Precision Drilling Corp (PDS) 2002 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Precision Drilling third 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 [inaudible] for questions. If anyone has any difficulties hearing the conference, please press zero for Operator assistance at any time. I would like to he mind everyone that this conference call is being recorded and we'll now turn the conference over to Mr. Frank Swartout, Chairman, President, and Chief Executive Officer.

Thank you. Good afternoon, ladies and gentlemen. It's nice to have a chat with you in our quarterly report. I'd like Dale to proceed with his rendition of our numbers, please.

Thank you, Hank. I'll start by reading our conference call and webcast contained forward-looking statements based upon current expectations that involve a number of business risks and uncertainties. The factors that could cause the 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.

As we have already released a detailed press release outlining our financial results for the quarter, I will give an overview of our financial highlights for Q3 by business segment. As indicated, in our last conference call, the second quarter does appear to have the bottom of the current cycle and a slow steady improvement is expected. It is encouraging to see sequential revenue increase of 11 percent to 383 million from 346 million between Q2 and Q3 with operating earnings increased sequentially 310 percent to 24 million from 6 million, a marginal contribution of 48 percent. The geographic split in revenue shifted from 70 percent domestic in Q3 last year to 63 percent in Q3 this year.

Contract drilling in Canada achieved 6,944 rig operating days for a 34 percent utilization rate in the quarter. This was unfavorable to prior years where the days were 9,858 or a 47 percent utilization rate. the 30 percent decline in PD's activities for the third quarter and 31 percent year to date is in line with the industry statistics. The CLDC drilling days were down 29 percent. The average day rate for Canadian drilling was approximately 12,400 compared to 14,300 one year ago, and 13,800 last quarter. Low rig demands still remains the key issue with wet weather conditions in August and September compounding the situation. The activity was strong in shallow drilling which our single and (inaudible) tubing units and heavy oil which is our super single.

The service rig fleet generated 92,988 rig operating hours, 42 percent during Q3 compound compared to last year's Q3 of 127,641 hours or 54 percent. Average hourly rate were flat over last year at around the $400 per hour rate equal with Q2.

Precision Drilling International operated 14 rigs in Q3 compared to 16 rigs one year ago. Drilling operating days were 761 days in Q3 of '02 compared to 1,090 days in Q3 of '01. Rig 709 spudded (ph) late September in India.

A breakdown of revenues for Q3, domestic drilling 86 million or 55 percent, a drilling services 39 million or 25 percent, international drilling 23 million, 15 percent, and 5 percent is other. Sequential revenue increase Q3 over Q2, 26 percent. Sequential operating earnings, Q3 over Q2, 73 percent. The technology service group results for the third quarter were below expectations and while they approach the prior year in revenue, they fell short in EBITDA and operating earnings. Diversification of revenue continues. Canada for 2002 was 35 percent compared last year to 44. The U.S. was point 24 percent compared to 33 percent last year, and the big growth in our international operation 41 percent compared to 23. TSG's sequential revenue increase compare in Q3 '02 to Q2 '02 was 14.6 million or 10 percent. Sequential operating earnings improvement was 8.1 million or 51 percent. This represents a marginal contribution of 55 percent. Canadian open hole and case hole jobs (ph) performed in Q3 were 3,194, a sequential increase of 34 percent, over Q2 of '02 compared to '01, the general industry slowed down continued to be evident.

As with open hole, Q3 activity levels are below goals of '01 with the number of jobs being 19 percent below last year. Revenue per job increased modestly by 2 percent over last year's quarterly results. Directional drilling activity by the company's major customers was considerably higher than originally anticipated. EBITDA was 3 percent better than last year. Canadian testing is down over last year with the main reason for this negative variance is slower than anticipated activity in the northern regions throughout the quarter, especially in August and September where I mentioned earlier it was very wet in Canada.

In the U.S. revenues continues to be a direct reflection of the decrease in market activity. The year to date U.S. rig count average so far in 2002 was 842 rigs, compared to an average of 1,271 rigs, representing a 34 percent decrease. Not only is there less work to go around in the U.S., but the work now demands lower price, which translates directly into lower EBITDA and profit. Case hold jobs in the U.S. were 2,755 compared to 3,240 last year. International revenue excluding the Burgoes Project (ph) increased 92 percent to had 42.9 million in Q3 with Venezuela operations continuing to be slow. The Burgoes Project (ph) as of the end of September, 213 wells have been rig release. For Q3, product line revenues were 6.2 million due to strong testing activities and the payment for additional services.

