Precision Drilling Corp (PDS) 2008 Q2 法說會逐字稿

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

Good afternoon and thank you for joining the Precision Drilling second quarter earnings call. Just before I hand the microphone to Doug Strong to recap our second quarter financial results, I want to express my thanks to the employees of Precision Drilling and as all of you know the second quarter is the most challenging quarter for Canadian service companies. However, it's far more challenging to our employees who are facing seasonal work slowdowns and in many cases seasonal Layoffs. I want to thank all of our employees who through their hard work and dedication helped Precision through the spring quarter as we began to provision ourselves for the rebound in the Canadian, US and the emerging international opportunity for Precision Drilling. On that note, Doug, please recap the second quarter for us.

Thank you, Kevin. Ladies and gentlemen, through a news release this morning, Precision Drilling Trust reported financial results for the second quarter ended June 30, 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 stated otherwise. In addition, some of today's comments may refer to non-GAAP measures and such as operating earnings and distributable cash and we refer our listeners to disclosures in the news release.

We mind our audience that today's comments may include forward-looking information and statements reflecting Precision's views about events and the 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 governments of Canada. These expectations involve risks and uncertainties that could impact Precision's operation and financial results and cause actual results to differ from such forward-looking statements and information. The June 30, 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.

Earlier today, Precision Drilling Trust reported net earnings of CAD22 million or CAD0.17 per diluted unit for the second quarter of 2008, compared to CAD26 million or CAD0.20 per unit for Q2 2007. A reduction of CAD4 million or CAD0.03 per unit. In the quarter, incentive compensation expense was CAD4.2 million. 87% of which was included in general and administrative expense. Last year second quarter incentive compensation resulted in an expense recovery position of CAD4.4 million. With the recovery of long-term incentive performance from prior periods. This quarterly compensation expense variance year-over-year was CAD8.7 million. Adjusted for this impact, earnings in the quarter for 2008 were slightly higher than the 2007 second quarter.

For the six months ended June 30, 2008, Precision reported net earnings of CAD128 million or CAD1.02 per unit, diluted unit, compared to CAD184 million or CAD1.46 per unit in the first half of 2007. As reported, the decrease was due to lower 2008 first quarter industry customer demand and pricing for both of Precision's operating segments in Canada and was partially mitigated by new market growth. For fiscal 2008 second quarter, the 2008 fiscal second quarter reflected improving conditions in Canada in Precision's Canadian market and decelerating growth in the United States land drilling market with (inaudible) news from Canada and a fleet of 19 rigs and quarter end with an additional two rigs active in the first week of July.

In Canada Precision is currently experiencing higher customer demand than a year ago as the improvement in natural gas pricing over the past six months has revitalized industry fundamentals. Canadian spring breakup weather had a negative impact on equipment utilization, yet Precision generated higher activity than the prior year quarter in all divisions, except for Canadian drilling which was 3% lower. To give you a sense of the bottoming that we believe has taken place in Canada during this second quarter, Precision experienced higher year-over-year activity in the quarter with increases of 6% for service rigs, 107% for snubbing units, 21% for camps, 20% for rental days, 108% for waste water treatment units. This underlying demand has held pricing firm through the six months of 2008 at levels carried over from 2007. With an improved outlook and opportunity for higher well activities, especially in Canada, the third quarter of 2008 has had a better start in terms of activity with pricing continuing to hold.

In terms of new customer contracts for Precision's 2008 Super Series rig build program, four new contracts have been signed since Q1 meaning seven of 19 rigs have signed contracts. For the 19 rig program, this designates three rigs for the United States and four for the Canadian market. The manufacturing process is well under way as planned. The program will consist of 10 Super Single rig designs and nine Super Triples. An increased portion of the associated capital expenditures are expected to be incurred in 2009 because of favorable supplier terms. The program has remained on schedule and through external supplier relationships Precision has increased its new rig manufacturing capabilities.

Before I speak to operating earnings in the quarter I would like to draw your attention to Precision's financial position as of June 30, 2008. Precision continued to carry a strong financial position with long-term debt in excess of working capital by CAD17 million, long-term debt of CAD105 million, and long-term debt to long-term debt plus equity ratio of 0.07. Precision has in excess of CAD600 million in financing available under its current bank facilities. The syndicated bank loan facility was renewed during the quarter with favorable terms that included a provision to increase the size by CAD150 million. Tenure on the facility has been renewed to June 2011. Unit holders' equity decreased CAD27 million in the current quarter as Precision generated net earnings of CAD22 million and declared distributions of CAD49 million.

During back to the statement of earnings, revenue in the second quarter of 2008 was CAD139 million, an increase of CAD17 million or 14% as compared to the second quarter of 2007. The contract drilling services segment increased 18% with growth outside Canada partially offset by lower pricing in Canada, and the completion of production segment grew revenue over Q2 last year by 6%. This higher activity overcame the impact of lower pricing carryover from 2007. Compared to the first quarter of 2008, customer pricing in the second quarter held as customer demand for the second half of 2008 has strengthened in all divisions.

For the second quarter of 2008, Precision's operations in the United States and the one rig in Latin America comprised 24% of total revenue, compared to 9% in the second quarter of 2007. Precision's entry into new markets with year-round access had a significant impact in the quarter and underlines Precision's organic growth plans. Precision reported operating earnings of CAD22 million for the second quarter of 2008 compared with CAD27 million for Q2, 2007. A reduction of CAD5 million. Before incentive compensation expense, operating earnings were marginally higher due to strong margin, new market growth, partially mitigated by lower customer pricing at both of Precision's Canadian operating segments.

Sequentially, for the quarter average revenue day rates essentially held at Q1 2008 and fourth quarter 2007 levels before winterization for Canadian drilling. Compared to the second quarter of 2007, the Canadian contract drilling division experienced an average revenue day rate decline of 4% and an increase in daily operating costs of 6% per day. On a per day basis. Cost control has aligned with competitive pricing pressures to mitigate reduced earnings margins associated with 2007 and the year-over-year decline in operating days for the quarter of 3%.

