Precision Drilling Corp (PDS) 2002 Q4 法說會逐字稿

Welcome to the Precision Drilling Corporation end of year results conference call. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a Q&A session. Instructions will be provided at that time for you to get in line for questions. If anyone has any difficult hearing the conference, please press star zero for operator assistance. I would like to advise everyone that this conference call is being recorded and would now like to turn the conference over to Hank Swartout, Chairman and CEO.

Thank you very much. Good afternoon, ladies and gentlemen, it's a pleasure we have a chance to give you our fourth quarter results and year-end for 2002. We'll start with Dale Tremblay. Give us your dissertation.

Thank you, Hank. I'm going to start off with the conference call and webcast 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 services supplied by our corporation.

During the fourth quarter, the company continued to operate in a business climate that seemed impossible to predict. Our North American oil feed service business operated in a climate where the customers were facing declining production capabilities with a strengthening in natural gas pricing due to the decline in storage and yet oil field activity remained sluggish at that.

The company maintained their workforce to meet anticipated demand which never materialized until December in Canada. The U.S. market, which we expected to reactivate ahead of the Canadian market remains below activity levels which would have sparked improved profit margins. Our international business has been challenged by both the growing international tensions in the Middle East and the political instability in many of the Latin America countries we operate in, especially Venezuela.

I'll give an overview of our financial achievements for both our fourth quarter and annual results as we have earlier today issued a detailed news release of these results. I will keep my comments brief to give you guys ample time for operational discussions and the -- be available afterwards for any follow up questions. The consolidated financial statements have been prepared in accordance with Canadian GAAP and on the basis consistent with previous periods.

Overall, revenue of 394 million for the quarter was marginally better than Q3, 2002, by 11.5 million or 3%. The geographic split in revenue shifted from 65% domestic in Q4 to 2001 to 62% in Q4 of 2002. Revenue outside of North America represented 22% of the total fourth quarter revenue. Operating earnings of 14.7 million were 4% of revenue for Q4, 2002, were disappointing and less than Q3, 2002, operating earnings of 23.6 million or 6%. Year-over-year operating earnings collapsed by 80% to 14.7 million compared to 73.8 million last year.

Moving to contract drilling - Revenue was 190 million, up 22% sequentially to Q3, which was 155 million but down 16% in comparison to Q4, 2001. EBITDA remains solid at 56 million or 29% compared to Q3, 2002, at 27%. Year-over-year Q4, 2002, was down 35% in comparison to Q4, 2001. For the year, contract drilling revenue was 774 million, down 23% from 1 billion. For the year-ended December 31st, 2001. EBITDA for the year-ended December 31st, 2002, for contract drilling was 246 million, down 34% or 128 million in relation to 374 million for December 31st, 2001.

Some Canadian drilling statistics, revenue per day, 14,100, down 10% from last year's 15,800; Q-over-Q revenue was up 14% from 12,400; operating days for drilling for the quarter were 7984, down 10% from a year ago, which were 8892; 2002, Q3 to Q4 operating days increased 15% from 6944. Well servicing revenue per hour was 437 compared to 453 last year, down 4%; Q-over-Q revenue per day is up 5% from 418; well servicing hours for the quarter were 94,988 with a utilization rate of 93%, down 5% from 99,937 in Q4, 2001. Q3 compared to Q4 were up 2% from 92,988 hours.

International drilling saw revenue increased 20% to 28 million compared to Q3, 2002. Year-over-year Q4 revenue was down 12% from 31 million for December 31st, 2001. TSG's revenue of 145 million for Q4, 2001, was down 12% from 165 million in the fourth quarter ended December 31st, 2001. It's important to note, this includes a reduction of revenue of $10 million with an offset of $10 million to expenses with no effect on EBITDA. And it is also down 11% from 162 million for the third quarter ended September, 2002.

EBITDA collapsed to a loss of 8.6 million from a positive 5.2 million in Q3, 2002, and 16 million for Q4, 2001. TSG's annual revenue remained relatively stable at 639 million, down only 4% from last year's 669 million. EBITDA for the TSG group for the year declined to 2% of revenue on $14 million. The decline arose from on-going reduced activity in North American market with severe pricing pressure in the U.S.

Although our international operations have continued to grow, profitability has not followed at the same rate. Canadian wireline, open hole jobs increased 5% to 648 jobs, and is consistent with reduced rig count for the quarter. Case hole jobs performed were down 5% to 2455 for the quarter. U.S. wirelines, case holes for the quarter decreased to 2311 jobs in Q4, down 16% from Q3, 2002. Open hole jobs increased 9% to 178 jobs in Q4, 2002 compared to 163 jobs in Q3, 2002.