Research expenses for Q3 was approximately 9 million for the quarter or a reduction to our bottom line of around ten cents per share. And as mentioned earlier, this effect is great during the slow periods of time. The adrenaline production group continues to meet expectations with revenues up year over year by 6 percent for the quarter. Our Randall group with its relationship to oil field activity was 40 percent off the same period last year. CEDA, as outlined in our press release continues to perform above expectations. CEDA's operations map met or exceeded budget in all business segments including catalyst, industrial and mechanical. Energy Industries has completed the third quarter of 2002 8 percent higher than the third quarter last year. EI sold 14 new units during the quarter. EI continues to pursue various international orders, rental program complete the quarter with approximately 71 percent utilization. This is about 52 units.

Before leaving the income statement, I would like to make a comment on our taxes. The effective tax rate is impacted by the loss of tax at high rates in North America than earnings generated in lower past jurisdictions and our corporate structure is established to take advantage of the tax planning opportunities available to Canadian companies.

Jumping to our balance sheet, our working capital remains comfortable at 194 million, down slightly from our year-end amount of 216 million. Our working capital ratio is 1.50 to 1 compared to 1.56 at year-end, and our net capital expenditures for the year is expected to end up somewhere around $170 million. Thank you, Hank. I'll turn it back.

Thank, Dale. Ladies and gentlemen, now we'll have Larry Comeau tell us how the PSG group has had a building year and has a lot of future ahead of us. Larry, please proceed.

Good afternoon, ladies and gentlemen. As you guys all know, over the past three years our focus has been to develop global channels to distribution and put the infrastructure from both management, maintenance and repair and supervision point of view in place so that we could start to receive sometime new technologies we have been developing. Through most of 2003, we've established our manufacturing facility in Houston and slowly started to get our production cranked up and started to roll out tools. I think we finally started to turn the corner and delivering services in September and then that growth has continued.

I'll give you a little background through our production in September. We're basically producing (inaudible) environment tools starting at two strengths per week in September. That's moved up to four strengths per week now in October, and we're hoping to by mid November to be at you're target which is five strengths per week. We currently have a tool base today of 35, 35 tools with also five real time L to BD (ph) systems in operation. Current geographic location of the systems is we have 7 operating in North and Central America, we have two operating in Asia, both of them are operating in extreme hostile conditions, high temperature, one operating on a telemetry using electromagnetic and the other one on mud pulse but we also have a system operating in Europe. We have additional systems to be deployed over the next few weeks into the Middle East and into other countries in Latin America.

Overall performance, particularly on the HAL tool (ph) has been excellent. We are trans - we're moving away from the telemetry. We were operating the basic system onto the I phase and this full integration and completion of the Bi phase telemetry will occur by the end of November as part of the Bi phase integration and the change in the software, it enables us to include the rotary steerable and the (inaudible) tool strength. The RFT and integration testing we had hoped to have in the field in September or October. This is the development of firm ware (ph) has been a little bit slower. Final integration testing on the system was completed at the end of last week. The tool's currently going through surface trials on our drilling simulator in Houston this week and we anticipate sending that to the field within a week to ten days. And the initial test will be executed in North America.

The fourth version tool, the tool we believe will be our commercial version is now in production. We have 6 tools to date. We are wrapping up our manufacturing and intend to be at 10 tools per month by January. The overall performance, at least from the surface tests and in our drilling simulator, is extremely encouraging. We feel that mechanical operates we completed the device in the time we spent to up grade is going to payoff for us. It's a beautiful tool. When I saw it this last week, our team in the U.K. has just done an incredible job and I think it will be a real industry eye opener. We've had several major operators review the tool to look for applications both in North America as well as international and been extremely impressed with what they've seen.