For the service rig division, Precision well servicing, the average revenue hourly rates in the quarter decreased 5% and daily operating costs were 3% higher compared to the second quarter of 2007. Fleet utilization was 27% in Q2 2008, a small increase over Q2 last year. Once again, cost control has aligned with competitive pricing pressures to mitigate reduced earnings margin associated with 2007 customer pricing trends. Our United States drilling operation grew operating days by 20%, 21% over Q1 2008 to 1,227 in the current quarter, with utilization near 100%. Demand for high performing rigs and less weather interruption continues to drive Precision's success in the United States.

General and administrative expenses increased by CAD7 million over the second quarter of 2007 to CAD17 million. The increase was associated with the change in accrued incentive compensation expense and professional fees. Adjusted for these items, G&A was lower than Q2 2007 as cost reduction measures taken in the fourth quarter of 2007 generated savings that exceeded costs associated with US growth and improvement of new management personnel. Below the operating earnings line for the quarter, net interest expense in the amount of CAD2.1 million was marginally higher than prior year due to higher debt levels. You will note that the effective income tax expense for the second quarter of 2008 was a recovery of CAD1.8 million, due to the effect of income to be distributed to unit holders not subject to tax in the trust. On an annualized basis, Precision continues to expect its effective income tax to rise as taxable income is generated outside Canada.

Turning to the statement of cash flow in the quarter, operations generated cash in-flows of CAD200 million. The cash used for investment in the net purchase of property, plant and equipment was CAD25 million. With CAD22 million of this going towards new rig construction and the expansion of Precision's Super Series rigs. Cash used for financing was applied to reduce borrowings by CAD119 million pay CAD49 million in distributions to unit holders. Our capital expenditure estimate for 2008 is CAD290 million with CAD75 million for upgrade capital and 250 -- CAD215 million for expansion. We have also estimated that the carry-over impact of our 19 new rig build will be CAD130 million in the first three quarters of 2009. Kevin will comment further on our [Advanta] growth program in a minute.

In the second quarter of 2008 Precision declared cash distributions of CAD49 million or CAD0.39 per unit based on a monthly rate of CAD0.13. At June 30, 2008, Precision's drilling rig fleet stood at 228 in Canada, 19 in the United States, and one in Latin America, for a total fleet of 248. Precision delivered the final rig from the 2007 build program in July and there are 19 new drilling rigs in the '08 program for 20 additional rigs.

In closing, once again 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 remind our audience that the government of Canada 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 the situation carefully in terms of value maximization for unit holders. Kevin, that concludes our 2008 second quarter financial overview.

Thank you, Doug. Now I'll speak to some of the operational highlights during the second quarter and discuss our views on the Canadian and the US and international markets as we look forward.

Just first off, late last year when we announced our capital rig build program for 19 new Super Series rigs, we also created an internal organizational adjustment to create a project execution team to enhance our manufacturing capabilities around these rigs. We challenged this team with ensuring that we would deliver these rigs on time and within budget. I'm very pleased to report that the first three rigs produced by this group were delivered during the second quarter. These rigs are produced approximately 11% under budget and either on schedule or ahead of schedule. And frankly, in a labor market, labor and construction markets such as Alberta where cost overruns and project delays are almost considered the norm, these results are more than remarkable to say the least. As we look forward to the balance of this current capital build program, the performance of this team gives me confidence that we will deliver our rigs on time and they will be manufactured within the budgets that we've allotted for these rigs.

Also reasonable to note or important to note, these rigs went to work, they've gone to work with minimal operational down time as our customers expect high performance rigs to begin their operating careers. Doug commented earlier that we signed contracts for seven of our 19 new build rigs. He also mentioned that we have LOIs or advanced customer negotiations on the remaining 12 rigs. Just want to clarify how we report our rig contracts. First of all, we don't report rigs as being contracted until the rig contract has been fully executed by both parties. Sometimes this process can lead from a verbal LOI through hard written LOI through a confirmed letter of intent but the contract may lag these commitments by the customer by several months. The fact is we don't report these rig contracts until we have a signed and agreed contract on both sides. In any event, for the remaining 12 rigs we have very strong customer interest in those rigs. Those rigs are scheduled to be delivered in the first half of 2009. And we're working closely with a number of customers at the commitment level for these rigs on high performance applications and we fully expect that by the third quarter conference call, most or all of these rigs will be under a fully executed contract. And you can expect us to begin discussing and looking at our 2009 capital build program and new rig build plan sooner than our typical late fourth quarter guidance.

So I'm also very pleased by the excellent execution of the rig build group and we'll continue to challenge our marketing team to keep the emphasis on our Super Series rigs. These rigs offer our customers superior performance. They have the best day rates, the best margins and the highest sustained utilization rates through all cycles of the market.

Moving on to our views for the markets, going to begin with Canada. And most of you that have talked to me will recall that when we announced our program for new rig builds we suggested most of these rigs would probably end up in the United States but we also cautioned you not to be surprised that some of the rigs were contracted in Canada. Currently, four of the 19 rigs are contracted to Canadian clients. These are all Precision Super Singles rigs which are proven to be the most efficient rigs for commission of rotary drilling. It's also important to note that these are destined for customers for use in Alberta and Saskatchewan. Albeit primarily for heavy oil drilling and conventional gas and the notable point here is that none of these are slated for shallow gas. Which is a very traditional Super Single market.

Which brings me to the important observation about the Western Canada sedimentary basin. Land sales in BC, British Columbia, and particularly Horn River and the Montney play have been exceptional. Saskatchewan is riding high on the Bakken oil play. But unfortunately the traditional very fast response and highly service intensive Alberta shallow gas region remains stale. The persisting effects of last Fall's Alberta Royalty Review are still significantly holding back shallow gas development. The major players in shallow gas made their capital decisions late last year and redeployed capital to other regions where they could see more secure, better returns. I believe they will stand by these decisions through the course of 2008. However, I believe there is a high likelihood of return to shallow gas in 2009 as our customers see sustained continued strength commodity pricing.

