Precision Drilling Corp (PDS) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Precision Drilling Trust fourth quarter results conference call and webcast. I would now like to turn the meeting over to Mr. Kevin Neveu, Chief Executive Officer.

Good morning. I'd like to thank those of you joining the call this morning for making yourselves available on short notice. As you can see from our string of press releases this morning, we have a very busy day ahead. With me today is our Chief Financial Officer, Doug Strong, and I'd like to introduce our newly-appointed Executive Vice President of Investor Relations, David Wehlmann. And with that introduction, I would like to ask David to open our briefing this morning and provide the legal disclaimer.

Thanks, Kevin. It's a real pleasure to be joining the Precision team.

Through a news release earlier today, Precision Drilling Trust reported financial results for the fourth quarter and year ended December 31, 2008. Please note that our financial figures are in Canadian dollars, unless otherwise stated.

In addition, some of our comments may refer to non-GAAP measures, such as EBITDA. Please see our press release for additional disclosure on these non-GAAP measures.

Our comments today may include forward-looking information and statements reflecting Precision's views about events and their potential impact on our financial results and capital structure. These forward-looking statements include oil and gas commodities; supply, demand, and pricing; weather trends; cost-cutting initiatives; demand for our services; estimated capital expenditure levels and timing of those expenditures; projected rig utilization and rates for our services; future financial results and distribution policy; projected capital structure and integration of Grey Wolf and Precision.

These expectations -- involve risks and uncertainties that could impact Precision's operations and financial results, and could cause actual results to differ materially from such forward-looking statements. Please see our regulatory filings that are available on SEDAR.com for additional information about these risk factors.

Due to the nature of the events today, we will not be able to have a question-and-answer session at the end of the prepared remarks today. Kevin, I'll turn it back to you.

After my opening comments, Doug Strong will update you on our financing activities and we will come back to David to provide a summary of fourth quarter and year-end results. And I will conclude with our business update and market views.

But right off the top, I'd like to make some general comments that deal with key issues on our minds. First of all, when we envisioned the acquisition of Grey Wolf, we fully anticipated the potential for down cycles in drilling activity. What we are seeing today is depressed commodity prices and reduced drilling involves servicing activities were not outside our views on business planning.

And frankly, the leadership and management of Precision has experienced, lived, managed through several similar cycles before. Our people know how to respond, how to execute our business plan through these low-activity periods.

With the transaction distraction behind us, we are focused entirely on cost control, operational execution, margin protection, and preserving our strategic capabilities.

Now, did we anticipate the global economic slowdown? Not to this extent. But I believe you'll see that we are taking the appropriate steps to deal with this challenge.

As Doug will explain in a few moments, a key issue for Precision Drilling is to deleverage our balance sheet and structure our debt to ensure we are well-positioned for when the oil service market rebounds, as we know it will. And I'll discuss our market views on that later.

The new Precision creates North America's premier high-performance, high-value driller, with the best people, the best systems, and the best technology in a comprehensive footprint from northern Canada to southern Mexico. On that note, let me pass it over to Doug to brief us on our financing update.

The fourth quarter of 2008 has certainly been noteworthy and, along with lower financial operating performance to start 2009, has had an impact on capital resource allocation.

Precision is taking three separate steps, each of which will serve to add certainty to our capital and debt structure. First, we reported earnings and therein Precision Drilling Trust announced the suspension of cash distributions for an indefinite period, effective immediately. This measure was taken in response to lower financial operating performance at the start of 2009.

Second, Precision Drilling Trust announced its intention, pursuant to a preliminary prospectus supplement, for new issue of trust units of the trust in Canada and the United States. This offering is anticipated to raise gross proceeds of approximately $150 million.

Third, Precision Drilling Corporation intends to refinance our $400 million bridge facility as part of these initiatives.

These independent measures add greater certainty to Precision's capital structure. As of December 31, 2008, Precision reported long-term debt on the balance sheet of almost CAD1.37 billion. There is supplemental information contained in the earnings release on our debt structure. I encourage our listeners to examine this material.

For those not familiar with Canadian generally accepted accounting principles, unamortized debt issuance costs of CAD159 million have been offset against gross long-term debt.

As previously announced, Precision established a new credit facility in the amount of approximately $1.6 billion with the closing of the Grey Wolf acquisition. Precision's existing unsecured bank loan facility was terminated in the process. The new credit facility funded prior borrowings to cash consideration paid to acquire Grey Wolf and has capacities to fund the redemption of Grey Wolf convertible notes in the first quarter of 2009, as required.

These developments provide Precision with the opportunity to solidify its debt structure with greater commercial certainty. Further, we would highlight that, as at December 31, 2008, borrowings under the $400 million revolving credit facility were $108 million, leaving significant capital to fund operational investing activities going forward.

Working capital was CAD$345 million at year end, an increase of CAD200 million over prior year.

