Precision Drilling Corp (PDS) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, welcome to the Precision Drilling Trust second quarter 2007 earnings conference call and webcast. I would now like to turn the meeting over to Mr. Hank Swartout, Executive Chairman of Precision Drilling. Mr. Swartout, please go ahead.

Thank you, Chris. Doug Strong, CFO, will you give us a financial overview, please?

Certainly. Thank you, Hank. Ladies and gentlemen, through news release this morning Precision Drilling Trust reported its unaudited financial results for the second quarter and six-month period ended June 30, 2007. The news release included the unaudited consolidated financial statements consisting of the consolidated statement of earnings and deficit, consolidated balance sheets, the consolidated statement of cash flows as well as business segment information and Canadian drilling operating statistics.

Please note that the financial figures are stated in Canadian dollars. We remind our audience that today's comments may include forward-looking information and statements reflecting Precisions view about events and their potential impact on our operating and financial performance and legal entity capital structure including oil and natural gas commodity prices, weather trends, growth initiatives, demand trends, estimated capital expenditure levels and timing, projected equipment utilization, customer revenue rates, operating expense levels, earnings cash flow, the cash distribution policy of Precision Drilling Trust and tax legislation and policy announcements by the government of Canada. These expectations involve risks and uncertainties that could impact Precisions operations and financial results to cause actual results to differ from forward-looking statements and information. In addition, some of today's comments may refer to non-GAAP measures such as operating earnings and we refer our listeners to disclosure in the news release. The June 30, 2007, unaudited financial statements complete with notes and managements discussion and analysis will be filed with regulators and made available on CEDAR.com by August 14, 2007.

Precision Drilling Trust converted to an income trust on November 7, 2005, and now has generated a distribution history for 20 months and six complete quarters. During the six quarters ended June 30, 2007, Precision has declared cumulative cash distributions of 575 million or $4.58 per unit. Precision declared second quarter 2007 cash distributions of 57 million or $0.47 per unit based on a monthly rate of $0.19 per unit for April and $0.13 for each of May and June. The decrease in distribution rate for May reflected low equipment utilization levels on a seasonally adjusted basis, for Precisions operations in Canada and an increasingly competitive pricing environment. By comparison, the trend for the second quarter of last year, 2006, was favorable, solid customer demand and record financial performance carried over from the first quarter and enabled Precision to increase the monthly rate in May 2006 by $0.04 to $0.31 per unit for the balance of the year.

As many of our listeners know, Precision operates within a cyclical sector, and with its concentration of services in Canada, it's subject to seasonal volatility for equipment utilization in addition to the underlying commodity price fundamentals. As they have in the past these business risks play an important role in Precision's future performance and we encourage our investors to examine the 2006 management discussion and analysis in our 2006 annual report on pages 30 to 66 and the MB&A in our Q2 '07 report to unit holders.

In summary, the second quarter of 2007 was characterized by a sharp decline in Canadian equipment utilization due to higher than normal Spring precipitation in many regions and seasonally adjusted low customer demand. Excess equipment supply created a competitive pricing environment for all divisions. Despite these conditions, all divisions with the exception of snubbing generated positive operating earnings in the quarter. The only division to increase operating earnings over the same period, same prior year period was Precisions one year old United States drilling operation, which grew from a one rig start up situation with a handful of operating days in the second quarter of 2006 to 352 operating days in the quarter. The advantages of year around drilling conditions in Texas and Colorado enabled a utilization of rate 98% for the five rig operation. For the second quarter of 2007, this made a significant contribution against the highly seasonal and inactive conditions in Canada this year.

Canadian drilling activity for Precision when compared to the same prior year quarter has been negative for four successive quarters. Q3 '06 was lower by 7%, Q4 '06 was lower by 33%, Q1 '07 was lower by 29% and now Q2 2007 was lower by 54%. Precisions completion and production segment led by our service rig division was impacted by the same conditions as drilling, but as is traditional was less volatile as operating hours for '07 second quarter were 35% lower than Q2 '06 at 52,680 hours. Well work overs or production work made up 77% of the hours in the second quarter. Completion work was lower by approximately 50% over the prior year quarter consistent with a decline in drilling.

