Precision Drilling Corp (PDS) 2003 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Precision Drilling second quarter results. [Operator instructions] I would like to remind everyone that this conference is being recorded and will now turn the conference over to Mr. Hank Swartout, chairman, president and Chief Executive Officer. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen. We appreciate you dialing into listen to our second quarter results. I would like Dale Tremblay our CFO to start our dissertation, please.

This 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 the results to differ materially include, but are not limited to, national and regional economic conditions, oil and gas prices, weather conditions, and the ability of oil and gas companies to raise capital or other unforeseen conditions which could impact on the use of our services. We have already released a detailed news release, including our consolidated statement of earnings and retained earnings, our consolidated balance sheet, our consolidated statement of cash flow, and our statement information, along with our Canadian operating statistics.

I will, therefore, cover some highlights by segment and leave ample time for Hank and John to cover our operations and comment on the strong market conditions we are currently operating in. Overall, our financial performance for Q2 was in the range we expected if we adjust for the one-time item in the quarter. You get to around 15 cents per share. The tax benefit derived from our structure, our foreign operation is, of course, amplified in the second quarter, and this amounted to approximately 9 cents per share. This is consistent with last year. Moving to contract drilling, some data points. Operating days for the second quarter of '03, 6600 days compared to last year of 4100. It is an increase of approximately 35%. Revenue per day was around 13,700. Compared to last year that was 13,850. So it held in there relatively well. Operating costs per day were approximately 9800 and that compares to 10,500 last year.

We already commented on the weather and the effect that it had on the quarter and the ability for us to operate our rigs. I think this is the main event for the drilling for the quarter. The demand was very strong, but our inability to drill during the quarter has pushed activity into the third quarter. The majority of our activity came from double, super single and some deep triples. Moving to well servicing, operating hours, 77,000 compared to 74,900 last year. Revenue per hour, $409 compared to $405 last year. So, basically, flat. Operating costs we per hour were 365 this year compared to 350 last year. Utilization rate for the quarter was 35% compared to 34% last year. Moving to international drilling, we're down to 13 rigs at the moment, and just note that we did sell our interest in the two rigs in Argentina. There was an increase of 191 days over Q2 last year to the total number this year is 895 days compared to 704 days last year.

Even though operating days were higher than last year for Q2 ’03, revenue was lower due to the decline in the U.S. dollar. The U.S. dollar went from $1.55 last year to $1.40 in this quarter. This will be the same for most of the international operations effective in the TSG group. Moving to TF group. TF generated a respectable EBITDA in the quarter of 3.7%. If you were to adjust for the unusual items affecting EBITDA in the quarter, TF would have achieved approximately 5.5% EBITDA. That is significantly up from last year. In general, Canada was down for the quarter, as is expected during the breakup period. Both the U.S. and Latin American operations showed considerable improvement, while Asia Pacific continues to be our most difficult region. Some data points, Canadian open hole case planes and slick lines, they did a total of 4,707 jobs.

That compare to last year of 3,829 jobs, or an increase of 23% year-over-year. U.S. wire line in total, both open hole and case hole 3,082 jobs compared to 2,426 in the first quarter of '03, a sequential increase of 27%. Latin America, the increase was due mainly to the high levels of drilling services in Mexico and higher drilling services in Columbia.

The Asia Pacific area, this is the area which is of most concern, and we continue to review the region from both an operational and financial per perspective. Expenditures for research and engineering were in line with expectations. Rental and production. Revenue and operating earnings were up considerably over last year. Rental revenue was up 67% from 4.1 million to 6.8 million this year. The rental fleet was out for 173 rental days, 173,000 rental days for the quarter. (Inaudible) went from 51 million to 57 million, an increase of 11%. The increase is due to the activity in Canada through both the mechanical and catalyst group and in the U.S. through the catalyst group grew but somewhat offset by the lack of activity in the U.S. industrial group. That concludes my portion. Thank you

Thank you very much, Dale. As we review the drilling operations for the second quarter, obviously, we had a lot of snow in May which was challenging for us. As we go forward in the third quarter, we're at record anticipations right now. We had 154 rigs running for 69% utilization of our assets in Canada. Three days ago -- we're going to slow doa little bit. It is a long weekend in Canada. The Mexican operation, obviously, is going to go forward with three more rigs being put into Mexico. One has already arrived from Venezuela which was not active at the time. That extension we can talk about later. The rental and service group is coming nicely.

