Precision Drilling Corp (PDS) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Precision Drilling second quarter results 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 difficult hearing the conference please supress star zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded on Thursday, July 29, 2004, at 2 P.M. eastern standard time. I 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'll let Dale Tremblay, our CFO, start with a disertation of the second quarter.

Thank you, Hank. This conference call and webcast contains forward-looking statements based upon current expectations that involve a number of business risks and uncertainty. The factors that could cause results to differ materially include but are not limited to national and regional political and economic conditions, oil and gas prices, weather conditions or other unforeseen conditions which could impact on the use of our services supplied by our corporation. We release add detailed news release including our consolidated statement of earnings and retained earnings, consolidated balance sheet, consolidated statement of cash-flow, our segment information along with our Canadian operating statistics.

I will therefore go through the segment highlights and provide the usual data points for each of these segments. A protracted spring break up, such as we experienced this year in Canada has had a substantial affect on the second quarter numbers and reinforces our commitment to globalization of some of our various businesses to diminish this exposure. Contract drilling, in Canada, operating days, 5,297 for Q2 '04, compared to 5605 last year; a decrease of 5.5%. Revenue per day, Q2 '04, 15,561, compared to 13,707, an increase of 1,854, or 13.5%. Our operating costs, 10,698 compared to 9,853 an increase of 845 or 8.5%. Average days per well was 4.2 days compared to 4.6 a year ago, a decrease of 8.6. Weather during Q2 had the greatest affect on all of our Canadian operations so as we go through the Canadian operate -- operations regardless of whether it is drilling or the T.S. group, keep this fact in mind,

the Canadian drilling improvement year over year relates to the rate increase that was achieved in the Fall of '03 and was maintained for most -- for the most part throughout this quarter. Moving to well servicing, our operating hours Q2 '04, 80,986 compared to 77,018, an increase of 5%. Revenue per hour, $458 per hour for Q2 '04 compared to 409 a year ago, an increase of 12%. Operating costs for Q2 '04, 352, compared to 365, a decrease of 3%. The improvement in service hours over prior year Q2 relate to the north -- northern and western areas as operators were more willing to transport rigs to locations in order to take advantage of favorable commodity prices. All general rig rates held through the break up. The company has been working diligently on the cost structure of this group and we were able to deliver a 3% improvement.

Moving to international drilling, the additional of the global Santa Fe rigs during the quarter was the greatest change. The company has moved to 50 rigs outside of Canada. That moves us to being number three in the world. Operating days comparison for Q2 '04, 1,329 days, compared to 895 days a increase of freight 48%. Three of the eight global Santa Fe rigs in Venezuela were activated during the quarter. Three additional rigs were added to the Bergos project last year and increased the numbers this year. Consolidated revenues from Q2 '04 increased by 13.7 million, or 53% over Q2 '03 in line with the 48% increase in operating days over the same period. Moving to T. F. The T.S. group generated positive EBITDA of 9.5 million, or 5% even with the reduced activity levels in Canada.

T. F. revenues increased 36.9 million, or 26%. However, operating earnings declined by 2.8 million. On the face of it this is somewhat disappointing but the numbers do require a somewhat closer reflection. The entire revenue growth was due to improvements outs of Canada, totaling 37.3 million with increased revenue in the U.S., Asia Pacific , Bergos and the Middle East. Plus the acquisition of Reeds in May. The contribution to earnings outside of Canada amounted to 8.3 million, or 22%. This however was offset by declines in Canada, increased spending in R&D and some write-offs associated with the manufacturing operations. R&D increased 3.6 million including .7 million that was associated with Reed. 1.3 million associated with the ramp up in our R.S.T. development and additional planned spending in Houston, LWD of approximately 1.2 million.

In Canada although revenues were flat year over year profitability declined 4.1 million, due mainly to the lower margin revenues, based other on the business mix. Higher repairs and maintenance and staffing levels incurred in anticipation of increased activity and higher depreciation,. Looking sequentially quarter over quarter for T.S. , comparing Q1 '04, revenues decline 47.6 million, while operating earnings declined 42.8 million. The explanation is similar to that that we have seen in revenues outside of Canada growing 32.3 million and contributing an increase in earnings of 7 million, or 21 percent, while Canadian revenues dropped 80 million, and the combined effect of the charges and reduced Canadian profitability accounted for a corresponding decline in earnings of 49.5 million.

