Precision Drilling Corp (PDS) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Precision Drilling Trust third quarter results 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, sir.

Thank you, Mary. Good afternoon. It is a particular pleasure to be here today speaking regarding third quarter results for Precision Drilling as this is my first call with a significant year-over-year earnings improvement. In just a moment, Doug Strong will brief you on Precision Drilling third quarter results and detail. I will then update you on the progress of our growth and diversification initiatives and Doug will close with a detailed update on the Grey Wolf merger process before we open the call to questions.

I would like to begin by thanking the excellent people of Precision Drilling for the strong performance over the past year, and especially the past three months. I am especially proud of the efforts and results of our people. The management of Precision Drilling, like everybody else, is very concerned about the global banking crisis. We are intimately aware of the affect this is having on the credit markets and the global economy. This is clearly a time when strong leadership and especially operational excellent are of the upmost importance.

Our third quarter results demonstrate that Precision continued to focus on the basics of our business delivering operational excellence, earnings growth, and continuing our geographic diversification despite the head winds of declining commodity prices, the credit crisis and the economic uncertainty. I want to reiterate a comment from our press release regarding our fixed expense reductions and our reorganization that we implemented in November of 2007. Those steps were taken a year ago and they were designed to deal with the volatility we saw in the market at that point and we continue to see in this business looking forward. I am confident that Precision is very well positioned today for whatever the market and the economy will present to us in the coming months. I will come back with an update on our business after Doug briefs us on third quarter results.

Great. Thank you, Kevin. Hello, ladies and gentlemen. Through a news release this morning, Precision Drilling Trust reported financial results for the third quarter ended September 30, 2008. The news release included discussion and analysis and the unaudited consolidated financial statements and notes. Please note the financial figures are stated in Canadian dollars unless otherwise noted.

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 mind our our audience that today's comments may include forward-looking information and statements reflecting Precision's views, events and their potential impact on our performance and capital structure including the proposed acquisition of Grey Wolf, Inc., 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, 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 operations and financial results and cause actual results to differ from such forward-looking statements and information. September 30, 2008, unaudited financial statements complete with notes and management discussion and analysis will be filed with regulators and made available are on [sedar].com. We encourage investors to examine Precision's annual and quarterly filings, including the MBNA annual information form and information circular.

Before I speak to earnings in the quarter, today's capital markets warrant renewed balance sheet discipline and prudent capital management. I would like to draw your attention to Precision's balance sheet as of September 30, 2008. Precision continued to carry a liquid and solvent financial position with long-term debt in excess of working capital of only $39 million and the long-term debt to long-term debt plus equity ratio of 0.14 versus 0.08 at December 31, 2007.

Precision had an excess of $500 million in financing available under its current bank facilities, facilities that were successfully renewed for a new three year tenure during the second quarter of 2008. As I will expand upon later, Precision through its proposal to acquire Grey Wolf, Inc. intends to replace the current debt structure with a new $1.6 billion arrangement in US funds. The new debt structure is designed to fund the Grey Wolf acquisition, refinance Precision's borrowings at the closing date, and provide ongoing financing to provide future working capital and capital expenditure requirements.

For the third quarter ended September 30, 2008, unit holders equity increased $33 million as net earnings of $82 million exceeded $49 million in declared distributions to unit holders. Earlier today, Precision Drilling Trust reported net earnings from continuing operations of $82 million, or $0.65 per diluted unit for the third quarter of 2008 compared to $70 million or $0.55 per unit for Q3 2007, an increase of $13 million and 18% or $0.10 per unit. The year-over-year improvement came from the contract drilling services segment with solid results from both Canadian and US operations.

In Canada, drilling rig activity rebounded by 14% and margins were better than expected. In the United States, Precision's rig growth accelerated with an average of 25 rigs active in the quarter compared to seven in Q3, 2007. Precision's North American drilling rig fleet essentially held flat at 248 year-over-year as at September 30 and in the quarter generated a the 29% increase or 2,440 additional operating days in the third quarter of 2007. Deployments (inaudible) of US Shale gas stations and stronger demand in Canada drove the results.

For the nine months ended September 30, 2008, Precision reported net earnings from continuing operations of $210 million or $1.67 per diluted unit compared to $253 million or $2.02 per unit for the comparable period in 2007, a decrease of $43 million or $0.35 per diluted unit. In favorable variance narrowed with third quarter results but remained due to lower 2008 first quarter performance.

The fiscal 2008 third quarter reflected improved conditions in Precision's Canadian market and accelerated growth in the United States land drilling market with nine rig moves from Canada and a fleet of 28 rigs at quarter end. In Canada, Precision today continues to experience higher customer demand than a year ago as the 2008 improvement in natural gas and oil pricing that revitalized customer demand has carried into the fourth quarter. This underlying demand strength is evident in the number of capital rig upgrades to our Canadian fleet being partially or entirely recouped in customer contract terms. At present, we have 17 such rig arrangements with upgrade initiatives from $100,000 to $2.5 million. These upgrades vary in nature from top drives to rig mobility to drill pipe handling. These expenditures are included in Precision's upgrade capital expenditure classification.

As we all know, favorable commodity price trends have reversed from their highs as our customers plan their 2009 capital budgets. Many are with dealing with cash flow reductions and contraction in lending and equity markets. That said, average natural gas pricing for Q3 was 51% higher than Q3, 2007 and so far in the month of October, spot pricing is running about 10% higher. Kevin will provide comments with respect to Precision's outlook in a moment.

