Precision Drilling Corp (PDS) 2005 Q1 法說會逐字稿

Welcome to the Precision Drilling Corporation first quarter results conference call. At this time all participants in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. [OPERATOR INSTRUCTIONS] I would like to remind everyone that this conference call is being recorded on Thursday, April 28, 2005, at 2:00 p.m. Eastern Time. I will now turn the conference over to Mr. Hank Swartout, President and Chief Executive Officer. Please go ahead, sir.

Thank you very much. Good afternoon, ladies and gentlemen. Dale Tremblay our CFO will start with a review of our numbers. Please, Dale.

Thank you, Hank. First off I would like to remind our audience that some of today's comments may include forward-looking statements reflecting the Company's view about future events and their potential impact on our performance. These expectations as well as risks and uncertainties that could impact the Company's operations and financial results and cause our actual results to differ from our forward-looking statements. We have released a detailed news release including; consolidated statement of earnings and retained earnings, our consolidated balance sheet, consolidated statement of cash flows, 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. In the first quarter, we saw record earnings growth year-over-year. This morning, we reported diluted earnings per share from continuing operations of $2.22 Canadian compared with $1.88 per diluted share in the first quarter of 2004. On a Companywide basis revenues increased 20% to 792 million and operating earnings increased 32% to 224 million. These results are a function of three factors; our international growth strategy, which focuses on attractive geographic markets, continued improvements in pricing, and increased asset utilizations. Both pricing and asset utilizations improved partly as a result of the uptick in the drilling cycle and partly as a result of the internal initiatives to increase service offerings to our customers and deploy the assets in line with demand.

Year on year, growth in operating earnings was as follows for each of our three business segments: Contract drilling, up 16% over Q1 '04. Rental and production, up 43%. And energy services, up 107%. Moving to the Canadian contract drilling operations: Operation days for Q1 '05, 13,999. Q1 '04, 14,768, this is a decrease of 5%. Revenue per day, 18,545 for Q1 '05, compared to 16,844 for Q1 '04. This is an increase of 10%. Operating costs; Q1 '05, $8,844, Q1 '04 $8,711, an increase of $133 or 1.5%. Average days per well for Q1 '05 and Q1 '04 was 6.5 days. Our average meter per well was 1,187 for Q1 '05, and 1,126 meters for Q1 '04, an increase of 5.4%. The activity level for Q1 '05 was 769 days less than what occurred in Q1 '04.

Virtually all of the activity variance was from the month of March. This occurred because of unseasonably warm weather causing a premature end to the winter drilling season. During the period, 221 rigs of the 229 rig fleet were active. Industry manpower shortages remains an issue throughout the winter drilling season, with 60 rigs working with two crews. At this time, there is no shortage of work and expectations are to maintain current pricing levels.

Moving to well servicing, operating hours Q1 '05, 139,674. Q1 '04, 150,693, a decrease of 7%. Revenue per hour, Q1 '05, $600. For Q1 '04, $534. This is an increase of 12.3%. Operating costs, Q1 '05 $373, Q1 '04 $349, an increase of 7%. The decrease in service hours over prior year Q1's relates directly to a lack of crude and unfavorable weather conditions in March, as almost all areas were affected by the early spring break up. We will continue to push spot market rig rates as market demands remain strong and equipment and skilled people remain limited.

Moving to international drilling, the addition of the rigs purchased during the second quarter of 2004 increased marketable rates to 48. Out of the rigs acquired in Venezuela, two rigs were active at the end of March, 2005. The days in Mexico remain low, although the Pemex contract was formally extended on January 25, 2005. It will not fully utilize any all of the rigs in the country. On average, four rigs were idle throughout the quarter. Moving to the eastern hemisphere, 22 of the 28 rigs were under contract during the quarter. The operating days for Q1 '05, 2,812, for Q1 '04, 1,239. This is an increase of 127%. The consolidated revenue for Q1 '05 increased to 73 million, or an increase of 42% over Q1 '04.

Moving to PES: As relief technology serves or TS group is now referred to as precision energy services or PES. And generated 80 million EBITDA in Q1 '05, compared to 47.5 million in EBITDA in Q1 '04. Revenues increased 74 million, or 35%, with operating earnings increasing by 29 million, or Q1 over Q4 - - or Q1 '05 compared to Q1 '04. A tremendous turnaround despite the shortened Canadian drilling season. Revenue growth of 57 million was due to the improvement outside of Canada with increased revenues in the U.S., up 64%, Asia-Pacific up 223%, Latin America up 95%, Europe/Africa up 53%, the Middle East up 55%, and Mexico up 18%.

In Canada, revenue from operations was up 16 million, or 13% year-over-year. Driven primarily by wireline operations which included 15 million in revenues related to the compact for the quarter. Revenues from production services increased 4 million, or 19%, over last year. Offsetting this was a drop in drilling and evaluations revenue of 8 million. Total jobs for open hole case hole and slip line for '05, 8,686, compared to 7,545 for '04. This is an increase of 15%.