I'd like to make a couple comments about commodity pricing. Obviously it drives the economics of our customers and in the end drives our economics. But clearly oil and gas pricing is highly volatile. It's going to remain volatile. I'm a lot less concerned about the volatility. As I view the long-term energy challenge that we face, it's restrained by tight supply, whether it's North American gas or global oil. The supplies are factually very tight. There is no question that these high commodity prices are going to slow down demand. No question that economic slowdown in North America will impact demand. I don't believe these impacts are long-term. I think the long-term trend for energy demand will continue on its historic trend and supply will remain tight. The fact is that natural gas drilling and production in Canada and the United States remains at a very low risk proposition and a relatively low cost energy solution for North America for the foreseeable future. Thus, the demand for high performance, high value services will remain strong through the cycle.

So, just returning back to Canada for a moment, outside shallow gas we are experiencing the front end of a strong increase in servicing and drilling demand in the Western Canada sedimentary basin. Most of you have heard me say that Canada has too many rigs, yet, surprising, we announced or commented that Precision will add four new build rigs to Canada this year. Let me clarify the math on the rig fleet for all of you on the call. Last year we retired 11 drilling rigs from Canada. Over the last two years we transferred one rig internationally, 14 to the US and expect to move several more to the US over the coming weeks. Precision's rig fleet will have been reduced from 240 rigs at that time end of 2006 down to 222 rigs by the end of 2008. I believe we're doing our part to stem the oversupply of drilling rigs in Canada.

Which raises another issue around what the real supply looks like for drilling rigs. The winter of 2008 was a very interesting period in that the true drilling service -- drilling of service industry capacity constraint manifested itself when the CAODC rig count got in around 500 rigs. Well below the number of rigs available in the market. Clearly the labor constraints became evident at about 500 rigs. As we staffed up to 593 rigs in Canada it was clear the performance was suffering by the end of the drilling season and I think the entire service sector experienced significant challenges on the labor front.

Just a quick comment here on Precision's view. We certainly understand the labor challenge. We have a very robust recruiting problem that last year met Precision's needs very admirably. As we look at the growth in 2008 and into 2009, we kicked off our recruitment program this year on May 1, and are actively staffing rigs up right now and believe that we'll handle the labor situation. However, the conclusion that both our customers and our peers have to understand is that while the industry has excess assets in Canada, the number of (inaudible) assets is in very, very short supply. And like all open markets, this is a relatively efficient market and as such, you would expect the day rates to reflect the market tightness. Frankly, the spot market day rates may have bottomed out in Q2. We believe they have. But the labor tightness is not being priced in the spot market prices as yet.

Currently, industry is operating 459 rigs. We know the labor issues are already beginning to emerge in this market and I caution the industry, I certainly caution our customers to recognize that in order for us to staff up and go forward, it's going to require pricing response to the marketplace. I do expect the market to respond appropriately in the fall and I'm pleased that our sector is showing very good pricing discipline in the face of intense customer pressure to lock in lower rates for longer term.

Now, on a very positive note, the high performance segment of the market is showing excellent resilience. As evidenced by our new four build, four rig contracts for new technologies rigs. I think that helps demonstrate the strength. But even more interesting, is that we have customers working with us to upgrade 16 of our conventional terry doubles and late triples to improve those rigs for mobility, for higher capacity and enhanced performance for unconventional drilling opportunities. These upgrades will deliver rigs to our customers which reduce costs for our customers, achieve improved day rates and margins for Precision. 70 of these upgrades have been completed and nine more are in process right now.

The Canadian market is well-known for rapid change. It's clear that we are in a positive mode right now and I believe we're at the start of a rapid swing to rapid growth through the remainder of this year, into 2009. Our recently announced intent to acquire Rick's Well Service in Southwest Manitoba reinforces our confidence in the Canadian market and especially in the southern Saskatchewan region, particularly the Bakken play. We expect to close this acquisition at the end of the month and we certainly welcome Rick Mailhiot and his staff to the Precision family.

Turning to the US market, during the course of 2007 and early 2008, Precision's growth came in a period of relatively stagnant US rig count. Our market share was essentially developed by displacing less efficient, lower performance rigs with our high performance, high value rigs. However during the second quarter of 2008 we began experiencing a significant increase in drilling demand, as did the entire US market driven by strong commodity prices and particularly the emerging shale opportunities, notably the Marcellus and the Haynesville plays. This strong demand continues through Q3 and we'll continue on through the end of 2009 we believe. Currently we have 21 rigs operating in the United States. Number 22 and number 23 are in transit and we have intense negotiations on several additional rigs for delivery during the quarter.

Right now, we have two rigs drilling in Marcellus Shale in New York, we have seven rigs in Texas, the Barnett Shale, two rigs on deploy at the Permian Basin, four rigs are drilling the Bossier play, two in the Anadarko Basin, and we're operating for a total of six different clients. I'm very pleased with the diversity of our footprint now and particularly happy with the broadening customer base and the recognition of our high performance, high value proposition. Of particular note is that all of our rigs, 100% of our rigs are drilling complex directional wells and we're chosen to drill these wells because we can minimize risk and maximize performance for our customers. As we look at the US market, we are continuing to choose, to focus on away from the highly price competitive markets and keep our focus on the high performance, high value operations, seeking leading day rates where our value is recognized or ordered by our customers. As we commented earlier, we expect to sign contracts for the balance of our new build program primarily for the United States over the coming weeks.

We're very pleased with the progress of our organic growth strategy in the U.S. and fully expect the momentum to continue well through 2009. However, this brings me to our intent to acquire Grey Wolf drilling. Certainly it's our belief that the Grey Wolf rigs, the Grey Wolf people and the facilities will be an excellent fit in Precision Drilling and will certainly support our growth strategy. We believe that Precision's systems, our processes an our size will bring immediate operating cost savings and particularly capital cost reductions to Grey Wolf operations. We also believe that Grey Wolf's loyal and diverse customer base will help us to accelerate our high performance, high value, organic growth opportunities in the US and we know that the fine Grey Wolf people will certainly fit the culture of Precision drilling very well. Grey Wolf has publicly announced they will formally review their strategic alternatives. I expect Grey Wolf will proceed quickly in this process and I expect that Precision will be considered in this process. Should we successfully achieve a definitive agreement with Grey Wolf, we'll update you at that point.

