Precision Drilling Corporation Reports 2012 Third Quarter Financial Results

Marketwired

CALGARY, ALBERTA, CANADA--(Marketwire - Oct 25, 2012) -

(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.

Precision Drilling Corporation ("Precision" or the "Corporation") (PD.TO) (PDS) reported net earnings of $39 million or $0.14 per diluted share for the three months ended September 30, 2012 compared to net earnings of $83 million or $0.29 per diluted share for the third quarter of 2011. In the quarter Precision recognized an after tax foreign exchange loss that reduced net earnings by $4 million and net earnings per diluted share by $0.01 compared to the prior year when an after tax foreign exchange gain was recognized that increased net earnings by $25 million and net earnings per diluted share by $0.09.

Revenue for the third quarter of 2012 was $485 million and earnings before income taxes, other items and depreciation and amortization ("EBITDA") totalled $151 million compared to $493 million and $186 million, respectively, during the comparable period in 2011. Third quarter 2012 revenue and EBITDA were lower than the comparable period in 2011 primarily due to lower industry activity in Canada and the United States and start-up costs incurred in international operations.  

Third quarter 2012 revenue and EBITDA were higher than the second quarter 2012 revenue and EBITDA by $103 million and $54 million, respectively, due to the seasonality of oilfield service activity in Canada known as spring break-up that typically takes place during the second quarter. This is a time in Canada where heavy equipment cannot change locations due to road bans and normally occurs in March to June of each year.

In the Contract Drilling Services segment, average drilling rig revenue per day increased by US$2,090 to US$23,110 in Precision''s United States operations and by $2,484 to $20,099 in the Canadian operations in the third quarter of 2012 over the comparable quarter in 2011. Average revenue per day in the third quarter of 2012 decreased over the second quarter by US$35 and $550 in the United States and Canadian operations, respectively. Declines in spot market pricing is the primary reason for the rate decreases from the second quarter in both the United States and Canada, while revenue from winter related operations in the second quarter also contributed to the decrease in Canada.  

For the nine months ended September 30, 2012, Precision reported net earnings of $169 million or $0.59 per diluted share compared to net earnings of $165 million or $0.57 per diluted share for the same period of 2011. Revenue for the first nine months of 2012 was $1,507 million compared to $1,364 million for the corresponding period of 2011. EBITDA totalled $494 million for the first nine months of 2012 compared to $465 million in the corresponding period of 2011. The year-over-year increase in revenue resulted from higher pricing in the Contract Drilling Services and Completion and Production Services segments, growth in Precision''s international drilling and growth in the Corporation''s directional drilling businesses partially offset by lower drilling activity levels. Average drilling rig revenue per utilization day was up 16% in Canada and up 9% in the United States for the first nine months of the year when compared with the same period in 2011 while activity, as measured by drilling utilization days, decreased 12% in Canada and 5% in the United States. 

Precision signed long-term contracts for two specialized new build service rigs to work for two separate customers in heavy oil operations in Canada.  

Precision is increasing its 2012 capital expenditure plan from $875 million to $921 million. This increase is primarily due to expenditures associated with additional rig upgrade contracts and the two new service rig contracts.

Kevin Neveu, Precision''s President and Chief Executive Officer stated: "Precision''s third quarter results reflect weakening North American customer demand, a muted Canadian seasonal recovery, continued reductions in dry gas and gas-liquids drilling and a pause in the rapid growth of oil directed drilling in the North Dakota Bakken.  Despite these challenging market conditions, we continue to see customer demand through additional long-term contracts for upgrades of Precision''s existing rigs and for Precision''s newly introduced "rack and pinion" heavy oil well service rig.  These additional customer commitments coupled with the 11 contracted new build Super Series drilling rigs deployed during the third quarter demonstrate our ability to seize market opportunities backed with firm customer commitments."  

"Also, I believe it is important to note, that despite headwinds, Precision has only two drilling rigs currently classified as "idle but contracted" and we have not experienced any early contract terminations this year.  I remain pleased that Precision''s High Performance, High Value services continue to provide leading-edge performance for our customers in their quest to improve drilling efficiency and reduce total well cost; however, our value goes well beyond delivering efficiency.  Our Precision rigs and crews deliver the consistency, predictability and repeatability our customers need to achieve cost reductions while importantly mitigating the safety and environmental risks which concern our customers and the communities in which we operate."    

"Precision continues to make investments in our people, technology and systems, and as of today, we have delivered 51 Super Series rigs since the beginning of 2010 and upgraded approximately 35 existing rigs. Precision now has 171 Tier 1 rigs in our fleet, compared to 109 at the beginning of 2010. The fleet enhancement over the past few years is one example of our commitment to delivering High Performance, High Value services to our customers."

"This past quarter, the seasonal recovery in drilling activity never fully materialized with Canadian industry drilling activity down 29 percent from this time last year. The U.S. industry rig count is down 10 percent from this time last year and down seven percent since the beginning of the third quarter. Across North America, and despite healthy oil prices, we have seen a reduction in demand from our customers as they have moderated spending during the second half of the year in an effort to operate within stated 2012 budgets."

