Precision Drilling Corp (PDS) 2004 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Precision Drilling corporation fourth quarter and 2004 year-end results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties during the conference, please press star zero for operator assistance at any time. I would like to remind everyone that this call is being recorded on February 10, 2005 at 2:00 p.m. Eastern Time. I will now turn the conference over to Hank Swartrout, Chairman, President and CEO. Please go ahead, sir.

Thank you very much. Good afternoon, ladies and gentlemen. We appreciate you listening in to the 2004 year-end conference call. We'll have Dale Tremblay to start with the financial review, please, Dale.

Thank you, Hank. 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 services supplied by our corporation. We have released a detailed news release, including consolidated statements 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 key data points for each of these segments.

The oil field service business continues to gain momentum as we completed our fourth quarter with earnings of $1.43 per share in are 2004. The best results in history. Along with posting record returns for the year at $4.22 per share, up 29 percent from the $3.26 per share for 2003. With this as the backdrop, we look forward to 2005 with a continuing strong domestic market and improving international environments driven by sustained high crude oil and natural gas prices. The Company positions itself as the third largest international land drilling company in the world with the timely acquisition of an international based drilling operation with 31 excellent rigs, well suited for the expanding international market. The Company also acquired Reeves, which solidified energy services product offering in the wireline business. Both of these acquisitions, combined with Precision's excellent fleet of equipment, will allow the corporation ample opportunities for expansion in the future. The corporation was able to achieve this growth while maintaining its balance sheet, further evidence of the management's commitment to be positioned for future growth opportunities.

Moving to contract drilling segment. Our Canadian rig fleet achieved 12,099 rig operating days for a utilization of 58 percent in Q4 '04. This compares favorably to the prior year, 11,631 days, or 56 percent, an increase of 4 percent. For the year, the spud to rig release days were 41,625, down 2.5 percent from 2003, which was 42,725. The rig utilization rate for 2004 was 50 percent, compared to the industry rate of 53 percent, and last year 52 percent for Precision compared to the industry rate of 53 percent. Revenue per operating day for Q4 '04, 17,600. For Q4 '03, 16,300. This represents an increase of 8 percent. Operating costs per day, Q4 '04, $8,700. Q4 '03, $9,100. This is a decrease of almost 4 percent year-over-year.

The activity level for Q4 '04 were high and somewhat exceeded expectations, as we benefited from a backlog of work going into the fourth quarter, an influx of junior oil and gas companies, and good weather conditions. Our well servicing rig fleet achieved 127,694 rig operating hours for 58 percent utilization in the quarter, which compared favorably to prior year of 113,134, or 51 percent in the previous quarter, which translates into a 13 percent increase year-over-year. Revenue per hour, Q4 '04, $553, compared to Q4 '03, $484 per hour. Or an increase of 14 percent. Our operating costs per hour, $358 for Q4 '04, and $357 for Q4 '03. Which is basically flat year-over-year. The improvement in service hours over prior year Q4 occurred in the northern and western areas, where there was an 18 percent increase. While in the southern and eastern regions, saw a 5.4 percent decrease. Higher operating costs were offset by a reduction of facility costs as a result of operation centers being consolidated, and we shut down 6 facilities.

Moving to international drilling, in the western hemisphere, there were 21 owned rigs at the end of Q4 '04, compared to 13 at the end of Q4 '03. Out of the 8 rigs acquired in Venezuela, 3 rigs were active at the end of December, 2004. The lower activity level in Mexico came mostly as a result of the completion of the extension of our existing contract.

In the -- moving to the eastern hemisphere, 22 of the 27 rigs were working at year-end, with both Kuwait and Egypt above Q4 forecasts. Total operating days, Q4 '04, 3,234; compared to Q4 '03, 1,247. This is an increase of 159 percent. Revenue per operating day, 22,900; compared to Q4 '03, 29,800. And this is due to the mix of rigs. Operating costs per day, Q4 '04 13,900; compared to Q4 '03, 17,900.

Moving to energy services, energy services had both year-over-year and sequential improvement in revenue of 34 percent and 7 percent, respectively, for the quarter. From an operating and earnings perspective, the year-over-year improvement was 18.9 million, and the sequential increase was 5.6 million for the quarter. On an annual basis, revenue increased from 696 million to 874 million, an increase of 26 percent. Operating and earnings also improved to 36.7 million, from a loss of 3.8 million for the year ended December 31, 2003. It is important to take into consideration the effect of foreign exchange on the ES segment compared to our drilling segment, since a greater percentage of overall revenue for energy services segment is earned in foreign currencies, compared to our drilling operations. The effect of foreign exchange relating to ES for the fourth quarter was a negative 2.5 million, and had currency stayed constant, ES would have had operating earnings of 17.3 million, more in line with our expectations. ES is analyzed from both a regional and product line perspective. Revenue by region, Canada, 89 million; U.S. 65 million; Mexico, 36 million; and the rest of the world, 56 million. Revenue by product line, wireline was 128 million; drilling and evaluation, 75 million; production services, 25 million; and other, 18 million. And those total the 246 million for the quarter.

Revenue for the quarter increased by 62 million, or 33 percent, to 246 million as compared to Q4 '03. The sequential increase in revenue was 17 million, or 7 percent. Canadian data point, number of wireline jobs, the total jobs 6,862, compared to 6,268, an increase of 9 percent. Drilling and evaluations average jobs per day decreased as compared to the same period last year, to 26 jobs per day from 32 jobs per day. Production services was down slightly with -- from activity levels, while revenues remained flat with 601 jobs in Q4 '04 versus 628 jobs in Q4 '03.

Moving to the U.S., revenue for the fourth quarter '04 was up 23 percent from Q4 '03. In constant U.S. dollars, the increase would have been 32 percent. This was particularly due to an increase in land drilling activity in the U.S. U.S. wireline data points for opening K4 -- Q4 '03 -- or '04, 3,261. Q4 '03, 3,410. This represents a decrease of 4.4 percent. Drilling and evaluations increased by 115 percent for Q4 '04, compared to Q4 '03, with the increase largely attributed to the size of the fleet of tools available to generate revenue and an expanded sales force. U.S. production services, activity levels remains strong in the Rockies and are expected to remain steady throughout the winter. The operations have been at a near full capacity for the entire quarter.

