Precision Drilling Corp (PDS) 2003 Q3 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Precision Drilling third quarter results conference call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions.

If anyone has any difficulties hearing the conference, please press star 0 for operator assistance at any time. I would like to remind everyone that this conference call is being recorded today, October 30th. I will now turn it over to Hank Swartout, chairman and chief executive officer.

Thank you very much. Good afternoon, ladies and gentlemen. As usual, we'll start with Dale Tremblay, our CFO, giving us his dissertation of the numbers.

Thank you, Hank. This conference call, and the webcast contains certain 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.

We have already released detailed consolidated statement of earnings and retained earnings, consolidated balance sheet, our consolidated statement of cash flow, our segment information, along with Canadian drilling operating statistics, so therefore I'll just hit some of the highlights and give you some data points. Contract drilling, Canadian, operating days for Q3 '03, 10,848, or 52% utilization. The C. O. D.C. rate for Q3 was just slightly over 53%. Q3 '02 was 6,944, or 34%. Revenue per operating day for Q3 '03, 13,336. For Q3 '02, 12,390, an increase of about 7.6% year-over-year. The sequential decrease was about 2.7%.

With drilling rates ready to be increased -- or they've already been implemented October 1st, and I'm sure Hank will talk to you a little bit later on that, our operating costs for Q3 '03 were 8,050 per day, Q3 '02, 8,600 per day, a decrease of 6.3%. Activity levels for the third quarter were up on the prior year due to near-term perfect weather conditions in July and August. Improved commodity pricing resulting in higher industry activity and the backlog of work created by the unfavorable weather conditions in the second quarter. In the fourth quarter the corporation will be adding two Super Single Lights, bringing our total fleet in Canada to 226.

Moving to well servicing Canada, operating hours, Q3 '03, 110,447. Q3 '02 was 92,988, an increase of 19%. Revenue per hour averaged 432 for Q3 '03, compared to 418 per hour a year ago. Operating costs per hour averaged 309 for Q3 '03 compared to 324 per hour for Q3 '02. Utilization rate for the quarter was 51% for Q3 '03, which compares favorably to Q3 '02, which was at 42%. The majority of the unfavorable activity was -- or the favorable activity was related to the completion work in the northern areas because of the backlog work created by the [inaudible].

Moving to international drilling, there were 15 owned and operated rigs at the end of Q3 2003. The corporation will add two more rigs in the fourth quarter into Mexico, a rig into the Middle East, and another rig into the Asia Pacific region early in Q1 '04, bringing our total international fleet to 19 rigs by Q1, '04. There was a total increase of 281 days over Q3, '02. Q3, '03, had 972 international operating days compared to 691 a year earlier, an increase of 41%. The area with the greatest improvement during the quarter was Latin America, where four rigs operated, compared to two rigs one year earlier, and the Asia Pacific region, where the one rig that is currently operating had just been moved into the region. Although operating days were significantly higher, around 28%, compared to the same quarter last year, revenues were only up 9%. This was due to two factors: The decline in the U.S. dollar, and revenue in Q3, '02, included a lump-sum mobilization for the rig that was moved into the Asia Pacific region.

Moving to Technology Services, the efforts of our T S group relating to restructuring, cost cutting, and focus on return on capital employed, has culminated into positive operating earnings for the quarter of 713,000, compared to a loss of 7.8 million in Q3, '02. Although management is not satisfied with the level of profitability, it is important that we recognize the efforts of those involved in both management and operations to have worked diligently to get TS to this point, and challenge them to stay the course and deliver sequential improvements over the next two quarters. The 10.5 EBITDA generated in closing is within our expectations of the segment and significant improvement over the 3.2 EBITDA generated in Q3, '02.

Canada had strong results for the quarter, an increase of 21.7 million, or around 41%, compared to Q3, '02. I've just given you some Canadian data points. Case hole(ph) open hole slipline jobs totalled 8,614 in Q3 '03, compared to 4,720, an increase of 82%. Testing in Canada improved 31% over Q3 last year. U.S. data points, case hole and open hole jobs increased 24% to 3,628 from 2,918 in Q3, '02.

The U.S. market continued to improve significantly year-over-year, and also sequentially. Latin America, which excludes Mexico now, and the Asia Pacific regions, were two regions that continued to struggle, although we did see sequential improvements in each of these areas, areas with significant growth in revenues were Mexico, with the expansion outside of the integrated service contract, and the Middle East, where the corporation has been successful in adding new contracts. The explanation for the significant increase in R&D during the quarter was a result of modifications made to our L W D tools to address issues experienced during the early field testing.