"Despite current market pressures, Precision remains focused on ensuring we deliver High Performance, High Value services that we know are critical to our customers in meeting their objectives." concluded Mr. Neveu.

SELECT FINANCIAL AND OPERATING INFORMATION

                 
(Stated in thousands of Canadian dollars, except per share amounts)  Three months ended September 30,       Nine months ended September 30,     
  2012     2011   % Change     2012     2011   % Change  
Revenue $ 484,761   $ 492,944   (1.7 ) $ 1,506,793   $ 1,363,619   10.5  
EBITDA(1)   151,000     186,248   (18.9 )   493,766     465,225   6.1  
Net earnings   39,357     83,468   (52.8 )   168,699     165,431   2.0  
Cash provided by operations   61,183     20,281   201.7     498,969     313,915   59.0  
Funds provided by operations(1)   146,124     73,182   99.7     456,236     336,285   35.7  
Capital spending:                                
  Expansion capital expenditures   177,783     136,591   30.2     473,131     234,107   102.1  
  Upgrade capital expenditures   23,166     45,619   (49.2 )   107,388     93,733   14.6  
  Maintenance and infrastructure capital expenditures  
 37,701
   
37,466
 
0.6
   
 100,888
   
70,530
 
 43.0
 
  Proceeds on sale   (5,011 )   (4,610 ) 8.7     (13,820 )   (8,694 ) 59.0  
Net capital spending   233,639     215,066   8.6     667,587     389,676   71.3  
Business acquisitions (net of cash acquired)  
 -
   
59,709
 
 (100.0
)  
 25
   
 92,886
 
 (100.0
)
Net earnings - per share:                                
  Basic   0.14     0.30   (53.3 )   0.61     0.60   1.7  
  Diluted   0.14     0.29   (51.7 )   0.59     0.57   3.5  
                                 
Contract drilling rig fleet   363     366   (0.8 )   363     366   (0.8 )
Drilling rig utilization days:                                
  Canada   7,735     10,505   (26.4 )   24,110     27,246   (11.5 )
  United States   8,305     9,716   (14.5 )   26,583     28,053   (5.2 )
  International   736     177   315.8     1,319     530   148.9  
Service rig fleet   213     220   (3.2 )   213     220   (3.2 )
Service rig operating hours(2)   72,766     86,146   (15.5 )   217,368     229,301   (5.2 )
                                 

(1) See "ADDITIONAL GAAP MEASURES".

(2) Prior year comparatives have changed to include United States based service rig activity.

FINANCIAL POSITION AND RATIOS

(Stated in thousands of Canadian dollars, except ratios)  September 30,
2012
 December 31,
2011
Working capital $ 323,653 $ 610,429
Long-term debt(1) $ 1,206,425 $ 1,239,616
Total long-term financial liabilities $ 1,232,220 $ 1,267,040
Total assets $ 4,506,689 $ 4,427,874
Long-term debt to long-term debt plus equity ratio(1)   0.34   0.37

(1) Net of unamortized debt issue costs.

Revenue in the third quarter of 2012 was $8 million lower than the prior year period. The decrease was mainly due to a year-over-year decrease in drilling utilization days in both Canada and the United States partially offset by higher drilling rig revenue per day in both Canada and the United States. In addition, Precision experienced a four-fold increase in international drilling rig activity with an average of eight rigs working during the quarter compared with two in the prior year period. Revenue in Precision''s Contract Drilling Services segment decreased by 1% while revenue decreased 7% in the Completion and Production Services segment in the third quarter of 2012 compared to the prior year.

EBITDA margin (EBITDA as a percentage of revenue) was 31% for the third quarter of 2012 compared to 38% for the same period in 2011. The decrease in EBITDA margin for the quarter was primarily attributable to lower equipment utilization and higher costs offset partially by higher average dayrates in both Canada and the United States. Higher operating costs in the quarter were the result of crew labour costs and increased maintenance costs in the United States and start-up costs internationally. 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 365 contract drilling rigs, including 203 in Canada, 154 in the United States and eight rigs in international locations and the capacity to run concurrently 90 directional drilling jobs. Precision''s Completion and Production Services segment includes 190 service rigs, 19 snubbing units, four coil tubing units, 107 wastewater treatment units, 67 drilling and base camps and a broad mix of rental equipment.

During the quarter, an average of 84 drilling rigs worked in Canada, 90 worked in the United States and eight worked internationally totalling an average of 182 rigs. This compares with an average of 222 rigs in the third quarter a year ago. 

Oil prices were higher and natural gas prices were lower during the third quarter of 2012 compared with the year ago period. For the third quarter of 2012, West Texas Intermediate crude oil averaged US$92.26 per barrel, 3% higher when compared to US$89.59 per barrel in the same period in 2011. AECO natural gas spot prices averaged $2.28 per MMBtu, 38% lower than the third quarter 2011 average of $3.66 per MMBtu. In the United States, Henry Hub natural gas spot prices averaged US$2.88 per MMBtu in the third quarter of 2012, a decrease of 30% over the third quarter 2011 average of US$4.12 per MMBtu. 