I believe it is important at this point to assure everyone at this time that the Canadian market has returned to expected levels as we have moved into the summer season and I am sure both Hank and John will be able to alleviate any of your concerns relating to the Canadian market. I will move to some Canadian data points. Total jobs for open hole, base hole slickline, 4,313 for Q2 '04, and this compares to 4,709 in Q2 '03, a decrease of 8%. Revenue for the second quarter in 2004 in the U.S. was up for the 48% compared to the same quarter of 2003. U.S. data points are total open whole [inaudible] 3,504, for Q2 '04; compared to 3,082 in Q2'03. This was an increase of 14%.

Latin American revenues improved with wireline showing the biggest improvement followed by drilling operations. Mexico continues to improve on the strength of the Bergos project, although there has a slow down in some of the non-Bergos activity. Europe, Africa and the Middle East have both improved quarter over quarter. Our Asia Pacific region has shown the greatest improvement in revenue, up 67%, year over year, and a return to profitability at the EBITDA level. Rental and productions, revenue in operating earnings were down year over year for this quarter. Precision rentals, their revenue was 5% higher than Q2 '03, due to the ability to maintain strong pricing for the first quarter. Precision rental fleet achieved 165,747 utilization days for a 30% rate, compared to 2003 where there were 173,000 utilization days, or 32% utilization.

CEDA results were below last year as the company has been affected by the slower than anticipated activity in Fort McMurray area with several projects being moved or cancelled. In Canada, the mechanical product line showed the biggest slow down while in the U.S. industrial was off by 22% over last year. During the quarter CEDA received the President's award from Sincrew. This was awarded for safety and training programs as well as innovative use of equipment with the development of the super lamp. Moving to the balance sheet, it remained strong and was further reinforced with equity issue of 4 million shares, or approximately 200 million U.S. which closed July 26, '04. Our working capital continues to improve since the beginning of the year. A quick comment on taxes for the quarter. As outlined previously the company has several tax structures of which some give us a flat tax benefit of approximately $1 million per month.

And during the second quarter where income is low this flat tax benefit reduces our overall tax rate. Although this tax benefit is enjoyed throughout the year it becomes most noticeable during each second quarter. Moving to capital additions during the quarter, contract drilling grew 39 million, the T. S. Group, 47 million, rental and production, 10 million, and our corporate group, 10 million. Cap ex is expected to move to approximately 340 million, from 300 million, with the acquisition of Reeds and the drilling rig operation. That concludes my portion. Thank you.

Thank you very much, Dale. John, could you please talk about TSG?

I am going to speak a little bit about some of the operations on the global basis, touch a little bit on Canada and then I am going to ends with an update on our technology and some of our qualification trials that were conducted in Q2. As Dale pointed out, we have continued, and I have spoken about it before in previous calls to try to balance the T. S. Business model and that is based on the seasonality that comes in Canada. we do have weaker Q2s in Canada and the goal is of course to offset that with a strong enough international business. I think the good news is that our international business continued to grow. As Dale pointed out, versus Q2 '03 and versus the first quarter of this year, we see substantial growth in our international business. And international is defined as everything outside Canada for us.

While having said that, we've also seen in some of the areas we've been challenged with some contract cycles not starting up as fast as we'd expected and expected from contribution had in Q2 and continuing flat in a few places like Venezuela and down a little bit in Mexico. Show really goes to show that our international operations in Asia Pacific, Middle East and other areas are growing and are focused and the time and attention we paid there are paying dividends. And I expect to see that be a strong contribution in the second part of this year. As I said I had expected some of the contracts to pick newspaper Q2.

They were delayed and that's just a fact of life in the international market and we are seeing that happen right now. So I'm expecting strong Q3's and Q4 from the international market. Canada, it's just a fact of life. As Dale pointed out, wet weather, thing were slowed down a little bit. The mix of work that we looked at in Canada changed a little bit. Our directional services, average number of jobs per day was down about 35% in Canada from Q2 '03. Not only that, the number of horizontal wells that were drilled in the industry as had a whole was down 18 to 20%, and that's a higher margin business than pure directional bills so overall Canada was hit hard in Q2.