Moving to the U.S., revenue for the third quarter 2005 was up 64% compared to the same quarter of '04. Moving the U.S. data point, open hole and case hole for '05, 4,974. For '04, 3,059, An activity increase of 63% year-over-year. Revenue for Q1 '05 was up approximately 64%, compared to Q1 '04 due largely to the impact of compact tools and increased drilling activity in the U.S. In constant U.S. dollars, revenue increased - - that would have increased 77% from last year.

Latin America revenue improved once again. The the increase was due to improved operations in both wireline and drilling and evaluation. Revenue in Mexico was up 18% in Q1 '05, compared to '04, with improvement in the non-Burgos project and with a slow down in Burgos activity. The primary drivers of year-over-year revenue increase was sustained increase in wireline work, assignments in Pemex's marine division and higher activity in Vera Cruz and Reynosa for drilling and evaluation services. Europe/Africa increased 53%, Q1 '05 over Q1 '04, primarily driven by the inclusion of the compact wire line business. Revenue in the Middle East increased 55%, Q1 '05 over '04, with substantial increase in all product lines. The result of new projects in Saudi and other countries in the region.

Revenues in the Asia-Pacific region increased 223%, with major increases in drilling and evaluation and wire line. Research and engineering expense for the quarter was 11.3 million. It remained relatively unchanged from last year's Q1 '04. And we expect a run rate of approximately 11 million per quarter going forward. Rental and production: Revenue and operating earnings, both improved year-over-year for the comparable quarters. Revenue improved 32% while operating earnings improved 43%. Precision's rental revenue was a record 13.7 million in the quarter, 6% higher than Q1 '04. Much of the improvement has been due to the ability to maintain strong pricing throughout the quarter. Precision's rental fleet achieved 222,541 days for a 41% rate compared to 2004 where we had 253,000 utilization days or 46% utilization rate.

Season's revenue increased Q1 '05 over Q1 '04 by 41% to 54 million, with both Canada and the U.S. activity levels up over last year. Capital handling in both the Canada and the U.S. improved 20% year-over-year with the biggest gain relating to the U.S. operations. The industrial group in Canada had a great quarter with revenues of 61% year-over-year to 21.5 million. The quarter was stronger than expected as a result of a fire at one of the heavy oil facilities along with a coker shut down during the quarter. U.S. industrial group had slightly higher revenues compared to the previous year.

The mechanical group also enjoyed a strong quarter with revenues up 68% to 14 million due to an unscheduled shut down at two facilities in the Fort McMurray area. The Company continues to experience strong cash flow and improved liquidity, with our long-term debt. The long-term debt plus equity ratio dropping to 22%. Enabling a proactive approach to opportunities as they arise. Working capital continues to improve since year end to 722 million, at March 31 '05, up 165 million since December 31 of '04.

Capital spending during the quarter for our contract drilling group, $20 million. For our PES group, $35 million. For our rental and productions, 11 million, and corporate, 7 million. For a total of $73 million spent during the quarter. Capital for the year is now expected to top out at approximately $350 million for the year. Thank you. Hank?

Thank you very much, Dale. John King, Senior Vice President with Precision Energy Service, please John.

Thank you Hank. Thank you, Dale. I'm going to touch a little bit more on the qualitative reasons for our improvement here in Q1 '05. Dale I think has quite comprehensively touched on all the quantitative issues. Improved results are basically a combination of three things; the appropriate geographical focus, the maturing of our technology initiatives, and our focus in the last year, year and a half, on operational quality. Which has been an important part of being able to actually execute.

Geographically, we believe that we are now starting to be in the right markets. Those markets are the higher volume markets. the markets with the appropriate margin of pricing, longer contract cycles and so on and so forth. We think we're focused in those markets and we think we have the appropriate technology that is applicable to applications in those markets. Technology focus, both from an organic point of view as well as from an acquired point of view, organically of course, in our drilling and evaluation group, we have continued to improve in our operational expertise with our LWD as well as produce Dribble tools. And on the acquired side and the wireline, the acquisition of Reeves last year, which included the compact line of wireline tools, has been nothing but a positive impact on a quarter by quarter basis. So the technology side has really started to come to a maturing phase.

Where we're actually seeing commercial applications and a commercial business with our technology, versus say a year ago, where we were still primarily in the startup phase. Operational quality, as I've talked about on several quarter calls before, it is all about the ability to actually go out and execute people, systems, and so on and so forth. And we made a big impact last year or made a big initiative last year to train more people, open a new training school on the wireline side. We've had several new schools on the drilling and evaluation side. And basically, we've been filling that side of our business, and that part of the - - what a successful recipe would be to us. We've been improving our people quality quarter by quarter. And it is starting to show here as results of improved in Q1. The other operational quality is we basically moved in a number of markets from being critically small to having more of a critical mass. Where we're starting to see some margin expansion, and being able to capitalize on some economies of scale. That comes from focus and it also comes from being able to apply our technology into those markets.