With respect to wire line services, we have been busy mobilizing equipment international. We have the MN (ph) contract up and running where we have bolt and case (ph) and slick coal (ph) slick line (ph) capabilities running, the projects flowing well, doing a good job, the customers happy and it's amazing we took a base from absolutely nothing up to fully operational in about 90 days. Third quarter we did have a lot of costs associated to the establishment of maintenance in our facilities and the distribution of our assets, but I think getting through this year we should start to see a return on that investment.

Our focus throughout the year has been to introduce all of our technologies around the globe. Next year our concentration will be on execution, and probably the fun part of our job, this initial development process and heating process has been difficult for all of us and we're start tog see some of the rewards from that today.

Some other technologies that I'll talk about just shortly, one is the torque buster which has been the torsal (ph) impact turbine running with PDC bits. We see this technology as an industry changing device. It has enabled us to demonstrate our, rate of penetration increases in North America in both Canada and Mexico anywhere between four and six times and enabled PDC to drill extremely high compressive strengths rocks which in the past that have not been able to be drilled. We have gone in production on the tool. Our first 6 and three quarters tools will be delivered on November 10th and we're expecting very significant things with this. Our wire line technology and development continues on schedule, and I think Hank wants to talk now.

Thank you, Larry. Ladies and gentlemen, what Larry is alluding to is that we knew there were some pain getting into this technical services group. We've had a pain of year. Some people say we're not watching our earnings. Sometimes you have to have products and tools working before you can have earning. Keep in mind when we got into the Computalog we had a tier 10 provider and we're trying to move a lot of products up the food chain and we're pleased with the way it's coming we're going to concentrate on operational characteristics and profitability next year. We probably will slow down our tool development as we try to balance this next year ahead of us and we look at our cash flow and what we can spend. We're going to budgets now, and we think drill will be increased neck year, certainly Canada and parts of the world where we are. the ability to apply our tools, we have four three quarter tools built. As Larry alluded to we have multi frequency tool working and our LWD, but we don't have the neutron tool, it should be very shortly. The density tool, we believe it's world class. We don't have a full combination triple combo in the 4 and three quarter size.

Keep in mind after you go four and three quarters then 6 3/4, then 8 1/2, then 12 1/4. So the full deployment of tools is going to take some period of time but we're very comfortable with the product we have and with the rotary strip (ph) will be great. and as we focus on our deployment around the world now concentrate on the earning side of things and give the market improvement quarter by quarter going forward.

The drilling front is very steady in Canada. Keep in mind that as we go into this new year we're starting to see some of the efforts of the consolidation. Usually it takes a year for people to consolidate and move out of that consolidation mode, rationalize their personnel and go forward with their priority of prospects. And we're start tog see that. We're very comfortable saying we will see at least 200 of our rigs working. We're seeing most of our rigs being booked for the winter which will be somewhat from the middle of December to February which is the positive sign. The CEDA group is very strong, rental division will move up with the drilling division. Well Servicing is going to have a good year. So we're very comfortable in Canada that as we proceed into 2003 and we'll grow and hopefully 2002 will be the trough year.

We're still somewhat hesitant, though as we look at some of the smaller, intermediate size oil companies becoming trusts. We lost 1.2 billion, probably by the end of this trust frenzy that we have in Canada could be as high as $2 billion that are not deployed back into the research and development of oil and gas. It's just being sent out to the different shareholders in the trust and that takes a bit of the wind out of the sale of momentum. But as gas starts to move forward I'm going to allude that weather related we still have to have a cold winter to move forward. Some people are very positive we see a new threshold in gas weather. I think that's a little bit of a gamble and I'm not a gambler. I work hard every day and try to make a few pennies and put them together to have a nickel. We can go on, but I think the future is very bright. We're positive what we're doing. We're looking at projects in other countries obviously with integrated services and I'm going to open it up to questions now. Thank you.

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. If you are requesting, please press star and the number 1 on your touch tone phone. You will hear a three tone prompt acknowledging your request. 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 2. Please make sure you lift the handset before using the speakerphone before pressing any keys. One moment, please, for the first question. the first question comes from Roger Reed (ph), Simons & Company (ph). Please go ahead.