It's not a fundamental impairment in the T. S. or the precision business as a whole it's coming back. Our average number of jobs in all our product linrs in Canada are up and we're expect ago strong Q3. If we take it a little bit further and we look at some of the other costs that were incurred we did as Dale pointed out, incur some one time costs with our manufacturing initiatives that -- in Q2. Part of that is a ramp up in manufacturing that we've really started to take some of the components we've had in inventory, assembling and putting together to get the tools into the field to satisfy some of these contracts that we're excited about starting up in the second half of this year. That in itself starts to create a few a cracks in the organization as we try to double or triple our manufacturing initiative. On top of that we've implemented SAP in Canada at the end of last year and in the U.S. just recently.

That itself, the SAP implementation has created a little bit more visibility or transparency and that has resulted in some of these one time write-downs. I think it's a positive development because it bodes well for our controls and the way we manage our business on a going forward basis. It's unfortunate it happened in Q2, which is the weakest quarter for the company but I think it's a very positive development. Secondly R&D spending as Dale point the out, is up. I'm comfortable with that. it's planned. It's a large part of it as you pointed out, was in the rotary steerable initiatives that we have underway. That has been planned. It's been talked about. It's a big part of the future of this company, the rotary steerable business is. We've seen great successes with technology which I'll touch on in a minute.

So that was expected. The addition of reads adds a little bit more in terms of R&D costs and we've had just similar little ramp ups in Fort Worth and in Houston with our directional services and wireline R&D. We still aim to be in that 48 to 50 million Canadian dollars by the end of the year in R&D costs, and our ultimate going goal is to be 5% of revenue. That we think is a manageable level to be in. As we deploy this technology and start to generate more volume from it in the second half of the year on a run rate basis we think we're going to be -- we're going to be in that area so we're comfortable with that. I am just going to talk a little bit about some of the successes we've seen in second quarter here with technology. We continue to prequalify in a number of areas with our logging or drilling tools. That on the one hands is being very successful we are excited about it.

Unfortuately in some cases, you know, we've had to do those trials at substantially lower rates than what'd you call a full commercial rate. But that pays off. We're seeing the commercial rates coming in and in July and August and you have to pay a little bit of pain to get into the game. Our rotary steerable has as I pointed out, I think, in the first quarter conference call I expecting to see a step change of reliable and to see that really hit the -- hit the street on a commercial basis and that has happened. We've had several very successful jobs, some high profiles jobs that we've return in the North Sea. We've had some in Asia. We are seeming our 4 3/4 inch and our 6 3/4 inch rotary steerable tools showing runs in excess of 120, 140 hours below the rotary table, which are good strong results and that has resulted in more demands for our tools in different areas and we're excited about that.

The 8.5-inch tool we expect to be pre-trialing sometime at the very end of Q3 and early Q4. Now with the successes that I just pointed out with rotary steerable, we're ramping up our production and we should be in strong situation by the end of this year, Q4, to have enough tools to start making a meaningful impact on our financial results. So all in all, despite the fact we had a weak quarter in Canada in Q2, I'm positive, I'm encouraged with what I see. We've won a number of contracts. The challenges have right now are more operational. Getting up, getting the business moving, getting the appropriate people in place in some of these foreign jurisdictions and getting these contracts kicked off. We won them at good pricing. We haven't had to dig down deep and do anything on an uneconomical basis so, very positive in my mind. And with that I will turning it over to Hank.

Thank you very much, John. Dale has gone through the Canadian scene as far as the weather side of things. Obviously we didn't quite meet our budget but we are not that far behind because we are able get a better day book rate. One thing I want to comment on is our international operations are moving nicely along. The acquisition of Global Santa Fe, we were able to add 1400 extremely well trained people to within our organization and most of these people are indeginous to the Middle East which is a very fortunate thing to have at this time as we continue our growth in the Middle East. We're certainly seeing some demands from ARAMCO, and we're seeing some demands from Kuwait for more iron, plus some countries that are close to both of these countries are inquiring about some opportunities.

