Precision Drilling Corp (PDS) 2005 Q4 法說會逐字稿

Welcome to the Precision Drilling Trust 2005 year end results conference call. (Operator instructions) I will now turn the conference over to Hank Swartout, Chairman and Chief Executive Officer. Please go ahead, Mr. Swartout.

Thank you, very much. Good afternoon, ladies and gentlemen. Doug Strong, our CFO will start with the analysis of 2005.

Thank you, Hank. First we would like to remind our audience that some of today's comments will include forward-looking statements reflecting the Company's view of events and their potential impact on our performance. These expectations involve 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've issued a detailed news release, including unaudited financial statements, consisting of the consolidated statement of earnings, and retained earnings or deficit, the consolidated balance sheet, the consolidated statements of cash flow, our segment information along with our operating statistics.

In terms of financial performance, I would like to start our review with the statement of earnings. Fourth quarter results clearly demonstrate the tremendous earnings leverage within all of our business units. For the fourth quarter of 2005 we generated revenue of $428 million, an increase of $114 million and 36% over the comparable period in 2004. Operating earnings for the quarter was $176 million, an increase of $62 million and 54% over last year.

These results were reduced by one-time reorganization costs associated with our income trust conversion in the amount of $17.5 million. The Q4 2005 operating earnings margin as a percentage of revenue before reorganization costs equates to 45%, an improvement of 9 percentage points over the 36% in the comparable fourth quarter of 2004. For the full year of 2005, the margin was 38%, an improvement of 6 points over 2004.

Throughout 2005, margins have trended higher year-over-year with particular strength in Q4, as winter pricing was put in place. This gives Precision a very strong pricing platform to begin the 2006 fiscal year.

Included in our earnings release is segmented financial disclosure of our continuing operations. There are two operating segments, in addition to corporate and other. The contract drilling services segment contains our contract drilling rig, camp and catering, oil field supply and manufacturing divisions. The completion of production services segment contains our service rig, snubbing and rental divisions.

For Q4 2005 revenue from contract drilling represents 72% of total revenue, with completion and production services 28%. Contract drilling generated an operating earnings margin of 50% in Q4 and 44% for the 2005 year. Completion and production services generated an operating earnings margin of 41% in Q4 and 30% for the 2005 year. Compared to 2004 fourth quarter, Q4 results in '05 for contract drilling were 6 points ahead of last year, or 14% and our completion and production businesses were 11 points ahead for an increase of 37%.

Consistent throughout the year, our service rig division in particular has shown tremendous improvement through pricing and cost efficiency. As disclosed in the segment information, corporate and other reduced operating earnings by $30.4 million in the fourth quarter of '05. This amount includes $17.5 million in reorganization costs.

Below the operating earnings line for Q405, earnings were reduced by certain one-time items. First, a charge of $6.4 million was incurred with redemption of indentures in October, 2005. Second, a further loss of $50.7 million was realized on the holdings of 26 million [Wetherford] shares obtained as partial consideration through the business divestiture of Precision Energy Services and Precision Drilling International in Q3.

Moving to income tax expense for the current quarter, the expense is in a small recovery position, with realization of certain tax loss numbers and the pre-tax flow of earnings associated with Precision's conversion to an income trust on November 7th, 2005. These factors combined generated earnings from continuing operations of $120.8 million in Q4, or $0.96 per unit.

To close out discussion on statement of earnings, earnings from discontinued operations in Q405 amounted to a loss of $37.3 million, bringing our 2005 year earnings from discontinued to a gain of $1.4 billion. The loss in the current quarter is due to adjustments related to purchase consideration on the business divestitures and income tax considerations.

Operating statistics and additional financial information for Q4 2005 as compared to the fourth quarter in 2004 are as follows. For our drilling rig fleet, we achieved 14,350 drilling rig operating days for 68% utilization, an increase of 2,251 days and 19% over last year's operating days. Average revenue per operating day was $19,700 compared to $17,624 an increase of 12% over last year.

