nine rigs.
From the previously announced capital expenditure plan of $189 million, Precision is planning an additional $29 million for 2010
for North American and international
rig and asset upgrades to meet
customers’ needs. Total
capital spending for 2010 is now estimated at $218 million with an additional $82 million to be spent in 2011 for the new‐rig builds. Drilling in Canada for 2010 to date is outpacing the drilling activity of 2009 because of oil related drilling activity. In the United States, the industry and Precision have experienced improving utilization as customer spending has increased due principally to higher oil prices. Oil and natural gas prices during the third quarter of 2010 were higher than a year ago. For the third quarter of 2010 AECO natural gas spot prices averaged $4.21 per MMBtu, 44% higher than the third quarter 2009 average of $2.93 per MMBtu.
In the United States, Henry Hub natural gas spot prices averaged US$4.28 per MMBtu
in the third quarter of 2010, an increase of 36% over the third quarter 2009 average of US$3.15 per MMBtu. West Texas Intermediate crude oil averaged US$75.97 per barrel during the quarter, 11% higher when compared to US$68.18 per barrel in the same period in 2009. Summary for the three months ended September 30, 2010: •
Precision continues to have a
strong balance sheet. As at
September 30, 2010 Precision had
a debt
to capitalization ratio of 0.21, a cash balance of $209 million and, in combination with $436 million availability under its revolving credit facility and demand operating lines, continued to carry ample liquidity. •
Operating earnings were $65 million and 18% of revenue, compared to $55 million and 22% of revenue in 2009. Operating earnings were positively impacted by the increase in activity in most of Precision’s service offerings over the same period in 2009. •
Financial charges were $22 million, a decrease of $8 million due to the reduction
in
long‐term debt over the prior year period. • The majority of Precision’s credit
facilities are denominated
in U.S. dollars. During
the quarter,
the Canadian dollar strengthened in
relation to the U.S. dollar giving
rise to unrealized
translation gains which accounted
for most of the $18 million foreign exchange gain recognized in the quarter compared to a $67 million gain in 2009. •
Capital expenditures for the purchase of property, plant and equipment were $36 million in the third quarter, an increase of $22 million over the same period in 2009. Capital spending for the third quarter of 2010 included $7 million on expansionary capital initiatives and $29 million on the maintenance and upgrade of existing assets. •
Average revenue per utilization day
for contract drilling rigs decreased
in the third quarter of 2010
to US$18,914 from the prior year
third quarter of US$22,497 in
the United States and decreased
in Canada from $18,195
in the third quarter of 2009 to $15,686 for the third quarter of 2010. The decrease
in revenue rates for the third quarter in the United States reflects the greater proportion of rigs working under well‐to‐well contracts compared to the prior year and idle but contracted revenue in 2009. In the United States, for the third quarter of 2010 57% of Precision’s working
rigs were working under contract
compared to 82% in the 2009
comparative period. These figures also include US$1 million in revenue generated from idle but contracted rigs associated with term customer contracts, a reduction of US$8 million compared to the prior year third quarter. Turnkey revenue for the third quarter of 2010 was US$15 million generated from 183 utilization days compared with US$6 million from 117 days in 2009. In Canada, contract drilling rates are down from the prior year comparative period due to a higher
proportion of rig activity being
derived from the competitive
spot market and the receipt of
idle but contracted revenue in
2009 of $9 million compared to
$2 million in the current year.
Within Precision’s
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Completion and Production Services segment, average hourly rates for service rigs were $595 in the third quarter of 2010 compared to $614 in the third quarter of 2009. • Average operating costs per day for drilling rigs decreased
in the third quarter of 2010 to US$12,395 from the prior year third quarter of US$12,692 in the United States and from $8,802 to $8,303 in Canada. The cost decrease in Canada was primarily due to rig mix with a higher percentage of spot market work for the double and single rigs which are lower cost rigs. In the United States, the decrease was due to lower labour costs and lower ad valorem taxes partially offset by higher repairs and maintenance as drilling rigs are put back into service. Within Precision’s Completion and Production Services
segment, average hourly operating costs
for service rigs were $434 in
the third quarter of 2010 as compared to $438 in the third quarter of 2009.
Summary for the nine months ended September 30, 2010:
•
Revenue was $994 million, an increase of $83 million or 9% from the prior year due to higher activity in both of
Precision’s business segments.
•
Operating earnings were $158 million, a decrease of $54 million or 26% from 2009. Operating earnings were
16% of revenue, compared to 23% in 2009.
•
Capital expenditures for the purchase of property, plant and equipment were $65 million in 2010, a decrease of
$114 million over the same period
in 2009, and
included $14 million on expansionary capital
initiatives and $51
million on the maintenance and upgrade of existing assets. During the first nine months of 2009, 16 newly‐built
Super Series drilling rigs were added to the fleet under long‐term customer contracts, seven in Canada and nine in
the United States.
•
Financial charges were $103 million, a decrease of $10 million from the prior year, as reduced interest charges
were offset by
increased amortization of deferred
financing costs from the
repayment of debt.
Total debt has
been reduced by $104 million year to date in 2010.
•
During the first nine months of the year Precision recorded a foreign exchange gain of $12 million compared to
a $105 million gain in 2009. A significant component of these results relates to the translation of Precision’s U.S.
dollar denominated credit facilities.
•
General and administrative costs were $73 million which was in‐line with the prior year. OUTLOOK Precision has a strong portfolio of long‐term customer contracts that provides a base level of activity and revenue for
the Corporation. Precision expects
to have an average of
approximately 96 rigs committed under
term contracts in North America in the fourth quarter of 2010 and an average of 82 rigs contracted for the first 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 all of 2010, Precision expects to have an average of approximately 88 rigs under term contract, of which 49 are rigs contracted
in the United States, 37
in Canada and two in Mexico.
For 2011, based on the current position, Precision expects to have an average of 32 rigs in Canada under term contract, 31 in the United States and two in Mexico, for an average of 65 for the full year.
Since July 22, 2010, Precision added five term contracts for new build Super Series rigs expected to go to work in 2010 and 2011. Capital expenditures are expected to be approximately $218 million for 2010, with approximately $144 million for upgrade
and maintenance capital to existing
equipment fleets and $74 million
for expansion capital.