Good afternoon, gentlemen. Hank, I was wondering if you could give us a more of a view of the first quarter in Canada, specifically we've heard numbers all over the place, but greater than 600 rigs. Is it fair to say that you say the first quarter depends on to a certain extent gas driven prices according to weather or that weather needs to be cold in order to move rigs in Canada?

No, obviously in Canada we will be cold in the winter. We have quite a history of that so we're very comfortable there. What I was alluding to is that if we look further than the first quarter, I can't guarantee you how active we'll be second, third quarters of 2003. First quarter we'll be extremely busy. Keep in mind a lot of the majors have not been able to get the prospects they want and we have four gentlemen now that are most active drillers in Canada controlled in the United States, so these gentlemen have to get their budgets proven to go to work and there will be a mass efforts effort to put all these rigs to work to be required in the first quarter and we still have our declines in Canada as you have declines in the United States.

But we are starting to see some strength through the summer for shallow gas and other projects which were very reluctant in 2002. We're very comfortable we'll see an increase in the number of wells drilled in 2003 but to the extent we can have a whole blown drilling fun day we'll have to wait and see if it's weather related. I think you have to also keep in mind in the United States you had a very unique pricing the last time. Keep in mind it is the most mature reservoir in the world and I say that as a tour the world. But in Canada we can still deliver a very profitable return at certainly $4 U.S. would be fantastic for us. We've had prices as low as 80 cents in NCS this summer at different times with some of the problems we've had with deliver ability and selling it. So if we can see gas at $3.50 to $4 we'll have a very good, as high as 18 to 19,000 wells drilled in Canada because shell and gas will become a more prevalent source. If that happens, we're back to the numbers we were and with our international exposure, we will be the most dynamic company that you will talk to in a while.

Undoubtedly. Kind of falls into the next question I had which is on TSG. How much CAPEX has gone into this business in 2002? How much do you expect goes into 2003? I mean obviously somewhat less, I would guess. and barring a cyclical up turn, what's your sort of expectation for profitability actually improving in this business? In other words, excluding a cyclical up turn would make it look better?

Well, keep in mind we have been spent approximately $120 million in 2002, and a lot of our products haven't come to market yet. We've also deployed assets into Yemen, $6 to $7 million, build a facility in another country I'm not going to comment on. We spent a lot of money deploying assets and getting ready for this tool build we're bringing out. and if you look at the numbers that Schlumberger and the other gentleman that sell these tools, what they make in the areas we're going into is the highest profit margin in the tools we have. We will be there. Now, as to the extent Larry how many tools are we going to build next year? What's the wish list?

The estimation for next year is a minimum 100 (inaudible) steerable tools, builder (inaudible) will continue at 10 per month on the 4 3/4. In Q2 we'll start to produce a 6 3/4. Then the 8-inch tool at ten per month.

And the hope for the LWD?

Help systems are to migrate to - will stay at 20 per month, which is 5 per week. The LWD with resistivity bore hole (ph) annular pressure as well as the neutron density is scheduled at 12 to 18 a month for next year. We currently have, I probably should have made reference to, we have four and three quarter, six and three quarter, eight inch resistivities and BAP (ph) in the field.

The 8-inch isn't in the field, but we've got it built and hope to see it out working shortly. We've had tremendous success and once you get the Bi phase firm we're working in communications and all our systems and of course finish you will off all our four and three quarter neutron tool which we expect to be done a week week-and-a-half we'll have the first chance to run the triple combo. We sit back and dream about the possibilities. As far as the revenue, I think you can say that we'll be very proud of what we've released.

OK. and just one final question. You alluded to it going into the international projects. Is there anything you've won recently or missed out on recently? Can you give us an idea of what sort of would be bids outstanding there in terms of if not specific projects, at least sort of maybe a region by region break down?

We've looked at integrated bids I would say we've lost about approximately $200 million worth of bids that we had. Keep in mind that as you work in some of these countries that once you are a player in one side of the bid, the other people that are there try very hard to get it back. You can't get every bid, and we're very careful that the bids we put into have been extremely accretive for us. As we look at it, as a team, it is a been a team building experience for us. There are certainly some bids we're working on now that are coming through. We just have to balance our cash flow and how much risk we want to take in some of these projects with the return on our new scope of full LWD and rotary steerable which will yield much larger increases potentially than we can do with an integrated service project on a smaller size. Bigger integrated service packages, we have over the next two years probably three or four and they're about a year a way, some of the key ones we're after because we're trying to break it down so we would have all the services other than possibly facilities which is a huge risk component and we don't control that one. We control the rest of them.

