Precision Drilling Corp (PDS) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Precision Drilling Trust first quarter 2009 earnings conference call and webcast. I would now like to turn the meeting over to Mr. David Wehlmann, Executive Vice President Investor Relations. Please go ahead, sir.

Thank you. Good afternoon, everyone. I'd also like to welcome you to Precision Drilling Trust conference call and webcast, where we are going to discuss our first quarter 2009 financial results. With me here today are Kevin Neveu, our Chief Executive Officer, and Doug Strong, our Chief Financial Officer.

During a news release today, Precision Drilling Trust reported on the first quarter 2009 results. Please note that the financial figures are in Canadian dollars unless otherwise indicated. Some of our comments today will refer to some non-GAAP measures such as EBITDA. Please see our press release for additional disclosure on these non-GAAP measures.

Our comments today will also include forward-looking information and statements reflecting Precision's views about events and their potential impact ton trust financial results and financial structure. Forward-looking information and statements include but are not limited to items that we have detailed in our press release. There are risks and uncertainties that could cause actual results to differ materially from those indicated by such forward-looking information and statements. Please see our press release and other regulatory filings for more information on these risk factors.

Doug Strong will begin the call this morning or this afternoon, excuse me with a brief overview of the financial results for the quarter. I will then follow with a quick recap of the financing transactions that we announced on Monday, and then Kevin Neveu with provide an operations update and outlook. After that, we will open the call up for questions. Doug, over to you.

Thank you, David. Ladies and gentlemen, this morning Precision Drilling Trust reported net earnings of $57 million or $0.30 per diluted unit for the quarter, first quarter of 2009, compared with $106 million or $0.84 per diluted unit for Q1 2008, a per unit reduction of 64%. Earnings were lower than a year ago as revenue growth, EBITDA growth, and the larger asset base with the December 23rd, 2008 acquisition of Grey Wolf were impacted by reduced equipment activity, customer pricing, debt service costs, and foreign exchange translation associated with borrowings under new credit facilities placed upon close of the acquisition.

Included in the Q1 '09 results was an unrealized foreign exchange loss on long term monetary liabilities of $35 million, and interest expense on long-term debt was $36 million higher than the first quarter of 2008. Clearly the start to fiscal 2009 has been difficult for the oil field service sector in both Canada and the United States due to low energy commodity prices. During the first quarter of 2009, Canadian drilling and service activity in terms of utilization was as low as we have seen since the early 1990s. In the United States, we have seen the active rig count decline at a rapid pace from about 1,600 rigs to start the year to below 1,000 currently. The trend began in the fourth quarter of 2008 and has persisted. Precision is prepared to cope with the sharp decline in industry fundamental brought about by reduced energy demand due to the global economic recession.

As we have said before, our 2009 focus is on debt reduction, acquisition integration and business execution. The first of the focus on the balance sheet and in that regard, we call your attention to the following financial highlights. Steps have been taken to solidify our capital structure since January 1, 2009, the most recent of which was our announcement on Monday. David Wehlmann will address these developments in a moment. Through debt and equity securities, Precision has significantly restructured the capital structure of its balance sheet and reduced interest expense going forward. Further, we have packaged our most recent initiatives with the objective of completing the full syndication of our secured facilities meeting the pricing terms of our debt and are expected to be solidified in the second quarter of 2009, a very positive and significant outcome.

During the quarter, Precision reduced long term debt by $221 million, and lowered the debt to capitalization ratio calculated as long-term debt over long-term debt plus equity from 0.37 to 0.31. The majority of the funds used to repay debt were obtained through successful equity unit issue that closed on February 18, 2009. Liquidity was strengthened in the quarter as working capital increased $22 million to $367 million, including a cash balance of $130 million as March 31st, 2009. Looking forward to the second quarter of 2009, this cash will be applied to substantially reduced borrowings under the revolving credit facility. Through this week's debt restructuring announcement, we expect the revolving credit facility to be reduced to US $260 million, a level that continues to provide ample liquidity to fund operational investing activities going forward.

As of March 31, 2009, trade receivables were $458 million, a reduction of $144 million and 24% from December 31, 2008. The reduction is indicative of lower sequential business activity in Canada and the United States. As we move into the second quarter of 2009, the seasonal slow down in Precision's Canadian operations and the reduction in United States drilling activity is expected to lower working capital and increase quarterly cash flow from operations.

The second and third key elements of our plan were focus on execution of the 2009 business plan and the integration of the Grey Wolf acquisition. Kevin will address integration developments in a moment. For the quarter, capital expenditures were $75 million, with $61 million of that amount for expansion capital. Our capital expenditure estimate for 2009 is reduced by $29 million to $210 million, with $40 million for upgrade capital and $170 million for expansion. During the first quarter of 2009, six new drilling rigs were completed and ten are scheduled for completion over the next few quarters. This completes the delivery of all rigs in Precision's 2008 new super series rig program, all of which are backed by long-term customer contracts.

Cash distributions to unit holders were suspended indefinitely during the quarter after a declared distribution of $0.04 a unit for January 2009. Cost reduction measures were taken to reduce and align personnel and infrastructure costs with very low near term customer demand. Most notably, during the quarter, office and shop workforce was reduced by 14%. In Canada and the United States, facility consolidation is taking place to improve efficiency and field support operations. The CEO forfeited his 2008 short term incentive entitlement and the CFO took a reduction. Pay scales for rig crews in Canada and the United States have been reduced, and Precision is taking steps to integrate field wages in its United States operation.

Turning to statement of earnings, the news release has considerable detail on rig operations and I do not plan to repeat these figures. However I encourage our listeners to review our segment disclosure. Revenue in the first quarter of 2009 was $448 million, an increase of $105 million or 31% of compared to the first quarter of 2008. The increase was attributable to acquisition and organic new rig growth in the United States on shore contract drilling market. For the quarter, Precision's operations in the United States comprised 52% of total revenue, as compared to 8% in the first quarter of 2008. This balance in revenue generation is the result of Precision's strategic direction to diversify revenue sources beyond Canada.

