Precision Drilling Corp (PDS) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Precision Drilling Corporation's third quarter result conference call. At this time, all participants are in the listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at the time you queue up for questions. If anyone has difficulties hearing the conference, please press star 0 for operator assistance at any time. I would like to remind everyone that this conference call is being recorded on 28 October, 2004 at 2:00 p.m. Eastern Standard Time. I will now turn the conference over to Mr. Hank Swartout, the Chairman, President and Chief Executive Officer. Please go ahead, sir. Thank you.

Thank you very much. Good afternoon, ladies and gentlemen. We'll start with Dale Tremblay with the introduction, please.

This conference call and webcast contains forward-looking statements based upon current expectations that involve a number of business risks and uncertainties. The factors that could cause 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 have released a detailed news release, including consolidated statements of earnings and retained earnings, the 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. I started my Q2 comments with a protracted spring breakup such as we experienced this year in Canada, has a substantial effect on our second quarter numbers and reinforces our commitment to globalization.

For the third quarter, I'm not sure whether to discuss the continued protracted spring breakup or just say that our third quarter weather-wise in western Canada was just plain lousy. As indicated, the WCFB experienced 23% more rainfall this year compared to last year, and this hampered all aspects of our Canadian operations. With Canada comprising only 55% of the revenue, down from the expected 62% of our revenue, we were still able to deliver respectable net earnings for the quarter. The other significant event which occurred during the quarter was the strengthening of the Canadian dollar, which reduces our operating cash flow from international operations.

And finally, the tax rate of almost 37% is high as a result of unforeseeable expenses during the quarter that are not tax effective. The most significant is the foreign exchange loss that occurs on translation of our foreign subsidiaries, with the other one being share-based compensation expense. Moving to contract drilling, Canada, operating days, Q3 '04, 9,479; Q3 '03, 10,848 -- a decrease of 12.6%. Revenue per day, Q3 '04, 15,029 compared to Q3 '03, 13,336, an increase of 12.7%. Our operating costs for Q3 '04, $8,584, Q3 '03, $8,041, an increase of 6.7% Average days per well for Q3 '04, 5.2; and last year, it was 5.1 Our average meter per well, 1,046 compared to 1.022. The activity levels of Q3 were hampered by wet weather. These conditions were the one single issue which caused activity levels to be lower than 2003.

The Canadian drilling improvement year-over-year relates to the rate increase that was achieved in the fall of '03 and maintained for the most part throughout the year. Well servicing, operating hours, Q3 '04, 112,637 compared to 110,447, an increase of 2%. Revenue per hour, Q3 '04, 479; Q3 '03, 432, an increase of 11%. Operating costs for Q3 '04, $344 for Q3 '03, $309, an increase of 11%. The improvement in service hours over prior year Q3 occurred in the western region, as there was a 21% increase, while other areas remained below prior year. The main reason for the increase in this region was the heavy doubles and skid doubles were more active throughout this quarter relating to completion work and deeper re-entry jobs.

The flat markets have increased year-over-year, as operations continue to -- as operators continue to drill more slat wells. These rigs service multiple wells from one [INAUDIBLE] location. Moving to international drilling, the addition of rigs purchased from Global Santa Fe during the second quarter increased marketed rigs to 48. Precision is the third largest provider of rigs in the international market. Operating days comparisons: this includes both our western region and eastern regions. This year, we had 3,295 days compared to 972 last year, an increase of 239%. Three of the eight global [INAUDIBLE] in Venezuela were active at the end of September 2004, and consolidated revenues from Q3 '04 increased by 54.2 million, or 215% over Q3 '03, in line with the 239% increase in operating base.

As a relief, Technology Service -- or TS, as we refer to it -- is now referred to as Precision Energy Services. And it generated $33.6 million EBITDA in Q3 '04 compared to 17.8 million in EBITDA in Q3 '03. Revenues increased 54.7 million or 31%, with operating earnings increasing by 8.9 million. Q3 '04 over Q3 '03 -- a tremendous turnaround, despite the slow Canadian activity levels. The entire revenue growth was due to improvements outside of Canada totaling 60.5 million, with increased revenues in the U.S. They were up 42% quarter over quarter '03 and perhaps '04. Asia Pacific, 136%; Latin America 40%; Europe, Africa, 50%. Plus, the increase related to Reeves, which -- the purchase was completed in May.

In Canada, revenue from operations remained flat year-over-year, where the negative impact of weather was offset by the addition of Reeves. Although activity levels in all product lines declined from Q3, 2003, the declines were offset by increased pricing, especially related to the wire line. I will move to some Canadian data points: Total jobs for open hole case hole [PHONETIC] slick line, 6,047 compared to 8,606 last year, a decrease of 30%, while our revenue was only down 8.5%. U.S. revenue for the third quarter, 2004, was up 42% compared to the quarter of 2003. U.S. open hole case hole, 3,843 jobs compared to 3,628 jobs last year, an increase of 6%.