The 2007 second quarter began with low drilling activity levels following an early winter shut down in late February and March. Generally, Spring breakup weather conditions in Canada hampered drilling start ups well into the month of June. Financial highlights for the 2007 second quarter include net earnings of 26 million, and cash distributions declared of 57 million for a decrease in unit holders equity of 31 million. On a per diluted unit basis Precision reported $0.20 in net earnings and cash distributions declared a $0.45, a decrease of 71 and 49% respectively over the same period in 2006. Income tax recoveries were lower in 2007 and accounted for $0.15 per unit of the year-over-year quarterly reduction of $0.50.

Investing activities in the quarter led to 53 million in Capital Expenditures for additions to property, plant, and equipment and consisted of 9 million in maintenance capital and 44 million in expansion capital. Precisions organic growth program to expand the drilling rig fleet commissioned one new drilling rig and one new service rig in Canada during the quarter. Over the next year the remaining 13 rigs under construction are scheduled for completion by Q2 '08 with seven for Canada and six for the United States. Precision continues to estimate total Capital Expenditures of 275 million for 2007 with an allocation of 90 million for productive capacity and maintenance of existing assets and 185 million for expansionary initiatives. Most of the expenditures are directed towards completion of the new drilling rig build program.

Financial highlights for the six-month period ended June 30, '07, include net earnings of 184 million and cash distributions declared of 128 million for an increase in unit holders equity of 56 million. On a per diluted unit basis, Precision reported $1.56 in net earnings and cash distributions declared of $1.02, a decrease of 41% and 40% respectively over the same period in 2006. Investing activities in the first half led to 109 million in Capital Expenditures for additions to property, plant, and equipment and consisted of 26 million in maintenance capital and 82 million in expansion capital. With the completion of the capital expenditure plan in place today we expect to be operating a total drilling rig fleet of 259 rigs, 11 in the U.S. and 248 in Canada, and the service rig fleet of 239 rigs.

Fiscal 2007 follows record setting 2006 financial performance with significant year-over-year decline in customer demand for three successive quarters and a Canadian industry drilling rig fleet that is about 12% higher than a year ago, excess supply and lower demand has created very competitive operating environment going into the second half of the year. With about 70% of drilling activity in Canada directed towards natural gas, the recent July sag in North American natural gas has caused optimism for the second half of the year to fade.

During the second quarter of 2007, as compared to Q2 '06, Precision generated revenue of 122 million, a decrease of of 102 million or 45%. Operating earnings for the quarter was 27 million, a decrease of 47 million or 64% lower. The financial deterioration over 2006 is consistent with declining activity and customer pricing decreases with excess equipment supply. Activity declines for Precision in Canada are consistent with second quarter 2007 well licensing trends whereby on a year-over-year basis natural gas well licenses were about 49% lower and for the first half 2007 were approximately 45% lower.

Near term, these statistics suggest the third quarter of 2007 will be similar with significant declines compared to 2006 especially for the months of July and August. Through July to date, Precision is averaging about 90 rigs drilling and ten moving for a utilization rate of 42%. In the second quarter of 2007, the operating earnings margin as a percentage of revenue equates to 22%, a decline of 11 percentage points over the comparable second quarter of 2006. In the second quarter of '07 drilling rates declined 9% and operating expenses on a per operating day basis were 2% higher. The increase was aided by cost recoveries such as Workers Compensation and tight control over scheduled equipment maintenance. The service rig revenue rates were up 3% with 2006 pricing strength carryover while operating expenses per hour were higher, were 11% higher due to labor and fixed cost overhead allocations over less activity. Consistent with comments last quarter, the emergence of additional industry equipment supply and the fiscal reality of lower customer cash flows from natural gas production in 2006 and now 2007 continues to weaken equipment demand in Canada.

Operating cost as a percentage of revenue in the second quarter of 2007 were 59%, an increase of 4 points over Q2 2006. Actual operating costs in Q2 '07 on a daily and hourly basis for the drilling and service rig division were higher by 2% and 11% respectively or approximately $270 per drilling rig operating day and $41 per service rig operating hour. The increases were associated with labor, scheduled equipment, maintenance and other direct operating costs with partially offset by employee incentive and Workers Compensation cost recovery in Q2 '07.

During the second quarter of 2007 general and administrative expenses reported at 10.2 million, a decrease of 6 million due to a reduction in employee incentive compensation accruals. The operating earnings line for the quarter, net interest in the amount of 1.6 million remains low and in line with the prior year due to low debt levels.