Now turning to the international front for a moment. We're into the final six months of our non compete. And you can expect us to come out September 1, and begin aggressively marketing our capabilities globally. We intend to begin our international growth organically as we re-establish our international reputation for high performance and high value. I would not anticipate any early M&A activity in this expansion. Expect us to pursue other relationships with major integrated oil and gas producers who value our high performance and our high value. We also believe the integrated project management market is interesting for Precision and expect to see further opportunities in that area as the IPN providers seek high performance rigs to help them manage cost and manage risk.

So to wrap up I just want to reinforce that we are feeling very positive about the Canadian market, the indications and the facts support a sustained improvement during the latter half of '08 through 2009. We're very pleased with organic growth in the United States and we expect to keep that momentum through 2009. The potential Grey Wolf acquisition will be a very nice fit but we'll keep a very disciplined approach in that process and most importantly we remain confident that our alternative strategies will also deliver very attractive growth for both Precision Drilling and for investors. Regarding the very important international market, we're locked and loaded and we're anticipating our September 1, access to those markets. On that note, I'll return us to Joe for the question and answer period.

Thank you. (OPERATOR INSTRUCTIONS) Thank you. The first question will be from Alan Laws from Merrill Lynch. Please go ahead. Your line is now open.

Good afternoon, guys. It's Al here at Merrill. Couple things. The first thing was your comments on Grey Wolf, get a lot of questions on that. I understand they're in a process now, but can you tell us about any other contact you've had with Grey Wolf since -- maybe even in the past. Have you done due diligence on this Company before when they were being shopped?

Alan, appreciate the question. Certainly know there's a lot of curiosity about the process going forward. The answer is, it's really inappropriate for us to comment on the process right now. It's a process being managed by Grey Wolf and they have obligations to do the right things for their shareholders. We hope that will include us as they move through their process. How's that for a non answer?

They clearly voted that they like money more than less money but I think that -- can you maybe just talk about, are you just one bidder now? Is your package or their desk? How do you understand where you stand in the process that they're going through? I don't need you to comment on their process but where do you stand?

We were on record, certainly before their vote, as reconfirming our offer and putting our offer out there. So I would say it's fair to say that they have a good sense of both the cash and the equity portion of our offer and my guess is that they can evaluate it fairly directly. And I can also tell you that we've got a -- I certainly have a very good sense of both the people and the assets at Grey Wolf and have a high degree of confidence that it's a great fit for Precision Drilling.

Okay. That's good. And then something else here, on the rigs deployed to the US, you had 19 at the end. You added a few more. I think you said you deployed 14. What type of rigs are you moving down there? Are they kind of the high end HVAC rigs out of Canada or are they a mix?

Generally speaking we've got I think seven or eight new build rigs that were sent down on the contract. We transferred down a couple of our newer AC rigs to some particularly good, high value opportunities for us and is there a mix of some of our light triples and other rigs moving down right now. Frankly, one of the advantages of a Canadian rig is the rigs are designed to move very quickly, rig up quickly, and get set on the well quickly which is indicative of the Canadian winter here and having a very short season to drill. When those rigs move down to the US, there's no question they can mobilize quickly, they can relocate quickly, they are generally, the crews are certainly very experienced crews. So even one of our more conventional rigs in Canada here ends up being a particularly high performance rig in most markets we enter into the US.

You said you have seven contracts now, that's up from three in the first quarter; is that right?

That's correct.

You said there's a lot of interest. Can you comment maybe on the time line of when you think you would have the additional 12 locked up on term deals?

I'm very confident and certainly believe we'll have all 12 of those locked up by the end of Q3. It's likely we may have all 12 locked up on firm contracts by the end of Q3 but highly likely that they're all committed. We prefer to be specific when we have a contract signed and it's all been signed on both sides of the arrangement that we will confirm that at that point. But confidence level remains very high. Those rigs are scheduled for Q1, Q2 deployment which actually makes them a particularly attractive and highly desired rig in the US right now.

Sure. Sure. That makes sense.

We're kind of picking our customer right now rather than waiting for them to pick us, frankly.

Any opportunities for additional orders?

Absolutely. And we'll revisit our capital plans and new build plans during the next conference call at the end of Q3.

One last question here on -- you mentioned the natural gas prices, it's clearly volatile. Clearly people think that CAD10 isn't enough to own these stocks. It's kind of funny. Is there a price that you think would hurt the ramp that you presently see in Canada right now, in your discussions with your customers.

Well, I don't know many of our customers right now that are using CAD10 as their hurdle rate. They're all using numbers below CAD10, I think they're very cautious about the volatility in pricing also. Certainly when eco prices start to begin with a five or have a bottom of a five, people get nervous in Canada. I think in the US, if they think the prices might dip down to low sixes or high fives, I think that will have impact. Surprisingly even last year in the US when prices did dip down, it really didn't slow down drilling because I think most of the producers fully recognized the tightness in supply. Canada is being very responsive. A very quick dip in Canada could cause an impact here and could cause an impact in Canada.

That sounds good. I'll turn it back. Thanks for the answers.

The next question will be from [Nima Ballew] from [Bloom Investment Counsel].

Good afternoon, Kevin. Quick question, if Grey Wolf if that process for whatever reason doesn't work out or falls through, is there a plan just to beef up the organic build rate or are there other opportunities, other targets in the works?

A couple of quick comments. first of all, I never enter any exercise without a couple of alternatives. Never want to be on a path where the only thing I can do is the one in front of me. Because I'm bound to 50% chance of failure. Fact of the matter is we have some very, very encouraging alternatives that we're considering and should the -- should Grey Wolf decide they have other alternatives that are more attractive to their investors, that's a decision that they could easily make. We have a very exciting organic program running right now that frankly, by the end of next year gives us an organization in the US that is maybe more than half of what Grey Wolf is today. Outside of that I do believe we have other opportunities we can consider that would help accelerate our growth in the US.

Okay. And you were saying that activity levels are looking to recover as early as Q3 2008. Were you surprised by that sort of time frame? Because don't the producers set their budgets towards the latter half of the year?