Capital expenditures for North American and international rig tier improvements are included in upgrade capital. The
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expansion capital program
includes nine new build Super Series
rigs and additional
rental and water
treatment equipment. The first nine months of 2010 experienced substantially higher drilling activity
in Canada than the prior year and United States drilling activity
continues to make improvements.
The demand for energy is
rising as
the global economies are starting to improve and move out of the bottom of the recession. There is also increased liquidity in
the capital markets as well as higher oil commodity prices which
is providing some of Precision’s customers’ liquidity to increase drilling programs. The drilling sector in both Canada and the United States is experiencing a period of year‐over‐year
improvements
in utilization. According to
industry sources, as at October 15, 2010, the United States active
land drilling
rig count was up about 64%
from the same period in
the prior year while
the Canadian drilling rig count had increased about 69%. Even with the year‐over‐year improvements in rig utilization, there has been virtually no
change in spot market dayrates
charged to customers
in Canada, and only modest improvements
in dayrates in the United States.
Future
improvements in dayrates are expected
in Canada as we move into 2011 and United States rates are expected to continue to modestly improve. Due to the
increased demand for drilling rigs, Precision
is experiencing
increased demand for rig personnel.
On October 1, 2010 a wage
increase to Canadian rig based personnel went
into effect. Precision
is also seeing this increase in demand for rig personnel in the United States and a near‐term wage increase in the United States is a possibility.
Precision expects to recoup
the majority of these wage
increases, if implemented,
through higher dayrates to our customers. Natural gas production in the United States has remained strong despite reduced drilling activity over the last two years.
United States natural gas storage
levels are currently near the upper
range of the
five‐year average but slightly below storage levels of a year ago. This also strongly influences Canadian activity since Canada exports a significant portion of
its natural gas production to
the United States. The increase
in oil and natural gas
liquids drilling in areas like the Cardium, Bakken and Eagle Ford have been strong and the United States oil rig count as at October 15, 2010 is 125% higher than it was a year ago. Precision has more equipment working in oil related plays than
at any time in the last
20 years; however, approximately 40%
of Precision’s current active rig
count
are drilling for natural gas targets. With high storage levels, consistent production and the view that North America has an oversupply of natural gas, gas prices have remained at relatively low levels. To date, there has been little change in customers’ natural gas drilling plans.
If
low natural gas prices continue, Precision and the North American drilling
industry could see a further reduction in demand for natural gas drilling. With the current demand for oil and liquids rich natural gas drilling, Precision believes further reductions in gas directed drilling would continue to be offset by increases in oil and natural gas liquids rich drilling. Despite near term challenges, the future of the global oil and gas industry remains promising. For Precision, 2010 represents
an opportunity to demonstrate our
value to customers
through delivery of High
Performance High Value services that deliver low customer well costs and strong margins to Precision. Beginning
January 1, 2011, Precision will
be reporting its financial statements
under International
Financial Reporting Standards (“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 may be made which will impact the opening balance sheet amounts and those key first‐time elections are discussed later in this report under the section “Transition to International Financial Reporting Standards (IFRS).”
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SEGMENTED FINANCIAL RESULTS Precision’s operations are reported
in two segments. The Contract Drilling Services segment
includes the drilling rig, camp
and catering, oilfield supply,
and manufacturing divisions. The
Completion and Production
Services segment includes the service rig, snubbing, rental, and wastewater treatment divisions.
Three months ended September 30,
Nine months ended September 30,
(stated in thousands of Canadian dollars)
2010 2009 %
Change
2010 2009 %
Change
Revenue:
Contract Drilling Services $ 305,813
$ 216,391 41.3 $ 845,515
$ 791,496
6.8 Completion and Production
Services
55,209 38,738 42.5 156,239
127,303 22.7
Inter‐segment eliminations (1,870)
(1,792) 4.4 (7,638) (7,420)
2.9
$ 359,152 $ 253,337
41.8 $ 994,116 $ 911,379
9.1
EBITDA(1)
Contract Drilling Services $ 105,806
$ 86,094 22.9 $ 279,565 $
308,543
(9.4) Completion and Production
Services
15,584 8,250 88.9 36,901
29,816 23.8
Corporate and other (8,793)
(8,605) 2.2 (26,472) (23,973)
10.4
$ 112,597 $ 85,739 31.3
$ 289,994 $ 314,386 (7.8)
(1) Non‐GAAP measure. See “NON‐GAAP MEASURES”.
SEGMENT REVIEW OF CONTRACT DRILLING SERVICES
Three months ended September 30,
Nine months ended September 30,
(stated in thousands of Canadian dollars, except where noted)
2010 2009 %
Change
2010 2009 %
Change
Revenue $ 305,813 $ 216,391
41.3 $ 845,515 $ 791,496
6.8
Expenses:
Operating 186,883 117,200
59.5 525,716 439,513
19.6 General and administrative
13,124 13,097 0.2
40,234
43,440 (7.4)
EBITDA (1) 105,806 86,094
22.9 279,565 308,543
(9.4)
Depreciation 40,509 25,610
58.2 112,562 87,007 29.4
Operating earnings(1) $ 65,297 $
60,484 8.0 $ 167,003 $ 221,536
(24.6)
Operating earnings as a percentage of revenue
21.4% 28.0%
19.8%
28.0%
Drilling rig revenue per utilization day in Canada(2)
$
15,686 $ 18,195 (13.8) $
15,681
$
18,384 (14.7)
Drilling rig revenue per utilization day in the United States(2)
US$
18,914
US$
22,497
(15.9)
US$
18,792
US$
24,344
(22.8) (1) Non‐GAAP measure. See “NON‐GAAP MEASURES”. (2) Includes revenue from idle but contracted rig days and lump sum payouts.