Latin America's revenues improved once again, while our wire line shows the biggest improvement, up 91% over 2003, followed by drilling services, which increased 37% over 2003. Revenue in Mexico was flat for Q3 '04 compared to Q3 '03, which with improvement in the Verdos [PHONETIC] project and with a slowdown in some of the non Verdos activity. The revenue increased in Q3 '04 versus A3 '03, parallels capacity increase due to the addition of three rigs last year during September through November 2003. Activity dropped in September '04 due to tax budget restrictions, and will remain low through October. Activity levels are expected to rise in November and December, as [INAUDIBLE] gained access to '05 budgeted funds. Rig 721 was redeployed to Canada in September.

Europe/Africa increased 50% in revenue Q3 '04 over Q3 '03, relating to improvements from all product lines, led by drilling services. The middle east was marginally higher in Q3 '04 compared to Q3 '03, with drilling services higher, primarily due to new projects; while both testing CP and wirelines were down for the quarter. Our Asia Pacific region has shown the greatest improvement in revenue, up 136% year-over-year and a return to profitability at the [INAUDIBLE] ratings earnings line. The Reeves wire line business continues to perform above our original expectations. In particular, U.S. operations had an outstanding quarter, returning record results for them historically.

Including the Reeves research and engineering expense for the quarter, this category remains relatively unchanged from last year's Q3, with a run rate of approximately 13 million per quarter. Rental and productions: Revenue and operating earnings both improved marginally year-over-year for the comparable quarters. Revenue improved 8.6%, while operating earnings improved 3.6%. Precision Rental's revenues was a record 10.1 million in the quarter, 6% higher than Q3 '03 and 4% higher than the previous record high in 2001. Much of the improvement has been due to the ability to maintain strong pricing throughout the year.

Precision Rental's fleet achieved 197,985 utilization days, for 36% rate compared to 2003, where there were 200,000 utilization days or 36% utilization rates. Cedar's revenue increased Q3 over -- Q3 '03 by 9% to 43 million. The quarter started out slow, but gained momentum in August and into September, which had -- which now carries on into the fourth quarter, with several unscheduled shutdowns. Catalyst Handling in Canada and the U.S. were slower than the previous year. The industrial group in Canada had a great quarter. Industrial vacuuming led the way, along with chemical cleaning.

The U.S. group maintained their activities in comparison to last year and the mechanical group had a busier quarter than last year, with revenues up 22%. Moving to the balance sheet, it was strengthened during the quarter with the equity issue of 4.4 million shares, and continues to remain strong to allow the company maximum flexibility going forward. Our working capital improved since year end to 475 million at September 30th '04. It's up 175 million from Q2 '04. Capital additions during the quarter: Contract drilling, 35 million, Precision Energy Services, 45 million. Rental and production, 2 million. Corporate, 4 million -- for a total of 86 million. Cap Ex for the year is now expected to top out at approximately 300 million. That concludes my portion. Thank you.

Thank you, Dale. John King, can you give us an overview of Precision Energy Services, please?

Okay. Thank you, Hank. We're comfortable with the results we've seen in Q3. We've had positive developments and some developments that have taken a little longer than expected. On the positive side, as Dale just outlined, our international business has been up materially. And this is consistent with the guidance and goals that we've previously outlined in other quarterly calls. And that is, we're trying to flush out our business in the international market to offset the size of our Canadian business.

Canada, on the other side, as Dale went to extreme levels of explaining how it was impaired by weather, that is a bit of a mixed emotion for us. The fact that Canada was down and we were able to provide positive results with such increases from '03 is positive, and obviously anybody can see when Canada kicks in, as it is right now in Q4 and as it will through the winter, that our entire energy services organization should be able to perform admirably. We enjoyed several technology qualifying runs in Q3, some some the middle east, the North Sea, South America, places like that.

I think the important thing to look at, as I've outlined in previous calls, is that in order for it to be a meaningful contribution to energy services as a whole, we have to have a meaningful fleet of new technology -- new tools, so to speak. One data point I'll give you is, when we started at the beginning of this quarter, Q3, our [INAUDIBLE] tools, we had a number of 4.75-inch tools, which were good for the small holes. And the slightly larger size, the 6 3/4-inch tool, we've actually increased the size of that fleet by 350% in the quarter. So at the beginning of the quarter, we were able to do a couple jobs. And at the end of the quarter, we were able to do about three and a half times more than that. And that will continue to grow quarter over quarter. And that is reflected also in the capital spending to ramp up that you see in Q3 '04 versus Q3 '03.

On an international basis, when we look at all our markets, as Dale pointed out, we've seen some exciting growth in many places. We think that's just a precursor of what's to come. In some places, we have actually in Q3 been inflicted by the fact that we're still running qualifying runs. Lots of these qualifying runs are at lower than market rates in order to sort of to demonstrate that our technology works. And in extreme cases, in fact, we're actually doing it for free in a few places, and that's ending. We have qualified in all these areas, and we believe that's coming to a commercial position here in Q4 and in Q1. So with that in mind, that is an important stepping stone where our technology can't come back and say that we're still qualifying, can't come become and say that we're still developing, expecting it to be commercial. It happened in Q3, so now we're in the execution phase. And that comes with a different set of challenges.

But in any event, it's nice to be through that stepping stone into the next area. If you look at our wireline business as a whole, as Dale alluded to, Reeves is being a pleasant addition to our business. It has its biggest impact in North America, given the fact that that's where the biggest part of the business is. And we're taking those tools and we're taking the technology that Reeve's is bringing, and we're starting to spread that across our organization, across the world, and we see that as being a meaningful piece of our entire organization in '05 as we go forward. On the production side of things, we've experienced some pleasant awards. We were awarded our Southern North Sea Contract at better or more favorable terms than we were operating under in the previous couple years, so hat should be a positive contribution in the years going forward.