Moving to rental and production, this segment had a very successful Q3 that showed market improvement over the period last year and was one of the strongest third quarters ever. Precision Rentals revenue exceeded Q3, '02, by 48%. Our rental fleet operating days increased 32%, to 200,000, up from 151,000 a year ago. Our CEDA (ph) operations were in line with both forecast and year results. Just to plot points, floor plant maintenance, our man-days are 66, compared to 64, an increase of 3%.

Moving to our balance sheet, it still continues to be solid. Our working capital is 246 million. It's up from 210 million at year end. Our long-term debt has decreased by 68 million since December '02. Basically that relates a lot with the sale of the E. I. Our capex to date for -- well, looking at the third quarter first, our drilling is about 33 million, our TS group 28 million, rental and production 2 million, and our corporate 6 million, so about $70 million for the quarter.

Year to date drilling of 63 million, of which one of the largest numbers, 30 million for the additional international drilling rigs, the TS group 149 million, LWD makes up about 90 million of that number, rental and production 9 million year to date, and 6 million for corporate which relates to the S AP program that we're putting in place to control our operations of all of TS. That concludes my portion.

Thank you very much, Dale. As we proceed into the winter with the Canadian drilling scene, we're very optimistic that -- or very comfortable forecasting that it will be an exceptional winter, obviously, in our fourth quarter. Safety is our biggest concern as we go forward, but fortunately this year we've had more rigs activated through the summer and the fall than we've had in the past, drilling booms per se, so we feel more comfortable that our crews will be a little bit more prepared for the onslaught of the December, January, February, March period.

The Super Single Light, which Dale referred to earlier, is a new concept of a drilling rig which was taken, a drilling rig outside of the envelope and creating something that we think can compete with [inaudible], and if we can accomplish that this winter, we'll have accomplished something that is rather unique, and we're looking forward to that challenge. On the international scene, obviously, we're very pleased with the rig going to the middle east. Everything looks extremely positive. Our customer, of course, is a very large multi-national, that's extremely pleased with our performance and our ability to deliver on time with some very unique technology, and there's some interest that we could have some more bids in this area and other areas.

Well servicing has done a great job as they focus to get into the winter. The rail production group, obviously when we consolidate it together, their bottom line is reaching a new level as we consolidate G&A, etc., and CEDA is having a great year going on course of what we've expected and we expect to see them increase for the next two to three years, as the level of activity increases in the United States with the catalysts [inaudible] has been one of our biggest increases, as we go forward. I'd like John King to go through the TSG side now, please.

Thank you, Hank. Obviously, we're encouraged by the improvement that we've seen year-over-year in TS. Hank, more importantly though, we're more encouraged by the regional and product line improvements that we've generated in the last five month. I think if you peel back you'll be able to look at it and see that, at a granular level, that you're actually running into some significant streamlining of costs, you're seeing efficiencies, you're seeing operational improvements, which is what we've been striving for, and that has resulted in better morale and better contracts with our customers. What I'd like to do is basically go through each region, just briefly, talking about the milestones in the third quarter, and then I'll touch on our technology and touch a little bit on each product line.

Starting off in the -- in Canada, obviously as Hank alluded, and Dale alluded, Q3 is a very active quarter. We continue to break records, continue to break records in efficiency, in terms of number of case holes, open holes, directional jobs done. In that corner, we also continue with the integration of plains, [inaudible]. I'd say that's about 75% completed at this time. It's quite a challenging undertaking to take, when you've got seven, 800 people, trucks, locations, a challenge that takes some time to basically work it out. And in Q4 we'll continue to do so, and my thoughts are that we'll be basically reaping the benefits from that in '04.

We had a few firsts in the last month or two. We've ran our first combined E-M Hell LWD integrated system in Canada, which is a first anywhere in the world, and we're quite excited about that. And that's something we're going to be able to piggyback on our U B D systems on a global basis. And as Hank alluded to, the next six months we're also pretty much locked in, we're focused on safety and focused on efficiency, and ensuring that we get out, make money, and do so in a safe manner.