Summary for the three months ended September 30, 2012:

  • Operating earnings were $74 million and 15% of revenue, compared to $122 million and 25% of revenue in the third quarter of 2011. Operating earnings were negatively impacted by higher depreciation costs associated with new depreciation policies on Tier 3 rigs and newer equipment in our Contract Drilling and Completion and Production services segments, the decrease in activity in Precision''s United States and Canadian drilling operations, start-up costs internationally and higher labour and maintenance costs in the United States operations. In general, activity in Canada was down from the prior year due to unusually wet weather in the western Canada sedimentary basin continuing into July as well as spending restraint exhibited by our customers. 
  • General and administrative expenses were $33 million, an increase of $9 million from the third quarter of 2011, due to incremental costs associated with growth in international and directional drilling activity along with additional costs associated with incentive compensation tied to the price of Precision''s common shares. 
  • Finance charges were $22 million, a decrease of $12 million from the third quarter of 2011 due to interest expense associated with Canadian income tax settlements in the prior year of $15 million partially offset by an increase in the average long-term debt balance.
  • Capital expenditures for the purchase of property, plant and equipment were $239 million in the third quarter, an increase of $19 million over the same period in 2011. Capital spending for the third quarter of 2012 included $178 million for expansion capital, $23 million for upgrade capital and $38 million for the maintenance of existing assets and infrastructure.
  • Average revenue per utilization day for contract drilling rigs increased in the third quarter of 2012 to US$23,110 from the prior year third quarter of US$21,020 in the United States and increased in Canada to $20,099 in the third quarter of 2012 from $17,615 for the prior year period. The increase in revenue rates for the third quarter in Precision reflects the higher percentage of utilization days realized from Tier 1 rigs relative to total days and the pass through of increased labour costs. In the United States, for the third quarter of 2012, 73% of Precision''s working rigs were working under term contracts compared to 79% in the 2011 comparative period. Turnkey revenue for the third quarter of 2012 was US$10 million compared with US$7 million in 2011. Within Precision''s Completion and Production Services segment, average hourly rates for service rigs were $734 in the third quarter of 2012 compared to $683 in the third quarter of 2011.
  • Average operating costs per utilization day for drilling rigs increased in the third quarter of 2012 to US$14,816 from the prior year period of US$12,467 in the United States and increased in Canada to $9,828 in the third quarter of 2012 from $8,922. The cost increase in the United States was primarily due to crew labour cost increases and higher repair and maintenance costs. The cost increase in Canada was primarily due to a labour rate increase that became effective in the fourth quarter of 2011. Within Precision''s Completion and Production Services segment, average hourly operating costs for service rigs in Canada increased to $519 in the third quarter of 2012 as compared to $484 in the third quarter of 2011, primarily due to a labour rate increase and higher fuel costs. Typically labour rate increases are recovered in dayrate increases.
  • Precision realized revenue from directional services of $33 million in the third quarter of 2012 compared with $21 million in the prior year period.
  • Funds provided by operations in the third quarter of 2012 were $146 million, an increase of $73 million from the prior year quarter of $73 million. 

Summary for the nine months ended September 30, 2012:

  • Revenue for the first nine months of 2012 was $1,507 million, an increase of 10% from the 2011 period.
  • Operating earnings were $276 million, a decrease of $9 million or 3% from 2011. Operating earnings were 18% of revenue in 2012 compared to 21% in 2011.
  • General and administrative costs were $97 million, an increase of $7 million over the first nine months of 2011 primarily due to incremental costs associated with the growth in international and directional drilling activity partially offset by a decrease in incentive compensation costs tied to the performance of Precision''s common shares.
  • Finance charges were $65 million, a decrease of $27 million from the first nine months of 2011 due to the 2011 charge of $27 million for the make-whole premium from refinancing a previously outstanding debt and interest expense associated with Canadian income tax settlements offset by higher interest costs from an increased average long-term debt balance.
  • Funds provided by operations in the first nine months of 2012 were $456 million, an increase of $120 million from the prior year comparative period of $336 million.
  • Capital expenditures for the purchase of property, plant and equipment were $681 million in the first nine months of 2012, an increase of $283 million over the same period in 2011. Capital spending for 2012 to date included $473 million for expansion capital, $107 million for upgrade capital and $101 million for the maintenance of existing assets and infrastructure.

OUTLOOK

Precision has a strong portfolio of long‐term customer contracts that provides a base level of activity and revenue. Precision has an average of 119 rigs committed under term contracts for the fourth quarter of 2012, an average of 100 rigs contracted for the first quarter of 2013 and 91 for the second quarter of 2013. In Canada, term contracted rigs normally generate 250 utilization days per rig year due to the seasonal nature of well access, whereas in the United States and international they usually generate 365 utilization days per rig year in most regions.

Capital expenditures are expected to be approximately $921 million for 2012, of which $681 million has been expended during the first nine months of 2012. The expected 2012 total includes $139 million for sustaining and infrastructure expenditures and is based upon currently anticipated activity levels for 2012. Additionally, $631 million is slated for expansion capital and includes the cost to complete the drilling rigs from the 2011 new build rig program and the new build rigs for 2012. The total capital expenditures also include an estimated $151 million to upgrade approximately 14 rigs in 2012. 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 $921 million will be split $802 million for the Contract Drilling segment and $119 million for the Completion and Production Services segment. An additional $90 million of committed expansion capital, upgrades in progress and long-lead commitments are expected to carry forward to 2013.

