Precision Drilling Corp (PDS) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Precision Drilling Trust first quarter 2008 earnings conference call and webcast. I would now like the turn the meeting over to Kevin Neveu, Chief Executive Officer. Mr. Neveu, please go ahead.

Thank you, Michelle. Good afternoon. Joining me today on the call is Doug Strong, the Chief Financial Officer.

I just want to begin my thanking the employees of Precision for an exceptional effort and strong results over the course of the Canadian winter drilling season. As all of you know, the winter ramp-up is is a huge challenge every year for the Canadian oil and gas service sector. The labor challenge we face is, at times, exasperating. Nonetheless, the Precision team, beginning in Q3 last year recognized this challenge and kicked off our recruiting program which added over 1,500 new employees and reacted 2,500 prior employees to Precision's field operations for the winter operating surge. Congratulations to our recruiting team. These new recruits, along with our existing employees and our experienced field leadership group, operated our rigs through a very challenging winter season and delivered exceptional performance with over 97% of rigs operating with no loss time accidents. So again, congratulations field operations group.

Just before I ask Doug Strong to walk you through the financial results for the quarter, I want to make a couple of general comments on the Q1 performance. Our Q1results came in exactly as we expected, and while others may be surprised, we are not. As I have stated before, Precision will not pursue utilization at the expense of margin. We accept the pressure we face on our utilization levels, but we will ensure that we continue to maximize the return on every person and every asset working for this company. On that note, let me turn it over to Doug, please.

Thank you, Kevin.

Ladies and gentlemen, through a news release this morning, Precision Drilling Trust reported financial results for the first quarter ended March 31, 2008. The news release included discussion and analysis and the unaudited consolidated financial statements and notes. Please note that the financial figures are stated in Canadian dollars unless cited otherwise. In addition, some of today's comments may refer to non-GAAP measures such as operating earnings and distributable cash and we refer our listeners to disclosures in the news release.

We remind our audience that today's comments may include forward-looking information and statements reflecting Precision's views about events and their potential impact on our performance and 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 pricing, 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 Precision's operations and financial results and cause actual results to differ from such forward-looking statements and information. The March 31, 2008 unaudited financial statements complete with notes and management's discussion and analysis will be filed with regulators and made available on sedar.com. We encourage investors to examine Precision's annual and quarterly filings including the MD&A annual information form and information circular.

This morning, Precision Drilling Trust reported net earnings of $106 million or $0.84 per diluted unit for the first quarter of 2008 compared with $158 million or $1.26 per diluted unit for Q1 2007, a reduction of 33%. The start to fiscal 2008 was negative in Canada as customers reduced their natural gas drilling and well work over programs. And positive in terms of Precision's geographic diversification as operational performance in new markets continued to garner more opportunity for our organic growth program. Before I speak to earnings in the quarter, I would like to draw your attention to the balance sheet. At March 31, 2008, Precision continued to carry low debt levels with access to over 500 additional million through existing bank and operating loan facilities.

At quarter end, Precision's financial position remained solid, At March 31, 2008 the long-term debt to long-term debt plus equity ratio was .13 compared to .10 on March 23, 2007. Over the past 12 months, long-term increased by $65 million to a balance of $214 million at March 31, 2008. Of the increase, $55 million is related to the payment of tax reassessment. Precision has an income tax recoverable of $58 million classified as a long term asset on March 31, 2008. Late in the quarter, Precision received and paid provincial tax reassessment of $55 million including interest regarding the treatment of interest for periods prior to 2005. This amount, plus the $3 million reassessment paid in 2007 have been treated as a long-term income tax recoverable. Precision believes the reassessment are without merit and is in the process of challenging. The resolution of this matter is expected to take in excess of 12 months and therefore, has been classified on the balance sheet as a long-term asset. For the quarter, capital expenditures $23 million with $20 million of that amount for expansion capital. Our capital expenditure estimate for 2008 is $330 million with $70 million for upgrade capital and $260 million for expansion. We have also estimated that the carry-over impact of our 19 rig build program will be $90 million in the second half of 2009. Kevin will comment further on organic growth program in a moment.

(inaudible) equity increased $57 million as net earnings of $106 million exceeded declared distributions of $49 million in the quarter. Turning to the statement of earnings, revenue in the first quarter of 2008 was $343 million, a decrease of $68 million or 17% as compared to the first quarter of 2007. Compared to the fourth quarter of 2007, revenue increased $93 million due to the seasonal winter increase in activity in Canada. Continued growth for Precision in the United States land rig market and the commencement of international drilling with one rig in Latin America. For the quarter, Precision's operations in the U.S. comprised 8% of total revenue. For Canada, rigs under term arrangements with customers made up about 20% of the operating days in the quarter.

Precision reported operating earnings of $124 million for the first quarter of 2008 compared with $178 million for Q1 of 2007. A reduction of 30%. Operating earnings margin as a percentage of revenue was 36% the first quarter of 2008 compared to 43% in Q1 2007 and 46% in the record setting first quarter of 2006. Generally, compared to Q1 2007, rates are lower, consistent with the trends established in 2007. Sequentially, for the quarter, average revenue day rates essentially held at fourth quarter 2007 levels for Canadian drilling rig and daily operating costs were 4% higher. Given drilling rate fleet utilization of 50%, our lowest for the first quarter since 1999, earning margins held nicely. Compared to the first quarter of 2007, the Canadian contract drilling division experienced an average revenue day rate decline of 11% and a reduction in daily operating costs of 2%. Cost control, aligned with competitive pricing pressures to mitigate reduced earnings margin associated with the year-over-year decline in operating days for the quarter of 11%.