For our service rig fleet, we achieved 142,000 service rig operating hours for 65% utilization, an increase of 14,429 hours and 11% over last year. Average revenue per operating hour was $679 compared to $563, an increase of 23% over last year.

In terms of operating expenses on a daily or hourly basis for drilling and service rigs, costs were essentially flat on a quarter over quarter basis in comparison to 2004.

Turning to the balance sheet, the closing of our business divestitures in the third quarter provided Precision with an opening cash balance in Q4 2005 of $1.585 billion. During the fourth quarter, this balance was reduced by two significant events. First, we redeemed our indentures and dispersed cash in the principal amount of $704 million; second, a special cash payment in the amount of $844 million paid as part of our arrangement is ratified by shareholders and effective November 7th, 2005 with our income trust conversion.

These transactions effectively eliminated our cash balance as at December 31, 2005. With surging demand for our services in Q4, working capital funding has moved us into our $550 million loan facility and at December 31, 2005 we have long-term debt of $97 million on the balance sheet.

With a positive net debt position, when you include our working capital balance, our balance sheet strength puts us in a good position to deal with growth in our asset base going forward.

Moving to property, plant and equipment, capital expenditures for Q4 2005 amounted to almost $45 million, of which $17 million related to new rig build programs. For 2005 year, continuing operations invested $155 million in capital expenditures. This is split $63 million towards expansion and $90 million towards sustaining and upgrades to our existing property, plant and equipment asset base.

In terms of current liabilities, we have an income taxes payable balance of $163 million at the end of the year of '05, which for the most part will be remitted in Q1, 2006.

Hank, that concludes our financial comments on a fabulous fourth quarter.

Thank you very much, Doug. Gene Stahl, the President and Chief Operating Officer, please begin.

Thanks, Hank. Once again I would like to reiterate that we are extremely proud of the results that the team was able to deliver in the fourth quarter, and really it is a story of momentum from Q3 weather. We had a world-class efforts by all employees, managers and VPs of Precision.

As Doug alluded to, we did see record utilization and it has carried forward into January and February, both in terms of utilization and rates. We've worked all but two drilling rigs this winter, and we worked up to 217 of our service rigs.

In terms of our labor situation, we are very well-positioned. This year we had 15 rigs with two crews and about 30 rigs that did have three crews, although they were short-handed, so that is a significant improvement over years past. On the well servicing front, again a three-year effort of including a swing hand in operations has served us well, and our pool of swing hands has built up to 146 individuals. We have seen huge gains in our Drive to Target Zero, as so far year-to-date we've seen a 50% reduction in our reportable frequency.

Hiring, we hired 890 people in the fourth quarter, putting 360 of those through our unique, two-day orientation and rig simulation. We've also got our hotline for recruiting up and running, and that is 1-877-RIGWORK and continue to be proactive in the department of safety, training and recruiting in order to keep ahead of our ongoing labor demand.

Talk a little bit about the current gas price situation, and what have we seen as gas prices have softened. Today, we haven't seen anything, and not that we would because break-up isn't here yet, but again our customers are telling us they have not changed their plans for programs. We have an extremely high demand; we have over 800 wells in which we cannot currently assign rigs to, which would be in the order of 4X larger than anything this time of year, we have seen.

Again, coming back to break-up, we are still probably two to three weeks away from having a real clear visibility on where we are at with break-up and the effect that may have on rates. We do see opportunities on the spot market to increase rates, and again with our long-term customers we will work closely with them to negotiate appropriate rates.

We are seeing longer term still conviction in the commodity cycle, as we do have discussions to build up to 12 new rigs. We are still in negotiations to take one of our super singles into the U.S.A. and based on our performance, see a possibility of expanding that.

Other things we are thinking about in 2006, obviously growth is on our minds and what it looks like. Because of our size and our challenge to grow in absolute terms, again representing over 25% of the upstream service business in Canada, we look towards our organic growth in 2006. We'll be delivering 16 rigs, retrofits, pump trucks, camps, rental equipment, snubbing units and again, the opportunities to add another 12 rigs in 2007 based on how discussions go, at very attractive returns.