We were awarded our first off-shore CPD opportunity in India. We mobilized for that job and should be actually kicking that off pretty soon. And that could expand into a bigger opportunity, so we're excited about that. And there's a number of different tenders on the horizon here -- Couple in South America, one in North Africa, couple in the middle east -- which we should win our fair sure of. And that, once again, should have the impact sort of towards the end of Q1 into Q2. So when we look at all our product lines in our regions, we think we're well positioned. We're comfortable with what happened in Q3. We're happy with the results we've seen from our qualifying runs with the introduction of the new technology.

Our customers are starting to understand that our technology is reliable, and in many cases they're starting to look at it and see that we can actually operate in more harsher and challenging environments. We did have two runs -- one in the Gulf of Mexico and one in the North Sea, where we're running our tools at 22 -- 23,000 feet. 24,000 PSI operating pressures. That's in the top tier of harsh environment operating environments in the world. We were -- successfully completed those jobs and they have actually turned into more work. So it's a slow start to actually show that you can do this work; but once it happens, then we're excited and we see that proliferating into more volumes in these areas. So with that, I'll hand it back to Hank, and if there's any questions at the end, I'll be happy to answer those individually.

Thank you, John. On the Canadian drilling scene, we've had a good quarter, an acceptable quarter with what we've discussed as far as weather. As we look forward to this winter, it will be a very busy year. And as we look forward to all our divisions and Precision, knowing people will be our biggest challenge to make sure we're fully staff and trained to the level that we need, but we're very comfortable that we can achieve that.

On the international drilling side, we're very pleased with the acquisition of GlobalSantaFe and the integration. Dean Kelly's joined us in Calgary on the management team as the Senior Vice President of International Drilling, and did a fine job making everybody understand how we go forward in the future. We've seen a tremendous demand for rigs in the middle east. We've bid quite a few. We're not going to go in and say that we have them until we have them, but I think you'll find that the middle east will take most of the variable rigs that are left in North America and in South America that are the 2000 [INAUDIBLE] plug. So we're very pleased with the developments that are going forward. We're very pleased with the integration of the people and indigenization of our different countries in the middle east where we're very fortunate that we hit a few [INAUDIBLE] in mainly indigenous people and people that travel from the middle east to other parts. CEDA has had a good year -- it's going to have a great year next year. As we look forward to CEDA, it's going to be a solid winter going forward. There will be -- sooner of later, there will be shut down in San [INAUDIBLE], and we'll be able to facilitate that as well.

The catalyst handling in the United States, we've grown that from $4 million to $30 million plus in the last five years. I'm very pleased with that. We are the number one catalyst handler. And with the prolification of the different plants running through the whole sumer with no shutdowns, you're going to start to see plants shut down to change out catalysts. And there is a new higher sulfurcide catalyst that is going to cause these turnarounds in catalyst to be more orientated on an annualized basis rather than every two year. So CEDA will still continue to grow the United States. Rental is very good. We'll continue on. We're looking at some acquisitions on the rental side to -- whether it be capital and some small things to facilitate that bottom line.

So we're going to open it up to questions at this point in time. We're very pleased with the quarter. It would have been nice to have had a record quarter, but we're with results going forward, and we're very comfortable we'll be able to achieve some good returns for our shareholders. We'll open up for questions and answers, please.

Thank you, sir. One moment, please. Ladies and gentlemen, we will now conduct question and answer session. If you have a question, please press star followed by the one on your touch-tone phone. You will hear a tone acknowledging your request. Your questions will be polled in the order they are received. Please make sure you lift your hand set if you are using a speaker phone before pressing any keys. One moment, please, for the first question. Your first question is from Jamie Stone, UBS. Please go ahead.

Good afternoon, guys. First question is, Hank, could you just update us on the -- on winter pricing and how much day rates went up in October, and what sort of net realization you expect to achieve relative to wage and other cost pressures? And then my second question for John is, how comfortable do you feel with getting the PES margins, say, in the fourth quarter up close to or at a double digit level, you know, coming off of what you had in the third quarter?

Well, just let me start with our pricing for the fourth quarter. We still look with a long-term relationship to our customers. We certainly raised it up obviously from spring breakup and our numbers are as high as they've ever been. We're very cognizant of our customers' queries about what we're doing. And on a spot market, obviously, it's going to be challenging for people to not pay what the price is at. Long-term customers, we're not going to decrease those prices. So obviously, there will be an increase, but it is to say that the percentage you'll hear about is in the first quarter of 2005 when we talk about our numbers. I'll let John go into the other side of the question.

Jamie, I assume what you're talking about is the operating earnings, margins, the GAAP being around 4%, correct?

Mm-hmm.

Okay, yeah. You're not going to see in the fourth quarter the operating earnings margins over 10%. What you should see is you should start seeing for the year -- at end of the year, as I said, we should see that the EBITDA margin would be in that 15 to 17% range, and that the operating earnings margin will be in the 5 to 7% range. So we will see incremental contributions from Q4, which obviously will be above Q3. And then as more tool arrive, Q1 will be a big quarter. The real target is the break-even in Q2 of next year and continue to grow through '05. And we're comfortable we're on that track. And in fact, I'm very comfortable with what happened in Q3, just given the fact that Canada wasn't able to contribute to the extent -- anywhere near the extent that it did last year.