Precision experienced higher year-over-year activity in the third quarter with increases of 14% for the Canadian drilling rig fleet, 39% for portable top drives, 250% for the US rig fleet, 4% for service rigs, 45% for snubbing units, 77% for camps, 27% for rental days, and 42% for waste treatment units. This underlying demand strength has reversed 2007 downward pricing trends as pricing has [ferned] through the first nine months of 2008. With higher customer demand and growing rig crew scarcity for the industry in the third quarter, Precision entered the fourth quarter with opportunities to increase customer pricing for labor cost escalations and for certain drilling rig markets and margin increase.

In terms of new customer contracts for Precision 2008 Super Series 19 rig build program, ten new contracts were signed during the current quarter. All but two of the rigs now have long-term signed customer contracts and at least 12 rigs have been earmarked for US shale and peg gas basins.

Revenue for the third quarter of 2008 was $286 million, an increase of $58 million or 25% compared to the third quarter of 2007. Precision's contract drilling services segment grew by 33$ with US growth and higher activity in Canada, completion of production services segment grew over Q3 last year by 7% as a 4% increase in activity for service rig division was complemented by larger increases in our snubbing, rentals and waste water treatment divisions.

For the third quarter of 2008, Precision's US operations in the United States and the one rig in Latin America comprised 17% of total revenue compared to 6% in the third quarter of 2007. Precision's entry into new markets with year-round access has significant impact in the quarter and represents Precision's diversification strategy. Precision reported operating earnings of $99 million for the third quarter of 2008 compared with $73 million for Q3 2007, an increase of almost $27 million. Margins increased with activity trends as overall operating margins in Canada were essentially flat with the prior year and US drilling rig day rates remain strong.

For the Canadian drilling division, sequential quarterly average revenue day rates held firm for the trailing 12 months before winterization. Compared to the third quarter of 2007, the Canadian contract drilling division experienced an average revenue day rate of $17,062, a nominal decline of $50 per day and a nominal increase in daily operating costs. Internal cost control systems kept cost escalations to a minimum and preserved operating margins.

For the service rig division, Precision well servicing, the average revenue hourly rates in the quarter were $675, a decrease of 1%, and daily operating costs were 4% higher compared to the third quarter of 2007. In the current quarter, fleet operating hours were 4% higher due primarily to the acquisition of six service rigs in July. The division experienced a modest erosion in its hourly margins due to competitor pricing and higher operating costs, fuel in particular.

Once again, operations and internal support services have done a good job containing cost increases. General and administrative expenses of $12 million in the quarter were in line with prior year and reflect cost control measures taken in the fourth quarter of 2007. Below the operating earnings line for the quarter, net interest expense in the amount of $2 million was marginally higher than prior year due to higher debt levels. You will note that the effective income tax rate before an active tax rate reduction was 15% in the quarter and 12% year-to-date compared to an effective tax rate of 8% for the nine-month period ended September 30, 2007. The rate remains relatively low due to the affect 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 rate to rise as income is generated outside of Canada.

Turning to the statement of cash flow for the 2008 third quarter. Operations generated cash inflows of $3 million. As is customary for third quarter with significant operations in the oil field service sector in Canada, $113 million was used in the quarter for changes in non-cash working capital balances and significantly reduced cash inflows from operations. Cash used for investing activities included $16 million for a small business acquisition and $74 million for the net purchase of property plant and equipment of which $58 million was primarily for new rig construction and the expansion of Precision's Super Rig Series.

Financing activities resulted in borrowing of $126 million from loan facilities and payment of $49 million in distribution (inaudible) holders. Precision's capital expenditure program estimate for 2008 is $290 million with $75 million for upgrade capital and $215 million for expansion. The estimated 2009 carry-over spending for our 19 new rig build programs is $130 million in the first three quarters. At September 30, 2008, Precision's drilling rig fleet stood at 220 in Canada, 28 in the United States, and one rig in Latin America for a fleet total of 249. Precision delivered the final rig from its 2007 rig build program in July, and there are 19 new rigs in the 2008 program for commission starting in the fourth quarter of 2008.

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, especially natural gas. We recommend that listeners examine Precision's regulatory filing. Further, once again we remind our audience that in June 2007 the Government of Canada passed into legislation certain tax laws that were initially announced to 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 will now update you on our growth and diversification opportunities. Kevin, over to you.

Thank you, Doug. This afternoon I will probably talk a little bit more about global economic uncertainty, tight credit markets and commodity prices than I would normally. But clearly, it is in all of our minds and very pertinent. Let's begin with the Canadian market and our views as we look forward to winter and clearly the sharp pull back in commodity prices from early this year has been stark. We can agree that the market sediment is not comforting, but we also need to consider some of the real positives we see in the marketplace. We realize, as Doug mentioned earlier, that the AECO gas prices remain about 10% ahead of last year's price. Comment that WT oil prices also in line with last year's price.

The weak Canadian dollar will somewhat serve to support cash flow for our customers buffering them from further commodity price risk and allowing our customers some additional capital flexibility. We believe these factors provide some support for the strong business levels we are currently experiencing and as we expect these to continue through the fourth quarter and into the coming drilling season. Continuing on the Canadian theme for a moment, we do see several bright areas over the coming quarters. We also see weakness in other regions.

Specifically northeastern, British Columbia, and southern Saskatchewan will remain busy for us at Precision over the course of Q4 into the coming winter. Most of our deeper high capacity rigs are book and currently drilling northeastern D.C. and northern Alberta regions and, as Doug mentioned earlier, we have customers who ventured in to long-term contracts to pay for upgrades for 17 of our rigs to meet these more challenging drilling demands. The southern Saskatchewan (inaudible) oil play also remains very active for Precision both for well servicing and drilling operations. This is a region where the softer oil price is a concern but also the weaker Canadian dollar significantly buffers the F&D cost for our customers and we expect continued firm activity in Q4 concerning the momentum into Q1 2009.