We will be, in 2006, focusing on our existing business segment in the Canadian market, where we are very familiar with operations and where we do dominate, with the one exception being where we will look at our super single technology, in which we will focus on niche markets in the U.S. with opportunities to expand it. This translates into a return through distribution, keeping in mind that the trustees are very cognizant when considering distribution levels, and one month doesn't make a quarter, and a quarter doesn't make a year. On that note, I will turn it back to Hank.

Thank you very much, Gene. In summary, the gentlemen have done a yeoman's job, becoming a great trust and going forward we are extremely excited about the future. Obviously we are halfway through February now so we've got half of our first quarter under our belt. Our numbers are every bit as good as the increase that we saw in 2005 over 2004. We've seen a better increase in 2006 versus 2005.

When we look at our numbers, we are comfortable that our bottom line has increased approximately 10% in the first half of this year, just when we look at the margins that we were able to do. As we go forward and with the demand, we are not going to comment as to what it can get to, but obviously with the demand we have we probably can lower our margins for a while. So I am very excited that 2006 will be every bit as good as 2005 was over 2004, probably better because we are well-organized.

The one thing that I am very comfortable with is our ability to lower our costs on a per day basis; it is still coming through on a quarterly basis, and that is something that very few other people can deliver. This team that works for Precision is a machine and these gentlemen are going to be rewarded on their ability to deliver our unit holders the largest value that we can.

Our trustees are looking at the first quarter at this point in time, and we have to be cognizant of whether it can change the Canadian utilization. Obviously the cold weather arrived today, we're not sure how long it will last, but if it lasts for two or three weeks we see the North going to -- anything over March 8th which would be an average, obviously it will increase our utilization.

Keep in mind that in 2005 June was blown away with rain, so we have a lot of opportunity to enhance where we were, certainly over 2005 and we started in a tremendous way. Now we are going to open it up for questions, please.

Thank you. (Operator instructions) Your first question is from Alan Laws - Merrill Lynch, Please go ahead.

Good afternoon. I was wondering if you could provide us with your thoughts on the M&A environment, or talk a little bit about the deal flow that you see out there? What areas it is in, land or work over, or whether it is in the U.S. or Canada? If you could do that.

Well, we certainly good. Obviously when we trade at deals we're at, and the other gentlemen are all trading at huge multiples because of all this growth they are going to have, obviously we could hire somebody. We'd take half the Company in goodwill, and we have a slight problem with that going forward. We have some internal growth that will be $100 million to $150 million to $200 million going forward for 2006 and 2007, and that is greater than 10%.

So we're comfortable the internal growth will give us great return, and to jump in and just try to take over the world, we have a very unique position in the Canadian market. We have talked about the ability of going -- we are going to take one rig down to the U.S., some of our new technology. We are negotiating for a position to possibly take some rigs into very niche markets in the United States and that will take place in 2007, subject to what we do in 2006.

That could lead to many rigs in 2007 because our equipment is rather unique and it is a great opportunity. To go out and say that we are going to take over the world is difficult at what everybody is trading at today. Once things settle down, people understand that safety is important for us, our maintenance group that we have is by far the best in the world. Our ability for marketing and just our ability to generate bottom line is unique.

We're looking after shareholder value. We do not see an inflection point in rates at this point in time. That's a question that most people have. We do not see it whatsoever. We are going to continue on to monitor it, obviously. But going forward, with the backlog we have and the demand going into 2006 is something unprecedented that we've ever seen in this Company. If something becomes available and it could be accretive, we will certainly look at it but we are not about to just make acquisitions for acquisitions sake.

So overall a softening may play more into your hands, actually, if you have a softening through the spring, into the summer on the gas market, do you think that changes the environment that you just laid out?

I think it possibly could, but let's keep in mind that all of the service companies this time are virtually debt-free, so there is not going to be a great inflection point of people running for help. Some things will happen with some of the people getting tired, it happens even around Precision Drilling, some of us got tired and had to go on --

Not you though, right Hank?