Drilling rigs under term contract arrangements with customers made up about 27% of the Canadian utilization days in the quarter, and almost the inverse, 74% of utilization days in the United States. Precision reported EBITDA of $169 million for the first quarter of 2009 compared with $147 million for Q1 2008, an increase of 15%. EBITDA margin as a percentage of revenue was 38% in the first quarter of 2009 compared to 43% in Q1 2008, and 40% in the prior fourth quarter of 2008. The relatively solid margins given poor sector fundamentals is a reflection of premium performance and rates for Precision's rigs that are not on long-term customer contract, and as Kevin will expand upon, a reflection of the the visibility Precision has with its portfolio with term customer contracts.

Income tax expenses in the quarter were low and led to a small recovery but lower business activity in combination with higher interest expense on financing associated with the acquisition of Grey Wolf has provided additional shelter from current cash taxes in the United States. Although Precision has suspended cash distributions, we expect minimal taxable income flow through to our unitholders for fiscal 2009. That concludes our 2009 first quarter financial overview. I will now turn the floor back to Precision's Executive Vice President of Investor Relations, David Wehlmann, for an overview though week's financial announcements. David?

Thank you, Doug. As we announced on Monday morning, Precision has entered into an agreement with Alberta Investment Management Corporation, otherwise known as AIMCO on behalf of certain investors, pursuant to which the investors have agreed to purchase by way of a private placement $175 million aggregate principal amount of senior unsecured notes of Precision bearing interest at 10% and having an eight year life. In addition, 35 million trust units at a subscription price of $3 per trust unit for gross proceeds of $105 million and 15 million purchase warrants of the trust, entitling the holder to acquire up to an additional 15 million trust units at a price of $3.22 per trust unit for a period of five years from the date of issuance. The trust also intends to initiate a rights offering for up to approximately $103 million that will allow unitholders including the investors to purchase trust units at a price of $3 per unit in their proportionate ownership share on the same terms as the investors.

Precision expects that the AIMCO transaction's totaling gross proceeds of $280 million will close later today. The proceeds will be used to reduce our unsecured bridge facilities. With regards to the rights offering, Precision is in the process of obtaining regulatory approvals and can set a record date once those approvals are obtained. We expect to know in the next few days and set a record date before the end of the month. More details will be forthcoming in the near future.

Now I'd like to turn the call over to Kevin.

Thank you, David. I will provide some color on our current operating activities and brief summary of integration process, and then give you a sense of how we see the business going forward. As our press release states, the integration of Precision and Grey Wolf is going very well. Our people in Calgary and Houston are working seamlessly. We are retained all key personnel. We expect to have our SAP Company-wide enterprise management system up and running at the end of the second quarter. We also expect to begin to see some elements of Precision's vertically integrated business process up and running during the second half of the year delivering value and margin enhancement in fourth quarter. We are measuring the success and progress of integration on a weekly basis against three operational metrics and we are on plan or better with all three measures.

Now, the current state of the markets in both Canada, the United States are visible. Certainly this has been the slowest winter since mid 1980s in Canada and while the rate of slowdown in the United States may finally be showing some signs of easing up, the activity levels have plunged down to levels last seen in early 2003. We understand the challenges our customers face particularly with the very low natural gas prices, and we feel that pressure everyday as all of the conversations with our customers are about lowering the cost either by lowering day rates or improving efficiencies, but honestly most of the focus right now is on day rates. As we have said in the past, these are conversations we face with our customers in all market conditions, all market cycles and at all utilization levels.

This is no surprise to Precision and we remain focused on delivering maximum value to our customers by providing high performance services that drill complete and service wells faster and safer than our competition. And we will not price this value at a discount to our competition. The spot market has not fully emerged and will not emerge until the market bottoms. However, we are seeing some new bids coming up for this work this sumer and the pricing competition has been intense. It is clear that those service companies with little or no work are driving rates right down to their break even levels. Now I said earlier, Precision will not lead rates down nor will we price our rigs or services to support utilization levels.

However, as you consider Precision's sector leading margins, I will remind all of you this is a combination of not only stronger day rates but also very importantly demonstrates the cost advantage we enjoy with our vertical integration and day rates that may be at cost for some of our competition are likely still nicely profitable for Precision. As we run this business through the cycle, Precision is very well positioned not only with high performance rigs, strong contract positions, good geographic diversification but also an excellent cost advantage in these difficult times.

Speaking to specific regions for a moment, in Canada, we do remain encouraged by deep gas drilling in northeastern British Columbia, we see year-over-year activity remaining strong, with two new Super Series rigs delivered earlier this year and one more due to be delivered later this quarter. Southern Saskatchewan, particularly our activity in the Bakken Oil is also a great spot. Now, currently the area is shut down due to spring breakup, however, we've delivered two new rigs, and expect to be returning back to strong activity levels in that particular region later in the summer. Alberta is clearly very challenging. Activity remains depressed and we see little likelihood of a meaningful recovery until commodity prices return to more supportive levels. Shallow gas is virtually shut down. Across Canada today we have 23 rigs running, I will point out that only 12 of those are on long term contracts, and I assure you the balance of the rigs are not running at Precision's cost.

In the United States, we see continued weakness in all regions, except east Texas and west Louisiana particularly deep Bossier Haynesville plays. We also see interest in Marcellus firming up. Most of the work in these areas though is already contracted to existing rigs where new builds are being delivered. We do see early signs of bottoming in north Texas. The Barnett shale and even slight improvements in south Texas.