Well, don't forget that we -- we announced a new rig investment in December of 2007 when arguably that might have been the worst time in the world to be talking about building 19 new rigs with no committed customers at that point. So to tell you we're surprised by the rebound, probably not entirely surprised. I think we anticipated a rebound in Canada.

Okay. That's my questions for now. Thank you.

Thank you.

Thank you. The next question will be from Dana Benner from Thomas Weisel and Partners. Your line is now open.

Good afternoon, guys. I wanted to start with your CapEx announcement. I think versus Q1, you have -- you've pushed I think about CAD40 million of additional or of CapEx that would have fallen in '08 into '09. And yet your -- I think your statement is that your delivery schedule remains tight. So I guess just to clarify, have you altered the payment terms to back end load them more and that's why we're seeing a shift to '09?

Dana, we've done a couple of things. I'll let Doug take over in a moment here. When we kicked off our in-house project management team, we gave them a number of charters, particularly our cost reduction and around schedule management. It caused us to develop a much more rigorous scheduling process inside Prediction Drilling and we also asked the team to forecast spending relative to the schedule which creates an S curve. Meaning early in the project you spend very little and then you spend most of the money at the halfway to the three quarter point in the project and then very little towards the very end so causes an S curve shape in the spending. And then we challenged them with going out and rescheduling payments and commitments to the vendors to push back the service as far as we could and playing off the fact that we're a trust, we distribute a lot of our free cash to unit holders, therefore we like our vendors to help finance some of these projects for us. Doug, do you have any more comment to add to that?

Yes, Kevin, Dana, the shift -- we did revise from our Q1 guidance on our CapEx. We did push an additional CAD40 million into 2009. That's entirely reflective of some supplier discussions we've had whereby in effect we're outsourcing some of the actual construction of the rigs and that that timing reflects those terms. So all very constructive and allows us to build our fleet quite frankly to get the rig built program accomplished quicker and to be able to rig up on a concurrent basis as opposed to Precision facilities alone.

Makes a lot of sense. I'm not sure that that's well understood in the market. But I think it's a great move. I guess secondly, I wanted to talk about capacity in the US, just yesterday I think Nabors was talking about what may have been 15 new rigs coming out of your old shop, national oil well, the so-called rapid rake. And I wonder, A, do you worry a little bit more about US capacity now, given perhaps an accelerated pace of development by the Nabors of the world, and B does that make it a little bit harder to differentiate? I think most of us acknowledge you're taking down fairly elite rigs into that market, but does it get harder to differentiate the quality on a go forward basis.

Dana, I think the performance of a rig, whether it's a Precision Super Series rig or any one of the other branded rigs in the marketplace, there's several different branded rigs that have a lot of high performance characteristics to the design of the rig. The rapid rig being one of those rigs. I think the performance is as dependent or more dependent on the quality, training and the consistency of the crew. And without commenting on Nabors and how Nabors will accrue those rigs, I do know how we crew our Super Singles and Super Triples rigs and our customers know how we crew the rigs and for example, we moved a rig recently from the Barnett Shale. It was one of our Super Series rigs. It moved out to the Permian Basin which is about a 500 mile move. Pretty good distance move. The entire crew went with the rig and traveled to the new location with the rig which is quite uncommon in the US. That's just typical of how Precision operates anywhere in the world. We keep our rig manager, our drillers and the majority of our crew with our rigs. Hence, we get excellent performance out of even non Super Series rigs. Let alone our Super Series rigs. So frankly, I'm not too concerned about more competition with high quality assets. And I also know that the market has a lot of room in the US for a lot of high quality assets. Along with a lot of room for high quality crews. So to make a long answer short, I think the market can absorb many, many, many of those rapid rigs, many ideal rigs and many Precision Super Series rigs and other branded rigs without seeing an oversupply issue on those high performance rigs.

So the four rigs then that you've carved out for Canada near term, that we should not infer anything on that except you had Canadian customers who wanted those rigs sooner than later and you just decided to take them from that pool.

Well, it's not so much what pool. We set out the rig designs early this year. We set the schedules in place and there's no question that Canada is always very quick to react and as the commodity prices strengthen in Canada, our Canadian customers reacted quickly and purchased high value, high performance rigs before the US customers did from us. But I think that the balance of the 12 rigs, probably most will end up in the US.

Two more quick questions. Firstly, maybe for Doug, some G&A guidance. Noted that it notched up a little bit this quarter and you note compensation expense and professional fees and presumably some of this is related to the Grey Wolf process and part of it I guess is your early spending to grow your -- the number of crewable rigs, et cetera. But how should we think about G&A through the last half of this year? Then my second question is for you, Kevin. I realize you don't want to comment on what Grey Wolf is doing. But to the extent that you're still involved in that process, would you consider materially increasing the cash component of your CAD10 bid in a follow-up round if that's what it took to get Grey Wolf?

Dana, just on the G&A side, the G&A going forward is consistent with what we've indicated in the past and if you think about our G&A before the impact of incentive comp, we're still in that 5 to 6% on annualized revenues and we'll continue to see through the balance of this year that variance in incentive compensation to 2007. 2007 was a year where we recouped a lot of the performance incentive accruals that were made from the record year of 2006. Our LTIP is a three-year program and as of February this year, all the recoveries for all the in the money had been brought back. So that effectively that program currently is out of the money. So bottom line, we're still consistent in that 5 to 6% of annualized revenues.

I think it's over to you, Kevin, on the second question.

Okay. And the second question was would we consider increasing the cash portion of our offer for Grey Wolf. I'm just going to leave any comments relative to how we negotiate with Grey Wolf to any press release we might issue after we're successful, if we're successful.

Could you comment on whether you think you have the balance sheet capacity to do it?

Well, what's interesting is that during the process that Grey Wolf went through prior to their shareholder vote, I think one of the questions they raised was whether we had the balance sheet capacity to acquire Grey Wolf and continue our aggressive organic growth program. We know that we do have that we do have the balance sheet capacity to acquire Grey Wolf and continue our aggressive organic growth program and we have the balance sheet capacity to acquire Rick's Well Service and we have other targets in mind right now. So the answer is yes, we have the balance sheet capacity. We're going to maintain a very disciplined approach and frankly I'll reiterate our position. We think CAD10 value that we offered a while back is a very solid valuation of our Company.