Of course we all know that last October, the province of Alberta introduced royalty amendments which will kick in January 1, 2009. These royalty, the new royalty environment is continuing to restrict shallow gas drilling, foothills gas drilling in a variety of plays in Alberta. These are traditionally low-risk opportunities for our customers but remain, for all intents and purposes, off line at this point.

Regarding heavy oil drilling opportunities, these remain reasonably good with two of our new build rigs entering service in Q1 2009 to pursue heavy oil drilling, and we still have customers continuing to talk to us about additional new super singles rings for delivery later on in 2009. While the economic and commodity price implications are unfavorable or less clear, we are considering several other positive entities in our forward view.

The persisting field personnel shortage and the recently announced CAODC recommended wage increases specifically addresses the entry level jobs that have been hard to attract in to this industry over the past several quarters but really shows the increasing demand for people in our sector. The willingness of our customers to accept these price increases and labor cost increases have been shown by the service industry firming up pricing over the past quarter supports this view. We think these micro indicators stand in support of our view that activity this fall and winter will be crew limited, not demand or asset limited.

On hold for Canada our customers' 2009 capital spending constraints but also in our minds, while it may put a damper on four-year 2009 expectations, we believe that our customers, given the availability of Precision services and equipment, would spend the entire budget in the first eight weeks of the year maximizing cash flow, and especially in these uncertain times. That said we remain confident of a strong fall and winter drilling season.

Now, Canadian activity later on in 2009 will depend heavily on North American natural gas pricing coming out of the winter heating season. In the event of firm commodity pricing next spring, our customers are likely to reevaluate full-year capital spending just as they did this year. We did see significant increases in budgets and drilling plans through the course of Q3 into Q4 based on improved cash flows earlier this year. From a Canadian perspective, we are a little less focused on full-year budgets and we are more focused on the coming couple of quarters.

Before I comment on Precision's US operations, let me state that our view on our opportunity for US growth is not changing despite the economic uncertainty. That said, we are keenly aware of the impact of tight credit on our current and perspective US customers' drilling aspirations. We are very excited to be right on track with our US organic growth with 28 rigs running today, up from 19 on July 1 as we guided earlier this year. We also remain confident we will be running at 30 rigs by year end and up to 45 rigs by the end of the second quarter. All of these rigs are long-term contracts with large ENT companies.

It is also important to note that we're operating five basins in the United States with approximately 80% drilling horizontal or directional wells and all of these rigs are operating a tight gas or shale gas target zones. As Doug mentioned earlier, our new build program is also on schedule. We currently have three rigs scheduled to be delivered in the fourth quarter, eight more in the first quarter and six more in the second quarter of 2009 with the last rig falling over early into the third quarter. 14 of these rigs are in long-term contracts for large ENT customers in the United States, particularly for Piceance basin, Deep Bossier, the east Texas and [Haynesville]. Achieving our 45 rig Q2 target looks pretty good. We do not expect any significant adjustments to this forecast. As we consider the various factors in the US gas supply equation, we share the concern many have expressed, but we also balance those concerns with the clear understanding of the overall supply picture.

Just let me read a recap from last year and I will read a quote that goes back to September of 2007. Natural gas declined during August supported briefly during the middle of the month from the threat of production disruptions in the Gulf of Mexico. After the risk premiums for hurricane softened, prices hit an 11-month low. Additionally, a large operator announced it is shutting about 6% of its production. This report goes on to say that after posting solid gains for the first half of the year, oil service stocks took a roller coaster ride through month of August as it split with the broader market due to the nation's credit crunch hysteria. You could have taken that quote from September 2007 and applied it to September 2008. But to further exasperate last year's concerns, L&G was viewed as an important part of this long-term energy solution for North America.

So what has changed from last year to this year? Clearly Europe and Asia have embraced L&G as a clear long-term energy solution creating a true global L&G market taking the pressure off L&G in North America. Obviously economic uncertainties risen to historic proportions and surprisingly shale gas drilling has led to significant year-over-year production growth in the United States. Finally, the commodity prices have dropped from mid year highs. The picture now for us clearly has a lot of areas that look very concerning compared to this time last year.

While the economic uncertainties are real, the net effect on spending and commodity consumption by consumers is yet to be fully understand. Regarding the commodity price drop, I'm a firm believer that moderate to lower commodity prices is far better in the long term for our sector than the exceedingly high prices we experienced earlier this year. Demand destruction by high prices is a far greater risk than demand growth simulated by moderate commodity pricing.

Now, specifically for Precision, the most prolific North American shale plays can say be drilled and produced at NYMEX gas prices of just a little over $6, and many of those with NYMEX prices as low as $5. So at Precision, frankly, we like shale gas drilling and we are very pleased that our customers are seeing great success on those wells. These are very complex wells. They're extremely expensive to drill and [fracture] and they demand high performance drilling rigs.

The additional high productivity of these wells allows our customers to quickly pay off the high cost reducing the risk, walking in the long-term return, and the best part for us as a driller is that within 12 to 18 months these wells have declined just a fraction of their initial production. As a high performance driller, this perfectly aligns with our strategy. Hence, we are very firm that the status of our 28 rigs and 12 new build rigs is very firm looking into 2009.

