Precision Drilling Corp (PDS) 2003 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Precision Drilling first quarter conference call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. At that time, we will provide you instructions for queuing up for questions. If you have difficulty, pres the star, followed by the 0, at any time. This conference call is being recorded. I will now turn the conference call over to summer Hank Swartout. Please go ahead, sir.

Good afternoon, ladies and gentlemen. It's a pleasure to chat with you with our results. Canada is not a bad place to be all of a sudden, with the demise of the storage and a few other things we'll go through. Obviously we've a good first quarter, we see it growing potentially to 2005. It's one of the best places to be in the world and I'll let Dale Tremblay start off today.

This conference call contains forward-looking statements based on current expectations that involve a number of business risks and uncertainties. The factors that could call 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 the oil and gas companies to raise capital or other unforeseen conditions, which could impact on the use of services supplied by our corporation.

For those of you who have not had a chance to read our press release, I'd like to start my presentation by reading our closing remarks, as I believe it is important to keep this thought when you're evaluating precision over the next several months. The corporation's commitment to international expansion will continue.

That being said, the anticipated record activity levels in Canada where the corporation enjoys a dominant position will be the driver for improved earnings. This statement is clear, although we did meet expectations -- did not meet expectations over the previous two quarters, we have not wavered on our strategic plan to develop and deploy new technologies to the oil and gas industry.

The good news is that we believe we are now in a market that will allow us to generate profits in all facets of our business, including our technology services segment that will give us the opportunity to get this technology deployed while still delivering the profits our shareholders expect out of our organization. Favorable conditions in the Canadian drilling market, which translates into improvement in all of our oil and gas services business, has led to these improved results.

As we have already released a detailed press release outlining our financial results for the quarter, I will only give an overview of our financial highlights for Q1 of '03, and leave you time to discuss the other current and future operations.

Overall, our financial performance for Q1 was better than originally planned, with earnings from continuing operations at $1.30. When we began the quarter, we were thinking in the range of $1 to $1.10, and it was all based on where drilling prices and activity rates were going to be. We are very pleased with the rig operating days increase of 19% over the same period in the prior year, with rates that improved somewhat through the quarter and ending at only 3% lower than last year.

Contract drilling. In Canada, we achieved 14,641 operating days or a 72% utilization rate for the quarter compared to 12,289 days in Q1 2002, or 61% utilization rate. To put this into context with 2001, which I think a lot of people like to compare to, we had utilization rate of 80% back then, or 16,552 days.

We experienced band power issues, were a struggling in the first quarter, and crewing our rigs was tighter than it ever has been before. A number of rigs were ran with only two crews. Activity levels were as anticipated, with high rig demand, but the bonus was the backlog of wells to be drilled by junior upstart companies. For the most part, the weather cooperated well in March, with the colder temperatures creating a prolonged winter drilling season. Improved average rates of about $400 a day was mainly due to the strong spot activity rates at the end of the drilling season. Activity levels for boilers, pop drives and cams were strong throughout the quarter. During the quarter, the company acquired the assets from Mackenzie caterers, and added 19 rig counts.

Revenue per day was $15,100, compared to $15,500 in 2003. While servicing our fleet of 240, service rigs produced 138,000 operating hours, for a 64% utilization, up 7% over the previous year, which had 129,000 hours, or 59%. Revenue per hour for 2003 was $496, compared to $497 per hour in 2002.

Our international operation saw operating days increase a total of 157 days over Q1 '02. By regions, Venezuela was down 178 days, and produced 182 days. Mexico was 566 days, up 179 days. India, 77 days, and Argentina, 51 days, down 21. The change in days between Venezuela and Mexico was due to the transfer of two rigs to the Mexican market. Revenue was down due to 56 days of force in Venezuela.

PDI operated 13 rigs at the end of Q1 '03, which was the same as Q1 '04. Rig 814, which was contracted with [Petta Vesa] was not shipped, and the associated rig modifications were written off during the quarter, as there was no use for this equipment in Canada.

In both India and Mexico, days were as budgeted. The other charges against contract drilling related to a dispute with client, which has now been settled. These two changes affected our income by $3.3 million. Revenue from Canadian drilling and well servicing was $309 million, international $26 million, for a total of $336 million.

Moving to our technical services group, results were somewhat better than expected. At the revenue level, and quite a bit better at the operating earnings level, where we were 29% better than last year. I'd like to emphasize the point made in our press release that operating earnings would have been approximately $6.3 million higher had it not been for the write-down of inventory, some open hole equipment, and pulling out of product line out of Colombia, and write-off in our Asia-Pacific region, and some restructuring costs related to severances in this group. The TF segment would have generated double the operating earnings, compared to last year, and it is encouraging for the remainder of the year. Canadian markets and the U.S. markets are continuing to improve.

