Precision Drilling Corp (PDS) 2005 Q2 法說會逐字稿

Welcome to the Precision Drilling Corporation second quarter results conference call. At this time, all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star 0 for operator assistance at any time. I would like to remind everyone that this conference call is being recorded on Thursday, July 28th, 2005, at 2 p.m. Eastern. And we'll now turn the conference over to Mr. Hank Swartout, Chairman, President, and Chief Executive Officer. Please go ahead, sir.

Thank you very much, [Shawna]. Good afternoon, ladies and gentlemen. We're looking forward to this very concise quarter, because we have a lot of discontinued operations, obviously. Bob German will go through a financial overview to start with.

Thanks, 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 the use of services supplied by our corporation.

We have released our consolidated statement of earnings and retained earnings, consolidated balance sheet, and consolidated statement of cash flow. These statements look substantially differnent than past quarters due to the pending sale of our Energy Services and International Drilling divisions to Weatherford and negotiations being held with respect to the sale of our industrial plant maintenance business carried on by CEDA.

As a result of these activities energy services, international drilling, and CEDA have been classified as discontinued operations. As Hank alluded to, my comments will be focused on the continuing operations, which are comprised of the Canadian drilling rig, service rig, snubbing, [camp and catering], and rental businesses. Overall, the market for our services is very strong with winter [inaudible] for the most part being maintained through the spring and summer months. This is positioning the industry well to see improved pricing for the next winter season.

Operating margins have improved year-over-year with operating expenses as a percentage of revenue declining to 64.3% from 68.5% in the second quarter of 2004. For the traditionally slow second quarter, this performance is strong. Equipment repairs and maintenance expenditures, while substantial, are in line with our expectations. Strengthening customer demand for services in the spot market has underpinned pricing and is a significant component to our operating margin improvement.

As is the norm in the second quarter, activity levels are very much dependent on weather conditions. The quarter was shaping up to be a record breaker until the heavy rains and floods hit Alberta in June. Dry conditions have returned in July and activity has quickly ramped up. On a comparative basis year-over-year, second quarter equipment utilization statistics are as follows: in drilling we achieved 6,049 drilling rig operating days, or 29% utilization, an increase of 770 days. In the quarter, 161 of our 229 rigs were active, with an exit count of 100 at June 30th. At present, we are running 170 to 180 rigs.

In well servicing, we achieved 72,814 service rig operating hours, or 33% utilization, a decrease of 8,200 hours. Record rainfall severely hampered the movement of our fleet. At present, 146 of our 239 service rigs are active. In snubbing, we achieved 5,776 snubbing unit hours, or 24% utilization, virtually identical to the prior year. Delayed startups -- delayed startups industry wide as a result of wet weather led to modest utilization and a backlog of jobs going into the third quarter. At present, 11 of our 26 snubbing units are active.

In camp and catering we achieved 1,230 camp days for 16% utilization, an increase of 141 days. In the quarter, 26 of 87 camps were active, including one base camp. At present, 27 camps are active. In rentals, we achieved 167,000 rental days for 31% utilization, a marginal increase of 1,500 days. Service equipment utilization was higher by 8%, and accommodation facilities were higher by 2 percentage points. Conversely, tubular equipment utilization was down 12%. With the exception of snubbing, all operating divisions reported higher revenue for the quarter. This is particularly noteworthy in our servicing, where service rig operating hours were 10%less than prior year.

Moving on for the [inaudible] income statement. At first glance, general and administrative costs appear to have increased by over $9 million in the second quarter. While costs have increased as a result of options granted in the last half of 2004 and additional expenses incurred in realtion to internal and external audit functions in this post Sarbanes-Oxley world, there are also a number of severance, financial advisory, and legal fees not associated with ongoing business. These costs amounted to approximately $4 million in the quarter.

It is also important to note that during the six months or so following the sales transactions mentioned earlier, general and administrative expenses will be reduced as the corporate functions will be sized to match the needs of the smaller, ongoing business. Our tax rate on income from continuing operations has increased from 2005 as a result of the increased nondeductible options expense and a tax law change in the second quarter that was made effective January 1st of this year.