Moving to the international, international operations on a year-over-year basis has increased 51 percent to 157 million for the quarter, compared to Q4 '03. Sequentially, the quarter-over-quarter revenues improved 7 percent.

Moving to our rental and production group, there was a strong improvement in both revenues, and in particular, our operating earnings for Q4 '04 compared to last year. Revenue improved 14 percent to 55 million, up from 48 million in Q4 '03. Operating earnings of 11 million increased by 50 percent for the fourth quarter '04, compared to the fourth quarter '03. The rental division generated a record quarter, with high activity levels with the ability to maintain its market share with increased pricings on selected product lines. Our rental fleet utilization days for Q4 '04, 220,810 days; compared to Q4 '03, 225,000 days, a slight decrease of 2 percent. The fourth quarter is generally the slow period for the CEDA operations, although this year was busier in both Canada and the United States. The total revenue for the quarter was 45 million, an increase of 17 percent over Q4 '03. The catalyst groups on both sides of the border were very busy during the quarter. The Canadian industrial group had a great quarter, while the U.S. industrial group maintained their activity level year-over-year. The mechanical groups generated better-than-expected revenues, with an increased activities level at plant facilities located around Fort McMurray, Alberta. For the year, the rental and production group remain relatively stable with 2 percent increase in sales to 215 million, and operating earnings of 40 million, with a similar percentage increase.

Moving to capital expenditures for the year, our contracts drilling group, 110 million; energy services group, 135 million; rental and production group, 17 million; and our corporate group, 20 million. For a total of $282 million. Long-term debt comprised substantially of the 3 bond issues. Our '07 bond issue, 200 million; our '10, 150 million; our '14, which we recently did last summer, 300 million US, which converts to 369 million CAD, for a total of 719 million. And we have no other long-term debt at this time. Our working capital has continued to improve and was 557 million at December 31, 2004, compared to 248 million at December 31, 2003.

Just looking forward, to give you some guidance on our taxes for 2005, we expect our tax rate to range between 33 percent and 35 percent. Thank you, Hank. That concludes my portion.

Thank you very much, Dale. John King, Senior Vice President of Precision Energy Services, will give an overview PES, please.

Thank you, Hank. Thank you, Dale. As Dale alluded to, we're comfortable with the results that we demonstrated in Q4, even including the $2.5 million foreign exchange loss that we incurred in that quarter. Quarter-over-quarter, we continue on the appropriate flight path. Each quarter in 2004 have seen a marked improvement from 2003, but more importantly, on a sequential basis, we continue to see strength in the business. In Q4 '04, we had positive cash flow in every region. On an operating earnings basis, we're profitable on a global basis in all our product lines. Those are issues that, of course, we were challenged with in 2003.

As we look around the world and we go into specific areas where we've seen the biggest growth and the biggest changes, we're comfortable with what we've seen in Latin America compared to what it was in '03. Asia-Pacific has showed a substantial increase from '03. And the U.S., as Dale pointed out, has seen significant growth in revenue. We've had a very strong wireline business there which is being bolstered by the acquisition of Reeves earlier on in the year. Our directional business has showed some tremendous topline growth, although we're still a small player there, and we're still seeing insufficient pricing power, and it is a challenging market for us in that area.

From a technology point of view, we've been very comfortable with the successes that we've seen in Q4. Q4 was a big proving quarter for us. We had trials in the Middle East that were successful with both our LWD and our Rotary Steerable tools, and anybody familiar with that market would know that it takes a long time to prove yourself in that market, and once you're there, it's usually a very strong position to have. We have had some successes in the North Sea, north Africa, and all of these have translated into contracts and more work that we're seeing in Q1 and basically as planned for Q2 and Q3 of this year. So from a technology point of view, as I pointed out on previous calls, we're comfortable with the fact that our technology is reliable. We're showing superior performance in our mind, versus what we'd see as a traditional industry standard. What we -- the only issue we have is the number of jobs and the volume we're generating right now, and that will come as we build more tools. And we start to build some critical mass in places around the world in the different markets that we've chosen.

So in a nutshell, we're comfortable with what Q4 looked like. We're very comfortable with where our flight plan is and how we continue to show quarter-over-quarter growth. And we're positive about what we see in '05, both in the North American market as well as continued growth internationally. Thank you.

Thank you very much, John. Ian Kelly, our vice president -- Senior Vice President of International Drilling will do a review of international drilling. Please, Ian.

Good afternoon, ladies and gentlemen. I think maybe we can summarize that the fourth quarter was very good. We solidified the purchase of the various operations and rigs in mid '04. As was evidenced by our fourth quarter and our entire '04 financials, which exceeded all our internal metrics and our expectations.

Going forward, we see the market continuing to be good, particularly for the heavy rigs, the 2 or 3,000 horsepower market. And this is evidenced in the Middle East, most recently with extensions in agreements we've reached on various opportunities there. More particularly, we've just reached agreement in Kuwait to take 2 3,000 horsepower rigs for the next 5 years at substantially increased dailies, and extended the other 5 operating rigs we had in there which were not -- that were not already on long-term contracts. Venezuela is -- increasing activity there. We're seeing increased requirements, particularly again for heavy rigs. Activity levels and discussions are all that increased day rates along the lines of -- as we had previously said. Our only negative in the whole scheme of things is our operations in Mexico, where Pemex budget constraints reduced, and that's probably down to 70 percent of the activity we used to have. However, we are offsetting that with discussions with other operators, where we're in close discussions with our operators to secure alternative work there. That's about all I have.

Thank you very much, Ian. Ladies and gentlemen, to comment on the Canadian scene as far as the drilling, well servicing, rentals, and CEDA, all I can say is that every day is a new record. We're very comfortable with what we did in 2004. We're very pleased with our record results, obviously. Safety was a great concern for us. And we got that through with an improved safety record for our group, and Target Zero is still something we communicate to our employees and expect to continue through 2005. Our safety stand down we've talked to about 2700 employees, since January the 4th when we started our safety stand downs. And we're very pleased that the executives of this company have gone out when it is 35 below and 30 mile an hour winds, you realize how hard those gentlemen work. So we appreciate their effort.