We see that Libya has a chance to come back into the fold as a substance, you know, I'm not sure of the number of rigs that will be there but I'm sure we will be there and I'm sure that T.S.G. will be there in some fashion or form. We are with Reeds already and there's a big demands for the rest of our equipment as we go forward. Mexico is solid. The nice thing about Mexico is that we are performing at a level that nobody else in the world is performing and we have the other people trying to keep up with us, but I'm happy to say that FEMX is extremely pleased with our productivity on a monthly basis and we are going into a bid process Bergos again, there's Bergos I as we would call it, there's Bergos II coming up and there's two or three more bids. So there's a tremendous amount of work to be bid in Mexico and I feel comfortable that we will be able to participate in it in some shape or form.

Venezuela has come back stronging with the advent of just having to get back to work basically. We've deployed five of the eight rigs that with the Global Santa Fe for the network. The fifth one is contracted now and I'm very comfortable to say that of the 16 we bought 31 rigs with Global Santa Fe and at the time 16 were not working. We should have work for all those rigs by the ends of this year. So as we go forward we see some tremendous growth on the international side and we're going to decide which country can give us the best return and which country to go into. We obvious have more demand than we have equipment. Fortunately there are some other acquisition that we will look at as we go forward and it's going to be a very opportunistic year for to us decide which countries we are going to be in and how we're going to deploy ourselves on an international basis. So I am going to open it up to questions and answers now, thank you.

[Operator instructions] Your first question comes from Justin Kentor from Simmons and Company.

Good afternoon.

Good afternoon.

Just wanted to spend sometime on Mexico. You mentioned that you're in the bidding process for several Bergos projects right now. Can you discuss what those projects entail as far as potential revenue contribution?

More than we were making.

More than you were making. Can you elaborate a little bit?

They're larger contracts than what we have been on the past so if you annualize Mexico, which we break up somewhat.

We've had three to three to $400 million contracts.

These are, the once we will deal with are probable in the neighborhood with an extension, billion dollars contracts.

Okay. And can you elaborate a little bit on how the margins in that region compare to some of your other operating regions?

Not a chance.

Hank, this is, you just talked about Venezuela and the outlook in that market, who will those rigs be going to work for in Venezuela? And if I could also get John to answer how important is Venezuela with respect to T. S.G.?

We've gone to work for Exxon, Mobil, Rep Sal. We have one rig working for Beta Besa, we have other people from other countries that are coming into play. Obviously we have our heavy oil rigs that we work on a continuous basis, and that hasn't changed any. So we will, we feel very comfortable that we can operate six out of the eight G.S. F. rigs and the two, 3000, there's some interest right now from, I won't mention who it is because the competitors that we have are aware of it, there's a potential for one to 3,000 to go to work, but we have a potential to move both those 3,000's to the Middle East without any question. And our decision now is to negotiate within ourselves where we get the best return for the next five years and we're very fortunate that some of our Middle East contracts are being moved forward for long-term negotiations at this point in time.

And the question on T. S. G.s involvement in Venezuela, how big is that market for T. S. G.?

Scott, the way to look at Venezuela for T. S. G. is about the future. Right now, we're active in there. We provide directional services, wireline and some testing services. It's not a meaningful contributor. I more look at it as something we're trying to stabilize our operation in there, ensure we're in the right place when things continue to ramp up. I'm positive about what I see there. A large piece of T. S. G. business is with Peta Vesa, which in itself is somewhat inconsistent. We don't do a lot of work with the I. L. C.'s. We're working in that direction, but it should be a strong piece of the company I would say, a year from now. We've won a number of contracts recently but it's not, on a run rate basis as we speak right now, it's not a meaningful contributor. Let's put that it way.

Thank you.

Thank you.

Your next question comes from Jamie Stone, from UBS. Please go ahead.

Thanks very much. John, can you just talk to us, I mean it looks to me like basic -- as you said,you basically had -- you lost everything that you had in Canada, everything that you lost in the quarter really came out of Canada as non-U.S. business, showed positive revenue, positive income. Can you give us a sense as to what level of revenue you need to achieve in Canada in order to basically break even there? And secondly, as we look into the second half of the year given the volatility seen in your margins, what sort of level of EBITDA or EBIT margin are you targeting now for the second half of the year? Should our -- should the perform in the second quarter affect previous margin guidance that you guys have given?