Demand remains solid for existing Tier 1 Super Series rigs for both Canada and the United States, however, customer''s interest in contracting new build Super Series rigs has softened. Precision believes it will have opportunities to contract additional new build and upgraded rigs in late 2012 and during 2013, although the pace of contracts awards is likely to be significantly slower than the pace during 2011. According to industry sources, as at October 19, 2012, the United States active land drilling rig count was down 9% from the prior year period while the Canadian drilling rig count had decreased about 29%.  

Natural gas production in the United States has moderated, but remains strong despite reduced drilling activity. United States natural gas storage levels as at October 12, 2012 are 7% above the five-year average and 5% above storage levels of a year ago. This strongly influences Canadian activity since Canada has historically exported 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 has been strong and the United States oil rig count as at October 19, 2012 is 30% higher than it was a year ago. On average, Precision has more equipment working in oil related plays than at any time in its history with approximately 84% of Precision''s active rig count drilling for oil targets.

With high storage levels, consistent production and the view that North America has an oversupply of natural gas, gas prices have remained at 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 can expect continued weak demand for natural gas drilling. However, the budgets of many of our customers are driven in part by cash flow from existing hydrocarbon production, which would be positively influenced by higher gas prices.

SEGMENTED FINANCIAL RESULTS

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, coiled tubing, rental, camp and catering and wastewater treatment divisions.

(Stated in thousands of Canadian dollars) Three months ended September 30,       Nine months ended September 30,      
               
  2012     2011   % Change     2012     2011   % Change  
Revenue:                                
  Contract Drilling Services $ 409,889   $ 413,131   (0.8 ) $ 1,273,136   $ 1,137,640   11.9  
  Completion and Production Services  
77,506
   
83,153
 
(6.8
)  
240,854
   
234,960
 
2.5
 
  Inter-segment eliminations   (2,634 )   (3,340 ) (21.1 )   (7,197 )   (8,981 ) (19.9 )
  $ 484,761   $ 492,944   (1.7 ) $ 1,506,793   $ 1,363,619   10.5  
                                 
EBITDA:(1)                                
  Contract Drilling Services $ 146,080   $ 171,950   (15.0 ) $ 477,112   $ 448,669   6.3  
  Completion and Production Services  
23,143
   
28,010
 
(17.4
)  
71,332
   
70,694
 
0.9
 
  Corporate and other   (18,223 )   (13,712 ) 32.9     (54,678 )   (54,138 ) 1.0  
  $ 151,000   $ 186,248   (18.9 ) $ 493,766   $ 465,225   6.1  

(1) See "ADDITIONAL GAAP MEASURES".

SEGMENT REVIEW OF CONTRACT DRILLING SERVICES

(Stated in thousands of Canadian dollars, except where noted) Three months ended September 30,      Nine months ended September 30,      
  2012     2011   % Change     2012     2011   % Change  
Revenue $ 409,889   $ 413,131   (0.8 ) $ 1,273,136   $ 1,137,640   11.9  
Expenses:                                
  Operating   252,556     233,957   7.9     765,749     665,035   15.1  
  General and administrative   11,253     7,224   55.8     30,275     23,936   26.5  
EBITDA(1)   146,080     171,950   (15.0 )   477,112     448,669   6.3  
  Depreciation   67,659     56,158   20.5     193,666     156,631   23.6  
Operating earnings(1) $ 78,421   $ 115,792   (32.3 ) $ 283,446   $ 292,038   (2.9 )
Operating earnings as a percentage of revenue  
19.1
%  
 28.0
%      
22.3
%  
25.7
%    
Drilling rig revenue per utilization day in Canada
$

20,099
 
 $

17,615
 
14.1
 
$

20,699
 
 $

17,840
 
 16.0
 
Drilling rig revenue per utilization day in the United States(2)

US$


23,110
 

 US$


21,020
 

9.9
 

US$


23,162
 

 US$


21,302
 

 8.7
 
                                 

(1) See "ADDITIONAL GAAP MEASURES".

(2) Includes revenue from idle but contracted rig days and lump sum payouts.

  Three months ended September 30,  
Canadian onshore drilling statistics:(1) 2012   2011  
  Precision   Industry(2)   Precision   Industry(2)  
Number of drilling rigs (end of period) 202   825   205   810  
Drilling rig operating days (spud to release) 6,957   30,220   9,487   40,763  
Drilling rig operating day utilization 38 % 40 % 51 % 55 %
Number of wells drilled 948   3,607   1,005   3,601  
Average days per well 7.3   8.4   9.4   11.3  
Number of metres drilled (000s) 1,491   5,853   1,594   6,787  
Average metres per well 1,573   1,623   1,586   1,885  
Average metres per day 214   194   168   167  
  Nine months ended September 30,  
Canadian onshore drilling statistics:(1) 2012   2011  
  Precision   Industry(2)   Precision   Industry(2)  
Number of drilling rigs (end of period) 202   825   205   810  
Drilling rig operating days (spud to release) 21,579   93,470   24,393   104,108  
Drilling rig operating day utilization 41 % 42 % 44 % 48 %
Number of wells drilled 2,223   7,940   2,492   8,634  
Average days per well 9.7   11.8   9.8   12.1  
Number of metres drilled (000s) 3,798   15,013   3,936   16,052  
Average metres per well 1,708   1,891   1,579   1,859  
Average metres per day 176   161   161   154  

(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) 2012 2011
  Precision Industry(2) Precision Industry(2)
Average number of active land rigs for quarters ended:        
  March 31 104 1,947 100 1,695
  June 30 97 1,924 102 1,803
  September 30 90 1,855 106 1,915
Year to date average 97 1,909 103 1,805
         

(1) United States lower 48 land operations only.

