Precision Drilling Corp (PDS) 2003 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Precision Drilling Corp. fourth-quarter and year end 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. (OPERATOR INSTRUCTIONS) I would like to remind everyone that this conference call is being recorded on Thursday, February 12, 2004 at 2:00 Eastern Standard Time and will now turn the conference over to Mr. Hank Swartout, Chairman, President and Chief Executive Officer. Please go ahead, sir.

Thank you very much. Good afternoon, ladies and gentlemen. We're going to have Dale Tremblay, our CFO, start off with a discussion of this release. Dale, please.

Thank you, Hank. This conference call and Webcast contain 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 oil and gas companies to raise capital, or other unforeseen conditions which could impact on the use of services supplied by our company.

We have released a detailed news release including consolidated statement of earnings and retained earnings, consolidated balance sheet, consolidated statement of cash flow and segment information along with our Canadian drilling operating statistics. I will therefore just hit the highlights in each segment.

First off, I would like to begin with the financial review by getting everyone on the same page as to the earnings from operations for both the fourth quarter and the year. Starting with the fourth quarter, the discontinued operations figure of 9,842,000, this number being reported in accordance with GAAP, is comprised of two components. It has an earnings loss for the fourth-quarter of $727,000 or 1 cent per share, and a $9,113,000 write-down of the assets of discontinued operations to their estimated net realized value. Therefore, adjusting for the 1 cent earnings loss, the earnings per share from continuing operations would have been $1.16 had we not decided to continue with these operations -- or discontinue these operations.

Moving to the year end results, the discontinued operations figure of 19,915,000 is also comprised of these same two components, an earnings loss for the year of 10,802,000 or 20 cents per share, and the same $9,113,000 write-down of the assets of the discontinued operations as previously mentioned. Therefore, adjusting for the 20 cents earning loss, the earnings per share from continuing operations would have been $3.26 had we not decided to discontinue these operations.

Moving on to the segments. Contract drilling, Precision's Canadian rig fleet achieved 11,631 rig offering days for a 56 percent utilization rate in the fourth-quarter, this compares favorably to the prior year which was 7984 operating days or 39 percent, an increase of 45 percent. For the year, the sparked (ph) rig release days were 42,725, up 36 percent over 2002 which was 31,363. Rig utilization rates for 2003 was 52 percent compared to the industry of 53 percent and last year our number was 38 percent and the industry was 39 percent.

Revenue per operating day for the fourth quarter of '03, 16,300 compared to 14,100 a year ago, an increase of 15.6 percent. Sequential rate increase was $2945 or 22 percent. Operating cost for the quarter -- '03 fourth-quarter, 9100 per day compared to Q4 '02, 8574, up 6 percent year-over-year. The quarter began with strongest demand from the larger companies working the rigs giving less opportunity for the spot market.

This situation changed somewhat during November as some of our customers were unable to bring their 2004 budgets forward. Fortunately the wave of new juniors and startups fueled a very hot spot market and we were able to fill the gaps. Well licensings continued to break new ground in Canada, and for 2003 we established a new record of 27,454 new permits being issued, this compares to 21,967 back in 2000. In 2003, there were 21,805 wells drilled beating the previous record of 18,184 wells released in 2001.

Moving to well servicing, rig fleet achieved 113,000 rig operating hours, up 51 percent compared to 94,988 hours in Q4 of '02 or a 43 percent utilization rate. Revenue per hour for Q4 '03 $484, Q4 '02 $437 up 11 percent. Operating costs per hour 357 for Q4 '03, compared to Q4 '02 of 371, a decrease of 3.8 percent. The increase in the average rate for the prior year is mainly due to rate increases, sales mix and rig demand and boiler usage.

Moving to international drilling, there were 17 rigs owned and operating during Q4 '03, up two rigs from Q3 '02 -- or '03, sorry, which were added to the Mexican fleet. Total operating days increased 446 days over Q4 '02. There were -- 122 additional days were achieved in '03 Q4 due to the full utilization versus only 2 to 3 rigs in Q4 '02 due to the National Oil Workers strike in Venezuela, 235 additional days in Mexico attributed to the additional rigs moved in to the Burgos project. The further additional days were related to new rigs in the Middle East in November of '03 totaling 52 days. And we're now and process of moving the rigs into the Asia-Pacific region -- a further rig.

To give you a perspective of the strengthening effect of the strengthening Canadian dollar to the U.S. dollar on our international revenue, stated in Canadian dollars for Q4, increased 10,406,000 or 38.9 percent over the same quarter last year. However, revenues in U.S. dollar terms for Q4 '03 were 28,182,000 U.S. dollars compared to 17,031,000 U.S. dollars in Q4 '02 which calculated to an increase of 65 percent.

Just summarizing contract drilling, the Canadian drilling operations, $186.2 million in revenue, well servicing $55.2 million revenue, international drilling 37.1 million, and other services net 12.3 million, and that should total to 290.9 million.

Moving to Technology Services. Although the Corporation did not show sequential improvements over Q3 of '03, it is important to recognize the reason for these results. In an effort to ensure 2004 can be a year with very little adjustments to the quarterly results, the Corporation took additional steps to get the balance sheet reviews completed and all adjustments booked in the 2003 year end. This resulted in approximately 3.9 million adjustments to the fourth quarter which, if added back, would have delivered operating earnings of approximately 3.2 million for the quarter. This would have been a 2.5 million increase over the 7. -- 0.7 million operating earnings generated in Q3 '03.

Management is of the view that there will be a strong sequential gain in Q1 '04 driven by strong activity levels in Canada as this is traditionally our strongest quarter. On an annual basis EBITDA for 2003 was 80.4 million, an increase of 272 percent over the 21.6 million generated in 2002. TS is analyzed from both a regional and product line perspective. Revenue for the regional -- on a regional basis, Canada was 84.5 million, U.S. 40 million, Mexico and Latin America 39 million, Middle East and Asia 27.2, and take off for R&D global of 1.3 gives you $189.4 million.