Research and engineering has remained flat quarter-over-quarter at 9.6 million compared to 10 million. Year-over-year, 34.9 million compared to 32.4 million. Moving to rental and production, the rental and production group increased slightly to 274 million from 272 million last year or 1%. EBITDA generated for the year declined 12% to 59 million from 67 million a year earlier. Comparing sequential quarter revenue decreased marginally to 59 million from 65 million or 8%. EBITDA decreased significantly by 4 million or 28%.

The decline relates to reduced activity in both CEDA today and this is traditionally their slow period and EI while Montero improved marginally. Montero fleet of equipment was out for 167,000 rental days, up 4% from last quarter but down 20% year-over-year. CEDA achieved record revenues at 168 million for the year with strength in all business lines, catalyst, industrial and mechanical. EI (ph), we had previously indicated the potential to sell off this entity. EI has continued to perform above expectations in light of the current competitive market conditions and has held its profit margins year-over-year.

Just before leaving the income statement I'd like to make a comment on our taxes which we have seen -- seen and commented on before. The effective tax rate is impacted by the losses taxed at higher rates in North America than earnings generated in lower tax jurisdiction and our corporate structure is established to take advantage of our tax planning opportunities available to Canadian companies.

Turning to our balance sheet, working capital remains strong at 210 million compared to 216 million one year earlier. Ratio is 1.54 to 1. Our long-term debt has crept up slightly to 515 million from 496 million last year. The corporation's long-term debt as a percentage of capitalization is 25.1% compared to 25.9% at December 31st, 2001. Our debt has remained within our traditional rates and we will -- are well-positioned to meet on-going growth expectations. Thank you. Hank, I'll turn it back to you.

Thank you very much, daily. Now, ladies and gentlemen, Larry Comeau is going to give us a rendition of TSG. Please, Larry?

Good afternoon, ladies and gentlemen. Revenue declined in Q4 in Canada, the United States and Latin America for the TSG. In Q4 operating cost increased in Canada due to their requirements to train in excess of 150 professional and nonprofessional employees so that we could gear up for the winter drilling season.

Increased operating cost in our U.S. and other international operations primarily due to the result of increased staffing for the commercialization of the health, LCD (ph) and rotary steerable products also impaired our fourth quarter operating costs. Total shut down of Venezuela due to the on-going labor strike had a significant affect on us as it was one of our key markets in Latin America. Decrease in our revenue primarily due to predatory pricing by some competitors on a global basis in Canada and the U.S. and we have seen pricing declines up to 10% in some product lines in the fourth quarter. Other factors that affected us in the fourth quarter were delay in delivery of new technology for the drilling services and wireline businesses.

Outlook for 2003, current activity that we have anticipated in Canada is exceeding our expectations as is activity starting to pick up in the U.S. Rig count in the U.S. has increased to 884 from which is -- which is the highest it has been in a year and this is the third consecutive week for that -- that we have seen increases.

As far as oil drilling permits, increases to 29% and we are seeing this coming through in our activity, particularly in drilling services in the U.S. At the present time, we are operating at maximum operating capacity with our people and equipment here in Canada. Our drilling services group setting new records on a daily basis with respect to on-going jobs.

We anticipate that the MX Burgos (ph) integrated service project will continue at its present level throughout 2003. Over the past two years we have made significant investment in expanding our channels of distribution globally. We have focused on indigenization of our operation and we are now reviewing our operations globally so we can reduce our operating costs to insure that each operation is delivering acceptable rate of return.

The key element of our strategy going forward in 2003 are, invest in our health, LBD (ph) and RSD services will continue at planned levels as the product line will be our focal basis point for TSG growth in 2003. Revenue growth for technology is anticipated to be in excess of 120 million Canadian in 2003 and a majority of that will come through the MWD/LWD rotary stereo product line. Wire line services continues as a core competency of the organization but the capital investment will be limited in 2003 to the commercialization of new technologies only.

Limited capital will be available for other product lines in 2003. Drilling services, with respect to our LWD development, today we have 13 LWD jobs going on. We have systems operating in Canada, the U.S. and Mexico. We increase to 17 jobs operating by the end of February. We were recently awarded a contract in Mexico for directional drilling, LWD/MWD bids were over 25 million Canadian. Numerous runs have been made with the forensic recorder density (ph) tool with overlay to wireline logs, the recorder density was run in the 97 A hole where in this hole we saw washups (ph) where in this hole we saw wash holes up to 16-inch and tool delivered wireline quality logs and really impressed how our staff did with its performance. The triple combo (ph) is currently been field trialed and has been for the month of January. Production is proceeding with respect to the L and LWD systems and primary delays at that we have had and continue to have problems with is respect to our navigation and we have had problems with reliability and QC on our accelerometer and we are working to try and solve this problem.

The RFT (ph) was successfully field tested as we announced in January of 2003. We fed the month of January adding additional functionality to the RFT (ph) so it provided a more seamless operation on the rig. We are currently on standby for a commercial job in the U.S. and we anticipate tool going downhole in the next ten days. We will also be doing the integration testing of the RFT and triple combo in Mexico over the next few weeks.