Okay. And then Hank, could you just talk a little bit about what you see in terms of the margin differential between your Canadian drilling operation now and the international drilling operation now that you're, you know, sort of three or four months into the integration of the GSF business?

As we put rigs to work notice middle east, there's a very good margin on it. And I think you'll see that from the other gentlemen that operate there as well as do here. There is more of a margin in the middle east if you have the iron, and depending on what capital you put in it, and there could be in Canada. We also get 365-day utilization versus the 200-day per year utilization. We've also had great utilization in Mexico to date, then all of a sudden there's a slowdown. And -- as we go through October and November. We had a Mexican breakup almost in a sense. But as we go through the process, we look at each country carefully. We're look at the return and the capital we spend -- we want to get the best bang for the buck. Obviously, we're facilitating with our operations in the middle east to expand on those, and that's where we review our capital requirements and its return. So we're back to doing the proper analysis for our shareholders and making sure you will get the best return.

And how many rigs do you have running in the middle east today of the fleet? What's the utilization like?

75% overall.

No, in the middle east. Ian Kelly's going to shup up.

In the middle east itself, and I'll do this off the top of my head, we'll be up at 85% in the middle east alone. But overall internationally, we're about 75%. We do anticipate by the middle of next year to be much closer to the 100% mark.

Thank you.

Jamie it's John King. Can I just add to that? Just keep in mind, of course, that the impact of the foreign exchange was a full 1% impact on the margin's operating earnings, so I mean, our operating earnings multiple net of FX was about 5, so we're pretty much on schedule to be in that 5% -- 5 to 7% range for the year.

Okay.

And one other thing I'll comment on. We've always said that as we took a refocus on Precision Energy Services, it's quarter per quarter, year-over-year. And we're certainly on track. We're very comfortable. What we alluded to in earlier discussions will happen in 2005, and as to the development of the 6 3/4 and the 8 3/4 tool, as far as the rotors [INAUDIBLE] lends itself to take the LWD and some of the other tools that we have now into a higher profit range, we're very comfortable to achieve some very nice numbers in 2005 and some tremendous numbers in 2006.

Right.

The next question from Matt Mackenzie from [INAUDIBLE]. Please go ahead.

Good afternoon, guys. First question probably for Hank. You touched on the bidding activity in the middle east. How many rigs are you thinking OF maybe in a best case scenario? Are we talking about two, four rigs that could be moved into the region?

Well, if we looked at the numbers that are being requested by some of the people in the middle east, we feel that we'll probably put 7 to 8 over there. But if we look at the demand right now, it's probably for somewhere in the neighborhood of 15 to 20, in that range.

Okay. And that 7 to 8, would that be the best case or is that more a likely scenario?

Well, that's all we have.

Okay.

That aren't working. The rest are working. So we feel that the -- some of our equipment in Venezuela, obviously, we'll move to the middle east because the demand is there.

Okay.

Just to add one point -- on the 15 to 20, it's only the 2,000 [INAUDIBLE]. There's another rash of about 10, 1500 on-spot requirements in addition to that.

Okay. And actually, how much of the fleet is tied up in pricing arrangements -- or maybe where I'm going is, what's the outlook for increased pricing on some of these new contracts?

Well, we're just renegotiating in one country, for example, for an extension. And that will be finalized shortly. We just facilitated the three rigs in Saudi under a three year plus one contract. And the rest will come up shortly for the three year plus one contracts, or in some cases -- I guess most of them are all three plus one.

Yeah, most of the time is three -- three years in the middle east, Kuwait, Saudi and these places generally contract long term. And I guess what you are looking at is contract by float residence -- what's available to take up side. Well, in very broad brush terms, middle eastern rates are probably 50 and now being discussed and bid 50% higher than they were a year ago, rough numbers.

Wow. Okay, thanks. That's very helpful. Just moving to Canada, how many rigs are you going to have this winter with insufficient crews, or just running with two crews? And then how would that compare to last winter?

Well, last winter we ran approximately 90 rigs with two crews. We'll probably be in that same range again. Again, safety is more important to us than making a few extra dollars. We're not going to put untrained crews out on to the field. Our gentleman that we support with the safety side of things in the [INAUDIBLE] we had stay with us because of that, and we're comfortable that we'll probably operate somewhere 210 and 220 at the peak, and we have 227 rigs that could work. That's the range we do have. We will still work three weeks and let the rig sit for a week and the boys take the time off. It won't change much -- the only thing that'll change is obviously the price will on us later.

Right. Okay. And actually, just touching on that. I just wanted to get your thoughts, Hank, Oxvene Canada [PHONETIC] put out yesterday that they're going to drill less wells due to the outward pressure on service costs. Do you think this is going to be a theme with the other senior producers as they come out with their 2005 budgets, or do you get the sense that most operators are going to be ramping up next year?