I'll answer the last question first, Jamie. What we've seen in the second quarter is not going to change the guidance we've given for the whole year. The second half of the year should be strong. As I said there's a number of contracts internationally that just picked up that will be contributors here in Q3 and Q4. Operating earnings margin, we've always talked about, sorry, EBITDA margin, we've always talked about this year being somewhere in the mid-teens, somewhere in that 15, 16% range and then '05 trying to be in the low 20s. I'm still comfortable saying that. In terms of Canada, one of the things to keep in mind is Canada's activity levels over the last couple years continues to ramp up. In order to be prepared for Q3 and also to make sure that our equipment is in the readiness mode for Q3 we incur some slighting higher R&M costs in Q2 and we retain some more personnel and have equipment readiness costs in Q2 that are a little higher than we've had maybe historically in other years. Q1 was big. As I say, right now, Q3 is very strong. It's everything we expected it to be and Canada is a big part of the T. S. G. group. As I said in the very beginning, the goal is to get some balance in this business model and I think it's very positive that the rest of the world, which includes the U.S., has continued to show growth and profitability and if we continue on the same flight path we have here in Q1 and Q2 by Q4 it'll be a very strong piece of the two technology services groups.

On an anualize -- like if we were to look down the road to the end of the year what do you think your revenue split's going to be Canada versus nonCanada?

Canada versus non-Canada, I would say at the end of the year you are looking at Canada being somewhere around high 30s, maybe 40 percent, and outs Canada being in that 60, 65% range.

Okay. And then secondly, when you look at your margin targets for this year and for next year, do you see much you know, on a, again twelve-month basis, getting rid of the seasonality, do you see much difference between the margins in Canada on the business versus the non-Canadian margin?

What you are saying is do we expect - ?

Do you see much profitability difference between your non-Canadian revenues and your Canadian revenues.

I think the non-Canadian revenues are going to increase in profitability as we go forward. I mean, that's happening. I am confident of in saying that. And Canada should stabalize It should be strong and [inaudible] and we got great utilization. The U.S. we have great utilization. I'd like to say that we're seeing some pricing increase, but we're not. It will come but it's not something that I would as an analyst modeling anything count on a massive increase in pricing right now.

I'm still not clear, if you meant that your margins outside of the U.S. are the same as, I mean outside of Canada, are the same as they are in Canada or just going to improve more than they are in Canada?

I see what you're saying. Canada when we have the volume, we have the operational leverage and the operational efficiencies. So our Canadian margins when we're in a high state of volume are stronger than they are outside of Canada.

Yeah, but I mean, like you know, if you just look over the course of a twelve-month period, you get rid of that high volume, low volume period.

Yeah, Canada's still a little bit higher but the rest of the world is closing in.

Closing in fast.

Very fast.

Very fast and Reeds is a great addition to us as we try to globalize some of their products within the existing TSE structure. And, of course, the rotary steerable is still the holy grail and our success is without question first class and just step by step by step.

And if rotary lives up to your expectations that should effectively be the thing that closes the gap and maybe swings you over the top.

It'll swing it over quite comfortably. You know our 4 3/4has not had any price erosion at all, we only have seven -- actually we got one new tool today so we have eight 6 3/4 tools. The 8 1/2's are on build so we're in great shape as we always said 2005 to have some tremendous revenue. We had runs 120, 130 hours without any problem at all. World class runs that our customers are extremely pleased with and you'll see some of those reports very shortly.

Jamie, maybe I could just add one thing. I have to emphasize the fact the rotary steerable becomes a meaningful contributor when the economies of scale start to work so instead of having a good technical event in one area of the world it's when we're actually running three or four jobs at one time in one region and that is what we expect to see coming in the last half of this year. Right now we have a great job, we are exciting but it's one this week, next week and so on.

My second topic that I wanted to did you say is just looking at the margins on the drilling side, I mean I was just, I guess frankly just kind of blown away with the margins you guys reported on the drilling side this quarter, even relative to a year ago which was pretty good second quarter. I mean can you just talk, is it just pricing?