In the U.S., continued strength. I would say that any questions in terms of pricing in the U.S. is it's creeping, basically. A few regions of it Rocky Mountains areas and so on, there is some strength showing, but for all intents and purposes the gulf continues to sort of go sideways, which has unleashed some more supply for the land-based markets, which is meaning that we're not actually seeing the pricing increase that, perhaps, you might have seen in '01 with similar activity levels.

In any event we add few firsts in the U.S., which we're quite proud of. Did our first off-shore open-hole job, was completed. It was a 20,000 foot well, [inaudible] system, and went off without a hitch and we're back and working with the customer again as we speak, and see some more opportunities in Q4, as well as '04. We got a new district up and running with the directional services in Wyoming, all ready, business up there, we're running our first directional job this week. And that's something we that were working on through Q3.

We've completed several triple combo runs in '03, some in the 15 to 20,000 foot range, and they were all on land. And, we also, just recently, actually completed one with our latest size of tools, which is the 6 and 3/4 inch tool, which we're quite proud of. We're picking up a few rigs in the Gulf of Mexico, and the [inaudible], which is a few more than we had the last quarter, so it seems to be moving in the right direction. Slow, inch by inch, but moving in the right direction. And, we are running our first land-based rotary steerable job this week, which is a first and hopefully the beginning of an important market for us in the United States, and globally -- with rotary steerable.

Mexico, onshore and offshore directional services in Q3, we had a $10 million Vera Cruz extension for our directional services, which took us offshore, which was an expansion of our services in Mexico. We've been pleased with the level of activity there, and we continue to increase our service capacity, combined with our IS (ph) rig improvements in Mexico, and continue to see the fourth quarter as being a strong area for TS and '04 looks very interesting, and we're quite optimistic about Mexico as an important piece, the third largest piece, I guess, of the TS pie after Canada and the U.S.

Europe/Africa, in the third quarter we were awarded our first long term Hell MWD/LWG (ph) contract in Europe in the Eastern Block, it's a two-year contract. We're excited about that. We're exploring some opportunities with some of the I O C's to run our high pressure, high temperature tools in '04, and we're very confident we're going to see that. And that would be a big one for us. It would be the first opportunity to be running our equipment in the north sea, and our customer seems to be exited about it as well. We did see a little weakness in the third quarter with our land-based wire [inaudible] operations in Europe.

There have been several mergers that they'd been working themselves out, the customers have, and their spending rate went down in Q3. We don't think this is a long term issue, in fact we're already seeing Q4 as picking up, and we're optimistic about '04 with the few new contracts we've won. We have introduced an open-hole truck into Europe in Q3, and we did that in the middle of the quarter, and we're seeing positive results from that. We'll continue to monitor it, but we think it's a new market for us.

Middle East, we were awarded a significant under balance drilling extension with one of our customers, which we're very proud of. We think it's the beginning of a larger piece for U B D in the Middle East. We went through significant marketing in Q3 which has set up a number of trials with our rotary steerable and LWD technology, which are kicking off this month, that was quite a task in Q3, and I think we have tools on the ground there as I speak, and really it's a new chapter for the Middle East, and going on with its core businesses that we'd be strong in, in the last year, year and a half there, it should compound in increased profitability there.

Latin America , as Dale alluded to, Latin American operations excluding Mexico, I would say we're still struggling in Venezuela, although the light at the end of the tunnel is becoming a little brighter, the rig count is picking up. Basically, it can only get better. We have seen an improvement in our [inaudible] results there, and as our rig count continues to pick up, we do expect to see better results in '04.

Asia Pacific, we continue to manage our costs in Q3 and basically I determined to stabilize the situation and believe that we will be able to reap upon that better cost structure in Asia in '04. We've been awarded approximately $20 million in L W D contracts, which were won in Q3. They will be kicking off late in Q4 and will have a major impact in '04. So, we are quite excited about that, that the first commercial contracts we've won using our new technology, and it's a good footprint, a good platform to continue to grow the Asia Pacific business.

Just touching on technology, first of all on the directional side, our job capacity of our Hell MWD/LWG (ph) is 27 jobs at the end of Q3, which is up from the low 20's at the end of Q2. More importantly, what we've been doing is basically improving our size distribution of our tools, and creating a more complete tool string. So we're actually in a place where we can provide all three different measuring parameters, [inaudible], gamma ray and [inaudible] density. That is something that we'll continue to do, improve our product mix in Q4 and right through '04 continue to expand upon that.