So I will go through each product line just specifically and make a few points. Drilling and evaluation, we've talked about qualifying trials on several quarterly updates. We're still qualifying in certain areas. But what we've seen is a take-up where we've actually gone from that qualifying stage to commercial models. That's happened most recently in Q1. We're actually awarded a contract in Abu Dhabi with [ADCO]. That was a qualifying period that took somewhere around eight or nine months. That was a big step for the company. We are now qualifying with ARAMCO. We're very excited about that. And we've had several successful runs. And that will turn into a very positive commercial impact for the Company.

I think most importantly when you look at drilling and evaluation, we've been able to add our technology to the runs we've done. So effectively if you look at our revenue per job, it is up over 300% from Q1 '04 to Q1 '05. And that's just specifically because we're getting utilization of our LWD tools and our rotary dribble tools. We've continued to round out the repertoire of sizes of tools. We're now basically finished. Our most recent addition in Q1 was the largest size steerable tool, the 8.25" tool. We have a few of those tools but we now deem it commercial. We have had several runs that have been very successful and we have ramped up the production of that tool. So, we are basically in a position now that would allows us to bid on more projects because we to have the appropriate sizes.

If I turn to wireline, we briefly talk about that. Obviously the impact of the Reeves acquisition and Compact Tools has been extremely strong for us. We continue to anticipate strong demand for those tools on a worldwide basis. We took the initiative at the middle of last year to increase or double the size of our product capacity in the U.K. We should see the fruits of that decision coming out here later in Q2 and Q3. And as I said earlier on, we've been training people at a ferocious rate so that we effectively have people to run these tools when they get in the field. The outlook remains positive. There's projects all over the world.

Our utilization, our asset utilization in North America has been especially strong. Q2 in in the U.S. will be stronger than Q1 was. So we see the U.S. market continuing to pick up. So all in all, our wireline business, which you know has been the cornerstone of our Company for the last year, has really continued to perform. And what we're seeing is the drilling and evaluation and production services side is catching up.

The production services group had an extremely good quarter, a dramatic improvement over Q1 '04. Better utilization in the Middle East. Some contracts with ARAMCO, which are exciting, which can grow. Basically, we've seen an awareness improvement by NOC's for under balanced applications. And we think that is going to translate into better operating earnings and better opportunities in the eastern hemisphere in the rest of '05. And we actually installed our first early stage production facility, which was an addendum to our production services repertoire of services in Q2 and Q3 of last year. We now have one of those installed and there was an impact of those earnings in Q1, which was strong. And we see other opportunities.

If you just look geographically and go around the world in terms of where we're at and where demand is, basically we're we see continued utilization in North America. Canada we're in the breakup stations right now but we see, as Dale pointed out ,a lot of demand for the rest of the year. Utilization is strong. We're seeing some opportunities for pricing increases in places. In the U.S., especially our open hole business is very strong. We've seen our drilling and evaluation business grow quite effectively in the Gulf of Mexico. We say it is faster than what the industry pays as a whole. In South America, we're happy with what is going on in Mexico. With all services there actually winning a few different contract, they will be kicking in toward the end of Q2, Q3. And a fairly large volume of opportunities that we will be addressing in the next couple of months.

If you move overseas, Europe continues to be strong. The North Sea, drilling and evaluation has several jobs that are set up here for Q2, which are rotary steerable and LWD. And we're seeing actually some traction in that market . Which by the end of the year we should see on a run rate being a meaningful contributor to the Company as a whole. Middle East, I don't think there is much I can add to what the general consensus is. It is very strong. We think we're well positioned. We've got the right technologies. We qualified in the appropriate markets. And all in all, it is clearly a good opportunity through '05 and into '06.

And as Dale pointed out Asia-Pacific has the biggest pickup for us. 2 to 300% increase in revenue. Primarily, that has been coming from places like India and Bangladesh, South Asia, which we see continued take for our services there. So I'm going to pass it back to Hank and I will be happy to answer any questions specific to Precision Energy Services in the end.

Thank you very much, John. Management is very pleased with PES' year-over-year quarter over quarter. Obviously as we told everybody everybody, that's what you watch. And that's the leading indicator. And the first quarter was a boomer. And we look forward to John's analysis, we're very comfortable that we will beat quarter over quarter quite easily going forward. The Canadian market itself on the drilling side is a phenomenal market. As you could see, we went down 5% utilization on 2004 over - - or 2005 over 2004. Yet our revenues were up by 10%. As we go forward, we have virtually everything that we own booked for the summer. We have 15 rigs under construction in our long term contract at this point in time. And we could not deliver a rig until the latter part of 2006 and possibly into 2007. And it is going to amazing to see where the iron will come from.

So we're very buoyant as we go forward. It is going to be a great summer. And yes, we will probably raise rates this summer. That can be almost assured with the demand that we have ahead of us. The rental group did a great job. They had some more assets coming and they will continue to grow. CEDA has had a great first quarter. The second best quarter ever in the history of the Company and it is in the worse quarter of the year for them. So, they're very pleased with the growth they've had.