Just pricing, Jamie. Basically the year before we had to drop our prices in springtime because of the demands and we were so far behind that some days we've had 90 rigs waiting on weather and trucks. Right now we are running approximately 150 rigs today. After the long weekend we will be up to 170. We could be up to 180, 185. Obvious when will we get full utilization like that pricing allows us a lot of flexibility and the customers, we've chatted with them and long-term we're in good great shape. If you go back to 2001 we were able to whole the price in the 30 some years I've been in the business and positive for it inly as you go forward we see more and more demand on the drilling side, and it's quality of crew, safety's become a very big important point with a lot of our customers and we're very comfortable saying we have the best if not the best safety program of anybody in Canada and we'll stands up to that any day.

Are you planning, are you willing to plan or commit to an October, you know, winter price increase in -- up in Canada at this point?

I will talk tow my customers and understand how much they want to pay extra.

My last question is, the Canadian market, the Canadian beat I should say has been growing at about a three to 5% rate over the last four, five years. Do you see the continued growth in the total size of the beat?

I do, Jamie, and I think the demands is there for it. I mean when we go to 22,000 wells this year the only thing that was holding us back was the weather this spring. Once we get to 23, 24 thousand, and coalbed methane is becoming it's own world unto itself and there's some planned rigs just for CBM and when you can drill two wells a day, if you want to classify CBM as a gas well for example, we could get to 25,000 wells and, of course, we are still declining in Canada, we are somewhat flat, the U.S. is declined. Gentlemen, we need gas and I don't think the five to $6 level is going to hold it where it's at. There's is going to have to be another bump until we have some supplier erosion, for you to survive. We are in great shape in Canada and you have to have a friendly driller to get there.

Thank you, that's helpful.

Next question comes from Kurt Hallead from RBC Capital Markets.

Good afternoon.

Good afternoon, Kurt.

I guess you guys are that friendly driller, aren't you.

Just that choir boy trying to make a living.

Hey, Hank, just wondering if you could provide some insight, there's been a lot of chatter about the prospect of taking the drilling business and turning it into some sort of income trust vehicle. Can you give us an update as to what, what may be the thought processes internally there and you know, if you can, if you can't I understand but just trying to get some insight.

You know, we've never commented, everybody wants us to look at it but keep in mind we have T. S. G. on one side, we have Precision Drilling on another side. We just made acquisitions of both and we are going forward with a view to have two very strong companies that are controlled by one corporate sector, as we are today, and at some point in time we may look at it when we become self sufficient on one side or another but at this point in time we don't see anything in the near future that even qualifies that. And as I've told everybody as far as the trust, no comment.

Then, John, a follow up for you, you mentioned on the tool side, marginal rates in June or July, you know, vis-a-vis your pre-qual rates, can you give us some color on the commercial rates?

It's all on a very regional basis, Kurt. What I would see is that we picked our markets carefully. In Q2 as I pointed out with did have to do some prequalification runs to qualify our logs because and they were done at substantially lower rates. I would say the areas that we are focused on which are some select markets in Asia Pacific, India, Indonesia, Middle East, the Gulf market there, the rates are very strong. They are stronger there than what we are seeing and what we're trying to get in places like the Gulf of Mexico.

Okay.

So I don't necessarily want to go into the operational rates we've seen in each one of these areas for competitive reasons but we pick and choose and make sure we are getting the right return on our investment.

Gotcha, okay. Bye guys, that's it for me. Thanks.

Thank you very much.

Next question comes from John Tasdemir from Raymond James. Please go ahead.

Hi. Good afternoon, guys. Just kind of wanted to follow up on Jamie's question with the margins and the revenue contribution from contract drilling business, it seems like, you know, margins are the best, I think, they've ever been in that business even when you had rates pretty similar in 2000 or 2001, I guess it was. Maybe Dale's given us enough numbers to work through that and I haven't done it yet but in the top line side of that business, were there other big contributors outside of just contract drilling or something that would, is there anything else going on there that would result in much higher margins and much higher revenue than I would have thought.

Nope, just straight forward as it is, supply and demand dictates what we can get.

All right. Fair enough.

John, just a quick comment on the, you know, our service rig business, you know, has stayed very strong, you know, with our rates and we had a rate increase last year and [inaudible] and our cost side of that operation continues to improve. And we have told people we, you know, we've been working on it for the last couple of years and it's now starting, you know, to come around with the reductions of some facilities and improvements, you know, at the rig sites.

