Precision Drilling Corp (PDS) 2006 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Precision Drilling Trust second-quarter 2006 earnings conference call and webcast. I would now like to turn the meeting over to Mr. Hank Swartout, Chairman and CEO of Precision Drilling. Mr. Swartout, please go ahead.

Thank you very much. Good afternoon, ladies and gentlemen, we appreciate you signing in for the second quarter discussion. Doug Strong, could you please lead off?

Thank you Hank. Good afternoon, everybody. We would like to remind our audience that some of today's comments will include forward-looking statements reflecting Precision's views and--- about events and their potential impact on their performance including plans of expansion into the United States, projected growth of the completion of production of services business segment, projected size of our 2008 drilling rig fleet, capital expenditure estimates, projected customer revenue rates, and the projected cash distribution policy of the trust. These expectations involve risks and uncertainties that could impact Precision's operations and financial results and cause actual results to differ from forward-looking statements.

Earlier today a news release was issued that included the unaudited consolidated financial statements of Precision Drilling Trust, consisting of the consolidated statement of earnings and retained earnings or deficits, the consolidated balance sheets, the consolidated statements of cash flows, business segment information and operating statistics for Precision's contract drilling business in Western Canada.

Before we get to the numbers, it is important to emphasize that Precision's conversion -- that with Precision's conversion to an income trust on November 7th, 2005, Precision Drilling Trust as the successor in interest to Precision Drilling Corporation has been accounted for as a continuity of interest. This means that the consolidated financial statements of Precision for the second quarter and first half ended June 30, 2006 and comparables for the quarter and half ended June 30, 2005, reflect the financial position results of operations and cash flows as if Precision had always carried on the business formerly carried on by Precision Drilling Corporation.

Beginning with the unaudited consolidated statement of earnings. For the second quarter of 2006, Precision generated record revenue of 224 million, an increase of 66 million and 42% over the comparable period in 2005. Operating earnings for the quarter were 74 million, an increase of 50 million and 208% over Q2 '05. The financial improvement over the quarter is consistent with trends established in the first quarter of 2006 and was attributable to an increase in work volume and price.

In terms of volume, or equipment activity, service rigs were 11% more active and drilling rigs were 14% busier. As many Calgarians know, Q2 last year was hurt by record rainfall during the month of June in many areas of Alberta and Saskatchewan. In terms of pricing, both drilling and service rigs achieved overall average to revenue rate increases over Q2 last year of 24%. The 2006 operating earnings margin as a percentage of revenue equates to 33%, an improvement of 17 percentage points over the 60% margin for the comparable second quarter of '05. The improvement was widespread. As both of Precision's operating segments and each division contributed. As a result of strong seasonally adjusted industry activity levels in the Western Canadian sedimentary basin.

Operating costs as a percentage of revenue in the second quarter of '06, were 55%, a decrease of 9 percentage points from Q2 '05. The percentage reduction is due to the impact of revenue rate increases, as actual operating costs in Q2 '06 on a daily and hourly basis for the drilling and service rig divisions were higher by 2% and 10% respectively. The drilling division is expected to carry over a little more major repair expense into the third quarter than normal as repair fabrication shop space remains in very tight supply. Also factoring into Q2, '06 certain employee benefit cost recoveries in the quarter benefited the drilling division.

Included in our earnings release is segmented financial disclosure of our continuing operations. Precision has two operating segments in addition to Corporate and Other. The Contract Drilling Services segment contains our drilling rig camp and catering oil fuel supply and manufacturing division. The completion of production services segment contains our service rigs, snubbing, and rental divisions. For Q1 2006, revenue from Precision's contract drilling services segment represented 70% of total revenue. While completion and production services generated the remaining 30%. As a percentage of revenue, contract drilling services generated an operating earnings margin of 39% in 2006 versus 27% in Q2 '05. Completion of production of services generated an operating earnings margin of 29% in the current quarter, versus 19% for Q2 last year.