At this point let me restate our commitment of the Grey Wolf acquisition. The combination of Precision and Grey Wolf gives this company a fast geographic footprint, a diversified customer base, active operations in virtually every shale and tight gas opportunity in North America and, as Doug will update you shortly, we expect to close many the fourth quarter. All right.

Turning for a moment to the international arena. Today we have Precision sales teams in three countries actively marketing our drilling services and we expect to be announcing contracts shortly. I will point out that our rig in Chile has completed its contract. It will be redeployed through other opportunities either in the US or internationally. We do believe that the deeper, higher capacity Grey Wolf rigs will significantly bolster our international capabilities.

On a final note, with the expiring of our international and our technology services non-compete back in August, we are ruling out Precision's directional drilling services. This will be offered to our customers as a combined service with our high performance high (inaudible) drilling rigs. As I mentioned earlier, roughly 70% to 80% of Precision's North American rigs are currently drilling directional and horizontal wells. We believe that integrating directional drilling service with our drilling operations will continue to enhance the high value we offer our customers, while expanding our revenue base. I will now ask Doug to update you on the process to acquire Grey Wolf.

As Kevin indicated, Precision's proposed acquisition of Grey Wolf is proceeding on schedule. In terms of process, we have completed and received the Hart-Scott-Rodino early termination. The (inaudible) deployment and preliminary ratings from Moody's and Standards & Poor to a displacement of our new debt structure. We will not discuss the ratings during the call as they are subject to customary confidentiality for consideration by perspective lenders as we work with our lead lenders to syndicate the plan, $1.2 billion secured and $400 million unsecured facilities.

We will say that we are extremely pleased with the preliminary ratings and they should help move the process forward. Precision is paying aggregate consideration not to exceed US $1.12 billion in cash and $42 million for (inaudible) drilling trust units is laid out in our joint news release on August 25, 2008. The shareholder election process will be laid out in the proxy materials. We expect to mail, as planned, to facilitate a Grey Wolf shareholder vote and funded transaction close before Christmas.

In terms of the debt markets, we would reiterate that we have committed financing through an agreement with Royal Bank of Canada, TD Bank, HSBC and Deutsche Bank. We are progressing with our syndication process to have the required funding in place for close of the transaction. Kevin, back to you.

All right. Doug, thank you. I will turn the conference call back for questions.

(OPERATOR INSTRUCTIONS). The first question is from John Tasdemir from Tristone Capital. Please go ahead.

Hey. Good afternoon, guys. A nice quarter. I wanted to talk about Grey Wolf for a minute. Can you give me a sense of how committed their rigs are for 2009? How well are they going to be able to wether a likely downturn in US activity?

Hey, John. Thanks for the compliment. Regarding the Grey Wolf fleet contract status, obviously we've had access to a lot of information. We feel pretty comfortable with the way Grey Wolf manages the contract status. A couple of comments I will make is that first of all, I think they have been representing that they have about 60% contracted long-term status and they have been suggesting those are 18 to 24 month type periods. But from my perspective when I look at their utilization right now, I see a fleet that is utilized at about 93% according to the public information. The fleet which is arguably a (inaudible) fleet. I am quite pleased with the utilization and very pleased with how they represent their contract status. So to answer your question going forward, I don't think we have the detailed information on a rig by rig basis to look at 2009 fully but I have a high degree of confidence they have done a great job managing their contract status.

That's fair enough. Also on this transaction I think the expectations for Grey Wolf might come down. I think, tell me if I am wrong, but doesn't the strength in US dollar actually bolster this deal from an accretion level?

Yes, John. It is Doug. Absolutely, it does. In terms of how we report in Canadian dollars, given the margins we are pulling in the US it will increase underlying cash flow and earnings from not just the Grey Wolf acquisition but from Precision's successful organic growth program which should be in that 40 to 45 rig count by the second quarter of 2009.

All right. Okay. And Kevin, I guess I wanted to you talk a little bit more about the directional drilling business, how exactly do you add that on?

We are just kicking it off right now. We will be having our first customer conversations as early as next week, but I think it is really simple for us. A large percentage of our rigs are going directionally. In most cases our driller is either effectively doing directional drilling under a remote control from an off center somewhere back in Calgary or Houston or the directional driller on the job came off our rigs in the first place. So we are quite confident we can train our drillers to take on a greater responsibility and help create more value for our customers.

Okay. All right. That's all I had, guys. Thanks a lot.

Thank, John.

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

Good afternoon. Good afternoon, guys.

Good afternoon, Alan.

First off on the Grey Wolf proposal, thanks for laying that out again. I think that's a question we get a lot of whether it is going to go through. Just as an intent question,.you guys still have all of the fire in your belly to do this deal, right?

Absolutely.

And the question that we get a lot is what would you know make you walk away from the deal? How bad would it have to get before you walk away from this?

Alan, this deal has always been, a strategic deal if for us from the start. From our first conversations as early as February last year through the basic process, it has been strategic. And our mid to long-term view on North American natural gas drilling hasn't changed. There's no question there's short-term uncertainty, but this is a deal for strategic reasons. It has great value for us. Gives us great footprint and I would just answer the question tell you we are intending to close the deal.

Excellent. I like that. There's a 10% arm spread still sitting out there free money for people. It's pretty nice.

That's been ranging from 10% to 20%.

That's right. I know it is pretty crazy. The second thing is on the new builds, you have got 17 contracted this quarter. That's, or not quite 17. You had some before, but you've only got two left. You built the other ones not on speck but on anticipation given the demand you were seeing. What's the chance that you would expand the program now given the backdrop of the current gas market?

