Precision Drilling Corp (PDS) 2002 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Precision Drilling 1st quarter results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time to queue up for questions. If anyone has any difficulties hearing the conference, press star zero for operator assistance. I would like to advise everyone this conference call is being recorded. I would like to turn the conference over to Mr. Hank Swantout, Chairman, President, and Chief Executive Officer. Please go ahead, sir.

Thank you. Good afternoon, ladies and gentlemen, and welcome to our 1st quarter results for 2002. I would like Dale Tremblay, our CFO, to start the discussion, please.

This conference call in Westcap contains forward-looking statements. Based upon current expectations that involve a number of business risks and uncertainties. The factors that could cause results to differ materially include but are not limited to national and regional economic conditions, oil and gas prices, weather conditions, and the ability of the oil and gas companies to raise capital, or other unforeseen conditions, which could impact on the use of our services. The satisfaction of delivering earnings per share that are greater than consensus and better than most of your peer group is very pleasing. Precision has always been open with their shareholders and always given the straight goods on where we think the industry activity levels will be. We have been very realistic as to our markets and have shared our views earlier in the year as to why expectations should be dampened for the year. Market conditions improvement in our domestic drilling market and strong fundamentals relating to the production side of our rental and production group has led to these improved results. As we have already released a very detailed press release outlining our financial results for the quarter, I will give you an overview of our financial highlights for Q1 of 2002 and leave ample time for you to discussion current and future operations. And I believe this will be of greater interest to you. Starting with the contract drilling groups in Canada, we achieved 12,289 rig operating days, for a 61% utilization rate for the quarter. Compared to 16,552 days in Q1 of 2001 or 80% utilization rate. The greatest accomplishment for the quarter relating to the contract drilling groups was that both our average day rates and our EBITDA per day, both were out when compared to Q1, 2001. January got off to a slow start as the unseasonably warm weather carried on into 2002. Initial indications were leaning towards an early spring breakup and Hank's comments earlier in the year relate to this quarter, but fortunately, March came in very cold and persisted throughout the month with the first road bans coming on in early April. The favorable average rate is mainly due to the combination of the sales mix, the April 1, 2 001 rate increase which has held, spot market activity. Both our supersingles and triples were busy throughout the quarter, while the double rig market remained competitive. The service rig fleet generated 129,000 hours for 59% utilization during Q1 2002, compared to last year. This is a 22% decrease in utilization. Average hourly rates increased to $497 per hour, compared to $445 per hour in Q1, 2001. Precision Drilling International increased its number of rigs to 13 compared to 11 one year earlier. Drilling operating dates increased 11% to 819 days compared to 735 last year. In Mexico, we drilled 49 wells compared to an expected budget of 40 wells. Breakdowns for Q1 revenue. Domestic revenue, $190 million, well servicing, $64 million, international drilling, $30 million and other, $21 million. TSG results for the 1st quarter were lower than expected from both a revenue and EBITDA respective. The revenue decline reflects the greater than expected decline in drilling activity in Canada and the United states. Canada's open and [INAUDIBLE] jobs performed in Q1, were 4,407 compared to 5,558, down 21%, reflecting general industry slow down. Directional drilling activity corresponded to reduced field drilling activity. Overall, Canadian drilling was 95 million for 2002, compared to 120 million in 2001. Down 21%. U.S. revenue is a direct reflection of this depressed U.S. oil field market. U.S. Revenues were 32 million, down 36%, with an operating loss in virtually all product lines. International revenue increased 166% to 56 million for the quarter with strong margins in all regions. R&D. Precision continues to invest in the future spending eight million in the quarter or a reduction of our bottom line of approximately 10 cents per share. Our rental production group continues to surpass our expectations with revenue up year over year by 7 million to 74.3 million or 10%. Our rental group, with its relationship to the oil field activity, was down 35%. Both Ceda and EI, in the production segment of this group, had strong quarters. Ceda is operating at a robust pace with a 17% increase year over year in revenue to 39 million with improved margins. This is very positive for Ceda, as we are just now entering the busy season. EI as well, outperformed with revenues of 27 million, up 13% over Q1, with a slightly lower profit margin. Turning to the balance sheets, our working capital continues to improve, up almost 100 million since year end with the current ratio of 1.72-1. Inventories have remained constant in both our drilling and rental and production groups, with a slight build in our TSG group. Capital editions by segment. Contract drilling was $10 million of which that, the main number was 5 million in drill price. TSG group was 29 million, the main items were $5 million for logging, $2 million for drilling tools, advantage engineering spent $2 million on new test equipment and expansions, um, we spent $3 million on service gas [membranes], a million dollars on new [INAUDIBLE] at Polar, and approximately $4 million for new equipment for fleet cementers. Rental and production was $9 million. The main item were a million dollars in drill pipes for Big D, 4 million relating to Ceda, and 2 million relating to EI or, um, expansion in the rental fleet. Just a note, goodwill is no longer amortized, and you will see the change in wording on our balance sheet. And finally, long term debt, there was really virtually no change since year end. Thank you.