On the international side we're poised to make some real strides. We have a huge outstanding bids at this point in time. And we have a limited number of rigs that will fit these new bids coming forward. So, in the next three to five months, we should everything that we don't have deployed engaged under long-term contracts. We've moved to a 2,000 horsepower rig from Venezuela into Mexico. It is going under a long-term contract with the gentleman that is not Pemex. And we moved another rig over. And we will facilitate the last two to three rigs in Mexico. Either we will find a job for them there, or obviously we bid some of the things in Venezuela on the heavy oil side, or we could bring two back to Canada. So virtually by the middle of the summer, every piece of equipment we have should have a home, or going to a home. So with that, we're going to hope open it up for questions, please.

[OPERATOR INSTRUCTIONS] The first question comes from Ian McCurson from Simmons and Company. Please go ahead sir.

I think that Dale went through this quickly, and I may have just missed the fine print. But can you walk me through again how much of the strong performance in Q1, in well service was attributable to Canada? And how the seasonality - - the seasonal impact will impact that side of the business? And what sort of guidance we can look toward for Q2?

Well, we're somewhat segmented. Dale can give you, as far as the increases in the second quarter, he didn't say anything. But he can review the increases in PES, and in the drilling, and in the rest of the services.

Okay. I will get back offline and go through that.

Thank you.

For a follow-up, looking at the Middle East, just wondering if you have any more color on that market? And if you can just talk about how much revenue you're generating in that market kind of relatively with and without the rig component? And how you see the growth prospects for the nonrig piece shaping up for the balance of the year?

Well, I think John can allude to it but I will just help John out a little bit here. Obviously as our equipment has been accepted in the Middle East and we are now working with some of the major corporations in the Middle East, the revenue will grow as to the amount of equipment we can give it. It and as we go forward, we have to decide what we can do. And that hasn't been finalized as to the amount of equipment we can do on the nondrilling side. On the drilling side, we have one rig on its way to Kuwait. We have potentially other rigs that we're going to move over there. But we haven't solidified those contracts at this time. So we really can't tell you when. But I can tell that you the whole Middle East is certainly wanting more rigs. And they also brought some rigs in that weren't of the best quality the last while that came in, not a high grade rate. So I think they're going to pay up this time for the next go around.

It sounds like from John's commentary that the pricing is accelerating, probably faster than was - - would have been inferred from the previous conference calls. I'm curious to note if that is the case, or if we can still look at '06 the real proving out year for the - - for that side in the Middle East?

Yes, I mean pricing continues to improve. I think it is important to say that our Q1 '05 results really didn't have a very large impact from pricing increases. The pricing increases are happening as we speak. We are into sort of long term cycles in the eastern hemisphere and those long term cycles are being renewed. There's a lot of it being renewed this year. So that pricing increase will only really be appreciated towards the end of this year as we renew those contracts. The activity level that exists in the Middle East is I guess unprecedented. In all of these different area, all three of our services are seeing significant pickup in demand. We're being very careful to make sure that as we move into those areas, we can provide the right reliability and the right quality of service. Because there is quite frankly too much to do it all. But I would say if you look at it ARAMCO is picking up there is a lot going on in Abu Dhabi there is a fair amount going into Africa. And all in all that is both rig drilling services as well as the testing and formation of valuation side of the business.

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

Yes, I just want to say first off just a great quarter on your part, John, in the PES business. Can you just talk about, given that margins ran so much further ahead, I think most people thought you would be at this point in the business cycle What your outlook - - if your outlook has changed at all in terms of what you think you will average for margins for the year either on an EBIT or EBITDA basis? And does the performance that you saw here sort of shorten the time horizon where you're reporting to actually earn over the course of your competitive margin with some of the other bigger service companies out there?

Jamie, I think we can get there. I just want to caution you of course that we have Q2 firmly in our sights right now. I think the real big push for energy services will be to see exactly how we do in Q2. If we can come close to breaking even, that is a tremendous actual achievement compared to the years before. I would actually say it is even a bigger achievement that what we've done in Q1. And I think we have a very good opportunity to do so. Because the rest of our business outside Canada has grown materially. And that's what we kept saying that we needed a more balanced portfolio of income. And that's what we will be working towards. I think when you see the margin expansion, what you're talking about is that as we continue on a per job basis, to be able to get that ticket up, because we've got more technology in the hole, then that's where you're starting to see the margin expansion.

And we're also starting to see it in some of the markets where we were, as we pointed out, critically small. We're now starting to see some economies of scale where I think some of the margin expansion has actually surprised us. Where we're actually running five or six jobs instead of one from time to time. So I suspect that, you know, your question is whether we become, I think it was somewhat competitive with our peers. I have no problem believing that we can do so by the end of the year, on a run rate. When you look at what we've given in terms of guidance for margin, we've said somewhere around 20% EBITDA, and somewhere around 9% or 10% EBIT or operating earnings for the year. And those are readily achievable and depending how fast we pick up some of these new contracts we can likely beat them. But it remains to see what happens after Q2. It sounds to me, based on kind of what happened in Q1 with - - it sounds like the Canada wasn't nearly as good as you would have expected it to be. It could have been competition or breakup on the PES side and that gives you a pretty good break up in the springboard into the quarter.