Revenue by country, Canada was $113 million, the U.S. $36 million, Latin America $36 million, Europe $9m, Middle East $10m, and Asia Pacific and Other $10m.

Revenue by product line, wire line, which includes both open and cased hole, 76 million, directional drilling 73 million, testing and CPD, 28 million, and all of our other remaining product lines, completion products, pumping bits, and project managements were 337 million. Canada's open and cased home jobs were 7,194 for the quarter, directional drilling had 565 days. Drilling services set a record with 63 concurrent jobs in the month of March. A couple of our small product lines, completion products, and pumping services, continue to provide lower than expected operating earnings, and our business has stayed approximately the same activity levels.

U.S. wire line jobs were up about 3% year over here, and this year, 20,426 jobs were provided. Our Berger Basin project continues to improve, with revenue up approximately 10% year over year. The remaining of our areas relating to TF I'll leave for John to comment on. They basically were all net above equal over the next -- for this quarter.

Rental and productions, EI was sold with effect on January 1, 2003, so we adjusted our statements to reflect the discontinuing business. Our overall segment remained constant year over year with an improvement in rentals as the oil and gas activities picked up. And there was a slowing in our industrial service part of this business. Rental revenue was driven by the strong southern activity in Canada and in particular [Frak] programs.

Rental fleet of equipment was out a total of 222,000 rental days. [Seata] was flat year over year at the revenue levels. The Canadian level continues to stay strong, while the U.S. market has tailed off in the industrial part of this business. Catalysts -- and this is the slow period in Canada, and the U.S. has stayed busy, but on smaller jobs that have a lower margin. The mechanical portion of this business had a strong first quarter driven by the Canadian market.

Turning to our balance sheet, it has continued to stay strong. As you probably noticed, our accounts receivable have increased dramatically based on the activity levels that we had in the first quarter. Collections have been very strong in the second quarter, with little chance of bad debt risk.

Our working capital, 349,000, compared to year-end 210,000. Our working capital is up approximately $138 million since year end. Ratio is 1.85 to 1. Capital additions, Contract Drilling Group was $15 million. The technical services group, $54 million, rental and production, $4 million, and corporate $4 million for a total of $77 million. The substantial amount of the TF is the new tool bills of approximately $45 million.

Our long-term debt has gone up marginally to fund the tool bill. Our operating line is used for both day-to-day operations and for other general corporate purposes. Based on our increase in our receivables, we have -- we may have been able reclass somewhat more of this debt to current. So our working capital may be slightly overstated. Thank you.

Thank you, Dale. The next gentleman who will chat is John king.

Good afternoon. I'm John King. I joined Precision Drilling in mid March. I'm going to speak and give an operational overview for technology services globally for Q1, give a brief synopsis of our future outlook, talk a bit about the cutbacks and rationalization of streamlining that has gone on in the last month and finally end with some highlights in terms of the technology updates, developments.

Just to start with here, obviously Q1 operations in Canada were very strong. The technology services group, Q1 operations year over year from 2002 to 2003, taking out the one-time cost that Dale alluded to very earlier on, were very strong. A lot of that came from an exceptionally strong Canada. We saw improvements in the United States. We saw some strong signs internationally, and in some places we continued to struggle. Obviously there's geopolitical issues in certain areas of the world and certain countries where we have operations, like Venezuela where we did not see any appreciable increase in operations. But we are surely seeing life come back in those markets, and I will talk about that when we talk about the future outlook.

Q1, some of the questions that will be asked in terms of Q1 is whether pricing was seen to increase as Q1 continued. As I look at it, quarter 1 of 2003 is basically the beginning of a cycle, as Hank alluded to at the very beginning. It could be all of 2003, 2004, and maybe even 2005, if you're familiar with the industry, you know it can turn quite quickly. So right now, operations in Canada started slowly in January but really started to pick up -- [ inaudible ] pricing was really comparable to 2002 levels. We did not see any appreciable increase in pricing, and probably will not do so until Q3 and Q4 of this year. As we speak right now, Q2 has started a little bit slowly in Canada with the rig count being down, but we see things picking up in May and June.

In the U.S., there were regional improvements. Some areas continued to struggle through Q1. We still see no appreciable increase in the Gulf of Mexico activity. The rig count seems to be going sideways there, but certain areas, east Texas, south Texas, Oklahoma, some were showing increased activity and some signs of price appreciation.