For the service rig division, Precision well servicing the average revenue hourly rates in the quarter increased 7% and daily operating costs were 4% higher due primarily to the seasonal influence of winterization compared to the fourth quarter of 2007 with fleet utilization of 55% in Q1 2008, earnings margins for service rigs also held nicely. Compared to the first quarter of 2007, the service rig division experienced an average revenue hourly decline of 8%. Daily operating -- hourly operating costs that were open essentially unchanged. Once again, cost control has aligned with competitive pricing pressures to mitigate reduced earnings margins associated with a year-over-year decline in operating hours for the quarter of 15%. Sequentially, Precision's overall operating earnings margin of 36% in the first quarter of 2008 is the same as the adjusted operating earnings margin reported in the fourth quarter of 2007. Our United States drilling rig operations grew operating base by 24% to 1,016 with utilization near 100%. Demand for high performing rigs and less weather interruption continued to drive Precision's success in the United States. General and administrative expenses increased by $4.6 million and 32% over the first quarter of 2007 to $19.1 million. The increase was associated with the opening of an office Houston, employee compensation increases, incentive compensation plan cost accruals, professional fees and reorganization costs. Measures taken in the fourth quarter of 2007 to lower costs will take full effect in the second quarter of 2008. The operating earnings line for the quarter, net interest expense in the amount of $2.2 million was marginally lower than prior year due to lower debt levels.

You will note that the effective income tax expense rate is 13% for the first quarter of 2008 as compared to 10% in the first quarter of 2007. As Precision diversified its underlying earnings base outside of Canada, the rate is expected to increase as earnings are subjected to jurisdictional tax rates. To the statement of cash flow in the quarter, operations generated cash in-flows of $57 million. The cash was used for income tax recoverable of $55 million for investment in the net purchase of property, plant and equipment, $23 million with $20 million of this going toward new rig construction and the expansion of Precision Super Rig series. Cash, sourced from financing was $20 million with net borrowings of $90 million and $69 million paid in distributions to unit holders. In the first quarter of 2008, Precision declared cash distributions of $49 million, or $0.39 per unit on a monthly rate of $0.13. At March 31, 2008, Precision's drilling rig fleet stood at 231 in Canada, 14 in the United States, and one in Latin America for a total fleet of 246. For 2008, we have three rigs from the 2007 program to finish and 19 new drilling rigs in the '08 program for an additional 22 rigs. In closing, for those listeners that are new to Precision and the Canadian oil field service industry, we would emphasize that Precision's activity is seasonal and highly dependent on oil and natural gas commodity price levels. Once again, we recommend that listeners read Precision's regulatory filings. We once again remind our audience that the government of Canada has passed into legislation certain tax laws during June 2007 that were initially announced or proposed on October 31, 2006. Generally, the tax on distribution implications take effect on January 1, 2011 provided Precision complies with growth guidelines. Our trustees, directors and management continue to monitor to the situation in terms of volume maximization for unit holders. Kevin, that concludes our 2008 first quarter financial review.

Thank you, Doug.

I would like to begin by addressing our 19 rig build program, give you more specifics and details around those rigs. As reported earlier, three of these rigs are contracted and 16 remain uncontracted. We have been meeting with customers and are in the final stages of negotiations on several of these rigs for long term use. I have no concerns regarding the contract status of these rigs and suggest the timing of contract signings with our customers will not always line up nicely with our conference calls. However, based on our customer needs, we are now prepared to give the specifics of the mix. Ten of these rigs will be Super Singles, three of which are contracted. Four of the rigs will be 1200-horsepower Super Triples and the remaining five will be 1500-horsepower Super Triples. Delivering these rigs will begin in Q3 with the first rig, approximately three rigs will be delivered in Q4 2008, six rigs in the first quarter of 2009 and eight rigs in the second quarter of 2009, with possibly the last rigs spilling over into the third quarter of 2009. I do want to stress these are preliminary dates and may change as customer needs change or our vendors front up deliveries on (inaudible) components. However, this is a plan we are currently manufacturing rigs under. We also have contracted three rigs yet to deliver this quarter from our prior build program Doug mentioned earlier. Let me now turn to first quarter pricing results for a moment.

As I commented earlier, the Precision team remains focused on protecting our margins and insuring that our customers fully recognize the value we provide. Our first quarter results are clear evidence we succeeded in protecting our margins in spite of intense pressure late last year to significantly lower day rates. For example, we did not participate in the spot market bottom of the day rate game. In fact, the lowest day rates we accepted were based specifically on margin targets and not utilization objectives. As a result, our utilization remained pressured throughout the quarter as other service providers seemed willing to put their assets and people to work at rates far below what we would accept. I want to caution you regarding Q2. First off, the commodity prices are excellent.

The oil, NYNEX and (inaudible) gas strips are likely the strongest we have ever seen and we are certainly experiencing a significant of uptick of optimism in the marketplace. However, this is coming too late to have a meaningful impact on Q2 results. The industry is still burdened the budgets, drilling plans and spinning profiles of our customers in late 2007. These plans are still fundamentally based on the Q4 commodity prices and the unintended consequences of the Alberta Royalty Review. We know many of our customers are re-evaluating economics in light of the significantly improved commodity price and the revisions by the Alberta provincial government tried to undo some of the unintended consequences of the Royalty Review. We also know that our customers are extremely sensitive to service rate increases and they are seasoned experts at shielding the true demand and managing service rates around those demand increases. As it stands, we see Q2 developing or emerging as a bottoming quarter, and that is a bottoming of the year-over-year demand declines and a probable bottoming of the year-over-year rate declines. We will have a better sense of how Q3 and Q4 will develop respective to utilization and drilling rates over the coming six to eight weeks. I do want to stress that the commodity price based optimism is not yet translating into meaningful changes and activity levels at day rates.