I suspect that's the best I'll do on that question. So I'll turn it back.

Thank you. The next question will be from [Brian Pardy] from National Bank Financial.

I just wanted to clarify how many of the new rigs under the CapEx program do you expect to be delivered within '08? Is it just the seven rigs or is there a different number there?

Brian, we expect up to five rigs this year. It could differ by two or three, where we straddle it by three weeks on either side.

Okay. And when you -- you've mentioned the rigs that are moving to the U.S. Are those under some sort of contract arrangement or how is that working?

All of our rigs in the US are under term contracts.

Would they be one year deals for a rig that's moved or would that be -- is there any standard there?

We have a couple of one year deals but most are under longer term arrangements.

In terms of your CapEx split, you mentioned the upgrades and the new rigs. Is there any guidance you can give us in terms of out of the CAD215 million you've targeted for expansion capital, what would be new rigs versus upgrades or I'm not sure how you're accounting for the move, if that's capitalized as well.

Just to back up on your 250 number. It's 215.

215, yes, sorry.

For 2008. And then we've got $130 million carryover into 2009 to complete the 2008 rig build program and as Kevin indicated, I think we'll provide some pretty interesting color on where we're going with our expansion capital program for 2009 earlier than we traditionally have.

Okay. Do you have any sort of rough split on the 2008 spending and where that's going?

That amount's entirely on the new rig build program, the 215.

So the upgrades, that would come out of sort of a maintenance -- the maintenance side?

That's right. And the upgrade for the year 2008 is estimated at CAD75 million. That includes some facility upgrades. We've got a new facility going in for our well servicing operation in Red Deer. Includes some of that, not just all equipment.

Okay. Great. And just on the Grey Wolf issue as well, I wanted to ask, obviously you guys have been considering 50% of the purchase price in units. Is there a unit price that your units might get down to where the acquisition doesn't make sense in your minds?

The acquisition makes great sense in our minds. It's a great strategic fit. If we can come to terms with Grey Wolf, we'll have a deal.

Okay. So you think you can make it work, even if the sector remains a bit depressed with the natural gas price coming down? Is that fair to say?

We think we can make these two companies together into an excellent, very strong company going forward. Hopefully the Grey Wolf Board investors agree with us.

Okay. Thanks very much.

Thank you. The next question will be from Kevin Lo from First Energy Capital. Please go ahead. Your line is now open.

Hey, guys. Not to beat a dead horse, but I want to ask you something that Doug highlighted, which is that your balance sheet is relatively clean right now. There's almost no debt. What debt leverage or ratio would you be comfortable with as a Company or as a trust going forward with or without Grey Wolf?

Kevin, we've seen in our sector companies get to debt to EBITDA of 2 times. Still able to function, carry out their CapEx programs. We don't see ourselves picking up any where near that level of debt with this deal. So we're very comfortable with the leverage that we'll put on and the strength of the underlying balance sheet to execute on acquisitions and not just Grey Wolf, per se, but to fund our complete strategy going forward.

Okay. And my last question is with a comment I think that Kevin made in passing, which was that he thinks that he could be half the size of Grey Wolf by let's say the end of '09 or 2010, would that be 60 or 70 rigs organically, even if you don't acquire Grey Wolf? Am I putting words in your mouth.

I'll tell you what. You're not putting words in my mouths. You're on the mark, Kevin. Currently I think we've given guidance out to the end of Q2 2009 that suggests we think we'll be at around 45 or more rigs by the end of Q2 2009 and getting us out to something that's high 50s by the end of next year is well within our sights organically and those are all going to be high performance, high value rigs achieving very solid day rates and I think you would see a business there that looks like a very strong, very well positioned drilling contractor. Even if we don't consider any other acquisitions.

Right. Now, if I was to say what your current capital plan includes, where does your current capital plan bring you to in the US in terms of rig count?

That brings us to the 45 by the end of Q2.

Okay.

And we have given guidance on the capital plan beyond Q2, but . expect to do so on our next

Great. Thank you.

Thanks, Kevin.

Thank you. The next question will be from [Jamie Murray] from Dundee Securities. Please go ahead. Your line is now open.

Hey, guys, how's it going.

Good, Jamie, how are you today?

Pretty good. Just on the upcoming winter season with the expected pick-up in drilling, in Q2 do you guys maybe have higher maintenance and repair charges than normal to make sure all the rigs are in tiptop condition?

The second quarter, very low utilization numbers so our major repair program is consistent with what it is every year and we have moved the maintenance program up in anticipation of higher activity in the third quarter. But it's still very much in line with historic averages. We're fairly consistent with the maintenance routine. We're fairly consistent with the maintenance routine.

All right.

Our guidance there should be in line with our expectations.

Okay. And then one more. We've heard a lot on the Haynesville shale, Petrobras saying that there could be 100 rigs in there by 2010. You guys have the rigs in the Marcellus, do you have any idea what like a growth rig count could be in the next couple years there?

Jamie, it's Gene Stahl here. Currently we don't have many in the Haynesville, but we are under negotiations for some of our new build rigs to be able to anticipate in that area.

What about the Marcellus, do you see any more there?

Yes, continue to evaluate, bid and look at where we can grow our business there.

Okay. Thanks.

Just a quick comment on the Marcellus. It's fair to say that a lot of the qualities that Canadian drill contractors have with mobility and access, tend to fit the Marcellus geography better than some of the bigger, less mobile rigs from the southern US. We think we're very well positioned to deal with that market.

Okay. Thanks, guys.

Thank you. The next question will be from Roger Serin from TD Securities.

Good afternoon, guys. Couple easy questions. US staffing of the rigs, where would you be in terms of US versus Canadian and where do you see that getting to, absent of Grey Wolf, just to organic build?