Going forward, Canada as both Dale and Hank alluded to, continues to look promising. We have many commitments with wire line and United Diamond and on our polar side of our business, as we go forward in Canada through Q3 and Q4, so it continues to look promising. U.S. should see a Gulf of Mexico pickup as we move forward, which will work well for wire line and directional services in Canada. Venezuela, signs of life are reappearing. We have a number of wire line contracts that only currently as we speak are starting to show signs of life that were effectively dead since Q3 of last year. So, you know, really the story for Venezuela is that it really can only get better.

In Europe and North Africa, we won some new contracts with directional services. Europe and eastern European opportunities continue to be steady. That's always been a steady region for the technologies group. Mexico continues a steady volume in the outlook for the rest of the year. It's a strong year for Mexico with all services that the technology services group provides.

The Middle East and Asia, far east, both have gone through some unstable periods. As we look forward, the Middle East seems to be coming out of a quieter period. Quoting trends are up, we're looking at more under balanced projects, directional projects in that area. Asia and Far East has been quiet but quoting continues to strengthen as we speak. There is a bit of a slowdown due to SARS, but a number of our clients have travel restrictions and so on and so forth, which is delaying some of these projects. They're getting pushed out a couple months, but no cancellations, they're just basically delays.

In the last month, we've made several cuts to the technology services group. The -- what you might call the highest levels of cut is the stream lining staffing levels across the globe. Approximately 5% of the total Employees in the technology group were released. The people that were released were basically not individuals that in our opinion impair operational execution capabilities, they're people in the shared administrative services, strategic planning, so we've taken care to make sure that the cuts we made were not impairing our ability for operations on a going-forward basis.

We continue to rationalize facilities and locations, both in North America and internationally. We shut down some bases and combined with other bases in regions and we've instituted some clear global asset management guidelines in order to get better efficiency with the assets we have within this group internationally.

Overall there's been a conscious effort to reduce cost. We've really put more justification process in place for managing travel costs, entertainment expenses, and so on. All of those together in aggregate should have a meaningful impact for technology services for the remainder of this year, and that's not on an annualized basis, but for the last nine months of the year.

Continual focus will be on stream lining and improving operations. We're going to have what I would call a little more core focus on our ongoing core businesses. Technology is a very big part of the growth of the technology services group, but it's important not to forget there are mature businesses that are the core of this group that require continued focus and continual marketing improvements. So there's a real push on that right now.

We continue to streamline costs and rationalize administrative source globally, where one person is doing the job of two or three that were done in the past. And we continue to build internal management controls in order to measure exactly how we're doing month to month and quarter-to-quarter, so we can be proactive in making decisions for cutting costs, ramping up, so on and so forth.

Technology highlights. Q1, achieved some milestones. There obviously have been challenge that still persisted in Q1. What we have seen is we've seen a number of successful triple combo logging well, LWD triple combo runs. We're very comfortable and happy with that. We still had challenge in January and February, but more recently we've been happy with the successes there. With Rotary Steerable we had challenge the beginning of the year, with you we continue to see some successes from the last couple weeks, and we'll have field trials in the next two to three weeks that hopefully will show improvement. Both the LWD and Rotary Steerable, there's an expectation that commercialization is imminent. When I say imminent, I don't mean in the next couple days, but as we see success, we will see commercialization and in this quarter at some point.

We do have a number of other technology initiatives underway. United Diamonds itself has drilling tools as well as PDC bit improvements that continue to show good field trials. All in all, I would suggest at this point when you look at the Technology Services Group as a whole, there has been in the past obviously some disappointments and some delayed deliveries and so on and so forth, but what we're looking at right now is we don't have an impairment to the core science or the core physics of these tools. We're running into what I call sort of the operational challenges, the product development, the deployment challenge, so managements' mind and attention is really sort of moving away from what I call the hard-core R&D sign to exactly what kind of execution plan will be required, what kind of execution plan will be required in terms of resources, people, global, repair and maintenance, ramp-up, continual technology upgrade and modification processes, and so on and so forth.

So the shift in thinking of management is sort of time and attention to exactly how this technology is going to be launched in the next couple quarters, how to do so in a cost-effective manner, how to prioritize regions and assets deployment. I mean, we're starting off with a small core of tools, and there's many demands from different regions, and we have to decide exactly where what you might call where the low-hanging fruit is. I will independence at that point, and if there's any questions, I'd be happy to speak to them.