Turning to the statement of cash flow. Cash provided by operating activities in Q2 2007 was 229 million, a decrease of 111 million over Q2 2006 due to the quarterly earnings decline and the early curtailment of Winter activity in 2007. And the associated impact in the year-over-year changed to non-cash working capital balance as a decrease of 65 million. Surge of cash that occurs in the second quarter from the seasonally active winter began early this year.

Turning to the balance sheet. As of June 30, 2007, Precision remains in strong financial position with working capital of 78 million and long term debt of 52 million. We continue to carry financial strength and expect to add a conservative level of net debt as we proceed to complete expansion plans into next year. Precision continues to work well within its $700 million syndicated bank loan facility and $50 million operating line. Unit holders book equity decreased during Precision's seasonally slow second quarter of 2007 by $0.25 a unit or $31 million as previously mentioned. For those listeners that are new to Precision and the Canadian oil field service industry we would emphasize that Precisions activity is seasonal and highly dependent on oil and natural gas commodity price levels. Once again we recommend that listeners read Precisions regulatory filings.

To close, we acknowledge that the government of Canada has passed into legislation certain tax laws during June 2007 that were initially announced to propose last October 31, 2006. Generally the tax on distribution implications take effect on the earlier of January 1, 2011 provided Precision complies with growth guidelines. Obviously, we continue to monitor this situation carefully in terms of the best overall value maximization for our unit holders. Hank, that concludes our financial overview.

Thank you very much, Doug. Our next speaker will be Gene Stahl, our Chief Operating Officer.

Thank you, Hank, and thank you Doug, for that detailed dissertation. Clearly, as we've transitioned to just over the half way mark through the year, we continued to favor our bearish tone for the outlook in Canada for the remainder of the year and as it's standing now probably well into '08, we are expecting difficult operating conditions as we go forward, but that is an environment that we're very familiar with, and Precision, as always is a very strong company with the ability to weather the storm better than most, and as we look forward ultimately we think that could lead us to some very interesting opportunities.

A few brief operational comments, but first again, I would like to share my thoughts about some of Precisions people. I'm extremely proud of the focus and the positive attitude of our people in what is proving to be a really challenging operating environment. From a safety standpoint, we completed the second quarter with Precisions lowest recordable frequency on record. We're maintaining our momentum that we've created with target zero and our mission towards no recordable injuries and it's a direct compliment to all of those individuals out in the field given the challenges that we are having with our activity levels.

From a pricing standpoint, we continue to competitively bid for work across all product lines in all areas, and obviously with a record amount of equipment out there available in Canada, it's not surprising that we have to bid for work to compete, not only on price but on service, quality, and offering as well and that, from our standpoint, this is a real healthy dynamic and we believe differentiates Precision from the industry. Our sales and operations group recognizes the critical role that they play in the success of our organization in this type of environment. They understand the hustle that is required to ensure we meet our customers needs, and to secure the work that is available. I know all of them very well and we have some of the best people and some of the best relationships in the industry that we're really going to need to leverage on as we go forward.

Despite the slowdown, as you heard Doug talk to, we are still committed to our capital expenditure programs. We're building drilling rigs, service rigs, snubbing units, wastewater treatments all for the North American market for two basic reasons. We believe that the service company of choice in the future in North America is one that can do something better and this kind of equipment that we're building allows us to accomplish that.

Secondly, we also have customer commitments and the quality of those customer commitments on this equipment build makes great business sense for Precision to carry forward with our organic growth initiatives. We also, despite the downturn, continue to be excited about the opportunities to negotiate the building of additional new drilling rigs and service rigs and as we become more finalized on some of those opportunities, we will be announcing that. We would also like to take advantage of the fact that there is still some buoyancy in the U.S. market and we have redeployed a number of rigs into the U.S. market. We sent four existing rigs in the quarter to the U.S. on long term contracts and as Doug alluded to bringing our total rigs in the U.S. to 6 and 11 by the end of the year.