I am not going to go there. I probably got tired. But the groups that we have are doing a world-class job. This is probably one of the best machines as the drilling industry, we've ever put together. I am proud of the whole new team and we have a whole new team, they've done a great job and they've come together very comfortably as a team and they will be rewarded as a team going forward. There are no prima donnas in this group now.

The last question I have, it is more like some extra color around something you put in the press release. You talked about capacity growth, combined with some deterioration in natural gas prices. What are you seeing as far as the erosion of this favorable supply/demand balance? Is it in shallow rigs, or doubles, or deep, or is it just a regional thing? That you are concerned about, I guess.

Well I am not concerned at this point in time in any -- I think the shallow market at some point in time could reach an inflection point, only because of some of the unique things we are doing, we are starting to get a little more -- we don't drill just vertically now, we are trying to get sophisticated as people are in other parts of the world in the shallow side. We see a huge demand across the board, and if there was anything that could fault, I guess it would be -- the weakest portion of our equipment that we have is the coil. Whether we like it or not, it has the least utilization in the past, mind you it is very strong right at this point in time, and we hope that it will continue on. But the rest of the market is a great demand.

Where we also see a little bit of weakness in Canada, we have for the last two or three years, it is a very deep market. There is not a huge market for deep rigs, and we have one or two rigs that they do go to work, but it always seems to be a challenge. The rest of the market is full bore and talking to most of the trusts and the other companies, they are definitely trying to tie up -- and we had a lot of majors that didn't tie up enough iron in 2005, had to wait through the process and they are going to get a chance to tie up their rigs in 2006. We are discussing some major swings of equipment. But the other gentlemen that have it, won't let it go. We are very excited about the revenue stream for 2006.

So you are not, when you look out here, you are not as concerned about the supply/demand balance? You are not looking -- or are you looking -- to lock up more rigs on term deals? Is that a strategy or do you want to be spot exposed still?

We have a lot of rigs in long-term relationships. Our spot market is probably -- I couldn't give you the exact definition, but it would probably be a third of the fleet to 50%. It is somewhere in that range. But the people that we are working with have all funded themselves very well, a lot of them are those gentlemen on the spot market, have tied the rigs up for a period of time at increased rates. If somebody wants to tie up the rig long term, we will certainly not turn them down, by any means. The rates that we are charging are very respectable.

Sounds good, I will leave it at that. Thanks, guys.

Thank you.

Our next question comes from James Stone - UBS. Please go ahead.

Good afternoon, guys. That was a terrific quarter. I just want to go through a couple things. First of all, can you talk to us a little bit about how you see -- you mentioned that you have been able to keep your costs relatively flat. Where do you think you can keep operating costs as we look into 2006 right now?

I think that our operating costs are going to go up slightly, obviously as our inventory and our supply and our demand is met and the increasing costs, we have to see those at some point in time. But just the power of this organization, our purchasing power and our long-term relationships have held us in good stead going forward. Obviously you have seen what we've done in the last half of 2005 compared to our competition. We have certainly put in a potential increase of, I think Doug would look at it in our budget, about 5% to 7%, it could be as high as 10%. Will we get there? Probably the 5% to 7%, but the nice part of it is that our margin has gone up to that 10% already versus our average in the fourth quarter of 2005 to the first quarter of 2006, well ahead of what our cost base is.

Do you see much change in your cost base this 4Q to 1Q on a per day basis?

We don't see anything yet. I am just saying that obviously something could happen in the latter part of 2006 as we get there. Keep in mind that we are one of the few companies that have a large inventory and we used that very well. But we have great relationships and a lot of our equipment has been bought out, our repair equipment, for example. We purchased everything last year, we put in a lot of orders and we are in very good shape for 2006. I think you will see it start to materialize more in 2007 if the service equipment manufacturing side still increases the demand, then we'll see it. You'll see it come sooner or later, but on a per day basis on utilization of our rigs, with the higher utilization we are able to bring our costs down on a per day basis, that is what is very unique about this organization.