Well, we look forward -- we have a tremendous amount of new co's [PHONETIC] that have been developed I mean, our intermediates are now the trusts, and the trusts are spending money at a far greater rate than they've ever done before. They're starting to realize that with the new oil and gas prices, they have the disposable income that will give them the yield, plus will let them explore. And we're tying up a lot of our rigs with some trusts as well at this point in time. So as we look forward to this winter, there will be nothing available. Next spring, we'll see what'll happens. But that's a shell that gas created. There's a lot gases which I know every rig we have that can run, and when the weather's right will run.

Okay, so yeah, even if in Canada slows down, I'm sure it's fair to say [INAUDIBLE] someone else is going to be more than happy to pick up the rigs.

At this point in time, it would help ease the on some of us for the future if they did back off a bit.

Yeah. Okay. Last question. Just you talked about Mexico. One of the rigs was deployed back to Canada. Can you just give a little more color on maybe what's been happening down in Mexico, or are you planning on moving any more back or into other international locations?

Well, in Mexico, as most people are aware of, we were not successful in the last bid in the Pervose [PHONETIC] area. But fortunately for us, we had 11 rigs down there. And the one rig brought back was certainly in demand in Canada because of the way it was winterized, and it was easily brought back and put to work. But PEMEX [PHONETIC] has given us a direct award for the Pervose area -- we're negotiating the final details of that now. All our will go forward through 2005 and possibly 2006, and possibly forever and ever. Our ability to drill and the professionalism we've brought forward has allowed us to get at something that nobody else has ever achieved in Mexico. And we've done that with performance.

Okay. Sounds good. Thanks very much, guys.

Thank you.

The next question is from Miles Leech, Peters and Company. Please go ahead.

Hi, guys. Good afternoon. Hank, just on the Mexican situation, so your plans are, say, by next quarter, you've got all ten rigs running down there, is that fair?

That is correct. We'll be -- have all the rigs running here and November 1 we'll be back up and running.

Okay, so and like you say, probably no plans to move additional iron in there, but those ones will be active through the year?

Well at this point in time, we don't have any rigs that we can move in there. We're -- fully utilized every piece of equipment we have.

Okay. Just turning over to the TSG or the wireline side. John, do you see the wireline side continue to ramp up in the U.S., net of new tools coming out? I guess just looking at where the drilling activity is in the states and where it's going, can you see that thing going up 25, 30% or where's your thoughts on that?

Yeah, Miles, I can see it continuing to improve. You know, we still -- there's a lot of market down there, as you pointed out. And we have -- with the addition of Reeves, we find ourselves very well positioned as a low-cost provider of formation evaluation services. I think our growth in all different areas, whether it's the Rocky Mountain Region, our operation in the Appalachian, Alaska or even sort of Texas. We see growth in all those areas.

Any kind of gauge on scale from where you are today to where you'll be, say the end of '05?

I'm not uncomfortable saying we could grow another 20% there -- easy on the wireline side.

How about directional services? A little bit -- a little off on that side, but I would assume that that area is also picking up, or?

Yeah, I mean, from '03 to '04, growth in discretional services in the U.S. has been sort of exponential -- it's been enormous, because basically, we had next to nothing in '03. The real impact for us now is to get a lot of our technology working in the U.S. -- get the [INAUDIBLE] tool in there. It's working offshore. We're on the job today. It's actually the first job we'll be in offshore in the Gulf of Mexico. We have no problems, we've never been in a hole for three days. So as we start to roll in or deploy that technology over and above our core just directional business, you'll see a margin expansion, and you should also see some volume expansion. It's the biggest market in the world. So I mean, we have to be there. We've got the technology to prove it. And we're excited about it.

Now offshore -- the offshore market -- are you seeing it actually coming back at all? I mean, listening to a number of different conference calls of the U.S. guys, the Gulf Coast is still pretty slow. And I guess you're small enough now where any lift is fairly significant to you?

That's correct. And what we're finally being able to prove to the oil companies in the United States that our technology is as good as we say, our rotor steerables is one of the best, if not the best -- we think it's the best, but they're may be some qualifiers, [INAUDIBLE] people, but they'd have to prove it, and we prove it day daily now. So with the flow through that we have with the LWD, etc, just because we have the ability for pressure and temperature, which very few other people have, we will pick up and we will grow exponentially as our tools build through 2005. And we don't have to have more rigs running. We just have to have the rigs that are there going in a little deeper, little hotter, and we'll take over.

And Miles, that's happening because any growth in the Gulf of Mexico drilling, I believe, is going to come in the deep shelf. The deep shelf is 20,000 feet plus. It's 20,000 PSI plus, and it's 150 degrees C-plus, and our tools fit directly in that pocket.

John, just as a gauge. Number of rotary steerables and tool -- your tool suite -- I mean, that's been -- you know, you've been trying to grow that suite. Are you -- do you have ten tools or do you have 100 now? Like where are you at? Have you got another tools where you can spread it out to a number of different places and actually start to make money with this, or --?

I'll explain it this way. In the small size, in the 4 3/4, at the beginning of Q3, we had a number of tools. The problem is that when you go out to do a job, you've got to be able to do both hole sizes, right? They want an 8 1/2 inch hole size as well as a 6 or 6 and an 8 So you need both tool sizes. So at the beginning of Q3, we could in the large hole size with the 6 3/4 inch drill, we could do one or two jobs, that was basically it - 4 3/4, we could have done a lot more. Now, as we've continued to add to the 6 3/4 base, which I explained, has gone up 350%. Instead of being able to do one or two jobs, we can now do 5, 6, 7 jobs. So -- and that'll increase again in Q4. So does that -- does that answer your question?