In 2002, we concentrated on reliability improvements on our existing mud poll (ph) and EM technology. This initiative has improved our mean time between failure by a factor of four. This is decreased the number of tools and repair from 35% to 15% of our fleet. The benefit has been in decreased maintenance and repair costs and better asset utilization.

Okay, with respect to our wireline service product line. Our focus in 2002 was to develop tools to fill in our gaps in our product line and improve tool reliability. The reliability improvement program has produced three-fold increases in our open hole performance on the equipment that has been upgraded to date. We were recently awarded an offshore wireline contract in Mexico for six units worth over 19 million Canadian and an additional contract in Yemen for additional case hole services.

With respect to our PDC drill bit line, we're currently introducing a new Qatar for our bits which is a more abrasive resistant and will last longer and harder formations. This development is going in conjunction with our torque buster which has been operated in both Canada, the U.S. and Mexico and we will field trial with six and three quarter torque buster within the next week. We also introducing a new bit that we anticipate will improve our ROP (ph) and stability well directional drilling.

In our under balance drilling and well testing, well testing and under balance drilling assets are fully utilized globally. Our operations in the Middle East have demonstrated the value of our engineering capabilities and the improved well productivity resulting from underbalanced drilling. We anticipate that additional demand for systems will occur in the near future. With respect to our completions product line, we made a significant investment in developing of lighter hanger product line and we are now beginning to go sell these liners in both Asia, the Middle East and Europe.

Polar (ph) recently completed its very first job in Indonesia and since then has done three additional, the new Vera cone (ph) liner systems operated in a well in Indonesia in over 400 degrees and at flow rates of over 12 barrels per minute with exceptional perform and we're excited about this new addition and that is it.

Thank you, Larry. Dale has given us the numbers on the drilling side and the well servicing side and also the relevant production side. The fourth quarter was what we had expected. We certainly didn't see any increases in Canada. The one concern we have as we go forward into 2003 is there is going to be a dynamic requirement for our tools in Canada and safety is our biggest concern as we go forward. We have challenged the people in our field to an extent we have never seen before and I can tell you that in my 30 some years I have been in this industry, we have never pushed people as hard as we have this year and we're being very, very careful within Precision Drilling that safety is paramount and we do shut down rigs so people can have time off and lives are far more important than money.

That is a concern we have as we go forward. We're seeing this build starting to bubble to a dynamic year. If we can have utilization of our assets on a far more generalized basis rather than a spike basis, we would have a lot safer people and a lot safer everything for the whole company. But I'm very pleased with the efforts that the field people have made and obviously January has been a very good month for us. We're very pleased with what we see. We're also very cognizant of the fact that a lot of people are wondering what we're going to do with TSG and how we're going to react and we have torn it apart. We're still tearing it apart in some places. I'm working with Larry and Mick and the team to get to the basis of this and make sure TSG will be profitable going forward. I can tell you with it has my full attention without any question. Drilling can certainly survive without me. I'm very pleased with some of the growth that we have had.

When we look at our R&D, there is only 2% of the total fleet when you consolidate all our numbers, it's a very realistic number going forward. The product line development as Larry has alluded to has been headed in some cases but it's just on the edge of working very, very well. And I have to admit that we would like to have had it sooner but what we're going to bring forward will certainly open some eyes. Of courts we would like to do it quietly so the other people will find and not try to beat us at the knees on a daily basis but we have never seen price changing pressure on the TSG side by our competitors as of this year. It is absolutely amazing how they have been able to drop their revenue side.

So without further ado we're going to open this up for questions and answers. One comment I'll make on Venezuela, we are operating two rigs right now. Most of our equipment is shut down. We have a bunch of contracts ready to go. We have evaluated that first quarter will probably cost us one, maybe two cents in the first quarter and on an annualized basis it's somewhere between six and ten cents per-share that we're not going to achieve possibly this year. That is sort of the upside to the down side for 2003 and we'll open up with questions on that. Thank you.

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 '*' followed by the one on your touch-tone phone. You will hear a three tone prompt following your request. Your questions will be polled in the order received. If you would like to decline from the polling process, please press star followed by the two. Please insure you lift the hand set if you're using a speakerphone before pressing any keys. One moment, please, for your first question. Our first question comes from John Tasdemir from Raymond James. Please go ahead with your question.

Thanks, guys. A couple of questions. I want to start with looking back to 2001 when we saw a pretty good spike in activity in the first quarter. You guys made a lot of money seemed like on some of some of your spot contracts that rigs that were going to work you didn't really expect to go to work. Are you seeing that same thing going this time and what are kind of the peak day rates at this time in Canada?