Regarding calling a bottom for US activity, I am less concerned about what that bottom rig count level is. Precision has a good contract position with 58 rigs under contract. We have the further 15 rigs working at day work contracts right now, and again, those are not at break even prices. However as other work develops in the marketplace right now, it will be at very depressed day rates. So frankly, whether the US rig count bottoms at 900 rigs or 800 rigs or for that matter, even lower, it is not very important. Our customers are going to need a significant improvement to commodity prices before rig demand, rig activity and margins will improve.

Now, it is my belief that despite most of the excellent results we see coming out of some of the new shale gas regions like the Horn River in British Columbia or the Marcellus or the Haynesville play in Louisiana. The infrastructure for gas collection and gas transmission, and for that matter, even additional drilling rig resource, for those plays will take several quarters and in some cases even years to develop before meaningful amounts of gas are delivered to the North American markets. While at the same time, the mature fields in the conditional regions such as south Texas, the mid continent region, most of Alberta, and even the Barnett shale, have seen such dramatic drilling declines, the lack of gas production decline replacement is well underway and undoubtedly will become evident during 2009.

Now I say this confidently, and the proxy that I have is right here in Western Canada sedimentary basin. Natural gas production after peaking in 2006 at almost 17 BcF per day is now averaging barely 14.5 BcF per day and still declining. This is a direct result of drilling activity reductions in late 2007 through 2008, and the activity declines in the lower 48 has been far more abrupt and more severe than we have seen here in Canada until recently. As Precision looks forward and views our position, we have our rig fleet geographically and technically positioned to continue pursuing the limited opportunities in today's market. Our cost basis for operations delivers industry-leading margins, allowing us to compete profitability in very competitive markets through the bottom of the cycle.

When the production decline curve takes hold, gas commodity prices will respond. Our customers will have to reinvest in drill bit to replace and restore those production short falls. Precision will have 390 drilling rigs, 229 service rigs and all of our supporting businesses in fully marketable and operable condition, able to respond to the needs of our customers.

Now, just turning back to the financing package for a moment, our recently announced financing package including the significant ownership position by Alberta Investment Management Corporation is timely and helpful for Precision. Importantly, it also brings an investment fund manager very familiar with the oil services sector, and for that matter, Precision Drilling, back into this space. We are pleased to have our strategy endorsed not only financially but strategically by the AIMCO group and while our board approved the financial package, it is very important to note that management and our financial advisors have been dealing with the debt issues for several months. We've been considering and aggressively pursuing several alternatives, which I know some of you on this call are very familiar with. In fact, some of the alternatives were very attractive for Precision, however, they may have involved significantly more time and more execution risks to complete.

What made this particular proposal attractive was the unique combination of debt equity, size, and particularly the speed of which the investor was able to move. This clearly puts Precision on a very defined path to investment grade on a very short horizon, and most importantly, it allows us, the management team to put our energy back into running the business, not negotiating with banks. On that note I are pass this call back to David Wehlmann for questions. Thank you, Kevin. Theresa, if you will open it up for questions now?

Certainly. We will now take questions from the telephone lines. (Operator Instructions). There will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from Kevin Lo of FirstEnergy. Please go ahead.

Good morning, guys. You've kind of alluded to driving toward being investment grade company the next couple of years. Can you kind of allude to what you think the, if there is any changes to your interest rates going forward, either in 2009 or 2010 based on what you see and the financing package that just occurred.

Kevin, it is Doug. The interest rates we have provided in the news release that went out on Monday. Beyond that, that's a current indication of where the rates are. Bear in mind as we disclose in the debt table that most of those interest rates with the exception of our note indenture with AIMCO are floating rates.

Oh, okay. So there's no, even as you progress through the year, let's say you work off a little more debt than you have now, you are not going to see a reduction in rates unless you refinance with another debt package?

What we put forward here is a permanent debt structure and as we repay principal certainly, the interest costs will come down with that.

Okay. And as I understand it, the term A and term B loans, there's no prepayment restrictions?

The term A, and term B loans have scheduled amortization repayments.

Yes.

And in addition to that we do have excess cash flow that is swept at the end of fiscal period, all subject to various formulas as laid out in our debt agreements.

So, no other penalties for prepayments beyond those scheduled and cash-free provisions.

That's great. The last question I have is with respect to Mexico, can you update us on what is happening with that and any other international expansion?

Sure can, Kevin. We have, we currently have two rigs running Mexico, both of those rigs are on long-term contracts for a major integrated services provider. We are actively marketing, certainly in northern districts of Mexico right now, some of our smaller lighter rigs that attuned to the shallower drilling in northern Mexico but at this point, nothing to report. As we have said on previous calls though, Kevin, certainly as we have been on this very singularly focused deleveraging mode, that we will look for opportunities our rigs can go out and deliver value immediately without a lot of capital investment. And frankly northern Mexico is one place that looks attractive.

Okay. That's great. Thank you, guys.

Thank you.

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

Thanks, good afternoon, guys.

Hey. How are you?

Very good. So for the CapEx cut or the CapEx cut is down $29 million, right?

What are we taking that from? Andrew, that's coming off upgrade capital. The combination, there's a, there's the slice coming off our infrastructure admin capital budget as well as coming off in alignment with activity levels. The upgrade capital for all of our fleets of equipment, drilling and service rigs.

Is any of this sort of notion lily maintenance capital items?

It is probably fair to say, Andrew that, you know, right now if we can avoid buying drill pipe we will avoid buying drill pipe. There will be some deferrals but I wouldn't view it as being particularly significant at this point.

Okay. And I guess, the next question because we just went through this a little while ago, and the question came up then, is there a lot of take this down further and clearly the answer today is yes, there is. Is there any latitude to take this down more throughout the year if the situation gets worse than where we are.

There absolutely is more latitude, and clearly if we weren't in a position to announce a financing project recently, likely that decline might have been already larger even at this point. But we think we are modeling the business forward appropriately. We think we have modeled the capital appropriately forward. But we will continue watching this on a quarter-by-quarter basis.