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Three months ended September 30,
Canadian onshore drilling statistics:(1)
2010 2009
Precision Industry(2) Precision
Industry(2)
Number of drilling rigs (end of period)
202 805 226 865
Drilling rig operating days (spud to release)
6,816 29,575 4,232 16,406
Drilling rig operating day utilization
37% 40% 20% 21%
Number of wells drilled 820
3,178 584 2,004
Average days per well 8.3 9.3
7.2 8.2
Number of metres drilled (000s)
1,288 5,422 891 3,046
Average metres per well 1,571
1,706 1,525 1,520
Average metres per day 189 183
210 186
Nine months ended September 30,
Canadian onshore drilling statistics:(1)
2010 2009
Precision Industry(2) Precision
Industry(2)
Number of drilling rigs (end of period)
202 805 226 865
Drilling rig operating days (spud to release)
19,315 82,941 13,103 53,017
Drilling rig operating day utilization
35% 38% 21% 22%
Number of wells drilled 2,077
7,902 1,666 5,909
Average days per well 9.3 10.5
7.9 9.0
Number of metres drilled (000s)
3,457 13,757 2,487 8,482
Average metres per well 1,665
1,741 1,493 1,435
Average metres per day 179 166
190
160 (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)
2010 2009
Precision Industry(2) Precision
Industry(2)
Average number of active land rigs
for quarters ended:
March 31 78
1,297 82 1,287
June 30 88
1,464 50 885
September 30
93 1,603 53 936
Year to date average 86
1,463 61
1,036 (1) United States lower 48 operations only. (2) Baker Hughes rig counts.
Contract Drilling Services segment
revenue for the
third quarter of 2010
increased by 41%
to $306 million and EBITDA
increased by 23% to $106 million
compared to the same period
in 2009. The increase in revenue
and EBITDA was due to the higher drilling rig activity in both Canada and the United States. Activity
in North America was impacted by
increased customer demand due to
the improvement in
global oil prices;
this was offset by wet weather conditions
in western Canada restricting drilling
rig mobility. Drilling
rig revenue per utilization day
in Canada was down 14% over
the prior year as a result of
increased activity in
the competitive spot market. During the quarter, 32% of Precision’s utilization days in Canada were generated from rigs under
term contract compared with 42%
in 2009 while in the United
States
57% of utilization days were generated from rigs under term contract compared with 82% in 2009. The majority of the additional activity was associated with oil
related plays. As at
the end of the quarter in
the United States,
there were 59 drilling
rigs working under term contracts and 36 in Canada. Drilling rig utilization days (spud to rig release plus move days)
in Canada during the third quarter of 2010 were 7,557, an increase of 62% compared to 4,653 in 2009. Drilling rig activity for Precision in the United States was
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76% higher than the
same quarter of 2009 due to
the recovery of drilling
rig activity which began in the
third quarter of 2009.
Precision had two rigs working
in Mexico during both periods.
Precision's camp and catering division benefited from the start up of a 500 man base camp in Canada that is expected to be contracted through the end of 2010. Contract Drilling Services operating costs were 61% of revenue for the quarter compared to 54% for the prior year quarter. The increase was primarily associated with the lower rig rates received in the spot market. On a per day basis, operating costs for the drilling rig division in Canada were 6% lower than the prior year quarter due to the differences in rig mix as 2010 had a higher proportion of days from single and double rigs which typically require less ancillary equipment. Operating costs for the quarter in the United States on a per day basis were down from the comparable period
in 2009 due to lower
labour costs and lower ad valorem
taxes partially offset by higher repairs and maintenance, as drilling rigs are put back into service. Quarterly depreciation
in the Contract Drilling Services
segment increased 58% 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
Three months ended September 30,
Nine months ended September 30,
(stated in thousands of Canadian dollars, except where noted)
2010 2009 %
Change
2010 2009 %
Change
Revenue $ 55,209 $ 38,738
42.5 $ 156,239 $ 127,303
22.7
Expenses:
Operating 37,452 27,790
34.8 112,928 90,318
25.0 General and administrative
2,173 2,698 (19.5)
6,410
7,169 (10.6)
EBITDA(1) 15,584 8,250
88.9 36,901 29,816 23.8
Depreciation 5,611 3,714
51.1 16,164 12,405 30.3
Operating earnings(1) $ 9,973 $
4,536 119.9 $ 20,737 $ 17,411
19.1
Operating earnings as a percentage of revenue
18.1% 11.7% 13.3%
13.7%
Well servicing statistics:
Number of service rigs (end of period)
200 229 (12.7) 200
229 (12.7)
Service rig operating hours
70,265 49,581 41.7
195,277
147,253 32.6
Service rig operating hour utilization
38% 24% 31%
24%
Service rig revenue per operating hour
$
595 $ 614 (3.1) $
608
$
664 (8.4)
(1)
Non‐GAAP measure. See “NON‐GAAP MEASURES”.
Completion and Production Services segment revenue
for the third quarter
increased by 43%
from 2009 to $55 million and EBITDA
increased by 89% to $16 million.
The increase in
revenue was attributed to an
increase in operating hours and
the increase in EBITDA was the
result of higher activity along with a decrease
in
variable costs. Service rig activity increased 42% from the prior year period, with the service rig fleet generating 70,265 operating hours in the third quarter of 2010 compared with 49,581 hours in the prior year quarter for utilization of 38% and 24%, respectively. The increase was a result of higher service rig demand for completions of new wells along with
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10
production maintenance of existing wells, both with an emphasis on oil wells.
New well completions accounted for 26% of service rig operating hours in the third quarter compared to 23% in the same quarter in 2009. Average service revenue decreased $19 per operating hour to $595 from the prior year period due to the impact of wage reductions implemented in late 2009 that were passed along to customers. Operating costs as a percentage of revenue decreased to 68% in the third quarter of 2010 from 72% in the same period of 2009 as lower variable operating expenses and fixed costs spread over a higher activity base were offset by lower revenue rates in the service rig division. Operating costs per service rig operating hour have decreased over
the comparable period in 2009
due primarily to lower wages,
partially offset by higher repair
and maintenance costs to prepare for increased activity.