That's correct. Q1 came in like a lion and out like a lamb, basically. Jan and Feb were great and it got pretty quiet net March. Which was a little disconcerting. Q1 is still good in Canada but it could have been better obviously. A nd like I said, I mean it is the balance, it is having a real business in the U.S. And we do have a real business there. And it is picking up and I think it is Q2, it could be - - it will carry the day in Q2 versus in the past, it was more of a hobby than a real business.

And then, Hank, I might as well ask it, since it is going to come up later anyway, but can you just update us on your thoughts on the whole trust issue, and, corporate restructuring, cash to shareholders, any of those issues?

Well, Jamie, seeing I can't make any comments on it, you are certainly welcome to ask. The Board is certainly aware of many things coming at us. We're evaluating it properly and in time we will let everybody know.

But have you not - - the Board has not foreclosed that option at this point?

No --

There - - no decision has been made either way?

No comment.

Okay. That's all I have. I will let somebody else go.

Your next question comes from Mike Mazar from BMO Nesbitt Burns. Please go ahead, sir.

Hi, guys. Just wondering about the 15 rigs you mentioned. And I wanted to clarify, you said that they're not going to be delivered until late '06? Did I hear that right?

That's correct. Some of the rigs that we have, we will - - out of the 15 rigs that are coming out, nine will come out in 2006. And obviously, six will be in 2005.

And that's all Canada?

That's all Canada.

And just kind of ballpark, where - - what kind of like - - what market are they in, in the sense of what size are they generally, what's the split?

They vary from the most innovative rig anybody has ever seen that will be out in August to one of the deepest rigs that - - no, actually, it goes from about 500 meters to 4,000 meters.

Okay. Okay. That's great. Thanks.

Your next question comes from Alan Laws from Merrill Lynch. Please go ahead.

Good afternoon. Hi, guys. I am wondering if you can help make some comments about some of the comments from your large cap peers. Actually in their 1 Q conference call they reported strong results from their energy services business and their product lines in particular like the directional and the wireline. And they said demand is very strong, and in fact some of them said they're going to add capacity. And as a current capacity adder yourself in the market do you see any one particular product line that is facing stronger demand and are you focusing or changing the mix of your rollout to meet this?

Alan, it is John here. We're not changing the mix. You know, we have a significant amount of growth that can actually come from just taking what I would say our traditional, like a directional only platform, and piggybacking on the back of it all our LWD type measurements. And that's where you will start seeing margin expansion from us. Mot on a top line - - not so much the top line but from a margin point of view. When you're adding those measurements and that technology you can see significant growth. And we can actually address some of the demand that's out in there in the market without having to go crazy and build a whole bunch more tools. So we don't have to double our feet in order to address the demand that's out there. Just commenting on what our peers are saying, absolutely. I mean we're seeing demand everywhere. Which is significantly more than we've seen before for all our services. And I think on the open hole side of things, our timeliness with the acquisition of Reeves has really put us in a role here where I think from a customer point of view, we're seen as an alternative to the other two or three players out there. And we're in that peer group. So we get to have a look-see at all these operation, all these opportunities around the world. And I find it hard to believe how anybody is going to be able to address the entire demand that exists both in the eastern hemisphere and the western hemisphere. So I'm not surprised that they're actually picking up their CapEx.

So does this mean the incremental tools, that you add are the ones that are already out there, are facing higher utilization then you had originally expected earlier in the year?

That's correct.

So then margin expansion can accelerate? Without any price increases is what you're saying?

That's the idea. And that's what happened in Q1. We didn't see significant pricing increases. We just saw asset utilization go through the roof.

And just a follow-up question, how would you characterize the ongoing rollout of the new tools? Are you ahead of schedule? I know you mentioned on that quarter you are now commercial. So are you ahead or are you in line, behind?

I would say we're right in line. I mean I always sort of have a bit of a margin of plus or minus three months around where you're expected to come out. And I think we're right on line. It is one thing to actually will have a prototype and go into the field and sort of start running tools. The second thing to actually will have, say half a dozen successes and deem it commercial. And then go actually out to work. Where you're just not one in field, you're in the eastern hemisphere and the western hemisphere. And that's what we're doing with our large rotary steerable tool and that's what we're doing with our LWD tool. So I think we're right on track.

In conjunction with that would you characterize pricing versus your expectations earlier in the year as better or in line as well?

No, it is getting better. But we haven't been able to capitalize it yet in the results because the contracts we are winning in the new businesses coming is at the higher rates. And that should come in the future in the last half of the year as you ramp up these projects.

Okay. And the last thing is, what would be your average jobs per day now that you're running?

For the drilling and evaluation?

Yes, the drilling and evaluation.

If you look at Q1 '04, with we were in the 50 to 20. We're now sort of closer to the 25 to 30, and that would be depending on whether your some are rotary steerable, LWD' some are just LWD. But as a whole you can see that's the sort of increase we've had.

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

Good afternoon, guys. Hi, first of all, for like '05, what do you think kind of ballpark, the percent of revenues of the Company, the mix between like Canada versus international, is it 50/50 yet or - -?

We think about 60/40.

Approximately.