Assuming that break-up doesn't start for a couple weeks, you've got some cold weather coming in or it is similar to what it was like last year, does it look like your utilization over all is going to be up in terms of days, 1Q over 4Q?

I believe it will -- well not totally, the only reason being is we are not sure what March will do. January, February have been fantastic and we can't really comment on that until we see the last half of March.

But what is unique, because we've had very little snow in Western Canada this year, is that our break-up could be just an inflection point. We could see something happen, and rather than it being six weeks we have this huge amount of snow to melt. It dries up quickly, and if we have a normalized spring, road bans are off, we could be actually running south of Edmonton without road bans, obviously in April which has never happened before, just the weather situation.

So it is a unique quandary that we're in. We are going to take advantage of it and obviously we are certainly going to be a lot higher utilization in 2006 versus 2005 first quarter, and the numbers are rather dramatic.

Right. And in terms of the pricing outlook for the first quarter versus the fourth quarter trends?

We can say, at this point in time with our boilers and everything else in there, we have had approximately a 10% increase on contributions. You can do the math.

No, I got that. Hank, if you just -- going back to an earlier question that Allen asked, I am curious as to why you put that statement in the press release, or Gene put that statement in the press release when it doesn't really sound like you are seeing any shifting in the supply/demand balance, and you are actually talking about an unprecedented back log of wells to be drilled that don't have rigs.

I will let Gene answer that.

Just comment on the fact that again, if we are looking at our inventory of 800 wells to do, based on what kind of break-up we have, will we see some projects fall off that reduce that 800 wells to 600 wells, 400 wells? That's what we don't know. Again, just a little bit of perspective saying break-up will still come in to play, the rigs being added will still come into play, but today we don't see our customers changing their plans.

Have you ever had, at this point in time, have you ever had that kind of a backlog of work?

Gene alluded to the fact, Jimmy, that it was 4X anything we have ever seen before at break-up and what I am comfortable with is that these new gentlemen are trying to be conservative and not take -- we are not going to make comments that we are going to blow this away or that away; obviously we are trying to be a very conservative trust that gives a tremendous amount of cash back to their shareholders. And everybody asks me, when will the inflection point be? I have no idea if there will be an inflection point, but if there is not an inflection point for two to three years, gentlemen it is going to be a great, great two to three years. It could be five years.

I am sure that the gentlemen in the U.S. are much more knowledgeable than us, and they have made some statements. Could we tie off every rig if we wanted to? Obviously we would love to tie off every rig at a great rate, but let's keep in mind that a lot of these smaller companies don't have the ability to tie up rigs other than for 10 wells at a time. So they still migrate from one customer to another customer.

The one thing that we are very fortunate with is that our crews are at a state we've never seen them before, we're very comfortable, we have some of the best people in the industry and as we go forward, it is a great fulfillment to see the amount of people we were able to employ this winter and the success of our safety program this winter as well. It's tremendous.

Okay, and then my last question and I will let someone else get on. Doug, could you give us what your capital spending number is going to be for 2006 and the breakdown between sustaining and expansion?

The capital expenditure plan for 2006 amounts to a total of $285 million. That's comprised of $120 million for sustaining upgrade capital expenditures on our existing asset base. That is approximately 50% higher than depreciation, and the remaining balance of $165 million is towards expansion, the vast majority of which is related to our drilling rig program.

Okay, and you said you were going to deliver 16 drilling rigs this year?

That's correct. There may be one or two that spill over into '07, but --

But most of the money on those will be spent this year?

We have already delivered a couple, so this will be 18 this year with the two retrofits included, I believe, and keep in mind we have some more rigs we are going to deliver in 2007 and we could enhance those two to three rigs that we have confirmed for 2007 into another 12 that we're negotiating, so that could become 15 for 2007 as well.

That's great, thank you very much.

Thank you.