2009 is emerging as a different story. It is no stretch to say that 2009 is looking significantly more active than 2008 and we are anticipating 2009 utilization growth and day rates more indicative of the optimism we see in today's commodity prices. We will comment that Precision is well positioned for a rebound in activity, but is also extremely well positioned for what we expect for Q2 and whichever way the market decides to emerge in Q3 and Q4. Looking forward, specifically places like the Montene shale plate. It was getting a lot of press and more importantly, a lot of operating attention right now. Precision is participating in private drilling programs currently underway in that region and Precision will be a significant player as drilling programs unfold in 2009 and forward. We have rigs geographically well positioned to support this region, and specifically, our Super Triple rigs, particularly the 1200-horsepower class are very well suited to the complex drilling typical for shale gas plays like the Montene Plain. Let me turn for a moment to our U.S. operations.

Notable to comment, but we are not reporting any new contracts or any new rig placements in the U.S. as of today, but I will comment that our U.S. growth is on track. We still expect to have 20 rigs on contract by the end of the second quarter and in the range of 30 to 35 by year, roughly doubling our 2007 growth rate in the U.S.. We currently have rigs operating in the Rockies, in Texas, Barnett Shale, Oklahoma, and New York. We expect to have additional rigs in New York as the Marsela Shale play develops and we see further growth in east Texas (inaudible) regions for Precision later in this quarter and into Q3 and Q4.

During this quarter, we opened our U.S. -- I'm sorry, during the first quarter, we opened our U.S. operations headquarters and are building our U.S. sales team and initiating our human resources and recruiting operations. We are very pleased with our recruiting successes in Canada and the U.S. to date. We believe that our systems and our people will allow us to staff our U.S. rigs with the same quality and performance we demonstrate in Canada. Currently, 33% of our U.S. work force is local and we expect to see that grow with the majority of the U.S. local workers as our growth is fueled in the U.S..

One area I want to talk about is new technology and how new technology impacts new rigs going to work. I'm certain all of you have heard about many of the shake down issues related to new rigs and new technology particularly offshore but even on shore rigs. An important milestone to bring to your attention regarding Precision. During Q1, we started up two high-technology (inaudible) integrated -- fully integrated Super series rigs in the U.S.. These rigs were started up virtually trouble free and ran 100% utilization throughout the quarter. I am pleased with the way we introduced technology and the way our operations people are able to execute the start up of those rigs and satisfy our customers demands in emerging markets like the U.S. To conclude, while our U.S. results fall short of the analysts' expectations, we remain confident that we are on track for the year and we are anticipating that while Q2 will remain under pressure, that it may prove to be a cyclical turning point in the sector. We view 2009 in a very positive light and believe the likelihood of a second half 2008 recover is improving as our customers gain confidence in the sustainability of these commodity prices. On that note, Michelle, let me turn it back to your for questions, please.

Thank you. We will now take questions from the telephone lines. (OPERATOR INSTRUCTIONS) Thank you for your patience. Our first question is from John Tasdemir from Tristone Capital. Please go ahead.

Good afternoon, guys. First, a couple of, just clean up questions for you, Doug. I know you addressed them on the call but I didn't get it all. Basically, on the tax and on SG&A, are you starting with SG&A, there was -- it was a little higher than we thought it would be. You mentioned that your cost cutting initiatives ought to start being seen in the second quarter. Can you give me -- can you give us kind of a range for SG&A on a quarterly basis? What should it be?

As Kevin indicated, there again, we feel we're, on an annual basis, we are on line. We previously indicated that our SG&A will range from 5% to 6% depending on activity and where our revenues grow. So we are still on track for that. We are trending right now toward the higher end of that range, and we do have an element in our incentive compensation program to do with retention that is tied to unit value. So, that will be a factor as well as you see in your disclosures today.

Okay.

And as far as the tax rate, you saw -- as we spoke about on the call, you saw our tax rate go from and 10% to 13%. That's indicative of profitable operations outside Canada, where you are subjected to the jurisdiction tax. In the case of the United States, you tend to be subjected closer to the corporate tax rate. So that's -- you will see that drift as we continue to be successful with our growth and that amount begins to overwrite the shield within the trust.

Understood. Okay. That ramps up over time. Then switching gears, Kevin, since you talked about pricing, let me ask you. Obviously, we are pretty positive and optimistic with commodity prices where they are, and we think that rigs will get back to work pretty quick, but we still have a lot of rigs out there in the Canadian rig fleet. When do you think you guys start to get a little pricing leverage? Is it going to be capacity driven, is it going to be people driven? Any general thoughts there?