Roger, thank you for the question. It's been a real big focus for us. In fact, the manager of HR for Precision Drilling has relocated to Houston earlier this month. We're installing our Canadian style recruitment process into the US market right now. We have a recruiter positioned in Weatherford, Texas. Currently 40% of our staff in the US is domestic labor and we have an objective to be at about 70% by the end of the year on the organic side of the business. Frankly, very pleased with the progress so far and Gene can tell you a quick story from his visit the other day.

Yes, I guess I had a chance to get out to a few of our rigs last week and five out of the ten individuals that we visited with were locals and varying years of experience in the industry and one of the fellows who had been with the rig for five months, in the industry for four months, asked him how he had heard about Precision and he had said well, it's quite clear to me that if you ever want to get ahead with opportunity at a company, you need to get yourself signed up with Precision. So that's certainly a proud moment for all of the Precision folks in the U.S. about what we're doing and where we're going.

That probably didn't even cost you a beer. I got one other question. I'm not sure I can do the math here. It relates to sort of 45 rigs by Q2 '09. I sort of get 21, couple of moves, some builds, maybe not all for the US. But that still gets me to the mid-30s. Does that imply you're looking to either build more that I'm not thinking about or move additional ones from Canada to get to the 45.

Move additional rigs from Canada to get to the 45.

That's all I needed. Thanks very much.

Thank you. The next question will be from Jeff Fetterly from CIBC World Markets. Please go ahead. Your line is now open.

Good afternoon, guys. On the construction side, with the changes in the capital program and the spread of the capital spending, have you changed the scope of what's being done at Rossdale and what's being farmed out to third party contractors?

Well, Jeff, not really. Let me give you some guidance on how we do the work typically. The Super Singles rigs are about 70% produced in Rossdale and about 30% outsourced. On Super Singles rig outsourcing would include things like Caterpillar engines and hydraulic components. So the rig is ostensibly built inside Rossdale. When we move up in size to the bigger rigs like our Super Triples rigs, and our 12 and 59 horsepower rigs, a lot of the major components like top drives are outsourced, the Control Systems are outsourced, even some of the heavy fabrication is outsourced just due to capacity in Rossdale and certainly producing eight or nine rigs a quarter like we're planning in early 2009 suggests that we have to have a higher component of outsourcing. Typically in our big rigs, about 50% would be outsourced, 50% insourced. Currently on the 2009 plan we pushed that ratio to a slightly higher ratio of outsourced, maybe like 60% outsourcing, 40% insourcing on the big rigs for the current build program.

Have you changed the mix of the rigs in recent quarters?

No, we gave guidance on that a quarter ago and it hasn't changed.

So it's still four 1200 horsepowers and five 1500 horsepower Triples then?

That's right.

Have you freed up any additional capacity at Rossdale for a potential '09 program by doing this shuffle?

For '09 we really haven't rolled out the '09 program yet so to tell you that we freed up capacity would be incorrect. We haven't filled the capacity that we have for '09 in Rossdale yet. We'll be announcing that at the next conference call.

Okay. With this new construction group, where do you think your capacity is in terms of rigs per month or rigs per quarter?

Well, we're ramping up right now to run eight to nine rigs per quarter and I would tell you that I'm quite confident that's not going to be a hard ceiling for us. I think we have more room beyond that. I'll stop short of telling you what I think our ultimate capacity might be. As we consider the potential for accelerated growth in the US, either organically by ourselves or hopefully with a combination with Grey Wolf, we think we have the capacity to accelerate and increase our eight or nine rigs a quarter flow rate.

Assuming a standstill for the next six weeks, do you see better opportunities internationally or in the US right now?

I think the US remains a very great opportunity for Precision drilling, organically, acquisitionally, with or without Grey Wolf. I think the value we provide and the performance we give our rigs, I think it's becoming very compelling to our clients in the US and truly we're just going to start in earnest marketing, selling, installing rigs, delivering our value internationally, sometime post September the 1st. So take a little longer to get to where we are today internationally compared to the US. But clearly, as we go internationally, we'll focus organically to begin with to get our name back out there, to re-establish our reputation. As we then start to consider acquisitions, hopefully our high value, high performance capability will reflect on the acquisition.

Assuming you were successful with Grey Wolf, do you have the balance sheet capacity to be building eight to nine rigs a quarter on top of acquiring that Company?

Yes.

Okay. And I guess the -- you've cut off my second question but I'll ask it anyways. What is your view on the Trust structure?

I think we're hopefully going to prove that a Trust can be a growth entity also. But the fact is, the simple fact is the Trust structure has a time frame already attached to it by the Federal Government. Fortunately they've given us the guidelines now for conversions just a couple of weeks ago. Our strategy is (inaudible) today and talked about this acquisition in 2008 and into 2009. I don't think our Trust structure is going to impede our strategy on the short term and it might just happen that our strategy and the end of 2010 quite well. But if we are successful at growing organically and acquisitionally faster than we're planning right now, we might revisit that question at a later date.

Can't count many that are building eight to nine rigs a quarter. Anyways, on the Canadian side, the 222 number you said by the end of this year, does that have any retirement assumptions in it?

No further retirements.

On the capacity side for Canada, you say we are seeing some signs of stress at 500. Where do you think the industry can get to in the winter of '09 based on what you see right now?

Well, pretty good proxy is where the rig count takes out this summer. Certainly we're running at a higher rate now as an industry than we were at this time last year. But the challenge is going to be making that step change from the high fours into maybe something that might start with a six for a rig count this winter or maybe even a seven, depending how ambitious the industry gets. Huge challenge. There is no labor out there right now ready to go work on rigs. They moved on to other things in their lives. Unless the firms have very clear, well-defined recruitment processes and training process, it will be a a very difficult winter for the industry. We clearly have, like we kicked off our organic team last year, we kicked off a special team to manage our recruitment and integration of new employees in the Company and we think we'll be very well positioned but it will be a stressful season for the industry this winter if our expectations for rig count plays out.

How much would repatriating the US labor back into the Canadian force impact your ability to crew rigs in the winter of '09?