Cutting the shop expenses and office expenses by 14%, are these interrelated concepts as well?

Those are absolutely cash conservation concepts all around deleveraging.

So I guess another way of saying fewer guy, fewer people working in the shop results in spending less capital. Is that linked?

They're not, you know, the few people in the shop doesn't actually impact the capital cost number, but our separate items on the -- one's on the income statement and one's balance sheet of course. But the activity -- we are kind of matching up the size of our business right now with the activity to some degree. As I have said in the past, we felt we had our business right sized. I can tell you right now, certainly the levels of activity we are seeing right now, we have room to push things out further. We did.

Okay. Thank you very for that. Can you put dollar figures around that 14% number, Doug?

We are not going to put hard numbers to that, Andrew. I can tell you of that 14%, the majority of the personnel were office, salary-related. And there's some incidental, we have minimized on contract and temporary staffing. And there has, there was not a large component of shop personnel in that.

Okay. But we can't, it is hard to take that 14% number and turn that into a dollar figure.

We are not going to put a hard run rate on it. We will continue to monitor the business going forward. Clearly it will reduce G&A costs, but we are not going to guide forward on the actual hard dollars.

When you combine some of the severance issues right now, it is not as impactful on the very very short term, probably better over the course of the year.

Fair enough. And I was curious about your comments about, about targeting day rates now toward a marginal cost and your marginal costs probably a little bit lower. Do you have a target, in your mind is there a threshold margin at which you won't, a threshold that you will not cross?

The short answer is yes there is. The long answer is we are not going to put it out there because I notice we have quite a few customers on the line today too.

But as a positive dollar value to it and it is a hard line.

Yes. We are not going run the rigs into the ground and depreciate them and not recover a profit for investors.

Okay. And I guess last question is just in recent weeks, I guess, we would have had some, if there was to be an impact from the change in the royalty terms in Alberta, especially vis-a-vis the meterage credit, are you noticing any impact there on your business?

I will let Gene speak to that, Gene is with us today, too.

Hi, Andrew. We saw it in a small way both on the drilling side and on the well servicing side. So three jobs that I know of, three rigs that were delayed and went to work April 1st, and on the well servicing side as well, there was a number of completions deferred until April 1st.

That doesn't sound extraordinarily impactful then.

No.

No. Okay. Well, thank you very much I guys.

Thanks, Andrew.

Thank you. The next question is from Dana Benner of Thomas Weisel Partners, please go ahead.

Good afternoon, guys.

Afternoon, Dana.

Kevin, you made the comment you don't want to get into the business of prognosticating exactly when at what level the US rig count bottoms. But having understand that, I understand that sentiment. But, I guess with the back drop of Nabors' conference call this morning where they kind of got the market all a tizzy with the comment that they believed that the bottom may be right at hand. And of course, if that is the case, that would be a very significant development, maybe shaving another couple of hundred rigs from being, from being let go. And these are all just relative measures. We all agree that it is weak. But given your presence in the US market, I am just wondering if you have seen any signs that would accord with their observation that the bottom is at hand, just kind of field reports or anything like that.

Yes. I didn't hear what they had to say this morning, but what I can tell you is as I commented earlier, we have seen, we have seen a couple of bright spots, certainly apparently growing interest in the Marcellus. Clearly the Haynesville is not going through much of a decline right now. And the number of rigs actually operating in the Haynesville is probably a lot smaller number than most people are putting it out. But think in the range of 50 or 60 rigs. But as we look at some other areas like north Texas,it seems to be bottoming a little bit there. We seen a little recovery in south Texas. A couple of weeks back, Baker-Hughes rig count was neutral week over week.

Dana, it is certainly early to say this is the bottom. But there certainly are some encouraging signs that the bottom is near rather than far. And I'm not sure if you recall, but I have been suggesting that our customers have no reason to wait until the end of Q3 to lay rigs down, they will lay their rigs down as fast as they can. We have been suggesting we expect it to bottom sometime in Q2, nothing I have seen right now tells me that it is going to push out until the end of the year. So I am still thinking we are probably closer to it than further from it. Long answer, but again if another 100 rigs come off in the next weeks, we understand our position quite well and we are not too bothered by the number of rigs coming off.

That's terrific. If you think about the US market, do you feel that through the, let's call a collapse is what it has been, given the collapse of drilling in the US, do you feel like you have been able to maintain your market share broadly?

Short answer is yes, we have.

Okay.

What I will comment in areas that there are a significant number of rigs in the US right now that are down, but they are contracted and those aren't just Precision rigs, they're across the fleet. People are paying for rigs to be idle right now because it is cheaper to pay the standby costs for a rig than go ahead and drill a well in the environment. So certainly we measure not only our active rig count but also our stand by idle rig count. We feel we are maintaining our position.

How would you assess your market share in the Horn River and the Montney plays, again Nabors was out this morning suggesting they felt like they were the single largest player in those plays and pointing to them as big areas of growth. You have a fleet that is very competitive in that depth range and for plays like that. I wonder how you would assess your market share in those plays.

I think we are in pretty good shape up there. I really don't keep track of , on a region by region, rig count by rig count level. But, you know, as I commented during the call, we are pleased with our northeastern BC business. Great customer relationships. We have put new two new rigs into the area. We have one more rig going in there right now. My view right now is there are probably not many more rigs in existence that can drill up there, so we are close to capacity, meaning for significant growth in the Horn River, it will require new rigs at some point in

Right. Two more quick questions. Firstly the issue of corporate structure, the distribution is now $0 as you preserve capital. You know, does it make sense to stay as a trust and if not, what type of time line might you make that decision over? And then secondly, just some tax rate guidance for this year would be very helpful.