Hi, John, it's hard to comment on that because we have a long-term relationship with most of our large customers here and we treat everybody quite fairly. Obviously in a spot market you can make more money. We don't raise it on a well by well basis. We try to keep it uniform. Our biggest concern is the safety side of things and it has been a great January for us, there is no question. February is going to be another good month. Certainly not as strong as we were in 2001, obviously, because of the rates that were there, but we're certainly pleased with what we have and Dale alluded to the numbers that we have had are obviously going to get better. I don't forecast that we're going to raise our rates in April of 2003 as we did once before. But I can guarantee you that certainly we are going to have a vibrant year and we had some contracts with some of the majors that gross up depending on the utilization of the market and we're going to see some very good rates this summer, certainly much better than we saw in 2002.

Okay. Let me also comment on or ask a question about what you and Larry mentioned were pricing declines for the TSG group, particularly in the U.S. What particular, you know, product line is it wireline? What is it that is having the most price pressure?

Wire line opened up case hole just killed us.

Okay.

Canada, this winter if you look at the big boys here which is one of them we have never seen any pricing like it before in our life.

Okay.

So I think they're in a lot more trouble than we are.

Then just a couple of cleanups for Dale. So you guys increased your debt by about 85 million in the quarter. I think that was to pay off about 100 million in purchases or property claimed equipment. Remind me, what were those purchases? Was it an acquisition?

For?

It just looked like in the quarter you spent about $100 million on your cash flow statement for PP&E.

That was -- there is always assets, additions and inventory build in TSG as we're buying inventory on a regular basis for building new tools. And we're also taking -- we make some principal repayments on the EDC loans during the quarter, and, you know, there was some all rating losses that was substantially where the majority of the dollars went.

Okay. Let me also get one thing cleared up. The tax benefit that you guys reported in this quarter, I guess there really wasn't expecting that. School help me model that for the first quarter?

I think the swing in the tax -- you know, I think you have forget what happened in the fourth quarter of this year and you go back to -- you know, to revisiting the first quarter in the new year and you have to understand that we are now in an upswing on the Canadian side operations and, therefore, we're going to have a build in our deferred tax number because of our partnerships that we operate both our drilling and well servicing business in. So our deferral tax will increase significantly in the first quarter and our overall tax rate will be somewhere around 35, 36% for the first quarter and probably, you know, a good number to use on an average for the year.

Okay, thanks, guys, I'll turn it over to someone else.

Thank you, John.

Our next question comes from Roger Reed from Simmons and company. Please go ahead.

Roger Reed with Simmons and company. Good afternoon, gentleman. Kind of to beat a dead horse here on TSG, in the press you make comments sounds like a cost rationalization in terms of I assume capex spending going forward. Can you give us a little more view of where your business is in terms of capacity for business relative to the current or even expected demand in the first half of this year outside of Canada which is obviously having a good T-1 drilling season.

I'll answer some of that and Larry can step in. We have looked at -- we're looking at our worldwide globalization of TSG and we have come to the realization that we just don't have the ability to globalize all of our products at this point in time and so we're going very thoroughly through each region of the world in understanding where we should participate with some of ourselves and we're just withdrawing in some areas. We're just not going to stay the course, as some might say. Obviously there is some very powerful parts which is our directional drilling, our LWD rotars (ph), these sort of things, certainly going to take the forefront going forward and some of the other ones as Larry alluded to. There is no more capital. We're very comfortable. We may move assets around. There is no capital being spent in the future other than the drilling services side of things. As far as the deployment of revenue that we're going to have, that is a hard one to ascertain until we can actually get offshore with our LWD which I think are Triple Combo, what are we going to have, Larry, shortly off the Gulf of Mexico?

We're going to do our first LWD job in the gulf of Mexico sometime in the next week or two weeks. It's just a gama (ph) utility it's an LWD job without nukes (ph). It will have pressure and vibration.

Keep in mind we have pressure and vibration capability that we have is giving us to a level that very few people in the world have. We're very pleased with the stuff we see. The biggest challenge we have is the navigation as Larry had alluded to. We still are not banging every front but it's coming nicely and we found a few surprises at our test facilities and other things and once that is cleaned up, we're going to be off on a race, gentlemen.

Okay. Kind of following along that way. If you do generate 120 million additional revenue this year, kind of prior to the exceptionally big spend in the group and what was a good year in 2001 EBITDA margins were kind of the mid to upper teens. Is that a reasonable level to expect at least on the incremental business of the 120 or, you know you know, how should we think about problems?

I'm not worried about that on the incremental side of stuff. I think we're comfortable in agreeing with you there. We have looked very carefully at our cost of TSG going forward and of course this is the time everybody looks at their goodwill scenario. We have looked at it very carefully three or four different ways. We're not taking any write downs on TSG going forward so we're comfortable what we have spent in place is going to go forward and that is as a team. That is our board. Everybody else at this point in time we're comfortable with what we have spent will come back and return the revenue that we would like. Average just time and time is going to start -- it's already started.