OK. Thank you.

Thank you.

The next question comes from Kurt Hallead of RBC. Please go ahead.

Yes, good afternoon.

Good afternoon, Kurt.

Just real quick, I wonder if you can maybe give us on the technology services group some idea from a geographic region basis what you're pleased with in terms of the progress and what area that you're still in pursuit of improvement? And if you could be specific, as specific as you can get from a geographic basis, that would be great.

OK, Kurt, it's Larry. We're still quite pleased with international. Each of the areas are doing pretty well. Asia, Asia has done well, Middle East is doing well, those two are growing. Latin America, you know, definitely has been a little bit of a struggle with Venezuela, but Mexico has done well. In Europe it's probably from a growth point of view hasn't grown as fast as the other three, but it's been able to maintain its margin. So we're not investing in a lot of money and introducing companies like Polar and United Diamond and trying to expand our wire line or under balanced drilling business whereas the other three we are. It's the place where we're getting killed and we're still struggling in the U.S. And the U.S. would obviously improve if we could leave some LWD and MWD assets in, but as soon as we get a bill we end up sticking them on an airplane and sending them overseas. So U.S. Case Tools (pH) is still struggling and (inaudible) Services, and we've introduced Polar. We're up to four stations there now, also introduced United Diamond, all are going through start up costs and not delivering any positive cash flow on those new start ups.

The function in the U.S. more of the product introduction than it is a difficulty in penetrating the market?

Yeah, not a problem with penetration in the wire line case tool side in the markets we compete in we're fairly significant market shareholder there. The problem we have is we're working for food. It's just a tough, tough market there for the plug and chug services.

Kurt, I think to try to summarize that a little bit, there are very few operators making money in the United States of America, no matter which product we're looking at. We have broken out of our mold in the United States on our drilling side with our EM and new series of EM directional tools which I think we're up to 12 now. We haven't run the resistivity (ph). We ran it once. We're running it in South America right now. We're seeing some great successes in Asia. And right now as the tools come out, we're seeing demand but we're going to move them to the areas that we set up internationally. I think the U.S. is just something that - if it's another spike and some other people will do well, but you have to look at the rest of the world, in the next 3 to 5 years L&G will be a force, and the most mature reservoir in the world will have a problem getting return on invested capital. So those people that have all their assets inside it. I've betted big time on that philosophy. I will stay with it We will be of consequence internationally, and we'll grow comfortably now to 2005 and 2010 and you'll be proud to be part of it.

Just a follow-up question, you may have answered this in the prior question, so if you did, just say you answered it and I'll be fine. But from an absorption on R&D and start up costs, does it look like with the internal plan that you will pretty much be through that absorption in 2003 and start turning the corner on profitability overall in all geographic areas?

By the end of 2003 I think that will be behind us, Kurt.

Lastly with respect to pricing on the rig side, could you give us some general - with you give some general sense as to what you may see transpiring during 2003 say with a specific focus on break up, do you think pricing will hold up through break up, or do you think pricing may come down a bit?

Well, we will go up this winter in pricing. We've already ascertained that with our major customers that we work with and I'm sure that we will probably lower the price for the summer as we have traditionally for 31 of the 32 years I've been in this business. But fortunately we're also starting a sharing system now that we are going to make more profitability for some of our customers next summer because we're hedging, they'll get a break in the winter and we get a break in the summertime. That will help us in the future. But supply and demand is still going to be the key thing, Kurt, and you're only going to run 100 rigs through the summer there's no pricing leverage whatsoever. Once in my lifetime was able to raise prices in April. If that happens again I'll be a very happy man.

Do you think pricing can remain fairly stable going through this spring break up period, In terms of the volatility factor, do you think it will be lessor more volatile?

Kurt it's supply and demand.

Thank you.