Our first Next Generation super single crossed the border in July working in the Texas region. We're extremely pleased with how that initial rollout of the rig has gone and continued to learn as we advance our generation of Super Singles for the U.S. market. And lastly, I'll just close and most importantly, is the welfare of all of our people, the 6,500 people in the field and the reliance that they have on management to make sure we're executing our business plans, setting our goals, prioritizing, and delivering. To help us with that, we've also realigned the safety and the HR groups which will allow us as Precision to continue to build off the successes we've had. Thank you very much, we're grinding away here in the second quarter and on that I'll now turn it over to Hank.

Thank you very much, Gene. Ladies and gentlemen, as we all know, North America is a gas story. It is what it is and it shall be what it shall be and to say any more is looking into the future, and I certainly don't have a crystal ball that gives us that answer but we do know at some point there has been a turn or inflection point. There's going to be a lot of pain until we get to that point and so people are just starting to understand that now and with what we look forward today we don't know when it will turn but we know that Precision is strong enough that we'll survive any downturn and it will come back as a force second to none as we go forward so that's what we're contemplating in technology. We'll be the leader in the future, maintaining our people as best we can in these trying times and focusing on delivering to our customers as always the best job that any drilling contractor can deliver. So with that I'm going to stop chatting and open it up for questions and answers. Thank you.

(OPERATOR INSTRUCTIONS) The first question is from Alan Laws from Merrill Lynch. Please go ahead.

Good afternoon. First question, we always appreciate your frankness, Hank. I guess a perspective question. What do you think or how are we going to get rid of these large equipment overhang in the Canadian Market kind of going forward here?

Well, Alan, with the prices that we have today, we're not , you know, a lot of it is low horsepower in a sense and there's not a lot of markets in the world that it's needed. Obviously in the trend exists in the United States and we're seeing some problems down there being generated when you talk to some of the bigger pipeliners that are not able to move gas from one market to another market, their problems are just going to start. This is a North America trend and until we have a winter of temperature that allow us to really take some into storage we're going to have to live with potentially more downturn in the United States. Some people think that there will be a minor weakness. It could be a major weakness. The U.S. has always been six months to a year behind us. Canada is going to have to go through this cycle and until we see a change in storage which is dictating our price of gas going forward, and if everything went according to plan today, we could be maximized in storage in some part, the later part of August so September, October it is possible we can get back to the 350 in the spot market in Canada which means we should shut in most of our gas because most people are producing it at zero profit and drilling should slow down. Some people will do it, very few because of the inability of the bigger people to manage that but long term there is nothing I see at all that changes me from extremely bearish point of view.

I think you're going to find most of the junior oil and gas companies are not going to drill that much. It doesn't make any sense to drill anything but three to four year life. At this point in time until you can see some recoveries of the gas market, and we're hearing stories about LNG. Well, LNG could go from BB to BBBBs a day but we still have a unique ability to produce in North America and that's our challenge. Until we take away some of that storage capability and our ability to deliver as quickly as we have, I don't think there's any great future in the service business, and I'm just being very honest.

Now we are still building rigs for people that want some unique technology and to do things better and more efficient and even at a higher price, so we're fortunate in some sense but we also from a Precisions point of view, we have 250 rigs and not all of those are the most advanced rigs in the world. They are are a combination of many things, but it's challenging in all fronts and the other thing we have in the Canadian market which we saw coming the last five years could go back to a financial dinner done in January where Mr. [Trzakian] said that the drilling contractors would probably accomplish what they've done to the overbuild, there's no question and the pain is starting to come today, but -- the reality is what it is it is and as far as the change we're not going to be able to move these rigs to other parts of the world to any consequence. What we need in the Middle East and everything else is 1,500 to 2,000 horsepower.

We have a limited number of 1,500 and 2,000 horsepower rigs in Canada and keep in mind even some of the stuff that's been generated out of China they have not been great stories as far as equipment and technology going other places, we've had a little bit of crashes here and there, but oil is oil and there's been a huge disconnect and until you find gas and oil getting together with some semblance of reality and maybe it should be 9 to 1 instead of 6 to 1, obviously which we all like to play the game on a long term basis until that comes to if you're wishing I don't think anybody, and of course you people are all much smarter than I am obviously. I just sit back and throw out some musings to answer your question,

All right so net-net, as far as margin compression, and we're basically definitely going to cash breakeven in the Canadian market?

