Precision Drilling Corp (PDS) 2002 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by.

Welcome to the Precision Drilling's second 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 for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star, zero, for operator assistance at any time.

I would like to remind everyone that this conference is being recorded, and will now turn the conference over to Hank Swartout, Chairman, President and Chief Executive Officer.

Please go ahead.

Good afternoon, ladies and gentlemen, and thank you for taking time to listen to our second quarter results for the June 30, 2002 year.

As usual, I'll let Mr. Tremblay lead off - please, Dale.

Thank you, Hank.

I'll start by giving the dissertation on ...

The conference call and Web cast 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 oil and gas companies to raise capital or other unforeseen conditions which could impact on the use of services supplied by our corporation.

In today's world of uncertainty, especially in relationship to North American business, Precision is pleased to have achieved financial results in line with our expectations. Although the quarter was not as strong as originally projected, the first half of the year is relatively where we budgeted last fall, with the first quarter a little better and the second quarter a little worse.

Based on these results, and our expectations for the remainder of the year, Precision will continue with its long-term strategy of global expansion and its commitment to research in engineering at the same aggressive pace. It is important to recognize that these expenditures have a greater adverse effect on the results during periods of low activity.

The exciting news is that Group has achieved several new milestones in the development and launch of our new LWD/MWD technology, and will expand on these accomplishments later inn this conference call.

The second issue I'd like to follow up on from the press release is the effect of rapid strengthening of the Canadian dollar versus the U.S. dollar during the second quarter, resulting in earnings being negatively impacted by a foreign exchange loss of 4.1 million, or five cents a share. This sudden reversal in foreign exchange trends during a period of high outstanding U.S. receivables cut off, caught us by surprise, and we were unable to reposition some of our debt in U.S. dollars in time to mitigate some of this loss.

The company has now focused its attention to the fact that the Canadian dollar may continue to strengthen, although it has since weakened back to the 1.59 range from 1.52. As we have already released a detailed press release outlining our financial results for the quarter, I'll give an overview of our financial highlights for quarter two by business segment. It appears that the past quarter is the bottom of the current cycle, and a slow improvement is expected.

Contract drilling in Canada achieved 4,146 rig operating days, for a 20 percent utilized rate, utilization rate in the quarter. This was unfavorable to the prior year days of 7,514, or 36 percent. The 45 percent decline in PD activity for the second quarter, and 32 percent decline year to date, is in line with the industry statistics. CODC's drilling days were down 29 percent, rig release days were down 32 percent. The average day rate for the Canadian drilling was 13,840, compared to 14,446 one year ago, and 15,500 last quarter.

As usual, spring weather plays an important role in the activity levels in Canada. The weather conditions this year were very significant, as it was wet and snowy through April and May, causing delays in the traditional startup of rigs in Southern Alberta. During the quarter, 43 percent of the days were achieved by the super singles and medium heavy triple rig categories, which in Q2, have two of the highest day rates. Service rig fleet generated 74,946 hours, or 34 percent during the quarter, compared to last year's Q2, which had 99,838 hours, or 43 percent.

Average hourly rates were flat over last year at around the $400 per hour rate. Precision Drilling International operated 13 rigs in Q2, compared to 14 one year earlier. Drilling operating days were 704 days in Q2, 2002, compared to 665 days in Q2 2001. Just a quick breakdown of our revenue for Q2. Domestic drilling, 57 million. Oil servicing, 30 million. International drilling, 28 million. And the remainder is just other.

PSG results for the second quarter were lower than expected. The revenue decline reflects a greater than expected decline in drilling activity in the U.S. Canadian revenues were in line with expectations, with international operations off slightly from forecast. PSG was the business segment most affected by the foreign exchange loss previously mentioned. Canadian open hole and case hole jobs performed in Q2 were 2,383, down approximately 26 percent from last year. Directional drilling for the quarter was strong at 11.9 million compared to 13.9 million last year.