Thank you very much, John. Ladies and gentlemen, it's been a great first quarter for us. We're back focused where we -- we didn't think we weren't focused before, but it certainly helps when the market turns and the demand for our equipment and utilization of our assets yield the bottom line that we like to see. We're very comfortable as we go forward that this is not the best year, but the second best year ever.

And I'll also make a comment, when Dale was taking about the 81 rigs, there are six rigs that have now -- another 550 days, so there's probably about 75% utilization, so we were close to the 81 utilization, and I think you'll see the demand we have coming out of the spring breakup we have 187 rigs, we're also building two rigs that are rather unique. We're negotiating potentially more than five rigs for Canon under payout contract, so we're in very good shape and most of these are with heavy oil development. So we're extremely excited about what we have.

We're very pleased that the steps the TSG is getting to turn the bottom line around, so the operating income can stay on a positive and regular basis. That's the focus right now in corporate. We're going to make sure that every bit of detail and attention is brought to bear to make sure the technology we have will yield some of the results we want.

We're comfortable that what we're bringing forward are state of the art equipment that could move us up to a tier 1 player in a couple areas. We're very comfortable to see that, and I believe our competitors are comfortable we'll be a challenge as well. We can ascertain their cost to build and maintain, and when it comes down to the mean time between the players, and our requirements for our tools are far more demanding than anybody else in the industry.

So let's open it up for questions and answers. We expect to have a great 2003, and I think we're going to build a 2004, if the price of gas looks as promising as it does. Let's open it for questions.

If you have a questions, press the star, followed by the 1. Your questions will be polled in the order they are received. If you would like to decline from the process, press the star followed by the 2. One moment, please, for your first question. Your first question comes from Marshal Adkins from Raymond James.

Good afternoon, guys. Obviously a great quarter. I think we all kind of expected strong things out of the Canadian drilling side, but I think the most encouraging thing for us is the turnaround here that seems to be happening in TSG. John, you went through a whole lot of detailed stuff. Can you bring it back home and let's talk about a couple things that are happening there. Apparently, pricing hasn't really changed. You pretty much addressed that. Is that fair?

That's fair as this point, Marshal. When we talk about Q1, absolutely it was in Canada, the same as it had in 2002. We saw some improvements in the states, but they were still slow.

Are you seeing pricing pressure from Schlumberger?

Definitely. That's worldwide. They didn't limit it to Canada or Mexico. They're an aggressive competitor but our directional services in Canada had a record year. We had great returns, margins better than last year. So some were better, some weren't as good, Marshal, so as we go forward with the existing facilities we have, it looks very promising. I also will say we seem to move from the four to five step market, and if gas will stay above 80 cents Canadian on July 4th this year, we could have a lot of fun.

If it wasn't pricing, obviously the benefits, either the cost-cutting or higher utilization. John, any sense, can you break down, was it mainly the cost-cutting side, or was utilization a big part of what's spreading more assets over a smaller base? Was that a bigger part of it?

Marshal, the cost-cutting initiative really only kicked in in March. What you really had was some operational efficiencies, let's talk about Canada, for instance. We had a very successful Q1, and February was actually a record directional month.

We saw tremendous utilization with our EM technology, and our technology, it's worth pointing on you this technology is one of the internal product development cradle to grave initiatives that I think speaks to how technology expertise within this company, the ability to put it together, develop the science, bring it out and provide a commercial tool in the field has ended up with something that's much more efficient. We had less than 15% of our tools in repair and maintenance in Q1 '03 versus 25% in Q1 '02. Our mean time between failure almost tripled with EM in Q1. At the end of the day, you don't really require price increase to get higher field margin with those developments.

So it sounds like cost-cutting really benefits, but really what's coming home to roost is just better efficiencies and actually technology starting to work like you thought it would.

That's correct.

That's correct, and you'll see labor savings as we go forward, but we had globalized for a distribution of our product lines that weren't ready to go worldwide. We took it on the chin last year I got zero bonus last year, I deserved it. We just couldn't get the development of the tools and other things deployed at the proper time. We sat back and rationalized that we couldn't have the $100m swing last year. We've been working on it since the fall. We've redone our budgets four times. I give credit to the whole team, we started in October, those were tough decisions, but they're behind us, and we will see the bottom line continue to grow as we continue through the board.

Maybe that tough board will give you a break on pay this year. Two quick questions for Dale. CAPEX was a little higher than I thought. Can you give us guidance on what you're looking for, CAPEX for the remainder of the year?

On CAPEX?

Yeah.