John, I'm going to scan down my viewer list and see if I have anybody from in Canada or (laughter) on the call right now. But you know, that joke aside, John, I think it is probably pretty fair to say that the pricing leverage tracks the demand pretty closely. And whether the delay is one month or three months, it is not much more significant than that. And I have made a shielded comment during my prepared comments around our customers being very good at trying to shield the demand. It might be suggested that even late last year they were doing a real good job understating the demand for the winter season because I think that the ramp up during the winter probably caught a few people by surprise. In that, I know rigs were out there working at rates people were very unhappy with on the drilling contractor side. And we also saw evidence late last -- late February and early March of crew supply shortages and I think that Precision did pretty well. But I know that the industry was right at the limit, maybe even a few rigs short of manpower. So, clearly, as the supply of rigs you can put to work, and put to work means an asset ready plus people to go work on the rig, as that supply tightens, there's no question pricing leverage becomes very strong on the services companies side. You will see a pretty well engineered trade off between the demand for rigs and that supply transparency over the coming, certainly over the coming six months. We're hearing indications by our customers right now about trying to get rigs to work in Q4 so that everybody can handle the anticipation of business in Q1 next year. We're hearing things like that, but no real activity to suggest that yet. But what I find interesting is a lot of indicators suggest we will be far busier later this year than earlier this year, yet our our clients doing a great job holding back that signal, that firm signal to us. So short answer to, short version of the long answer is, as demand picks up, the leverage will track very closely behind.

Well, how are you -- what is your sense of -- so we are in the end of April, we've got another month or so before break up. Are you getting any sense of guys trying to get busier than we were a year ago, or you said, the back end of the year you feel a little bit better about. But, anybody started negotiating in a meaningful way?

Clear answer to that one is no. The shield answer is that RCLC was far more active this time this year than they were this time last year and customers have time for them right now. Meaning they want to see our people. A year ago, they were really trying not to see our people because they were worried about having to push back (inaudible). There's a lot of really neat, kind of anecdotal, positive indicators right now, but to answer that we are seeing negotiations change yet? The answer is no.

Okay. Alright, guys that's all I have for now. Thanks.

Thank you John.

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

Good afternoon.

Hi. How are you today?

I'm doing alright. Alright, a lovely day in Colorado.

I assume the weather in Colorado is better than it is in Calgary today.

I think it is a lot better.

I am fighting a bit of a cold because I don't think after eight years in Houston I was attuned to winter persisting through the end of April, but please go ahead.

It'll help to break up the deeper. First question is a little follow on to John's there, when do you think you will be in a position or have confidence in the strength of the '08-'09 winter season, do you think it will be by the summer or do you think it has to wait until late in the fall for freeze up?

Alan, I think that we will have a real good sense of the winter '08-'09 season probably earlier in Q3 rather than later in Q3.

Okay. Now on the U.S. side you didn't announce any further U.S. contracts for the new build program this quarter. You mentioned it there in your comments. Can you talk a little bit about these efforts? Are you still in discussions here or are you holding back because you think the demand is high, and you can get a higher rate here in two months?

We are not going to announce LOIs. So, I won't make any reference around LOIs, but I am confident we will have rig contracts fairy shortly. As much as I think it is a timing issue and clearly, during January and February, we are highly focused on ramping up operations for Canada. I won't say we took our eye off the ball in U.S., but the fact of the matter is we are pushing everything here to make sure we can meet our customers' demand if Canada through the acceleration period, mid January into February. I'd argue there might be a few timing issues around when these contracts are announced, but we'll be getting contracts and I have no doubt we will make our objective of hitting 20 rigs by the end of Q2.

Do you still see the sort of ceiling, if you will, for HE or high efficiency AC rigs as way above where they are right now in the U.S.? -- the number they could absorb?

The U.S. market is very careful about disrupting new rigs, be they high efficiency rigs or any rigs. It absorbs them slowly, is very much prove it to me as you do it. When you go out and achieve a high day rate, you get a rig to do it and you've got to go out and prove you can deliver that particularly (inaudible) like Precision in the U.S.. But I will tell you that I think the market will continue to accept high performing rates at the rate it has accepted them the past 12 months. That may increase as more of these rigs prove how effective they really are.

You mentioned in your release about taking rigs from Canada to the U.S. in the second quarter. What are these as far as the size of these rigs and do you have contracts for these?

Well, any rig going to the U.S. will be going down for a contract period.

Okay.

We will not deploying a rig on spec from Canada to the U.S.. I don't have the details on the size in front of me right now, but I know there's a mix of some triples in there and might be one or two Super Singles, but I don't have the specifics handy.

So you are pulling some of the high efficiency rigs out of Canada, then.

There will be a blend. Our Canadian rigs that go into the U.S., whether they are truly a Super series rig or one of our conventional rigs, they're well maintained, they are well supported, well staffed. They perform very, very well. We are having great success drilling some very high performance wells right now with conventional Precision rigs. Okay, last question is on the international, outside of North America. Can you kind of refresh us on, what are you thinking there post the August roll off of your non-compete. You have one rig deployed already. What are you thinking? Is this a big thing for you guys or is it just going to be a trickle. It will start off as a bit of a trickle, Alan, because we are going to have to go with the marketplace and organically grow market share and then look at potential for acquisitions. There's one acquisition on the table right now that's occuring that is primarily international acquisition. So that activity will probably pick up over the coming months. We think we had are in a good position to be ready if a right kind of opportunity comes up, but the fact of the matter, we can't make an acquisition that would close before the end of our non-compete. I am frustrated right now that in a very buoyant market for rigs that we are having to just get ready. Frankly, here is what we are doing. We have an operations group we are building right now. We have field (inaudible), rig managers lined up, an operations president, vice president lined up. We have a sales team we are building. We are receiving all kinds of inquiries that we are getting ready to execute on and it will be organic to begin with and we will keep our eyes open for acquisitions. Organic growth in land rig business comes one or two or three at that time. I doesn't come in 15 rig blocks.

Sure.

So the answer will be the start.