In the U.S. revenue was a direct reflection of the decrease in market activity, with revenue of 35.5 million, down from 60 million last year, with operating loss in virtually all product lines.

The TSG Group has chosen to maintain its current infrastructure through these times as we are on the cusp of rolling out our new technologies.

In the international market revenue, excluding the project, increased 108 percent to 36.7 million for the quarter, with the Venezuelan operations continuing to be negative.

TSG's product line revenue for the quarter in the Basin project was 25.7 million, which was higher than expected field activity.

Research expense for the quarter rose slightly, spending 8.5 million in the quarter, or a reduction to our bottom line of approximately $0.10 per share.

Rental & Production Group continues to meet expectations, with revenue up year over year. Our rental group, with its relationship to oilfield activity, was down 50 percent off the same period last year with revenues of 5 million.

CEDA has seen activity shift from the U.S. to Canada in the second quarter with the beginning of the shutdown season in Canada. CEDA continues to generate strong revenues at 51.1 million for Q2.

EI generated 21 million for the quarter and is down approximately 12 percent from last year. During the quarter EI sold approximately 11 new units and rental programs completed in the quarter with 77 utilization on a rental based fleet of 52.

Before I leave the income statements, I'd like to make a few comments on our taxes. Having a tax recovery of 6.5 million on a loss before tax of 2.2 million is unusual. However, it is a situation that we had expected to occur. This result stems from a number of factors. First, the tax recovery was increased by 2.6 million to reflect the impact on future income taxes of the upper provincial government's recent one-half of a percent tax reduction.

Second, tax rates in Canada and the United States are higher than the foreign jurisdictions in which we continue to expand our business. During the second quarter a number of our businesses in Canada and the United States experienced losses, which have been tax affected at higher rates than the incomes earned in foreign jurisdictions.

On a year-to-date basis, our effective tax rate is 34 percent, excluding the future tax impact of the Alberta tax rate reductions. And just a comment is we expect our tax rate to continue to drift downwards towards the 30 percent level.

Just switching to the balance sheet, our working capital remains healthy at 200 million, with a ratio of 1.6 to 1, compared to 1.56 at December 31st, 2001.

Capital spending year-to-date by business segment: Contract drilling 20 million, TSG 76 million; and the rental and production group, $13 million. Of note, our long-term debt has decreased $77 million since yearend.

With that, I'll turn it back it to Hank.

Thank you very much, Dale.

Next we'll have talk about the Technical Services Group, which everybody is waiting to here. So, , please.

Good afternoon, ladies and gentlemen.

Technology Services Group definitely had a difficult quarter, the second one. I think what I'll try and do is explain some of the operational factors that effected that and maybe you can get a little better understanding.

We, from a strategy point of view, have - which we developed back in late '99, early 2002 - committed to a five-year project to establish PD as global provider of oil fuel services and we stuck to that strategy every step of the way. One of the critical things we started last winter - or last fall - was to make sure that when the winter drilling season left that we were able to start to move and export equipment out of Canada and establish ourselves on a global basis. I'll just run through some of the startup operations we've gone through and currently what equipment we have on the with projects either just starting or are scheduled to start.

With respect to , we mobilized open total units into Colombia, also into India. We have three units on the way to Yemen, with two more units to follow with project startup scheduled for August; also two units to Bangladesh.

In addition, we mobilized additional directional drilling and well testing equipment to Mexico for the project, where we've expanded our rigs there from five to seven. And these particular rigs will be drilling deeper, wells, and needed additional TSG services to support them.

With respect to our store plans, drilling business, we've mobilized equipment during the second quarter into Oman, Algeria and Tunisia, as well as Mexico. The Oman project is up and running; the Algeria project, people are there and we expect to start operations in the next few weeks, as same as Tunisia. And Mexico should start in August as well.