Thank you very much, Dale. The next gentlemen will be Larry Comeau with the Technical Services Group, Larry, please.

Good afternoon, ladies and gentlemen. Um, as Dale indicated and stole most of my thunder, um, we went -- we had a relatively tough 1st quarter. The negative side, of course, was significant reductions in activity in North America. We saw a decline in our revenues in North America of $35.2 million and obviously this had a big impact on our -- on our [LINE NOISE] International showed considerable growth over 2001. Revenue in each of the regions increased from 28% to 123%, And operations continue to grow and additional services being -- were being provided in Mexico. Our CAP-X for the quarter, as Dale said, was $28.2 million. Our major investment was primarily focused around water lines, under balanced Drilling equipment and our actual Drilling. The downturn in the North American market has had a positive effect on freeing up assets, and thus allowing them to be redeployed into international. Assets from various product lines are now being deployed into Colombia, Mexico, Algeria, Greece, India, Bangladesh, Malaysia, Indonesia, and into Oman. Much of the cost associated to this redeployment of assets was incurred during the 1st quarter and some will continue on in the second. On the technology side, starting with the LWD development. During the quarter, directional gamma hell series tool had 27 runs. The [INAUDIBLE] in a recorded mode had 13 runs. Total tools available during the quarter were five, all of them were 4 3/4 tool size. The maximum depth encountered was 16,786 feet, maximum temperature 330 degrees farenheit, and maximum operating pressure was 15,350. As of today, or today we had three hell series 4 3/4 jobs in progress and have six tools available to operation, all systems are available around revenue. Manufacturing has been working with engineering in handing off manufacturing process to them. All the tools to date have been dealt by engineering. Manufacturing produced their first tool last Friday and subsequently, produced two additional tools over the weekend. Two 6 3/4 hell series tools, first of that size, were delivered on May 2nd. Our first 6 3/4 hell series tool job starts on May 10th. We refocused some of our engineering during the late fourth quarter to concentrate on an opportunity with Exxon-Mobil in Indonesia to design and develop an EM hell series tool for underbalanced drilling operations there. So we took some of our development team that were focused on density and [INAUDIBLE] and concentrated on building this device. This system is scheduled for delivery on May 21st in Indonesia and is now functioning. It provides us with the capability to not only use mud poles telemetry on the hell series tools, but also EM telemetry. The tool and system is designed to survive 200C. Seven additional 4 3/4 hell series tools will be delivered in May, and four more additional 6 3/4 tools will be delivered to May. Density. the density tool will be in the block today or later tomorrow morning, and is scheduleD for the first field test on the third week of May. All shop calibration and testing has gone exceptionally well. And the tool is mirroring its original development specification very well. Realtime [INAUDIBLE] will be available in the first week, of June. We have been waiting for an interconnect that will be delivered in May. The communication architecture has been completed and it's an inner connector we're now waiting on. The [INAUDIBLE] data has been analyzed in both the U.S. and Mexico against wire line data, and has shown excellent correlation. We anticipate writing a paper on one particular well were we utilized the tool at a higher [INAUDIBLE] formation and it provided exceptional response. The temperature and vibration upgrades were started on our [INAUDIBLE] based, the [INAUDIBLE] based tool, last July and that upgrade has been now completed and we're introducing that tool into the field. We have seen a dramatic improvement in reliability. We have recently did a well in the Rockies for BP where we had over 1300 hours down the hole and sustained absolutely no loss time or failures. So we're pretty encouraged, and our activity in the U.S. has changed dramatically over the last month just by providing a reliable quality product in the field. United Diamond introduced [INAUDIBLE] bit designs during the first quarter. These bits were targeted for Latin America and for the Asian markets. And so far, they have shown excellent performance, with one run in Mexico at 70% increase over average, [ROB's] in the area. United Diamond's torsional impact motor will be tested in May. This device was developed to allow PDC bits to drill higher compressive strength formations, and we have fairly big expectations for this device. Polar began field testing in the 1st quarter of their [vericomb] new liner hangar system, and we expect commercialization of the product in the 2nd quarter. Polar's also been aggressively developing their permanent packer line since the late 4th quarter, and we expect a full range of permanent packers available by the 3rd quarter. Polars also has commercialized a new sweep of stimulation equipment for brack related processes. This includes the straddle packer and pressure -- the high pressure selective isolation tool. With respect to our wire line business, Open Hole, in the 1st quarter, successfully ran a stacked DMI tool, which enables 360 degree well bore coverage. This has gone off well, particularly in the U.S.. Spectra gamma ray and the duel ladder log will be tested in the second quarter. The tools are assembled, have been through heat, have vibration qualification, and will be in the field. The reinduction tool's in the final assembly, and is scheduled for field testing in the 3rd quarter. During the 1st quarter, we introduced a hot hole slim sector [INAUDIBLE] tool, and it's now commercially operating. A new generation gamma CCL was commercialized in the 1st quarter and it is now operating as well. A new generation gamma neutron for case toll is in field testing now and will continue through the second quarter. High temperature and vibration upgrade is currently ongoing with our open hole tools. We saw -- we have seen poor reliability and performance on our open-hole tools when they're exposed to high temperature applications, and we have subsequently taken the team that worked on the repackaging of our [INAUDIBLE] and based EM tool, along with our open-hole and case tool staff in Fort Worth, and our advantage team are working together to upgrade our open-hole devices. We're taking basically one device at a time and requalifying and designing the boards to the similar packaging technique that Advantage is using. And hope to have the process finished by the end of the year, which will enable us to increase our reliability, increase our temperature operating specifications and provide a higher level of service to our customers. With respect to the P-MEX project, the 1st quarter was our best quarter for total wells drilled. As Dale said, we drilled 49 wells. To the end of the 1st quarter, we had 136 wells completed. We're currently operating, as of today, about 12 weeks ahead of schedule. And that's it.