I think just with clarification with respect to capital is that at the present time we're not anticipating any reduction in our capital spend from our original business plan. I think what we tried to communicate there was that arm capital focus will our capital price will be around our service line where we think we can deliver the highest EBITDA.

Capex going forward kind of a 30 to 40 million a quarter kind of a reasonable rate to expect?

If you look at Canadian it's not quite 30, 40 million per quarter. I would say this year it's probably 80 -- 20 million a quarter -- well, everything involved it's 40 million. Rotary steering and everything else, just not --

40 million a quarter is a reasonable range?

That is correct.

Okay, thank you.

Our next question comes from James Stone from UBS Warburg.

I want to follow up on your previous question what kind of incremental margins do you expect on that $120 million of revenue? If I kind of calculate just in the past quarter, it looks like you need to run about $170 million a quarter just to break even in the business if you just look at kind of where you have been in the last two quarters and, so, can you just give us a sense as to, A, is that calculation about right in terms of what your fixed costs are and given the fact that on kind of a $20 million decline -- see sequential decline in revenue virtually you had all of that drop to the loss line, what should we expect, you know, to see significant -- significantly higher incremental margins as revenues return back towards or closer to that 170 million a quarter level or above it?

I'll answer that. Our calculation break even is about 150 million and that is, you know, based on last year's earning powers come, you know, was quite low. We ended the year with somewhere around two to 3% EBITDA margin. We're anticipating, you know, and we're seeing in Canada a strengthening of our EBITDA and profitability. So I think, you know, overall, you know, that one -- the 150 million a quarter break even will probably reduce somewhat. You know, the new tools, the ones introduced such as EM in Canada where we have seen for the month of January, you know, extremely strong results, you know, significantly, you know, above where we have been currently running. You know, our exception for the overall business this year is to end up somewhere around ten to 12% EBITDA which, you know, is -- we think is the key hoop hole. Our long-term objectives in I think a year out from now, we will be -- our belief is we can be somewhere around the 20% EBITDA level for the company as a whole. And, you know, that would mean, you know, EBITDA margins on our new product lines of, you know, north of 30%.

Okay.

30 or 40%, Jamie. No problem.

Okay. So I just -- Dale, I don't really understand how you could be calculating a break even level for TSG at 150 million though a quarter. I mean, are we talking cash break even or are we talking about operating break even?

We were talking cash.

That makes sense. When you have rising or non-cash depreciation costs with the substantial capital invest that you made in the business so are you -- you know, can you -- are there ways in which you were looking at lowering your cash operating costs in the TSG segment at this point perhaps sounds like you guys have gotten a little bit over extended in earn areas and with the consolidation that you're looking at, can you bring that breakeven number down further and that is a goal of yours?

I think, you know, Hank answered that question. We are looking at the cash side or cost side of our business right now. Mick (ph), you know, has been challenged, you know, with the task of going through every business line in every region and working with Larry's group on exactly which business lines we should continue with and which ones we shut down. And the ones that, you know, we shut down, we think we will have that cost savings. And we also have to keep in mind, Jamie, the new tools, you know, are not getting, you know, the full value, you know, they're going to garner long-term. It's -- in the short-term there is a lot of testing and there is a lot of inefficiency as we bounce these tools around from area to area. And, you know, we have to be competitive, you know, with others in the market. So, you know, our efficiency, until we get a tool deployment around the world will not meet, you know, your -- our expected expectations. So I think it will improve in the near future.

And, Jamie, one other thing to keep in mind we do have the four regions of the world and we have to give them all some support in tools and that is a little bit challenging at this point in time. As we go forward we will accomplish that this year. And 2004 with the capital build and the tool performance that we have seen to date, we're just all ex-static over it. It's a couple of little things that happened and we don't think it is anything that is insurmountable to achieve very unique demand in our tools.

We have had a very amount of phone calls specifically the rotary strobel (ph), for example, after we released the information we had run it and we were pleased, 27 hours of operating and 54 hours of the shoe or under the table and the gentleman that wrote to Larry was up there watching it go up and down and a few other little things. We have played with it a little bit more and we're ready to go here in time. Once we get more exposure, we have had a huge demand from probably 20 different groups and large companies wanting to see the fourth quarter and we have not been able to do it yes, sir yet.

One additional question. Can you quantify how much revenue you made in -- you made in Mexico in 2002 and were you profitable for the whole year on that stream of revenue?