Obviously as we go into 2005, January is behind us. We're in the middle of February almost. Obviously, I've commented that last year could be a record. I'm very comfortable that 2005 will probably eclipse 2004 comfortably. So obviously we're on track for a record year again after a record year. So things have never looked so good, and with that I'm going to let you ask us some questions as to why the future is so rosy. Thank you.

[Operator Instructions]. John Tasdemir, Raymond James. Please go ahead.

Good afternoon, guys. First question, Dale, I've got for you, on the change in depreciation for your rigs, can you quantify that on a depreciation line?

Our estimates for the changes, and we're changing both the depreciation on the drilling rigs, and the drilling pipe, and the combined change will be somewhere around plus or minus $7 million, we expect. Improvement.

Is that all, huh?

Yes.

That's good. And I think you guys are still more conservative than some of your -- some of your competitors there.

Yeah, we did an extensive study in -- in relation -- we've got years of data, and with the acquisition of the international rigs, we took it upon ourselves to revisit, and we were very conservative in our depreciation to date, and we think that where we moved to is -- was warranted.

Okay. And maybe this question's for Ian. On the international international rig -- rig front, can you tell me, just kind of review, how many rigs you have working internationally, and what your effective utilization is, and what your plans are for the rigs that you don't currently have utilized?

Total international rigs we have right now are 48. I think our utilization is somewhere in the low 70s. 70, 75 percent range. I couldn't tell you exactly. I will just check in a minute and get back to you.

Okay.

We see lots of requirements out there. Something between 20 and 30 big rig requirements are visible in a 12--month horizon. Clearly we are targeting to acquire some of that work.

Okay. What about the day rate trends, internationally? Maybe -- you mentioned that. But can you review that again?

Day rates are substantially above historical -- recent historical levels. All discussions and tenders that are going on, tend to be significantly higher than historical norms.

Okay. And in Mexico, for Pemex can you -- how many rig do you have working for those guys?

We have 10 rigs -- I'll take care of that. We have 10 rigs in Mexico at this point in time. We have 6 working today, and we're still -- we have an extension on our contract. We're still in negotiations with Pemex, but we are in very serious negotiations and should be possibly finalized next week, with another group to actually work in Mexico and that could be another 2 or 3 weeks. So we might have to bring a rig in from Venezuela or from Canada, and I think comfortably, by the time we get everything organized we will have our 10 rigs running and Mexico will be just fine as it was last year.

Okay. And then one final question, and that's I guess maybe to John, is right now, for PES, I think I heard you mention that -- well obviously, business is getting good and better. In terms of -- do you have -- would it be better right now if you had more equipment, or are you still --

Absolutely, John. If we had more equipment, then we'd be in a position where in some markets we wouldn't be talked out of 1 or 2 jobs a day. We'd sort be to able to sort of extract or capitalize on some economies of scale and maybe run 3 to 5. It is that simple. It is the operational leverage that comes with more volume.

Okay. So that's what I needed to know. Thanks, guys.

Thank you very much, John.

Scott Gill, Simmons & Co. Please go ahead.

Good afternoon. This is Ian McPherson at Simmons. I guess starting off, on -- for John, back on the LWD and rotary steering progress that you've discussed, are we starting to witness the pricing benefit of that in the first half of this year? Or if not, how do you see the margins beginning to reflect the good progress that you're making over there?

It won't have an overall impact or overall result until the last half of this year, just because of the point I touched on with the previous caller and that is that we just don't have enough volume internationally in these technology-intensive areas for it to be a major contributor from a margin expansion point of view. And that is -- those are the markets, obviously, where the technology has the biggest impact. We're excited and we're comfortable about the trials that we ran in Q4. I mean, it was the first time we are really actually seeing any volume of any significance, and we're extremely excited about that, and that is being parlayed into some contracts, and more work here in Q1. But until we actually start seeing some sustainable volume, then it really becomes more of a hobby in some of these places than a real good business.

Okay.

Ian, just to qualify one other thing, too, we don't have the tool count anywhere near where where we will have at the end of this year as well. And that's the biggest challenge that we have is certainly demand of these tools, and in our case when we're in one country, we might have to have 2 or 3 tools -- 3 sets of tools for a job. Once we can get 2 or 3 in an area, of course, that extra tools come down, and that's what John's alluding to. He's not talking about volume. Our tool count is low, and it will grow. But the boys have done a fantastic job and they're being certainly well-recognized as a tier one provider if not the best tools in the world for what we in rotary steerable.

Okay. Thanks, Hank. My follow-up question, sort of staying on the capacity front but switching to Ian, there certainly seems to be an environment of surplus demand in the Middle East that you've talked about. How do you go about sourcing incremental capacity and what avenues do you think you have for expanding market share with 20 to 30 visible rig requirements out there, just for this year alone?

Well, clearly, we still have some assets line in Venezuela which are international spec, big rigs, which are clearly going to be the focus that we're going to spend most of our time on getting to work for. Thereafter, we will play it as it comes.

Play as it comes. Alright. Thanks.

Thank you very much.

James Stone, UBS. Please go ahead.

Good afternoon, guys. And nice year. Hank, can you first just talk about the pricing environment for the Canadian drilling operation and I was also, I guess, a bit surprised at how solid the pricing environment was on the well servicing side. And is there anything going on in the well servicing market, maybe because of the tightness in the drilling market that is leading to what seems to be a bit more acceleration in well servicing pricing?

That's probably one of the reasons, Jamie. We appreciate it. As far as the drilling, huge demand, obviously, solid straight through, first quarter 2005, is certainly going to be better than 2004. We're very comfortable with that. The well servicing, Jim, I'm going to give them full credit for taking a fleet of rigs that was a mismatch from everyone and our board. We have spent a lot of money on our well service division over the last years, far more than we've made, and we have by far the strongest, best-trained group of people out there. I'm very proud of what we have in our group and we're starting to see the benefits of it. Major companies understand that our safety regime is first class. Our training is first class. And our equipment is first class. And they're willing to pay for it, Jamie. That's one thing that -- safety is now important to a lot of operators much more so, and quality of the equipment is very much so as well. That's brought the pricing along. We're still challenged. We have -- we probably could have had a little bit more in 2004 if we would have had more people. People are challenge in the well servicing side. We are very comfortable with the drilling segment, handled it as best we can, but labor, once you get to a certain size which we are -- obviously, when you try to get the last 5 or 6 rigs at any site going, it is always a challenge, and the boys have done a tremendous job and we're very proud of what they've done.