We’ve segmented that into a new group and we’re starting to see some returns as we focus our individuals within those groups to a bottom line and more people selling more products within that group. It is a nice little rationalization within the drilling group. CEDA is having a good second quarter and third quarter looks good as you go forward. Very strong results as we spend more time in the mechanical side as well as catalyst handling in the United States doing well. There are no surprises in the second quarter other than the snow in May was challenging for us. We were not able to probably pick that much work up that we lost at that time because our smaller rigs are active and we start to see the deep rigs go back to work. I ask John King to have a breakdown of TSG

I have three sections. A operational update on Q2. I will touch on restructuring and streamlining of operations throughout the whole TSG organization and what was undertaken and accomplished in Q2 and a quick technology update. Obviously, Q2 TSG reliance on Canada as a whole. Canadian operations as both Dale and Hank pointed out were hampered by weather conditions in May and April as well. To that extent, our Canadian contribution was not as significant as we hoped, which resulted in the results you see. There was also a 4.3 million write-down if Dale eluded to which was attributed to inventory write-downs. In the U.S. we see continue continual improvement in Q2 right across-the-board waiting for a appreciable price increases although there are bright spots in like the Rockys and disappoints, i.e. the Gulf of Mexico remains flat. Expectations remain positive. We're in a wait and see mode there. Expectations were positive four or five months ago.

South America, Venezuela still flat. We could have experienced more pain there if it wouldn't have been for the cuts made during the quarter. We still are reviewing exactly what our cost structure looks like in South America but we see some positive developments slowly starting to come to life. There are obviously geopolitical issues there. Mexico was a bright spot. Across all service line that are active in Mexico with TSG, we saw some record months in there. That's a bright spot for the group. Europe, continental Europe is a land-based operation except for the one UPB we have package in the North Sea. Steady, but it is a small piece of TSG. We opened hope services in Q2. We had success there in the last month. It is not what you would call the technology focus region within TSG. There are other areas within the TSG group where technology is apparent than Europe. It is steady but a small piece of the pie. Middle East, we’ve seen improving environment in Q2. Not big market swings in the Middle East in market as compared to North America.

The growth we're going to see is the introduction of technology and how we're going to make some market impact there. Main areas in the Middle East are Yemon, Oman, and Abu Dabi although we do have projects in other countries but those are the main piece of the pie. As Dale eluded to Asia Pacific was a main focus in Q2. We continue to look at our cost structure. We pulled several operating entities outside of that region, stuck to our main two pieces, directional services and wire line. We cut costs there and continue to keep an eye on what activity looks like. There are some bright spots. Indonesia continues to be a little bit of a struggle but we're quite excited about what we're seeing in India. Things are picking up there. We’ve won some contracts going forward for the last half of the year will give us a positive attitude toward Asia Pacific. We will continue to review it.

Our restructuring in Q2, operational streamlining. Basically, there's a couple of main points we're looking at. Basically, streamline the business to ensure we have operational efficiency if there's something we're reviewing through the quarter. Reviewing the viability of some entities and some regions would be something ongoing in Q2 and evaluating strategic plans. I don’t really mean reviewing strategic direction but evaluating the execution plan that is going on with each product line in each region. Quickly going through the high points of some cost cutting and restructuring. Basically, streamline the operations into the three main categories, directional services, wire line and UBD. Pulled out the smaller entities and more focused on smaller markets in Canada and U.S. where they started. R&D. We shut down some portion of R&D. Did not impair the directional or wire line initiative. More or less what we were doing was centralizing some of the issues being undertaken in Canada and other areas of the world and moved them into our Fort Worth and Houston operations.. A bit of a cost-cutting exercise as well as getting some more focus and streamlining costs there.