Thank you very much, Larry. Ladies and gentlemen, some things I would like to comment on TSG, which is our technical service group as well, is that we took all our third-party charges with these verbous projects, the Mexico project, and our management cost which had a slightly negative EBITDA margin. I put that in his group. So it brought down TSG's EBITDA margins for this quarter -- quarter over quarter, because obviously we didn't have the project last year. We will not go into the actual numbers involved, but it is quite material. When we look at the effort these gentlemen have made and some of the tools and some of the successes we're starting to have, we're starting to just see the other end of the light at the end of the tunnel on some of our projects. One of the biggest things that causes a little bit of concern was taking our EM tools, changing them to handle the new dynamics that we see in other parts of the world. We're very comfortable with our EM tools in Canada because they're sort of a benign drilling scenario, but as we went around the world, we had other problems, and we had to fix them up. Our group has held up very well. We have a new tool that should come off, I believe, by August.

June.

June of this year, and it's our B-1, having to call it the Big One, but B-1 is a good name for it. It's extremely promising. We have different components of it in different parts of our EM, and it's extremely world-class, and we're very excited about it. We're also just at the forefront of a unique project with Shell in the North Sea, which we'll talk about next quarter, which has a tremendous amount of upside to it as well. On the drilling front, obviously, we're pleased with what we have done in Canada. We have tremendous relationships and going forward this year, as we restated our concern for our operators, that we certainly have dropped our prices from the winter. We said that very clearly. Keep in mind that for 30 years out of 31, we have done that. Only one time in our lifetime, and it might be the last, I don't think so, that we were able to raise the prices in April of last year, and that stood us in good sense going forth. Our long term alliance customers are working strongly with this. The 4 large gentlemen that came out of the U.S. to consolidate the different groups are working very diligently with us, so that we're a substantial part of their organizations, and we're very pleased with that. As we go forward this summer, we're not going to see potentially the demise that some people had anticipated. Because everybody's in good shape, and nobody's really hammering the bottom too hard. Except there's always one or two who will always do that. We have to say we're only as good as our weakest link in the business, and sometimes you can achieve gains above the weakest link if you have the proper people, equipment and safety. And safety has been one of our biggest concerns this year as we went forward. We talked about it at our meetings. We're comfortable to say it's the best safety record we have had to date. January, February, March have had the least amount of problems we've had in any spring time in the history of the company for our size. We're very pleased, and we're focused on it on a daily basis and continue to do so as we go through the year. When we look at the rental production group, Dale eluded to the numbers that we're doing. We're pleased with Ceda, we're very pleased with EI, and the rest of the group is doing well. I think you will see that Ceda will continue to grow, and EI will be the most dynamic package for compression in town this year. These gentlemen work very hard,they do a first class job, and they keep showing us the numbers on a regular basis. So, I think we will open it up for question and answers at this time. Thank you.

Thank you, ladies and gentlemen. We will now conduct a question-and-answer session. If you have a question, please press the star followed by the one on your touch-tone phone. You will hear a 3 tone prompt acknowledging your request. Your questions will be pulled in the order they are received. If you would like to decline from the pulling process, press the star and the number 2. Please ensure you lift the handset if you are using a speaker phone, before pressing any keys. One moment, please, for your first question. PAUSE] Your first question is from Jamie Stone with UBS Warburg. Please proceed.

Hi, guys, how are you doing?

Fine, Jamie.

First question is, Hank, it sounds like, from your last set of comments, that the outlook for the second quarter is probably looking a little bit better than you might have thought a couple of months ago. Looks like the rig count in Canada is bottoming at a somewhat higher level than those most kind of dire forecast that you eluded to. Are you seeing customers kind of lining up to come back to work post break up at a little bit faster pace than you thought?

Obviously, Jamie, [INAUDIBLE] gas is coming back with the price of gas that improved over the winter outlook. With the U.S. staying at 52 BCS and that range on a daily basis, realizing the declines they had have, we're seeing a lot of interest in [INAUDIBLE] gas in large demand. But keep in mind, we have the ability to drill with more rigs working one month, [INAUDIBLE] drill a thousand wells and three wells a day [INAUDIBLE]. So, they can certainly come back. We had never anticipated using all our [INAUDIBLE]. I think all our [INAUDIBLE] is committed now for the summer.