(Operator instructions) Your next question comes from Dana Benner; Westwind Partners.

Thanks, good afternoon, gentlemen.

Good afternoon, Dana.

Hank, I am just curious to find out if you could give us some insight as to your choice of a payout ratio with respect to the trust? You've chosen a higher payout ratio when most others have gone with a lower rate. I'd be curious to get your insight on that.

Well, Dana, that's a good question but you haven't seen what we are going to deliver for 2006, so our payout ratio may not be quite as high as you think. The other thing that we are very comfortable with is that we have a trust that has a certain amount that we can payout and could be a challenge, but we are trying to come to an analysis going forward.

The reason we can pay out the payout ratio that we have is we are virtually a very clean company. We have zero debt on the balance sheet going forward, the $200 million that we are going to spend, plus, is easily handled and our variable costs allow us to do it, because if things ever slow down in this industry, Dana, you as well as anybody should know there are not a lot of costs to carry us going forward.

So the idea behind becoming a trust, which the board came up with, was that when we had a chance to facilitate some shareholder value in [Pez] we took advantage of it. Keep in mind it was about $3.4 million added -- if you kept the Wetherford stock it is about $4.4 billion now if you put it into perspective. As we go forward, at some point in time, there could be an inflection point in the next two to three years, maybe its five years, I have no idea. But this company at that time will be in a position to facilitate anybody that wobbles a little bit, and we can buy with units or a great cash commodity as well.

So I don't know why we are being chastised, over the thought process for giving our shareholders good value going forward. It's what a trust does.

Right. I guess for background, it would appear that there are a number of high quality oil service trusts that have equally good balance sheets who have come out with payout ratios in the 60-70% region. I would argue, with equal growth prospects to yours. I just wonder why you would not have set it lower with the ability to move it up if necessarily.

We are not sure that we are not at 60-65% for 2006 going forward. Obviously our payout ratio, we started in 2005, Dana, with simply put that we had to clean up 2005 going forward. We have a tremendous cash machine that we've developed here and as we go forward, we will see what the numbers are. But they are not in the 80-90% payout ratio by any means.

Okay. Just one other question. Historically you have tended to be somewhat negative on the U.S. land drilling market, and I am curious to know why you've changed on that? Why you would look at expansion into the U.S. market now?

It comes down to economics.

It is super single technology in a niche market.

We have some operators that are familiar with what we've done in Canada and they would love to see us show up with some of our technology and somewhat Canadianize some areas of the U.S., possibly. We have to be very careful how we do this, of course and we are going through the process. We are committed to looking at this very seriously, because there is some growth perspective.

The other thing that we have to keep in mind, that we have the ability to work in the United States. We were working around the world. We were never against working in the United States, it is that we were never going to trade at a multiple the U.S. people were at, so those things happen.

As we go forward, if we can get the return whether it be in Canada or the United States, we will facilitate that. There would certainly be more than one rig that appears on the scene if we go forward with our plans.

Right. How many rigs do you think you'd need to run in the U.S. to have an economic operation? I mean, you can obviously do well on individual rigs, but you know well by virtue of the Company build and scale, has its advantages. Would you need 20, 30 rigs in the U.S. market to make that -- to give it the efficiency necessary?

Dana, obviously we would never go down with one rig, and as far as giving you the number that would give our competition some idea of where we might go or what we do. We are not going to comment on it. Obviously we think it will be a size, if we go down there with our equipment and our technology, and I am not sure where it will be in the next three to four years. I am not -- I can't guarantee that I'll be around here in three or four years, Dana. I am one of the one guys that might not be here in the time period.

Right. One final question. Incana, in its results communicated the fact that they were reducing CapEx in certain select areas of Western Canada. I just wonder if you think you'll have exposure to some of that?

Not really, we have certainly some rigs at Incana, we have some long-term rigs, we are building seven for Incana that will be under contract with them. We are very comfortable that our ability to go forward and our rigs outperform most other people because we have some great crews and we have some great relationships with them. So we are very comfortable.