I won't be touching on the number of tools that we have, either in our L W D business or our rotary steerable basis, on a going forward basis. Just because we've come out of that R&D phase, we believe we're commercial, we're in a competitive state right now and we're excited about what we have. So we will be talking more about the financial results that come from that. Right now rotary steerable we continued to make some improvements in Q3, had several runs on land. We did some commercial jobs, and we are excited about what we have on the go right now. Rotary steerable, the one key point that probably is worth talking about, is we just recently demonstrated the ability to build angles from vertical with the rotary steerable tool, and that's a feat we're very excited about. It's easier said than done. In our customers' view this as a significant economic benefit. And it's something that we think will give us a strategic advantage on a going forward basis.

Further evidence of the strength of our technology is what we're seeing in terms of our open hole and case hole tool rollouts in the states, and that should develop into greater revenue per job and per truck on a day basis, which is really what the whole intention was of our new R&D facility, which we opened for wire [inaudible] in Q3 as well. So just lastly, we have continued to review our business plan in technology services, and we're continuing to evaluate which product lines are core product lines, and we'll be making decisions here early on in this quarter, in Q4, in terms of where we see divestments and where we continue to see further capital investment. With that I'll pass it back to Hank.

Thank you very much, John. Ladies and gentlemen, we're going to open up for questions at this point in time.

Thank you, one moment, please. Ladies and gentlemen, we will now conduct the question-and-answer session. If you have a question, please press the star, followed by the 1 on your touch-tone phone. You will hear a three-tone prompt, acknowledging your request. Your questions will be polled in the order that they are received. If you would like to decline from the polling process, please press the star, followed by the 2. Please ensure that you lift the handset if you are using a speaker phone before pressing any keys. One moment, please, for your first question. Your first question comes from Scott Gill, from Simmons & Company. Please go ahead.

Yes, thank you. Good afternoon, gentlemen.

Good afternoon.

John, I guess for you, you're not going to talk about the number of tools. Can you give us some indication what your capital spending plans are going to be for M W D / L W D in 2004, and then if you could just kind of follow that up with how you view the competitive landscape, in particular with the rotary steerable technologies, how that landscape is going to unfold next year in North America?

Yeah, sure, Scott. Ah, '04 right now, we're just finishing off our budgeting process [inaudible], but it seems like it's going to be in the $80 million (Canadian) range for '04, and that's for both LWD and rotary steerable. And with that, what we'll be doing is, basically fleshing out triple combo, so we've got [inaudible] density tools in all sizes, and rotary steerable, increasing the size of our 4 and 3/4 inch fleet, introducing the 6 and 3/4 inch tool at the end of Q1, and going with the 8 and 1/2 inch tool some time towards Q3 of '04.

In terms of the second part of your question, which was to address -- I believe what you're asking was, in the US, to address what we see in terms of activity there, and the leveraging of our new technology. Is that what the question was, Scott?

Yeah that's a good way to go about it.

Okay. I did allude to the fact, you know, every time I speak to the investment community, I do point out that we are still in our infancy, we're almost in our embryonic stage, and I pointed out that we're actually on two rigs in the gulf right now, which is a couple more rigs than we're used to. So, I mean, it's a start.

We don't have triple combo off-shore, but we will be going there very soon. We are having great reliability with those tools in the Gulf of Mexico, and I see no reason why that shouldn't continue to expand. And we are, as we sit here today, actually running our first land-based rotary steerable job in the U.S., and with some of the unique features that we proved in other markets and within our trials, we believe and we're excited about the opportunity to span that land-based rotary steerable market in the U.S. which can have a meaningful impact to our overall operations and economics perspective.

John, I guess, to just kind of dig a little bit deeper into that, do you see your revenues growing faster than the market? In other words, are you going to be taking share, or is this just growth in the rotary steerable market in general?

Two answers to that, Scott. First of all, the rotary steerable market continues to grow, obviously. For us, the only limiting factor that I really see as we sort of start to pick up momentum here, is just the number of tools and our capacity.

Right now, once again, we're in infancy stage. Often you get into these contracts, you need to have various hole sizes. We could do one hole size right now, we will be able to do 2 hole sizes very soon. I think our limitation to grow is just as quickly as we can get out the larger tool sizes and basically win contracts. We believe that we're, - our system is cost effective, and from a reliability and from a technology point of view, we're excited, we think it's best in class.