Finally, capital expenditures for the ongoing oilfield services business will amount to approximately $200 million in 2005, with 50% of this amount attributable to growth or expansion in our equipment offering. A significant portion of this spending is being directed towards new drilling rig construction.

Hank, that concludes my remarks.

Thank you very much, Bob. Ladies and gentlemen, it was a interesting quarter. We thought we would blow our people for a little while but, obviously, the rain brought us back to reality. I can comment that July will be a record breaker for us. We're operating at about 75% utilization at this point in time, which July just about to be finished, we'll have approximate my 1,000 to 1,100 days above what we had budgeted and we see the demand continuing for August and September. We don't see a slowdown in September as we did last year looking forward.

The rest of the world is coming together nicely. We hope to facilitate the Weatherford divestiture by September the 1st, plus or minus a week. We're very comfortable that's coming together nicely, and things look extremely good as we go forward. We're going to produce our first casing drilling rig, that's a mobile unit with four loads and it should be out September 1. We're expecting it to be a very unique piece of equipment, and we see the options with CBM and Shell gas to build some more of those. And we actually are starting to secure equipment for some more builds in 2006 as well.

And we continue with our building program; I think we have 17 rigs under contract that we have to build, which will be delivered all through 2006 and some, probably, in the latter part or the first quarter of 2007. So with that, I'm going to open up for questions. Please, [Shawna], could you open up for questions.

[OPERATOR INSTRUCTIONS]. Your first question comes from James Stone from UBS. Please go ahead, sir.

Hank, I don't know if you can give us any more clarity on the process that you're going through in evaluating the trust, but I thought since -- I'm sure someone else is going to ask I'd start off there. And maybe you could also just give us an update as to how you see the tax situation shaping up on the Weatherford -- on the sale of PES and what your taxable liability might be there?

Jamie, I can't answer either question. We're still formulating some answers as far as the tax liability as we go forward as we go through it. First of all, we have to close Weatherford before we can be comfortable and express our taxation system as we're going forward. There are some nuances that we're playing with, it will be interesting to see as we go through it.

As far as the trust, it's only up for discussion; the Board has not made any commitment at this point in time, we're still evaluating all parameters. There's always a chance that somebody will come in and take us up for a better multiple than a trust unit. We have to be very cognizant of all options as we go forward.

Okay. Can you just perhaps give us an outlook -- since you've dramatically changed the financial reporting here by taking all this stuff and putting it into discontinued operations, can you give us a sense of what we can expect in terms of things like depreciation and amortization going forward?

Give us a sense of how much of the rental business -- how much the -- how much contribution you're getting from the rental business, since that's been sort of shuffled back up into the Contract Drilling space? Just trying to understand how some of the parts are going to move around here as we try and formulate new numbers.

I understand that you'd like that, Jamie, but at this point in time we have not closing this Weatherford divestiture before we start segmenting each one of the units, we're not going to go into that detail.

Okay. And then just lastly, you talked about having a record July. Can you give us -- and Bob mentioned that things are shaping up for good pricing going into the winter. Can you just give us a sense as to what you think year-over-year price gain will be in the third quarter up in Canada, and if you have an outlook for the fourth quarter as well?

You know, we don't like to comment on that and I haven't in the past. Obviously, you can see that the second quarter was higher this year than it was the previous year. I would assume, with some -- a little bit of vision, that the third quarter is going to be higher than the third quarter was last year, with more days, obviously. We take it as it comes. Obviously, with the demand, the pent-up demand that we have, we could actually be operating some more rigs at this point in time if we had more personnel.

Right now, the 180 rigs, we have two or three rigs we can run, but keep in mind 25% of our work force is employed in other places throughout the summer, so our other 25% will start arriving September 1 and we'll wrap that up. We've never been to 181 rigs ever in July in the history of this company, and it's just going to keep ramping as we have people coming back from their farming, ranching, fishing operations and other things that people do in the summertime.

You'll see that the numbers could -- we could add -- we're already 1,000 to 1,100 head. Obviously, another 1,500 to 2,000 per our budget, so we could add 3,000 days. Obviously, if the numbers we have tried to calculate, it's very incremental addition to us as we go forward for the third quarter of what our budget was.