Jeff, I don't think that bringing back Canadians working in the US will impact our ability here. I think we'll be able to answer our customers' needs, irregardless of what we do with our US employees. I'm more concerned that some of our guys working down South may not want to come back to the cold.

Great. Thanks for the color.

Thank you.

Thank you. The next question will be from [Dan Heeling] from The Calgary Herald.

Hi, Kevin. I'm calling today -- most of my questions have been answered. I wanted to ask more particularly about the international expansion or going into the international market. Do you have a location? Do you have any more specifics as far as what your goals will be in the first little while?

Dan, we have a team here running right now with a sales team, operations team and they are like I said earlier locked and loaded. We're into the final six weeks of our non compete. It's a very heated market internationally right now. A lot of activity in a lot of areas. I can tell you though that there are areas right now that look very attractive to us. I would feel much more comfortable talking about it post September the 1st.

You've got one rig internationally. Is that where you're focusing immediately?

That one rig is in Chile. It's coming to the end of its cycle there. It was really an opportunity for us to participate internationally in an area where we weren't excluded by our non-compete and it gave our internal systems a chance to get fired back up again and running and allowed us to establish fields attendants, and operations managers, and logistics and get the accounting system back up and running so that when we start in earnest in September, we're not trying to figure these things out. So it was a very profitable learning experience for us.

Okay.

Thank you. The next question will be from Todd Garman from Peters & Company. Please go ahead, your line is now open.

Good afternoon. Just two questions. Firstly, what -- how do you see a balance between rigs under contract in the US versus rigs in the spot market? What would be your thought there in terms of the balance?

Todd, that's a great question. Because right now we're sitting out there with 100% of our rigs committed to sort of medium to longer term contracts as we mobilized rigs down or moved new build rigs down. What's interesting is, at the high spec end of the market and whether it's us or our peers that are operating, very view of the high spec rigs or high technology rigs, or high efficiency rigs or high performance rigs ever hit the spot market. So the answer probably is as we continue growing organically, likely very few of our rigs will be spot market rigs in the US and will be a very high proportion of contract rigs. Should we be successful at growing through acquisition, obviously we'll then become a much bigger player in the spot market.

Is that to say then that the high spec rigs generally because they're better performing just don't ever reach the spot market, not necessarily that they are signed to contract?

It's chicken or an egg situation. The fact is I think the way you stated it is correct. They never reach the spot market because they're in demand and they're contracted again almost always to the same operator. Barring that, there's usually a waiting list by other operators to pick up that rig.

Then just second question, you mentioned earlier that you had a rig move that was 500 miles and you kept the crew. I can't imagine that's very common and if it -- if moves over long distances are becoming more common, what's changed in the industry that has allowed you to keep the crews on each of those rigs?

Well, that type of mobility in Canada would be considered quite normal. A lot of the rigs in Canada could be operating in Port Saint John with crews coming out of Southern Saskatchewan or the East Coast. That kind of mobility is uniquely common in Canada, particularly for Canadian contractors. We've been very intentional as we take our Canadian model into the US to try to capture as many of these advantages as we can with our rigs in the US. So we've actually moved a couple of rigs over this -- we moved some rigs from the Rockies to Oklahoma, and some moves from mid-Texas to West Texas and been successful having the crews follow the rig. The advantage for the operator, for the customer is, that the same crew, and the same rig, well after well after well ensures the customer a reliable, predictable outcome.

I understand the advantages certainly from your standpoint and the operators, I just wonder from the actual crew standpoint what's changed?

It's not that there's a lot of secrets here. I just really don't want to give away the secrets, however trivial they are. We work really hard to make sure the crews see the value in staying as a single team and moving with the rig.

Okay. Thank you.

Thanks very much, Todd.

Thank you. The next question will be from [Mark Brown] from Pritchard Capital. Please go ahead, your line is now open.

Do you have any statistics in terms of how many days you save when you move your rigs or how much cost you save. You mentioned a few times the hyper performance rigs and the advantages that gives you.

We actually do, Mark. There's no question that we have some real good stats on our rig times and rig moves. Typically, on one of our Super Singles rigs, they can mobilize, demobilize in a matter of hours. For our Super Single light it's under two hours. For our conventional Super Series it's usually within one shift like six or eight hours, if it's an infield move, like less than one mile move. There is very little else in the marketplace that can compete with that type of rig time. Most rotary drilling rigs would have move times that start at something like 18 or 20 hours. But very quickly become two or three days. So we think that on the particularly shallow rigs, we think we actually drill maybe one and-a-half times as many wells on the shallow rigs. On our deeper rigs our slowest rig movement of the big rigs might be two, two and-a-half days. Some of the more conventional rigs that we're competing against move over five days.

Okay. The other question I had was you mentioned the Haynesville as an area you're looking at in the's US. Is there a certain number of rigs that you would have to have in your fleet there in order to really make the economics work?

We began with one rig profitably. We grew through 2 rigs, through 12 rigs, through 21 rigs. We're operating rigs in New York State. We're operating rigs in West Texas, in the Rockies, in Oklahoma, in Louisiana and Texas right now and we're operating as many as four, five rigs in the same basin, as few as one rig by itself and every one of those rigs right now is coming in, turning an EBITDA profit for us, very strong.

My last question is just a previous person said assuming a standstill in the US and Canada, sort of how you looked at that decision between adding incremental capacity. What if natural gas prices went up to CAD15? You mentioned concerns with a 500 rig count in Canada. It sounds like you feel pretty confident you'd be able to handle the labor challenges associated with that. How would your decision between investing in the US versus Canada change if the nat gas price went up to, say, CAD15?

Well, for us we just follow the capital of our customers. If they're investing in the US, we'll follow. If they're investing in Southern Alberta shallow gas, we'll follow them. The decision isn't as much ours as it is our clients. I think the change we've made is we now pursue the US as a strategic element of our growth. It's now looking very closely at US investment.

Okay. Thank you.

Thank you.

Thank you. There are no further questions registered at this time, gentlemen.

Well, very good. Thank you for attending our call today and hope you join us on our Q3 call in October. Thank you.

Thank you. The conference call has concluded. You may disconnect your telephone lines at this time. We thank you very much for your participation.