As I alluded to before, some of the smaller entities like Polar and fleet, we have brought those back from being global initiatives back to a few different countries where they can be profitable. They can be managed, and we can review those entities going forward to see if they will become main entities of TSG or a piece of the company to dispose of them. Kick off in Canada the main streamline is integration of planes wire line with computer log. We are combining facilities right across the whole region. Streamlining management, not the operational management because we're so busy that we're continuing looking for more people. The higher end on the marketing and the high-end part of the management structure there. We've done some consolidation there. Process will take all of Q3 to finish and at the very end of it, probably for a Q4 savings. There is a couple million dollars of savings from that consolidation. Asia Pacific continued to downsize to the region. Continued focus on this region in Q3 and we will evaluate that on a month to month basis. Manufacturing, we cut back our Canadian manufacturing business, streamlined that back into the U.S.

Continued to evaluate our manufacturing business and whether we need all the internal capacities within the company, whether there is outsourcing opportunities that are a cost savings. Inventory, conducted inventory reviews, most of the 4.3 was due to physical inventory count that went on in Q2. More focus is required here. There are more savings to be found in this area. What we're looking at is a review of the entire supply chain management from the vendors through manufacturing to regional operational procedures. That's something that will continue in Q3. There are a significant savings there. Large focus on asset management. Continue to look at consistency across the regions to increase our purchasing power and reduce our R&N costs, repair and maintenance costs, better utilization across the region, reducing our capital requirements and looking for reliability improvements. Asset management is a core focus in Q2. We make big strides and continue to move in Q3.

A general comment on the restructuring. We are establishing crew systems and processes across-the-board. Many systems were there before. In some cases many were not integrated with the corporate system or for one reason or another they weren’t tailored to a new aspect of the business, i.e. manufacturing, R&D, global operations which weren't inherently part of the legacy companies that make up TSG. A last piece, a technology update. We are excited in what we see. We continue to see challenges. On the LWD side, tools are being introduced into the regions. Challenges remain. Applications are often first up. We don't have tools across the world. Quite often we will run into challenges in areas the first time in a certain environment. We are going through the early stage of commercialization. This will continue. Commercialization will continue through the year. We don't see any appreciable volume until the very beginning of 2004.

As I pointed out in discussions with investors before, we don't see a run rate in terms of the contribution from new technology until Q3 of 2004 and the first full year will be 2005. Introducing all of thedse services and all the technology is something that's being done from scratch. All operating procedures, repair and maintenance, human resources and so on, are being developed organically. Our competitors have big lead time in front of us. In some cases as much as ten years. We are working through that. We will make it through at a slower process. We awarded our LWD contract in Asia Pacific which was a high spot for the quarter.

We have had a tremendous unsolicited interest from different regions in the world, all in the smaller size tool where we have our main volume of tools right now, and we, basically, don't realistically have the opportunity to tap all the opportunities that are out there given the size of our fleet and the size of the tools in our fleet. That will come as the year continues to go on. Rotary Steerable tool, very encouraged by the process. Challenges were made and we made several changes to the design in Q2 all based on trial wells that we drilled in Q2. There was in the last month or so, last couple months, 11,000 feet of hole and 330 plus hours in the hole with Rotary Steerable tool. We have been paid for work with our Rotary Steerable tool but it is too early to suggest it is fully commercial given the fact we are still making design changes.

There are other internal initiatives going on within the company outside [inaudible], but for the most case that's where our main focus is. Wire line has introduced a new tools, case hole and open hole in Q2 and we’ve seen great success with those. They are starting to fill in the holes in the technology where we can be a first division type of player. With that, I will end and pass it back to Hank.

Thank you very much, John. Ladies and gentlemen, you've heard John's dissertation of TSG, and we are focused in all parts of TSG as we try to build a bottom line for every quarter as we go forward. We are pleased with the progress made in the last six months as we have gone forward. We are exciting about the future. We have dollars spent in this area that we're comfortable and should get a nice return on. Drilling is positive in Canada and the rental and services fleet as well. The rest of the world is not that bad, by any means. We see Mexico as a great friend for us. We are now up to the $339 million extension plus another contract we have in Mexico. Mexico keeps growing for us. We are pleased with that. The shipping of the two rigs to international parts are very fortuitous for us as well. It is a great bottom line, and those come once or twice a year. We were fortunate to have the capital and ability to go ahead and procure those and displace that equipment into these regions. Without any further talking, I'm going to ask the operator to open it up for questions and answers. We'll procedure.