Uh-huh. What about the outlook for heavy oil and -- and also just the outlook for deeper gas?

The doubles and triples.

We have 40 rigs running right now, which is more than we had anticipated. Again, when we were looking at some of our forecast in the fall, we said we're not sure where gas is going to bottom at. We thought it would come around. Obviously with the enthusiasm, and the lack of productivity out of the U.S., to deliver gas to the U.S., we're going to see more challenges and stability from Canadians to deliver into the U.S. Market. But deep is strong. Obviously heavy oil, with the differential in margins, we're seeing people actually acquire heavy oil fields. And going forward, obviously we're a very strong heavy oil driller. And that is probably one of the areas that increased our demand for our equipment more so than before. We're also negotiating to build another [INAUDIBLE] rig with another company that realizes that we are the final answer for [INAUDIBLE] In fact, the other two that we have, of a new generation, just broke every record in the book. So, we'll probably go ahead and facilitate that request as well. Heavy oil is strong, deep gas is still strong. If there is any weakness, it is in the double market where there is an oversupply of double in Canada.

Thanks. And then, following on to some of your comments on the Technology Service Group, I know you said you were't going to get into quantifying those third-party costs that you allocated to Technology Services in the quarter that might have resulted in a much lower than expected margin there. But is that a -- is that a one time allocation of cost, or is this going to be a recurring -- where this is where those costs are going to lie and be about the same as they were in the first quarter as we go out in the next couple of quarters.

I think when we look at it, we're also negotiating potentially -- We have been requested by P-MEX for two more rigs for the [INAUDIBLE]. They had the right to request two more rigs to add on to the contract. Those rigs, when they come in, will help the -- that number with the TSG group. We will try to mitigate some of the risk profiles and we're very comfortable now and very knowledgeable of what we're doing in comparison to where we started. So I think we'll be able to soften that a little bit better. But at this point in time, all the third party charges, which have zero revenue in them and zero profitability, will be on the TSG side. It will lower their returns for this year. Next year when we redid this project, there will be an extension on it, we're probably going to refocus how we do it internally. When we set it up this way, it doesn't make TSG look that good, but it makes the other parts look good. So we're very confident in that, Jamie. We just wanted people to be aware of that.

And then, it also sounds like -- this will be my last question -- that you have just a tremendous amount of new product coming -- that are coming in the next couple of months out of TSG. Does that indicate then, as we get into the second half of the year, that kind of $8 million quarter R&D expense is going to start coming down as you begin to harvest that whole new generation -- all these generations of tools?

I don't think it's going to come down this year because we're also deploying a tremendous amount of asset inside of Canada and other parts of the world. We can't go into it in detail, but some of our open hole and case tool equipment is going to be in different parts of the world. The other thing we're proud of, by June of this year, we're going to have TSG have full capability of deployment of all our product lines in all our different divisions around the world. Now that's a tremendous accomplishment for a Canadian company that really shouldn't be where we are. In some people's minds we're one of these wanna be's. But want to be where we're at, and we're going to prove to the world that we've accomplished it. To take the Polar products and the other products we have inside this company, and be able to sell that in all corners of the world is an extremely unique accomplishment. We're seeing tremendous demand for our triple combo, LWD, and we have a huge demand for our EM tools of a new level of competency. One thing we have not talked about is our rotary stirrable, we alluded to it. But our 4th quarter volume will be out. We expect to be tested this fall. And we're comfortable stating that, as you go forward, you going to see this off the shelf, MWD, which a lot of people have, is going be extremely limited in the application of the future. The new technology that we're bringing forward, and some others in this same high tech group, and ours all have intellectual properties, they are patented around the world, are going to change the world dramatically in the next couple of years from the low end life of MWD. That's something that you can say was said here, we're comfortable with it, and it will be amazing numbers that you'll see in 2003 and 2004 out of the TSG group.

Thanks, I'll let someone else ask a question.

Thank you.

Your next question is from John Tademir with Raymond James. Please proceed.

Hey, guys. Hank, really I was calling in to see if you have questions for me.

No, I don't. I'm pretty comfortable, thank you very much.

Actually, I did have a few questions. First of all, Hank, on your contract drilling business. Obviously, the margins were very surprisingly good. Did that mainly come from the fact that you got a larger portion of international mix into that? How -- I guess if you're just with the Canadian operations, how does that compare on a year-to-year basis?

We're very pleased with how it compares. Keep in mind, John, that we set our prices in October for the winter. We don't price ourselves on a well-by-well basis as the United states does. The operators sat down, and we discussed with each one of our operators, the relationship for the winter. We were very fair with them. And, as we go forward this year, we've set most of our prices, and we're very comfortable with where we are at.

But your prices this morning weren't better than last year, were they?

They were -- it's Dale here. Our EBITDA -- on an EBITDA basis, we were almost -- we were just slightly under our last year achievement. So the answer is, yeah, they were very strong. Our profit margins held up. And as I said, as our rate increased from last year, that went through April of 2001, held true for the most part, throughout the 1st quarter of this year.