Revenue by product line, Wireline was 83.7 million, directional drilling 57.4, testing and CPD 29.9, and bits 10 million and project management 14.4 million. Revenue for the quarter increased by 30 million or 55 percent compared to the same period in 2002. The sequential increase in revenue was 9.3 or 12.3. Some Canadian datapoints, for cape (ph) hole, open hole and slip line in Canada, jobs were 6268 compared to 4535 or a 38 percent increase. Drilling services had a strong quarter with average jobs running per day increasing 68 percent. Testing improved 14 percent quarter over quarter.

Yield from U.S. datapoints, revenue for the fourth quarter '03 was up 10 percent from Q4 '02 due to increased activity in the U.S., but to a large degree offset by the impact of the strengthening Canadian dollar against the U.S. dollar. Adjusted for constant exchange rates the revenue would have increased 30 percent. Some U.S. datapoints for cape hole/open hole, jobs were, for Q4 '03, 3410, Q4 '02 2489, for an increase of 37 percent.

Moving to the international region, Q4 '04, 64 million compares favorably to 56.5 million in Q4 '03. International operations on a year-over-year basis have increased 17 percent, sequentially quarter-over-quarter -- it remains -- revenue remained flat.

Moving to rental and production, it improved 11 percent to 48.4 million in revenue for the fourth quarter of '03 compared to Q4 '02. The quarter was -- had strong operations relating to rental and -- rental operations which increased 51 percent compared to last year. Rental fleet utilization for Q4 '03, 225,000 days compared to 150,000 -- 157,000. The fourth quarter is generally the slow period for (indiscernible) operations. The revenue for the quarter was up 4 percent over last year to 38.2 percent. Plant maintenance days this year 66 days compared to 64.

Our balance sheet remains solid with working capital at 248 million, an increase of 38 million from last year. Our long-term debt has decreased significantly to 115 million in the year to -- due to parts of sale of VI. CAPEX for the quarter and the year, contract drilling for the year 99 million, the quarter was 36; technology services 176.9, quarter 27.9; rental and production 15.2, 6.2 for the quarter; and corporate and other 23.8 million year to date and 7.8 in the quarter.

The year-over-year inventory decreased substantially due to the sale of VI. Just to give some tax guidance for 2004, we think a rate that we're going to be using throughout the year will be between 31 and 32 percent. And that concludes my portion.

Thank you, Dale. John King, could you please lead us through technical services?

Good afternoon, everyone. I'm going to split the Technical Services discussion into three sections. I'm going to talk a little bit of Q4 '03 over Q4 '02 and just sort of speak to the changes that we made in that period, talk a little bit about the ongoing changes and improvements we've made in '03, and then just finish off with some technology highlights in terms of our commercialization process.

Obviously, as Dale pointed out, there's been some massive improvements in a number of financial parameters between Q4 '03 and Q4 '02. Revenue is up sort of in the $50 million range, EBITDA has improved a positive 20 million from a negative number, and operating earnings, after taking into account the write down of $3.9 million, was actually positive in Q4, has increased by almost $25 million.

It's important to take into account that while these improvements have been there, we've also had some cost increases with our research and engineering, it has gone from $9.5 million for the quarter to $11.5 million, about a $2 million increase, and depreciation and amortization has gone up substantially.

It's very important that the message that I want to send is that a lot of this has to do with overall improvement across the whole company. Obviously North America has been strong and Canada has been strong, but if you look quarter over quarter between the '03 Q4 and the '02 Q4; in '02, four out of the seven regions were actually provided negative operating earnings and the fifth one was just marginally breakeven.

In Q4 of '03 only two out of the seven regions were actually under water, and the two that were below water that posted a negative operating earnings, were our smallest regions. So we've seen improvement across all the regions. The biggest improvement has been in the U.S. where we had essentially seen a 180 degree reversal which has gone from a big loss in Q4 of '02 to a material contributor in Q4 of '03.

With that all in mind, some of the questions that will probably come to mind is whether pricing itself or just general activity in North America has been driving the majority of the improvements here. I think it's worth pointing out that pricing as a whole in North America, we have not seen substantial increases in the U.S. or Canada. They're not back to 2001 levels, especially in the U.S., in some regions we're still struggling at 2002 levels. In Canada in a few areas, and especially here in Q1, we're seeing a little bit of improvement, but this whole improvement is not based on just the Canadian improvement or pricing improvement for that matter.

Secondly, just speaking now about the continuing improvement in 2003, the regions continue to do get stronger in 2003, we discontinued our losing operations in each one of the regions, shut down some product lines, rationalizing cost structures and actually strengthened some of our core businesses that we targeted for future growth. The technology started to make a small impact in Q4 which I'll talk about here in the technology highlights. Cost cutting initiatives continued all through 2003 from Q2 on through to Q4. We reduced G&A across the whole company somewhere between $9 and $10 million on an annualized basis. And I think in Q2 I'd said we'd probably get $10 to $12 million in run rate G&A reduction.

We rationalized our global focus, and what I mean by that is we actually decided what regions were important, where we were going to focus, and basically stepped back from being an inch deep and 1000 miles wide. On top of that rationalization of our regional focus, we also, as outlined in the press release, started to look at divesting of some noncore businesses, i.e. our pumping and completion businesses. And as we speak today, we're sort of eminent to closing one of those deals.

We've improved controls over 2003, we believe our capital spending is under much better control. In Q4 of '03 capital spending was 68 -- or was $29 million versus $68 million in Q4 of '02, that's a $40 million reduction. That sort of signifies we're reaching an end to the initial spin program that we had in place. We now obviously have a corresponding high depreciation and amortization, it's up to us to get the corresponding utilization to absorb those costs.