(2) Baker Hughes rig counts.

Contract Drilling Services segment revenue for the third quarter of 2012 decreased by 1% to $410 million and EBITDA decreased by 15% to $146 million compared to the same period in 2011. The decrease in revenue was due to lower activity for both Canada and the United States partially offset by higher average rates per day in Canada and the United States, increased activity internationally and higher directional drilling revenues. The decrease in EBITDA was the result of lower activity in Canada and the United States, start-up costs internationally, lower margin in the United States as a result of increased crew labour and maintenance costs.

Activity in North America was centered on oil and liquids rich natural gas related drilling activity. In the third quarter, drilling rig revenue per utilization day over the prior year was up 14% in Canada and 10% in the United States as a result of increased rates for rigs working on well-to-well contracts and new build rigs. 

Drilling rig utilization days in Canada (drilling days plus move days) during the third quarter of 2012 were 7,735, a decrease of 26% compared to 10,505 in 2011 due to lower industry activity with low natural gas prices and uncertainty in global markets with West Texas Intermediate crude oil prices dipping below $80 per barrel in late June. Drilling rig utilization days for Precision in the United States were 15% lower than the same quarter of 2011 due to a continued reduction in natural gas targeted drilling. On average, Precision had eight rigs working internationally as the Saudi Arabia based business ramped up and Precision had mobilized three additional rigs into Mexico during the second quarter of 2012. 

Contract Drilling Services segment operating costs were 62% of revenue for the quarter which is five percentage points higher than the prior year period. Higher operating costs in the quarter were the result of start-up costs internationally and increased maintenance costs in the United States. In addition, crew wage increases in Canada and the United States in the fourth quarter of 2011 contributed to the year-over-year increase. 

Quarterly depreciation in the Contract Drilling Services segment increased 20% from the prior year. As discussed in Management''s Discussion and Analysis for the year ended December 31, 2011, Precision changed its depreciation policy on certain Tier 3 rigs from the unit of production method to straight-line over four years resulting in approximately $6 million in additional depreciation in the quarter. Additional increases in depreciation are the result of a greater proportion operating days from our Tier 1 drilling rigs in 2012 relative to 2011 and depreciation from the growth in directional drilling and international contract drilling. With the exception of certain Tier 3 equipment and directional drilling equipment, 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 where noted) Three months ended September 30,      Nine months ended September 30,      
  2012     2011   % Change     2012     2011   % Change  
Revenue $ 77,506   $ 83,153   (6.8 ) $ 240,854   $ 234,960   2.5  
Expenses:                                
  Operating   50,474     51,750   (2.5 )   157,943     153,212   3.1  
  General and administrative  
3,889
   
3,393
 
14.6
   
11,579
   
11,054
 
4.7
 
EBITDA(1)   23,143     28,010   (17.4 )   71,332     70,694   0.9  
  Depreciation   7,640     6,676   14.4     21,775     18,830   15.6  
Operating earnings(1) $ 15,503   $ 21,334   (27.3 ) $ 49,557   $ 51,864   (4.4 )
                                 
Operating earnings as a percentage of revenue  
20.0
%  
25.7
%      
20.6
%  
22.1
%    
                                 
Well servicing statistics:                                
  Number of service rigs (end of period)  
213
   
220
 
(3.2
)  
213
   
220
 
(3.2
)
  Service rig operating hours(2)  
72,766
   
86,146
 
(15.5
)  
217,368
   
229,301
 
(5.2
)
  Service rig operating hour utilization(2)  
37
%  
43
%      
37
%  
38
%    
  Service rig revenue per operating hour(2)
$

734
 
$

683
 
7.5
 
$

745
 
$

672
 
10.9
 

(1) See "ADDITIONAL GAAP MEASURES".

(2) Prior year comparatives have changed to include United States based service rig activity.

Completion and Production Services segment revenue for the third quarter decreased by 7% from the third quarter of 2011 to $78 million and EBITDA decreased by 17% to $23 million. The decrease in revenue and EBITDA is attributed to a decrease in activity partially offset by increased service rig rates. 

Well servicing and snubbing activity decreased 16% from the prior year period, with the fleet generating 72,766 operating hours in the third quarter of 2012 compared with 86,146 hours in the prior year quarter for utilization of 37% and 43%, respectively. The decrease was a result of lower service rig activity compared to the previous year which had a very active quarter with customers performing well completion and production work on a backlog of oil wells from a prolonged spring break-up. Approximately 98% of the third quarter service rig activity was oil related. New well completions were 57% lower than the prior year quarter and accounted for 8% of service rig operating hours in the third quarter compared to 15% in the same quarter in 2011. Precision''s rental division benefitted from new equipment additions in the quarter, but utilization for some equipment decreased in conjunction with lower industry drilling and completion activity.