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. [Operator instructions] Your first question is from Roger Read from Simmons. Please go ahead.

Good afternoon, gentlemen.

Good afternoon, Roger

First question I have, is looking at the TSG piece of the business, a lot of moving parts here still. In terms of cost cutting and, also, in terms of future R&D spending, R&E spending to get the remaining products out, how do you see margins developing here? What do we see that will be different Q3 versus Q2, Q4 versus Q3 in terms of the magnitude of the cost cuts.

This is John King here. In terms of R&D, there are no new initiatives that are being undertaken within TSG for mutuals. We are focusing on the tools that are in the pipeline, so to speak. What we are seeing is you're seeing some of the R&D costs, those costs being split in between what you might call product support, on going retrofits versus new R&D costs. On a quarter by quarter basis, Q3, Q4, in the beginning of next year, you will see a slow but sure impact from the introduction of the technology. The introduction you get into, you do need a certain amount of volumes of tools out there to make an impact across the whole company.

We have a small volume of tools that might make an impact one region, i.e. Gulf of Mexico and U.S. But in order for us to have a meaningful contribution, we have to have that technology working in many different regions. To do that it's going to take six to eight months of manufacturing to get to the point where we can play in two markets versus the one we're in right now. So in terms of incremental spending for R&D, you're not going to see it. If anything we're going to try to tailor that down and manufacture it close to the bone. All the costs that are going in are sustaining initiatives we have right now and looking at ongoing support and retrofits for the early stages commercial challenges I talked about before

On the cost-cutting side?

We continue to cut them across-the-board. In some cases the costs are being offset by ramping up for more activities. In the U.S. we will be cutting some and adding some people. You will see some more costs, I believe, in Q3 and Q4. You might see a couple million dollars per quarter on annualized basis we're able to knock out of the company. The cost-cutting exercises will start to slow down towards the end of the year. If they don't, we will impair our ability to deploy these tools and exercise the opportunity to generate some return on them when they arrive. So a magnitude of cost cutting. We pointed out last time, $5 million to $10 million of savings. We've cut down distribution, wholesale, inventory facilities in Edmonton and centralized them in Forth Worth. We have cut back in Canada and other areas. The savings is probably another couple million bucks we saved. The reason I'm being vague is because we added some operational capacity at the same time.

Okay. Then looking at margins, what do you think? At the EBITDA line you can generate margins in the low double digits.

Yeah. Absolutely. I pointed out in the beginning we are heavily levered to Canada. She was affected by mother nature in Q2. I don't see a reason why we can't see the margins in the 11, 12, 13% region

Thanks. A final question, Hank or Dale. If you can give us an idea of how you think the second half of Canada drilling plays out and what that means for the upcoming winter season?

At this point in time, we're very pleased with what our forecast is going forward. We know that most of our divisions have light budgets compared -- as far as revenue. We are more active than we anticipated, running 50% more rigs this year than last year at this time. We see the fall building nicely. It will depend on what happens with the storage equation as everybody else looks at their expenditures. The demand for our equipment is very good. We look like we could be moving to 90 to 95% utilization, obviously, in the first part of 2004, possibly to 100%.

Keep in mind, last year we were at 32% and we're 69% as far as utilization in the summer of 2002 versus 2003. The prices are fair. We appreciate that. The rest of the world is not doing that badly. Some of the other things that John has alluded to. We have had contact by most of the major oil companies that see that our science and our tool quality logs are exceptional in the quarters. Some things that have hampered us is that we only have two triple combos in the 4 3/4. All we build are some problems. We have problems with detection of equipment because the United States after 9/11 bought everything available for the next nine months. We have been held back on unique little problems. It is coming together nicely. We are focused behind it. We will deploy the equipment and it will be world class.

Thank you.

Your next question comes from John Tasdemir from Raymond James. Please go ahead

Good afternoon. Following up a little bit, you kept John busy in the second quarter. Can you -- from what I've gathered, in all your asset rationalization and businesses and cost cutting, can you kind of give me a sense of how you see what you've done in terms of kind of what you lined out at the beginning, when you started here. Are you two-thirds done with the plans and the budgeting and the cost efforts, or are you halfway done?