Inventory management processes have continued to improve. We believe we've gotten a much better control of that. Asset utilization has been paramount focus in all regions including North America and getting better asset utilization. And we've implemented some soft sort of controls as bidding analysis where we're now actually trying to hold some -- trying to get some better return on capital employed analysis which is integral in part of our bidding analysis all over the world.

We've continued to look at our strategic focus. Most importantly we've agreed upon our eminent core capabilities of our commercializing technology. It's important to realize what we can actually make money from today versus next year or the year after. We've taken that and related it to -- identify the fit for purpose markets around the world where our technology has the best application. We've also looked at the timing of entry into each one of these markets.

Many of these markets are based on a contract style where contracts don't come up for renewal for two years, one year, three years depending on where you're talking about. So it's not a call out market which is something that we look out in North America. So we have to be careful not just put all our eggs in a basket where new contracts won't come up for renewal for two or three years. And we've also focused our existing resources on targeting those markets. So we're not adding marketing and business development around the world to focus on a number of different markets, we're focusing on the core markets where we think we have eminent success.

We've continued developing our execution plan which is something I talked about in Q2 and Q3. The execution plan really talks to the personnel development, recruiting, training, making sure we have the appropriate people in place to actually execute and help facilitate the utilization of these assets. Unfortunately these are the type of assets that don't make money while we sleep.

Repair and maintenance systems as well as standing operating procedures, these are all standard things that most people take for granted, but it's an inch by inch process and unless we have those in place we don't have the foundation to grow upon. We've continued to look at a product support model where we've taken our product support initiatives for operations outside of our R&D, and so now they're in operation so we actually have a business. And I'd really characterize that as moving from what I call a science project to a real business. That's what we've been doing in 2003.

Finally some technology highlights. Q4 basically saw a step change in our technology commercialization. I'd characterize Q3 as a period when we were excited yet tentative. We still had some fairly serious teething pains in Q3 which carried us actually right through into October and the early part of November of Q4. At that time -- in those periods we were seeing some challenges, no real fundamental science issues but sort of nickeling operational challenges. I characterized it as sort of a $100 problem with a $1 million piece of equipment.

R&D and ops remain focused, we were able to keep our eye on the ball, make sure that we knew where the biggest impact was going to be, and were able to make those changes. And we've seen a massive step change in Q4 that started in the middle of November. It was basically a binary change. Our MTB ap (ph), which is our meantime between failures with our tools, almost quadrupled from the end of November through December. We're seeing the same sort of run rate in January. And now the move which was excited and tentative in Q3 has actually changed now with our people to confidence and a high-level of pride in our equipment. We view it as almost bullet proof when we go out on a relative basis to where we were before.

With that in mind, we've demonstrated some world-class performance in several situations with our LWD tools. Many of you may have seen the press release that came out on January 29th where we were talking about our hell tools operating environments of 350 to 375 degree Fahrenheit in the U.S., and providing high superior Wireline quality logs. That press release was with an independent that was there, and since then we've seen a number of calls and we've been out on a number of jobs and similar situations. That's just proving that our technology which was built for these markets is actually working. It's actually providing the advantage to the customer that we hoped it was and we're seeing slow but gradual acceptance by the customer base.

We've also seen, as we've talked about, the advantages of some of our tools. We're demonstrating logging speeds in wells -- well in excess of industry standards with our LWD directional drilling tools. In Indonesia we've actually seen logging speeds performed with Wireline quality logs of at least 2.5 times faster than the competition. Time is money. When the customer is looking at this and they can log faster and they're on a very expensive day rate with their drilling equipment, that's what brings us back as the choice of service provider.

Recently in the Middle East we completed a trial with our LWD tools in the last month with a very sophisticated E&P operator there. We are required to go through this trial period. Our tools performed flawlessly, and now we're expecting that to lead into business for our LW tools within an existing contract we already had in the region. We were already under contract to provide what we might call the commoditized MWD and just directional services. The LWD tools are now qualified and we will be starting to provide those in the Middle East. And we think that's going to be the beginning of a bigger growth in the Middle East.

Really when you look at our LWD situation, what we've done is we began in the beginning to design and build tools to collect information and collect high-quality information. We then moved on to the next stage which was basically collecting the information in a reliable and efficient manner which is something we've gone through and Q3, Q4 of '03, and now we're starting to generate advanced interpretation products from that information. And we're able to grow that business based on our existing Wireline infrastructure where we have computing and interpretation centers in Houston and Calgary which is a strong foundation for our formation evaluation service offering. And that's really where the value is with the customer.

Finally, just touching on or rotary steerable tool, our rotary steerable tool has demonstrated success in Q4. We've completed several runs over 125 hours in the hole. We're still facing some challenges but they're not fundamental issues. I would characterize them as a situation not unlike where we were with the LWD tools at the end of Q3. I'm confident we'll break through that technology barrier and that we'll actually start seeing some high levels of reliability and start seeing the big pull through that we expect from our rotary steerable technology in the next couple quarters.

We've already demonstrated with our rotary steerable tool some first offs for rotary steerable technology. We've demonstrated some high build angles, we've been able to actually kickoff from the vertical where in a situation where our rotary steerable tool, instead of the customer having to trip out of the hole, we've been able to actually start building angle from a vertical hole which is something that saves money and allows the customers to be more efficient. We think those are first, our customers tell us they're first, and we're excited about what the rotary steerable tool is doing for us. And it will provide some good strong financial performance and pull through because it's a differentiator that makes us a world-class company. Thank you very much.

Thank you very much, John. And your enthusiasm was duly noted. And you've learned to talk as fast as I have sometimes. As we pull forward on the drilling and the well servicing side and the rental side for 2003, we obviously had a great fourth-quarter, as Dale had alluded to. Safety wise, we're very proud that we've made some very strong strides in safety as well as moving forward. We've got our recordables down right across the board. We've had a few vehicle accidents but we're getting better and better and we're really focusing on it.