In summary, compared to last year's second quarter, 2006 results for contract drilling were 12 percentage points ahead of last year, and the completion and production segment improved by 10 percentage points. As disclosed and segmented information, Corporate and Other operating earnings were reduced -- were 7.5 million in Q2 '06 versus 14.4 million in Q2 '05. A significant improvement. Nonrecurring cost recovery of $2 million in Q2 '06 was a factor, reductions in corporate depreciation expense, foreign exchange and a general and administrative expense is also factored into the improvements. Below the operating earnings line for the quarter earnings were reduced by interest expense of 1.7 million, a reduction of 84% over Q2 '05, with the repayment of Precision's indentures in October 2005.

Shifting down to income tax expense for the second quarter, before the nonrecurring adjustment for tax rate changes in Canada , was $6 million for an effect tiff tax rate of 8% on earnings from continuing operations. The 24% reduction and effective tax rate over Q2 '05 is primarily associated with the conversion to an income trust which has the effect of shifting all or a portion of the income tax burden for Precision to its unit holders. The adjustment for lower net tax rates, at a Canadian federal and provincial level, provided an income tax expense recovery of 21 million in the second quarter of '06. These factors combined generated net earnings of 88 million in Q2 '06 and $0.70 per diluted unit. The favorable tax effects previously noted make up $0.30 per diluted unit. The -- before tax normalized earnings is therefore $0.40 per unit, and represents a significant increase over Q2 '05 where net earnings including discontinued operations were $0.21 per diluted share.

Operating statistics and revenue average -- average revenue rate information for Q2 '06 as compared to the first quarter in 2005, for Precision's rig divisions is noted in the earnings announcement released this morning. With reference to the statement of cash flow, cash provided by operating activities in Q2 '06 swelled to 340 million, with a collection of receivables from the winter of 2005 '06. The changes to non-cash working capital balances contributed 258 million in the quarter. To manage cash in the oil field service sector in Canada one must always factor in the seasonal swings in equipment activity and resulting cash flow.

Precision continues to invest in Canadian oil fuel service opportunities with sites on the broader North American market. Our capital expenditures for the second quarter of 2006 were 61 million, an increase of 55% over Q2 '05, the 2006 spending increase is primarily associated with our new drilling rig built program as expansionary capital expenditures amounted to 39 million. Sustaining upgrades or some say maintenance capital, expenditures make up the remaining 22 million.

Turning to the balance sheet. Precision began the quarter with a positive net debt position of 164 million, based on working capital of 388 million less long-term debt of 225 million. During the second quarter of 2006, this position was reduced by 80 million to a positive net debt position of 84 million based on June 30th, 2006 working capital of 136 million and long-term debt and other liabilities of 52 million. We continue to carry strong balance sheets and expect to add a conservative level of net debt as we proceed with our expansion plans. Precision continues to work well within its $550 million bank loan facility.

Unit holders' book equity decreased during the second quarter of 2006 by $0.17 per outstanding unit or $22 million. As net earnings in the amount of 88 million plus the newly implemented distribution reinvestment plans cash receipt of 2 million were less than the declared cash distribution to unit holders of 112 million in the quarter. For the operating month of May 2006, declared distributions to unit holders were increased by $0.04 a unit to $0.31 per unit per month.

For those listeners that are new to Precision and the Canadian oil field service industry we continue to emphasize that Precision's activity is seasonal and that the first quarter activity levels are greatly reduced in the second quarter with what industry refers to as spring breakup. We would also advise listeners to reflect on our regulatory filings including our 2005 annual report and 2005 information form, as well as the Q2 2006 management discussion and analysis report including notes to the financial statements to be posted on cedar.ca in two weeks' time. Hank, that concludes our financial comments on the second quarter of 2006.

Thank you very much, Doug. Gene Stahl, please give us an operational review, please.

Sure, thanks Hank and Doug. First off, on behalf of the whole management team I'd really like to say how extremely pleased we are with the results of the second quarter. They far exceeded our expectations. I think what's keeping us grounded from thinking that we've got a total runaway on our hands here is just this potential short-term effect of the overhanging gas storage. That being said, however, our outlook for the remainder of the year is still very positive. Once again, as I have alluded to earlier our strong quarterly results are attributable to a number of factors; obviously the momentum for the first quarter, the better than expected pricing power that we saw in the quarter, this was the third year in history that rates didn't go down at breakout. Favorable weather conditions especially in June, and -- and essentially our continued performance by our people, the 7,000 employees we have, managers, and VPs.