We did not -- some of the other great finance service companies, you would say, have gone out and tied up some of their iron at somewhat lower prices. We are very comfortable with what we have, we will offer it to the industry and we'll be fine.

Great, thanks a lot.

Your next question comes from Kevin Lo; First Energy. Please go ahead.

Great quarter. I had two quick questions here. One, what are you guys seeing in terms of rig deliveries, and whether there is any slippage in delivery dates?

We are comfortable with the delivery dates as it stands right now.

Could you give us guidance on what G&A might look like for 2006? I notice that year-over-year G&A remains rather flat. Should we expect that going forward? What should we expect?

We are still going through and rationalizing, setting in to our go forward infrastructure on the G&A side. As we progress into next year, I think you saw that our G&A as an expense in the fourth quarter was 4.7% of revenue. I think as you look at us growing out, 5% is reasonable but we will continue to show on deliver economies, subject to compensation as well. I think you'll notice that there are no outstanding stock options, as at the end of the year. That program has been completely terminated.

You will, in terms of the infrastructure, there will be further rationalization but it won't be huge, necessarily. What you see at a 5% level is pretty realistic.

Okay, well great. Thanks, guys.

Thank you.

Our next question comes from John Harding, National Post. Please go ahead.

Good morning. I just needed some clarification in regard to the backlog, the 800 wells. I just wondered about the timeline. Would this work be done before break-up, is that what you were saying?

No, it could not be done before break-up. What we are saying is that we have a backlog of 800 wells, besides the wells we are drilling, that we can't get to at this point in time.

So then you were saying that customers have indicated that they don't intend to change plans, but could they change plans after, say, break-up and could that in fact influence that backlog? Reduce that backlog?

Certainly. Certainly, I mean the one thing about it when you are a service company, we do what the oil companies tell us to do. We are service providers. If they decide they don't want to drill, that would be something that could happen and possibly with the price of gas where it is at now, you might see some of the wells fall off. But as we go forward, with a lot of plans and a lot of people who have hedged themselves to a position where their costs are nicely handled going forward, at least for the summer -- let's keep in mind that gas in January of 2007 is at $10 so we start the cycle again October 1 as far as working with the storage.

If anybody has a vision that this is a five-month wonder and its going to change -- if we have a warmer winter than we had last winter, you might see some changes, but I can't comment on the future. We take it and we are very comfortable with what we see, talking to the industry in general, that we are going to have a fantastic year. 2005 was a record year and we said in 2004 it was going to be a record year. I will go on record as saying that 2006 will be a record year, and I am comfortable saying that with the knowledge we have to date in front of us.

Our next question comes from Brian Spratt from Miller Howard Investment. Please go ahead.

Good afternoon, gentlemen. Your payout ratio question that was asked earlier, you now say $0.27 for the latest monthly. I saw one of the sell sides that suggests that in a month or two it should easily go to $0.30 or higher. Have you guys given any kind of annual thought as far as dollar distribution?

Well we have a trustee group that will evaluate that. We have a matrix that shows where we are going. If we trended where we are this year, obviously, and continued on with utilization I would be -- if everything stayed as the utilization in 2005, you take the increase that we've had in 2006, the first month, obviously there would be an increase in distribution. But we're not going to go there until the trustees decide that. We are going to make -- as a gentleman who has been in this for the last 25 years, I have been in Precision for 21 years here, we've never made a decision until we understand where break-up ends. Obviously the last week in February gives us that extra two weeks of vision. Those are weather patterns we can count on to materialize and be real. If we get to March 8th up north, that's great. We've seen break-up come sometimes in the latter part of February. Those times play havoc on our utilization.

But as I alluded to earlier, that the weather patterns that we've seen, we could have a very short break-up and we could go into summer drilling. I am very comfortable that we have a lot of people with land retention problems that have committed themselves to a lot of work in summer drilling, and we are going to see more summer drilling, for example, in Northeast B.C. than we've ever seen before, as this winter a lot of infrastructure was facilitated so that we do have something called summer drilling. Of course, the B.C. government has incentives for summer drilling as well.

thank you.