Well, first of all, the two directionally under are effectively spoken for, let's be clear on that. But we will announce them when they become contracts. But going beyond that we will announce our 2009 capital program in December and that gives us a pretty good view on 2009. Interestingly enough, I can tell you with certainty that we have customers in Canada, United States and internationally that are highly interested in finding long-term contracts to build new rigs.

So everyone is still on the band wagon, for lack of a better term, of the new efficient rigs we are seeing some of your competitors continue to book new build contracts down here as well. So that's, you think that continues even in, if we have a weaker year in gas price next year? Do you think there's enough efficiency there that people still want them rather than lower priced older rigs?

Alan, simple fact of the matter is that even if you listen to some of the pundants talking about rig count reductions in the US a lot of these rigs simply can't drill a Marcellus well or a Haynesville well or a Horn River well. So as you look at these new emerging shale plays, you need to have rigs that have the technology and the control, the mud pump capacity and the top drivability to drill the wells. So it is not just a matter of sticking your top drive in a rig that might have come out of west Texas. There's a lot more work than that involved. I think our customers recognize that are prepared to fund the appropriate technology.

All right. I have a follow up to John's question on the directional side. You said 70% to 80% of your fleet is basically drilling directional. That's really almost twice what the North American average is, I think. What would you attribute this to? Do you think that's a sustainable level for your fleet given your move into services?

Yes, Alan. We know it is sustainable because we sustained it over the course of the year. We have been relatively quiet about directional drilling until now. But, it is a attributable to the fact that the Precision Super Series rigs particularly but also the balance of the Precision fleet is a high performance fleet and delivers high value to our customers. We get the more complex jobs and we get the directional horizontal wells.

All right. The last question has to do with international. I know your noncompete is off. Any thoughts on the strategy here as it evolves with your Grey Wolf acquisition?

We have been fairly public with our presentations on Grey Wolf about the spectrum of the rig fleet, the shallow Precision rigs, the medium overlap and then the deeper rigs from Grey Wolf we think gives us a great sweet of rigs for markets ranging from the Middle East like the Persian Gulf, North Africa through to Latin America. Our initial steps internationally will be organic, and we will go in and re-establish our reputation globally as a high performance, high-value driller.

Is there a number you need to be active internationally to where you think you would have critical mass? Is there a number you're looking for to say we have an international operation, we are an international driller.

We can say that when we start reporting international activity as a segment. Until then it is an organic growth effort.

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

Great. Thank you.

Thank you. The next question is from Mike Mazar from BMO Capital Markets. Please go ahead.

Hi. Good afternoon, guys.

Good to talk to you, Mike.

A quick question clarity on the debt that is going be taken on here. My initial understanding was that there was going to be $800 million term debt, about $400 million revolver and then now there's the additional $400 million which I initially understood was going to be a private placement. Is that's now bank debt if I am understanding that correctly?

Yes, Mike. You are correct in that there's the $1.2 billion secured facility is comprised of three tranches. One is a revolver of $400 million, a term A and a term B tranch of $400 million each. The unsecured piece of the debt is initial thoughts was potentially it could be into the high yield market. That $400 million is supported by a bridge loan in the event that that market is not available to us.

Okay. So in other words you don't know how that $400 million pay back repayment schedule is going to be set out yet?

Yes, the comment we would have. We have a lot of options on that $400 million. We can up size the $1.2 billion secured and we will see how the Grey Wolf convertible notes go through the transition in terms of how many actually exercise their convertible feature.

Just on that point, okay. So it becomes a $1.6 billion. You are paying $1.2 in terms of cash. Grey Wolf has about $300 million in cash. It seems like you are borrowing an awful lot in excess of what you really need. Is there kind of a rational behind that?

Yes, just to back up on the numbers with you. You will see in the proxy materials that to fund the transaction, the actual funding of the transaction net of the Grey Wolf cash is in around that roughly $900 million number.

Yes.

And then, as we, we will will refinance the borrowing off of our current facility and if you think about pro forma December 31, 2008, and think about how we got, how we need to fund our working capital needs for the Canadian winter, that's where that extra $300 million roughly comes into play.

Okay. Sure. And then finally on a different topic, maybe I'm the only one who doesn't know this, is it possible you can just recap what percentage of your fleet or how many of the rigs in your fleet as we sit here today are Super Series rigs?

Gene, can you take that question?

Sure. Yes. We have 55 what we categorize as high performance rigs in the fleet.

Perfect. Thank you. That's it, guys. Thank you.

Thank you. Next question is from Brian Purdy from National Bank Financial. Please go ahead.

Hi guys, congratulations on the quarter. I wanted to ask about the Grey Wolf fleet again. You mentioned the contracted status earlier. I mean if you want to suppose that say a 10% decline in US rig count next year, do you think the Grey Wolf fleet would be positioned to do, to see a smaller decline than that or do you think it would be around the market average?

Brian, it is Kevin. Thank you for the compliment by the way. I will tell you what, it really isn't appropriate for us to speak to Grey Wolf's operations. We are comfortable they do a very good job managing their customer base and contract status. But to, for me to predict what I think might happen with their contract status going forward would be pretty tough. What I will also say is we are very comfortable with their management style and how they have contracted the rigs, and we are particularly comfortable with their customer mix and the relationships they have with their clients.

Okay. Okay. Fair enough. You mentioned the Canadian labor cost increase and the price increase, do you think you can fully pass that through with no effect on your margins or do you expect a small impact one way or another?