Well actually, we have reduced that in the fall in some cases. Keep in mind, because we kept raising our prices, we were able to reduce them, and not see the decline. We were also able to keep our operating costs substantially lower than in the past as well, because we were not going through a build mode and expense mode as far as upgrading equipment. We have some tremendous equipment out in the field, and we're very pleased that it will maintain itself this year as well. And the spot market, we have a lot of people paying us more money per day because of our equipment, our liability, and our efforts to achieve superior performance on a daily basis, wherever we are in Canada.

The other side, John, is we had a significant turnaround in our well-servicing business from last year to this year. The margins on it was up over a 4%. So it's a significant improvement there.

Okay. Also, Hank, as far as the [INAUDIBLE] Sea project, I think for awhile, we thought that was going to Halli-Burton. But BJ said on a conference call that negotiations there are still alive and well. Can you give us any update there, what [INAUDIBLE] is actually doing?

Well, the Virgos 2 project is [INAUDIBLE] so nobody has it, it's been totally disqualified. We're negotiating on the Virgos 1 project extension, which P-MEX had the rights to all along. And I believe, you have to talk to P-MEX and see who they have given any other wells to. We won't go into it in detail. But our understanding is that the Virgos 2 project that was fit has been nullified and void.

Okay.

The tender's been canceled and the term in Spanish is [INAUDIBLE] basically the tender's been deserted, and the process will reoccur sometime in the future.

Okay. Let me switch gears. Larry, the TGS business, maybe you've already said this, but in the last quarter, what was the makeup of international versus Canadian revenues?

Okay. The TSG revenue mix shifted towards international with Canada -- Canada contributed about 51%. In 2001, it was 63%. The U.S. contributed 19%, previous year was 24. International went to 30% from 13 a year ago. The biggest hit we had, I mean we got beat up real bad as Dale said, we really struggled with all the product lines in the 1st quarter in the U.S., and it was a real tough quarter for us. We took -- we took a lot of [INAUDIBLE]. We took 114 people out of the U.S.. You know, we wanted to continue to aggressively reduce our structure there. We were struggling a little bit with the fact we had all this new technology coming out. At the same time, we got indication the market was going to start to improve. We have used a lot of people to help us with some of the reliability-upgrade programs we have going and some training. We are pretty much intact at a senior operation's level and almost all of our senior operating people, we still have them. And as the market recovers, we're seeing a big improvement. The big financial impact was our offshore business in the Gulf of Mexico. You know, in the 4th quarter, it really hurt us, and in the 1st quarter of this year. But in May already, our offshore operations have improved dramatically. So we're starting to see a lot more activity in the Gulf and a huge part of our profitability comes out of our water line work in the Gulf.

If I guess, given the larger portion of the international revenues, although we're still down in the U.S. -- activity levels over the 1st quarter, can you give me a since of seasonality, or 2Q revenues for the company. Are they going to be relatively flat, or slightly down a bit because Canada's down, the U.S. is down. Can you give me a kind of sense?

The U.S. will probably be an increase, because seasonally, January and February are never great months in the U.S.. Keep in mind, that is probably one of the lowest -- January and February is traditionally the lowest. As we see some of our American counterparts claiming that the rigs are coming back to work, they always come back to work this time of the year. That's nothing new. There should be a slight increase, and obviously with the price of gas going up, you will see our side increase. The international side grows profitably every month. When we look at what we have done in our globalization, there is not one part of our world that is not getting better. And as soon as we can deploy some of the tools we've bid -- specifically to the Indonesian area, where we have some great contracts coming up. And we have other products in South America that we have to perform. We have huge demand in the Middle East for some of the products as well. And that's not counting the offshore lwd, or the routory [INAUDIBLE]. I mean, it's very exciting. It's just delivering the tools and -- as we get the EM problems behind us as we went to a new tier of quality, we're able to go back to our basic tools and get some of our tools from TSG. Our new Advantage Pulser's ready to go with the telemetry that allows that to proceed. And it's just a challenge to get tools up and get them working.

Okay. One final question for Dale. Dale, it looks like the tax rate was a little lower than I anticipated. Can you kind of give me a benchmark for the rest of the year?

Ok. From relatively where we are, maybe come down a little bit throughout the year.

Okay.

You know, we run a pretty complex tax structure, you know, being in various countries around the world and, you know, year end is when we really do our, you know, our fine-tuning. So we usually go throughout the year a little higher than, you know, than usually the outcome is.

Okay.

we prefer that you guys all stayed a little high with us.

I got you. All right, guys, thanks. I appreciate it.

Thank you very much.

Your next question is from Jeff Tillery from Simmons & Company. Please proceed.

Yes, good afternoon. As commerciality for your complete fleet of LWD tools comes to commerciality, can you talk a little bit about the marketing strategy you're gonna take with the tools, such as what services you will market in conjunction with them, as well as which geographic markets you're going to target initially.