Thank you.

Our next question comes from Matt Mackenzie from Dundee Securities.

Good afternoon, guys. With the long lead time for some major recomponents, when do you foresee making a decision on these 12 rigs? Would it be sometime before the end of the first quarter?

We are negotiating in a sense now. We are looking at all the delivery times. Obviously we would not commit to anything until the middle of 2007 because we are fully booked up at this point in time. We are investigating ways to facilitate builds in different parts of the world, so we're no different than anybody else.

Fortunately we do have some control over some of the components. Some of them, we know the delivery times are very cognizant with the manufacturers, we are discussing things on a daily, weekly basis, any slippage in delivery. So we are comfortable if we are going to make a decision to deliver these rigs, it will happen.

So we'll know once the contracts are announced, I guess?

Yes, and again we are still looking at more than 12 months ahead of us before we start delivering.

Okay. And you mentioned the rig deliveries for the current CapEx program, 17 rigs are on track. Can you just give us a rough idea? I believe it was something like five per quarter for the next three quarters. Is that correct?

Doug, you can go ahead with that.

The CapEx if you try to average it into the fleet will be fairly progressive throughout the year, really starting with Q2.

And keep in mind, we were fortunate that we are having some of these larger rigs totally built by somebody else, we didn't have time to do it ourselves, we concentrated on our super singles and some of our innate iron that is unique to us. We have quite a build schedule ahead of us, but fortunately we had our orders in before it booked up, so it seems in our review where our manufacturers are, that everything is in progress, on time, and the most slippage we see, the worst case would be a week. So we are very fortunate.

Okay. And last question, just on a potential U.S. expansion. Would this be primarily new builds or if things did slow down a little bit up here or guys keep throwing the low costs, would you consider moving rigs from Canada to the U.S.? Would it just be contingent on economics?

That's possible. I mean, one has to be cognizant, if there ever was an inflection point in Canada where the U.S. was hotter than Canada, for example as far as the margins, once we set up where we were going to be there, it would be very easy for us to move 20 rigs in a heartbeat into an area. It's just going to be the challenge of people.

That's helpful guys, thanks very much.

Thank you.

Our next question comes from Todd German - Peters and Co. Please go ahead.

Good afternoon. Do you see the same continuing strength in service rig prices and activities in the areas mentioned in the press release?

I can tell you that I get calls on a daily basis from people that remember who I am and that we do have service rigs, and they want a favor from me. There is a huge demand for service rigs as well. The problem is if you don't tie these things in, especially in some areas in the winter time, which has been huge, you don't get your cash flow over the summer time. Service rig demand is certainly there, drilling-wise I am not sure if it will have the same type of potential increase going forward, but it is certainly not going to be a decrease and it is a tremendous industry as well. On a per hour basis, our margins have shot up very close to the drilling side.

Are there any plans to increase the size of the service fleet?

Not at this point in time, no.

Thanks.

Our next question comes from Mike Bazar; Nesbitt Burns.

Hi guys. Sorry if I missed this earlier. You mentioned the super single to the U.S. and obviously the U.S. expansion. What regions specifically are you targeting. Did you say?

No I didn’t and I am not going to.

Okay, I thought maybe you wouldn't. Thanks, that was it.

You're welcome, it was my pleasure.

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

Thank you very much. Thank you very much ladies and gentlemen for listening to the new team take this thing forward. Obviously it has been a fantastic 2005 for us. A lot of challenges. This Company has changed dramatically over the time period, I would like to say thank you for everybody that was with the Company, has left the Company, a lot of them I got to see and say thank you, some I didn't get to say thank you with so many things happening on a daily basis.

I am very proud of the gentlemen that are with Precision Drilling going forward. They will do a great job for the shareholders. I am proud of the way they have taken on the challenges and how they met them and what they are doing. I couldn't be more comfortable that the new team going forward will do a world class job for the shareholders. Thank you very much.

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