I'm going to break it into two areas, one the Burgos Basin we don't breakdown and segregate. I'm going to be honest that the directional contract we had further south was not profitable. We had a lot of third-party tools in that contract. We have gone through the contract now we have a new one with our own tool audit and we virtually third-partied most of the things there so it is not that profitable. The Burgos Project itself we're very comfortable with. We will -- I think we're comfortable we'll be able to negotiate some more work down there and --

Well, you know, we had a -- we don't like to discuss Burgos on its own but I will tell you, Jamie, we -- history to date, I don't have the exact year-to-date numbers with me, but history to date, we have met -- we're just slightly below what our original budgeted EBITDA level was going into that. So Burgos has been, you know, very profitable in virtually all of our business lines and the only thing that is, you know, dragged down our profitability is our management cost of running the business and overseeing all the third-party costs. So in general, Burgos has been very successful, more successful than we originally told our Board of Directors.

Okay, thanks.

thank you, Jamie.

Our next question comes from Victor Marchon from RBC Capital. Please go ahead with your question.

Good afternoon.

Good afternoon, Richard. The first question I have is drilling activity as we progress from the first quarter to the second quarter what you guys are seeing or getting indications on E&P companies on activities through break up and as we head into the summer.

Obviously we're approaching 2001 criteria. There is no question on that. We certainly I think if you go to year-over-year 2001 we had about 90 rigs running through break up. We could be 90 to 100 or more this year. We're behind. A lot of our companies are looking forward to a very active spring in shallow gas and if the weather stays as it is with virtually no snow in Alberta, the drilling will be quick and we could probably have the busiest spring break up that we have ever had in the company.

Have you gotten any indications on what the summer activities going to be looking like and if not, when do inquiries start coming in for you guys?

Oh, no. We know for example in Canada we'll probably drill more wells than ever in southern Alberta. Certainly the largest driller. We have some more shallow gas programs. Shallow grass and we have other programs that look extremely exciting on the foothills. This could be our best year ever in the Canadian drilling business, it's possible.

Okay. Regarding TSG, can you just talk on U.S. and Venezuela, you know, where you see activity levels going forward and I guess in the U.S. in the case in open hole pricing in '03?

Well, I think -- I'll let Larry cover that.

You know, we just between January and February we're seeing some improvement there, particularly on pricing. The expectation we have is that we were estimating the U.S. should get towards, you know, 950 rigs by third quarter. We are seeing improvement in each of the product service lines. They're just way too much capacity there and people are going out and basically, you know, we run jobs for food and that is about all we're doing. With respect to open hole, we are taking and seen a certain improvement in activity in our open hole in February and with the reliability improvement program we put in place, we're starting to log deeper wells. We did some work just recently at 19,000 feet and over 300 degrees and not so much as a hitch which is good for us. You know, we are improving and we're seeing that. So, you know, we expect that business to start to come. Our drilling services group is getting a lot busier as we start to add more hail and LWD systems. We have not been operating the systems in the U.S. Primarily we have been running them in Mexico and international. We really wanted to make sure we had the tool perfect. We had some issues primarily with firm aware, software, we got through those issues and we want to make sure when we hit the ground in the U.S. the tools are working really well. We have a three jobs running in the U.S. today and the tools have been doing the -- really well. We're a well running 18-pound heel [inaudible] bogging down temperatures at 325 and the tool hasn't missed a beat. So that is the performance we're looking for and, you know, one customer is talking to another. The phone is really starting to ring and we're ready to start to operate in the U.S. which we haven't been.

Great. That's all I have. Thank you, guys.

Thank you, Victor.

Our next question comes from Kurt Hallead from RBC capital. Please go ahead with your question. Mr. Hallead, is your phone maybe on mute? Our next question comes from Dana Benner from National Bank Financial. Please go ahead with your questions.

Good afternoon.

It's actually after lunch now.

You're right, Hank. I'm sorry. I would like to start on Canada if I could and focus on TSG in the first quarter. Perhaps you can comment on what the recovery and pricing and utilization might have been like in TSG in Canada in the first quarter and then I would be curious to gain your insight how applicable you think that might be in analyzing your U.S. business say in the second half of this year, presumably upon a stronger ramp-up state -side?

Well, we're very pleased with the first quarter. We don't segregate that on each group. But on TSG in January for example, record level -- I can't say that in Canada. I think there is some obviously the LWG site which we have not had in the held tool, our first spot, open hole might be down a little bit. Case well is doing very well. They're maybe not at the records that were there because there is certainly an oversupply and with an oversupply you don't have good pricing leverage. The Canadian side of TSG has had a great January. We're really delving into the U.S. in all shapes and forms and have a daily analysis as we go forward. As they pick up in the U.S., obviously there will be some recovery. When is there going to be a full recovery to what there was in 2001, I don't know. I can't say right now.

Can you talk about pricing in the first quarter in Canada?