With respect to directional drilling, MWD both tools and EM tools, we've completed field trials in Saudi Arabia, where we successfully qualified to be a provider to . We mobilized a EM tool into Indonesia for a contract there. The tools are on location. We mobilized EM technology into the UK to complete our first deep water or deep EM test for Shell in the southern North Sea, which was extremely successful. And we press released the other day, where we're using a proprietary innovative technique for data transmission to surface.

We also are currently - or just completed and mobilized in the second quarter EM technology into Malaysia for a job for Shell . With respect to the LWD, we have finally, after two and a half years of gone live with our activity tools, and I'll talk a little more about that, we are operating systems in Canada, as well as Mexico and the U.S.

During the second quarter, we mobilized with the . We've successfully now completed two field trials with the . The initial indications of the performance improvement were of our expectations. We saw increases in Mexico in our office of over 300 percent. And we're expecting additional field trials of that tool after we mobilize back to Canada in the next few weeks.

From a technology development point of view, we have moved a lot of assets outside of North America during the second quarter to obviously try and improve our utilization, diversify our revenue base, and not be as dependent on the North American market, and this strategy's definitely working.

As part of that process, we have recognized the importance of temperature and pressure capabilities within our open and cased hole operations. We had spent a year basically upgrading the EM tool, and the case hole tools back in 2000 and 2001. We recognize a need to, you know, upgrade our open hole tools after our initial start into the U.S., and we're basically taking the design capabilities and packaging capabilities that are embedded within our advantage engineering team and putting those into our open hole tools.

We are thermo cycling our tools from minus 40 to plus 350 every six hours on a 100 hour, or 100 thermal cycle testing program, and we're upgrading these tools. We expect our open hole performance on a global basis to improve dramatically with this redesign of our PCB boards. And we have the expectations for it. In addition in open hole we tested the spectral gamma ray, and the dual lateral log. The dual lateral log's critical for us to expand our capabilities into the markets where that is a primary measurement. We are starting to produce these tools now, and plan to utilize them both in the U.S. as well as international.

We also introduced several cased hole tools, including a new sector bond tool that's operated at 415F successfully, and it seems like, you know, our packaging guys and our electrical engineering guys have really got the hang of this high temperature hostile environment with conditions for our wire line tools and we're seeing really good performance. With respect to the advantage development, two and a half years, you know, from the time we started we completed our first real-time test. Since then we've started to operate the tools commercially.

We've been running multi-frequency tool for in hole and pressure. Directional tool phase gamma ray, and down hole temperature on a real-time basis. During the second quarter, our whole focus has been as don't produce tools until we're absolutely sure we've got the performance nailed down. During the second quarter we reached a meantime between failure of 2,300 hours, which we believe is in excess of current industry. We are now comfortable with the design, we're continuing to enhance our firmware and hardware and software on the system.

But reaching that reliability levels definitely will ensure that we have a very successful commercial launch. Our manufacturing group is now staffed to over 50 people at our development center in Houston, and R&D has now handed over the manufacturing process to manufacturing, to our manufacturing personnel, and we're hoping to produce between ten and 12 tools per month. We also just completed another high temperature job in Texas, with the hell series tools. Again, it was about 11 to 12 day job, no failures, tools performed extremely well.

We currently have ongoing testing of the density tool, coupled with a and gamma ray in Canada, for an operator up here. So we're running some jobs for both the LWDM hell tool in Canada and the U.S. and Mexico, and it's giving us a good cross sectional area to test the tool and make sure we're getting the performance we're looking for.

We also completed extensive training for our LWD personnel during the second quarter and obviously we've got a lot of tools to roll out and a lot of people or a lot of extra people within the organization that we need as we start to roll out these technologies.

Polar has now we've spent a lot of money in Polar over the last year and a half developing some new technologies and introducing some non-commodity based items. One of those is our business and we're starting to sell into the Middle East and Asia and our plant is currently booked out now and we're starting to outsource our manufacturing, so that's a big step for Polar and we'll start to see some changes there.

United Diamond also introduced some new bits into Asia that we've seen exceptional performance from and in Thailand and as well as in Indonesia.