Our investment in property, plant, and equipment during 2008 was CAD230 million, of which CAD60 million was for the upgrade of existing equipment and -- CAD170 million for the expansion of our asset base, primarily new drilling rigs.

For 2009, we expect our capital investment to be CAD239 million, with CAD75 million for upgrade spending and CAD164 million in expansion. The expansion capital is for 16 new rigs to be placed into service in 2009, as the culmination of our 2008 new build program. All 16 are under term customer contracts and we expect nine of these rigs to be deployed in the United States and seven in Canada. There are no new additional rigs planned as a separate 2009 build program.

Before I pass the floor over to David Wehlmann for a review of fourth-quarter earning results, we highlight that Precision expects to have an average of approximately 102 rigs working under day work term contract in North America in the first quarter of 2009 and an average of 93 rigs contracted for the second quarter of 2009.

For the total year 2009, Precision expects to have an average of approximately 85 rigs working under term contract with 53 rigs contracted in the United States, 30 in Canada, and two in Mexico. David?

I'm just going to do a brief recap of our earnings for the quarter and for the year. Precision reported net earnings of CAD92 million, or CAD0.71 per diluted unit, for the quarter ended December 31, 2008. And that compared to CAD89 million, or CAD0.71 for the fourth quarter of last year.

Revenue for the fourth quarter of this year totaled CAD335 million, and that's up 35% from the same period of 2007.

Earnings before income taxes for the fourth quarter of 2008 were CAD102 million. Those were also up 34% from the fourth quarter of 2007.

The net line is a little bit lower, due to a change in tax expense of about CAD23 million in the fourth quarter of '08 versus the fourth quarter of '07. But above the line, above the net income line, we had strong results.

These increases resulted from the trends that were started in the third quarter, with higher commodity prices, as our customers in both Canada and the U.S. engaged in the higher drilling activity, but that quickly changed as we got to the end of the fourth quarter here, as commodity prices have declined.

From a utilization day standpoint, in Canada, we worked 9,066 days for the fourth quarter of 2008 and that's up about 5% over the fourth quarter of 2007. In the U.S., we had a dramatic increase in days. This has to do with the organic growth -- the rigs that Doug mentioned in our new build, plus the acquisition of Grey Wolf, which came into effect for the last eight days of the year. But we worked 3,250 days, approximately, versus 900 in the fourth quarter of last year.

Looking at the full year for 2008, revenues totaled CAD1.1 billion for the year ended December 31, which was a 9% increase over the same period for 2007. This, again, was driven by the higher commodity prices we saw in the third quarter and in the beginning of the fourth quarter, and by the increased demand in the United -- or the increased utilization in the United States with our new rigs and the acquisition of Grey Wolf.

The trust reported net earnings of CAD303 million, or CAD2.39 per diluted unit for the year ended December 31, 2008, compared to CAD346 million, or CAD2.75, for physical 2007.

The net earnings decrease was driven primarily by lower activity and customer pricing in Canada, and relatively higher tax expense because a lot more of our income was generated in the United States.

In closing here, I just want to report on earnings before interest, income taxes, depreciation, and amortization, otherwise known as EBITDA. For the fourth quarter, we generated EBITDA of CAD133 million, compared to CAD103 million in the fourth quarter of 2007, which is just shy of a 30% increase, which shows you the cash flow generation of this company. For the full year, we had about 430 million -- excuse me, CAD439 million of EBITDA, compared to about CAD435 million for 2007.

Now I would like to turn it back over to Kevin for some -- his outlook going forward.

First of all, let me spend a few moments discussing integration of Grey Wolf, cost control, Precision's advantage, and then I'll move onto the market views.

The integration of Precision and Grey Wolf is proceeding exactly as planned. Integrating two competing organizations can be viewed as a big challenge. In the Precision/Grey Wolf integration, many of these typical challenges have been mitigated by the truly minimal overlap in customers, people, systems, and assets.

Importantly, we have been very successful retaining key individuals from both organizations. Our customers are pleased we're executing on strengths for both organizations, and we remain firmly committed to realizing the strategic benefits of this combination.

And while I'm very pleased to report on the support of our customers, I'm most excited by the enthusiasm of the Grey Wolf organization in the process.

Now, very specifically on the cost-control front, our accounting and operations groups are committed to scrutinizing every cost -- variable, fixed, all expenses, all capital requirements. We've shut down all discretionary expenses. We have frozen hiring. We're scrutinizing travel needs. We're scrutinizing expenses, third-party consulting.

The only sacred areas remaining are audit and safety, which we cannot compromise in any way. And we will not cannibalize our assets or our capabilities. We will preserve our ability to immediately respond to customers' needs as the high-performance, high-value oil services provider.

But rest assured, cost control is a key focus in every decision. Ken Haddad, our Vice President of Business Development, is coordinating this cost-control effort across all business units, both geographic and functional groups. And Ken will be reporting directly to me on a weekly basis on our efforts to control costs in the operations.