Depreciation in the Completion and Production Services segment in the third quarter of 2010 was 51% higher than the prior year due to higher equipment utilization. SEGMENT REVIEW OF CORPORATE AND OTHER Corporate and other expenses for the third quarter of 2010 was in‐line with the prior year comparative period at $9 million. OTHER ITEMS Net
financial charges were $22 million
for the third quarter of
2010 which was down from
$8 million when compared to the prior year quarter. The decrease was attributable to the significant reduction in long‐term debt achieved by Precision. The
Corporation had a foreign exchange
gain of $18 million during the
third quarter of 2010 due to
the strengthening of the Canadian dollar versus the United States dollar, as the majority of the Corporation’s credit facilities are denominated in United States dollars. Precision’s effective tax rate on earnings before income taxes for the first nine months of 2010 was 15% compared to 9%
for the same period
in 2009. The higher effective tax rate
for 2010 is primarily
the result of withholding, capital and state taxes incurred in a period of lower pretax earnings and foreign exchange gains offset by income taxed at lower rates.
LIQUIDITY AND CAPITAL RESOURCES In
June 2010, Precision converted to
a corporation pursuant to a
Plan of Arrangement under the
Business Corporations Act of Alberta.
Precision obtained approval for
the conversion from its unitholders
in conjunction with its 2010 Annual and Special Meeting of Unitholders held on May 11, 2010. An information circular and proxy statement was mailed to unitholders in connection with the meeting. The oilfield services business is inherently cyclical in nature. Precision employs a disciplined approach to minimize costs through operational management practices and a variable cost structure, and to maximize revenues through term contract positions with a
focus of maintaining a strong balance sheet. This operational discipline provides Precision with the financial flexibility to capitalize on strategic acquisitions and internal growth opportunities at all points in the business cycle.
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11
Operating within a highly variable
cost structure, Precision’s maintenance
capital expenditures are
tightly governed by and highly
responsive to activity levels with
additional cost savings leverage
provided
through Precision’s internal manufacturing and supply divisions. Expansion capital for new rig build programs require 2 – 5 year
term contracts in order
to mitigate capital recovery risk.
To capitalize on market opportunities
Precision increased its anticipated capital expenditures by $29 million to a total of $218 million for 2010. In
managing foreign exchange risk,
Precision endeavours to align the
currency of the majority of its
debt obligations and capital expenditures with the currency of the supporting operating cash flows. Interest rate risk is partially managed through hedging activities and by reducing debt.
During the third quarter of 2010 Precision used $98 million in operating cash inflow to fund a $30 million increase in
non‐cash working capital, $31 million
in net capital spending and
$13 million in long‐term debt
reduction. Liquidity remains sufficient as Precision had a cash balance of $209 million and the US$410 million revolver in its senior secured credit facility (“Secured Facility”) remains undrawn except for US$25 million in outstanding letters of credit as at September 30, 2010.
In addition to
the Secured Facility, Precision has available $40.4 million
in operating facilities (net of letters of credit of $0.7 million) which is used for working capital management. During the current quarter, working capital increased by $49 million over the second quarter of 2010 to $392 million. As
at September 30, 2010,
the Corporation was in
compliance with the covenants under
the Secured
Facility. Precision expects to remain
in compliance with financial covenants under
its Secured Facility and have complete access
to credit lines during 2010. The
Secured Facility contains customary
covenants including three
financial covenants: a leverage ratio; interest coverage ratio; and fixed charge coverage ratio. The current blended cash interest cost of Precision’s debt is approximately 7.0%. Precision has repaid $104 million in
debt during 2010 and may
consider further voluntary long‐term
debt reduction or refinancing as
industry fundamentals stabilize and
operating cash flow forecasts become
clearer. As at September 30,
2010, approximately $598 million was outstanding under the Secured Facility and $175 million was outstanding under the unsecured facility. On
June 30, 2010,
the Corporation amended the
terms of the Secured Facility to
lower the LIBOR floor for
the Term Loan B
facility to 1.75% from 3.25% and
lower the LIBOR
interest rate margin on existing
loans under the Term Loan B
facility to 5.0% from an
average interest rate margin of
6.45%. The Secured Facility was
also amended to provide for the payment in certain circumstances by the Corporation to lenders under the Term Loan B
facility of a fee equal
to 1.0% of the aggregate principal
amount of loans
subsequently prepaid or re‐priced under
the Term Loan B
facility on or prior
to September 30, 2011.
In connection with the amendments
to
the Secured Facility, non‐consenting holders of US$74 million in
loans under the Term Loan B facility were repaid by the Corporation with cash on hand. During the second quarter of 2010, Precision amended the terms of the Secured Facility to increase the size of the revolving credit
facility to US$410 million
from US$260 million.
In addition, a subsidiary of Precision arranged a new secured operating facility in the amount of US$15 million with a U.S. bank. Advances under this facility are at the bank’s prime lending rate. During the first quarter of 2010, Precision amended certain covenants and terms contained in the Secured Facility. These amendments
included an increase in the
leverage ratio test from 3.00:1
to 3.50:1
through December 31, 2011, a decrease
in the interest coverage ratio
test from 3.00:1 to 2.75:1
through December 31, 2011 and
the removal of the
restrictions on expansion related
capital expenditures (limitations on
total
capital expenditures remained unchanged).
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12
QUARTERLY FINANCIAL SUMMARY (stated in thousands of Canadian dollars, except per share/unit amounts)
2009 2010
Quarters ended December 31
March 31 June 30
September 30
Revenue $ 286,067 $ 373,136
$ 261,828 $ 359,152
EBITDA(1) 92,615
118,403 58,994
112,597
Net earnings (loss):
(24,885) 62,017
(66,547) 61,078
Per basic share/unit
(0.09) 0.23 (0.24)
0.22
Per diluted share/unit
(0.09) 0.22 (0.24)
0.21
Cash provided by operations
70,631 20,624 142,004
67,575
Distributions ‐ declared $ ‐ $
‐ $ ‐ $ ‐
2008 2009
Quarters ended December 31
March 31 June 30
September 30
Revenue $ 335,049 $ 448,445
$ 209,597 $ 253,337
EBITDA(1) 134,795
169,387 59,260
85,739
Net earnings: 92,376
57,417 57,475
71,696
Per basic share/unit
0.67 0.30 0.23
0.26
Per diluted share/unit
0.66 0.28 0.22
0.25
Cash provided by operations
82,904 201,596
212,554 19,948
Distributions ‐ declared $ 77,551
$ 6,408 $ ‐ $
‐ (1) Non‐GAAP measure. See “NON‐GAAP MEASURES”.