So things are positive. We've got a lot of people. It takes a lot of people to take and move this much equipment around the world. We feel we need the extra resources as we start to expand globally and the company overall to continue to be committed to the investment that we started. We don't want to impair our growth by dramatically reducing our infrastructure at this time. We believe that we're going to start to come out of this cycle and we're going to be in real good shape.

The big concern, as Hank said, is the U.S. We had just tremendous growth in international, the Project is going exceptionally well. A big problem we've got and the one that's really hurting us is the U.S. and we're continuing to work with it. We don't want to destroy what we've spent the last couple years building, but at the same time we need to probably size the organization a little bit closer to the current industry requirements.

Thank you.

Thank you very much, Larry.

Ladies and gentlemen, the Contract Drilling Group in Canada is solid. As we prepare ourselves for the winter, we will sit down with our customers and renegotiate our prices towards the end of October. We're very comfortable that there will be demand and time will tell us where we will be. We can't predict anything at this point in time.

We have two rigs from Venezuela into Mexico. We now have seven rigs in Mexico all working and we have another five contracts, which we're bidding on in Mexico at this point in time for various areas, some integrated packages, some not, and we also have the possibility of the MSCs, which are coming down, which are the operators coming out with this Multi-Service Contracts, which will be coming out shortly. So Mexico will be a very dominant part of our plans for this year.

In Venezuela there is some talk that they might be able to take the heavy oil away from the domestic crude and we'd go back to drilling for some more heavy oil but they have been under production restraint and as soon as the heavy oil was part and time will tell on that.

And the rest of the world, of course, is very small for us but we have our rig 7 and 9 on the water will be in India and we look forward to some tremendous things in India once they hit.

The Rental Product Group is going forward very solid. Obviously CEDA is doing well on a monthly basis. There are new records every month basically. And the other groups are solid but as drilling declines so do they as well. And when we look at the well servicing side, the gentlemen are working very hard with their customers to facilitate as much utilization as possible.

But keep in mind that the drilling side and the oil services side there is certainly more supply than demand and they take your toll at different times.

So at this point in time we're going to open up for questions, please.

Thank you. One moment, please. Ladies and gentlemen, we will now conduct the 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 three-tone prompt acknowledging your request and your questions will be polled in the order they are received.

If you would like to decline from the polling process, please press star, followed by the two. Please ensure you lift the handset if you are using a speakerphone before pressing any keys.

One moment please, for your first question.

Your first question comes from , UBS Warburg.

Please go ahead.

Good afternoon, guys. A couple of questions.

First, just wanted to see if you would comment a little bit about the outlook for the third quarter and the second half of the year. What kind of improvement are you looking for in revenues and earnings as we go out through the end of the year?

My second question is, in your technology rundown, you didn't really touch upon the development of the rotary system, and I wanted to get an update as to where that stands. If I remember correctly, you had anticipated beginning to commercialize that product in late August or early September, and I wanted to know if you were on schedule there.

And then, lastly, if you could just perhaps give us an update as to where you think you'll be with the LWD tools in terms of the total fleet size by the end of the year, and maybe what kind of revenue run rate you might be at in the fourth quarter.

You sure that's all you want, ?

Yeah, that and a corned beef sandwich, but you can't help me on that.

As far as the third quarter, we did have some weather problems in the second quarter of this year, which were somewhat unusual. And we hope that doesn't happen. And obviously by being through July and into August now, we're solid for July, August and September. It looks strong going forward.

We are seeing a little bit of a change in the U.S., and I think will comment on the TSG side, as he starts to rationalize the U.S. going forward. And as far as the TSG side, I'll let comment on the third quarter numbers that he's doing. I'll let him talk about his LWD and his run rate, et cetera.

And I think the other thing we can comment on is that we do have an LWD tool on its way to an offshore rig today, in fact. And so, , other than the on the density we're , we have the multi frequency working well. The should be here on August the 13th, so I assume it will be the 17th. But we'll get that with your sandwich on the 15th. And I'll let speak, please.