Average service rig revenue increased $51 per operating hour to $734 from the prior year period due to rig mix and increased labour and operating costs passed through to customers.

Operating costs as a percentage of revenue in the third quarter of 2012 was 65%, compared to 62% in the same period of 2011. Operating costs per service rig hour increased over the comparable period in 2011 primarily due to higher wages and fuel prices.

Depreciation in the Completion and Production Services segment in the third quarter of 2012 was 14% higher than the prior year due to the addition of new assets to the service rig, camp and rental equipment fleet. The well servicing division 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. The Corporate and other segment had an EBITDA loss of $18 million for the third quarter of 2012, $5 million more than the prior year comparative period primarily due to increased costs associated with share based performance incentive plans.

OTHER ITEMS

Net financial charges for the quarter were $22 million, a decrease of $12 million from the third quarter of 2011 due to interest expense associated with Canadian income tax settlements in the prior year of $15 million partially offset by an increase in the average long-term debt balance.

Finance charges for the three and nine month periods ended September 30, 2012 and 2011 are as follows:

  Three months ended September 30,   Nine months ended September 30,  
(Stated in thousands of Canadian dollars) 2012   2011   2012   2011  
Interest:                        
  Long-term debt $ 21,181   $ 18,942   $ 63,818   $ 48,415  
  Tax settlement and reassessment   -     14,621     -     14,621  
  Other   14     55     109     101  
  Income   (641 )   (317 )   (1,621 )   (735 )
Amortization of debt issue costs   1,038     931     3,025     2,462  
Loss on settlement of debt facilities   -     -     -     26,942  
Debt amendment fees   149     -     149     1,134  
Finance charges $ 21,741   $ 34,232   $ 65,480   $ 92,940  

The Corporation had a foreign exchange loss of $5 million during the third quarter of 2012 due to the weakening of the U.S. dollar versus the Canadian dollar and the impact thereof 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 nine months ended September 30, 2012 was 18%.

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 variable cost structure, Precision''s maintenance capital expenditures are tightly governed by and 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.

During the quarter Precision amended its senior secured revolver ("Secured Facility") with a syndicate of lenders. The amendment increases the amount available under the Secured Facility to US$850 million from US$550 million and extends the maturity date from November 17, 2015 to November 17, 2017. Precision also increased its operating facilities to $80 million from $40 million in the quarter.

Liquidity remains sufficient as Precision had a cash balance of $227 million and the US$850 million Secured Facility remains undrawn except for US$27 million in outstanding letters of credit as at September 30, 2012. In addition to the Secured Facility, Precision has available $80 million in operating facilities which remain undrawn except for $21 million in outstanding letters of credit as at September 30, 2012.

As at September 30, 2012 and December 31, 2011 Precision had the following long-term debt balances:


(Stated in thousands of Canadian dollars)
 September 30,
2012
   December 31,
2011
 
Senior secured revolving credit facility $ -   $ -  
Unsecured senior notes:            
  6.625% senior notes due 2020 (US$650 million)   639,405     661,050  
  6.5% senior notes due 2021 (US$400 million)   393,480     406,800  
  6.5% senior notes due 2019   200,000     200,000  
    1,232,885     1,267,850  
Less net unamortized debt issue costs   (26,460 )   (28,234 )
  $ 1,206,425   $ 1,239,616  

As at September 30, 2012, 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 2012 and for 2013.

The current blended cash interest cost of Precision''s debt is approximately 6.6%.

Precision has 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)    
  2011 2012
Quarters ended December 31 March 31 June 30 September 30
Revenue $ 587,408 $ 640,066 $ 381,966 $ 484,761
EBITDA(1)   229,839   245,574   97,192   151,000
Net earnings:   28,046   111,081   18,261   39,357
  Per basic share   0.10   0.40   0.07   0.14
  Per diluted share   0.10   0.39   0.06   0.14
Funds provided by operations(1)   256,103   247,739   62,373   146,124
Cash provided by operations   218,857   162,440   275,346   61,183
  2010   2011
Quarters ended December 31   March 31 June 30 September 30
Revenue $ 435,537   $ 525,350 $ 345,325 $ 492,944
EBITDA(1)   144,518     186,411   92,566   186,248
Net earnings (loss):   (250 )   65,560   16,403   83,468
  Per basic share   -     0.24   0.06   0.30
  Per diluted share   -     0.23   0.06   0.29
Funds provided by operations(1)   133,903     192,337   70,766   73,182
Cash provided by operations   75,064     117,322   176,312   20,281

(1) See "ADDITIONAL GAAP MEASURES".

ADDITIONAL GAAP MEASURES

Precision uses certain additional GAAP 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 (loss), EBITDA, as derived from information reported in the Interim Consolidated Statements of 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 or how depreciation and amortization charges affect results.

Operating Earnings

Management believes that in addition to net earnings (loss), operating earnings as reported in the Interim Consolidated Statements of 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.