We've spent a lot of money on the well service and we're very proud of our fleet and it has become the provide of the Canadian industry. I question -- nobody questions that when you look at the quality of our equipment, but when we look at it we haven't had a lot of return to the bottom line either, we've spent a lot of money but we're very close to having everything buttoned up in great shape and we continue on our drilling sites. We do spend money on our equipment and that's why we get the prices we do because we have quality people. We have a great safety program and we do function well on a daily basis.

Okay. And then, kind of moving on to T. S. G., one of the -- one of the contract drillers in yesterday was talking yesterday about the fact that they were seeing a lot more horizontal drilling work. The market seems to be picking up. I don't know, you guys are obviously getting more into the market but is that market also moving up, John?

It is, yeah, absolutely. We're seeing increase in a number of different areas, Rocky Mountain region is strong. Of course the U.S. is regional depending on where you're talking about. I would add though that what you're seeing is better volume, better activity, but as I said before, you're not seeing a corresponding sort of, ramp up in rate in any shape or form. That could come if it continues at this pace but our directional business is growing substantially in the U.S. from last year. It's a profitable meaningful contributor now versus a liability at this time last year.

That's all I had. Thanks, guys.

Thank you very much.

Your next question comes from Andrew Bradford from Raymond James. Please go ahead.

Thanks. Dale, you ran through some numbers pretty quickly there on the one time start up and write-downs for technical services group. Could you repeat some of those?

Um... yep.

There are three things, you had R&M - As well as start ups and then rate downs and the fourth thing was, I guess you kept -- you hung on to a bit of your labor force, probably more than you ordinarily would have and what kind of a cost did that impose on you in the second quarter?

Sorry, I just have to get to the right pages.

You know what, Andrew, let me start off answering while Dale finds the information. The first thing keep in mind is that we did have a very strong Q1 so some of those R&M costs are for readiness of equipment that was basically worked hard in Q1 and I'd expected this to pick up in June and to have a higher day number of jobs running per day in June and it really didn't materialize until the very end of June so we missed the whole quarter all together. So those numbers, although they're odd for this time of year it's purely reasonable to expect that based on where we came from and what we saw something in Q3. And they, they were quite substantial. They had an impact on Canada. Dale probably contentify those right now, he might be able to talk to you about it later. The other thing is on our manufacturing, the write-downs we took there as I pointed out we have implemented SAP in the U.S. And with that it does come with a certain amount of clarity that you get as you initiate a system like that. You aren't able to enter the information data inventory, whether it's third party inventory, at machine shops that we use, or whether it's physical inventory we have. You're not able to enter it until it's clearly justified and with that you start going through it we had one or two pieces of inventory that's been around for a year, maybe two years that weren't there. So we had to take those write-downs and I think the total write-downs in manufacturing were sort of $1 million, maybe just a little over $1 million U.S. in the quarter alone. So we can expand upon some of that and give you some more quantifiable information if you call up Dale later, but think that, that hopefully directionally should give you some feel. The fact that the one timers on the manufacturing, I think, you know is justifiable. It bodes well for the future with the implementation of SAP. You can manage it better. But the R&M costs, that's a just fact of life given how busy we were and given how busy we were going to be.

Yeah I know, I just, John in truth here I am just trying to get at sort of what a clean number might look like for the T. S. G. group, had you not sort of had that lumpiness or hangover, I guess, from first quarter. That's okay. I can circle back with Dale afterwards on that.

Just remember a clean number would be if you're really getting clean if you want to go quarter to quarter you'd have to look that the impairment that Canada took versus Q2 of '03. You'd have to compare that and have to take these one time write-downs, which would be a couple million dollars and all in all you are probably looking at, you know, five to $7 million difference.

It probably would be sometime around the 10% EBITDA number instead of the sevenish.

Yeah.

Okay. That's helpful. Thank you very much. The second question.

And again.

Sorry?

And again we keep maintaining that over the years, you go you know, Canada ask very difficult because of the drop off in the second quarter. And I think it's more important to look at PF's over the years and we are going to maintain that 16, 17% EBITDA target and we're comfortable we can achieve that and get somewhere over 20% next year and I think that's what people have to get comfortable with and what happens in short periods like break up in Canada, I think is just a lot of noise.