It will get there. We all have long term contracts which give us some flexibility, but and some people are already bidding today. There's no question. Now, some of the other people that maybe are not operating as efficiently, we have to stay within a $1,000 to $1,500 of some of the lower drilling contractors. We do get a small differential for excellence, but we're also very realistic of what it is and we've had this per honest style for years and years. The last three years were unique. I went through it for 20 years and I saw two years of bliss and now it's back to reality, so it's just a cycle we go through.

All right my last question then and then I'll turn it back here is given your expectations here for the next six months I was wondering how the management team there felt about the distribution?

Well, the distribution is done by a committee that's outside of the management and we have our budget, we've looked at it and the trustees will make that decision. Ours is to run the Company and try to produce some money as far as budgets, as far as distributions we are not involved in that decision.

But on balance given what you see from your financials would you be in a situation where you have to cut the distribution again?

I'm not going to comment on that because I have no say in the matter whatsoever.

Okay. I'll leave it at that.

Thank you.

Thank you. The next question is from Dana Benner from Westwind Partners. Please go ahead.

Good afternoon, guys.

Good afternoon, Dana.

Whether it's Hank or Doug, maybe we could first start with the rigs on contract. Just looking at your rates in the second quarter, didn't come down all that much, pretty impressive in its own right; however, we all know what's happening in the market right now. Can you give us a sense for the proportion of your fleet through the rest of this year that is tied up on contract?

Yes. It's Gene here. You could use 20%.

Gene, what would the weighting be? Would a good chunk of that be in heavy oil or deep market or how would you characterize that?

Anything that we've built new is pretty much on long term contract, so it's a variety. Deep market, no, not so much.

Great. One of the concerns that a lot of people have is with respect to bad debts. A lot of small cap, E&P companies probably looking to extend out their payments. Obviously you've got a very strong balance sheet but notwithstanding, I wonder how much you consider this to be a potential problem as you look through the summer.

Well, I'll answer that. Receivables we watch very carefully. We actually ask people to put money up front before we start drilling and we will maintain that position as we go forward without any question, and the one thing we're very cognizant of, Dana, is that we watch our credit to people are great, we have committees to watching people that are weak, et cetera, and they do a tremendous job trying to watch for weak operators in this environment and we're very cognizant if an operator has some challenges, we'll ask for the money up front. If you look at Precision over the last 20 years, I can honestly tell you that I probably went five or six years in a row and never had a bad debt. We have had some the last little while but we're trying to clean that up and we're very cognizant of the fact that there will be potentially more.

Can you give us as well a bit more of an insight into the G&A reversal? I think it was reversal of long term compensation, just a little bit more color around that, please?

Yes, Dana. It's Doug. The long term incentive compensation and expense, the year-over-year impact of that for the second quarter essentially was a $4 million cost in '06 versus a recovery of $4 million in '07. So really a total swing of 8 on a total basis.

Right, and I guess the basis for that would be -- so the driving impact or the driving element behind that would be what?

Yes, our long term incentive plan is, has two components, a retention component and a performance component, so the driving element on the expense recovery is to do the performance component and the reversal of accruals and the performance that was achieved in 2006.

More so to do with what's happening in 2007 than 2006. 2006 was one of the most fantastic years ever so they had large accruals, obviously if it was a three year plan, they give some potentially back, Dana, at this point in time.

Okay. Obviously a lot of companies including yourselves, you watch capital spent at a time like this, and it's only natural to defer some maintenance expenditures. Is this something that you'll be watching very closely, again, I'll come back to the balance sheet. Your balance sheet is in very good shape so it's not that big of an issue, but you're obviously going to be prudent in the moment. Do you continue to defer maintenance or how do you address that?

Dana, we've been very, I mean, look over the years when you go to a position in time for example, that we're in today, you're going to find that there will be 30 or 40 rigs that won't work that often, so in other words, you might cold stack it, the U.S. people say that in Canada we don't cold stack it because we're cold half the time anyways, but we are rigs that don't operate and we'll put them in the corner and we'll need a lot of parts off those rigs, Dana. We have some old ones, probably 10 or 15 that might be on its last leg this last winter and we'll put them in the corner but fortunately, because our parts are all identical we can use a lot of the parts and pieces off those rigs so those rigs might never go back to work and once they start in decommission mode, we have pumps, engines, parts, and pieces and many things we can take off them. We're extremely frugal, we're more organized virtually than most people, and because of our own infrastructure buying, we're going to handle this far better than anybody else and we've done it before and we'll do it again.