NON‐GAAP MEASURES Precision uses certain measures that are not recognized under Canadian generally accepted accounting principles to
assess performance and believes these
non‐GAAP measures provide useful
supplemental information
to investors. Following are the non‐GAAP measures Precision uses in assessing performance. EBITDA Management
believes that in addition to
net earnings, EBITDA, as derived
from information reported in
the Consolidated Statements of Earnings and Retained Earnings,
is a useful supplemental measure as
it provides an indication of the results generated by Precision’s principal business activities prior to consideration of how those activities are financed, the impact of foreign exchange, how the results are taxed, how funds are invested or how depreciation and amortization charges affect results. The
following table provides a
reconciliation of net earnings under
GAAP, as disclosed in the
Consolidated Statement of Earnings and Retained Earnings, to EBITDA.
Three months ended September 30,
Nine months ended September 30, (stated in thousands of Canadian dollars)
2010 2009 2010
2009
EBITDA $ 112,597 $ 85,739 $
289,994 $ 314,386
Add (deduct):
Depreciation and amortization
(47,300) (30,378) (132,288)
(102,549)
Foreign exchange 18,003
63,486 11,670 105,055
Finance charges (21,848)
(29,396) (102,819) (112,947)
Income taxes (374) (17,755)
(10,009) (17,357)
Net earnings $ 61,078 $
71,696 $ 56,548 $ 186,588
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13
Operating Earnings Management believes
that in addition to net
earnings, operating earnings as
reported in the
Consolidated Statements of Earnings and Retained Earnings is a useful supplemental measure as it provides an indication of the results
generated by Precision’s principal
business activities prior to
consideration of how those activities
are financed, the impact of foreign exchange or how the results are taxed. The following table provides a reconciliation of net earnings under GAAP, as disclosed in the Consolidated Statement of Earnings and Retained Earnings, to operating earnings.
Three months ended September 30,
Nine months ended September 30, (stated in thousands of Canadian dollars)
2010 2009 2010
2009
Operating earnings $ 65,297 $
55,361 $ 157,706 $ 211,837
Add (deduct):
Foreign exchange 18,003
63,486 11,670 105,055
Finance charges (21,848)
(29,396) (102,819) (112,947)
Income taxes (374) (17,755)
(10,009) (17,357)
Net earnings $ 61,078 $
71,696 $ 56,548 $ 186,588
TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) Precision
is required to report
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 will be required on the effective date. Precision’s
IFRS project is on schedule and
progressing well. Precision’s IFRS
project team
and management continue to
liaise with the external auditors and key stakeholders
in the company to enable timely and smooth transition to IFRS in 2011. With respect to the key areas identified in previous reports, the following is a summary of additional progress: IFRS 1 – First Time Adoption IFRS 1 – First Time Adoption of IFRS ‐ provides one‐time accounting choices in the form of mandatory and optional exemptions. Precision has
identified the preferred
IFRS 1 elections and calculated the potential
impact of the elections on
its financial statements. Precision intends to restate its December 2008 acquisition of Grey Wolf under the principles outlined in IFRS 3 – Business
Combinations. This is expected to
reduce goodwill on Precision’s
balance sheet by the amount
of goodwill
recorded on acquisition of US$456 million with an equivalent
reduction in shareholder’s capital.
The difference arises in the
accounting for the purchase
consideration under IFRS versus
Canadian GAAP. Under Canadian GAAP
purchase consideration is valued
based on Precision’s share price
on the date at which
the acquisition was announced and
under IFRS it is valued based
on the share price on the
date at which
the acquisition closed. In accordance with the guidance in IFRS 1, upon implementation of IFRS, Precision intends to record certain larger drilling
rigs located in the United
States at fair value as the
deemed cost. Precision’s project team
and management are currently
in the process of obtaining valuations for the selected rigs.
It
is anticipated that the one‐time
adjustment to the carrying
value of these rigs to bring
them to their fair value at
the time of
initial adoption of IFRS is a reduction of carrying value in the range of $125 million to $175 million. The offsetting entry
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14
will be recorded in retained
earnings. The adjustment to
the carrying value is subject
to finalization of
the valuation estimate and review by Precision’s auditor. Precision has
rebuilt historical records as if
it had always followed
IFRS principles except for
those drilling
rigs identified in the preceding paragraph. As a result of rebuilding Precision’s historical records, there is expected to be
a reduction in the opening IFRS
net book value for property,
plant and equipment of approximately
$115 million. The offsetting entry will be recorded in retained earnings as required under IFRS 1. Capital Assets Precision’s IFRS project team has analyzed the potential impact of component accounting on Precision’s financial statements. Based on
the data collected by the IFRS
team in 2010, it is anticipated
that upon adoption of IFRS, annual
depreciation and amortization expense
will increase by 20% to 30%.
This is primarily due to
the componentization of drilling rigs
into three categories. The additional two categories are meant to better reflect the shorter useful lives of specific assets on the rig. Upon
transition to
IFRS, Precision will be required
to capitalize borrowing costs on
capital projects that
take a substantial amount of time to complete. Precision
is contemplating capitalizing borrowing costs for projects that take longer than 12 months to complete. This is not expected to have a significant impact on Precision’s financial statements. Internal controls over
financial reporting of
the Capital and Asset Management process have been
reviewed by Precision’s IFRS project
team. Internal controls under
IFRS are expected to remain similar
to
the controls under Canadian GAAP with the exception of management reports that have been redesigned for transition to IFRS. Precision’s procedures
for property, plant and equipment accounting have been
revised to
reflect changes as a result of transition to
IFRS. Precision’s budget preparation procedures have also been revised to
incorporate the changes resulting from differing treatment of capital and expense items under International Accounting Standards 16, Property, Plant and Equipment. Precision’s
IFRS project team has analyzed
a number of options for an
idle asset depreciation policy and
is presently discussing a preferred alternative with senior management. Financial Statement Disclosure Sample financial statements were drafted and reviewed by management in the second quarter 2010. In the fourth quarter
2010, management and Precision’s IFRS
project team intend to further
refine the sample
financial statements to enable efficient and timely preparation of the first set of fully compliant IFRS statements for the first quarter 2011. Income Taxes Precision’s Income Tax team continues to work on analyzing and implementing the requirements of IAS 12 Income Taxes. Impairments Precision continues to refine its IFRS Impairment test model by testing and reviewing the assumptions used in the model.