(inaudible) channel gas I know will be big. It's the doubles that are the swing part of the market and triples, once we get the majors all focused on their redeployment of their properties and their prospects, keep in mind in Canada you don't drill your line in five years you lose it. If you snooze you lose and these gentlemen have to get after it.

Gotcha. Thank you.

Thanks.

The next question comes from Dana Benner, National Bank Financial. Please go ahead.

Thanks, and good afternoon.

Good afternoon, Dana.

Hank, I just wanted you to clarify a comment you made with respect to slowing down your tool development next year.

What we're going to do, Dana on that is we've introduced many tools this year. We also have gone to virtually zero LWD to a full sweep and as we go from the four and three quarters to 6, to eight and a half and three quarters we also have to proceed through that process, we also have to finish off our rotary steerable sizes, which is four and three quarter, six and a half, 6 and three quarter if you want it call that and eight and a half we're will going to develop torque buster.

We have a few other tools we'd like to play with and develop, but due to our potential capital constraint we're going to develop fully the tools that we just spent the money on now, and that's with our polar group and our other groups and we're going to take all the tools that we have focus on that and get to profitability rather than developing new concepts or new tools. So what we're going to slow down is the R&D sort of wish list thing, get back to focus, make some money, show you that is a possibility and can be done in our TSG group and once we can prove that then we'll sit back and wait for the new tool development on the side for 2004.

That's very helpful. and secondly on Mexico, can you give us a little more detail as to how things are going, recent projects, won and lost and, I guess what potentially is out there for 2003, 2004?

Well, Mexico is producing 4 BCS a day, they have to go to 10 BCS. There's still importer from the United States of America which has major decline. They realize that they need more gas. We are the most efficient drilling machine they have seen to date. We bid one bid that was recently won by Schlumberger we lost that to them. We are by far the dominant player in that area. They wanted to stay there because (inaudible) Everybody expects the MSCs which are these multi service contracts to come through at some point in time in 2003 and if the Mexican Congress can achieve that it will be major goal for President Fox and Martez (ph). Martez (ph) is running the energy side of things.

And if that happens, we'll have more demand than ourselves. There are probably ten projects over the next three years that - our projects are coming in from Mexico and we will be players in one or two of them. We certainly won't get them all, but we've got a great relationship with those gentlemen and the more we work, the better we get and it's the growing team that we have down there that is extremely competent, professional and I'm very proud to be able to visit our site and visit our people, go into Mexico because we are doing a first class job and we are extremely well recognized by (inaudible) as we tour the different parts of Mexico and different parts in the world we run into certain individuals in other parts of the world.

Dana, from a well point of view just to get you up to date here, to the end of October we had 226 wells drilled. We currently have 7 rigs operating. The depth of the wells that we're drilling is getting deeper, and we're 48 wells ahead of schedule at the present time.

Did you ever think about revenues generated in Mexico in '03 as you sit here today, are you likely based on what you have on hand are you likely to equal the revenues generated out of Mexico?

We will increase our revenue in 2003 from the Burgoes Project from 2002 because we moved two rigs in and the F wells (ph) we're drilling, we're on the learning curve, they'll become much more beneficial to our bottom line. We're also at a point to develop some other parts of that project so 2003 will certainly be an increase from 2002.

We've also been fortunate 9inaudible).We picked up a completions contract in Mexico recently so our profit lines as well as our integrated services organization is expanding and we are working on an extremely large tender today for Mexico. We have a large team working on it here and bid due in November, end of November.

Can you speak to the profitability? I know that early on in the contracts you were reticent to get too excited about your good early progress because, you know, it's turnkey work and you never know how much you make until the last well is drilled. But speak to the ongoing trend in profitability, whether you're ahead of budget, on budget, how do you view that?

Well, Dana, we were very honest, we got into this project because we hadn't done anything of this size and complexity. We did this as a learning experience. If we made any profit it would be very fortuitous. I'm still reticent - it's been a good project for us, we're doing a great job and we're essential not going to go into any detail. We still give you more segment detail than most other people that you deal with, but we're not that bad.

But would you say that you're on budget, behind budget, how would you characterize it versus...

I would say we're ahead of budget.

You are ahead of budget?

Well, yes.

That is a grand admission. Thank you, Hank. That's all.