Can you maybe give us a little bit more specifics on where you see your year-over-year day rate change, say, in the first quarter and what you're thinking about in terms of pricing for break-up this year?

Jamie, I would like to do that. We don't do that at this point in time. And of course, even though we are the largest one, we don't like to lead, we like to follow. We certainly appreciate our customers and the respect that they give us. Fortunately, it is extremely dynamic in Canada, the best we've ever seen. If you asked me if I was going to raise rates at break-up, I would say no.

Okay. But the prospect for lowering rates, the break-up this year, seems pretty low?

Time will tell. I mean, we have a winter rate now that is extremely attractive. We'll be very open with all our customers and talk to them, but we expect to see a very busy summer and it will be -- if we continue on as we are at this point in time, 2005 will certainly be better than 2004, and I think that states the case as it stands.

Okay. Hank, you in the past have stalked about kind of getting the energy services piece to a size where if it is not being properly valued, you would look at strategic alternatives; and I think a year ago, or maybe even a little longer than that, you said it sort of targeted 2005 as that year. Are you on schedule for that? For being able to make that decision? And can you perhaps -- I know someone else is going to ask it, so can you just talk about where you stand on the royalty trust issue again?

The Board -- we had our Board meeting yesterday, and obviously, we've had many people talk to us from many different -- different sides of the equation. We at the Board are after maximizing shareholder value. We're not interested in building empires. We're after shareholder value. PES has come a long ways. It's well on track to being a very valued part of Precision Drilling. And if you look at what's happening in the Canadian industry, obviously, other people have trusted their rigs, et cetera. We're not blind to what can happen. And of course, the trust is one to distribute cash and PES is still coming -- it has a lot of potential to grow. So we're taking it under advisement, and we're reviewing it carefully as we go forward, and keep in mind that our goal is shareholder value. That's our main goal at Precision Drilling. That's the Board's statement, that's my statement, and we'll continue on, but it will take time to go through the process, to do things so we're evaluating it as we go along, every quarter. Every month, basically.

Okay. And then just lastly, Dale, can you give us a break down of your 2005 capital expenditure expectations for the 3 different segments?

Yes, can you just bear with me a minute while I look it up?

Sure. Maybe while you're looking it up, John can tell us what the change was in drilling and evaluation for the fourth quarter versus fourth quarter a year ago.

The change in drilling evaluation? First of all, I think Jamie, it is fair to say it was a fairly binary type of environment for us in terms of what tools we had to put to work. In Q3 -- or in '03 Q4, we really had what you would call their -- our meat and potatoes, our pedestrian directional drilling services and we had a cost basis that was there to deploy technology into. By Q4 of '04, we were starting to see the signs of some technology coming to the table. And there were some days there that we were actually saw ourselves with enough volume that if we could sustain that over a month, we were going to have a really good business. So like I said, we have seen that volume peak. We just need to get it sustainable here on a quarter-by-quarter basis, and I don't see any problem with that. We just need more tools and the ability to basically establish ourselves in these markets with continuous momentum. Does that answer your question?

Somewhat, yes. Thanks.

Dale --

Okay, Jamie, for 2005, our capital budget, I'm going to throw out the numbers which the corporate management believes we're going to be able to achieve. They may -- it may increase throughout the year, as projects arise, but for right now, realistically, we believe contract drilling, so this will be Canada and the international and well servicing, 152 million. Our rental and production group, 30 million. Our energy services group, 135 million. And our corporate group, 30 million. And then we just have some miscellaneous of 3s to round it off to 350 million in total. The corporate is substantially related to the rollout of SAP around the world. If you're wondering why that number is on the high side.

That's great. Thanks, Dale. Thank you, gentlemen.

Thank you very much, Jamie.

Alan Law, Merrill Lynch. Please go ahead.

Good afternoon. Hey, I just want to talk a little bit more about Precision Energy Services and I wonder if you could talk about the manufacturing rate of your various directional logging tools and sort of are you on track, or are you ahead of schedule, behind, and what's sort of the rollout rate?

Hey, Alan, certainly some of that is competitive information, but I'll try to give you a trend or a directional idea of where we're at. At the beginning of this year, I would say we were very heavy in terms of one size, and that would be the smaller size in the 4.75 inch tools, so we started to round out our sizes so that we're in a position where we could do the full well bore versus being hamstrung with only having small hole size or one piece of the well bore. As of Q3 -- at the end of Q3, we're in a position where 6-inch and 8-inch hole, the smaller size stuff, we were basically in position to be able to handle that. The problem is, is that a lot of contracts and a lot of jobs require the larger tools as well. Towards the end of Q4, we started to populate our fleet with some of those tools, so as we sit now, we're actually -- there's really not very many excuses to be able to go out and not be able to do the full well bore all sizes from the top to bottom. And that's -- that's with LWD with. With rotary steerable tools, we've always had a fairly significant base of 4.75 inch tools. We rounded out the 6.75 inch toward the end of Q4 and the larger size -- the 8.25, and we just have a hand full right now, and so we need to populate that side of it. A small handful. We have 2.

[Inaudible -- overlapping speakers] challenges as we go forth, but once we -- we hope to finish 2005 with 108 to -- I hoped it was 128, but I've been told it's going to be 108 tools as of yesterday, and that should allow us to do somewhere between 15 and 18 jobs depending where we're at and now we have the ability to do about --

We peaked at 7.

7. So we're going to double -- actually, if we get to 108, we could do how many jobs? 20?

We hope to be somewhere in the 25 to 30 range.

25 to 30. So we're almost 4 times as much. And the day work rate has stayed very firm. We're very pleased with it.

At the 108, is that the critical mass, or is it at 15 to 18 is at the critical mass to generate your --

I think 108 is -- we'll will be higher than that in 2006, but that's where we end up in 2005, we'll continue to building.

Alan, to be clear, if you have 15 jobs running in 15 different countries that's not critical mass. If you have 5 running in 3 different countries, then that makes sense.