I guess I'm just directionally in '05 then. So by mid-point of '05, you're going to be capable of doing 10 to 15 type jobs, is that fair?

That's absolutely correct.

Okay. Okay, guys, thanks.

Thank you.

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

Thanks, most of my questions have already been answered. But just really quickly here. John, can you tell us what the revenue contribution was from rotary steerable?

No, I can't tell you that. It was -- it's meaningless. It was very small. I mean, it's technology wins more than anything else. You go out, you do a job -- I mean, a job can be a significant -- you can make 200 or 300 grand on a job. The problem is, it's based on 229 million -- that doesn't exactly have a meaningful impact. As I said, the meaningful impact for technology will come midway through '05, and Q3 should be the first time you see a material contribution from all our technology.

Q3 05?

Yeah.

Okay. And Hank, just on the margins for contract drilling, 33% -- that was a bit below this point last year. We have some offsetting things going forward -- you know, the U.S. dollar margin is fundamentally, I guess, unhedged. And -- but you have better pricing on Canada. So where do you see the margins are settling out in the fourth quarter and looking for into 2005?

Well, as I alluded earlier, they're not going down. As far as where they end up, that depends on the mix between slot market and long-term pricing.

Would you put a compositive comparison on a year over year basis?

Yeah, it will be positive. Yes.

That's all for me, thanks.

Thank you.

The next question is from Ian McCurson, Simmons Company. Please go ahead.

Good afternoon, John. I'd like to start with you. With ES [INAUDIBLE] maturing as a commercial entity effective now with this growth driven internationally primarily, how leveraged currently to fill to Canadian fundamentals and how do you see today's geographic mix shifting by Q3 '05 when you talk about real debts?

Okay. Ian, I'll answer that by sort of speaking to what happened in Q3 and maybe sort of forecasting where I think we'll be in the Q3 of '05. In Q3 of this year, as we pointed out, the contribution that came from Canada was significantly down on our operating earnings line. I think it's fair to say it's somewhere around half of what it was last year. With that in mind, all of the growth in operating earnings and then some came from the international market. So if we're looking on a split between revenue and operating earnings, I would say that as we go to Q3 of '05, the majority of the uptick in any contribution from technology is going to come from outside of Canada. Really, Canada is a fairly benign market when it comes to rotary steerables and eldipity [PHONETIC] and so on and so forth. The big impact will come from outside this market. We hope to get to a point where on an operating earnings basis Canada is down in the 20, 25% mark, and the rest of the world contributes the balance to the 75% area. And that should be demonstrated by Q2 of next year coming into more of a break-even type of model. Then, when we're in a break-even model, start to get very comfortable with the fact that we do have a meaningful business outside Canada that the seasonality to Canada comes from becomes more of a positive where Q1 and Q4 are big, big quarters, and the Q2 and Q3 are carried by the rest of the world.

Gotcha. Gotcha. Great, thank you.

Thank you.

Your next question from Dana Brenner, Westwind Partners. Please go ahead.

Good afternoon, gentlemen.

Good afternoon, Dana.

John, with respect to Precision Energy Services, there's been a lot talked about in the middle east with respect to breaks. What are the prospects from our business in wireline -- you know, even beyond that with CPD, or your testing businesses?

Yeah, we're excited by what's going on, Dana. Number one, we're seeing a lot of interest in pull-through behind GlobalSantaFe. I mean, it's all of a sudden, we launched into the credibility factor where we're a meaningful player there, just because of our cousins with GlobalSantaFe. Secondly, some small things like we got our first short form contract with Aramco [PHONETIC]. We're in there providing CPD services right now.. We mobilized about three weeks ago. That should translate into a bigger contract. We'll probably go up for bid for it, but we'll get our fair share of that, which should be some contribution in '05. We continue to see good opportunities and we're working and making good money and good profits in Beaumon [PHONETIC]. India, as I pointed out, we've just completed -- or we're just mobilizing for our first CPD job there. And one thing CPD's been, Dana -- I'm really meaning control pressure drilling at anything near at balance or underbalance. So it could be UPD or it could be just sort of a near balance, and there's other opportunities in North Africa. So the middle east for us continues to be the opportunity for big growth. Not only because our technology fits applications there, but we've also have the opportunity to sort of ride in on the coat tails of what GlobalSantaFe's doing. And we're excited about what we see.

Do you view this as the sort of the hidden gem of the GSF acquisition?

Yeah, I think it's one of them. I mean, the credibility is undeniable. You go in there and you're now part of a team that has been around for 20 years or 25 years, absolutely. It doesn't hurt. You know, when you step up to the plate, you still have to prove yourself with technology. And as I pointed out in my earlier dialogue, in some of these areas where we're qualifying, we're doing sort of reduced rates -- and in one place actually for nothing. Those were in the middle east. Now we're getting to the point where they say, not only doe technology work, but boy, we can ride in behind the drillers who actually have been here for 20 years and they understand that we're actually part of a bigger organization can deliver more than just one piece of the pie.