The management of this company was very adamant that we participated in a safety stand down. We took -- had 116 man days, we contracted 1790 people, 221 site visits and 23 locations were visited in January by the management of this corporation, and we're very pleased with what we're seeing out there. There's a lot of enthusiasm. Obviously, this January was a very busy January. We had some cold weather as well as rather unique to come back from the Caribbean and start your car at -28 degrees centigrade, but that happens.

As we go forward for this year when we look at January 2004 over 2003, we have another step change. It's been a phenomenal month for us. We have our flash (ph) report in; we're very pleased with what we're seeing. And I'm very comfortable as we go forward to 2004. The dynamics of this year are building as we saw last year build in 2003. We are also very close to announcing three rigs for a Canadian company that we're going to build that are rather unique. We're just in the final throes of getting that done. There's some other announcements that will come shortly.

Our rig that's on its way to India is on its way to India and should be on payroll within the second quarter if not near the end of the first quarter of 2004. So we're very fortunate as we go forward and we're very pleased with our operation throughout the world at this point in time. Everything is coming together. It's a great team effort to change what we had in 2003 at the start of the year, with the changes we made in TSG and with the drilling group going forward. It's just a positive, great place to come to work, and we'd love to answer any questions. Thank you.

(OPERATOR INSTRUCTIONS) Justin Kentor from Simmons & Company.

Canada is obviously shaping up to be extremely strong, even in January -- now in January. What are your margin improvement expectations in Q1 versus Q4?

Well, I can tell you we go back to our busiest year ever which would be 2001 first quarter. We're certainly ahead of that in January, and it looks like February and March has carried through in Canada as is not the rest of the world in some areas, but obviously we're very comfortable there will be better earnings per share in the first quarter -- it looks that way at this point in time -- than we've ever had before.

How sustainable is that margin improvement going into fiscal year '04 as we approach spring break?

Well, last year we got brutalized because we had a large snowstorm, if one remembers. This year we are certainly seeing demand. We're not getting the wells drilled we would like. There is a lot of people that I have -- I have a lot of friends up there that remember who I am now, and they're ponying (ph) up for little favors, and it's really challenging. And the biggest problem that we faced is that we have more equipment than we have people. If we had more people, we could actually do some more work.

We have 90 rigs and we work with two crews because it's much safer, they're well-trained, they're professionals, and after they've work for two or three weeks you shut the rig down and sent them home for a week, and that's loss of revenue and it's also loss of ability to drill the wells, but the demand is growing, and shallow is just -- coalbed methane and shallow gas is just building.

I think that we're very close to a -- almost solid motion as we go forward to 2004 and maybe 2005 and 2006. If the basin is a declining basin and the United States is declining, which we're quite cognizant of, and Canada is declining, we're going to have to do it with a drill bit. So we're getting somewhere close to steady-state as far as revenue. I can honestly say that our numbers are higher as far as drilling than they've ever been as well. So we're very pleased with that, but we also have to give product to our customers. So we have to be very careful as we go forward not to disrupt the machine, but it looks extremely positive for 2004 at this point in time.

Okay. And one last question with regard to your technology service group. You mentioned on the last conference call 15 to 16 percent margins can be expected during '04. Are those still your expectations?

Yes. Our budgeted forecasted numbers for the TS group is 16 percent EBITDA. And I think we've got a shot at 17.

I could tell you that obviously January we certainly exceeded that. And with the more success we have with the rotary steerable and the LWD, that just adds to it.

Thank you, guys.

John Tasdemir from Raymond James.

Good afternoon, guys. You guys mentioned that you expect a pretty significant contribution from -- or an increase from TSG going into the first quarter. I guess, John, you kind of mentioned that you had some major steps in the fourth quarter with regards to that company, in particular the directional drilling business. Tell me, where's the -- when you say the significant increase in operating income going into the first quarter, where is that coming from? Is it Wireline, is it directional drilling?

Actually, John, it's coming from -- in the first-quarter right now the significant increase that we're seeing is coming from all product lines. To be fair, it's obviously a north American centric type of growth that's riding it right now. Canada, we're in our Q1 which is historically obviously the big quarter, we're seeing a massive quarter, as Hank has outlined with what's going on with contract drilling. But we're also seeing continual improvement with our core businesses in the U.S. That's not just based on activity, that's actually sort of like a reversal where we actually had businesses that were sick and losing money that are actually healthy and making money.

So as you go through this and you look at how we come out of Q1 and Q2, the plan is to have the international business divisions or regions being healthy enough and strong enough to offset the decline that you see from the big Q1 that we get in Canada. And when I say the international regions I'm actually also talking about the U.S. at the point because it obviously doesn't have the breakout Q2 that Canada has.

So as we continue to strengthen those regions, as we continue to introduce new technology, as we continue to pull through more higher margin type of technology services with our rotary steerable and our LWD, the plan is to be able to offset any decline from Canada with those on an international basis.

And John, can you kind of quickly review your tool rollout program this year?

What I won't do, John, is I'm not going to talk to the number of tools. But basically, if you just looked at a core LWD string, a triple combo, right now we have full complement of tools in the small hole size. So that's 4 3/4 inch tool and the 6 3/4 inch tools, and in the 8 inch tools we're almost there across all three, that's gamma ray, nuclear density, and resitivity tools.

So with that, we should be, by the end of Q2, in place to be able to do virtually all hole sizes on the way down to a 6 inch hole. At that point into Q2 we will not be limited by availability of tools or tool sizes. On rotary steerable by the end of Q2 we should have our small tools, a 4 3/4 which we have right now, 6 3/4 is coming out as we speak, and by the end of Q3 we should have our 8 1/2 inch tool available.

Fair enough. And I guess one final question. In the business, would you say that the competition in the directional drilling business is getting more difficult or is it -- is it a function of just market demand or are your competitors really pushing their tools as well?