Sure. Okay. So -- bit as far as your target for your EBIT margins for that group of being in that 10 percent run rate or 10 to 12 by year end, what to you need to have in the field running?

We need 15.

15. All right. And then as these tools roll out, are there any particular areas that you are targeting as far as who gets them first? Or --

There's some higher-end markets out there that really are more technology intensive. The Middle East is an area. We've had some success in the North Sea. But we're very focused in terms of where we're going to get the best return. There are markets that use technology that don't pay for it. And if we're not already there, there's no point in going in there and spinning our wheels.

I know you've said before that you don't want to be an inch thick and a mile wide, but are there region or is there a chance you could be a significant player or move into another market, say, like Russia? What are your thoughts on that market?

With our drilling and evaluation, no, not in '05. I mean, I would suggest that we're pretty focused and we've got to capitalize in the markets we're in. With wireline which is a bit more of a mature product line, we do have some opportunities in other areas. And, yes, and in Russia we did -- we just recently landed a contract there with an international producer where we'll be taking some of our unique Reeves wireline tools in there, and they're very unique. They provide us a very good strategic or competitive advantage against our competitors. And it is just the start of that market. And we can see that grow quite significantly in '05.

All right. My last question then is morally a -- a question on the held [ph]tools essentially, and there's been a lot more activity booked or set up this year for the Gulf of Mexico and these sort of deep shelf-type wells and with the high pressures and the high temperature would seem that your tools are really suited for that. Do you have -- or do you anticipate participating in any of those wells? Do you have any visibility on that?

Yeah, we participated in a few already. There is quite a few opportunities coming up. And we're very well positioned because our tools had 30,000 PSI and the highest temperature rating in the industry. I mean, we're exactly what the customer is looking for. The challenge you run into every now and then is some of these customers do have contractual obligations with some of our competitors. And so we do have to work through those challenges. I mean, it is not as easy as just marching up there and getting all the work. It does take a little bit of time to work yourself in there and get all sections of the well bore, not just the high pressure, high temperature bottom end of the hole. So yes, there are opportunities. We have done some. And we expect to capitalize on more in '05. In fact, in the first quarter here we've actually got a well already.

All right. Thanks.

Okay.

That's all I got.

Thank you.

Dana Benner, Westwind Partners. Please go ahead.

Thanks. And good afternoon, gentlemen.

Good afternoon, Dana.

Hank, can you talk about the strategy that you're employing to optimize your exposure to coal bed methane in Canada?

Well, obviously, we have -- we're designing a new rig that will be out in 2005 which we think will be the most advanced CBM rig the world has seen to date, and we're very proud of that. It will be coming out sometime in the fall. We're building 3 Super Single Lights which could be advantageous for that. The Reeves package and some of our logging tools that we're developing are being designed specifically for CBM. So that's going to be much more attractive for us as we go forward. But this is an area that we don't have any of the production side of things, so it's just either the drilling and the logging, and we're certainly focused on that, Dana, as we go forward. But other people are as well, and we're proud of what we're accomplishing and we think we're going to bring some firsts to the market, but other people are still building coil like it is never stopped, so time will tell.

I guess moving more broadly then, than just the coal bed methane business, I realize we're sitting here in the depth of February, but if you think out past spring break-up and I guess we always have to assume normal weather in this business, could we be surprised at the level of summer activity this year, might operators finally see the benefit of perhaps a little more activity in the summer and not trying to rush it all into December and March?

I believe when we get this far behind in the licenses that are produced and the number of wells we have to drill, it will be as active as we can be. But one has to keep in mind, we can still tear equipment apart really easily in spring time. So it depends when -- what spring is like. If the south warms up quickly and the north stays cold for a while, we will have much better break-up. We've been through these for many years but it is going to be very good year. I mean the -- all the indications are that we're going to have a good year, if not better than last year, and we had our best year ever last year, so we're extremely focused on that. Another thing I'll throw in is that our CEDA group is going to have a record year in 2005 with some of the challenged up at Fort McMurray that are facing some of our operators, so we're starting off to a record year in almost all of our front. It's just unbelievable. It's just like a -- the perfect storm almost.

And I guess one final question for John. You can talk about the contribution that Reeves is making to your broad technology efforts? Not only, I guess, on a top- and mid-line basis, but even maybe some of the things that you may be learning about how they did things and cross supply, not across some of your other operations?

Yes, sure, Dana. Answering the last question first, I mean their business model was considerably different than the business model that we'd had with our computer live wireline business. I wouldn't go as far as saying either one of them is much better than the other, except for they're more focused on particular market segments, and Reeves has been especially good at designing and building tools that are applicable to that very high level of efficiency in what would be traditional measurements. In other words, just doing what has been done for the last 15, 20 year, doing it faster, more efficiently. So they're not actually changing measurements or defying the laws of physics. When you get down to the actual contribution, in different areas of the world, they have more critical mass than others, so for instance, when we bought the company, they were strong in Canada, and they are actually strong in 2 markets in the U.S., one being Alaska, and one being the eastern side of the U. U.S. which were areas that we weren't in at all. So their contribution, not only from a margin point of view, has been strong, it's a very strong -- it's a high margin business, but they've also brought in a few other areas -- or a few other markets where we probably wouldn't have had any -- wouldn't have the tools to go in there and compete effectively with our -- with the competitors out there.

So all in all, I look at it and I think our wireline business, I look at our compact services which is what Reeves bought and traditional services. Computer log is well-positioned with traditional services, and you have to have that dimension of services available for a full wireline formation evaluation offering; and then on a lower end, the compact tools are the most competitive. And as such, we're able to hit the market on a 2-pronged approach. It is a very powerful model. Once again, just like in the drilling evaluation side, we have more demand than we have tools. The other problem we have on the wireline side is we don't have enough people to run -- basically to get out there and run the equipment we. Have we have to continue to train people. We've upgraded our training facilities in the U.S. We're running 13 schools through Fort Worth this year, which is about 10 more schools than we ran last year. So we're in a position where we're generating talent, and building people so that we can actually start to take the Reeves tools and deploy them around the world. We've doubled the manufacturing capacity of Reeves in the U.K. And that'll start hitting us sometime around May/June of this year. So we're excited about that product line. It's unique. It's proprietary, and it gives us an edge that, frankly, our competitors can't stay with. That's the name of the game.