Yeah, OK. With respect to you know it's kind of funny it's probably one of the key technologies we're developing and I never even thought about it this morning. So . We actually have a test ongoing in Houston today, and I read the report from it this morning.

Progress is pretty much exactly what you said. The only real significant thing there is we've engineered some additional , so we've got some additional on the tool that set us back a couple weeks. But, no, we're still scheduled to be in the field in late August, September. And no issues there at all.

The last test went very well. She just finished last night, so...

LWD...

OK, LWD, well we're still - my manufacturing guys are - it's kind of every day you kind of ask the same question. They're still committed to 60 to 70 tools by the end of the year. Reality up until the end of June was - I can give you a few numbers.

Manufacturing had actually produced at the end of June - they produced about 14 tools themselves outside of R&D. They're still committing to, you know, 10 to 12 tools a month. And, you know, committing to have, you know, ten to 12 tools a month, and in all committing to have 60 to 70 tools built by the end of the year. We haven't reached the ten, the ten or 12 tools a month yet. And, you know, we are seeing, you know, improvements. You know, we're constantly chasing, you know, the one or two critical components all the time it seems like. But, yes, we're still betting on that.

With respect to run rate by the fourth quarter, I honestly never looked at it. You know, the numbers keep changing all the time. We've been kind of migrating away from R&D or a field test mode into commercial jobs here now, and seem to be chasing ourselves with that, and not really focusing on just the element of ED projected revenue and earnings. So probably something Dale could talk to you about maybe later.

with , once you get the triple combo working, right now we're using portions of it, what we used as gamma rays and multi-frequency for example. But I don't have the neutron and density tool working. They should be out ...

Well the density tool's out.

... density tool is out, but we're not getting any revenue from it yet.

Right.

So, once I have revenue, that's when I consider it working, and the neutron tool. So the ability to have, I guess if we looked at the world markets, Larry, or a triple combo, that of course isn't as good as ours over that's . It varies.

It varies.

Yes. But you can certainly get more than $10,000 a day for it, you can get up to $20,000 a day, depending on the application. And once you put the rotary steerable in it, specifically the four and three quarter, which there's very few around, you can get to that 25 to $40,000 a day type of revenue, and that's when you start to understand our desire to get this intellectual property out and into the field, and as the tools grow, it's going to be very interesting. Now we are getting some unique calls from some major operators to sit down and chat with us, so people are aware we're working on these tools, and to the quality of the tools just from the gentleman that have done this before.

And the ability to handle the pressure and temperature, that 30,000 PSI is something nobody else has the tall to offer, and obviously with the core value. So I think you'll find that PSG will get better. I'm sure Larry will agree that next quarter will be better. And obviously as the year goes forward, we also expect some major things out of our, the turf buster that we have. We're very pleased with the original trials. And that has a tremendous amount of potential, we're just trying to be very careful about the intellectual property, and making sure that we have all that tied up properly. So that's our main goal at this point in time.

OK, thanks.

Thank you .

Your next question comes from , Merrill Lynch. Please go ahead.

Hi guys, how you doing?

Good.

Hey, I have two questions. The first one is just a quick one, and wondered if you were seeing any pullback on gas drilling? Given your position kind of with the major operators who are big into the shallow gas? And ...

Well, we actually saw a thrust because of everybody's opinion that gas was going to go strong again, and of course that's most analysts have come out up on gas to be stronger than it is now. We've been very cognizant of the fact that storage has been addictive to price of gas, and new storage, as we see storage build, there is some concern. We've actually had some people, some of our operators shutting in some of their more expensive gas to process. For example, in Canada when we have sour gas, the processing fees can be substantial, so people are actually shutting in wells in Canada.