Pricing is holding in all of our divisions. However, we have seen some of our competitors start to bid a little more aggressively for work and our strategy is quite simple. We continue to focus on our costs. And we work hard to do a first-class job for our customers which allows us to get paid the rates we get paid. We are still carrying a backlog of work. We have seen some small signs of customers becoming less aggressive than they were at the beginning of the year. That being said, we are not forecasting any material changes in our rates.

I believe that we can carry this momentum on as long as the 12-month [store] price of gas stays above $8. Obviously the risk for us is the [core] price coming down abruptly and the affect that has on our customers' cash flows and their drilling and completion programs. But until our customers say that they're cutting their budgets by 20%, and we still have our backlog and it hasn't dried up we anticipate to continue being busy.

A little bit about our current operating environment in both of our divisions. Drilling services division, well licensing remains 13% ahead of last year's place, licensing however in this quarter did start to back off a little bit as a result of the soft demand for our shallow styled rigs. Which was somewhat offset by our increase in demand for those drilling for deeper targets. We believe this really does reflect the current status of the natural gas pricing with a clear shift to deeper drilling and a strengthen in the spot market for heavy doubles. In our account division we had a tremendous year of growth in this area with the shortness that we've had for accommodations in the -- advanced activity levels, Clint and his team should be very proud to their contributions to Precision's results. By the end of our year in our camp division we should have over 100 camp and base camps in operation.

Results from our completions and production services division, show the companies in this segment are extremely busy as well year-to-date completions are ahead of 3.5%. Our service [three] division has shown tremendous improvement the. Very busy in oil and the heavy oil regions and as well with the regularly scheduled production maintenance work. The growth in this group has been exciting to watch in terms of both top and bottom line contributions. Even more importantly, what's been exciting to watch is the group in the well servicing as they have gelled as a team in overcoming many challenges. Helping our Company take the well servicing industry to the next level.

Additionally the rentals team continues to build great relationships and maintain solid utilization. As a point of interest today is utilization in our business, 74% of our drilling and service rigs are working, 50% of our camps are working, 75% of our well site trailers and our rental business are active and 30% of our snubbing units are out in the field.

As well in the quarter, we have made huge gains in our drive to reducing our injury frequency rate. Our mission towards target zero. Q2 was our third consecutive quarter continuous improvement. Year-to-date we've seen a 33% reduction in our recordable frequency rate from the same period last year. And for the first time ever in a full quarter, we had a whole quarter with zero LTAs, which is very positive considering we had over 2.3 million man hours worked. I would like to commend everyone at Precision for that focus.

I will now spend a few minutes on providing you with an update as to our growth initiatives in both divisions. On the contract drilling and services group, we moved our first rig into the U.S. as part of our initiative into that country. The rig crossed the border in late June and we have just finished a second well working in the Barnet Shell region in the U.S. Construction contracts for the ten new rigs for the region have also been finalized and construction is underway. We are ahead of our expectations not only for the rig and crew, but the entire segment. In Canada, we delivered another three new rigs to the field bringing our Canadian rig count to 235. Today I am pleased to announce the addition of two more rigs on long-term commitments, which we have been -- which we have added to our construction program. These rigs include one 3,000 meter super single, and one 1200 meter super single light. Both these rigs are backed with full capital recovery, long-term commitments.

We are also excited to announce a number of organic growth opportunities for completions and production services division. We have secured long-term commitments to build two new slant service rigs for the heavy oil market. In addition, we have finalized plans to construct four new stand-alone snubbing units of which two are on long-term customer arrangements. Also in this segment we have signed a letter of intent to purchase an oil field camp waste treatment business which nicely aligns with our existing cabin rentals business although it's not a material transaction at this point, it's an acquisition that I think we can grow very quickly.

And just closing my comments I will give you a quick summary of where we stand today regarding our [inaudible] going into 2008. Precision as we sit today will now be delivering a total of 27 more rigs, 17 for the Canadian market, and 10 for the U.S. market. As such we have revised our capital expenditure program an additional 50 million for the two new drilling rigs the two new service rigs, the snubbing units, new infrastructure, construction cost increases, and the planned acquisition of the camp and well site waste treatment business. The total updated cost of this program is now budgeted at 480 million, up from the previously announced 430 million. With 330 million of that being incurred in 2006. And the remainder through the second quarter of 2008. I am extremely excited about what's been happening at Precision. And at that -- on that note I will turn the meeting back to Hank.