Good question. It depends where you look. There are certain places, it's very competitive. Pricing on a -- all over the world is very competitive right now. There's a whole bunch of idle capacity that has been sitting still I guess since 2002 through 2003 with our competitors and they're hungry to get these tools to work. So lots of places you're seeing a highly competitive environment. But in some cases we're actually seeing where our technology is giving us a little bit of an added advantaged and we're able to sort of rise above the commoditized nature.

And that's not in all the places, I don't want to mislead you to the extent that our technology is a massive differentiator and we're not in the ditches with the rest of these guys. But the reality is that it is competitive, it will continue to be competitive until activity on a global basis picks up. But we do see in certain niche markets that we do have a little bit of an advantage which we're capitalizing on.

Thanks guys, I appreciate it.

Jamie Stone from UBS.

Good afternoon, guys. First of all, can you just touch base a little bit on what your CAPEX outlook is for 2004, and perhaps give us a little bit of breakdown as to how much of that is going to be on the drilling side versus the TS side? And then secondly, if you could also just follow that up with a discussion perhaps on your outlook in terms of use of free cash flow in 2004? And thirdly, maybe talk about whether or not you're interested in increasing your non Canadian business over the next year or so through acquisitions of assets or anything of the like?

As we look through -- Dale is going to get the sheet, I don't have it handy, but I can bring most of it back from memory. Maintenance CAPEX on the drilling side I think this year is about -- we have the three rigs that we've going to build in Canada so that's about 35 million, CAPEX for the whole drilling and production side is about 60 million, we plan on 300 million budget total and out of that 105 is for TSG new builds and about 45 is for maintenance. So that puts us in that range of 340 is our total budget with some minor changes as we add to it. Obviously there's some other things that are happening this year.

But if we look at it -- just the drilling side expansion capital is 41 million -- excuse me, 65 for maintenance and rentals is about 12 million, maintenance expense is 13, technology is 112 and 38. That's basically where we're at, Jamie. And we have certainly excess cash flow. Obviously with what we budgeted in the fall of 2003 and what we're seeing with the step change in 2004, we will certainly feel very comfortable with the budgets we've put together. And obviously as each month -- if February is as accreting as January was over budget, then we'll certainly have excess cash to play with.

Any comment as to what you might do? Dale, are you more interested right now in paying down debt? Do you have some pieces coming due this year that you certainly want to take out?

Jamie, paying down debt is limited, our main debt now is down to our two bond issues. And then we have a little bit of EDC, U.S. dollar debt. We like our U.S. dollar debt to sort of balance as our automatic hedge against foreign currency devaluations or fluctuations. So paying down debt is probably not in the cards. I think we'll end up generating surplus cash of between 80 and 100 million and then we'll probably invest it in the short term unless we can find an acquisition.

And John, turning to TS for a second, as you look out beyond the first quarter -- and Hank noted that margins at least in January were well above your target. Can you give us a sense as to how much seasonality you might expect in the margins as we go into the second quarter, or does the fact that you have a better ramp up of your non Canadian business into the second quarter with rotary kind of hitting its stride and LWD continuing to make progress that you don't have as pronounced a fall off in the second quarter as you have in years past?

I'll attempt to answer that. It's a hard answer to come up with given the fact that right now obviously if Q2 continues strong for our Canadian business, which it can't do like it did in 2001, then it can also be a contributor to the overall picture. But I think that as we continue to see strengthening business for our core product lines in the U.S., that can also be a bit of an offset to Canada. The U.S. starts a little slow in December, January, and early February and then starts picking up. And all signs seem to point to the fact that our core businesses there should continue to pick up through Q2 so we see that as an offset.

There's some contract cycles that are kicking in here at the end of Q1 which would be startup in Q2 with some international locations which I think would offset. And we also have some guaranteed sort of pick up in volumes, some contracts that we won in Q4 that don't really start up until somewhere in March and April of this year. So what I'm planning on and what I'm expecting to see is not as hard a fall in Q2 as we've seen in previous years, and that will come with -- depending on exactly how Canada fares through Q2. But it should be, as we managed and planned, start being offset by more strength on the international side of TS than we've seen in the past offsetting the weakness in Canada. That's the plan.

And if I could just ask one more question. Hank, on the drilling side, can you give us a view as to what you're going to do with spring pricing at this point? Back in '01 the demand was so strong -- I guess it was '01 or '02 demand was so strong that you didn't actually reduce prices going into the spring.

I think we actually raised it.

Yes, you did I think.

I don't know if we'll ever do that again because there were so many comments and I probably lost a few friends. But if we could keep it solid through the springtime, we evaluate it and we work with the rest of the -- we're only as good as our competition, Jamie, but it looks like it's going to be very strong for the shallow side. So we're extremely pleased going forward and we have a lot of work to do in certain areas through breakup so we could be as high as 100 rigs if the weather allows us to do that. So we're looking forward to that.

Right. The fact that the shallow market is improving -- does it give you less seasonality in the second quarter?

Yes, we move a lot of rigs from the North down to the south. But again, if we have a snow storm like we had last year, obviously that put us back dramatically and we had some major customers that were put back substantially as well. And you never catch up. Going forward -- and with coalbed methane now, it's a new mix that we've never had before and, of course, a lot of are shallow rigs could be utilized in some of those areas as well. It just is going to be a tremendous year as we go forward.

Thank you very much.

Miles Lich from Peters & Co.

A couple questions. Just looking at your TSG stuff, John, I'm wondering, do you need the Gulf Coast activity to lift to really get those products out and creating value or is the land activity good enough to make that happen?

That's a good question. Actually it would help, Miles. But I think the reality is when you're starting at zero then you actually don't need the performance in the Gulf Coast or the rig count in the Gulf Coast to pick up appreciatively. We've gone from running zero jobs offshore in the Gulf to right now averaging somewhere between two and four rigs. I think when I looked at the beginning of the week we were running three, and that's three more than we were doing two to three months ago.