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15
CAUTIONARY STATEMENT REGARDING FORWARD‐LOOKING INFORMATION AND STATEMENTS Certain statements contained
in this report, including statements
that contain words such as “could”, “should”, “can”, “anticipate”, “estimate”, “propose”, “plan”, “expect”, “believe”, “will”, “may” and similar expressions and statements
relating to matters
that are not historical facts
constitute “forward‐looking
information” within
the meaning of applicable Canadian securities legislation and “forward‐looking statements” within the meaning of the “safe
harbor” provisions of the United
States Private Securities Litigation
Reform Act of 1995
(collectively, “forward‐looking information and statements”). In particular,
forward‐looking information and statements
include, but are not limited to,
the following:
global demand for energy
is rising; customer demand for oil and natural gas
liquids 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 gas liquids rich activity leading the way; North American drilling activity levels will be higher in the fourth quarter of 2010 and, in Canada, during the 2011 winter drilling season; 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‐rig builds and the
location thereof; Precision's financial
flexibility; Precision’s expansion of
drilling, directional drilling
and international presence; demand for rig personnel and possibility of wage increases offset by higher dayrates; the potential
impacts of Precision's transition to
IFRS; the effectiveness of
Precision's risk management
efforts; Precision's continued
compliance with its financial
covenants and ability to access
its credit
lines; possibility of further voluntary long‐term debt reduction or refinancing; the number of rigs under term contract and the trend to move to spot market dayrates upon expiry; a reduction in gas directed drilling would be offset by an increase in oil and gas liquids rich drilling; and dayrate levels. These
forward‐looking
information and statements are based on certain assumptions and analysis made by
the Corporation in light of its
experience and its perception of
historical trends, current conditions
and
expected future developments as well as other factors it believes are appropriate in the circumstances. However, whether actual
results, performance or
achievements will conform to
the Corporation’s expectations
and predictions is subject to
a number of known and unknown
risks and uncertainties which could
cause actual results
to differ materially from the
Corporation’s expectations. Such
risks and uncertainties include, but
are not limited to: fluctuations
in the price and demand for
oil and natural gas; fluctuations
in the level of oil and
natural gas exploration and
development activities; fluctuations in
the demand for contract drilling,
well servicing and ancillary oilfield
services; capital market liquidity
available to fund customer drilling
programs; the effects
of seasonal and weather conditions on operations and facilities; the existence of competitive operating risks inherent in contract drilling, well servicing and ancillary oilfield services; general economic, market or business conditions; changes in laws or regulations; the availability of qualified personnel, management or other key inputs; currency exchange
fluctuations; and other unforeseen
conditions which could impact the
use of services supplied
by Precision. Consequently, all of
the forward‐looking
information and statements made in
this report are qualified by
these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Corporation will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on,
the Corporation or
its business or operations.
Readers are
therefore cautioned not
to place undue reliance on such forward‐looking information and statements. Except as may be required by law, the Corporation assumes no obligation
to update publicly any such
forward‐looking information and
statements, whether as
a result of new information, future events or otherwise.
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16
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(stated in thousands of Canadian dollars)
September 30,
2010
December 31, 2009
ASSETS
Current assets:
Cash $ 208,709 $ 130,799
Accounts receivable 339,366
283,899
Income tax recoverable –
25,753
Inventory 9,733 9,008
557,808 449,459
Income tax recoverable
64,579 64,579
Property, plant and equipment, net of accumulated depreciation
2,811,144 2,913,966
Intangibles 2,055 3,156
Goodwill 752,910 760,553
$ 4,188,496 $ 4,191,713
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities
$ 159,212 $ 128,376
Income taxes payable 2,056
–
Current portion of long‐term debt (note 6)
4,483 223
165,751 128,599
Long‐term liabilities 25,511
26,693
Long‐term debt (note 6)
679,291 748,725
Future income taxes 701,171
703,195
1,571,724 1,607,212
Contingencies (note 10)
Shareholders’ equity:
Shareholders’ capital (note 3)
2,770,853 –
Unitholders’ capital (note 3)
– 2,770,708
Contributed surplus (note 3(c))
8,803 4,063
Retained earnings 163,775
107,227
Accumulated other comprehensive loss (note 7)
(326,659) (297,497)
2,616,772 2,584,501
$ 4,188,496 $ 4,191,713
See accompanying notes to consolidated financial statements
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CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (UNAUDITED)
Three months ended September 30,
Nine months ended September 30, (stated in thousands of Canadian dollars, except per share amounts)
2010
2009
2010
2009
Revenue $ 359,152 $ 253,337
$ 994,116 $ 911,379
Expenses:
Operating 222,465 143,059
631,006 522,411
General and administrative 24,090
24,539 73,116 74,582
Depreciation and amortization
47,300 30,378 132,288
102,549
Foreign exchange (18,003)
(63,486) (11,670) (105,055)
Finance charges (note 9)
21,848 29,396 102,819
112,947
Earnings before income taxes
61,452 89,451 66,557
203,945
Income taxes: (note 4)
Current 608 5,216
4,755 13,380
Future (234) 12,539
5,254 3,977
374 17,755 10,009
17,357
Net earnings 61,078 71,696
56,548 186,588
Retained earnings (deficit), beginning of
period