Well, before we -- we have a huge demand from different major players around the world to get our tools out. We have the only tools that are competent -- we have a pressure facility that is good for 30,000 PSI, nobody else in the world is better than 22,000 PSI. Our tools are already in demand because of the pressure side of it, they're in demand because of the clarity of the signal. and what other people are seeing. The ability to deploy is going to be a fight among our own regions as to who gets the tools first. It's that much demand for what we have. I know the other gentleman maybe questioned that, that sell the tools. But just be prepared, because we're there.

That's helpful. And, as you see the -- the -- as we have seen the AMA activity take place in Canada in the past year, so -- the significant overlap in customers between the U.S. and Canada now. What sort of expansion plans do you have in the U.S., if any, to try to take advantage of that -- and try and leverage that relationship?

Well, we're not going to expand in the U.S.. The U.S. is the most mature reservoir in the world. It has the most rigs that are supposedly ready to go to work. At least you can raise your rates every well. I guess we have to be realistic that the price that the U.S. drillers trade at is far superior to anything we could dream of, and some of them are over a hundred times the [INAUDIBLE] ratio. So, we're just in awe of what they can accomplish with their [INAUDIBLE]. So, in all honesty, we won't be there.

Okay. My final question is, CAP-X during the quarter was about 40% of the guided '02 totals from last quarter of $120 million. Is $120 million still the target for this year?

Yep, we're pretty comfortable. We made -- as we become more profitable, we'll spend a little bit more money. But for right now, we're targeting the 120. It may come in at 140, 150 with, you know, with approval from our board.

Okay.

For example, we have two rigs we have to move into Mexico now. We have the -- that's going to take place. And we're also looking at moving some other rigs in different parts of the world that we're bidding on at this point in time. And those take a little bet of capital. We don't recover all of it on the original six months of the contract.

Alright. Thank you, gentlemen.

Thank you very much.

Your next question is from Dana Benner with National Bank Financial. Please Proceed.

Thanks, good afternoon, gentlemen. Hank, I don't want to beat day rates to death, but you've noted a couple of things. Number one, that you have done a lot of the negotiations already for the rigs that will be deployed later this year. And also noted that a number of other parties were getting quite aggressive on [INAUDIBLE] side. Can you give us a better flavor for what you are seeing this spring in relation to what you had negotiated for your winter? And then maybe talk a little bit about how that effects summer and later this year?

Well, Dana, we sit back with our long-term relationships, we give them a price in spring until October. And we're pleased with the way the negotiations have done, and have taken place. For example, we have seen some people come in on a spot market, on a certain well that's $2000 a day below us. We have been given the job because of the quality to perform rather than just low prices. Some people are getting tired of taking the lowest price and paying the results of it. So, actually, I'm very pleased with the way this spring is going. We're still negotiating with a couple of our other customers. We're not going to go into any numbers or detail, but we certainly have brought our rates down and we respect the operators and it's obviously supply and demand. If there is too many rigs, the price goes down. As far as the model, we're not going to do that on a conference call.

Okay. I guess I want to stay in Canada a bit and talk about your compression business. As you mentioned in your press release and on the conference call, you sort of bucked the trend, as it were, and did quite well. I would be curious to get your insight as to why you're performing so well, or relatively well, versus your competitors here in Canada.

If you talk to the customers and look at the quality of the packaging, sometimes if you do a better job, you can actually maintain margins and get jobs. We're the only nonaerial producer in all of Canada. So it's very simply put, we have a tremendous quality group. They're doing a first class job, and are able to respond and give a quality product faster than these other mammoth individuals.

I would say it's -- well, pricing is -- if our pricing is that much lower than anyone else, I don't know why our margin was much higher.

I don't know what your going was for the quarter.

Dale listed it earlier, but that's fine. We did very well, and our gentlemen are certainly north of 15% EBITDA. We're pleased with them, and they look like they're well on the way for potentially record year over last year. And our rental group is getting stronger all the time. We're at 50 rental units and climbing.

Okay. I guess -- I want to come back to Mexico and -- and I'm still a little bit unclear on this allocation issue of third party charges entered amongst the divisions.

Dana, let me -- The third party charges are for all the road construction and all the other things that were involved that have no profit in it.

Pipelines.

Pipelines, all these other things we're building and it's all part of our revenue out of Mexico but there is no profit in it. It's just embedded in cost.

Right. I guess what I'm trying to figure out is, if you think about the fact that you're considerably ahead of budget, at least in terms of your schedule, how would you -- how would you estimate the ultimate profitability of the Mexican project once you get past some of the allocations -- the divisional allocations of some of these charges, and things like that?

I think we're pleased as a company with where we're at. We're not going to -- we're certainly not going to make any world record profits on it, but it's very effective and we're very pleased to help the Mexican government and they have treated us well. We're looking forward to doing more work with them, and go forward as we're able to get more quality controls within our group. Our ability to drill now is better than it's ever been. We're much faster, much more efficient. Every once in awhile, though, we do slap ourselves in the toes over something. We've learned a tremendous amount over the last year. And I think you will see there probably will be an extension of this Virgos 1 project, and possibly an extension of the other extension we're negotiating. So, we're in great shape to continue to work in Mexico for a long time to come. And we have to be fair with them, as well as they're fair with us.