Brian a couple of key points, there was no labor increase last year and that caused a real shortage of people. It is really tough to recruit in Alberta right or Saskatchewan B.C. when you are not competitive with the other industries. Frankly, I was disappointed that we didn't push through an increase last year, but I am very pleased that we have been successful this year and I am also pleased that our customers are accepting this increase. They recognize the shortages we went through late last February, early March, and frankly they don't want to go through what they went through last year.

Okay. So in terms of impact on your margins, do you have any comment there for us?

It will not be a negative impack on margins. I can tell you that if you look at the pricing that might have been flowing around some spot market rigs late Q1, early Q2 last year I expect some operators, some drilling contractors are pushing through margin increases on top of their day rates. So I think the market our customers understand that it was really unhealthy situation last spring. So I am expecting that labor push through goes through to customers and I think there will be some margin response also.

Okay.

Margin positive response that is.

Positive impact on yourselves?

Yes.

And then finally I just want today ask in terms of the debt, I mean can you update us in terms of where you think the interest rate will come in when you finally do close that facility?

Yes, Brian I would comment that when we had our conference call our joint conference call on the 25th of August, we provided about 7.5% to 8%. In terms of pricing, debt markets have worsened from there. So without quantifying it, I would just say that we expect it to be higher than that.

Okay. So higher than the upper end of the range?

Higher than -- a new range all together.

Okay. Great. Thanks very much.

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

Good afternoon, guys. Kevin, I you wonder if you could start by giving us your sense either, address it on a winter basis or a full year '09 basis, to what extent you believe your Canadian rig fleet will be levered to the Montney, Horn River, plus the [Bachan] oil play, what percentage of your revenue do you think would be coming from these plays?

Okay. We don't break our revenue down on a geographic basis. We don't report it that way. Your best reference might to be to have a look at the public information on rig licenses and drilling rig locations but, in any event, both Bachan, Horn River, Montney are areas that require larger, heavier capacity rigs which does suit Precision quite well. We generally have market shares those areas that are indicative or slightly better than our traditional market share because of the make up of our fleet. So short of giving you exact rig counts, locations, and revenue by rig, we expect we will be in line or maybe slightly ahead of our average market share just due to the mix of our fleet. We are quite well positioned for Montney, particularly, Horn River, and for Bachan. And our new Super Triples rigs and some of our Super Singles will be rigs that will be rigs of choice. As those place particularly Montney, Horn River move from early development into full scale production drilling.

Right. It is obvious that you had pretty good exposure in Q3 which drove your margins the way they did, but I just wondered if you maybe had sat down and put pen to paper as you think about how you market the new combined companies here going forward and have you thought about to what extent you may be pulling revenues from these key plays in Canada but maybe you guys just haven't had a chance to do that yet?

We certainly have a very strong view on Canada, and very strong view on the Horn River, Montney areas. Clearly a strong focus for us, no question about it.

Okay. I guess second question would be to I want to turn to US for a minute, and I am sure you have been sharing lots of information with your, with your Grey Wolf partners or soon to be partners, and I wonder if you could speak to the issue of pricing in the US. You have addressed what you believe to be their contract status and the fact that they've had higher utilization even with a heritage fleet, as you call it, and even on '06, '07 when gas prices pull back they do better than the industry. So having said all of the that and acknowledging that could you give us a sense as to whether you think pricing is starting to suffer as we head into Q4 and look to '09?.

A couple of sort of macro points on the US rig fleet and the US demand. I think it is fair to say that probably right now, the US rig counts about 100 rigs richer than anybody expected. Being up in that sort of high 1970 range right now, it is certainly higher than most people predicted for 2008. So I think it got a little overheated. The likelihood of it pulling back I think is certainly greater than the likelihood of it getting larger. I'm in line with a bit of a pull back in the US.

When we look back last year between November and March last year there's no question that prices went through a flat period or a slight pull back in US. To expect that to happen again this year is a reasonable expectation. Flattening of prices a bit of a pull back. It seems like Grey Wolf has a very strong contract position going into this. I feel pretty good about that. You made the observation that another gas price pull back Grey Wolf does quite well. That speaks to their contract management very correct directly.

Great. I guess two more questions. Firstly, in terms of international ops I think you said you had sales teams in three countries. Could you or do you care to specify which countries those are in right now or are you keeping those cards a little closer to your vest?

It is, I tell you answer is I am not going to specify.

Okay. All right. And just one last question. Directional drilling, do you plan to roll this out both in the US and Canada simultaneously or will you start in one country?.

We are starting in Canada but really that's a 2008 event. We will start in 2009 in the US.

Okay. That's great, guys. Thanks a lot.

Thank you.

Thank you. The following question is from [Jeff Sagaleep] from CIBC World Markets. You may now proceed.

Hi, guys. On the directional drilling side, can you develop, are you going to be developing your own technology or are you buying stuff off the shelf. Are you focused on MWD? Can you give us some color in terms of your strategy there?.

Thanks, Jeff. Great question, and it is a question our Board also asked us yesterday in very good detail. We have no intent to develop technology. We intent only to buy off the shelf technology which these days is readily available.

Do you feel you can compete aggressively enough with the legacy players in that field using off the shelf technology?

On a large portion of directional drilling, yes. As you move to the more to the more call it high end and sophisticated type triple combo packages, no. We don't intend to. We are looking at the jobs where right now it is virtually our driller already doing the directional drilling anyway.

Okay. Is your intention at some point to look at rotary stirrable tools or some of the higher end component of that market, ironically enough where you're supposed to be?

The simple answer is really not right now. Our intention right now is to stay with very straightforward directional drilling, horizontal drilling with conventional tools.