So we're not looking for a massive piece of the market in the Gulf Coast. If we can get up to somewhere in that five to seven rig area that's a very strong part of our business and it would give us good utilization with some kicks on the LWD side. There is a fairly good LWD market or technology market onshore in the U.S. in different areas. Obviously you'd have to be selective. It doesn't exist in some of the more commoditized parts of the country. But to answer your question, there is a sufficient market onshore in the U.S. to give us good utilization, you just have to be selective.

So your rates on the land side -- say on the rotary steerable tool, are they substantial, less than offshore -- or can you -- are you still making 30 percent plus margins on land?

No, actually rotary steerable, there's not a hell of a big difference between what's going onshore and offshore, especially with our small tool, the 4 3/4. But when you're just looking at LWD and MWD, there definitely is a difference between offshore and onshore.

So the market still looks fairly good. So I guess on numbers of packages, maybe not so many tools, are you at a stage now knowing that the U.S. market is fairly fragmented that you can put -- do four consecutive jobs or can you do 10, or what is your -- where are you at right now I guess?

We've got the ability to do that, Miles. When I looked at the operations report the day before yesterday, on a global basis LWD, we had about 26 jobs running.

So that's your current capability is kind of 26?

We could actually do a little bit more than that. As I said before, where we really start to get good utilization -- where we actually start getting some critical mass and volume in any one area. So instead of having two or three tools on standby for one job, you have say four or five sets of tools doing two or three jobs.

Now are you at that stage now where you can -- like typically on an LWD or directional work you've got two tools on a job anyways. Are you at that stage yet or are you still running the third and forth just so you've got backup?

No, in the U.S. we're down to just one or two backups.

So you're running kind of with the two tools?

Yes, we're running on a fairly standard basis. When it gets really remote with Java Sea or somewhere in Indonesia then obviously you want a little more backup.

Alright. I guess Hank, on the growth side of the business, looking at the Canadian market, we all know it's been doing great. I guess when you look at growing precision from where you are today, international seems to be the place to go. Do you see acquisitions versus new builds? I know it's a pretty fragmented market as well, what are you thinking there?

Obviously we would look at acquisitions if they're accretive and we do. Unfortunately most of the other gentlemen that are in the drilling business have much higher currency than us. They seem to find it much easier to do acquisitions than we do. As far as growth, we're certainly bidding some more projects in Mexico. Mexico has been a great avenue and a great area for us to enter and we're very pleased and we're going to add to that hopefully this year in some of the projects we've bid on. We've designed two very unique small rigs on wheels that can really compete with coil, and we're just testing those out at this point in time. And if those rigs come forward we probably could build some of those going forward to challenge coil in a sense that coil is a $2000 a day throw away when you use coil, and these ones only have drill pipe, so it's about $300 a day. It's a $1700 a day savings and if they will outperform or work with coil and they're safer to use then we have something that we'd be very pleased with and that's -- we're trying something --.

That's more of the domestic market stuff I guess though. Could you --.

Yes, it actually (indiscernible) in areas around the world as well. That's the unique part about it because there are some projects that are coming up that need something that's 600 to 1200 meters and probably you'll see that in the next year or year and a half coming forward. So one major project. We are dealing with a couple of other -- we're always looking at acquisitions, we just haven't made any in the past. John and his group are focused very seriously in TSG and it's starting to come forward around the world and that's where most of our cash has gone the last while. But as John's group starts to turn a bottom line, and that's their focus right now, is to be able to live up to their own cash hopefully by 2005, 2006 for sure. Then all of a sudden this thing will have a tremendous amount of cash that we can look at and do and we'll take it as it comes.

Can you see potentially doubling the fleet in Mexico? Could you add -- I don't know -- another five or ten rigs in there? Where do you that market in the next year?

If (indiscernible) wanted 10 more rigs we would snap our fingers and do it.

Dale, one question for you on the FX and foreign exchange piece. Where do you see the impact in '04 being of effects? Do you have a gauge of what you thing the impact will be for your numbers?

Are you talking '04?

Yes, 2004 total FX impact. Just a ballpark.

Do you want it in dollars?

Either/or. Dollars are fine.

We'll say 10.

10 million?

Yes.

And that's on the negative I assume or --?

It moves around from quarter to quarter. And I mean, we work diligently on a quarter by quarter basis --.

I guess just directionally if you're seeing your U.S. activity lift, right? You've got TSG firing on more cylinders down there, you've also got Mexican operations --.

And then we're going to start bringing in more U.S. dollars and more -- carrying more U.S. currency or receivables. And then what we'd do is start increasing our U.S. debt to try to run a balance between it. And so when you say that, what's it going to be? The difficult part is the amount of receivables that start building and then how fast -- can we look at it monthly? And if you noticed this year we did an extremely good job of keeping it in balance. And we will attempt to achieve the same. But you can get stung just every once in a while. We work hard at keeping it in balance.

Okay, no worries. Sorry, one more question on TSG. John, you've identified a couple of areas that you still have left to clean up being fleet and polar. Are you comfortable with the rest of the operations?

Yes, very comfortable. They're core operations, we're got good, strong people there and we have a good plan going forward. So we're going to stick with them. We're going to try to get some synergy between them in a few places, we're actually starting to see that. Our directional and underbalance services are seeing synergy with our EM tool in Oman. It looks like we might be running EM directional services in conjunction with LWD on an underbalance job. We're the only company in the world that could do that. There's good benefit, there's good advantage to that and if that works. And we're very, very confident it will, we can export that to other markets. So those three cornerstones are what we're going to concentrate on.

Great. Thanks, guys.

Andrew Goffe (ph) from OSF Capital.

Can you go over again where you stand in the meantime between failures on the rotary steerable side? And also, have you all given some revenue guidance on the TSG side for '04?