Thank you very much, Gene. Ladies and gentlemen, we are very proud of our safety record and we are going to be very vocal about it; it's something we're very proud of in the business of Precision and we know we're only as good as the people that work for us and our gentlemen in the field are very proud of what they've accomplished, they walk around with a lot of pride that we are one of the safest operators in the business today.

And it's only good one day at a time and we understand that, but as we go forward we are proud of what we have accomplished this year. When we look into the third quarter which we're into now, we are seeing rates that are certainly higher than they were last year and of course our utilization is moving along higher in the -- between 15 and 20%, the drilling or well servicing, so we're in a great set of mind to certainly increase the 2006 quarter -- third quarter over 2005 third quarter, in -- not quite the same numbers as -- [inaudible] very possibly because the -- the utilization is high. So without further reflection on it, we're proud of what the gentleman has done, they are a first-crass group going forward, coming very strongly and solidly as a team and a lot of comradery, very proud of with what they're doing, the U.S. looks extremely promising, had some great comments on the U.S. and they're looking forward to show up and do what Precision does best and that's drill, not complain and just have fun. So with that we're going to open it up for questions, please.

[OPERATOR INSTRUCTIONS] The first question is from James Stone from UBS. Please go ahead.

Good afternoon, guys. And very good quarter. Let me just try and dig in a little bit on some of the numbers. Doug, I'm wondering if you can give us a little bit more clarity as to what the -- what the operating costs per day or the margin per day was on the drilling side in the quarter? And just get -- because I wasn't clear on what you -- on your -- on your drilling costs inflation numbers. And I'm also wondering if you might provide us -- as you have in the past, with some of the breakdowns on camps and the differences between well services and rentals, etc.?

Yes, James. Further to my comments, the drilling costs increased by -- on a per operating day basis increased 2% over last year. And for our service rig fleet those costs increased 10%, as far as additional costs breakdown and disclosure into the other divisions which aren't particularly material, we don't disclose that information.

And the 2% year-over-year cost change on the drilling business, was that -- were some offsets in there that I thought I heard you say just to -- because that rate of inflation's obviously well below what your wage rate was. And I'm just trying to figure out is it -- that you're pushing costs into the third quarter with some of the deferred maintenance that you have referred to in the press release?

Yes. That number is -- that 2% is certainly a low number. My -- bear in mind that the quarter had a 14% higher utilization which helps to lower costs on a per day basis. It was also a benefit -- we did have some employee benefit costs recovery that had a marginal impact as well. And -- and as I said, the major repairs we don't -- we haven't got a big carryover, but to the extent that we've got more days on the planned repairs that we did do, it ends up being a lower amount. So all that's very beneficial. Bear in mind that labor's the big increase. It was 7% last October and that's still with us on a year-over-year basis in the second quarter.

Okay. And I want to just delve in a little bit to the -- the mix shift that seems to be going on in Canada with -- I guess DC or one of the groups cannot lower the well count forecast for this year yesterday or today and, we've seen the cutbacks in the shallow gas but can you kind of address what you're seeing going on with the mix shift to deeper drilling and how that may affect you from a utilization or pricing standpoint price realization standpoint as we're going into the third and fourth quarter?

James, we---we're all cognizant that the unconventional gas, IE [inaudible microphone inaccessible], et cetera, were going to slow down in the [inaudible microphone inaccessible] environment that we had proposed. We had a lot of -- very -- analysts tell us that [inaudible microphone inaccessible] going nowhere. But fortunately when we took out of storage -- and added to it, receive the change. We might be the [inaudible microphone inaccessible] and [inaudible microphone inaccessible] programs back on -- on a -- quite easily. But we've never spent a lot of time on the bottom side. Obviously we haven't built out -- two years for a reason and that's a good -- [inaudible microphone inaccessible], are [inaudible microphone inaccessible] go and drill other wells feel very confidently and certainly was a right decision from our point of view. As we go forward, there at some point in the cycle, we're not sure when it will happen. Obviously as people keep -- we're going to see a foot on our rates at some point in time and we all expect that will happen some day at some point we're not sure when. But it's not going to fall dramatically as it did in the years past. Obviously as we see gas go through and we have a December that is a little bit cold and we can see that you use more gas through the winter in 2006 and 2007 as we did last year in the differentials between gas and oil, and a few other things that you gentlemen all tell us that are true and real in the short period of time, we can do gas to $89 through the winter and can -- steady don't have a warm December, stay steady through 2007, and again just like playing hockey when the car goes by game off [inaudible microphone inaccessible].