Right. Hank, will we see you building rigs to give you greater capacity internationally if you're getting to the point soon where you'll be turning away work or not bidding on certain contracts,. You know, might we see you build five, 10, 20 rigs to give you more capabilities?

Dana, we review every project by return on capital and obviously, as there are some, there's still a few rigs around the world that aren't being activated and haven't been rebuilt. Those are the ones we'll look at first before we go and build a new rig. A new 3000 horsepower fully outfitted for the middle east can be as high as $13 million U.S. So the return on that is a little more challenging than buying something for three to five and putting 5 to $10 million, depending on what you have in inventory. Unfortunately, with GlobalSantaFe, there's a huge inventory of equipment that it does exist, and we can play with that for the next year before we look at new builds. We will look at anything that makes sense. And as long as we have a contract that allows to build something, we will do it. There's no question. In Canada this year, we built three brand new rigs. We're also going ahead with a new colbate methane rig which we think will be the the most advanced CBM rig that the world's ever seen. It will be self-propelled, fully mobile, four units. We have a customer that signed up for this contract. And it'll change the world for CBM a little bit. So we're still looking at ways that we can get return for our money. And as far as retrofitting some rigs, we're going to do that for some of our older [INAUDIBLE] rigs in Canada for 2005. But it's just to be competitive -- we're not going to add rigs to [INAUDIBLE], we're going to make them more conducive to the new environment, or new rigs, and we want our equipment to be in excellent shape, which it is, and we want our people to work on the safest equipment that the world can offer.

Right. Can you -- I guess just finally -- can you talk about the turnaround that you've been able to manage in your Asian Pacific region, what it's facilitating out and where that may go from here?

Dana, I'll answer that -- it's John -- because the majority of what we're talking about is in Energy Services. I think I outlined in quarters before that we had actually won some contracts in Asia Pacific, starting as early as Q4 last year, but right through Q1 and Q2. And what we've actually seen is we went in there, early qualifying at the beginning of this year and the end of last year. And those contracts have come to fruition. We're actually writing some volume, getting a couple offshore contracts with CENA, Kodico [PHONETIC], people like that, and India's part of that group as well. And we're basically now in a position where we have a real business instead of a hobby over there. And that comes from basically hard work and the right -- getting the right people in the right places to make it happen. So we're excited about it. We see continual growth. We're not everywhere in Asia Pacific -- when we talk about Asia Pacific, we're not nine countries. I mean, it's really all about India, a little bit of Bangladesh and Indonesia. And we're comfortable with that, and there's more growth there and we'll focus on making sure the economies of scale work there, and making that more profitable in '05.

That's great. That's all I've got. Thanks.

Thank you.

The next question from Dan Barrett, [INAUDIBLE] Please go ahead.

Afternoon, guys. John, the question for you, can you expand a little bit more -- I mean, we talked a little about TSG in the middle east. Any guess as to how much you are thinking might grow revenues next year?

In the middle east or --

Yeah, in the middle east. Middle east, north Africa?

Well, I guess it doesn't really make much sense unless I tell what you we're doing in the middle east at this point. I think, you know, we could probably double the middle east next year from where it is right now. And that is, we can -- that's both wireline as well as directional services, and a little input from our CPD operations. That's in, to be clear, in a few core markets -- in the United Emerites, which is Abadabi, Saudi, Goman and Yemen, which is in the [INAUDIBLE] middle east. And now we have a fairly strong operation growing in Algeria and opportunitiess in Libya. So if you look at that -- and we term that for me as the middle east, it's a little broader when you talk about GlobalSantaFe, because they have Egypt and so on. But in those markets, there's opportunity for us to double the size of our business and generate some meaningful margins in there.

A follow-up on Libya. I know there's a lot of talk about activity there ramping up quite significantly over the next year. When are awards going to be given out as far as both, I guess on the drilling side and on the TSG side. So talk about the TSG side, and then maybe, Hank, if you can give us an update if there are any opportunities for you on the drilling side there?

Okay. I'll talk about Energy Services first. The first part, I mean, we're already actually in there providing directional services. We [INAUDIBLE] a rotary steerable tool in there. And we have a few other services going in in the next three to four months. They are not incremental contracts; i.e., it's not because come western company's come in there and is ramping up activity. It's just because there are so few service providers in there, there was an opportunity for somebody like us to come in, pick up maybe 10 or 15% of that market. And we see that as the opportunity through '05. When it actually ramp up and new players come in, the drilling guys would know better about that, so I'll let Hank speak to that.

As we look at Lybia, and just Lybia on its own, we're comfortable that there would be international oil companies coming in to Lybia and drilling at some point in time. They're positioning themselves. They haven't asked for bids on rigs specifically yet. The ones that are there are adding one or two wells. We don't see anything of the long-term consequence that it's come to us other than we've had inquiries up to three to five rigs from some other individuals. When those materialize, we will certainly bid on partners with somebody; but let's keep in mind that the GlobalSantaFe has been in the Libya through the Adwalk [PHONETIC] venture through the last 30 years. So we have some people that are certainly experienced in the area and know the area very well.

Okay. That's good for me, thanks.

The next question from Allen Love from Merrill Lynch. Please go ahead.

Good afternoon, guys.

Good afternoon.