102,697
60,416
107,227
(48,068)
Distributions declared –
– – (6,408)
Retained earnings , end of period
$ 163,775 $ 132,112 $ 163,775
$ 132,112
Earnings per share: (note 11)
Basic $ 0.22 $ 0.26
$ 0.21 $ 0.77
Diluted $ 0.21 $
0.25 $ 0.20 $ 0.75
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Three months ended September 30,
Nine months ended September 30,
(Stated in thousands of Canadian dollars)
2010
2009
2010
2009
Net earnings $ 61,078 $
71,696 $ 56,548 $
186,588 Unrealized gain (loss) recorded on
translation of assets and liabilities of self‐sustaining operations in foreign currency
(52,228)
(154,590)
(29,162)
(265,466)
Comprehensive income (loss) $ 8,850
$ (82,894) $ 27,386 $
(78,878)
See accompanying notes to consolidated financial statements
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18
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
Three months ended September 30,
Nine months ended September 30, (stated in thousands of Canadian dollars)
2010
2009
2010
2009
Cash provided by (used in):
Operations:
Net earnings $ 61,078 $
71,696 $ 56,548 $ 186,588
Adjustments and other items not involving
cash:
Long‐term compensation plans 3,079
4,786 8,884 2,914
Depreciation and amortization
47,300 30,378 132,288
102,549
Future income taxes (234)
12,539 5,254 3,977
Foreign exchange (18,392)
(67,321) (10,595) (118,319)
Amortization of debt issue costs (note 9)
7,621 7,056 50,400
30,119
Other (2,472) –
(1,586) –
Changes in non‐cash working capital balances
(30,405) (39,186) (10,990)
226,270
67,575 19,948
230,203 434,098
Investments:
Purchase of property, plant and equipment
(35,786) (14,198) (64,953)
(179,443)
Proceeds on sale of property, plant and
equipment
2,072
2,428
9,371
10,257
Changes in non‐cash working capital balances
2,395 1,741 7,785
(20,147)
(31,319) (10,029)
(47,797) (189,333)
Financing:
Repayment of long‐term debt
(13,387) (6,567) (103,760)
(887,605)
Debt issue costs –
(674) (2,165) (21,628)
Re‐purchase of trust units (note 3)
– – (6) –
Distributions paid – –
– (27,233)
Increase in long‐term debt –
– – 408,893
Issuance of trust units, net of issue costs
– (533) –
413,223
Change in non‐cash working capital balances
– (431) – –
(13,387)
(8,205)
(105,931)
(114,350)
Effect of exchange rate changes on cash and
cash equivalents
(295)
(4,164)
1,435
(14,397)
Increase (decrease) in cash and cash
equivalents
22,574 (2,450) 77,910
116,018
Cash and cash equivalents, beginning of period
186,135 179,979 130,799
61,511
Cash and cash equivalents, end of period
$ 208,709 $ 177,529 $ 208,709
$ 177,529
See accompanying notes to consolidated financial statements
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Notes to Consolidated Financial Statements (UNAUDITED) (tabular amounts are stated in thousands of Canadian dollars except share numbers) 1. Description of Business and Basis of Presentation Precision Drilling Corporation (“Precision” or the “Corporation”)
is a provider of contract drilling and completion and production services primarily to oil and natural gas exploration and production companies in Canada and the United States. On June 1, 2010 Precision Drilling Trust (the “Trust”) completed its conversion (the “Conversion”) from an income trust
to a corporation pursuant to
a Plan of Arrangement (the
“Arrangement”). Pursuant to
the Arrangement, Trust unitholders and
Exchangeable LP unitholders exchanged
their Trust units and Exchangeable
LP units
for common shares of Precision on a one‐for‐one basis. The Conversion has been accounted
for on a continuity of
interest basis and accordingly these
interim
financial statements reflect the financial position, results of operations and cash flows as if Precision had always carried on the business formerly carried on by the Trust and were prepared using accounting policies and methods of their application consistent with those used in the preparation of the Trust's consolidated audited financial statements for
the year ended December 31, 2009. All
references to shares and shareholders
in these financial statements pertain
to common shares and common
shareholders subsequent to
the Conversion and units and unitholders prior to the Conversion. These interim financial statements conform in all material respects to the requirements of generally accepted accounting principles
in Canada for annual financial statements with the exception of certain note disclosures. As a
result, these interim financial
statements should be read in
conjunction with
the Trust’s consolidated audited financial statements for the year ended December 31, 2009. 2. Seasonality of Operations Precision
has operations that are carried
on in Canada which represent
approximately 41% (2009 ‐ 38%)
of consolidated
total assets as at September 30, 2010 and 52%
(2009
‐ 45%) of consolidated revenue for
the nine months ended September 30, 2010. The ability to move heavy equipment in Canadian oil and natural gas fields is dependent on weather conditions. As warm weather
returns in the spring,
the winter's frost comes out of
the ground rendering many secondary roads
incapable of supporting the weight of heavy equipment until they have thoroughly dried out. The duration of this “spring break‐up” has a direct
impact on Precision’s activity levels.
In addition, many exploration and production areas
in northern Canada are accessible only
in winter months when the ground is frozen hard enough to support equipment. The timing of freeze up and spring break‐up affects the ability
to move equipment in and out
of these areas. As a result,
late March through May is
traditionally Precision’s slowest time in this region. 3. Shareholders’ Capital (a) Authorized
‐ unlimited number of voting common shares
‐ unlimited number of preferred shares, issuable in series (b) Issued:
Common shares Number
Amount
Balance May 31, 2010 – $
–
Issued pursuant to the Arrangement
275,663,344 2,770,853
Balance September 30, 2010
275,663,344 $ 2,770,853
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20
The following provides a
continuity of Trust units and
Exchangeable LP units from January
1, 2010 up to
the Conversion on June 1, 2010.