Right, so you -- you're at five moving to seven rigs in the near term, is that correct?

That is correct.

Now, you mentioned elsewhere that you could be as high as 10 rigs, whether it's, I don't know, 12 to 18 months down the road, I'm not sure.

Well, there is another bid that's came out for another five rigs, and there will be another bit for some more rigs in a short period of time. I'm not saying we're going to get them all by any means, but I think we will be a player, and be able to put some more into the group as the different projects come out of P-MEX. Keep in mind that P-MEX is about 4 BCS a day, trying to get 10 by 2008 to 2010. P-MEX was awarded $24 billion to spend on exploration and development this year, which is an extremely generous amount for the Mexican government to let them play the game. But they realize as well that they can't come to the U.S. for their increased production, they have to do it internally. They have a tremendous amount of geological potential. And we are sort of the new rule as far as drilling. You have to be as good as us at Precision Drilling or it will be tough to beat us.

Right. Final question for Larry. Larry, in your comments, you had mentioned that you were deploying a lot of different equipments into reasons like Colombia, Algeria, Greece, Oman, Indonesia, India, I think it was. Could you be more specific as to what that equipment is?

Well, in each of the regions international, our focus has been to try and introduce each of the product lines that we have. Recently, we have been fairly successful in tendering and, you know, we have picked up -- for example, in Colombia, we have picked up open-hole work. In Mexico, we picked up a significant directional drilling and drill bed and under balance drilling contract. We are continuing to bid on things like products for Polar and additional products for open and case hole. In Algeria, it's underbalanced drilling related, we have also looked at an integrated package and gone through the technical qualification process on that now. In Greece, it's almost all the services, including open and case hole directional drilling.

We're not moving it today. We have to finish the well we're drilling first. But it's going to move from Nova Scotia to India, and it is one of our super, supersingles, in the sense that it was the very first one that we developed. And it's been over to Kazhakstan, broke over record there. It's did a great job in Nova Scotia, and it is on the way to India. It's a very long-term contract, and we expect to see tremendous things happen in India. With the rigs, we'll have just about all of our services in India, which is a very tremendous accomplishment for us.

And you know, the ability to integrate the drilling rig and all of our services proves to be extremely accretive for the company. And we've been able to provide pretty superior performance for our customer. So, India was another one where, you know, you're basically going to end up with a little Mexico there and hopefully the performance we deliver will enable us to expand there. Bangladesh is case hole stuff related. Malaysia, we've got a real interesting project starting with Shell offshore with BM. And we also have drill bits and completion products going there. In India, we have completion products going. We recently received a large tender for products. And it just goes on. Each area, some of it's -- there's no specific one product. I mean, we're just trying to saturate the world with each of them. And, you know, we incurred some costs to get them done, but -- Colombia for example, we actually have two units landing there today. The second unit landed on Sunday. The ones on location, and we should log, I think, within the next five days, our first job. So, we've got a lot of bids out, and we got one real significant bid in the middle East that hopefully, we'll put in a case hole. That's the significant amount of equipment, and it will really change our operation there. So, we're just kind of attacking it everywhere we can.

Dana, what we're pleased with is that because we're closing our technology gap that we had on the open side, we're able to bid just about anywhere in the world now. That's a tremendous accomplishment for us. And we're able to take our assets out of Canada or the United States and move them internationally. And you know, we've learned the hard way with some of the stuff we used in the United States, but we've learned. The equipments getting better all the time. We're getting better on temperature and depth, and we're going to be a player around the world.

Okay, that's all I've got. Thank you.

Thank you very much.

Your next question is from Kevin Simpson with Merrill Lynch. Please proceed.

Good afternoon, Hank.

Good afternoon, Kevin.

I have a question on the impact of consolidation in your market and Canada. I guess particularly the Incana combination. They drill a huge amount of the wells, or have, I guess. And it was presumably going forward, particularly in the shallow end. You had said you're renegotiating with some customers. I was wondering, you know, I know you're probably not comfortable talking about specifics, but, I mean are they using their market clout to, you know -- which has got to be enhanced here to, you know, to squeeze a little bit more out of you?

I am sure that they wouldn't say that because we have such a long-term relationship together. But we probably have more respect for them now than we did before, Kevin. They're definitely a force to work with, but we've worked with both groups before. And to be very specific, last year I think we did 75% of [INAUDIBLE], AND 64 OR 65% of AEC's. Obviously, when the two come together, there will be less to drill. That's why they have come together. And we will be there to support them and do what we can going forward. We have a tremendous relationship and will continue the relationship on all fronts. Fortunately for us, people are starting to realize the scope and breadth of what we have. Keep in mind that virtually we do 40% of all the oil field service in Canada across the board. So, people are coming to us and they're asking for more development internally. And they're looking for some fair pricing, going forward, with the quality of work and volume of work that we give them.