Just one final question, if I may. Can you give us an update on the, on, I guess the evolution of the CEO title within the Company? I know that there's been a search process under way. Is there any kind of an update that you can give on that?

Dana, I am not part of the search. The Board is going through the process. They are certainly interviewing candidates and after good corporate governance, I have been kept out of it, obviously I will be gone shortly once this individual arrives. It should make some people happy. Maybe you happier than others Dana with some of your records over the last while, but fortunately, I've had a lot of fun here. You go on, the new guy I think will be challenged, but the team here will do very well and I'm proud of them.

All right. Actually just if I could be permitted one more. Hank, it sounded like you were, I think you used the term bearish longer term, which kind of surprises me in the sense that you've always been a believer that the cycle ultimately comes around and that this business fixes itself. Are you departing from that view or do you just think it takes longer for that to happen this time?

Well, Dana, anybody that has common sense would say that you can't be bullish in the environment today and until we see some change in GAAP that allows us to be bearish, I mean, I have a lot of investments in oil and gas, far more than I have in the service sector, which most people should have more oil than gas, which I'm fortunate, but if anybody can give us later or give us some credibility going forward that they could get bullish on gas, would let me see in the future, I'd be a great believer. I just take the facts that I'm given worldwide, put them into my equation and say I'm bearish going forward until I see a cold winter. I was very bearish last year and I'm extremely bearish this year. Every Board I sit on, I sit on are very comfortable with that. The other thing too, Dana, I had to throw out is that I'm not sure if it's a gentlemen or a lady that will be the CEO. Remember, both genders are available.

Great. Thanks a lot.

Thank you. The next question is from [Jeff Mutrick] from Cormack Securities. Please go ahead.

Good afternoon, gentlemen.

Good afternoon, Jeff.

Just wondering if you could give us a little bit more on the G&A question here for modeling purposes, just trying to get a sense of what the base level G&A is and what you expect it to be for the rest of the year, excluding the incentive plan?

Yes, Jeff, it's Doug. We've kind of discussed it previously a little bit. I think if you normalize our G&A on an annual basis, you'll find that we gravitate to the 5% of revenue range. We're there through the six-month results this year fractionally as a percentage lower compared to '06, and then, yes, as we go through extreme points in our cycle, like 2006 where we really outperformed incentive compensation causes that number to be higher and in periods where we have declining activity and poor results financially, some of that incentive compensation may, you may see a reversal in the cost recovery.

Could we just touch on kind of where rates are? You talked about rates being under pressure in Q2 and obviously your rates in Q2 weren't that bad and were better than what I expected and I think most of the market expected, but how do you see them going forward? Is there more pressure on spot markets so far in Q3 than there was in Q2 or are they holding where they were or where do you see them progressing through the quarter maybe into the winter season?

Well, obviously, Jeff, the other thing that bodes well as we get break up is that we have long term contracts which stay intact during the second quarter. The spot market is certainly the longer we go into this gap outlook and the tougher we get as we go forward, the spot market is coming down almost on a weekly basis as we go forward and we don't, you see our numbers and we try to keep it real, but definitely we're down back to the basement of basements trying to work for people to go to work on some of the companies and so therefore, you're down to just breakeven on cash flow and we have to follow that and where we end up is we have great relationships with some people that will give us credit for our capability and our confidence and our zero down time because of our great inventories and our great team, but there certainly is other people that want the lowest and moving costs become a great importance, obviously at this point in time when moving a rig from point A to point B can be the deciding factor, fortunately when you have 240 rigs around the countryside, you have more opportunity than somebody that has 5 or 6, so it's just a tough market. Been through it many times. Fortunate or unfortunately, I'm not going to go through this one down to the bottom of the cycle. Thank you.

And then do you see the same thing playing out in the service rig market or do you see better pricing power there just given obviously the leverage a little more production side of things?

I'm sorry, Jeff. I didn't quite catch that?