Trust units Number
Amount
Balance December 31, 2009
275,516,778 $ 2,769,338
Issued on redemption of non‐management directors DSU’s
28,586 154
Cancellation of units owned by dissenting unitholders
(840) (9)
Balance May 31, 2010
275,544,524 $ 2,769,483
Exchangeable LP units Number
Amount
Balance December 31, 2009 and May 31, 2010
118,820 $ 1,370
Summary Number
Amount
Trust units 275,544,524 $
2,769,483
Exchangeable LP units 118,820
1,370
Unitholders’ capital, May 31, 2010
275,663,344 $ 2,770,853
Pursuant to
the Arrangement, any unitholder of
the Trust could dissent and be paid
the fair value of
the units, being the
trading price of Trust units at
the close of business on the
last business day prior to
the Annual and Special Meeting of Unitholders on May 11, 2010. As a result a total of 840 units were repurchased for cancellation for
six
thousand dollars, of which a discount of
three thousand dollars over the
stated capital was credited
to contributed surplus. (c) Contributed surplus
Amount
Balance December 31, 2009
$ 4,063
Share based compensation expense
4,891
Redemption of non‐management directors DSU’s
(154)
Cancellation of units owned by dissenting unitholders
3
Balance September 30, 2010
$ 8,803
4. Income Taxes The provision for income taxes differs from that which would be expected by applying statutory Canadian income tax rates. A reconciliation of the difference at September 30 is as follows:
Three months ended September 30,
Nine months ended September 30,
2010 2009 2010
2009
Earnings before income taxes
$ 61,452 $ 89,451 $ 66,557
$ 203,945
Federal and provincial statutory rates
28% 29%
28%
29%
Tax at statutory rates
$ 17,207 $ 25,941 $ 18,636
$ 59,144
Adjusted for the effect of:
Non‐deductible expenses
4,879 1,644 5,343
6,372
Non‐taxable capital gains (128)
(16,248) (128) (16,816)
Income taxed at lower rates
(19,191) (1,388) (21,173)
(36,812) Income to be distributed to unitholders, not subject to tax in the Trust
– (202)
–
(2,525)
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21
Other (2,393) 8,008
7,331 7,994
Income tax expense $ 374
$ 17,755 $ 10,009 $ 17,357
5. Bank Indebtedness During the second quarter of 2010 a U.S. subsidiary of the Corporation arranged a new US$15.0 million secured operating facility with a U. S. bank. Advances under this facility are available at the bank’s prime lending rate. In total the Corporation and its subsidiaries have $25.0 million and US$15.0 million of secured operating facilities. At September 30, 2010 no amounts were drawn on these
facilities.
Availability of the $25.0 million
facility was reduced by outstanding letters of credit in the amount of $0.7 million at September 30, 2010. 6. Long‐Term Debt
September 30,
2010
December 31,
2009
Secured facility:
Term Loan A $ 271,018 $
288,887
Term Loan B 327,208
422,097
Revolving credit facility –
–
Unsecured senior notes 175,000
175,000
773,226 885,984
Less net unamortized debt issue costs
(89,452) (137,036)
683,774 748,948
Less current portion (4,483)
(223)
$ 679,291 $ 748,725
At September 30, 2010 the Term Loan A facility consists of a term A‐1 facility denominated
in U.S. dollars
in the amount of
US$245.3 million and a term A‐2 facility denominated in Canadian dollars in the amount of $18.4 million.
At September 30, 2010 the Term Loan B facility consists of a term loan B‐1 facility and a term loan B‐2 facility denominated in
U.S. dollars in the amounts of US$270.3 million and US$47.4 million, respectively.
During
the second quarter of 2010, the
terms of the secured
facility were amended to
lower the LIBOR floor for
the Term
Loan B facility to 1.75% from 3.25% and lower the LIBOR interest rate margin on existing loans under the Term Loan B facility
to 5.0% from an average interest rate margin of 6.45%. The secured facility was also amended to provide for the payment in
certain circumstances by Precision to lenders under the Term Loan B facility of a fee equal to 1.0% of the aggregate principal
amount of loans
subsequently prepaid or re‐priced under
the Term Loan B
facility on or prior
to September 30, 2011. In
connection with the amendments to the secured facility, non‐consenting holders of US$74.0 million in loans under the Term
Loan B facility were repaid. After the amendment the current blended cash interest cost of Precision’s debt is approximately
7.0%.
In addition, the revolving credit facility lending capacity increased by US$150.0 million to US$410.0 million and is available to
Precision to finance working capital needs and for general corporate purposes. Availability of the revolving credit facility was
reduced at September 30, 2010 by outstanding letters of credit of US$24.9 million.
During the first quarter of
2010 Precision amended certain
covenants and terms contained in
the secured facility. These
amendments included an increase in the leverage ratio test from 3.00:1 to 3.50:1 through December 31, 2011, a decrease in
the interest coverage ratio test
from 3.00:1 to 2.75:1
through December 31, 2011 and the
removal of the restrictions on
expansion related capital expenditures (limitations on total capital expenditures remained unchanged).
-
22
At September 30, 2010 mandatory principal repayments are as follows:
For the twelve month periods ended September 30,
2011 $ 4,483
2012 55,094
2013 71,243
2014 467,406
2015 58,333
Thereafter 116,667
7. Accumulated Other Comprehensive Loss Balance, December 31, 2009
$ (297,497)
Unrealized foreign currency translation
(29,162)
Balance, September 30, 2010 $
(326,659)
8. Share Based Compensation Plans The Conversion did not result in any significant changes to Precision’s share based compensation plans except that certain elements of the plans that were based on the Trust’s unit price prior to the Conversion are now based on Precision’s common share price. (a) Officers and Employees During 2009 Precision
introduced two new share based
incentive plans to replace
the Performance Saving Plan and the Long‐Term Incentive Plan. Under the Restricted Share incentive plan shares granted to eligible employees vest annually over a three year term. Vested shares are automatically paid out in cash in the first quarter of the year
following vesting at a
value determined by the
fair market value of the
shares as at December 31 of
the vesting year. Under the Performance Share incentive plan shares granted to eligible employees vest at the end of a three year term. Vested shares are automatically paid out in cash in the first quarter following the vested term at a value determined by the fair market value of the shares at December 31 of the vesting year and based on the number of performance shares held multiplied by a performance factor that ranges from zero to two times. The performance factor is based on Precision achieving a predetermined rate of return on capital employed and share price performance compared to a peer group over the three year period. As at September 30, 2010 $2.9 million is included in accounts payable and $7.3 million in long‐term liabilities for the plans. Included in net earnings for the three and nine months ended September 30, 2010
is an expense of $2.1 million
(2009
‐ $2.9 million) and $5.6 million (2009 ‐ $5.3 million), respectively. Notwithstanding
that
the Performance Savings Plan was replaced
in 2009, certain liabilities continue
to exist as eligible participants were
able to elect to receive
a portion of their
annual performance bonus in the
form of deferred shares. All deferred shares must be redeemed within 60 days of ceasing to be an employee of Precision or by the end of the second full calendar year after receipt. A summary of the deferred shares outstanding un