Okay, thanks, Hank. And you're -- you've kind of -- certainly did way better than we thought you would in the quarter and also, just in terms of where your run rate is now for rigs is, um, higher than we had thought. Maybe we were one of the doomsayers that thought things would get a lot weaker. Do you think that you're kind of at the bottom with your 40 rigs, or do you think you still have some, kind of near term weather vulnerability? And then, what's your -- I guess you've already talked to this, but maybe you could go over it again, what kind of ramp rate would you expect as we go through the September quarter?

Well, Kevin, I'm not going to predict the fall, because it still dictates on a cash flow. We are certainly at the bottom. We're starting to get more demand for heavy oil as we go into this. I mean, shallow gas is far more accurate than we thought in the October side. But as the price of gas firms up and gets solid in Canada, keep in mind we have a tremendous amount of $3 U.S. gas to be found in Canada. No question, it's $4.50 to $4.65 Canadian. We love it up here, and so do the U.S. people that have come forward, and other international operators. Canada still has a lot to give the Western Canadians. INAUDIBLE] basin is still underdrilled substantially compare to the huge drilled reservoirs in the United States.

So, your issue would be it's going to come, you know it's going to come and you don't want to get penned down on the timing.

I -- my problem is we don't know what storage is. Storage dictates our [INAUDIBLE] the last two years. I don't think anybody can argue that point. Each week we seem to learn something new. We know that there will be a spike at some point in time. And when it comes, we'll be there to be very fair with our customers going forward.

Thanks, Hank. That's it.

Thank you, sir.

Ladies and gentlemen, as a reminder, if there are any additional questions, please press the star followed by the 1. [PAUSE] Your next question is from Robert Ford with Sanders Morris Harris. Please proceed.

Thanks, morning or afternoon. Hank, you got Polar developing stimulation equipment now. Should I read into that that maybe it's time that Precision starts to enter the pressure pumping business in Canada, building some of its own fleet?

I wouldn't go that far at this point in time. We have to look at the overall company, and it's probably the one thing we're missing in Canada. Obviously, we have fleet cementers in the United States, and some of the best bracket and cementing equipment Canada can build, because we've bought it here and have taken it down here there. We also have a {INAUDIBLE] hanger division that is coming {INAUDIBLE] too. We're trying to get a cross section in tools that can make us competitive in all marked places. And these gentlemen have done a great job. Larry's group is proud of what they have accomplished. You will see Polar as a very strong edition internationally to us as we grow. We will look at anything, but we also have to look at the other gentlemen, what their multiples are. And hopefully we can get stronger and show the world that we have something called Technical Services Group that will generate some superior profits over the next three year -- two to three years. We will probably be able to add more to the pressure pumping side at some point in time.

Okay. Okay, thanks. Good quarter, guys.

Thank you very much.

Your next question is from Paul Beak with Dundee Security. Please proceed.

Good afternoon, guys. Larry, as I understand it, you have got six 4 3/4 tool sets out and available, and two 6 3/4 sets out. The original plan was to have, I think, 40 sets out by the end of the year. Is that still the plan?

We still think we're going to get there. The transition from engineering assembling the tools, and documenting all the steps and the processes to make sure all the quality procedures were in place has taken us a little bit longer. We had originally anticipated that our manufacturing, our procurement assembly and and tests we would outsource. We used the outsource provider to work through the upgrade on the EM technology, and we were not as pleased as we could have been with that process. So we have taken that in house, and so it's delayed us a bit. The manufacturing team we've got are under a lot of pressure, as you can imagine, to try to push the tools out the door and get them going. And they're still forecasting, assuming all of the capital that we had you know, it's probably a -- I'll know a lot better a month from now, I'll know a lot better two months from now. But the plan they have says they're going to get it done.

And as I understand from Hank, there is pretty much a demand for as many as you can get out.

Well, you know, today the unfortunate situation is, you know, we have contracts in Latin America, and we have contracts in the Middle East, and we have contracts in Asia, where we're utilizing third parties. And basically the tools we built are already all sold and committed for quite awhile. It would be nice to get a new tool, and go chasing around the market and go sell it to a whole bunch of people. but we actually have homes for them, today, where we're utilizing some of the Big Three or Big 3's tools, where well just replace those tools with our own. So it's going to be kind of a shotgun. We have some places they have to go all over. And -- but for us it will dramatically change our operating margins and provide us with, you know, substantially higher level of service capability in each of the regions. So, yeah, there is no shortage of homes for them right now.

Paul, keep in mind, quality, not quantity, is what we want to bring out of the shop this year. First and foremost, when you're young and fledgling like we are, we want to make sure that we've done it properly, and that our mistakes are behind us before we try to propagate the world.

Absolutely. Okay, thanks, guys.

Thank you.

Mr. Swantout, there are no further questions at this time sir. Please continue.

Thank you. Thank you very much, ladies and gentlemen. We look forward to having your questions on the second quarter and hopefully it will be as productive as this quarter. Thank you very much, have a good day.

Ladies and gentlemen, this concludes your conference call for today.