Keep in mind that in the, you know, we can't really comment on the U.S. because we have very little drilling operations there, we just have a couple of rigs that were taken down by one of our big customers in Canada. But we do realize from the technical services group that the independent basically runs 75 to 80 percent of most of the gas drilling in the United States and keep in mind that the United States is the most mature basin in the world and it's something I harp on, but it's something that is a reality. So they can turn the handle very quickly in the United States and we're seeing that in Canada. Even some of the new operators, some of the gentlemen are teamed, but they're a little bit cautious as we go forward. Everybody is watching their cash and it's something that we go through in cycles.

But we are comfortable that some time between 2002 and 2004 we will have another day to play the game.

So your expectations heading into this winter season is that we're going to have a fairly good or a normal kind of Canadian winter with --

(Inaudible) at this point in time where we've gone to the dates there will be somewhere between 14.5 to 15,000 wells. We came out with a budget of 14,500 wells on October the 1st, 2001, so I don't think we're that far off.

That's good.

My second question is maybe, Larry, you could tackle this one. We've heard a lot from incumbents and some of emerging competitors in the tools space talking up introducing their own tools very similar in a lot of cases even with the same names as your tools. I just wondered what was going to distinguish Precision in the tool market over the longer haul and essentially what was going to allow you to have this segment contribute significantly to the financial results?

Okay, well I guess LWD first of all, both the Turbo and the Quad Combo in LWD is continuing to replace the open hole long business. And I guess on a global basis the open hole market hasn't grown from a dollar and cents point of view for quite some time. LWD is getting more and more dominantly used and that technology migrating into land-based markets as well as offshore markets, so the demand is relatively high.

From an execution point of view what we see is operators today are incurring extremely high operating costs and very focused on reliability and service quality. And through the whole development process and the time we've taken to get the tool to where it is, it's been all concentrated around that.

We've taken and basically upgraded a lot of the old technology that Computalog has and brought it up to the spec and it's just amazing how our activity and market share in case hole or in open hole or even in drilling services has improved with the focus on reliability.

We believe on a global basis and we're introducing technologies that from a cost-effective point of view have a lower capital cost and also meet the requirements of the operator, which is focused on service delivery.

I recently was in the Middle East and before I went I sat down and studied the reliability of our open hole operation in Mexico. We completed when I was looking at it 62 open hole jobs and we haven't had a single failure since New Years. And it's that type of service quality and delivery now that that environment there is not hostile and it's very benign, but I think our focus on those critical factors will enable us to be successful.

What would you say the time horizon would be where you start to see price competition in some of the more leading edge tools?

You know, it's my experience in particularly the LWD market is that demand on a global basis has almost succeeded capacity and that demand seems to continue to grow because of the migration of the technology into other lower-end markets. So I think that there's a lot of room. I mean, we're a small player we're never going to be a giant. And so I think we can very successfully compete in the market and not impair pricing.

All right. Thanks guys. That's all I got.

OK.

Thank you.

Your next question comes from , .

Please go ahead.

Good afternoon, guys.

Good afternoon, .

I guess back to you, , on the LWD side, thinking about the production schedule that you have, trying to reach between 10 and 12 tools per month, can you speak to the demand, the latent demand for these tools? Are you comfortable that you'll have no trouble deploying them in an equal fashion, equal measure?

Well, built the training center in Houston. There is, because of the, you know, current condition of the industry, a lot of really, you know, good people available today. We also have a lot of good people within our organization from the different business units that are, you know, professional engineers that fit well within the LWD, you know, job family.

So we're not having trouble getting people. I think we got a lot of support out there. There's a lot of people who see us as a, you know, potential significant player. And you know getting people is the least of our time. We spend too much time on the phone with people maybe working someday. So, no, I don't think that's going to be a critical issue for us.

I guess - sorry, the thrust of my question is more on the operator, the producer demand side. Do you think you've got a sufficient number of jobs and a sufficient level of customer interest to absorb this number of tools coming into the market?

, right now we have some integrated projects where we are renting other people's tools at this point in time all over the world. When we populated the world, we assumed their tools , so we are paying some other gentlemen. And some of the other gentlemen are already looking to take some of our tools out; specifically more in the four and three-quarters , which is not available to themselves, so they don't have something that works well.