Is Reeves better than expected based on your -- your expectations coming in?

Absolutely. All fronts.

Financially and operationally.

We're very, very pleased with it, Dan. It was a very astute acquisition. Unfortunately, our tier one competitors missed it. That happens.

That's all I've got. Thanks.

Thank you.

Dan Barrett [ph], Fortis Bank. Please go ahead.

Good afternoon, guys. Great quarter. Just -- most of my questions have been answered. But just a couple for you, John. The number -- I may have misheard this, but the number of jobs that you did year-over-year Q4 '04 versus Q4 '03, did you say it was 26 jobs per day this year and 32 last year?

Yes.

And what's the -- what was the reason for the decreased number of jobs? I'm assuming you got more tools out there, so you should be doing more jobs per day.

Okay, so basically, Dan, we're talking about Canada there.

Okay.

And Canada is a somewhat benign environment. We don't have a lot of technology in here. In fact, we have very little at all. The competitive nature of the Canadian drilling and evaluation market is we've seen a few more EM [ph] tools enter this market, so what's happened is the lower end of the EM market in Canada is more competitive. We are very comfortable in the higher end, so if you're drilling under balanced or you're getting into deeper applications our EM tool is unparalleled; but if you get into more pedestrian applications, shallow or overbalanced applications, there are a few other tools out there so it's a little more competitive. But --

Okay, I didn't realize it was for Canada only. Can you give us some number for worldwide or do you not want to share that?

No, Dan. I can tell you, Dan that I think I used the word binary before, the numbers -- the pick up between Q4 '03 and Q4 '04 is substantial, because in Q4 '03, it was just -- it was next to nothing; and now we're in a point where we can be running a rotary steerable job in 6 or 7 different countries at one time.

Right. Okay, one further question on Saudi, you proved your tools there with ARAMCO. What's the next step, what's the process of winning some contracts and what kind of level of volume can you get -- can you get out of them?

Okay, to be clear, we've qualified with ADCO and ADMA in Abu Dhabi, which is ADNOC. We're in the throes as I speak today with qualifying with ARAMCO, but usually what happens out there is ARAMCO sits back and watches and once ADCO has qualified your tools, they have very, very strict geoscience requirements, ADNOC does. So once they have passed, and they sort of pass the litmus test there, you can go to ARAMCO, and that's what we're doing right now. But we've run LWD in all sizes and rotary steerable with ADNOC and be successful there. ADNOC runs 16 rigs on shore. There's no reason why we can't have 25 percent of that market. And right now, we've got 1 rig. And then with the ARAMCO, I think as Ian has alluded to, there is lots of growth. There right now, there is about 50, 51 rigs running in Saudi. We think that probably somewhere around half of those rigs are running LWD day in, day out. There's a great opportunity for us to have a small piece of that market, for it to be a meaningful contribution to our company.

Okay. Great. What -- one question -- that leads me into one question for Ian. What are you hearing now as far as Saudi's plans to add rigs? I've heard anything from 5 rigs to 30 rigs over the next 9 months.

Yeah, I wouldn't argue with with you. I've heard various estimates, but just purely ARAMCO, they're looking at adding something in the order of 12 to, as you said, the upside is -- I've heard 30, but that will be pretty hard to achieve given the number of rigs that are actually available over there. In addition to that, have you rigs being sought right now for the gas joint ventures and the Rhuba Khali [ph]. There's 4 or 5 rig requests out there in addition to the ARAMCO stuff. And it's all high end, high spec stuff.

When do you think some of those -- when do you think the first sort of round of announcements for additional awards and when that will start actually kicking in as far as from a revenue standpoint?

From the ARAMCO point of view?

Yes, from ARAMCO.

We're waiting for them to officially announce the results.

And from the joint venture stuff out --

They're at the stage of actually -- we're just compiling tenders for some of that stuff right now, where there's nothing being submitted. You got to recognize the lead time. These guys work 6 months out.

Correct. Correct.

Minimal.

So most of the revenue would be in 2006, Dan, not 2005.

Okay. Great. Okay that's all for me, thanks very much, guys. Great quarter.

Thank you very much.

Kurt Hallead, RBC Capital. Please go ahead.

Good afternoon.

Good afternoon, Kurt.

Hank, I wonder if you might be able to provide some color on what critical mass you think is needed at TSG and international drilling in terms of revenue and EBITDA for it to really be a successful stand-alone entity?

I'm sure you would like to hear that.

Of course I would.

Unfortunately, as everybody in this room giggles a little bit, we can't really comment on that. We've had -- we have to be very careful how we approach our discussions with all our shareholders around the world, and there's a certain time that we're comfortable and we've stated this very clearly, year-over-year, quarter-over-quarter, when John and his group are showing us tremendous growth, we're very comfortable with it. As you can see by John's comments that his tools are -- have to be built up. Obviously, PES if it has a chance to ever go on its own, it has to be fully capable of handling itself. We would never do anything that would jeopardize that from a board of directors point of view and the corporation. And every month, every quarter, they get closer.

But providing a ballpark figure, you don't think would be appropriate at this time?

That's correct.

Now, let me ask you another question along these lines then. As you go through the process of creating shareholder value, and you think about how TSG and some of the international drilling businesses could benefit from having the critical mass of the whole of Precision Drilling, how do you kind of go through that risk/reward trade-off? Because I'm sure that TSG and the international drilling businesses could probably benefit exponentially from having the balance sheet and the wherewithal of the total PDS corporate behind it vis-a-vis kind of doing a spin out. Any thoughts on that, Hank?

Well, I can give you my thoughts on it, and they're clearly understood by everybody in this room and our whole board, et cetera. One thing we have found and we've seen many other companies in Canada get trusted, they're actually getting an American multiple, something I've been chasing for 19 years, and when you look at that, that's something we have to pay attention to. Obviously, to get the yield and the yields of 8 to 10 percent and some of our trusts are 7.5 to 8 percent, that's huge yield. Now our trust is, very simply put, something that doesn't need a lot of money and you're going to distribute it. That's the Canadian trust. Now if you want to grow a company, you want to make sure that it has enough for its maintenance cap, its CapEx, and some expansion. Now, if you're going to go through the mode of that and try to grow a company, that's not a trust loan, that is a growth company. What you want for a trust for a mature company, and that's what we're faced with as we try to evaluate this, and we're very comfortable that we're growing comfortably on all sides. But as we get looking at evaluations as we go forward, we're being very practical and very pragmatic that we have to be very cognizant of how we do it, we have lawyers watching us every day to what we say. So we're just saying, generally, it looks like it's something we have to evaluate very clearly.