It was an approved budget of 260. We got another 20 at the board meeting yesterday. So we anticipate for '03 - 280. Realistically, I think with the Continued improvement in this industry, that we will be going back to our board throughout the year, and we think we'll probably end the year somewhere around $300 million CAPEX.

So $280m about a buy on the upside. Last question and I'll turn it over to someone else. Dale, can you give us any sense for the next quarter? Obviously Q2 falls off dramatically. I think we're expecting it to be better than last year, but will it make that much of a difference? Can you give us some kinds of earnings guidance for the upcoming quarter?

Yeah. We anticipated coming out of breakup probably a little stronger than we have. The only concerns we have is our weather. We had a major snowstorm last week, and that's slowed us up again at least another week. But with the number of rigs that are booked and the work that is on the boards, you know, we think, you know, we're going to have a strong second quarter, although it may just be deferred from second into the third. The work will not be canceled, only deferred. Right now the U.S. consensus is 10 cents U.S., which is 15 cents Canadian, plus or minus. I think that's a little strong for -- just because of where we are right now at an activity level, although if it dries up and the rigs pop, you know, the rest of May and June, you know, it can turn around quite quickly. So I think 15 cents Canadian for the second quarter may be a little high, and it will just slide into the third quarter.

Okay.

I think like a nickel high might be the number.

Somewhere in between where you were last -- same quarter last year and the consensus.

Great job on the apparent turnaround here, guys. Thanks.

Thank you very much.

Your next question coming from James Stone from UBS Warburg. Please go ahead.

Guys, you -- John, you gave a lot of information about what you're doing at TSG, but I wonder if you could put some numbers behind that in terms of how much costs you expect to take out of the organization, and over what time frame should we expect to see those costs dropping near the bottom line. That would be my first question.

Okay. The changes that have been made that we put in place in the last month, we should see an impact mostly in Q3 and Q4 from those changes. As we speak, some of those layoffs we're talking about, some of the rationalization, it takes 30 to 60 days for those to start to implement themselves.

In terms of talking and putting a dollar on it right now, Dale spoke to the fact that in Q1, we took a number of one-time hits. Part of that was severance, which was somewhere in the region of $1.5 to $2 million, somewhere in that range, which gives you a feel for the type of people that were cut, the G&A reduction that we get to. I'm a little hesitant to throw out sort of numbers at this point. The reason I say that is I'm waiting for an impact in May and June just to monitor exactly what this leads to. I do believe it will be meaningful. I do know that, you know, we have made more strides than just cutting salaries. I'm absolutely sure of that, but I think at this point it's a little premature for me to make big promises and tell you what impact that would very at the bottom line of the TS income statement. I will be able to extrude on that a little more in later quarters.

Let me look at it from perhaps a different perspective. The EBITDA margin came in around 17%, was not only obviously substantially higher than -- was actually higher than the best quarter you had last year. Is that kind of a number that you guys think is a sustainable margin, excluding perhaps, you know, second quarter effects from seasonality, but if you look into more normal quarters, back half of the year, is that a number you think is attainable.

The number used, the 17%, that's before all the one-times?

Yeah. Yeah. Unless there are going to be multiple times.

No. No. I just -- maybe if I could speak to that for just a second. As we continue, there will be continued stream lining. The biggest cost-cutting is behind us. As we move forward, obviously performance-wise, people come and go, but there's not the cost-cutting initiatives just with personnel have stopped at this point. I see as we move forward, if we continue to have demand, if we continue to see the volume of work that we've experienced in the last little while, if we see a pickup in continual pickup in the U.S., and especially the Gulf of Mexico, there's no reason why we can't be in that range.

And Jamie, just for clarification, for the year, for the forecast where we're working off of right now, we are anticipating that we'll run for the year 13% EBITDA for the TS group. And that 13% EBITDA would give us pretty much a break-even at an operating earnings level. I personally think with what's going on and the improved market these numbers will probably be on the conservative side by the time we get into the third and fourth quarters.

Okay. And then, Hank, you spoke to -- either Hank or Dale, you spoke to the rising trend of rig pricing in the first quarter where, I guess it was my understanding you came into the quarter with pricing about 10% below a year ago and exited the quarter with pricing down about 3% a year ago? Is that probably about a right range?

I think --

Did you have to lower prices for the spring, and what are you looking at in terms of - over 1/2 year price expectation going out over the 3rd quarter?