Hey, just one quick question. You know, Slumber Chaise [PHONETIC] recent report -- they have their margins from their oil fill business down quite a bit, sort of suggesting that, you know, they've been pretty aggressive on pricing for equipment and services. And I was wondering if you could comment on sort of the competitive environment out there and what yor're seeing in terms of fighting the battles with the big three?

I'll comment on that -- it's John King. You know, it is a competitive environment. It has been through '03 into '04, especially as a new player when we turn up on some of these tenders and actually are competing for work, then you've got the big three trying to protect their turf. We try -- and as I said in the past to many people -- we try not to compete directly with them, but basically go to the customer, explain to them what we have to bring, how efficiencies will improve, and get a little piece of the contract. So if we're at zero, if we get 10 or 20% of that market, then we're in good shape. I think you're probably going to see for all of the big three and ourselves going forward in the second half of this year and in next year, most of the excess capacity has started to be mopped up. You're now in a position where you see probably those margins start to expand through the last half of this year into early next yea,r just because there's not as much idle wireline work or directional services equipment laying around looking for somewhere to go to work. And if the Gulf of Mexico starts to show signs of life, then you will really probably start to see that excess capacity mopped up and not equipment from U.S. looking elsewhere in the would to go to work. So, you know, we will always see competitive pricing from the big guys. We're the new guys on the block. They don't want us there. They want to protect what they have, but we're making inroads. We'll be maturely and we try to be careful not really to get into a pricing war. We don't have to be everywhere they are, and if they're going to be extremely aggressive with pricing, then we'll just go somewhere else. You know, we've got lots of places to hunt.

Thanks. That's all I got.

Thank you.

The next question is from Jude Bailey, Jefferies & Company. Please go ahead.

Actually, it's Judd Bailey. Thank you. I just have a couple of quick questions. And the first one I think you may have answered already. But I apologize, I missed it. How many rigs did you say you might be moving into the middle east next year?

Approximately seven.

Seven? Okay. And what is your outlook for Venezuela? I believe Dale said you had three rigs operating at the end of September. Any indication that market's going to improve over the next year or so?

This is Ian Kelly here. Venezuela is still a basket case essentially. We've got six operating rigs right now. What we're looking at going forward is there are opportunities there, but they don't compete internationally with what we're seeing elsewhere, so we're looking at relocating the excess equipment we have.

It comes down basically to return of our invested capital, and obviously, the middle east is where the action is at this point in time.

Okay, great, thank you.

Thank you.

The next question is from Suneal Jaquani, Carlson's Capital. Please go head.

Yeah, hi. Good afternoon. Just had a quick question. I don't know if I missed this early in the call. But have you guys quantified a breakdown of your Cap Ex for '05 between maintenance Cap Ex for the rigs versus the TDS?

No,we haven't -- we're just doing our budgets at this point in time. Obviously, I think our maintenance Cap Ex will be a little bit higher than it was in 2004. And our Cap Ex when we started was somewhat limited after you make an acquisition of GlobalSantaFe and Reeves. We sort of blew that out of the water, so we'll look at any acquisition, and we certainly have enough [INAUDIBLE] on our sheet -- on our balance sheet -- to do what we want with anybody in the world, basically, other than one or two, and we don't want them anyway, so we're pretty comfortable with that. But we're in great shape, and as we go forward, you're going to see a nice build on our rotors steerable -- we will have some 8 3/4 tools, and the 6 3/4 will grow dramatically, and the fourth should grow, do fine. The LWD is in great shape as we go forward in our L-tools, so we're in great shape there. The challenge will be as to how much capital we put into the middle east rigs and where they actually are finalized when they end up, and what our opportunities are to take some of our big rigs out of Canada, which aren't overly utilized at times to some parts of the middle east or temper climates.

Just a quick follow-up. I guess I was just looking for a little bit of color in terms of where we stand in the overall Cap Ex cycle for the technology services group, given that we've obviously had a substantial portion in it already, and I'm assuming that we're coming kind of close to the tail end of the big stuff. And is that a fair statement?

That is a fair statement. '04 is a big spending year. We're trying to round out our tool sizes and our fleet. We should be coming down very early in '05. And you should see the '05 capital number being significantly utilized in '04.

Yeah, and lastly, just all the contracts that you guys have in the middle east and India, are they priced in U.S. dollars or local currencies?

U.S. dollars.

All right. Thank you.

Ladies and gentlemen, if there is any additional question at this time, please press star followed by the one. As a reminder, if you are using a speaker phone, please lift the hand set before pressing any keys . Mr. Swartout, there are no further questions at this time. Please continue.

Thank you very much. Thank you very much, ladies and gentlemen, for paying attention to us today. Obviously, we're very comfortable going into the fourth quarter of 2004. We're in great shape, hopefully, to finish this off with the record that we thought we'd see other than the slow down we had in the third quarter. Those things happen. 2005 looks like a banner year in all fronts, and obviously as we go towards 2006. Well, we're very excited here, but we also recognize our challenges will be to keep our people happy as we go forward and work safely. Equipment-wise and capital is not going to be the problem. We have to train more people and we have to make sure our people are comfortable with the situation they have. Those would be our challenges as we go into 2005, as they will with every other major oil field service company in the world. People are what make us. It's not anybody else. And we need everybody to make it work. Thank you very much.

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