The next question comes from James Stone, UBS Warburg. Please go ahead.

Hi, good afternoon, guys. Just want to follow-up with maybe a little bit more specificity on the daily situation in Canada. Hank, you said you're going to be up this winter. Is that up sequentially or up on a year over year basis versus last winter?

Sequentially quarter over quarter.

Right. But how much of that is - formally you go up sequentially quarter over quarter just because you've got more rentals. Can you give us an idea of, you know, what you think day rates will be like on a year-over-year basis?

Well, there wasn't enough demand be so we didn't start our winter rate, some we have some we haven't depending on demand and where we're going. As far as the detail of it, it's certainly not what we would like to have had, but we have to be fair - keep in mind that even though we're 36 or 37 percent of the market. There are people that worked all summer and no profitability and some people came out with some early numbers and we have to keep in mind what other people do as where we get to. It will be good, but it's not going to be as good as it was a year ago. I can guarantee you that. As we go through the next summer with demands that will dictate how far we have to slide the parts.

Do you think that overall utilization will be up on a year-over-year basis?

I would say that's possible. But it depends on our winter.

I meant for the winter.

I know. I have January and February. I had a great March last year. When you have a March that's frozen right through and allowed us to run 100 rigs at the end of March, that's not a normal March. I know everybody and New York missed it because it never got cold there at all. We have weather that allow us to work through March. That's a plus for us. If we have people to spud ( ph) December 15th it would help as well. We're going to have to put 100 rigs back to work and 100 crews that will happen with the snap of a finger two, three, possibly four weeks time period. We're prepared for it, we do it on an annual basis but it's challenging on the safety side and we're asking operators to think progressively as far as the employment of people and the safety of people to allow us to do it and keep in mind it's only November the 5th. We're thinking about it, we'll be able to achieve that together if we work together as a team.

What do you think the odds are of these customers moving up their programs two weeks?

Well, I don't bet on the odds. I'm ready to go and we're negotiating.

OK. Just turning back to the technology services group, Larry, can you give us maybe some customer feedback on the performance of the tools that you have put into the field? I'm trying to get some understanding, I mean, have you had any problems on jobs where you've deployed the tools or have you had anything that you know kind of strikes you as a major up side surprise or downside surprise?

Well, if you take these things out and say they're going to run perfect out of the chute you've probably got rocks in your head. On the HAL (ph) tool, for example on the M tool (ph) we took it, brand-new tool (inaudible) operate with both telemetries, stuck in the hole, ran it in Indonesia. Did a real good job, they're happy. Flew two tools back. We have we needed to do some upgrading on some of the OS. Tools are back there today. Exxon Mobile's been extremely impressed. The tools are operating for Unical (ph) Thailand and we just started a project there in the last few weeks, but feedback has been very, very good. On the LWD side, the quality of the resistivity (ph) measurement and the reliability of the resistivity (ph) has been excellent.

The problem we are having, we're having some firm wear problems, we load the tool, we send it down hole, sometimes we're not really really careful in how we program the tool, the tool doesn't fire up and doesn't basically record data. So that's just in the operating systems and training of our people. There's an interconnect, a hard connect that goes between the tools that sometimes we've had problems with it. So we've had a tremendous number of successes, we've also had failures. It's part of the process. Overall it's taken a little longer than we hope, but I think we're going to have a world class tool that will do very, very well.

Uh-huh. But none of the - is it fair to say that none of the problems that you've had down hole are really design oriented problems, they're more kind of...

We've not had any.

...glitches or anything?

The signal we've seen more specifically in Mexico in their multi-frequency resistivity (ph) has been very, very unique. We brought it up here and put it into mold (ph), it gives the signal and it's extremely beneficial and petro-physicist or anybody looks at it, the density tool is a world class configuration. We're just excited about it. Of course we've had a lot more multi frequency runs than we have at density tool to date, but we're just a week or two away from having it all put together, then we have a tremendous amount of people interested in it. Then being fortuitous as a four and three quarter to start is great but when you go on a job you have 6 3/4 so you can get the 4 3/4 , but fortunately there's not a lot of 4 3/4 out there. We'll be fine. We actually have some of the majors actually seeing if they can rent four and three quarter.