Funds Provided by Operations

Management believes that in addition to cash provided by operations, funds provided by operations, as reported in the Interim 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.

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: That Precision will remain focused on ensuring it delivers High Performance, High Value services that it knows are critical to its customers in meeting their objectives; challenging market conditions; Precision''s average number of rigs committed under term contracts; Precision''s expected capital expenditures for 2012 and the anticipated uses of capital and the timing of such expenditures including the carry forward to 2013; demand for Super Series rigs; Precision believes it will have opportunities to contract additional new build and upgraded rigs in late 2012 and 2013, although the number of contracts is likely to be significantly lower than the 42 rigs contracted during 2011; if low natural gas prices continue, Precision and the North American drilling industry can expect continued weak demand for natural gas drilling; the producer budgets of many of Precision''s customers are driven in part by cash flow from existing hydrocarbon production, which would be positively influenced by higher gas prices; and Precision expects to remain in compliance with the covenants under the Secured Facility and have complete access to credit lines during the remainder of 2012 and for 2013. 

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.

INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)  

(Stated in thousands of Canadian dollars) September 30, 2012   December 31, 2011  
         
ASSETS            
Current assets:            
  Cash $ 226,841   $ 467,476  
  Accounts receivable   496,304     576,243  
  Inventory   14,541     7,163  
Total current assets   737,686     1,050,882  
Non-current assets:            
  Income tax recoverable   64,579     64,579  
  Property, plant and equipment   3,334,704     2,942,296  
  Intangibles   6,923     6,471  
  Goodwill   362,797     363,646  
Total non-current assets   3,769,003     3,376,992  
Total assets $ 4,506,689   $ 4,427,874  
             
LIABILITIES AND EQUITY            
Current liabilities:            
  Accounts payable and accrued liabilities $ 371,161   $ 436,667  
  Income tax payable   42,872     3,786  
Total current liabilities   414,033     440,453  
             
Non-current liabilities:            
  Share based compensation   7,164     11,303  
  Provisions and other   18,631     16,121  
  Long-term debt   1,206,425     1,239,616  
  Deferred tax liabilities   567,515     587,790  
Total non-current liabilities   1,799,735     1,854,830  
             
Shareholders'' equity:            
  Shareholders'' capital   2,250,819     2,248,217  
  Contributed surplus   23,468     18,396  
  Retained earnings (deficit)   85,539     (83,160 )
  Accumulated other comprehensive loss   (66,905 )   (50,862 )
Total shareholders'' equity   2,292,921     2,132,591  
Total liabilities and shareholders'' equity $ 4,506,689   $ 4,427,874  

INTERIM CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

  Three months ended September 30,   Nine months ended September 30,  

(Stated in thousands of Canadian dollars, except per share amounts)

2012
 
2011
 
2012
 
2011
 
                         
Revenue $ 484,761   $ 492,944   $ 1,506,793   $ 1,363,619  
                         
Expenses:                        
  Operating   300,396     282,367     916,495     809,266  
  General and administrative   33,365     24,329     96,532     89,128  
Earnings before income taxes, other items and depreciation and amortization   151,000     186,248     493,766     465,225  
Depreciation and amortization   76,754     64,504     218,247     180,416  
Operating earnings   74,246     121,744     275,519     284,809  
Other items:                        
  Foreign exchange   5,277     (34,105 )   5,610     (31,300 )
  Finance charges   21,741     34,232     65,480     92,940  
  Other   -     -     (758 )   -  
Earnings before income taxes   47,228     121,617     205,187     223,169  
Income taxes:                        
  Current   15,135     38,730     47,160     40,882  
  Deferred   (7,264 )   (581 )   (10,672 )   16,856  
    7,871     38,149     36,488     57,738  
                         
Net earnings $ 39,357   $ 83,468   $ 168,699   $ 165,431  
Net earnings per share:                        
  Basic $ 0.14   $ 0.30   $ 0.61   $ 0.60  
  Diluted $ 0.14   $ 0.29   $ 0.59   $ 0.57  

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

   Three months ended September 30,   Nine months ended September 30,  
(Stated in thousands of Canadian dollars)   2012     2011     2012     2011  
Net earnings $ 39,357   $ 83,468   $ 168,699   $ 165,431  
Unrealized gain (loss) on translation of assets and liabilities of operations denominated in foreign currency  

(53,424
)  

96,717
   

(49,476
)  

59,865
 
Foreign exchange gain (loss) on net investment hedge with U.S. denominated debt, net of tax  

35,638
   

(80,034
)  

33,433
   

(62,835
)
Comprehensive income $ 21,571   $ 100,151   $ 152,656   $ 162,461  

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)