I would say not at half point yet. I would say about -- in terms of understanding what has to be done, I think we're probably 80% to 90% of the way there. In terms of actually doing what has to be done, I would say we're 40% to 45% there.

Those are things you can do and it is not a market-driven issue.

No. It is not exciting stuff It is going out there day in and day out, grinding, finding out the costs, finding out where you have redundancy and getting it back and getting people focused

You mention the cost savings. A moving target is very difficult to figure out. You targeting 5-10 million and a couple million this quarter and the next quarter. If you are 80% or 20% done, it would seem there's potentially more actual dollars in savings that are coming.

If you look at it in Computalog, [Gap in audio] the changes we're making, not having any impact on Q2 and very little impact on Q3. The impact will be Q4 and the full year of 2004. There is at least for a full year, 2.5 to $3 million in savings right there with plains and compute log. We have some entities in this organization that don't fit there. As you're able to split those off, you can reduce your shared services costs, which you can knock out on a quarter by quarter basis a couple million dollars. I would think we have so many moving pieces here. What we've done is cut back the low hanging fruit and said, look. There are 5 to $10 million of savings instantaneous for this year. As we go on and continue to streamline and get efficiencies in place, every quarter we hope to generate $2 million, $3 million, $4 million again which, on a run rate basis, will qualify in a big savings in 2004

I got you. That makes sense. Moving on to -- you did talk about international activity. You didn't give us the revenue number for contract drilling internationally. Do you have that?

I have it.

I guess following with that question while you look for it, Hank, you're doing some more stuff with Pmax. Can you give me a sense of your revenue expectation, growth going from this year to next year internationally, quantify the moves you're doing

It is hard, John, because the negotiations are an ongoing target. We're negotiating for some rigs in the other parts of the world for 2004. Whether or not we achieve those, we're not sure. Obviously, we think Mexico will require more rigs,. The MSCs are coming to a point now were we’re being asked for many many many numbers by many operators for the season. That goes in the Burgos basin that could be huge plus. You can see us go from 10-15 rigs in two months if the programs are installed and our ability to do what we do down there for MX is accepted by the international operators.

All of them have talked to us. We have the rig that is could go there. We are looking at other parts of Mexico and a couple of the parts of the world where we can have some projects as well. It is really hard to say where we're going to end up. We are pleased with the growth the company has done this year in the international side. John, we take it time by time. The project that we have done are extremely attractive as far as margins. Those are the projects we have the capital to move forward without any question.

John, the revenue for the quarter was 26 million.

So you guys are in a good hundred million dollar run rate this year and growth next year?

Definitely. It will grow, definitely.

I also have you guys going forward -- first of all, let me ask you this. A lot of cash flow. Can you tell me, again, what your cap ex plans are for the next -- rest of this year and next year?

We're going to be somewhere in the 350 plus range, I guess, if we had to go. That's if you take in that was not carried through from 2002 into 2003. We are not sure of our spend rate from 2003 to 2004. There is a blend. You can't spend it all in one period of time, even though we account for it all very clearly. So we're comfortable that we're very close to our operating cash flow issue. We had some tremendous cash flow opportunities. You can't refuse those. We do not need to grow to get equity.

We are comfortable with the line where we are going. All our covenants will be met. Whether we have the ability to spend another $100 million in projects I can't tell you. We would be -- cap ex will be in the $180 million range. We won’t let this company decline in any way, shape, or form. I'm sure TSG will find a way to have new capital to spend in the $70 million mark without any question. Your 250 before you start and anything more than that is in projects. Everybody's had nice internal growth. We are pleased with that. I can't tell you 2004 until I get there.

Okay. Fair enough, guys. Appreciate it.

Thank you, sir.

Ladies and gentlemen, if there are any additional questions at this time, please press the star, followed by the one. If you are using a speaker phone, please lift the handset before pressing a key. Your next question comes from Dan Barrett from UBS.