So I will just deal with the structure question off the top and tell you certainly our current financing activities are not impactful to the structure. More importantly, as we look down the road, once we have better visibility of 2010, and we understand what the revenue flow looks like in 2010, we will be in a better position to assess the value of the trust tax structure through the course of 2010. But on the flip side, there's no pressing reason for us to change the structure be it today, tomorrow. So the time line is not, the clock hasn't started yet, other than we know the game ends at the end of 2010. Doug?

To your question on tax rate guidance, as you saw in the quarter we had a small recovery and you will find as we proceed into what is a low demand period, and correspondingly lower earnings, given our interest deductibility in Canada and the US that you will see our effective tax rate playing out to be a little lower than what you have seen historically. Historically we have been in the 8 to 14, 15% effective tax range. You will certainly see us inside of that.

That's terrific, guys. Thank you.

Thanks, David.

Thank you. The next question is from Alan Laws of Banc of America. Please go ahead.

Good afternoon. I have just a few quick ones here. First one on the contracted rigs, what are the margin levels on those?

Thanks, Alan. I will just turn that back to Doug for a second, we have given limited guidance on that in the past.

We don't put specific guidance out on there. We do contract our rigs to get pay out terms within the anywhere from typically a three to five year time period. Again the capital cost of a rig and the time period of typically a thousand days, they're healthy margins. I think you have seen those margin levels as we went through the peak, mid cycle of 2008 where you are talking EBITDA margins, healthy margins in that 9 to 11, to $12,000 range and potentially higher depending on the size of the rig and capital investment that went into it.

That's a good answer. Then the rigs that are working in the spot market now, what percentage of that would you be getting, for your value? Because it is pretty clear that's what you are delivering.

The spot market, we touched on it briefly in our prepared comments, but in Canada, notably, you look at our first quarter activity in Canada, where we had 7,482 utilization days, 2034 of those were with our contracted rigs, in other words 74% of our days tied in with what some people refer to as spot. We don't view it that way. We view it as rigs that potentially have been working with customers for years. But that gives you an idea of the split in Canada and the United States. Our split there was, as I mentioned earlier, the inverse, the contract position was 74%. But given the steep decline in the US, we had 26% on well to well style contracts.

And the result is our blended EBITDA margins are staying quite firm.

They're good. I just wonder, is that a good bogey going forward, then, to use? Adjusted for some pricing pressure but not extreme?

Sorry, Doug go ahead.

Obviously as contracts roll off, not in a position to renew. So I think you will find we get a higher weighting of noncontracted and more of a spot market influence. But clearly we, that's the typical situation. Having this kind of visibility in portfolio is the exception.

Okay. That's good. Thanks. Appreciate that. The other question was we saw on the release that you changed your depreciation schedule to unit production from straight line for the US. I know that's the standard practice in Canada due to seasonality, just wonder if you can put color on that and what precipitated the change.

Clearly there was a situation where as we went through accounting and acquiring Grey Wolf, that we adjusted Grey Wolf's depreciation policy to match Precision's. So clearly, that was a straightforward exercise for us. We have gone through, analyzed the rigs and allocated the purchase price, and applied our depreciation policy.

Okay. Excellent. So, let's see, one more I think here. On the going forward on the new builds that you have out there, under construction, is there any risk at all to cancellations here?

Alan, those new builds are all for large, large cap size customers and we have been investigating that question pretty much every day because certainly the concerns we have are like ones expressed in the call. To sit here and say that there is zero risk, probably can't do that, but what I could tell you is the risk is truly very minimal. And I will tell you those are still booked at the mid 2008 day rates, and we are going through customers very carefully. We are trying to make sure we can balance the value we provide. But we expect those contracts will stay tight and we will do a good job for our customers.

Great. Sounds good. Lastly I would like to say we like the expanded disclosure in the segments, wish some of your Canadian peers would take notice. Thanks again.

I appreciate the comment. We recognize that last quarter with the lack of questions we made it tough for you guys, appreciate your patience last quarter.

Sounds good. Thanks, guys.

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

Thanks, guys, just one follow up on Alan's question, on the new builds do you see much of a risk of displacing existing rigs working with those clients?

Doug made some reference earlier to swapping a few days around. It is fair to say that a couple of the new builds have already swapped out a few days with rigs that might have been on day work or some short term contracts in the US. They might have closed out a contract that had a month left and put those days on one of the new builds, but Roger, it wouldn't be particularly material to the, our views of business going forward.

Thanks, guys.

Thank you. The next question is from Teresa Fox of Stone Harbor. Please go ahead.

Thank you. There's a couple of moving parts in your capital structure, would you mind going over pro forma,the AIMCO investment. I believe your term A should be about $382 million, and $0 on the revolver; is that correct?

Yes. This is David Wehlmann. If you look at our press release that went out Monday, it has a very good table in it that shows our debt balances and the term A is 381.8 pro forma for the transactions with AIMCO and the rights offering and revolver would be paid off at that time.

Okay. And then in this today's press release you indicated a $13 million term A amortization. So that would bring down the 382 down another $13 million; is that correct?

That amortization was reflected in the March 31st balance.

Okay.

Remember, that represents the quarterly payment that was made right at the end of March.

And you made a comment on your availability on the revolver but I missed it. Could you repeat that, please?

Yes, the comment there is that once we fully apply our surplus cash in the quarter we will within reason have complete and full access and a very small draw on that revolver. So very good liquidity going forward.

And your -- the $5 million contract cancellation that you listed on your press release, could you give us some granularity? How long was the life of that contract and what kind of rig was canceled?

So it wasn't actually contract cancellations, it was a prepayment to avoid continue monthly payments. Yes. So, just to distinguish between canceling and not fulfilling obligations, versus canceling and fulfilling obligations.

About a year and a half.

Probably a year and a half left on that particular contract because they paid it up front.

Okay. Thanks very much.