And can you talk a little bit about to the extent you're seeing with oil prices staying as high as they are and -- it seems like there's more, -- more sag D activity, are you seeing more -- are more of your rigs shifting over to that -- to that activity grouping than we would have seen say three, six months ago?

No. That's -- we group into all of our operators that we can really well that -- very timely basis, much more fortuitous than they had forecast. We do have a facility in the Canadian market to drill a lot of Sag D and these rigs are being used on other projects other than sag D. I don't see a big build rate on that side but we are negotiating right now for two more 4, rigs which could come on in -- [inaudible microphone inaccessible] Gene's already referred to. And when we have 450 million plus new growth starting for not -- for not growth companies, it's a -- [inaudible microphone inaccessible] trust. Seem to be dealing quite well for some reason it's amazing and we'll have those -- [inaudible microphone inaccessible] discussions on a few others. So we can have another 50 to 100 million easily being put into the mix next year without even trying this year. So I don't see it -- it breaking down. I don't see the rates breaking down. When people are still lining up 18 months ahead to deal with D rigs that are very fair contracts for both of them. It's a very interesting period of place to be in.

What is the -- as you look at the -- the CapEx program that you're on right now based on a contracts that you signed what is sort of the expected incremental return that you're targeting on that capital?

It will be 20 to 30%.

Okay. That's it for me for now. But really good second quarter.

Thank you very much, James.

Thanks.

Thank you. The next question is from Alan Laws from Merrill Lynch. Please go ahead.

Good afternoon. I have a couple -- a couple questions, actually. The first one, I just want to know if you can give us some more color on the camp waste business that you bought. Is it just like porta potties or --

No. Very sophisticated porta potties.

Okay.

What it is, on any camp -- not on any -- on some locations where -- whether you have a camp or whether you have well site trailers, they have to treat any byproducts, if you will. And so they have a couple choices. You can contain it and truck it away or you can treat it on location. And that's what this is about.

Is -- in terms of EBITDA expectations it sounds like it's a smaller transaction but do you have any color on that?

Not closed yet so --

Oh, okay.

Private company. We won't disclose it. But it has a lot of growth potential for us on the rental side and not proprietary. We're being very honest about it. But it's a nice add-on to the rental fleet. Something that we need as a to going forward, obviously in the northern area we're playing with and we need more than we have -- could be huge demand.

I understand in -- some time in June that you -- the province ran out of these things, is that true?

Are you talking about Port-o-Potty?

Yes. [overlapping speakers]

Demand for these products is growing very well.

[Inaudible] you got to [inaudible] watch what you have to say, you have to be careful.

Sure. We'll get off this. The next question is what would you say is the sort of critical mass for your U.S. operations in terms of -- of rig level?

Well, right now we have 10 being built for the U.S., we have some other gentlemen that are watching the operation. There's a possibility that if the areas that we're working in, we can prove that we are as good as we think we can be, we can get [inaudible].

Okay. But these are the rigs that are -- that are going there now, like when you -- when you've set up a base there at like four or five, are you kind of break even on your sort of incremental operations, or -- you're saying 11 by the middle of 2008.

We'll -- we'll be very -- we'll be nice profitable operation. We're also -- rentals and a lot of other things.

All right.

More than -- I don't know if we can get that new technology down there yet but we'll have to use it in the end.

The first one is working on a term agreement, right?

It's working on a commitment.

Of -- of a year on a term like that, or is it like a well commitment or --

It's a longer term commitment.

Okay. Were all 11 rigs all of rigs are going down right now, are they going down under similar commitments? When you build them.

Those rigs are going down under payout contracts, full capital recovery.

Okay.