The irony that you have to go through of financial machinations to get the multiple that your underlying business is striving toward anyway -- anyway just a thought. One follow-up for you, on Mexico, actually on Venezuela, is the work that you're doing there is still with Pedavase [ph], or you've been doing it with the international oils?

We've got mixed clients in there. We've got 1 rig working for Pedavase and the rest are working for other people.

And the stuff that's working for Pedavase, is there any issue in terms of getting your money out?

No, none whatsoever. They've actually been very good operator.

Okay. And then in terms of Mexico, an announcement came out this week that they put out that bid, for I think some of the Ricos work. Was that an area that you guys were looking to get into, or were you looking at other areas outside of that?

I'm not sure the business you're talking about.

I might have got the name wrong, but it came across a couple days ago that they put -- one of the bids that they put out, nobody bid on it, so they pulled it back.

That could be the MSD, that's not necessarily something that service companies would work on [inaudible].

So the opportunity for you in Mexico, you think that before, what, before the third quarter, before the second quarter, before year end? Do you think you're going to hustle some more work up down there?

I think with a little bit of luck, we'll have some come up next week, but we're very comfortable things will come our way. We have done a tremendous job for Pemex. They're fully understanding, and keep in mind that the last thing that Pemex wants to lose is Precision Drilling's ability to produce wells for them. We're very, very confident. We have a tremendous learning curve in the area. And we're probably the most efficient engine they've ever seen. So they're working with us. But they have -- we have to understand that there they're our customer, and then they have some challenges we have to work with. So we have patience and we're listening and we're waiting and we're working with them.

Great. That's it for me. Thanks.

Thank you very much.

Matt MacKenzie, Dundee Securities. Please go ahead.

Good afternoon, guys. Most of my questions have been answered. Just a couple follow-ups. John, on Reeves, it was a great quarter. Was there a particular region behind the strong results?

For Reeves?

Yes.

Specifically? There's nothing -- I mean, remember that we did not have Reeves, of course, in Q4 of '03. I think what we've been able to do is we've been able to integrate Reeves into our operations. We've been able to sort of stabilize the situation and get people focused on going to work every day in terms of -- instead of wondering whether there's going to be any rationalization of positions, so once you get people focused it is funny how they basically out in the trucks making money for us and the activity level hasn't been hurt at all. It's been obviously in all the markets we're in. It's been a tremendous run so --

Okay. No, that's good. That helps out. And just wanted to confirm as well, did you say on the LWD front that you guys peaked out at 7 jobs in 2004?

No, first of all, just on the Reeves point, to be clear on something. I mean Reeves is good, but our traditional open hole was just as good, so I don't want people to take from this that basically we only have a Reeves business and traditional is the poor boy. They're both as good as each other. They focus on different markets. The LWD point that you just brought up, what I actually was talking about was rotary steerable. Not LWD, I was talking about that at one point we had 7 rotary steerable tools in the hole on the same day, for different customers in different areas of the world, and we've been around that range quite a bit here the last couple of weeks.

Okay. Yes. That's helpful, thanks. And a follow-up for Ian as well. Obviously, lots of requirements in the Middle East and Canada is at 100 percent and it looks like Venezuela is picking up a bit and I know you are going to be sourcing some rigs from there, but do you look at new builds to meet some of these requirements? Or are you just going to continue to pick off rigs from where they're available?

We have enough backlog right now to take care of what we've got, and then we will start looking at new builds if and when it is warranted.

Okay. And just the last question, maybe for Hank, you touched on this a bit earlier, the expansion of the Canadian rig fleet. Your market share has declined a bit. At a certain point, whether it's -- I don't know, 25 percent, 30 percent of the market, would you look at an acquisition or new growth avenues to get back to -- to previous levels in Canada?

We're very cognizant of the industry. And as I alluded to earlier, we're going to build 4 new rigs in 2005. We certainly built some rigs in 2004 for SAG-D in a major project. We're also doing a retrofit on 6 of our older rigs so we can put them up to a new standard which would be far more competitive than that which they were. We look at a return on capital. We have look around the world. We try to balance ourselves. Keep in mind that things go up, sooner or later, things come down and we're very comfortable with what we're doing and people are also a challenge. When when you get to be the largest animal on the street, for example we can run 180 rigs, but when we have to go up to 225, that's 45 rigs, that's the fourth largest fleet that has to go to work instantly. People are the challenge as we go forward. And we have to balance ourselves around the world with our people ability as well.

Got you. Okay. Are you concerned with too much capacity being added in Canada? Or are you worried the industry's going to lose some of its pricing power?

One look at history, one would say that's a very good possibility.

Yeah. Okay.

This is a supply and demand business, and sooner or later there is more supply than demand, we will have the -- the knife will turn a little bit the other way.

Yes, looks good now. We'll see later. Got you.

Thank you.

Thanks.

Miles Feesh [ph], Pierce & Co. Please go ahead.

Good afternoon, guys. Just a -- kind of a global thing, if you're looking at '05 over '04, where do you see the biggest growth? You look at Canadian rates, obviously, Q1 rates better than Q4, utilization's been strong, maybe lifts up a little bit, TSG, international, where do you see the biggest bang coming out of PD in '05?

Well, obviously we're comfortable that the hedge group is going to do better. We're comfortable the international group had some serious potential as we move some unemployed iron back to work. And obviously, with the day work rates year-over-year it's going to be better, and the well service is better year-over-year, and rentals are better year-over-year. If we go and stay at the 25,000 wells, the CBM included, it's just going to be fantastic year. Unfortunately are, as we sit back we don't know when the downturn will come, because it just looks very good for the next 2 to 3 years looking out.