Okay. In terms of the '08 deployment program, the six rigs coming to Canada. Two of them you said are going to heavy oil. Can you give some color in terms of the remaining four rigs, what type of drilling they will be doing and when you think they will be in the field?

Actually, of the 19 rigs, 12 are currently slated for the US. Four are currently slated for Canada and of the remaining two it looks like one of those will be going to Canada, one may be going to the US or internationally. So of the five rigs for Canada, two heavy oil, one would be Super Triple will end up probably Horn River, Montney, and the balance, Gene, can you help me with that?

Yes. Various different places, central Alberta, gas and oil drilling.

Is that a triple as well, or all those all Super Triples or a combination of singles and triples?

Actually, four are Super Singles, one is a Super Triple.

Okay. When you said two will be out for Q1 on the heavy oil side, what about the balance?

Gene, do we have that information here?

I will have to look it up. I don't think we have it right now.

Yes, going through rig by rig, Jeff. What specific number are you looking for?

I just want to know when they're all going to be out by.

All the 19?

All the Canadian component of it.

I will circle back through.

Okay. Lastly, on '09 capital program, not details at this point but logistically, if you were to announce in December and realistically your last rig from the '08 program is deployed in Q3 of next year, when can you get the first rigs from the '09 program out and when realistically could you complete an '09 program?

I think we can start delivering equipment as early as Q3 '09, and depending on the scope, we might run in to 2010. It depends on the scope.

Okay. Great. Thanks for the color.

Thanks, Jeff.

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

Good morning, guys. I have got a question for you with regards to your returns in different regions. As you look out now, what do you see in the best returns are? Is it from Canada, from US, international? I know it is pretty obvious that you get full utilization of the US, but wonder if that has changed at all? such --

Great question, Kevin. The 350 operating day here in the US is truly excellent for us. I mean that really helps balance out the cyclical Canadian nature. Obviously US returns look very robust for us, particularly with the high day rates we are achieving, but also I can tell you that some of our Super Singles rigs are drilling on pads that drill almost full year also make great returns. So there's a, there's a blend and it really isn't just regional. It really boils down to the nature of the contract we have on a rig by rig basis.

Okay. And on the international front, then, I know you had historical strategies to not go with the NOC. Can you kind of talk a little bit about what your strategy is now and how I guess on a higher level basis how that is progressing and what your customers are seeing in terms of what they want from you guys?

Well, a couple things. First of all, generally speaking, avoiding NOCs where they bid 50 people and take the lowest bid, but there are a few NOCs that are clearly recognized and reward high performance and high value, so we are focusing on places where the customers recognize technology, recognize performance, recognize safety and pay for it. Clearly a couple of NOCs that's primarily in the Middle East. The large integrated service companies recognize reward performance if the contract is structured properly. So we are certainly talking to those companies and following on the relationships we have with North American ENT companies that operate internationally is an area that will put off a lot of energy.

Great. Can you give us a little color on what you see will be the Canadian rig count I guess heading into 2009? You slashed a lot of rigs now both moving as well as from decommissioning? Where is the rig count going from 220?

Well, you mean the marketed fleet? I know what we have done and I can speak to what we think we are going to do. We think that our fleet in Canada right now is probably adequately sized. We are at 220 rigs in Canada. We'll have four or five more being added during the course of 2009, unless and of course that increases later with increased capital program. Likely we might move four or five more rigs to the US. So for us staying in the 220 range feels about right today. Quickly comment that last November when we retired 11 of our rigs we said that after Q1 we would look at further retirements if warranted. Frankly, they're not warranted. We think our fleet right now is actually adequately sized for Canada and the US. So that will use Canadian fleet in the range of around 850. Hopefully some of our peers continue moving rigs outside of Canada. I would like to see the Canadian rig fleet tighten up a little more. I can't speak for anybody else.

Thanks, guys.

Thanks, Kevin.

Thank you. The following question is from Todd Garman from Peters and Company.

Good afternoon.

Hi, Todd.

On the service rig side I guess going back to the drilling rig side you alluded that margins will likely improve due to price increases in the spot market and you intend to pass along the cost of labor. What about the on the service rig side? I'm assuming you will be able to pass along a cost of labor, but what about a margin bump, response been if that market from your clients?

Yes, Todd, because of the service rig market tends to be so much more fractured than the drilling rig market, it is a little tougher to get price increases there and I can tell you a couple of examples that kind of frustrate me. Early in Q3 Precision began addressing our customers with fuel surcharges and we had a real tough time getting that to stick because one of our competitions simply didn't want to go there. It was baffling to me in that fuel costs were the same for everybody. If they are going up dramatically because of commodity situations, I was really quite frustrated that our peers or small competitors up there weren't following. So, point being, pricing traction service rigs will be a little tougher to get margin improvements there on the short term.

Okay. Just coming back to the directional drilling side here, I understand that your field personnel are likely doing the work anyway. What I struggle with a bit, Kevin, is the revenue per day from directional drilling operation is substantially less than your drilling rate so what happens if you have trouble in the field related to your -- You don't want a lower revenue operation costing you days on the drilling rig site. How do you manage that?

I think several things, but first I think the first key issue right now is that the reliability of the (inaudible) is much different than it was several years ago. We've been tracking in our own fleet the number of days that we have directional jobs on our rigs and that those rigs are down waiting on problems with the tools. Frankly, you would be surprised how minimal that really is. We have a good body of knowledge and a good body of history of the Precision fleet over the past couple of years where we tracked the rig down because of waiting on directional, waiting on motors, waiting on tools and have a good sense for where that really lies. We feel pretty good.

Are you partnering with somebody locally to help you market it or is it all going be done in house?