In fact I will tell you, for it the the first time you haven't been downplaying the growth in Canada. You know, 10% growth on much lower utilization levels. I'm sure operating income growth was even greater than that. So, you know, maybe one of these days Canada is going to slow down, but it doesn't seem like it is going to happen. The last few years or the next couple of years.

No, John, it is amazing what we have ahead of us. And it is just the feeling through the whole industry. And we're having to - - actually, people would like us to build iron more than we have, and we just can't do it. We're at a point of saturation right now for a little while.

And you know, you mentioned on the well servicing side at least that, you know, the lower amount of hours was both a reflection of weather and of people. I guess that is just a struggle you guys will have to continue to just deal with. But let me shift focus back to John a bit. I do - - I did recall, I thought, that you guy did seem a little bit ahead on that 8.75 tool but I guess you're in line. I don't know if you want to give projections anymore, I've forgotten, but what's your - - do you have a goal by a year end of how many jobs you will be able to run in the drilling evaluations?

A goal? Our goal right now, I mean John, I'm not evading the question. The goal right now is to basically get as much of our high end measurement in the hole on a daily basis as possible. So what I'm getting at is; if you go back to a year ago, a nuclear density tool, we basically have increased the frequency of when we're using a new nuclear density tool in a traditional job five times. And we can double that again. And what that does for you, that gets you the utilization. So instead of sort of saying I'm going to go from 25 to 30 jobs to 50, I prefer to have 30 jobs running with triple combo in the hole every day. And that's what we're really focused on. And it's moving in the right direction. And if we can get there, that gives us a tremendous return on capital employed and basically gives us a great business. And we're not constantly talking about growing our business. We have a great business.

All right. I guess that's all I have. Thanks, guys. Appreciate it.

Thank you very much, John and one thing we're cognizant of to, and I don't know if John alluded to it earlier, our rate per run on our LWD equipment is up threefold versus last year. John is that not correct?

That's correct.

And when you look at something like that, and even we had to prove the tools but our MTBS on our LWD is in the stratosphere, fantastic equipment. And we're very comfortable that our rotary drill is every bit as good is not better. And we're proving that on a daily basis that our rotary steerable is something they all have to contend with. We are tier 1.

I will add one little data point. For a customer that I will leave anonymous right now, shallow water deep shelf in Gulf of Gulf of Mexico, we've got all the jewelry, triple combo, the whole shooting match at 30,000 plus feet right now. 25,000 PSI and really there's only a handle of MWD that have been that ever been that deep. Pulsing away we're getting good information and the customer is very happy. If this turns out to be a successful well, that's a nice market for us. Given the fact that our tools, I think we've talked about in the past, have the highest temperature and pressure rating in the industry.

That will be a great day for the whole PES team. We will be popping a lot of Coca-Cola and pretending it's champagne.

Your next question comes from Dan Barrett from Fortis Bank. Please go ahead sir.

Good afternoon, guys. Great quarter. Most of my questions have been answered but a couple more I guess for you, John. And maybe on the drilling side, and in the Middle East as well. Can you give us a little bit more color on your comments on the North Sea and the qualifying that you're doing there? And how big that might be and how many different customers? And also, in the Middle East, how many other customers are you still qualifying for in in addition to ARAMCO? And with the length of the contract cycle that you typically have in the Middle East, when do you think you can have some meaningful long-term contracts in hand?

Okay Dan, let's talk about the North Sea first. I mean the North Sea was a startup for us in Q4 of last year. We did two jobs. Both of them were very successful. Both of them were quite applicable to the type of technology we have. They like to drill for the reservoir hole 6 1/8 hole. Which means you're in 4 3/4 inch tools. Which means if you're going to run rotary steerable you need a 4 3/4 inch rotary steerable. And as I think you know there are very few of those in the world. It's really us and one other player that have commercial rotary steerables. So it fits our pistol perfectly. We have a number of jobs backed up based on that success that we already had in the North Sea. Some of the, are high pressure, high temperature. Some of them are just because of the size of the tools. But we see more and more demand. And it's a number of customers. I thought frankly we were going to sort of be working with two or three different customers before Christmas. And I think we have jobs for five different customers now. And we're seeing opportunities from a whole swath of different players. So the North Sea - from a pickup- - from a run rate basis probably won't be there until Q3 or Q4. But it is coming from a business that did less than a $1 million last year to over 10 this year. So that is significant impact. But on a run rate basis coming out of Q4 it could be a meaningful player in '06 for us.

When you go to the Middle East as I said it took a long time for to qualify for ADCO. We did so. We we were awarded a contract with them which in the middle of a contract cycle was a big win. I mean that is something that our competitors were not that happy about. But it happened anyways. They loved the quality of our measurements. And we've got a little piece of that ADCO land based drilling fleet right now. Which basically is sustaining, absorbing our costs and allowing us a platform to grow in Abu Dhabi. With ARAMCO we've had a number of qualifying runs. We're into a final one right now. And after that, we will be talking to them about just how many rigs we can handle. It is not so much us going in there saying can we have some more work. We just to have make sure what we tell them we can do we can do reliably and efficiently. And there is great opportunity in ARAMCO. So, I think that you should see, on a quarterly basis you'd see a full quarter of contribution probably in Q4. But see the signs of some of that stuff happening in Q3.