Andrew, first of all I'll just address the MTBF. The MTBF number that I referred to was just for our directional services LWDs, so our logging well drilling tools. In our logging well drilling tools we've seen that MTBF almost quadruple -- I think it was 3.8 times -- between Q3 and Q4. That really starts to point to the fact -- and that's on a high volume base. I'm not talking about sort of a couple hundred hours in the hole, I'm talking about -- as I pointed out to the previous caller there -- 26 jobs at a time around the world. So that's a step change. It's sort of a binary change out of reliability.

On the rotary steerable tool, hey, it's a little premature to talk about MTBF, and the reason being is we've seen some successful runs, as I pointed out. We've had runs in that 130, 140 hour range which are good, strong runs. The problem is we don't have a high volume base at this point, and without a high volume base MTBF doesn't actually mean anything.

So when do you think you'll have a better sense of that?

With the rotary steerable tool?

Yes.

I expect by the end of Q2 we'll be in a situation where we'll be able to start talking about it. We'll have enough volume, we'll have enough trials going on and we'll actually sort of be in commercial applications.

Okay, and --.

Moving to the revenue numbers for next year. Our estimate -- I'll give you them all. For drilling, we think it will be around 1.1 billion; TS will be somewhere just over 800 million; and the rental and production group somewhere around 200 million. So a total of about 2.1 billion, and that's just rough -- a rough estimate of where our budget is right now.

And what would the '03 clean number for TS be ex the things that you're selling? What's the -- in other words, what's the year of your growth in the remaining businesses that you're anticipating?

'03 over '02?

'03 over -- I mean '03 to this $800 million production?

'03 would've been somewhere between 650 and 700 million.

All right. Thank you.

Alan Shay from Iron Bridge.

I would like to get a little better understanding about your long term plans. Can you give us some guidance on how much you can expect to grow within the next five years?

That's a unique question and I'd like to give you a unique forecast, but if I look at TSG and its ability to grow, we expect them in five years time to be somewhere in the 1.2 billion, I guess that would be a comfortable statement. On the drilling side, there are enough rigs around the world. Specialty rigs -- we moved one into the Middle East and we moved one into Asia-Pacific in 2003, and we had those finished and done. We possibly are going to build -- well, we have three rigs for Canada -- we might build a couple more little ones but we have to find a unique area. It would be hard to do a lot of growth around the world because there are enough rigs we just have to modify something or fix it properly.

Five years from now -- I mean, TS will be generating some cash and, of course, Canada if we stay on and it's very profitable we'll probably (indiscernible) the dividend (indiscernible) because we can't spend it properly. And this thing can generate a lot of cash. If you've got TS up to where it is in 2006 and let's assume that they can get to a billion, a billion 1 generating -- they should be able to get 200 (ph) percent, maybe higher, EBITDA. If you get 250 there and you're (indiscernible) there's 750 million within this group and that's a lot of cash. Might even make it past it some day, you never know.

What is your estimate again on EBITDA of the whole company? Would you be able to achieve 33 percent EBITDA if TS --?

In 2006, if you averaged it at that point in time depending where we're at, if it gets to that point it's possible. But we're certainly not forecasting it across the board this year. It's about 26, so it's not that far from 30 -- the whole company. Now, if we get some successes, and our rotary steerable has gone through two changes and we're going through the third modification which we think will really help our MTBF, and if that does facilitate what we expect it can, and we can get 200 hour runs, boy, that thing is going to blow and go as well. So, we're just on the edge of a lot of things that are going to be very fortunate for us.

So I guess your future ties depend on the success of technology services more than increasing your drilling contracting business?

No, I think we can add to some parts of the world, but when you take drilling and rentals and we're at about 1.3 and we're certainly well over 30 percent EBITDA margin in that group, we won't go into it in the final number, but we could possibly add to that to 1.3, 1.4. But if you go back the last two years, we've been extremely (indiscernible) compared to the other -- every other land driller in the world.

So we're comfortable, we're doing it and we're in the right area. If you add that 225 rigs in 2003 you'd like them in Canada. And obviously Canada is going to be very good to us in 2004 because we've already exceeded all of our previous numbers we've ever had for January. Going forward is there a lot of growth in Canada? No, there isn't. We're at steady-state and we'll just have to stay there. As far as finding jobs internationally, we seem to find them and we've found some very good ones in 2003 and hopefully we'll find some in 2004. We're looking at Mexico obviously for some new additions, the extent and the amount -- we have to go through a bid process and we'll do that.

Thank you.

(OPERATOR INSTRUCTIONS) Justin Kentor from Simmons & Co.

Actually this is Scott Gill with Simmons & Co. John, going back to some commentary you made earlier about the Gulf of Mexico, your LWD rotary steerable business there, kind of zero jobs a few months ago to three to four rigs currently working, can you talk to us a little bit about the mix of clients that you're working for? How many of these have been repeat clients? And I know you've had a successful run for a new field in a high temperature application. Talk a little bit about your current client base and how you go from three to four rigs to five to seven, what happens, is it more clients or just more repeat at the current client base?

First of all, I think I said two to four rigs, but that's okay. The client base that we have right now that we're growing upon would be the independents, so the new field type of players on the Gulf Coast. We see a number of those players that are sort of looking at deep shelf area, and our technology is ideally suited for that type of drilling, it's high-temperature, high-pressure, sort of hot (indiscernible) environment applications. Our logging speeds we think we can -- we can be a contributor to success for them there.

We also have seen some success onshore with some of the larger players. The larger players are more inclined to look at us, test us out, run us on the onshore market where any challenges or any failures they have are not going to sort of be in a high day rate basis offshore. And we're now seeing in some of those players are saying as we move through Q1 to Q2, that they're going to look at sort of picking up a rig or two for us in the Gulf.

So we don't need, as I pointed out to Miles Lich earlier on, we don't need a massive increase in the rig fleet in the Gulf. What we need to is just continue to prove the reliability and success of our equipment in these hostile environment applications and we'll pick up a nice little market share in the Gulf, we'll get to the point were we have some critical mass, and we have good utilization with our equipment. And when we do that it seems that for the most part producers look at the Gulf as a testing ground and they say well, if you can do it there then we can take you to other places in the world. And we're establishing that credibility there and I think that in itself will spawn some activity with some of those players other places in the world.