Organically, in house.

Okay. Thank you.

Thanks, Todd.

Thank you. The next question is from [Nema Balute] from [Bloom Investment Counsel]. Please g ahead.

Congratulations on a strong quarter.

Thanks.

Just wanted -- you have mentioned it before and it is great to see you thinking over the long term rather than panicking over what are short-term concerns. But with respect to your customer base in the US and you had said that some shale plays are profitable at US $6 even at $5, are you comfortable with Grey Wolf's customer mix in terms of being exposed to the larger producers with the financial resources necessary to drill as well as exposure to those producers with the best assets that they can continue to drill at these lower levels?

Yes.

Okay. So, can you do you disclose the customer mix in terms of size at all in terms of Grey Wolf's customer mix?

We posted an investor presentation back with marketing of the the original deal that does give some pretty good indication of customer base. Grey Wolf is very well positioned with the mid to large ENT explorers for natural gas in the US and we feel quite good with the customer base.

And just to review, you said based on I guess what commodity prices were in the first half of 2008, you see pretty solid activity levels at least going to Q1 2009, and it is only if prices stay lower by Q3 2009 will you see activity levels drop off.

Are you referring to Canada specifically?

Yes, for Canada, I guess.

Yes, I think we are going to see real tightening of the budget front for 2009. No question about that. And I think that is a full year view heavily weighted by a lot of uncertainty today. I don't think that changes in the winter dramatically. I think winter stays strong and I really think you will see much like you did this year a reevaluation by most customers based on spring time commodity prices, natural gas storage in the spring time after winter draw down. Like every year, the weather this winter has lots of play with it. The economic conditions have a lot to play with it. But I would tell you I think that natural gas demand is surprisingly inelastic relative to economic conditions.

Great. Thanks for the color.

Thank you. The next question is from Andrew Bradford from Raymond James. Please go ahead.

Thanks, guys. For what it is worth, Kevin, I agree with your comments about the [unit elasticity] demand. I am going to beat this directional drilling thing one more step here. Is the plan here that you're going to brand this as Precision directional drilling?

I'm sorry, I didn't quite catch part of the question.

Are you going be branding the directional drilling services as Precision directional drilling or something along those lines?

Well, we are going to be branding those Precision Drilling high performance high value driller, including directional services.

No intention to take it to third parties only on our own rigs?

Absolutely. Correct.

Okay. And now with respect to international expansions and what I have historically found is the drillers that concentrate in a given geography or have a specialty in a given geography tend to outperform those who are a bit more scattered. Are you looking at life that way as well or are you looking at any particular international arena as being the area you want to champion or are you looking at several?

We are not guiding very closely where we are going but I will draw you to how we grew in the US. Our US organic growth started in one basin grew to two basins. We established a foothold in each area, continued to perform high and moved to three basins to four to five. Expect us to grow internationally very much the same way, establishing a presence in an area, developing reputation and growing that presence, looking for a secondary area, maybe looking for a third area. So, as you described, yes.

Okay. And as you come in to your 2009 capital program discussions, do you think it is possible here that if we get a slow down in drilling some of the rigs nominated for construction maybe the guys step away from deposits and you can step in and pick up some of those construction programs if you were thinking about accelerating your exposure? Is that a possibility?

I think that's always a possibility. I don't think this year is any different than any other year. We end up being a pretty large purchaser of things like drill pipe and top drives. That does give us a great clout with our key vendors. We work together very well. I think that if Precision comes to the table to deposit to by rig, I think we will get preferential treatment, generally speaking.

Maybe you know a guy or two at NOV or something.

I know a couple of guys over there.

Last question. Gene, could you include me on that delivery schedule for Canadian rigs?

I will make sure we do that, Andrew.

Thank you very much.

Thank you.

Thank you.

We are running a little short of time. Maybe we can shorten the questions a little to get everybody in.

Thank you. The next question is from [Derek Queen] from Citigroup. Please go ahead.

Hi. Most of my questions have already been asked, but I just wanted to follow up on Alan Laws' question. If there's such a big arm spread, then why don't you buy some stock in the open market, Grey Wolf stock in the open market?

Great question. Or why don't we buy some Precision stock. We have our deal in place. We will conclude our deal the way we structured it.

Thank you.

Thank you, Derek.

The next question is from Roger Serin from TD Newcrest. Please go ahead.

Thanks, guys. Real quick on the directional side. Are you doing to did the R&M and can you give me the number of units, or the total dollars you are looking to apply in both sides of the border?

Roger, we will provide that guidance when we do our capital budget in December, if that's okay with you?

That's perfect. Likewise to Andrew and friends, I would love to get the roll out of the Canadian e-mailed to me.

Great. Thank you.

Thank you. The next question is from [Asad Rara] from Canaccord Adams.

Good afternoon, guys. Just have a couple of questions for you. Firstly, just wondering on a date for the shareholder vote, has anything been decided there?

It is Kevin. At this point, no. We are still targeting early December, and don't expect anything to slow that down at this point.

Okay. Great. And in lieu of the transaction coming up and you are taking on additional debt and the current conditions going forward just in the market, financial market, any views on distributions going forward?

We've been quite clear on our presentations on the combined deal that a couple of important issues here. First of all, we are a trust, we are remaining a trust. We are not modifying our distribution policy. We believe that the combined company can sustain distributions in the current mode going forward.

Okay. Thank you. And just I would like to be forwarded on that Canadian rig information as well, please.

Great. We will make sure we get you on the list. Thank you.

Thank you.

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

Thank you for the questions. Look forward to joining you with our year end conference call.

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.