It was not on a new rig contract, just a term contract of an existing rig.

Got you. That's what I was trying to get at.

Thank you, Theresa.

Thank you. The next question is from Brian Purdy of National Bank Financial. Please go ahead.

Hey, guys. I wanted to ask about the, the rigs that you have that are contracted but idled, what is it going to take to either bring those rigs back on the market or have the customers pay them out? Is it going to be credit availability or natural gas pricing or is it some sort of more certain in the outlook, can you give us color around that.

Thanks. We sure can. The answer to your question is yes. And I'm sorry. Brian, sorry about that. I apologize.

Brian, the answer is yes. The first of all, better natural gas prices a couple of the things I think are in the Bakken oil play in North Dakota. So those will take better probably better take away capacity on that side. Certainly a couple of those customers will start drilling as they get better access to debt. But frankly, generally speaking, those customers are not encouraging us to remarket the rigs.

It sounds like maybe with these oil rigs some specific factors to do at take away capacity. Do you see these kind of rigs as being the next ones that would start up after a rig bottom or the next ones that might be laid down if things go deeper?

Certainly these will be the first ones to start up because they're the ones the customers already have expense on. My personal view right now just around where things turn around first, I have a sense that there is an awful lot of capacity in place idled right now, and it includes drilling rigs, it includes people, in includes supply chain, it includes infrastructure, in the Barnett shale. It is a well known area, low risk area. As we see prices respond, where there is infrastructure, where there is assets, where there are rigs that can drill the resource, it will come on first, and so that's one area prices firm up and firm up back into the something that starts with the high 4 or 5. And our customers get some confidence that the long strip looks good. We will see those rigs come back to work.

Okay. And I was going ask another question along those lines maybe you have partially answered already. If we see the bottom in the coming quarter or maybe the next few quarters, when you start to see rigs come back and you mentioned the Barnett, but are you expecting those to be in sort of unconventional plays either gas or Bakken oil before you would see them say in conventional plays like a mid continent or shale gas area.

Our customers have a number of things to look at. They look at price, they look at cost, but they also look at risks and just how quickly you can get things going and how quickly you can drill and get products to market. And my view is that it is really tough to generalize that matrix and certainly each customer looks at things differently. We will see response on a customer by customer basis in different areas. Clearly, the short term pay off of the shale gas has well has high early volume production, is very attractive when you are very worried about long term gas pricing. However, if you have a long term view, and you can see long term pricing, conventional wells are very inexpensive to drill. The payout may take a little longer, but the capital cost is less. So that's the kind of balance our customers will have to work through. However, talking about calling the bottom, talking about calling a turnaround, is when we see gas prices leading out and coming up, I will feel better about that.

Okay. Just a couple, I want to ask a couple of questions on the cost side, you mentioned here you talked about the 14% reduction in work force, but also here that further measures are being taken. Can you give us any guidance on what those measures are and size wise, are they similar to what you have taken already, or somewhat smaller.

Brian, things like combining facilities and getting rid of leases or selling small pieces of property, we are doing those things. I say that quite broadly and generally. In the process, people lose their jobs, it is a tough thing to talk about. We are not making a big deal about what we are closing and moving around. Not providing specific counts or guidance on head counts or numbers or things like that. Very sensitive topics inside a very tough industry right now.

You mentioned the 14% reduction so far. Would you expect further reductions would be smaller than that or do you think even larger?

If we are sitting here a year from now and still looking at activity levels like we are today, yes further reduction is likely. However, my view is that probably we are not looking at the situation as desperate a year from now as we are today.

Okay. So when you say further measures here in your press release, you are not looking at something that is imminent, but more longer term balancing of the business against the activity.

Actually, in the press release, the further measures was not referring to further things down the road, it was referring to the further things we're doing inside the business like consolidating facilities and I will comment that we are pushing vendors on pricing and having some success. But that's like my customers telling me they're pushing us for price. I don't like to make a big deal out of that either. Frankly, our vendors are working quite well with us right now. We are seeing vendors try to work with us now and find ways to save costs. And I'm pleased with that, and I know it is tough on them and I appreciate the efforts they're giving us.

And just further to the cost side I know we have seen some crew rate reductions in Canada put out by the CODC. I was wondering if you can comment on those, whether they would just be pass through to customers if not more so on the margin side. And then, do you see any crew rate reductions coming in the US and any sort of guidance on size of those?

The crew rate reductions in Canada were parallel to the US by us. It is a little different mechanism in the US but we have done the same steps in the US. And we have taken other steps in the US to reduce some of our costs around crews on rigs in the US also. But we work with the customers, some of that flows through to our clients, some of it helps us on margin a little bit. We are trying to find ways to help reduce the cost of drilling wells for our customers. That's an important part of it. It is really tough on the workers right now. These guys are seeing their salaries cut, their working hours cut, and the number of shifts they get cut. We are trying to spread the work out to more people but it is tough on the workers and I feel for what they're going through.

When you guys have to lay down a rig, is there a mixing and matching of crews to keep the more experienced people or is more you sort of lose a crew you lose everyone on that crew.

Brian, one of the things that Precision is very proud of is our retention rate of our key personnel like our rig managers, drillers, our guys are really good at stepping out of the rigs and moving out to the rigs and taking lower positions on the rigs and it really helps balance out their income and it helps us retain the senior leadership on the rig.

Okay. Great. I think that's it for me. Thanks very much.

Great. Thank you.

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

Hey, guys.

Hey, Jeff.

Kevin, the comments you made earlier about extending the vertically integrated business model and supply chain into the US, and potentially having an impact on Q4, care to give us some guidance as to how much you can realize on that.