Two quick questions, your contract in the Asia Pacific, this $20 million contract. Did you disclose who the client was?

No, but it was three contracts, Scott.

Okay, three. Alright, and, Hank, can you give us guidance on your expected rig margins for the fourth quarter and the first quarter?

Well, obviously they are going to increase from the summer, and I guess the guidance I can give you, they probably won't be quite as high as 2001 across the board, simply because of the increased number of rigs. But the differentiaI is not huge, and we're going to have a great, obviously 4th quarter, and a good first quarter.

Okay, thank you.

Thanks, Scott.

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

Yeah, thanks. Good afternoon, guys.

Good afternoon, John.

Just wanted to follow up on that last question, a little bit. For the third quarter on the contract drilling business, margins were better than I expected, which I guess isn't a big surprise. Was there - the foreign currency gain that you guys booked, was that in the contract drilling segment, or was that kind of spread out across the entire businesses?

Spread out.

Okay, so, not really a one-time issue there for the margins of the contracts -- on the contract side?

No.

So we should see improvement for that?

Yes.

Secondly, Dale, you mentioned international drilling days and revenues were up 9% year over year. Can you give me the revenue number for international drilling?

I don't have it right here, but can you just give me a shout back?

Yeah, no problem.

The other thing that's happened, of course, John, is we moved three more rigs into Mexico that we did not have the previous year. Obviously, the Middle East rig should be spudding. In the next week we're going through an extremely extensive test, because there was another competitor there that seems to have not accomplished anything in 18 months. So, they are extremely pleased with what we've been able to do, and we have to be very careful that everything is to the super extent of this new high tech thing that they want. So that didn't come in our third quarter, we thought we would have some, but fourth quarter is going to do very well and obviously the platform rig that we're going to put on the platform in India will be in the first quarter of 2004. There is some more bids coming in Mexico, obviously, in the southern part for some integrated service packages, and we're very cognizant of what they are and I'm sure we will participate in the bidding.

Okay, that was my next question. Moving on, just some clean-up, you mentioned that in the TSG business, the R&D expense was a little bit higher than expected. Can you kind of give me a run rate for R&D for the next quarter or so?

John, if you look back, just commenting on that for a minute. What you will see there is, frankly, a whole bunch of retrofits in what we call engineering change notices, that went in to upgrade some of the design changes that we made from our trials in Q2 and Q3. So, we're taking some of our existing tools and just either upgrading telemetry systems, or some of the [inaudible] design issues that are there. There were no fundamental changes, but basically addressing reliability. On a quarter by quarter basis, our run rate, we are aiming in '04 to be around 5.5% of revenue, and that should work us out to somewhere on a total basis of about 45 million. So 12, 13 million dollars a quarter. Canadian.

Okay. Thanks, John. I appreciate it, guys. That's all I had.

Thank you.

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 are using a speakerphone, please lift the handset before pressing any keys. Your question comes from Miles Lich, from Peters & Company. Please go ahead.

Good afternoon, guys. Just a question on TSG. Either John or Dale. Looking at what you brought to the bottom line versus the top line in the quarter, I'm expecting that most of that, or a lot of profit was made in Canada. Are you profitable in the U.S. right now?

Yes, we are profitable in the U.S., and yes, the majority of the profit did come from Canada, you know, Canada is extremely strong on the home front. But, you know, on an operating line basis, operating earnings basis, we were profitable in pretty well every area except Latin America and Asia Pacific.

Can we expect, I guess, Dale, just on a go forward basis, what are we targeting for either an operating earnings number gauge, compared to where we are now? I expect things are going to get better. Obviously Q4 and Q1 in Canada will be really good, but in the U.S., can we expect to see things pick up to bring this number back into the 20% range or is it destined to stay closer to 10 to 15?

We're anticipating on getting to, like as a group, this year we set a target of -- and I'm going to talk EBITDA -- we were expecting to be on a year basis that we could get somewhere around 11% EBITDA this year. I think next year, you know, our target is somewhere in the 15, 16% range, and we think by the time, you know, we get enough quantity of tools and size and that, we then think by '05 we will be moving back over the 20% EBITDA range, and that's, you know, after R&D.

So back into where you historically have been or closer to, anyways?

Correct.