Alright. It looks like land rigs internationally becoming more of a strategic asset. (inaudible) and private equity stepping in for Saxon. And you see weather for building some. Are you seeing or getting inquiries from the bigger service companies to be a partner to do their IPM work internationally?

No comment.

Alright, I will turn it back. Thanks, guys.

Thank you. The next question is from [Nema Balou] from Bloom Investment Counsel.

Good afternoon, Kevin. Quick question. With respect to the deferral $40 million in CapEx, are you just trying to align more of your CapEx spend with greater activity levels in '09 or is it just getting the manpower to build these out?

Actually the deferral wasn't so much a deferral, more just as we -- as we formalize the S curve on building 19 rigs, and the fact of the matter, the Precision team prior to my arriving here didn't have experience build thing big of a block at one time. I think it's fair to say that as we developed our S curve for the project of building these rigs, we just have gotten clearer on how the spend will occur relative to the rigs.

Got you. It is not a comment on activity or outlook by any stretch, just a matter of getting it right and getting it built on time at the quality that you want.

Frankly, working with some of our vendors to push back the purchase as far as we can so we can just manage our cash appropriately.

In the U.S. you are managing to displace older rigs with high efficiency rigs. In Canada, because of the excess capacity, is the strategy, again, just driving pricing off of margin and willing to defend that pricing and not chase utilization? Is there anything you can do beyond controlling supply and controlling the offer?

I'm not quite sure what you are asking, but let me take a couple of stabs at that. First of all, I wouldn't say that we are just passively in the marketplace in Canada managing our margins. We do believe that we are high value proposition for our customers here. Low risk, high performance on the safety side and high performance on the drilling completion side. I was just looking this morning at our penetration in the seg D drilling, I think we are disproportionally meeting larger market share than I would have expected in seg D. And it does speak to our performance, our high performance value proposition to our customers. So (inaudible) everyday in the marketplace trying to increase our market share based on high performance and continuing margins, not just being satisfied with our fair share. I mentioned three rigs coming into our fleet in Q2 right now from our last year's build program, all of those are for Canada. New rigs funded in this environment for this market.

So it is sort of the same strategy in Canada as in the U.S., just put the best rigs out there and deliver the best service and hopefully achieve premium day rates through that.

Have the best rigs, have the best people on those rigs delivering the best performance. Internally manage our cost so that we have the best internal cost structure and we think that provides a very attractive investment. I think our margins support that.

Thanks very much.

Thank you.

Thank you. The next question is from [Harry Livint] from Income Research Dossier. Please go ahead.

Good morning. I was just wondering. I was looking at a couple of balance sheet items if I might. The accounts receivable I noticed between December 31 and March 31 is up by about 105,000 now. I know that 55 of that or so, 58 is relative to the income tax, I presume is in there. Would the balance simply sort of reflect a little bit more difficult market conditions, slow -- a somewhat slower payment on the part of customers?

Harry, it's Doug Strong. Yes, the increase in receivables is a function of the increase in the revenue from quarter to quarter. So our revenue increased $93 million. If you look at the trend in the first quarter of 2008, it was a slow start and we -- industry plateaued really for a pretty good duration, right into the early parts of March. So we had a pretty good finish to the quarter. That's indicative of what is really a pretty traditional seasonal pattern for Canadian rig activity where you get a pretty good build on your receivables and your working capital coming out of the first quarter.

Right. Would -- are you then saying the revenue in Q1 '08 was more back weighted on the quarter then than perhaps Q1 '07 -- or pardon me, I guess, well at December 31 '07 receivables.

Absolutely. More back weighted and higher activity levels than the fourth quarter.

Okay. And would I be right, and it may be anecdotal then, would that be an indicator of sort of some increasing level of activity, toward recovery as oil and natural gas prices are improving or is there some other factor at work there?

No, you are exactly right. It is indicative of really in terms of how the quarter finished, there were a lot of positives. They weren't negative trends, they were positive trends to exit the quarter.

Okay. I apologize if I missed it, two more questions. The first is on the income tax reassessment. If I did miss it in there, I apologize. Can you give any little bit of color on the nature of that.

No, we are not going to get into any kind of specifics. There again, we will say it is to do with interest treatment, it's to do with prior periods and it is a position that we are in the process of challenging, and we will update quarterly going forward.

Okay. Thank you very much. And then on the capital budget which you have reduced to 330, you are now using a term called "upgrade capital". You are using sort of different terms than are typical I guess, so I am not -- just so we understand them.

Well, that's --

-- upgrade now, is that equivalent to sort of sustaining in your --

That's a very good observation. Yes, upgrade capital is the equivalent of productive capacity maintenance that we have used in the past and we will now standardize around the word upgrade.

Okay. And in your sort of distributable cash description, the -- be deducting for upgrade and also you comment deduct the purchase of property of planning equipment for expansion initiatives to grow. Is there -- would that expansion initiatives be the difference between the 70 and the 330 that you forecast this, I am just trying to --

Yes, yes, the answer to that is yes.

Okay. So that would be quite an aggressive distributable cash calculation.

That's right. Both -- all of the entire amount of the capital expenditure program is deducted in the calculations as you will see in our earnings -- news release this morning.

So you would then plan to deduct $330 million for -- if that was your entire capital budget for 2008 as forecast from your distributable cash?

We are strictly speaking about how we calculate standard distributable cash as a calculation, and that by the way, is a non-GAAP measure which we do explain in our news release this morning.

Okay. Thanks very much. That's all I have.

You're welcome.

Thank you. The next question is from Larry King from Thomas Weisel. Please go ahead.