Our view is that we have a pretty good sense of that business in Canada. We know how we measure up against our peers in Canada. And it is our view that we think we can achieve the same kind of leverage across the rigs in the US. I will stop short of giving you a hard percentage number or a hard savings number because I'm going to be held accountable to it three quarters from now, but as we move through this market right now, it is a material number for us internally, and it does give us some leverage on our operating costs, on our maintenance, even on our operating capital, as we do some of that upgrade work internally, and reduce the cost of upgrading rigs.

So for example, we have one customer right now here in Canada that's taking one of our rigs which is not on contract, and they're paying us to upgrade the rig and include some additional pipe handling on the rig. So we have actually signed into a contract to fund that improvement of the rig, even though the rig itself is not a long term contract. Fortunately, because our costs are lower internally, it is less costs for our customer, less cost for us, and allows us to move forward very efficiency. And we think we can do similar upgrades in the US and achieve the same results as our customers in the US, and the piece that doesn't really come out in the numbers easily is the way we control downtime, because we control our supply chain, because we control our maintenance, and our maintenance services, we run some very impressive down times to our rigs, with impressive meaning very minimal levels of mechanical down time, and frankly mechanical down time is a point in time for the rig when full costs are running but no revenue is running.

Let me ask it a different way. Do you have a sense as to how much the delta from a margin perspective is between the US and Canadian operations, and how quickly you can close the gap there in Q4?

Yes, we have a complete sense of the gap, and we think that Q4 will go a long ways to closing the gap, but it will take well into 2010 to close the gap.

Okay. On the rig side, it looks like you moved one rig on the US side out of marketed. Is that something that we should expect to continue?

Maybe that's just a reconciliation error either on our part or the numbers. But no, no rigs were taken off the market. In fact, a couple of comments on that. The entire rig fleet right now which is about 380 rigs I believe, the entire rig fleet is operated somewhere, some place some time in the last two years, other than two rigs. So, of the current rig fleet, all but two have operated somewhere productively, profitably, and we don't expect or anticipate any retirements during the course of this year.

Okay. Doug, SG&A wise, along the same vein as Andrew's question, can you can you give us some guidance in an absolute term run rate or a percentage of revenue basis for SG&A on '09?

Jeff, on the SG&A, we in the past, as we have gone through pretty good cycle, we have been in the 5 to 6 range historically as a percentage of revenue. Going forward, you have to bear in mind we do have very good balance in the US operations, so G&A in the Canadian dollar, in terms will be subjected to an exchange rate and and we will continue to economize, but I expect it to creep higher as our revenue base comes off, and we'll continue to do things to become more efficient. But you can expect a little creep upwards.

But assuming an $0.80 dollar, something at the high end of the 5 to 6 range is still reasonable?

Definitely, yes.

The 100 rigs that you have disclosed as having under contract for Q2, what's the break out US versus Canada in that number?

Jeff, this is David Wehlmann. It is about two-thirds US, one-third Canada.

And what's the same ratio for the rest of '09 or should that increase modestly in the US portion?

No, as new rigs come on, they're factored into those numbers, but some of the legacy Grey Wolf contracts, which were not for new builds, will roll off near the end of the year. So we go next year I believe we were pretty close between the two, like 29 and 28 moving into next year, 29 in Canada and 28 in the US.

Okay. The rollover on the Mexican side, is that in 2010?

Yes, it is.

Okay. Contracts, have you had any other rigs go idle other than 17 thus far in Q2 or have you had any additional buy outs to the one that has happened in Q2.

No, we have not. I think at this point there might be one other conversation going on from one other rig, but generally speaking, no. Specifically speaking we've had no other changes.

Okay. And the operating, the paid operating day metric that you have given for Canada and the US, does that include any days that would be associated with idle rigs?

Those day rates that are in our news release this morning do include the idle but contracted as well as the run rig lump sum.

Okay. But the 7,589 operating days doesn't have anything to do with the idle rigs; correct.

That's correct.

Okay. And lastly, Kevin, your comment in terms of pushing vendors, can you give us a sense as to what concessions you have seen? Ideally by type, but also by magnitude and what you expect you can see going forward in 2009?

Yes. Jeff. It is helpful to us but probably doesn't materially move the numbers from a modeling standpoint. And I really caution that statement by our vendors don't have an awful lot of slack in the supply chain, and they're working as heavy as they can right now, so it's not like there's a couple of thousands a day to save on vendors. For that matter a couple of hundred dollars a day is a tough savings on vendors and real tough for those guys to survive. But what I will tell you is it is a cooperative effort to try to lower costs, but it's not particularly material.

And as you know, more importantly, the expectation that this supply chain can be squeezed down tighter, which seems to pervade the industry is an unreasonable expectations. These companies are running tight right now. We are lean, our suppliers are lean. We know how to operate through tough business climates, but there is not a lot of leverage on the vendor chain to create a lot of cost savings. What and what we are doing right now is trying to do that through efficiencies rather than the backs of our employees through salary cuts.

Okay. Thanks a lot.

Jeff just to follow up on the contracts in the US and Canada for 2009, we expect to have 94 rigs working under term for the whole year with 56 in the US, and 36 in Canada and two in Mexico.

Okay.

I was looking for the ratio specifically near term but I think you have given it to me. Thanks, David.

Thank you. The next question is from Todd Garman of Peters & Company. Please go ahead.

Good afternoon. What's your sense of the type of assets that are going to be required from a drilling and service perspective when ever activity levels actually begin to improve? How do you see that mix changing if at all?

Todd, great question, thank you. Certainly, any of the emerging shale plays, particularly in Horn River, Marcellus and Haynesville, will probably require the most advanced assets in the field. Events could be a combination of drilling capability, drilling depth, drilling controls, and mobility so particularly in Marcellus in the Northeastern US, mobility is a very real challenge with very narrow roads, light bridges, things like that. So having rigs that are high capability rigs that can break down and move in very efficient loads will be important. Frankly that type of rig doesn't truly exist other than maybe in one of our super singles right now. So it will be interesting as those particular areas emerge and begin to develop. That's why my comments earlier about the infrastructure lagging on some of the emerging sectors.