Okay. Thanks.

Your next question comes from John Tasemir from Raymond James.

Hank, I guess I was hoping to really learn something on this call, man, but I guess you can't say a whole lot right now. Let me ask you this. This sounds like a pretty obvious question, but why is the rig count -- why now is the rig count able to be so high in the month of July? I mean, obviously the economics are there to drill more holes, but I always thought it was kind of a seasonal issue. I mean, can we run 500 rigs now every July?

If we have the proper weather we can do it. I mean, the other thing that we have is we have all our juniors and our trusts, et cetera, are all back in the drilling mode. They realize they have to do it with the drill bit. And when you look ahead and you assume that -- you can go back to summer's past and we drilled 6,000 wells a year, we're on the 24,000 wells per year, going to 25, 26 with CBM.

We could get up to 30,000 wells in Canada in the next two or three years, and it's just the demand. And obviously, a lot of it's shallow but it's very accretive. And when you get rained out in June, everybody's lined up. We have a huge demand. We have a challenge trying to meet the requirements of our customers.

Right. I guess I'm just looking at it -- it seems to me like when the economics are there, there actually is a little bit more growth in Canada than maybe the common perception is.

Well, I think you can -- I've seen your price on gas. Obviously, gas isn't going down, ladies and gentlemen, and as the price of gas keeps moving up more CBM projects come into vision and they have return -- when you look at the profitability of our customers, it's nothing to sneeze at. These gentlemen are making lots of money and they have to spend it to keep going.

Right. One other question. I mean, I know you've got your hands full now, but listening to neighbors and Patterson and some of the other companies, what are your thoughts now about for Precision Drilling over the next couple of years? I mean, are you guys going to elect to get back internationally or just hunker down at home in Canada or do you want to get into that right now?

Well, first of all, we have to finalize where we're going, whether it be -- when we get the Weatherford thing behind us. But, obviously, we have to build another 20 rigs without question, possibly 30 rigs, for Canada, and our return is extremely good in Canada. And, obviously, our shareholders are going to find out that if we ever get into that other word that everybody's talking about, it can be extremely accretive what the cash will flow through.

Thanks, Hank. Appreciate it.

Thank you very much, John.

[OPERATOR INSTRUCTIONS]. Your next question comes from Matt MacKenzie from Dundee Securities. Please go ahead, sir.

Hi, Hank. I'm not sure if I'll be able to get answers to this, but any sort of guidance on the timing, possibly, for the sale of CEDA?

It will be around September 1 as well.

Okay. Can you just -- once again, I don't know if we'll get an answer -- but can you just speak a bit to the strategic rationale behind that? I mean, I know the trust thing is not finalized, you're looking at all the options, but it would just seem to me like CEDA would be a very appropriate division to be rolled into a trust, but can you just add a little bit of color to that for me?

When you look at CEDA's EBITDA versus the drilling trend, it's somewhat less. They have a huge future ahead of them, there's no question, and it comes down to tax planning; what one can do with the tax pool one has available. And these gentlemen are going to a company that will treat them very well. They are excited about it. They'll be a great company and they'll do a great job. It comes down to shareholder value, that's what dictated the answer.

Fair enough. And just last question, succession, just with the CFO departure, any new developments on that front or what's the plans there?

We've got a great team coming forward. Once we get through the Weatherford disposition, the team is basically working hard to get themselves into position. We're very pleased going forward. The gentlemen that here, Bob's done a super job, Nick's done a great job; Doug Strong from drilling is participating. We have great depth in this company and we won't miss a lick. And you'll see a whole new team as we go forward, as we get out of our little international shell into a domestic company.

Fair enough. And just last question, did I hear you right saying that four casing drilling -- sorry, no, not for the four loads-- just casing drilling rigs that you're rolling out, can you add some details on that, please?