Thanks, good afternoon guys. It's Dana on the phone. I wonder if we could start with U.S. pricing. Could you give us a sense as to what you are experiencing as you go to sign up an increasing number of rigs onto contract into this market and to various regions obviously a miscellany of clients, of the MP clients. Maybe give us a sense as to how that dynamic is shaping up for you.

Sure, Dana. It is Kevin speaking. There has been a lot of pressure on U.S. day rates over the past couple of quarters and I am seeing a bit of a trend of sort of reported news coming in that the day rates may be flattening up in the U.S.. What's interesting for us as the new entry player down there is we really haven't experienced a lot of the day rate pressure because we don't have much rolling off contract first of all, and second of all, we are still coming in kind of the high end of the market. So we're not -- it is much tougher for the customer base to be comping us against everybody else quite yet. So, we are still -- some of the position on day rates and we will probably be there, probably through the end of this quarter as we get past 20 rigs, I think it will change and we will be subject to some of the pressure some of our peers have seen. What I will tell you thought, is that we have had one roll over in the U.S. and the clients tried very aggressively to get us to renew day rate. In fact, we renewed (inaudible) at the same day rate.

Right. Do you think that and maybe your ability to maintain healthy pricing in your negotiations is strongly influenced by the turn around that we have seen in natural gas i.e. outside of that you may have been forced to perhaps be a bit more competitive notwithstanding the fact that these are very high quality rigs?

Well, that's a couple of what ifs, what ifs. So I have a hard time getting into too many what ifs because you can set up any sort of scenario. I think the fact is that the demand for drilling in the U.S. is probably going to look a little stronger than people thought a few weeks ago and I think day rates will stabilize or probably, if anything, trend a bit stronger as demand picks up and I don't sense a lot of weakness if you are talking to your customers and focusing on performance drilling where customers recognize performance. How is that for a non answer?

Let me ask it this way. As you go to finish work on the remaining contracts for the rigs that you're engaging to build, presumably, we should not expect to see any real, any meaningful move down in applied pricing for those rigs. Is that a fair statement?

Dana, that's a fair statement.

Okay, just one more question, I guess coming back to Alan's question on the international environment, I would be curious to know with the passage of time and with events, is there any one region that maybe is start to go look a little more attractive than any other region that you may have been looking at? Is your thinking evolving regionally?

Well, probably more around clients than specific regions. There's to question that one of the large service companies is having great success with their IPM model. I think that beyond one service company, it is taking hold a little bit of a second service company, the third is struggling a bit. That really points well toward the NOCs. So I think that Precision is probably fairly well positioned to look at the IPM model with the service company at some point in time for the NOCs, but outside the NOC type operating company, when you get back into the global, EMP companies like BP, like Exxon, like ConcoPhillips, I think that we can find places where they're operating nationally that our value proposition has real impact for them. So I think it will be more of a customer-by-customer rather than uniquely regional. We are really pleased with the success we're having with one rig operating several thousand miles away from the head office in a remote operations for us. And it's been a great testament to what we can do on a one-by-one global organic emergence.

Right. Well the speculation or I guess, I guess most of us have always believed that that rig is in fact, in Chile. You've seen Calfrac move into Argentina. Can we expect a more substantial move into southern, South America.

If it is a country, a region or a client particularly who recognizes our performance, it will be easier for us to get in there. Latin America is one place where there are several opportunities like that.

That's all I have got, guys. Thanks.

Thank you.

Thank you. The next question is from Todd Garman from Peters and Company, Limited. Please go ahead.

Good afternoon.

Hey, Todd.

In the eight rigs that you indicate that you could transfer to the U.S. from Canada here in Q2, are you -- have you already started to move all eight rigs? Or what portion of those alt rigs has actually begun to move to the U.S.?

Well, we can move to a rig to the U.S. depending which base in a matter of a few days. The answer is, they will begin to move once a contract is signed.

Okay. And is that -- I gather you are reasonably certain you will have contracts in hand for all eight of those rigs prior to Q2 '08 ending?

Yes, Todd. In my comment earlier, was, I was just going to reiterate, is that we are not going to get into discussing LOIs or things like that. We will publicly state when we have signed a confirmed contract and just, I think around timing issues right now today, tomorrow the next day, we are imminently close to having a couple of those rigs locked down.

Second question is, in the U.S., how do we think about margins, I guess. Two-thirds of your stock in the current fleet is Canadian, certainly some portion of the new rigs at that will be transferred and/or built, those rigs staff will have to be, also, I am assuming come component to them will be Canadian staff, so how do we think about margins going forward given -- do you -- will you have protection in your contracts that still provides provisions for travel for your staff to and from Canada?

A two-phased answer there. First of all, as we grow in the U.S. from this point forward, I am really pleased with our operations team in the U.S. and I expect that most of the new rigs will be fundamentally staffed by domestic employees as opposed to a lot of Canadians going forward and forth.

Okay.

So I don't think that whether we have a Canadian rig manager or driller or rig, I don't think that will be a negative impact on our margins.

Okay.

So going forward, fortunately, right now, I don't have to report segment reporting on U.S. operations. So we do shield our U.S. margins a little bit. That will probably change sometime later this year. But we are quite pleased with U.S. margins right now and don't expect that they are going to change dramatically during the course of this year.

Can you give us any color, Kevin, as to whether or not they're higher or lower than margins you are generating in Canada?

Generally speaking, we think we are gaining a pretty good gap over our peers in Canada, and we expect to have a reasonable gap between our peers in the U.S..

Okay. Thank you.