Our research into the , clearly we will have no problem for at least a year and a half with what we have in hand. That's what it looks like at this point in time.

Now as it is, we think it is coupled with our durability and the that we will have this tool. And the clarity of the signal, keep in mind multi frequency in the investigation. These other gentlemen aren't even close. But as usual, we'll have to show you, then you can believe it.

Yeah. And we probably - yesterday or - we probably could negotiate with one of the major operators in the world all of our production for the next 12 months, probably 14 months of production for a two-year contract to take every tool we've got and that we can produce. And you know we're seriously looking at that.

We may not have 50 customers, but we may have one that's, you know, potentially . But he could take all that we can produce. So...

And that's the type of response we're getting from some of the background of the in group and what they've accomplished in the past. And when you see, you know, indications of interest like that, , we're not the least bit concerned.

OK, fair enough. , there was a high profile job in the Gulf of Mexico LWD, whereby - I can't remember the operator, but they had tried the tools of the major - your major competitors and had found them wanting. And I believe that job, particular job, that it was a marquee job for the group. It's supposed to start some time this summer. What's the status on that?

We are still, the section of hole that we're going to operate in is a four and three-quarter hole size, is 26,000 PSI. They drilled the well, finished it. They're moved on to another well, and, you know, they've verbally and told us that we're going to go on to that well. That well's outside of the U.S. in the Caribbean area. And we, we're still expecting to go sometime in August or September.

OK. I guess thirdly Larry, coming back to the U.S. What is the fundamental problem, do you think, with the U.S. market? Is it the fact that the market is changing away, or I mean, is the market itself changing, and it not just being an issue of right-sizing Precision in a down market, but is the, has the nature of the marketplace changed? Do you simply need to be larger in that market to maintain good activity levels in a weak, or even perhaps a stronger market? You know, speak to the fundamental nature of what's happening?

OK. Well, you know, for us we, you know, we basically in the U.S. we're a mom and pop service provider. And our primary customers, and really our only customers back in 1999 were independents. You know, we study a lot the activities of all the major operators and the independents and everybody, and, you know, unfortunately our client base in the U.S. is primarily independent until today. And although we're beginning to work more and more for the big guy, the majority of our revenue comes from the independents.

The average reduction in span by independents in the U.S. is about 54 percent. You know, you look at their span numbers between 2001 and 2002, it varies from a reduction of 40 percent, to as much as a 100. And, you know, when your client base is primarily that group of oil and gas companies, companies like ours get really heavily impaired. You know, in Canada we have much larger and more diverse customer base, we're do a lot of work, and majority of our work for the majors. And we don't have the same, you know, cyclical impact or as significant as the U.S.

Does that, I think our business is growing, I mean, our market share in case hole has probably doubled in the U.S., but to say that our client base has totally changed over a two year period, it hasn't. And it's a real weakness for us. And we're trying to fix that.

one other thing I comment on. I think if you look at all the other service contractors that are operating on land in the United States, I don't think any of them are making any money either, but just a comment.

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

Thank you.

Your next question comes from , Raymond James. Please go ahead.

Hey guys. Can you hear me?

Yes, go ahead .

I guess kind of following up on question about TSU in the states, I guess that's kind of been one of the more difficult segments of your business for me to model. I guess you guys did 35 and a half million in the states this last quarter, with all the businesses reporting losses. Can you kind of help me out on your outlook for the third quarter in that business? You know, is that going to be something that more or less moves with the rig count in the states? I mean, is it mostly just cased hole to open hole stuff that you're, that you're doing? Anything else?

Well, we saw, we saw an improvement in cased hole, significant improvement. Actually our best month ever in July in cased hole. Drilling services forecasted to have their best month in August as we start to give them some LWD tools. At the same time, you know, we have some commitments internationally, you know, we've exported a system in Indonesia for Exxon Mobile on a high temperature under balance drilling contract where we put the EM tool, or put an EM telemetry package on the advantage tool.