I guess, the other question I've got, I'm putting these new tools out, are you really going after the land market? I guess the off-shore market, Gulf of Mexico, has been fairly slow, and all indications are it doesn't look like it's going to ramp up to any great extent through '04. What's your marketing plan, I guess? Maybe that's to John.

You're specifically talking about the U.S., right Miles?

Yeah, exactly.

Okay, I would say it's a two-pronged approach. In many cases, what we're seeing, is customers that are active in the Gulf of Mexico, are saying, since we are the new player on the block, show us what you can do on land and once we're comfortable with reliability, and so and so forth, we will be taking you offshore So, the two rigs we are talking about right now, actually, we went through a little period of trials on land with this customer, now we're offshore with them. So, I don't think that as we sit here and look at it we're actually saying we're going to have all our tools offshore, or all our tools on land. What we're saying is, we know the customers we want to focus on, we know the type of customers that are going to be, let's put it this way, amenable to a new entrance, and we know the type of customers that use the specific technology and tool sizes that we have available today. So we are accurately -- or effectively focusing on them right now to get the biggest impact in '04.

So, I guess, John, on the margin side of the game, do you feel comfortable -- is it going to be mid '04 before you feel like you're making a reasonable amount of money? I know, that, with a small fleet of tools it's extremely difficult to make a lot of money, especially if you're moving them all over the place.

What we're planning is Q3, '04 we should start getting enough critical mass in tools that, on a run rate basis, that we start seeing and getting comfortable with the contribution we're getting from new technology Okay, so that's kind of your target, is Q3 of '04 to start seeing profitability? Reasonably good. I mean, I'm talking north of 15%. That's correct.

And the thing -- just touching on the question Dale addressed, I think it's important to realize, we look at it -- it's not out of the question that, very quickly here, we're going to be profitable in all regions. What we have to do is, we have to get the technologies, you know, as you clearly understand, getting enough volume to offset the global cost, which is the R&D cost, and that is where we're really focusing on '04.

One other question on day rates. I guess the day rates really coming out of the third quarter haven't been as strong as, I guess, we'd expected. Have you got your price increases? We had talked earlier about anywhere from a thousand to, say, $1,500 in additional day rates. Is that net of boilers, or winter equipment this call?

Obviously, Miles, boilers we give everybody a break in the springtime, because we shut the boilers down, but obviously it is net of boilers, yes, and the rates went up October 1, we're negotiating with all of our customers at that point in time. So, depending on activity and utilization, you will see the numbers in the fourth quarter. And to be specific, you will see them when they come out rather than talk to my competitor's ability to raise prices, we're comfortable that the rates we have are as good across the board as anybody else but I also alluded to the fact very clearly that we will not reach the 2001 numbers as far as profitability.

Yeah, okay. Thanks, guys.

Thank you.

Your next question comes from James Stone from UBS. Please go ahead.

Okay. First of all, John, I just wanted to come back and talk about this -- the R&D issue again. You had been running at kind of 8 to 9 million a quarter previously.

Right.

So now you've come back this quarter, sounded like you had to go back in and kind of catch up on some upgrades or some refit -- retrofits of tools based on your experience.

That's correct.

What I don't understand, though is, why you're going to roll forward at like 12 or 13 million a quarter from here on out.

Okay. Well, basically, two points there. First point is, I hope I alluded to in my discussion there, that we actually opened a new wireline R&D facility in Fort Worth in Q3 as well, and it is focused on wireline and it's a significantly bigger enterprise than what we had before. To say that is not to point to the fact that costs are out of control there, but it is a bigger enterprise and something that should be delivering tools more quickly. So there is increased cost there.

On a going forward basis as we look through '04, with the size of the operation we have and the continued upgrade in tools, when I say upgrade in tools, what I mean is I'm not addressing the fact that we'll have continual sort of design changes, or anything, we continue to add new features to the tools. So a standard [inaudible] tool might be changing into something that has more of a [inaudible] approach to it, or something in gamma ray, you're adding and tweaking different features, and with that you continue to incur R&D costs.

Also, we are ramping up our rotary steerable initiative, as you well know, and with that, most of the R&D costs have obviously been incurred to date but on a going far ward basis we have in that R&D cost a higher product support, an engineering technical support group, to support the bigger volume of tools that are gonna be out there in '04. So you have to take that into account as well.

That makes sense.

One other thing I'm going to throw in, we've certainly got over 6% of revenue for R&D but we are going back to the 5%. That is the focus. We will be there, and we have the ability to bring that into line.