Thank you. The next question is from Mark Kellstrom from Strategic Energy Research. Please go ahead.

Thanks, good afternoon, guys. First, I was just wondering if you could remind us what you think your dry powder is on the acquisition side, what you have available in liquidity?

Yes, Mark, in terms of your existing access to debt facilities, our long-term debt at the end of the quarter is $214 million. We have a little bit of bank indebtedness, less than $20 million. So, we have got additional access to debt of a little over $500 million. We currently have the $700 million syndicated bank loan facility as well as a $50 million operating line. So that's -- in terms of the state of things today, that would be the clear cut answer.

Okay, thanks. And then you mentioned the Montene, do you have any opportunities in the Horn River or do you see that being a meaningful growth spot for the company?

Yes, we have opportunities and yes, we will participate and I think we'll -- the type of rigs and the type of performance we offer for Horn River will be well suited. I don't know that it is going to meaningfully change our reporting results. It will be a good play as the year develops.

Yes. And I guess that's a winter access only in a lot of that basin too. So, that may make a difference.

That's right.

Okay. And then thirdly, Alberta recently backtracked a bit on the royalty changes, added some incentives. Does that -- do you see that having any near term impact or is it just a little plus on the margin?

I know the Alberta government is working hard with industry trying to get this sorted out. Unfortunately, it is coming slowly and it is coming in small bites. Our client base is struggling to comprehend what this really means to them. And the fact of the matter is, we haven't seen anything change based on the most recent announcements. I'm a little disappointed by that, but it tells me this is just a very complex problem people have to work their way through.

Okay. And then finally, on the international front, your comments on the IPM and getting going on that, if some of these opportunities were with Weatherford, would that make any difference on the non-compete, could they be precluded?

You would have to ask Weatherford that question, they control the non-compete. But I would assume that if we had a way to work with Weatherford, they'd want to work with us.

Okay. Great. Thank you very much.

Thank you.

Thank you. The next question is from Jeff Fetterly from CIBC World Markets. Please go ahead.

Afternoon, guys, just a couple of quick questions. On the labor side, you mentioned the big ramp up you put through this fall and early winter. How many rigs did you have the capability of crewing this winter, both on the drilling and well servicing side?

Oh Jeff, that's a cool number I am not going to give you today, but I will tell you that I think we are able to satisfy our customers pretty much across the boards. We were able to find 1,500 people that met our physical requirements and our organizational requirements between the end of Q3 2007 and sort of the middle of Q4 or Q1 2008. I am -- I was hugely impressed by the results we delivered on that. On top of the 1,500 new employees, we also did return 2,300 that were previous employees. Our guys did a great job. My guess is, if we asked them to find more, they'd find more.

Is it fair to say that the levels -- you met the levels of demand that were out there for the winter, or were you turning work away?

We met the levels of demand and I will comment that we also met of the levels of margin at the same time.

Going forward looking into the summer and into the fall, where is your labor pool at right now and where do you expect it needs to be for that period of time?

I'm -- I believe we've got 2008 winter season right. We have got a pretty good sense of what's going to happen for the winter next year. I will stop short of saying labor won't be a problem for us. It is a problem for everybody, it's tough in this sector. It is tough globally to man up drilling rigs with experienced people. But I will tell you, I think we have an excellent process and an excellent team of young ladies and young men engaged in that recruitment process. It is not, it is not one of the reasons why we would be concerned about our performance into 2009, Jeff.

Okay. On the capital side, with these rig transfers you are talking about in Q2 into the U.S. market, is this displacing temporarily some of the rig builds you were scheduled to put out, or is it pushing off some of the additional rebuilds into 2009?

Both questions, the answer is no. No. The schedule of rig builds and the execution of the rig builds inside Precision is driven by the fact that this is a large (inaudible), the largest we have undertaken in recent history. We are establishing a building and manufacturing team. We are establishing project benefit in the company, we're separating the building of rigs from the operations group. A lot of changes going on that I am driving through the organization with I many experience and believe that the shift in capital is simply getting the S curve of the production to match the actual spending.

How much additional capability does Ross still have if you were to start building rigs for the international market, could you handle them internally?

As you look at, I think it is Q2 next year, we are talking about delivering eight rigs during the quarter: That's pretty good pace.

Is it fair to say that's your capacity?

No, it is not.

Care to venture on what your capacity could be on a quarterly basis?

After 26 years of working for a rig manufacturer, that's one question that I have never answered. And Jeff, I will tell you what. When I came in here, to suggest a capacity was two rigs per months out of Rostel, people would have laughed at me. We will be running at more than two rigs per month in Q2 next year. So, I am comfortable with the way our organization has responded.

Okay. Well, thanks for the color.

Thank you.

Thank you. The next question is from Kevin Lowe from First Energy Capital. Please go ahead.

Hi, just two quick questions, one to follow up on Jeff's comments. Will the rigs that you are moving down to the U.S. be replaced in Canada? In the short term?

I would view that, Kevin, as we are just readjusting our Canadian fleet size.

So, I will take that as no.

One more comment that I'll make, we commented back in Q4 of last year that we would look at our rig fleet in Canada and determine at the end of Q1 whether or not we would do additional retirements. I think what we are suggesting in the trend is, that we actually have a better home for them rather than retiring them. Those rigs may not be the candidates for retirement, but we are sizing our Canadian fleet appropriately with those moves.

Okay.

And one more time, that those rig moves are anticipated but not contracted yet. Thank you.