We're into the second quarter and cello, which we're dominant in, is fully booked, so we were able to maintain a better price ratio as we anticipated. As we go forward, as we see the demand for taking putting thing into the single territory, we'll be able to maintain -- we're certainly not going to raise our prices during a breakup, but it looks very good, and we're starting to see huge demand for large programs for the fall and winter of 2003 and 2004. And that's demonstrative. At this point in time, we usually don't see it. As I alluded to earlier, we do have engineering contracts that we're looking at some design configurations and new configurations for some large projects, and those are 2004 projects, but massive in size, and people are very serious about it.

All right. You would anticipate, then, certainly prices are going to go up going into next winter given what you've got in demand.

No question.

Can you get back to '01 levels?

Possibly, yes. It strictly depends on demand.

But given what you see right now?

If I had to comment, I think this could be our busiest year ever and I think 2004 -- if 2005 will beat it we'll be forced to go to 20,000 wells to stay flat in Canada and when you sigh the decline in the U.S. and Canada, ladies and gentlemen, you tell me how we're going to handle delivery of what you need in the United States to make just the winter heating programs work. I don't know. Industrial demand can only drop so much. I thought we were close to bottom and listened and read a lot this winter. I'm extremely concerned if we had a real cold winter in 2003-2004, there is not enough LMG, we'll have a tough time.

How do you think your heavy oil activity will be if oil prices come down to, say, 22 by the end of the year?

Everybody's just considering it a bonus at this point in time but 22 to 25, where they have 55% to 75% recovery of oil in place, keep in mind we do have some government subsidies in Canada where your infrastructure gets deducted off any royalty payments until you get full payout. I still think you'll see a pipeline coming down from the McKenzie valley to the Ft. McMurry area and owned by the gentlemen who want to keep the oil going. We'll get to 3.5 million barrels by somewhere between 2010 and 2015, and that will be a major supply of North America. If they can stay at that 11 to $12 dollars a barrel, the more you get, the more money you make.

Thank you. Nice job this quarter.

Thank you, sir.

Your next question coming from Roger Read from Simmons & Company. Please go ahead.

Good afternoon. If we could get a little more clarity on the rationalization or cost cutting on the TSG, can you give us a range there? Is it closer to the 1.5 cost savings on the labor or closer to a $10 million kind of number?

Somewhere between $5 and $10 million. That's annualized, of course.

And obviously a bigger impact on '04 than '03. Looking at the issue of labor in Canada, this first quarter, how does that impact the rest of your year in terms of ability to get rigs out, Q1 of next year, and how do you adjust for that on a pricing basis? Are you going to try to get the crews from anywhere and raise the prices, on you do you just not run the rigs?

We were able to run everyone but 2 of our rigs. We actually ran 211 at one time. We were probably the most successful on using our assets on a comparative basis. We did not run into a problem with drillers. We have a great group of people. We have a summer program where we retrain our drillers and allow them to work as roughnecks and pay them more to stay within the group. That cost certainly pays us back in multitudes in the winter time. We're comfortable if we can get a start in the summer, let's say get to 150, 180 rigs by October, for us to go from 180 to 225 is nothing, but we had to go from 110 or 120 to 210. We virtually started 90 rigs up in a matter of three weeks. We hired 2,000 people. We had 5,000 phone calls in a week to get people to work. So our people worked very hard. It was the toughest year we've had in my 30 years in the past to get people, but we did it and did it safely.

Our safety award, we've got the most improved on the drilling side. We won the [A-award] for large service contractor on the well servicing side. We're very proud of that. We're working hard on safety day to day. We have a lot of in-house training programs where we bring in outside instructors for zero safety. We had in-house commercials that we do to keep seat belts on, with safety paramount to go forward for our people. But when we have employees that have a chance to work six or seven months out of the 12, they have a normalized lifestyle.

We had 70 rigs this winter -- excuse me -- we had 210, 211, but at one time we had 70 rigs we did not have a third crew for. We did not want to put them at risk. We would run it for 21, 28 days, shut down for 4 or 5 days, give them a week off, and go back to work. Sometimes they were paid on their week off. So these gentlemen respected what we did for them. We passed all the money on to our employees and we have a lot of loyal employees, and most would love to have the ability to work six to seven months a year, and then they could have a normalized life.

That's understandable. A couple final questions. TSG, in terms of commercialization of the two recent -- or two upcoming projects, the Triple combo and Rotary Steerable, what's sort of the impact of the top line between now and the end of the year?