Good quarter considering the weather. A couple questions. On the Rotary Steerable front, you said you're not ready to declare it commercial. You're still working on it. That's the 4 3/4 inch size. Can you give us a sense of the timing, when you're going to start building the larger tool size? We have heard from some of your competitors that in certain places you can't even get on a bid list for certain work if you don't have a Rotary Steerable product. Certainly with a 4 3/4, that provides you some unique opportunities, but it would limit, possibly, as far as the amount of work you could bid on without, say, a broader range of sizes. Can you give us a sense of when you expect to start building a larger Rotary Steerable?

We expect to have the 6 3/4 built and tested and, hopefully, commercialized by the first quarter of 2004. Hopefully, it will be done the fourth quarter 2003. Let's say the first quarter 2004 because of the timing. We've had an interesting evolution in some of our design techniques that we have used. A lot of people are excited about the 4 3/4. You are correct. Some of the bids we have not been awarded. We are on stand by for the 4 3/4 which is a unique concept to give us that type of basis to step in. It is the same with the LWD. We do not have the full-size complement yet. Until we do, it hinders a little bit, there's no question. Keep in mind that in time our cost base and repair and maintenance will be so much less than everybody else's. We have the durability, science and quality we say we have. The other gentlemen will try to come up with another way to keep us out of the box. It never changes. We'll be there

A follow up, the larger side on the LWD, is that the same time frame, first quarter next year?

The MFR, the problem we have right now as I eluded to was because of the helium detection equipment we need. That delayed us six months that none of us are any control over. We hope to have the 6 3/4nukes as well. We hope to have some more 4 3/4 tools out in the next few months. We are pleased with the development we had there. It takes time. We do have to have the sizes to get the work. We are cognizant of that fact. So are the majors. We've had -- put them in the top two or three majors that have come to us and we would like the exclusivity on the Rotary Steerable. We are developing that discussion

Changing gears a little bit, pricing. Can you comment a little bit about what we're looking at going into the winter season, both on the TSG side and the drilling side and a follow up with John, when you said 10, 11, 12% margins, was that EBIT margins?

EBITDA.

Drilling will go up this fall. There's no question when we go through our winter rates. We have advised our clients they will go up. As utilization goes up, so do prices. That's a normal progression. The TSG side, Canada for example in wire line, we've had our best month in the history of the company this year. We're comfortable as we procedure and we can have technology additions to our tool case side, we will be comfortable. The one thing we caution is how much equipment we can run depends on the amount of people we can employ over a period of time.

Fortunately with the activity this is summer and you have 154 rigs running versus 93 rigs from the year before, we have easily another 57 crews that are out there fully committed to work through the winter. I think it's going to be much easier for us to deploy more of our iron in the winter 2004 where last year we were cognizant where we finished with 60 rigs working with two crews from safety point of view and the gentlemen would finish a well and move to the next well and send everybody home. Hopefully this winter we can be organized and utilize our assets through the winter and take advantage of that. TSG is having the same challenges as they go through with their workload.

We have to keep people employed through the summer. Obviously at this point we can run more equipment than we have people this summer. We are working very hard to facilitate the employment of people through the fall and through the winter so we can utilize their equipment

One additional comment on pricing. There is room as utilization continues to increase in Canada for pricing appreciation. The big room in the U.S. is a fair amount of pricing room there left this year, whether it is on land or in the Gulf of Mexico. Right now we haven't seen the increase in price that we would expect in Q1 to Q2.

Anything else, Dan?

I'm sorry. I believe he has disconnected. Mr. Swartout, there are no further questions at this time. Please continue.

Thank you very much, ladies and gentlemen. Just to summarize our little discussion, we're very pleased with the second quarter and our initiatives in TSG and our initiatives to the whole company are to make sure our shareholders get a great return. We are pleased with the way the winter is shaping up. It looks like it could be one of our better winters. If not the best, the second best winter every.

Obviously, with the 2004 discussions with some of our customers, 2004, if the price of gas stays up there, we're going to do quite well. We are very excited about it. The rest of the country, as far as TSG in Canada is growing, we will see more EM requirements this year. We are trying to sell the tool requirements in Canada by itself is going to be huge this year. The rest of the world is coming nicely. We work hard. We thank you for listening to us and hope to hear from you during the next quarter and, of course, Dale will answer any questions, or I will, questions that you have. Thank you very much.

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