Okay, and then if I listen to all the things that you've talked about today, in terms of what is happening in TS. I mean, it strikes me that what we're not hearing anything about are things like bits, cements, you know, those businesses. Is it a foregone -- should we conclude at this point that you are pretty much going to exit almost all of those other non, non-mentionable businesses beyond LWD, wire line, and underbalance within TS, and, you know, what sort of -- should we look at that on a kind of proceeds-realized basis going forward?

Jamie, as we've alluded to earlier we're looking at every part of TSG. Obviously some of the ones that you said are quite profitable, and some of the ones that you talked about, are not profitable. If we're not gonna be outsized, and it's a distinct advantage to stay in the business, we will clean up that business.

Okay, and then, Dale, you talked about your operating costs on a cost-per-day basis were down on the drilling side on a year-over-year basis in Canada.

About $600.

About $600. I guess, couple of things. One, one of the problems you had last winter was your operating costs were a little higher because it was such a crazy winter, started late, not as efficient, a lot of overtime, et cetera. Would you expect your operating costs on a year-over-year basis heading into fourth and first quarter to be comparable to last winter or above or below?

I think they're going to be comparable and probably up slightly, you know. Not a ton, but, I mean, you know, we've looked at our operating costs, you know, over a long period of time, and they've been -- they creep up, they don't jump up. So I think they'll drift upwards just with activity level and, you know, and then a lot of it depends on the type of winter we have, and how much we really get pushed.

The other thing that comes to play in this, Jamie, is that if it's 40 below for a few months it's a lot harder on the equipment than if we have a nice winter. So that's something we have to remember that, on January 11of last year in the far forth, it was warmer up there than it was in Florida.

I don't think that's probably going to happen this year, but those are just things that happen. But we're also seeing some tremendous efficiencies from our single pump going throughout our 220-plus rigs in Canada. We're only a few years away from being virtually identical as far as our mud pumps and every rig in Canada, which is a very unique concept and it's also a tremendous savings for us.

I guess the point I'm trying to raise is, that it sounds like you're much better prepared going into this winter. Hank, you referred to it. You're much more efficient, you've got much better visibility, and I would have thought that the reverse of that last winter could have contributed to a higher or less efficient operating cost structure and yet I'm trying to understand what are the drivers of increased costs that are offsetting those gains in efficiency.

I appreciate it, but the other thing you're going to have to be cognizant of well, we're not going to say we're going to do something and not do it. We think we're going to have a very good winter as far as efficiencies but we're very cautious and alluding, we're better prepared crew-wise and we are better prepared across the board totally for this winter. That's all I have. I appreciate it. Thank you. Thank you.

Your next question comes from Mr. Matt McKenzie from Dundee Securities. Please go ahead.

Hi guys. I know you're still finalizing capex numbers for '04, but you alluded a little bit to the LWD numbers from TSG. Do you have a number for total TSG for 2004 roughly right now?

Matt, it's probably going to be around 150 million Canadian. And that 80 million I alluded to, remember that LWD [inaudible] is terrible. It's a basically all directional services, when it comes right down to it.

Okay, and 150 for the full year.

Yeah.

And, just a last question, maybe one for Dale, I know you come up with this information later, but I'm just trying to reconcile the operating earnings number for TSG. Do you have G&A and op expenses there, I know you break it out later in your nice glossy version in a couple of weeks but do you have it now?

No, not with me.

Okay, that's all for me. Thanks.

Thank you.

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

Well, we thank everybody for listening in. Obviously, we're very comfortable with the fourth quarter, extremely exciting, and as we go through 2004, one has to keep in mind that, we go back to the same old story that storage will dictate the price for next year. If the price of gas is up, we'll have a great year, if the price of gas is down, Canada is still the place to be.

Mexico looks very good in 2004. We see some exciting stuff as we go forward. But let's not lose sight of the fact that TSG will grow on a quarterly basis, quarter after quarter, for the next, not only the next two quarters, we expect us to continue growing for the next many years. We're very comfortable with some of the processes put in place, and the rotary steerable is exciting and the pull-through that it gets just magnifies everything we plan to happen.

Obviously we're looking at many things to increase our bottom line on all sides, and we're always looking after shareholder value. That's our main thrust. So, thank you very much for listening in ladies and gentlemen. We look forward to talking to you next time. Thank you. Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.