I'm going to answer that, John, bear with me. We're very close to being commercialized with the 4 3/4, and it would be the second Rotary Steerable out there. We're going through modifications on two different design criteria. One of them we're pleased with. We just came out of a well with 46 hours in Mexico. It worked extremely well. The other modifications will be done within the next two weeks and we'll have ten of those that will allow us to do that. The 6 1/2 tool is being designed. We won't get that until the third quarter of 2003, obviously we will see how that works out, but we're pleased that it's coming. On the LWD, when you have the 4 3/4 tool, we have to build the 6 1/2. You have to have the 6 1/2 to get the 4 3/4, or else you're subcontracting to some of the majors. And there's one or two that might work, some won't, so it's a bit of a challenge getting the 4 3/4 out by itself. You'll see the bottom line start to materialize dramatically during 2004. I've always alluded to the fact that during 2005 you'll start to see the real appreciation of the gem we have inside the company.

And Dale, balance sheet, debt continues to go up with a $300 million CAPEX that doesn't leave a whole lot of free cash left in '03. What is your target on debt? Are there any particular plans there?

Well, our target on debt, you know, we may not -- we may flip a little bit in the current year 2003, but we anticipate, you know, 2004 to be very strong with the deployment of these tools that we are building in the current year. But our overall, our after-tax cash flow will be somewhere in the -- around $350 million, and with our debt payments of somewhere around $20m, we think we'll be able to substantially pay for our CAPEX and have a few dollars left over. Not a lot. If we didn't anticipate such a strong '04, we wouldn't be spending the CAPEX that we are currently anticipating. You know, and our target, Roger, is to keep our debt, you know, pretty much at the same level that we are.

So kind of a 30% debt to cap, or something like that on a gross basis?

We'd like to be 25, if we could.

Okay. Thank you.

Your next question coming from Victor Marchon from RBC, please go ahead.

I just wanted to address pricing one more time on the Canadian drilling side. If you could lay out what you're seeing for the summer pricing versus winter. If it's going to be flattish to slightly down, and if you're seeing any positive pricing on the shallower-type rigs.

Victor, keep in mind we don't have to run boilers and other things, so our profitability does decrease in the summertime. As far as the price per day, there will be across-the-board, I would say, in the intermediate side, there might be a small drop, not a big drop in the shallow. It looks like it's pretty steady. So there's not a huge drop in the winter time, but in the winter we have so many other things that allow us that we can rent that are part of the rigs that aren't in the summertime, that it drops as far as our EBITDA margins just because it's part of the Canadian system.

That's about a thousand dollars a day, right? The added equipment?

Well, a few other things, it's probably $1200, somewhere in that range. Now, camp wiz, we run less camps in the summer, as well as the summer drilling. We can actually drive to hotels and other things. Keep in mind that the snowstorm we got was rather devastating. We had a lot of challenge in just moving around the city, and it went for 200 miles north. So it was quite a snowstorm that hit us.

And just last question, Dale, can you give us what you're looking for on the tax rate for the out quarters?

Well, for the year, I'd go with about a 30% number. That may be a little bit high, but if you run on an average, 30% for the year, I think it will work out, or it would be good for your model.

Thank you.

Your next question comes from Dana Benner from National Bank.

Thanks. Good afternoon. My first question comes back to TSG. Clearly a nice turnaround, but can you slice up your margins between, say, Canada and the U.S.? Canada was obviously very strong. Can you give us a sense, if you posted say 17% EBITDA margins in the segment through the first quarter before your one-time costs, what might that have been say, allocated between Canada and the U.S.?

I don't know, Dana if we should be disclosing on a country by country basis at that level. We talk at the revenue level, but, you know, our disclosure sort of suggests that we -- you know, we're not as liberty to start disclosing on a country by country basis. We will comment that Canada was extremely strong compared to the rest of the world, and that's because activity levels were significantly stronger. As the other countries or areas improve in activity levels, they will improve at an EBITDA levels and operating earnings level.

I guess the thrust of my question is how high does the U.S. rig count have to get before you will see your U.S. operations before and after your current restructuring efforts you know get to break even and beyond. Even on an operating earnings basis, how much stronger does it have to get before we see you guys move above zero?

It's John here. We had a positive first quarter in the United States. I mean, basically, a total revenue, if you segregate, United States was somewhere around 17% to 20% of total TSG revenue. The US rig count is somewhere around 1,000. Right now, positive pricing continues to appreciate in there. It should continue to improve. If we see that rig count back in that 1,050, 1,100 range, I think we'll see some appreciable efficiency gains and a strong contribution from the United States to the whole family.

When you talk positive numbers, is that EBITDA or operating earnings?

EBITDA.