Dana, I guess I comment on some of the stuff that we have seen here, you know, we do, you know, quite a lot of project work here and, you know, quite often you can generate somewhere in the range of, you know, over in a (inaudible) truck per month in the winter and we have seen pricing last year over 200,000 a month drop to 90,000 a month. So a lot more significant than 10%. Now, there is some of that that just absolutely is stupid numbers that are going on. You can't operate an open hole truck 30 days a month on a three thousand dollars a day. That is something what we have seen and that is still, you know, really hasn't changed here today. we're still seeing of some of that today.

You have not seen material increase in your revenue per truck per month in this area and even more broadly in your Canadian TSG operations?

Dana. I'm sorry. I think -- deign A I'm sorry. I think we missed just the beginning of your question.

Yes, I guess I'm trying -- I understand this one metric that you're using here, but I'm trying to move a step up from that and just trying to get a better sense for a broader pricing trends in TSG in Canada in the first quarter.

Right. By-product line drilling services has done, pricing seems to be holding and with the upgrades and stuff that we have seen, our margins in those product lines are significant. I mean, they're exceeding, you know, the 45% EBITDA, 50% EBITDA ranges and so we are real happy with that. Open hole in January was under budget but the margins were, you know, up there. As good as we -- you know, they were -- we are just looking at the book here, you know, in relationship to plan. They were, you know, actually right on -- right on plan from an EBITDA point of view. But, you know, we're probably having to do a lot more work than we should for the EBITDA that were generating.

Well testing underbalance drilling, underbalance drilling as well has seen significant decrease YOY and increased competitive pressure and a significant difference in pricing. The asset utilization isn't very, very good but a lot of the projects and some of the project work we did last year we don't have because the end people are operating at five and $6000 a day under where we were. We're seeing it, Dana, I think people are panicked. I think a lot of them are struggling similarly like we were, particularly up here, with activity and the capacities here so people are giving away their services. And there is lot of capacity here.

And we have seen a lot of capacity in open hole and case hole commence in the United States as well which is not normal. We are seeing crews and trucks all the way from Louisiana and they don't work well at 40 below. That's the only good thing we have. (ph)

One of the good things that has happened to us we have had a lot of second calls and so we have been able to get leverage off of the pricing for that and then as well, our people are well trained, our equipment is getting -- is very reliability. We're providing a high quality of service and we replaced -- we replaced on several projects, you know, the guy went in and gave it away and we're doing good work and we're getting paid more but it sure scared us initially in, you know, the first three weeks of January.

That is very helpful. I would like to move next to Mexico if we could and maybe focus on the way you plan to approach the Mexican market on a go forward basis. I know there was a very substantial contract that you were after late last year which I believe upon -- upon re-bid you were not able to secure. And I wonder, does that -- what does that tell us about the Mexican market for you and other players going forward? Is it simply going to be harder for you to secure the contracts that are up for bid, you know, maybe give us some insight on how we should approach your strategy?

Well, keep in mind that, you know, if PEMEX plays the game very well and they are good at coming up with large integrated projects to bring the price down. They have wrote articles about it and have done a good job. This price decrease we have seen in Canada have taken place in other parts of the world by our other competitors. Specifically one who just lowered their prices beyond anything we -- and we enjoy it because over time -- as Larry alluded to been awarded two contracts which are substantially great profit margins down there and we're going to do more and more because we deliver quality service. But they're like anybody else, if they can get a job and they will put these gentlemen to task and if they don't deliver then maybe they won't be around next time to bid on it. It's interesting to see the largest service provider possibly anywhere in the world being challenged.

Dana, if we -- there is a lot of these projects coming up and we look at if we can pick up one in four or one in five we'll be pretty happy. You know, the critical thing for us in these big projects is they are very capital intensive and they do take a tremendous amount of resources here from Calgary to execute and if we're going to take them on, we want to get a reasonable rate of return. Burgos has been awesome for us a great experience for us and financially been very rewarding. We don't mind taking on these big projects but we have got to make money at it. On the last bid, you know, the price that it went at, we cannot work there for that. End of story. There is no sense worrying about losing it. We're not going take it on if we can't make money on it. They're too big, take too much in resources and too capital intensive.

That is great. That is all I've got. Thank you.

Thank you, Dana.

Our next question comes Aleem Israel from Sprott Securities.

Hi, guys.

Good afternoon.

What is the revenue split for TSG in Q4 on a geographic basis?

They're all scrambling I don't know if they have it at their fingertips but, Larry, what have you got?

I've got her. Canada was -- I have to be careful here, you guys, because this will end up getting us [inaudible] I think maybe we should give Dale a call after.

Just combine Burgos with Latin America.

I don't have it here and that is why I can't.

Okay. Maybe if you don't mind could you give Dale a call after?

That is fine.

I have it for the regions but I don't have the sheet on Burgos here with me.

Okay. How many rigs do you have working right now in Venezuela?

We have two today and we just put the second one back to work and the third one should go to work potentially in the next two weeks.