No, agreed. I guess if you look at it, from where I'm seeing it I can see that rates are going up, but I think rates have possibly peaked in Canada, and maybe that's in the first quarter here, who knows. I mean they've peaked a couple times, so on the Canadian drilling side, it's really a utilization game. TSG would follow the same kind of mode in the Canadian side, I would think. Internationally, utilization is now 75 percent. What do you see as your max? I guess, is it 90 percent? Is that -- basically 100?

I think 90 percent is a realistic goal. We have many bids that we're looking at. Of course, it's time to deploy the assets. I mean we have to do some upgrading depending which part of the world we go to and what we have to do. We also have some large rigs in Canada which would be far more advantageous in other parts of the world than it would be here, because our bigger rigs are in demand sometimes, but as you see in other Canadian drilling contractors who move some of their iron out of Canada, large is not always necessarily the best in Canada, and that's for the last 30 years.

Yes, no, agreed.

Those are things that we have to look at and again, at putting your equipment where you can get returns, and utilization of assets.

Can you see -- I guess internationally, and maybe -- I don't know if you're -- the struggle I'm getting to is the new rigs are coming on at the new rates. The old rigs, can you bump rates on that? Or are you locked into a 3- to 5-year deal and the rates stay where they are? Do you have any kind of flexibility in that?

All the rigs that we have company contracted, we've just renewed a few at substantially increased rates. We're going to renew some more shortly. Again, at increased rates. And we have about 8 to 10 becoming -- potentially becoming available or having a visible availability within the next 12 months. They will either be renewed at the new rates with the existing operators or they will be offered elsewhere at the new rates.

So what part of your fleet, I guess, if you're looking at your fleet right now, would you say half your fleet is going to be on new rates, versus the other half, kind of on existing rates? Would that be fair?

At what point in the equation, if you're talking 12 months out then --

Let's talk rate today, the end of the first quarter, say, would you have 30 percent of your rigs on the new rates or --

I'd have to go and calculate all this. I'm not sure. But certainly in that order of magnitude. By the end of the year you would be looking to have substantially more.

So closer to 50, 60 percent or --

I would have to go to go and calculate it but something in that order.

That is very real. There is not going to be much upward movement in some countries, for example, Egypt is a closed market. One has to evaluate which country you're in and what are the opportunities there. Certainly the Middle East is the one that has, by far, the most demand coming at us, and that's the one that has the most chance to raise rates and we can do that on every rig we have that there.

That brings up a point actually. The rigs in Egypt, yes, it is closed market, but there aren't 2000 hostile [ph] rigs if it doesn't keep track then we will -- we have availability of those rigs within a year.

Yes, so you can move them. It is just a slower cycle. I guess the point I'm getting at is the biggest growth coming from the international fleet, is probably going to happen through kind of into '06 more than -- and the Canadian fleet jumps around hourly versus over a 6 month period.

It certainly has the international market where you can have approximately 50 rigs with let's say half of them potentially looking at 5- to 7-year contracts. It is rather unique. It is almost its own trust onto itself just having those contracts.

No, I agree. That's good. Okay. On the tool side, I guess, John, you're hoping for '06 to kind of be in the position where you've got enough equipment out there that you've got the critical mass to continue your business. Do you see the biggest change -- do you see any change in rates that the tools are getting now, versus '06? It's just basically a volume change is what you're looking at?

That's a good question. On a market-by-market basis, obviously the rates change. I must say that I've been disappointed with the rates and where they've gone in the Gulf of Mexico and certain places on land in the U.S. And then other areas around the world they continued to strengthen. So I do -- I concur with your first point and that is, is that our volume will grow, we'll slingshot out of '05 with good volume into '06, and as I've said so many times before, Q3 and Q4 is when we start seeing some meaningful contribution from our technology. I think that, frankly, the markets that we're worth focused on, we've got lots of growth there and we think they're the strong pricing markets, and that's just it as well for the beginning of '06.

So pricing-wise, moving in '06, kind of late '05 on the technology side?

Yes.

Okay. Sounds good. Okay, guys. Great. Thanks.

Thank you very much, Miles.

Alan Law, Merrill Lynch. Please go ahead.

Hi, guys. I have another quick follow-up question here for Hank. I'm just wondering about your thoughts on the issues that one of your IPM competitors has recently raised or talked about in their conference call, doing what you're doing in Mexico. I guess sort of why does Precision appear better at it, and do you have any advantage in that market?

Well, the people that I think commented on that don't have the assets which are our assets. Obviously we are a drilling contractor. We know what we're doing. I'm not going to comment on their ability, but obviously, you know what I'm talking about.

Sure.

And the one thing about it, that bid -- we didn't touch it with a 10-foot pole.

You didn't bid on that contract?

No.

I see.

And you know what? We just enjoy watching these gentlemen challenge us and I think the challenge is over. And just lends itself to more potential with some other gentlemen in Mexico.

Do you think this makes you a stronger player or a stronger position in that market?

Yes, it does. No question.

All right. That's all I had. Thanks a lot.

Thank you very much.

Dana Benner, Westwind Partners. Please go ahead.

Hi, guys. Just a follow-up. As we watch your share price almost hit $90 today, or I guess it's exceeded it at some point. Would you guys look at a share split independent of any other process that you may be going through to ultimately maximize shareholder value?

Dana, we appreciate that, and the board is taking that under advisement.

That's it. Thanks.

Thank you.

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

Thank you very much, ladies and gentlemen. It was an interesting conference call. We appreciate it very much. One thing we can comment on, though, from the senior management of this company, we've worked very hard over obviously the last 19 years that I've been here. We started with less than a million dollars in sales, and we'll be 2-point-some billion this year. But we're also very comfortable stating that we can't spend all that we make no matter what we do, so we're going have a huge cash surplus going forward, and that leaves lots of opportunities for us to make some interesting decisions as we go forward. 2005, we're focusing on safety as we go forward. We're extremely pleased with what we've seen so far, we're only so many days 'til break-up in Canada. We're already on the countdown going forward. We expect to have a record year. If this continues on, obviously the price of oil and gas stays where they are at. So we look forward to chatting with you in our first quarter in 2005. And hopefully we'll all have smiles on our face. Thank you very much.

This concludes the conference call for today. Thank you for participating. And please disconnect your lines.