And if second question is, with respect to the day rates, I guess heading into the second and third quarter, should we expect the annual seasonal discounting or how -- is that going to be more or less severe than what it normally is?

Well you know, Q4 last year was really severe and so I don't know quite how to categorize normal these days, but my guess is that as the long term demand emerges, the pressure on rates will for sure soften.

Okay, if I may ask a different -- a different way, I mean your day rates kind of went down 11% year-over-year between Q1 '08 and Q1 '07. Do you expect that same magnitude between Q2 '08 and Q2 '07?

Between Q2 '08 and Q2 '07 do I expect 11% drop in day rates?

That's right.

I think it will be more probably mix related than it will be day rate pressure, Kevin, going into Q2.

Okay.

So it will be the type of rigs and size rigs and contracts that will impact day rates in Q2. We are not cutting any rates for Q2 for right now.

That's great. Thank you.

Thank you, Kevin.

(OPERATOR INSTRUCTIONS) The next question is from John Harding from the Calgary Herald .

Good afternoon. I just was hoping to get a clarification on the potential for international acquisition. Is that what you were saying, Kevin, that -- or if you could revisit what was frustrating you in that process and just also, wanted to double check, what size acquisition would you folks be able to do?

Okay. So, John a couple of questions there. The first question was what's frustrating me. What is frustrating me is the fact we have a non-compete through the end of August 2008. So, the fact of the matter is that we can't really get engaged in an acquisition right now. And a question we have been facing since I arrived here was, who would you acquire internationally, what candidates are there, there aren't many targets. The fact is, there are actually quite a few targets, some private, some public. There have been two transactions internationally so far. One was European and one recently here in Canada, which just re-enforces the fact there's activity in the international sector in acquisitions. I think that virtually anything other than rising internationally would be inside of our capacity, simply because there's nothing large enough international, be it public or private, which we probably couldn't afford if we chose to go after them.

Are there any limitations given related to the trust legislation on you?

John, Doug Strong. No, technically no, what drivers Precision is our business strategy.

Yes. Okay. So that is a negative. You can do any size transaction that you wanted, relative to the --

Relative to the targets that exist internationally, that's probably accurate to say that.

Okay. That's fine. Thanks very much.

Thank you, John.

Thank you. The next question is from Roger Serin from TD Securities. Please go ahead.

Just a couple of follow up questions. So, when you look to move eight rigs from Canada to the U.S., Kevin, would those be under different contract terms obviously than your new builds, i.e., they'd probably -- you would look for lower term commitments?

Boy, great question, Roger. I have tell you our guys are always looking for real strong contract terms and strong contract commitments. We are certainly a little looser with a rig that's already paid off than we are with a rig that's not paid off yet. But fair to say that we will be looking for strong contract terms.

Okay, so when do the math, the end of the year at 12 rigs in the U.S. building 19 potentially, transferring eight that gets me to 39. You are giving guidance of 31 to 35. Part of that is because you think some of the building will not so much slip, but you are just sort of timing it a little better and is part of that is just to provide flexibility on when the contracts might get signed?

Actually Roger, let me try to just get your numbers reconciled a little bit. Of our 19 rig new build program, we have announced contracts for three of those rigs and of those three contracts, they're all for a large single U.S. customer and Doug, I believe one of those rigs enters the the U.S., no two rigs enters during the course of --

That's correct.

This year. So two rigs have been (inaudible) in the U.S. and the balance of what we have for the U.S. will probably come out of Canada for the course of 2008 and recognizing that our delivery program of 19 rigs is based on working with customers, identifying the size and scope of the rigs and then layering that into our project management and our manufacturing sequence inside the company.

Okay. And one last question, on your operating at five U.S. areas, would you care to break out how many rigs you have in each area currently?

Not right now actually, I would prefer to wait until we have -- when you take 14 rigs divided by five, you get a few ones in there.

That's what I was looking for.

Up in New York, okay. I will give you clarity, Roger. In New York we have one rig, in Oklahoma we have one rig. Those are both important for us because it gives us a chance to go into a new basin and prove up our experience (inaudible)

Perfect. That's what I needed. Thanks guys.

Thank you. The next question is from Mike Clark from SIR Capital. Please go ahead.

Just a question for Doug. Trying to ball park the tax rate for next year. If we just take a look at the increase in the mix of U.S. rig base, is that a good way to ball park the tax rate? If the U.S. mix is up, say 20%, the tax rate could be up say 20%? I realize it is a big over simplification, but just trying to take a hack at it, guys. Yes, I understand where you're coming from, Mike. If you look at '07 and analytically, just look at our effective tax rate and then take the mix of business and operating days is not a bad way to go and just model it forward. I think you will find, as you saw in 2007 and now our first quarter in 2008, that it is a pretty slow migration upwards. Okay. Thanks a lot.

Thank you. The next question is from Harry Livint from Income Research Dossier. Please go ahead.

Yeah, thank you. Just one more question, probably for Doug. Would the timing of your capital expenditure budget of 330, is that an announced budget and do you expect to disperse actually disburse those funds in fiscal calendar 2008?

Yes. And fiscal calendar year 2008.

Okay. Okay. And does your dividend/distribution guidance, is that as you provided if your commentary in the (inaudible).

Yes, it is and you will see in our history that the distribution -- the underlying funding for the distribution comes from our operating performance.

Right. Okay. Okay. Thank you very much.

Thank you.

You're welcome.

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

All right. Thank you very much. I look forward to visiting with all of you again on your Q2 conference call. Thank you.

Thank you, the conference has now ended. Please disconnect your lines at this time. We thank you for your participation.