So we keep migrating technologies in and out and some of the expectation from our revenue and business plan point of view is we were going to leave it in the U.S. And we've had opportunities internationally where we get a lot higher data rates so the reality is we're going to go where we can basically deliver the highest rate of return.

So the U.S. guys have got hurt by the fact that we've moved equipment out. Some of the equipment come out of the U.S. and it's a case of we're dealing on a global basis here and we want to take and put stuff where we get the best performance.

We probably as well felt that the third and fourth quarter would be stronger and it hasn't.

One of the other concerns, John, we expected to have more tools so we had more tools around the world and obviously as we can price things higher outside of the United States we're also paying higher prices outside the United States. So our first goal, of course, is to look after the international group and make them self-sustaining. And they've grown substantially this year, year over year, so we're very proud of that.

I think we're going to be very cautious in the United States. We would like to see some more of our new EM tools. We have the V1 series that is now on its fifth upgrade on an EM capability as well as the durability of the tool and the temperature capability of the EM and, of course, everybody's hope is our press release on our world-class EM results in the North Sea.

So we're seeing some tremendous results in just getting the right tools in the right place and that's still the hold-up as we go forward. We've had some tremendous successes. We've had very little down time. Our mean time between failures with our MWD, which is nothing too sophisticated when Larry came over here, was probably in all honesty one of the worst in the world but it's now substantially higher than the average MTFB that other people have.

And keep in mind that MWD is off-the-shelf technology. There's nothing there that's unique.

We're just getting to the time and place now where two years of hard work getting people in the right place and we have a bunch of intellectual property coming forward. There is more. We have the DMT kit. We have our full meter tool that is getting a little bit better. And as Larry's group brings forward this technology and making sure we have the intellectual property in place, you will see the margins migrate up with the other .

Okay. Well then kind of stepping back further on the Technology Service Group, kind of looking at the whole business of international and Canada as well, a little guidance into the third quarter; could we expect obviously an up-tick there from Canada, enough to I guess get that business profitable in the third quarter?

Current forecast is on an operating level we'll be probably even.

Okay.

We see a fairly significant up-tick in the fourth quarter as we start to get more and more tools out and we anticipate activity to improve. But forecasts are pretty conservative right now. Everybody has been burnt a little bit here and we've spent a lot of money moving a lot of equipment around and a lot of people and everybody's a little careful right now. I think hopefully we'll see better performance than we've forecasted.

And keep in mind, John, as we've populated five different countries with the TSG equipment there's a tremendous amount of expense from the United States and from Canada that is just expense getting the tools ready, getting the equipment ready and getting everybody organized and trained.

So we took a kick this year but, of course, next year we'll see the best of that as these other countries are populated, the very unusual flow of a 365-day year. We have long-term profitable contracts and the TSG balance sheet next year will look very good.

Okay. Well, thanks guys. I appreciate it.

Thank you, sir.

Ladies and gentlemen, as a reminder, for any additional questions, please press the star, followed by the one, at this time. As a reminder, if you're using a speakerphone, please lift the handset before pressing the keys.

Sir, there are no further questions. Please continue.

Thank you very much, ladies and gentlemen. I think you can understand from the we're all looking at the TSG group as a turnaround group for Precision Drilling. Drilling in Canada is solid.

Keep in mind that our drilling group, when you look at it, is probably is not a bad place to be when you look around the world. And if you look at all our peers, I don't see a lot of money made in the drilling business. There are enough rigs in the world.

We have a couple of niche places where we seem to have done very well. That's why we have the numbers that we have.

But as we go forward, I still think the change in direction of this company is to be multiserviced and multifaceted. Bear with us as we get to 2003 and 2004. And we focus on shareholder value, and I think you'll be very proud of us as we go forward.

Thank you very much.

Ladies and gentlemen, this concludes the conference call for today. We thank you for participating and ask that you please disconnect your lines.