Would you consider your Gulf of Mexico operation at current levels? Is it profitable at these levels or do you need to get kind of to the five to seven rig count to make it profitable?

It's profitable as it is right now. If we are to sort of start picking up, as you say, tripling the number of rigs that we have then obviously we're going to have to put a slightly bigger infrastructure in place. To be fair, Scott, what we're doing is we're just taking sort of an offshoot of our onshore business and operating that on the offshore basis. So we're not putting in a whole massive sort of infrastructure on an offshore base to support 10 or 15 rigs in the Gulf yet because we don't have them.

And last question from a technological standpoint. You talk about your high-pressure high-temperature capabilities and your logging speed capabilities. How much of a leadtime do you think you have over your competition with those technologies?

Scott, I have no idea, I really don't. We'd know that our customers are telling us that what we can do is superior to what's out there. But they'll be on our heels. If they see us doing it, then -- and customers are running in our direction, then you can be sure those machines will look in that direction and start to sort of try to get something comparable.

Thank you.

Matt MacKenzie from Dundee Securities.

Good afternoon, guys. One question for you, John. You mentioned that one region was negative on an operating earnings basis in the fourth quarter. Which region was that and when do you expect to be profitable there, or do you?

Matt, I actually said two regions. So out of seven regions five were profitable and two regions were still struggling. The regions that were struggling are the smallest regions, or the (indiscernible) regions, we still have a little bit of struggle going in Asia-Pacific and part of Latin America which includes Venezuela is a little bit of a struggle right now as I think it is for most people.

Any timing, if you think you can turn this around by the second half of '04 it would be at least profitable on an operating earnings basis?

Yes, we're seeing increased activity in Venezuela, we're excited about what's going on there. I mean, it really can only get better in Venezuela. So we're seeing that and with the reliability of our tools we're actually seeing more -- picking up more rigs. Our Wireline business is picking up, we've tentatively won a fairly large contract in there, we've got some work going on in the lake (indiscernible). So we're positive about what's going on there. I think there's some strong opportunity there.

So Latin America doesn't really -- doesn't concern me too much. Asia-Pacific, on the other hand, that's a challenging environment, it's a very big area, it really only has two pieces for us. We have a big operation in India and a big one in Indonesia. We've one a number of contracts in Q4 which are scheduled to start up here at the end of Q1 that should give us some more volume and start providing more profitability in that area. So looking at Asia-Pacific as a massive contributor in '04, I think that's unlikely until we start getting towards the end of '04 into '05. But in terms of a burden, the plan is to be out of that situation by Q3 and I think that's readily apparent we can do that.

I think you mentioned last quarter actually you had a couple LWD contracts (indiscernible) in Asia-Pacific worth something like 20 to 25 million.

Yes, and those contracts -- we'd be starting up those contracts and as things happen in that area of the world, of the three contracts two started up and one is being delayed. If the one hadn't been delayed it would probably be a different story in there right now.

Sure. That's all, guys, thanks.

Jason Konzuk from First Energy Capital Corp.

Yes, Jason.

Just one quick question, gentlemen. I was wondering if you could give us some G&A guidance for '04.

Sure. We think G&A for the entire year of 2004 will be somewhere around $160 million.

That's great, that's all I had.

And it will be pretty much evenly distributed throughout the year, with a little drop off -- a pickup in first quarter and a little drop in the second quarter.

Great.

Thank you, Jason.

Bill Lutz (ph) with McKleskin Chef (ph) & Assoc.

Hank, I think you mentioned very quickly after the commenting on the amount of cash that you'll be generating in the next few years, and maybe it was tongue in cheek but you said someday we might make a nice trust. I'm just wondering if that's something that you have given active consideration to. And hypothetically, when you talk about that, would it involve maybe splitting up the company into pieces and that would be one way of addressing your issue of a higher multiple that would enable you to do acquisitions.

Well, obviously we've been inundated with many ideas, and as we've seen some of the smallest service companies go into trust and you have the biggest one, what would a multiple could we achieve? Now TSG is only a short period away from being self sufficient with cash, we're very comfortable saying that going forward. There's a possibility that certainly we could take TSG and dividend that out, butterfly it or do something, get our shareholders some value there and then you have the mother of all drilling machines in Canada which is precision into the trust and maybe you could get 10 times EBITDA. Obviously when you look at that that's almost an American multiple. I might have to look at it.

But, we take things as we go through it and we have a board that we discuss things with and we're not jumping into any conclusions at this point in time. But with the declining ability of the Canadian Western and sedimentary basins to deliver gas to the United States, drilling activity will be very solid for the next -- I know how long. I've never been as comfortable as we are with the Shell (ph) gas and talking to our customers, and the need they see and the infield spacing that we're going to drill as we go forward. We could have maybe five years, maybe longer, I have no idea. And if you're ever going to do something like that, it would be a nice place to go with possibly would be a trust.

The board will decide that at some point in time and we listen to our shareholders as well. And as I travel around and go do my one on ones with different customers, there's certainly different thought processes on how to do things. But most of the shareholders we've talked to (indiscernible) on the West Coast of the United States, extremely pleased with the strides we've made in TSG. And when you watch them quarter-over-quarter, year-over-year, you'll be very pleased. That's the one thing that we said we would bring forth. Obviously January is in the bank, February is coming along nicely. As we go forward time will tell which is the best way to get the best shareholder value for the shareholders, absolutely.

Thanks.

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

Thank you very much, ladies and gentlemen, we appreciate all the questions. Obviously looking forward to seeing you after the first quarter in 2004. I think you'll be impressed with what we can accomplish. Thank you very much.

Ladies and gentlemen, this concludes our conference call for today. Thank you for anticipating. Please disconnect your lines.