Okay. Now, on the drilling side, in the Middle East, You're building 15 rigs all for Canada. What about the Middle East? I would imagine that the Saudi's with all the announcements that they've made, I think they got 62 rigs working there today. There's talk about it going to 70 or 80 rigs. Where are those rigs going to come from? And have they approached you to actually build new ones?

Well, we've certainly bid on some projects and we have a reserve of 2 and 3,000 horsepower rigs in our stock, but not in Canada. Actually, the one market that's soft in Canada is the deep rig, the 2,000 plus horsepower. We could actually move something from Canada to the Middle East. But it would be rather expensive because of the different configuration and winterization and having to make it to the desert. But that is something in time. But we to have some more rigs in stock from the Global Santa Fe acquisition that as I alluded to earlier will - - we feel they will be contracted the next three to six months, and then they run for five years.

Your next question comes from Dana Bener from Westwind Partners please go ahead sir.

Thanks. Good afternoon, gentlemen. Firstly, John, is there any way that you could estimate the amount of revenue that Precision Energy Services would have generated from new tool, say those developed in of the last two years in the quarter? I mean you guys obviously put up great results. But just as a way for us to quantify your progress on the new tools side.

Dana, that is a very difficult thing to do. I'm not being evasive. It's just frankly, when you get into it, a lot of times the technology is complimentary to an existing traditional application and sometimes it replacing an old one. So I think one thing you can take away is the majority of the upside has come from the utilization of new technology. We're obviously getting good utilization with our conventional services. But the majority of the upside and the margin expansion has come from the new technology improved asset utilization.

Right. But no - - say not even a guesstimate at to say 10% of the - -?

I prefer not to, Dana.

Okay.

The answer is no.

I caught that. If we think about market share in your individual business units, is there an area, I guess specifically referring to the first quarter where you feel you may be taking market share away from some of your competitors that may not have come out in some of the numbers that you delivered?

Yes, I think our open hole business. In pretty much all the markets we're in, we're taking market share away from our competitors. We've got the acquisition of Reeves and some of the technology we've developed with the old computer log suite of tools are specifically suited for a lot of these large mature exploitation basins. And we're doing extremely well. So I think we're taking some share away. Remembering though in some places the market is growing so fast it is hard to measure that. One place I know we probably, our market share has grown is probably the Gulf of Mexico with LWD and our directional business. The Gulf is showing signs of picking up. But in the last quarter,we've actually shown some fairly significant takeup in activity there. Which I know compared to the peers and compared to what just general industry consensus is, is a little bit faster.

Right. Hank, what about the other two major business segments? Any area where you feel you're making great gains?

Well, not really in the drilling side, we're probably going to have 800 rigs in Canada. So obviously those rig are coming in faster than we can chat about it. And obviously our utilization is very good but on a percentage basis we are losing market share because we don't have the iron. So we are obviously deploying our assets properly around the world and our capital so that we can get a better return. The well servicing are fine. People are challenging all over the place. It is more to do with weather than people. We got up to the areas that we thought we could handle comfortably on the well servicing. We might have been able to run three to five rigs but they weren't guaranteed work. It is spot work.

And up with day here, one day there. And when we have a long term contract with a drilling rig, for example, it is like a mobile factory, the gentleman that go to work there know they have a five-year contract. That is easy to bring hands in to train them, to work in their factory for five years. That we can facilitate quite easily. It is still trying to get our operators to load level and give it a guaranteed work, we can guarantee the people. But if it is whole service industries as we go forward and John alluded to it and we're very comfortable in saying, training people is going to be our biggest challenge. We're up to it. We've got our own little universities and whether they be roughneck school or engineering school, we're putting together more facilities to train in.

Safety is still our biggest concern at Precision Drilling as we go forward. And we're very careful not go out and put people that are at risk. We try to our best. We go to an extent that very few people as far as we understand it do and our international record is beyond reproach, obviously. But it is a challenge. People in training are always going to be a challenge. But as far as assets, when we look at it, we've got a are lot of - - we're spending a lot of capital. In fact our budget, we can't spend it because it will never get delivered.

I guess I was thinking more of say your international drilling business or even CEDA, I wondered if maybe you thought there was either an area of the world or even maybe measuring it by certain project work flow that you thought you may be gaining some market share?

Well, CEDA is strictly in North America. And they do such a great job, we've earned our positions where we're at. And we've focused again on people skill, productivity and training. They have the best inhouse regime of anybody in the industry. And that's why we get paid what we get get paid. As far as international drilling there are going to be some increases obviously. We're going to move probably five to six rigs in different parts of the world here in the next three to four months. And we've already got some on the water moving to different places. So, we will have most of our assets, as I alluded to earlier, under contract. As what we see today, within the next six months. But keep in mind, that some of these can take reconfiguration or an upgrade of three months to six months to put it to work as well. And then you're gone for five years.