You won't see a big disagreement here on that. Just moving away that now, the second question I had just had to with fairly topical in the sector right now, is labor. And as we move into the second half and arguably it's been fairly busy, what kind of constraints is labor putting on the degree to which you can actually utilize all your equipment?

The constraints are not really happening at this point in time. The constraints come in the wintertime and we self impose those. If we can run 190 rigs this year with full crews that's going to be the best position we've been in. Last year we ran 90 rigs with two crews and every three rigs we shut rigs down for people to have the time off. That's our safety program. That's the best way for to us look after our people. It's not the best way to make money. Obviously we can get to 180, 190 rigs this year, we will have less two rig operations during the winter. So we're going to be in the best shape we've ever been for the winter but safety is still going to be paramount as we go forward and making an extra two, $3 million is not going to change our focus on safety.

Okay. And, Hank, beyond labor, or beyond crews is are there any other bottlenecks? We are going to be running, I think most people expect, your self included, that we're going to be running at pretty higher rates into the winter. Are there any other bottlenecks that we should be looking for, like lease construction or anything like that that can slow things down?

Again, a lot of the areas we drill up north it's strictly winter time and we will get back our 700 rigs working, 675, or 650 whatever our max was last year, a little higher than that. I think we closed closer to -- but we'll be full utilization of equipment basically.

And last question, just on global Santa Fe, Hank, you said that you expected by the end of the year you would get all -- substantially all those rigs working. If you did have contracts for all those rigs by the ends of the year what kind of utilization rate would that imply? What is full utilization on that equipment?

Well if we had full utilization that's 100%. For example, I could tell you that when we bought it, there was less than 40 million EBITDA and we think we can move that to over 60. So, we've got a challenge in front of us but we're very fortunate with the people we have and we're getting some great demands and some great interest in the Middle East and many countries which we haven't been in. So our challenge will be where are we going to put the equipment and how we are going to facilitate some of the new demands that we have which are unique and very specialized. Where we can outperform most people when it comes to highly specialized demands.

But just throwing out a number, like an annualyzed number for G.S.F. , it would be somewhere around $200 million Canadian an lived for the year in revenue.

That's full utilization?

Yeah, but you are never going do break it out so it doesn't matter. It's part of the whole group. We were -- it was a very fortunate acquisition for us. We've got some great people and I'm extremely pleased. We bought it on May 21 and I started my Middle East tour on May 22 and I met a large number of employees. That was every shop in every yard.

That's all for me. Thank you very much.

Thank you.

Your next question comes from Jamie Stone from UBS.

I just wanted to follow up on the rental and production side, the margins were obviously disappointing relative to where you guys last year second quarter. Just want to see, is there anything there that we should expect, do you think the profitability level to stay down at these levels?

No, they will come back up, Jamie, we put a new team, they are doing exceptionally well. They are focused together. The utilization of the rigs go down,which we have, all the secondary rentals don't take place.

It didn't sounds like rentals was the problem in the quarter, it sounded like the problem was CEDA.

CEDA is a one time change over on that side of it only in terms of shut down in McMurray which hasn't been scheduled, there's going to be a bigger one next year. So, this happens once every four years when we go through a period of time when the coker doesn't come down and, of course, we developed a piece of equipment which allows for that coker to last longer ourselves, so there's superlast, which we've got awards for, and it's a great tool, it's like a portable coil drilling rig that goes into the coker and takes the coke off the sides and we had some tremendous revenues this year on one we just installed in Exxon's refinery in Montreal, it was a world class operation for them. They've never seen anything like it and they paid for it.

Okay. Does it just happen that oil stands didn't come down this year because the price is so high?

No, just timing. Keep in mine that [inaudible] plant is 25 years old and they're getting well focused at at going forward in their turn around and these things happen over time. Now, one could come down, you never know in when a Coker is going o come down and last year we had a 56 day shut down, this year we are not going to when it's going to happen we know it will happen next year.

That's it.

[Operator Instructions]. Mr. Swartout, there are no further questions at this time. Please continue.

Well, as far as the management of Precision Drilling we would love to thank everybody for listening to us. We are excited about our third quarter and our fourth quarter and what's going to happen in 2005 as we go forward. So we look forward to being able to discuss our third quarter with you in the near future. Thank you very much.

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