Now, Precision Drilling operates 371 rigs across North America, 232 service rigs, along with about 100 drilling camps, oil service manufacturing, supply chain, and a [wild] wastewater treatment business. We pride ourselves on our high-performance, high-value strategy founded in our excellent people, our [comfort hits] of business systems, and our Super series rig technology.

As I stated earlier, we will also focus on preserving these capabilities and every decision moving forward will be viewed through a cost-control decision.

I will tell you that I believe our industry right now is plagued by a lack of visibility going forward. And while it's very difficult to provide a mid- to long-term view, we understand that the short-term challenges facing oil service companies.

And during these very challenging times, you can expect Precision to enhance our market transparency going forward, and appointing David Wehlmann as Executive Vice President, Director of Investor Relations, is a definitive step in that direction. David will be available for both investor and analyst meetings or calls on a real-time basis, while Doug and I also remain accessible.

We are committed to providing a high level of visibility as these market conditions evolve over the coming months and quarters.

All right. Let me now discuss our views. The drilling and servicing sector in Canada and the United States is at a significant decline right now and talking about spot market pricing is premature, as rig activity is still in rapid decline and, more importantly, from Precision's perspective, the stock market is less material.

Our strong contract positions, outlined earlier, for our high-value rigs will somewhat shield us from the full exposure to day rate pressure some service contractors may experience.

I think the important message that I want to really put forward is that our customers are remaining committed to our rigs. They're honoring long-term contracts for these rigs and especially for the new rigs which are being delivered.

Now, several months ago, we talked about new rigs displacing old rigs in the market. I can tell you that is not the case today. The new rigs that are being delivered by Precision and other drillers over the coming quarters are generally going to applications with which old-technology rigs simply cannot drill.

I will, however, comment that three of our new rigs slotted to the Rockies with a major E&P company will likely be displaced to a different location in the U.S., possibly displacing other rigs, non-PD rigs, and our customers will continue to honor our long-term contracts.

Geographically, for a moment, the Canadian winter drilling season is at its lowest activity levels since 1999, and this has been driven by a combination of low commodity prices and the inability of our customers to access credit. We know it will be a very slow spring. No surprises there, and frankly, it was a very slow spring in 2008.

At this point, we have limited visibility for summer and fall. However, we are well positioned for this depressed activity level and we will be able to respond when commodity prices improve and our customers once again have access to credit.

The general activity decline in U.S. land drilling is well documented. U.S. activity, particularly in gas drilling, has fallen from an historic peak level in September of 2008 of about 1,600 rigs, down almost 30% to last Friday at about 1,100 rigs. Oil drilling peaked in early November at about 440 rigs and it's since come down to 283 rigs.

It's also very important to note that the horizontal rig count has also dropped about 100 rigs during this period, and the directional rig count has fallen by over 120 rigs during this same period.

So clearly, the U.S. activity slowdown is broad-based, and not limited to any region, geographic or geologic. That said, the Rockies have been hit harder, generally due to depressed commodity pricing in that region.

Let's consider, for a moment, that 62 to 64 Bcf of natural gas consumed daily in the United States. Of that 62 to 64 Bcf, 56 Bcf comes from producing wells, both onshore and offshore in the U.S.. Almost half of this production was drilled by an average of 1,500 rigs over just the last three years.

Also note that the production decline curve on conventional gas is 20% or greater, and a whopping 60% or greater on unconventional gas. And keep in mind that the current rig count of 1,100 is roughly 500 rigs off the peak and still dropping.

My point in this analysis is that the rig activity declines are occurring quickly and deeply in both conventional and unconventional resources. And when you couple this 30% activity decline with 20% to 25% decline in production rates on conventional production and 60% or greater in unconventional gas, we are setting up a situation where there may be a North American supply challenge on that horizon.

And these numbers are very telling. It's our belief that our customers will lay down all the rigs they do not need or cannot afford as quickly as possible. They will not wait until the end of Q2 or Q3 to drive down the rig count.

However, the rigs they need will continue drilling, and while they may put pressure on drilling and service companies to reduce rates, they will strive to honor their commitments to these contracts. And they will do this because they want to protect access to these best-performing rigs when the cycle turns and high-performance rigs are once again in very short supply.

When this commodity -- when this current supply decline becomes apparent, we expect there will be a rapid response in commodity prices. I'll also point out that the bottom of the last cycle in North America for gas drilling was roughly April 2002, and back then, the backdrop was only conventional decline rates. At that point, rigs dropped -- gas drilling rigs dropped to as low as 600 rigs, and then it took six years of sustained rig activity growth for activity levels to recover to just sustained gas production.

So we will fall short of predicting minimum rig count levels and we'll fall short of calling when the turn will be, but we see clearly a potential for a very strong long-term view on our sector, and on those notes, I will pass this over to David for closing remarks.

In closing, we just want to thank everyone who has joined us on this call today for participating. As I mentioned earlier, we will not be able to take any questions in today's call. We look forward to future calls with our investors and with the analyst community, and again, thank you for joining and that concludes our call today.

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