Five that are an option but there are some gentlemen that are discussing very seriously the option. It will be gone in the next month or two that we --

Okay. As far as the timeline in which they arrive there, is -- do you want to frame -- or -- color on that. Or is that still --

Right now we are expected to have the first one delivered at the beginning of Q2. And then they transition us to the end of '07 and potentially into '08.

All right. Even loaded kind of thing?

Yes.

All right. Okay. That's all I'm going to bug you with today. Thanks a lot.

Thank you very much.

Thank you. The next question is from James -- James Lon from McKenzie Financial. Please go ahead.

Good afternoon, gentlemen. Good quarter.

Thank you.

Just a question. Hank, you refer to -- and we only three weeks -- three and a half weeks into the quarter you said the rates were better than they were, they were higher than they were a year ago. Are you referring to the day rates, or the utilization rate or both?

Both. I referred to the day rates being higher and the utilization rate being higher and I qualified that as -- I didn't qualify what the rates were but you can work on that. But we are -- our utilization is between 15% and 20% higher than it was last year.

Thanks. Just on the CapEx, program. Now, the 330 million to be incurred during '06, now is that a -- a total -- is there some sort -- when I go through the cash flow statement, there were CapEx but there were also proceeds on sales of PP & E. Now, is that a net number that the -- 330. Or is that just the top number that you're referring to?

That's the top number. That's a gross number, not netted for proceeds.

Do you expect these sales -- these sales of PP & Es to continue just a little bit of it every quarter?

There will be -- they won't continue at what you've seen in the first half. But we always have some. It will be -- I would -- it'll continue at roughly half the pace.

Okay. And you also -- you guys also said that your debt probably 50 million is probably not a going rate because there's some CapEx that you're going to have to expense in the next little while so can you give us a rough number as to where that -- that debt will be at the end of the year?

We have a current bank loan facility of 550 million. And based on the working capital draws and demands through to next winter if you look at Q -- Q1 '07 we do expect to get into the $400 million to $500 million dollar draw on that facility.

With a large draw of working capital if you've got a big --

----huge draw on the working capital.

Okay. Thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS] The next question is from Kevin Lowe from FirstEnergy Capital. Please go ahead.

Hey, guys. Just got some clarification questions. In terms of CapEx, I know you guys have raised it now. Due to -- does the final number you talked about include the sustaining CapEx for 2007 as well?

Yes. You're talking about the 480, if that includes the maintenance capital, Kevin?

Yes, for 2006 and 2007.

Yes, the -- Ken, that does not include 2007 maintenance capital.

Okay. So, I add that on. Okay. That's great. And, Gene, you talked about the second quarter being really strong for camps and that right now you're seeing about 50% utilization in terms of camps out. What was approximately your utilization during the second quarter?

Probably around that level.

Around that level.

But that -- but again for this kind of year for camps where they're not -- not -- really a lot of remote areas that's probably twice as busy as what we'd be this time of year.

The other thing, Kevin, is that the Alberta economy picks up and gets more demanding we're finding that hotel rooms in some of these towns are impossible to get as we used to get in the past so camps are being put forward more and more all the time and we expect extremely busy winter. We're done some major camps initiatives, we can have large 150, 200-man camps. We have changed the mode in that in that -- some great [inaudible].

And of course the rates have gone up as well.

It's amazing, yes, they have.

Last thing. Just looking at the overall fleet and everybody seems to be concerned about the shallow of fleets. Sorry, shallow gas drilling and all that and of course there's a lot of new rigs being built in the Canadian basin. Are you guys worried at all about overbuilt at any particular depth category?

We're not going to comment on that. Simply from the point of view that we're building at a category that's not in the -- the smaller size, per se. We're very comfortable that the 27 rigs that we will build, 17 for Canada plus the other that I referred to that we're negotiating with with the 19 are all of a mechanical design, i.e., an AC drive mostly across the board. Unique to see the work in the market and they will be the [inaudible] for the -- industry challenges with. And, with the other competitors do, that -- their ability, not ours to determine.

Ourselves personally were weighted towards 40% of the market share tripled 35 plus some of the market share for doubles and 16% of the market share on the shallows.

Great. Thanks, guys.

Thank you. The next question is from Todd Garman from Peters & Company. Please go ahead.

Good afternoon.

Hi, Todd.