What about on the CapEx side? Any change to the guidance that you were offering earlier this year?

The only guidance I can say is we talked earlier, we didn't have the seven rigs we just tied up the other day. So that is another 70 million that come into the CapEx. But most of that is going to be spent and half will be spent in 2005. Most of it in 2006. Because we can't deliver it. We had some other minor things. And as John's world is growing, as we have to build more tools, we are going to bring forth some CapEx for potential lost in order. Get things organized so that we have the tools that we need. And what we're really identifying very carefully is the long-term delays of any type of our tools in John's world, drilling-wise, anything that could delay the assembly of a drilling rig, a tool or anything else, we are very, very focused within all our groups right now to see where the worst problem could be and that's what we're taking up and ordering that now.

So Dale, I guess what, a revised CapEx number might be what?

We're saying right around 350 right now. It could push 400 but right now, let's keep focused around 350. Until we get a little more clearer, you know, in the year, clarity in the year.

Okay. That's great. Thanks.

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

Good afternoon, guys. First question is for Hank. You mentioned that you could possibly raise rates this summer in Canada. Would this be on the spot market? Or would you actually be raising rate quotes? And also what kind of increase, 5%, 10%?

Well, obviously, as you know me from the past, I never tell anybody what we're going to do. When it come, it comes. It will be more spot market. We still look long term, with our long term customer, we negotiate as we go forward. But if the spot market pushes us and we get into a situation where we have a rig available, we are known to charge what the market will bear.

Okay. So some of this could find its way to the bottom line then? You're not just pushing through rates -- [inaudible].

Well, I think Dale, if you listened to Dale earlier our costs have changed from 1.5% year-over-year. Our costs are probably the most organized of any drilling contractor in North America. We are very comfortable that we do such a great job of organizing our inventory, financing. When we can say that year-over-year our cost structure has changed by one-half percent with steel and everything else and that's on the inventory side and not on the new build side, very few people can throw that at you.

No, agreed. You've done a great job in the past. And you don't see them creeping up much more mid year then?

I can't really tell you today. But if they creep up one-half percent, I guess we'll handle it.

A question for John. Well, Dale give some information on the top line for energy services. And you gave a qualitative info. But just on the margin, what would the strongest margin improvement, whether that's a business line or geographic region, outside of Reeves, what was the strongest say year-over-year versus sequential?

LWD, drilling and evaluation. And just utilization.

Okay. And geographic region?

Geographic region, we've got a few regions that have been very strong. I would say probably Asia-Pacific. And specifically - - Asia-Pacific would be there. But there are a few right on its heels.

Okay. And just last question, just part of Dana's question, looking into 2006, the balance seemed to lean, all your debt and long-term bonds, the energy services, program should slow down a bit. What are the plans for the significant amount of free cash flow? I know you've got nine rigs and whatever built for Canada. Where do you see the focus? Is it going to be more on the drilling, more on the ES? Are you just going to look at demand when the time comes?

We will deploy our capital wherever we see the best return going forward. And obviously 2005 is, you know, on its way to beat the record. Which I predicted early in 2004 it would be a record yea. Obviously with the numbers are showing here in 2005 should continue on to be a record year. And if Canada stays firm and the price of gas stays up, 2006 will be a record year. So it is a great day to be in the drilling business in the oil field service business.

Okay. Thanks very much, guys.

Thank you.

Your next question comes from Jeff Barisch from Citadel. Please go ahead sir.

Hi, guys. Great question. I know you touched thon tangentially but now it seems like PES can operate as a stand alone Company. Is the Board much more disposed to this trust option than a quarter ago or just a bit more so? I'm just wondering if you can give a sense of timing of their decision.

I can't and no comment.

I'm sorry you can't --

I can't, and no comment.

Okay. Well you mentioned I guess maybe if I rephrase it, you mentioned last quarter that you speak to your accountants and some lawyer, I think the quote was every month, about the trust options. Would you characterize that maybe as every week now or even every day?

I know that somebody asks me that question every minute, I would probably have to think about it. But I can't make a comment on it.

Okay. Would it be fair to say that you could make a comment if you came to the decision that this wasn't something that you wanted to do?

I'm not going to make any comment.

Okay. Well, again, congratulations on a great quarter. It seems like the PES group could really operate now as its own spun-out Company. And, you know, really impressed with the performance this quarter. Thanks.

Thank you. And we're - - you know, the Board and the whole Company is very impressed with PE and the strike they had to go through to recreate themselves. But going forward they have some tremendous opportunities. And of course we see those on a daily basis in the office here. And John and his whole group are extremely excited because they have some world class things that are coming aboard. And I think the competitors actually know we could be considered a tier 1 now.

Well, again congratulations.

[OPERATOR INSTRUCTIONS] Mr. Hank Swartout there are no further questions at this time. Please continue.

Thank you very much, ladies and gentlemen. We've had a great first quarter. Obviously, from what we see ahead of us, the second quarter will certainly be ahead of 2004. We hope to be able to talk to you then in a short period of time. Have a great spring. And we will talk to you in the summer. Thank you very much.

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