From a technological point of view we started out with the relatively simple communication structure of the tool and now it's moving to the more advanced communication structure and that conversion will take about a month and a lot of that - problems we have today is about surface of the tools talking back and forth, surface computer and the down hole tool making sure it's programmed properly. Most problems we identified a couple months ago will have that Bi phase interface done and we'll be on a high speed telemetry system hopefully in November here. and then that just enables our platform for all of our sensors to get bolted on, away you go. Makes the rotary steerable, the density, the neutron, all those tools a lot easier to configure the system.

OK. Terrific. Thank you.

Thank you.

Next question comes from John Tasdemir, Raymond James. Please go ahead.

Yes, just trying to switch gears real quick on TSG group. Obviously you guys have been going through pretty good growth phase and build phase. Are there anything, any operations maybe in the U.S. like pumping or something that you guys are trying to cut costs on at this point meaning it's kind of, you know, maybe not in the growth phase?

Well, we're certainly going through - analyze that very carefully, John, as we go through the next budgetary thing. We're not going to fix on a lot of money. We're comfortable that what we have will work and will have a marginally - change the few locations on some of our products, but when you have PSG for example, as many different product lines and you look at them, no matter how you break them down geographically, I think we have 36, they're doing very well, we have 7 that are a little bit challenging. We're focusing on the 7 and next year it's not in deployment and R&D it's in operational profitability and finalized development. That's the focus.

Just to give a little more color obviously you have some good incremental margin on the business in the third quarter. Would you expect that business to turn profitable in terms of operating income as we go into the fourth quarter and we see a bit of up-tick in Canada?

We only have one multi - our LWD for example, we have one multi frequency tool

We have five today LWD.

On the frequency on those that are live?

Yes resistivity (ph) and then nine systems.

But those will certainly bring some dollars to it, but we have to get the full tool sweep out there.

You still have other businesses in that group [inaudible].

(inaudible) balance we don't have a lot of in the U. S. and the under balanced has done well. We look at it around the world and in Canada, we're going to have a booming year. Every kit we have is gone, January, February, March.

We started loading up kits this week.

It's all gone. So that we know. the biggest challenge we have is the massive size of the case tool business we have in the United States achieving some margin with that.

I guess our concern a little bit, October was wet and rig count, rig count was pretty weak. It started to pick up as you guys have all seen kind of late October and we're starting to move equipment into the field again. Our directional drill activity in Canada has gone up by 40 percent in the last two weeks. But part of October was pretty slow up here.

Comes down to just rig demand. We're operating about 100 rigs a day, 137 service rigs. We were 110 last week, went down to 88. We seem to bounce around. I still don't think we have 300 rigs in the industry - 310 just on a percentage basis. We have to wait until we get back to work. Keep in mind we are service industry and only as good as our customers let us be. So that's reality.

Already, guys. Well, appreciate it. I think you've been worked over enough.

Fine.

Ladies and gentlemen, if there are any additional questions at this time, please press star followed by the 1. As a reminder, if you are using a speakerphone, please lift the handset before pressing the keys. The next question comes from Alleen Isrous (ph), Proud Securities. Please go ahead.

Good afternoon.

Good afternoon.

The rotary seeable number that Larry gave out before, what was that again, for '03?

For '03 our intended production is 100 tools.

One hundred tools by the end of the year?

Yes.

And you're going to run hat that 10 per month?

Yes.

What do you expect utilization will be?

Business plan has been developed on them which is about 7 and a half days a month per tool.

OK. and what kind of capital cost do you expect for each of those tools?

We're very comfortable that our design is the most unique in the world and we're not going to go into the capital cost structure.

Very economical.

And we repair is extremely economical.

OK. OK. Last question, Dale, the 3.1 million acquisition, is that the Nighthawk acquisition that you guys did back in September?

Yes.

OK. What kind of revenue do you expect out of that?

Somewhere between 3 and 5 million.

OK.

Gentlemen, there are no further questions at this time. Please continue.

All right. Thank you, ladies and gentlemen. It was a pleasure to have a chance to chat with you. Look forward to talking to you next year. Thank you.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating and please disconnect your lines.