It's very simple; we're going to drill with casing rather than drill pipe. We're going to have an disposable PVC bit you bang into the ground and it's done and you move on. It's all self-propelled so you don't have to pay the trucker. The truckers, they looked at the costs, and we have a customer that looked at it, we spent a year and a half developing it. It will be extremely accretive going forward to the number of wells that we can drill on a shallow basis, and we think we have something rather unique coming up.

How many of these are you rolling out?

One to start with, and next year there could be a [plithory]; that means more than two to a drilling contractor.

Okay. And the first one rolls out in the third quarter?

September 1 at the latest.

Okay. Thanks very much.

Thank you.

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

Good afternoon. Hey, Hank, what are you going to do with all the cash after the CEDA sale and the Weatherford chairs and the cash you get from the Weatherford? Are you going to take out the public debt, are you going to pay special dividends? What's the plan on that?

At this point in time, I think we can say comfortably that there will be -- all the Weatherford stock will be distributed to the shareholders and a substantial cash portion.

All right. I think a few of you might even smile. But as far as the debt goes, you're not going to take it out at its premium? It's going to be part of the go-forward entity?

We're not going to dig it out at a premium. We're very comfortable we can handle it on a certain basis, and as we go forward that's part of our restructuring, what we can carry, what we have to deal with. There's going to be some planning done on that, but we're still in a tremendous cash position, as well as we have lots of options.

All right.

Huge amount of options.

Thanks, Hank.

Thank you.

Your next question comes from [David Hyman] from Raymond James. Please go ahead, sir.

Hi, there. Just sort of a follow-up to Matt's question. I don't know if there's a chance that you'd throw what CEDA did for revenue and EBITDA last year?

I don't think we have to get into that. It's a private company buying it. I think if you look at -- I won't -- I don't think we segregated it so I'm not going to do it now.

Fair enough. That was what I was expecting. That's all I had. Thanks.

Thank you.

Your next question comes from Jeff Davis from Wachovia Securities. Please go ahead, sir.

Good afternoon. Just wondering if you could talk about the number of wells you have and some the CBM plays up there, and if you're involved in the deeper drillings such as [Manville]? I know a few operators have moved that to commercial.

And then, secondarily I was wondering if you could discuss any recent conversations with the rating agencies, and I guess what your ratings mean to you as you -- whether in a trust or outside a trust, as you build new rigs and continue to grow? Thanks.

Well, first of all, as far as what we're drilling, we drill a lot of shallow wells whether it be CBM or just a block channel or some other formation. We don't separate that at all, so we can't talk about that from our service side of the business. Obviously, CBM is growing, there's no question for it, people want more. The other part of your answer, if we are going to grow, we're still going to have some cash inside of this company. And, obviously, we're building 17 rigs right now. We can -- you're talking about if it became a trust -- we haven't got there yet so I'm not going to go into that in detail at this point in time. But, obviously, trust can grow. There's no question.

If you look at the history of the ones in Canada, growth is not a problem as a trust; some of them are growing substantially. We have that ability as well. Taking on the world we're -- I'm not going to go into that. We're certainly, as Canadian entity, and have tremendous ability if we did go into the trust mode, i.e., to distribute the cash, do very well. But when you start paying taxes in another country and you look at moving things back and forth and some of the restrictions, it's not as accretive as you can grow inside your own -- internal growth is much more accretive than doing some external growth with some problems that you have in other countries.

Okay. Well, if I could just follow-on to that, whether inside the trust or outside the trust as it relates to your ratings, are those important to you to remain [inaudible].

They're certainly important to us and we're certainly dealing with the rating agencies. We have no problem at all in chatting with them and we're very comfortable we're not going to lose our rating as we go forward. At this point in time with our chats today, that's where we stand.

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

Thank you, Shawna. Ladies and gentlemen, thank you for tuning in. We'd all like to be more informative, but fortunately with Sarbanes-Oxley and lawyers on all sides listening to this call, we have to be frank, we have to be discrete, and we have to be straightforward. So if we can't answer, we don't do it.

But the Canadian entity going forward is in great shape. I've never seen anything like it before. And as we look down the road through 2006 and 2007, it's just going to grow. We're going to have a fantastic time and we're going to be able to deliver some great value to our shareholders. Thank you very much.

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