Okay. That's a great clarification. I guess moving back -- still on the TSG subject, I guess moving to your broader approach to the group, my impression has been that part of the issue that the market has had with TSG is the mixed messages that you've given out -- that management has given out on the operations. Obviously great expectations here for a number of years, but then followed by comments that, well, if it didn't work, you might spin it out, or look to something else. It seems to me that there's been a bit of a mixed message giving out with respect to strategy. Can you speak to that?

We can speak to it, Dana. We said if it didn't work, we would spin it out. We've been asked by yourself and others why we would keep it inside, because it would get much more money on the outside. Now are we comfortable it will make money? Yes, we're very pleased that it's going forward. What we did do, and I'm going to say this very clearly and carefully so that you can understand it, is we had a matrix system, overloaded ourselves around the worlds with deployment of assets that we didn't have the ability to deliver.

That was the biggest challenge and we sat back and said we cannot take this technology to this part of the world at this point in time. We had to back pedal. We got ourselves prepared a year ahead of time, and that's why we're cutting back in a few areas, changing some areas into countries, and we're looking at where we can be positive in deployment of our tools, and trying to get the tools into some of these other areas, because the gentlemen are waiting, they have deployment teams ready do go, but we've changed from a matrix to product model in some areas, and we've changed the whole concept of how we'll handle it. We brought our managers in, and we copied it down.

Dana, let me add one thing to there. The clearest point that I can make is we're changing the cost structure to be inconsistent with the actual business we have right now. Hank pointed to the fact that maybe the infrastructure got ahead of itself. My main goal right now is to take what business we have, what the appropriate cost structure put in place, without impairing this organization's ability to launch technology. When I say launch technology, I don't mean 18 places at once, but to do it in a prioritized fashion. We've picked the low-hanging fruit, we're there with the launch team and it's step-by-step process.

I guess what I'm trying to get at is it the current strategic plan to keep TSG within Precision Drilling if it's successful? Or if you're successful, does it largely make sense out of the company?

Dana, we'll keep it inside, and I'm sure everybody will tell us what to do over time, because we listen so well --.

It seems to me there hasn't been a consistent message on that respect. I just want to move next, if I can, to Mexico. I know that you've said that that operations are pretty solid there this year. There's been a lot of new contracts awarded over the last six months. Can you give us a sense for bid flow and how reasonably -- or how reasonable are expectations you can grown that business say over the next 24 months?

Well, at this point in time, we are -- we should be close to finishing our existing contracts within the basin, and when you do that, you sit down with the customer and have a chance to try to extend it. That's what we're doing at this point in time. I can tell you with the MSCs there seems to be some desire by the multinationals to participate, and Mexico understands clearly they have the geological potential, they have a way to do it. We've been asked to look at some other projects which we are looking at, Dana, and at this point in time, Mexico looks like a very good opportunity to enhance our South American operations.

Just one final question. Your deeper rigs seem to have done a bit better than many here in the first quarter. Can you give us a sense for what deeper drilling looks like the back half of this year, both for you and the industry more broadly in Canada?

Well, we were fortunate that we have some tremendous relationships with the large independents, and they support us, because we have a great safety records. I don't see any weakness in the deep side. Shallow is still a huge demand and of course we can't fill the demand we're being asked to fill so we're seeing people that couldn't get work with us, and going to somebody else. We're doing the best we can to facilitate our long-term best customers.

That's all I've got. Thank you very much.

Your next question coming from Judd Bailey from Jefferies and Company.

Yes. I had a quick question. When you talked about weather a little while ago, can you tell us how many rigs you have currently contracted? And out of those, how many are working? And maybe a sense of what you expect over the last couple months?

I alluded to the fact that we had 187 rigs of work ahead of us. We have about 35 to 40 rigs somewhere in the process. We have 35 to 40 rigs waiting on weather to change to move. We didn't expect to get less than 80 to 90, and we will be there when we get everybody back to we're. We'll be right around the 80 point. As soon as it dries up, it just builds proportionally as we go north. We could have 100 working down south, but we have to get back on the block, and Canada has a huge, huge program, and they have 20 rigs themselves waiting on the weather.

Great. Thanks.

Ladies and gentlemen, if there are any additional questions at this time, please press the star, followed by the 1. As a reminder, if you're using a speakerphone, please lift the handset before pressing any keys. There are no further questions at this time.

Thank you very much, ladies and gentlemen. We appreciate your questions and looking forward to a great year ahead of us. Bear with us as we move through this breakup and get into the summertime. It is exciting, and we're back to where the service side of the industry in Canada can show momentum hopefully for a few years. If that happens, we'll enjoy some tremendous share value. Thank you very much.

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