Okay. And just back to the pricing pressure that you're seeing from your competitors. Do you think it's an effort to price you out of the market or is it just more of a derivative of a weak global drilling market?

I think they're starting to realize they will never price us out of the market. We're very nimble and competitive. If you look at our numbers for 2002 as sole grain as they may be it is our best year ever. We realize we have to perform better and we will. But there is some other players that are smaller players that are going to be hurt in this. This is no -- there is no question. There is probably one or two that might not make it to the winner. That is possibly. We're certainly going to be there and we're going to stay the course in our technology. We're comfortable it will have a payout and I'm comfortable with what we have seen to date and how we're working. We have set our globalization cost us a bit and we're sort of bring that go in and getting our cost controls back in favor.

Okay. Great. Thanks very much.

We do have the split of revenues here.

Okay.

Let me just read them out to you. Canada was about 57, U.S. 36, Latin America 26, Europe nine, Middle East 15, Asia nine.

Okay.

And then some eliminations bring it down to 144.

Okay, great. Thank you very much, guys.

Thank you.

Ladies and gentlemen, if there are any additional questions at this time, please press the '*' followed by the one. As a reminder if you're using a speakerphone, please lift the hand set before pressing any keys. Our next question comes from Miles Lich from Peter and company. Please go ahead with your question.

Good afternoon, guys. Hey, just a question, on the wireline side, any plans to combine the planes in Canada as well as on the TSG side down south, are you downsizing in the U.S. or are you just picking select areas in internationally as you're pulling it apart?

No, we're going to -- we're looking at the TSG and I think very clearly on an operational base by base we have actually shut one base down there the latter part of December. As we go forward here, we're evaluating plains and computer log and we do that on a yearly basis. Obviously playing the slick line component and not in the computer log side of things and they are working better together. We evaluate it all the time. No decision is made at this point.

So nothing planned. So in the U.S., I guess, consolidation just because of the number of stations you've got set up, Hank or is it certain areas just are not profitable or where do you go --

To evaluate if we're going to stay we're also looking at some of our product lines that we have down there and we're starting to make some decisions now, for example, we're not going to be all over the place and we realize we have to grow slowly before we can globalize and we're doing that very carefully. But there are actions being taken on a daily basis going forward over the next couple of weeks.

Okay. I guess for Dale, capex for '03, Dale, a total, do you have a number in mind?

Well, we have an original budgeted total but I will tell you at this time, I don't think I would like to release that until Mick and Larry finish revisiting the TSG side of the capital budget. But, you know, in general, we have always kept our capex in relationship, you know, to our cash flow, our after-tax cash flow and this year would be no different. It will be, you know, somewhere around meat our underneath our after-tax cash flow. I guess until Larry and Mick (ph) finalize their capital budget, you know, I think it is best I don't talk about it. Drilling we think is going to be somewhere around 60 million and the rental and production group will be somewhere around 20 to 25 and the corporate group here will be somewhere around 20 million which includes, you know, working on the new SAP project to spreading it international. So we'll just for now leave the TSG side of it out.

Okay. I guess, the biggest question in modeling is TSG and timing on profitability with the changes you have in mind. What are your thoughts? Are you assuming that the TSG -- I assume it's the U.S. group that is losing the money. I expect the Canadian book with wireline at all going flat out that that side should be profitable. Do you see the end of the first quarter being profitable in TSG, you know, with the U.S. being a bit of a laggard? When does that group turn the corner?

Well, you know, unfortunately in a big part of our business or fortunately the big part of our business is in Canada and so for the per first quarter, you know, TSG will be profitable because of the strength of the Canadian market.

Right.

And so then it's a question of, you know, what spring break-up brings, if it slows down substantially in Canada and they're not able to keep Canada operating, you know, at significant rates, the rest of the international and the U.S. will bring TSG's down probably to a loss position. But we think on the back-half of the year with the reorganization and the restructuring and the strengthening of the market because we believe there is going ton a billed in the market in the -- a build in the market in the U.S. and limited in the international market that TSG will be profitable on the back-half of the year.

Okay. So really your thoughts are then is that the second quarter is the only thing that is in jeopardy from TSG's point of view?

At this time.

Yeah.

Yes.

Okay, guys, thank you.

Thank you.

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

All right, thank you very much, ladies and gentlemen, as we proceed through 2003, we're looking for a tremendous year in the oil field service industry. Obviously the price of gas and the price of oil and some of these things that are happening in the world are challenging to all of us and we're challenged as far as not only safety in Canada but security and other things as we travel and go to other parts of the world. We have had some challenges in the Middle East and Asia. We are focusing very, very hard on TSG to make sure that it is a profitable group as we go forward and you'll see some of the fruits of that as we go forward over the next month, and the next two months. We thank you very much, ladies and gentlemen. We look forward to talking to you after our first quarter. Thank you.

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