Just wondering if you can provide some color around the firm contracts that you've signed with the service rigs and whether or not any more of those will be signed in the coming quarters?

Not much color, other than their commitments for capital recovery. And we're very pleased that we are able to get those and look forward to trying to secure more of them.

Are there any -- do you foresee any delays other than what the industry's experiencing on average in terms of the deliveries of your equipment?

There can be some challenges but -- when you're -- Precision side, we have some ability to make sure that people -- our customers, our OEM manufacturers realize that we will [inaudible] whatever. Rig -- winter and we're very good about getting our equipment on-line. But there always is some delays that can be -- could be a month delay. We've been delayed for two or three weeks taking a rig for one specific piece of equipment that's the furthest we've seen our delays and we might be challenged to spend all this money by the end of 2006, the possibility as well. The challenges we have going forward is equipment will come, it will be there, training new people when you have this mass of a size that we're going to put out over the next year and a half. That's our biggest challenge. We are ready for the challenge and we are focused on it and we will show these new employees the Precision -- [inaudible] and make them part of the [inaudible] and away we go.

What are the larger clients that you guys have had, longer term relationships with indicating for their winter programs? Is it --

Well, we've seen some of them slow down on the shallow [inaudible] side and they've cut some rigs back but fortunately they haven't cut ours back to any extent so our ability to work and show that we have abilities to deliver product as good as [inaudible] we believe it's better than anybody else's shows up in our rigs stay under contract and -- the people on [inaudible].

Thanks.

Thank you. The next question is from Elliot Miller, private investor. Please go ahead.

Yes. I have actually three quick questions. One is you mentioned that you've -- you try to get a return of -- on your CapEx of 20% to 30%. I was wondering what the weighted average cost of debt and equity capital is and I assume it's different than it was before you became a trust, number one. Number two, the second question is the tax impact of doing business in the U.S. and how that's going to affect your margins, because obviously you can't increase your prices beyond what the U.S. competitors are charging. So you are going to have some U.S. tax impact your margin? I just wondered about that. The third is I understand from the deals that are being done in the trust area, that the -- particularly in -- in -- in gas weighted trusts, that the price per flowing BOE is -- is for gas weighted transactions. It's gotten quite significant. I think Prime West was paying $103 per flowing BOE. $103,000 per flowing BOE. Are you seeing any impact of that? Those are my three questions.

Elliot, I'll start with the back one and go to the first one. I think I forgot the first one.

The first one was the weight average cost of capital.

I know what it was. I will answer that. It hasn't changed a whole bunch. We started at front, we were at 10.2, we've always considered it expensive process. Now we argue that we're down somewhere between 7 to 8.5 depending on how you want to depict it. Hasn't changed a whole bunch. The U.S. tax thing for trust I'm not going to go into that in detail we're very cognizant of what it takes. And we think that it can certainly be accretive for a -- it's a fair deal. It's not super plus but it's something that can be handled very well on the trust side of things. And we're comfortable with that.

As far as commenting on the price gas, I can also tell you that if you look at the last two trusts that just closed the other day which I'm not going to go into detail they are about 60,000 of flowing BOEs for gas, that depends on the reserves and many other things and we are an upstream not a downstream type of person so we don't comment on what our customers pay for oil and gas we are just pleased that they hire us.

Good. Okay. Me, too.

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to you, Mr. Swartout.

Thank you very much. Ladies and gentlemen, I am very proud of what the team has done on the second quarter going to the third quarter. We are certainly not copied by any means, we are comfortable that we will continue bringing utilization going forward and I think it's time for everybody to realize that there's not going to be a -- a quarter over-quarter increase in -- to the fast. I think we have to be fair that we will work on our customers and they should be looked after properly. We are also wanting to look after the Precision of employees, so that our people have a lifestyle and a homestyle, an educational style and some of the other things we are doing, the initiatives to maintain our people that we all work in harmony, we have a great year. Price of gas goes higher. Obviously it will be a better year than any of us anticipated. Than what we are already anticipating and as I alluded to earlier in 2000 in the first quarter, 2006 will be a record. In 2007 is another record after 2004, 2005 and 2006 being a record, we're all going to be very happy campers and you as shareholders will be very happy as well. Thanks very much and I look forward to talking to you in the third quarter.

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation and have a great day.