How do you see that playing out in the service rig market ? Is it better or worse or do you see rates continue to hold up better than they were last

Well, service rigs will be challenged as well. Obviously with oil there's a lot of service work to be done which is great. I can give you an example for two years ago or three years ago, we used to get phone calls for snubbing units and we were told that the road to (expletive) was paved with unproducing gas wells. I can tell you the road to (expletive) is paved now with snubbing units. So from a full need of 200% to what we have now it can change that quickly. You have to accept it. We have some new technology we're going to bring out that will bring the cost down for the Operators but those are things that we're looking at and some of the old equipment, these are times when you can get rid of it. Now go back to 1984 where we had 4574 rigs in the United States. These things go through cycles now, I don't know when we'll reach the level of the United States, but gas is back down to a level we never thought it would be at and until it can turn and see some momentum for six months run of some type of forecast, it will be challenging for all of us.

Thanks a lot, guys.

Thank you very much, Jeff.

Thank you. (OPERATOR INSTRUCTIONS) The next question is from [Dan Baird] from Citadel Investment Group. Please go ahead.

Hi, guys. A quick one. Sounds like you kind of alluded to the fact that you thought there would be some opportunities potentially for acquisitions during sort of the rough times you see over the next year. With your distribution and sort of even a reduced CapEx level of maintenance CapEx, Are you just going to drawdown your revolvers or is there, when you talk to the Board and the Board goes through sort of this discussion on what to do with the distribution and what to do with growth and that, et cetera, how do you guys think about that and what do you talk about?

Well, these gentlemen aren't at these levels of the Board meeting when we have these discussions. Our Board, as long as we're a Trust we're looking at distribution as to value for the distribution to get value for the unit holders. That's something that is always a challenge as we go forward , but the Board and -- they are going to make the decision. So I can't tell you what the future thoughts are going to be and I have to leave it at

So what you're saying is basically if there are opportunities right now it looks like you'll probably either have to just lever up or make a decision on the distribution?

Well, possibly, or somebody could do units, but let's keep in mind that as we go forward, we're all starting to feel pressure as to our multiples and these multiples will continue to change as we go forward with the price of gas until we see some momentum change.

Okay, that's all for me. Thanks, guys.

Thank you very much.

Thank you. The next question is from [Dan McDonald] from [Peters & Company]. Please go ahead.

Hi, good afternoon, gentlemen. Doug I was just wondering if you could quantify what the amount of WCB recovery might have been and if there were any other one-time recoveries in the quarter besides the formula and the incentive compensation?

Dan, that's something that always occurs in the second quarter of every year so I think your question is a little bit of what is the differential in terms of our refund this year over last. Our safety performance has been excellent in both quarters. We participate in the partners and injury reduction program with the WCB here in Alberta, and good recoveries both periods, certainly because of financial performance and the Board, they were a little higher this year but we're not talking huge differential. A couple million dollars.

And there weren't any other recoveries or one-time items that may have occurred?

Not outside of what we've already discussed, nothing of note.

Okay, thanks a lot.

Thank you.

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

Sorry, guys. I had a follow-up here. With the Trust tax law thing kind of fait accompli I guess what are you thinking in terms of the Corporate structure now? Is the discussion to convert back like it sounds like the previous question you had there, it conflicts with your ability to grow to some degree. What are your thoughts on that?

Alan, our Board at this point in time is going to stay in the Trust mode and monitor that on a monthly basis as you go forward. That's all I can tell you.

Okay, and then the last thing, can you guys remind me of the term of the contracts that you have on your U.S. rigs?

We haven't got into it but it's a three year term.

Okay. That's good. Thanks, guys.

Thank you.

Thank you. The next question is from [Mike Mizzar] from BMO Capital Markets. Please go ahead.

Hi, guys. Just wanted to clarify one thing. If U.S. business generated 9% of revenue, so $11 million is fair for the U.S? Did I miss this if you had talked about it already?

Mike, could you repeat that, please? You didn't come through very clearly.

Okay, sorry. Can you hear me now?

Yes.

I was just saying the press release alludes to 9% of revenue, total revenue generated by the U.S, so I'm sorry if I missed this earlier, but that's $11 million?

Yes.

On 352 days?

Thereabouts, that's straight drilling days, no move days.

Okay, understood. That's great. Just wanted to clarify that. Thanks.

Thank you.

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

Thank you very much. Ladies and gentlemen a pleasure as always and the group of people here look forward to working hard for the next quarter, and chatting with you after the third quarter in 2007. Thank you very much. Have a great day.

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