  Three months ended September 30,   Nine months ended September 30,  
(Stated in thousands of Canadian dollars)   2012     2011     2012     2011  
Cash provided by (used in):                        
Operations:                        
  Net earnings $ 39,357   $ 83,468   $ 168,699   $ 165,431  
  Adjustments for:                        
    Long-term compensation plans   3,830     1,144     15,057     15,156  
    Depreciation and amortization   76,754     64,504     218,247     180,416  
    Foreign exchange   5,886     (34,204 )   6,092     (31,696 )
    Finance charges   21,741     34,232     65,480     92,940  
    Income taxes   7,871     38,149     36,488     57,738  
    Other   (320 )   1,350     1,279     (1,070 )
    Income taxes paid   (2,741 )   (108,655 )   (7,315 )   (111,166 )
    Income taxes recovered   271     154     613     400  
    Interest paid   (7,181 )   (7,307 )   (49,964 )   (32,646 )
    Interest received   656     347     1,560     782  
Funds provided by operations   146,124     73,182     456,236     336,285  
Changes in non-cash working capital balances   (84,941 )   (52,901 )   42,733     (22,370 )
    61,183     20,281     498,969     313,915  
Investments:                        
  Business acquisitions, net of cash acquired   -     (59,709 )   (25 )   (92,886 )
  Purchase of property, plant and equipment   (238,650 )   (219,676 )   (681,407 )   (398,370 )
  Proceeds on sale of property, plant and equipment   5,011     4,610     13,820     8,694  
  Changes in income tax recoverable   -     108,176     -     -  
  Changes in non-cash working capital balances   11,295     27,427     (62,410 )   10,637  
    (222,344 )   (139,172 )   (730,022 )   (471,925 )
Financing:                        
  Repayment of long-term debt   -     -     -     (175,000 )
  Premium paid on settlement of unsecured senior notes   -     -     -     (26,688 )
  Debt issue costs   (2,855 )   (8,946 )   (2,855 )   (13,304 )
  Debt facility amendment costs   (149 )   -     (149 )   (1,134 )
  Increase in long-term debt   -     381,520     -     581,520  
  Issuance of common shares on the exercise of options   185     961     1,490     2,100  
  Changes in non-cash working capital balances   -     -     -     (746 )
    (2,819 )   373,535     (1,514 )   366,748  
                         
Effect of exchange rate changes on cash and cash equivalents  
(7,523
)  
39,275
   
(8,068
)  
35,576
 
Increase (decrease) in cash and cash equivalents   (171,503 )   293,919     (240,635 )   244,314  
Cash and cash equivalents, beginning of period   398,344     207,226     467,476     256,831  
Cash and cash equivalents, end of period $ 226,841   $ 501,145   $ 226,841   $ 501,145  

INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)

(Stated in thousands of Canadian dollars)                  
 

Shareholders''
capital


Contributed
surplus 
Accumulated
other
comprehensive
loss
 
Retained earnings
(deficit)
 

Total
equity
 
Balance at January 1, 2012 $ 2,248,217 $ 18,396   $ (50,862 ) $ (83,160 ) $ 2,132,591  
Net earnings for the period   -   -     -     168,699     168,699  
Other comprehensive income for the period  
-
 
-
   
(16,043
)  
-
   
(16,043
)
Share options exercised   2,372   (882 )   -     -     1,490  
Issued on redemption of non-management directors DSUs  
221
 
(221
)  
-
   
-
   
-
 
Issued on waiver of right to dissent by dissenting unitholder  

9
 

(3
)  

-
   

-
   

6
 
Share based compensation expense  
-
 
6,178
   
-
   
-
   
6,178
 
Balance at September 30, 2012 $ 2,250,819 $ 23,468   $ (66,905 ) $ 85,539   $ 2,292,921  
(Stated in thousands of Canadian dollars)                  
 

Shareholders''
capital


Contributed
surplus
  Accumulated
other
comprehensive
loss
 
Retained earnings (deficit)
 

Total
equity
 
Balance at January 1, 2011 $ 2,244,417 $ 11,266   $ (46,220 ) $ (276,637 ) $ 1,932,826  
Net earnings for the period   -   -     -     165,431     165,431  
Other comprehensive loss for the period  
-
 
-
   
(2,970
)  
-
   
(2,970
)
Share options exercised   3,198   (1,098 )   -     -     2,100  
Issued on redemption of non- management directors DSUs   384   (384 )   -     -     -  
Share based compensation expense   -   6,426     -     -     6,426  
Balance at September 30, 2011 $ 2,247,999 $ 16,210   $ (49,190 ) $ (111,206 ) $ 2,103,813  

THIRD QUARTER 2012 EARNINGS CONFERENCE CALL AND WEBCAST

Precision Drilling Corporation has scheduled a conference call and webcast to begin promptly at 12:00 noon MT (2:00 p.m. ET) on Thursday, October 25, 2012.

The conference call dial in numbers are 1-800-396-7098 or 416-695-6616

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 November 1, 2012 by dialing 1-800-408-3053 or 905-694-9451, pass code 6282411.

About Precision

Precision is a leading provider of safe and High Performance, High Value services to the oil and gas industry. Precision provides customers with access to an extensive fleet of contract drilling rigs, directional drilling services, well service & snubbing rigs, coiled tubing services, camps, rental equipment, and wastewater treatment units 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:
Precision Drilling Corporation
Carey Ford
Vice President, Finance and Investor Relations
403.716.4575
403.716.4755
Precision Drilling Corporation
Suite 800, 525 - 8th Avenue S.W.
Calgary, Alberta, Canada T2P 1G1
www.precisiondrilling.com

Rates

View Comments (0)