It takes several months, nine to ten months to build a rig from scratch. If you want more rigs for Marcellus or Horn River or Haynesville, there will be lag time. So, when you see response, you will see response in places where there is excess assets that can drill right now like conventional oil. Conventional oil is relatively, or gas, conventional gas is very inexpensive to drill, relative to some of these complex horizontal shale wells, it just that the lower floor rates mean longer pay offs. If our customers see long term stability in gas price, bringing on a conventional gas well and a conventional rig to drill that is an easy decision. And going back to a place like the Barnett shale, where there's assets, rigs, very easy to manage risks, we see coming back there also. So, fairly a broad-based improvement once prices firm up and long term visibility and pricing looks better.

Thank you. And then the just a follow on to that, what does the resource play well, what does that require for the completion business? And how do you look at that?

Our roll of the completion side is really just the service rig going in and completing the well at the end of the day. So we don't have a lot of visibility on the downhole completion techniques or on the pressure pumping side of the business.

Okay. Thank you.

Thanks, Todd.

Thank you. The next question is from Dan Healing of the Calgary Herald. Please go ahead.

Good day. Just a quick question on the layoffs front. Can you tell us how many there are and where they are?

Yes, David. Two issues there. First of all, out in field with rigs, when our rigs get laid down, all of the rig crew has to go home, and it is real tough. So certainly field, the field has taken this one on the chin heavily, that's not just Precision, it's right across the sector. A lot of young guys out there that relied on us and our competitors for their jobs are at home right now trying to figure out how to pay for their pickup trucks. And downtown Calgary here, we have same thing going on as we did some lay offs earlier this year. I really don't want to put those numbers out there frankly.

We publish percentages earlier and I think I will just hit on those. I appreciate you'd like to get hard numbers there, but.

Can you tell me the other side of it, how many employees do you have today?

I don't have the count at my fingertips but if you give me a call back I will see what I can do.

A question about portability of rigs, do you see moving any rigs from Canada, which seems to be doing less business than the United States to other markets?

Dan, that's a great question. We certainly moved quite a few rigs out in 2007 as we were organically growing in the US and even into early 2008, and as we mentioned earlier, we think northern Mexico will be a good place for some of our shallower high performance rigs. I think the potential to move some more rigs out of Canada certainly exists. And it would certainly appear that there are probably too many rigs in Canada right now. Now, for the US markets, unlikely that many of these rigs end up in the US because most of the needs down there will be deeper higher performance rigs.

You mentioned other alternatives to the AIMCO financing, can you tell me what sorts of alternatives there were?

We were working on a number of very well developed strategies on that front. In virtually all cases we were working with potential investors, there are confidentiality agreements in place.

Not even to say what sort of alternatives there were?

You know I really can't do that. It would violate the agreements we have in place.

Okay. Thanks very much.

Thank you, Dan.

Thank you. The next question is from Carrie Tait of the National Post.

Thanks for taking my question. I am just wondering if you can elaborate a little bit more on the impact that the drilling credits had on your business. I know you touched on this a little bit in the analysts Q and A.

A little more impact on the drilling credits, Gene, do you have anymore you can add to the impact of the drilling credit?

You know it has been helpful for a couple of small customers, we picked up a couple of rigs early in the spring in April. Of course now with spring break up that's all lost in the noise, and nothing is emerging yet for the summertime that's particularly impactful. I think a lot of the small companies still have serious challenges on the credit front. I don't mean solvency issues just drilling from debt is tough right now. It will be a while before we can get a sense of what the drilling credits will do for the sector.

Did it have a material effect at all for Precision?

A couple of rigs for a few weeks in the first part of this quarter, but nothing that shows in the financials specifically.

Is, do you think then the Government needs to do more to achieve their desired effect of getting the industry juiced up again?

Yes, I think that the Government of Alberta has had a long history of working well with the industry. And certainly, the last couple of years it has been more stressful than it was before then. They're working hard to bring that together right now and I know this Government is working hard with our customers to try to understand the cost structure of our customers and trying to get the right framework in place. But it is really complicated, Carrie. And we are not discussions don't get involved in those. The solution to this industry right now is not government-based. The solution is commodity-price based.

I am wondering if you can touch a little bit on the criticism that has been levied against the financing package, that it was a bailout and there was -- it was almost framed as unfair to your competitors. How do you respond to that.

Well, first of all when a competitor tells me that I have been treated unfairly it sounds a bit like competitive envy, and it happens in front of our customers all the time. This Company, Precision Drilling works hard with our customers, and our investors, banks and we believe we're an excellent organization both operationally and financially. No question we misread the credit markets last fall and we worked hard to get a debt structure in place that our investors can have confidence in. Frankly, this is a very large investment for AIMCO, very large investment they take very seriously. The amount of scrutiny that AIMCO put on Precision is like every other large private investor puts on Precision and frankly I think we meet the investors scrutiny quite well.

How about the reaction from the liberals and the AMDP how do you answer those challenges?

It really doesn't impact us. It is a commercial deal, and I think the politics will sort themselves out.

Were there other types of pension funds involved when you were looking at different alternatives like CPT or Elmer's or the case?

Carrie, we as we get into negotiations with the investor if it goes beyond the interest, are you interested phase, then there's a confidentiality agreement that binds us from speaking about the deal for a long period of time even postnegotiations, we are not able to comment on any other arrangements we may or may not have had going.

That's all my questions. Thanks so much.

Thanks, Carrie.

Thank you. The next question is from [George Gift], private investor. Please go ahead.

Hello, gentlemen. I have a quick question about operations and then a couple of quick questions about the financing. First of all, as I recall that when the Company divested international operations or operations outside of North America several years ago, we were bound by some covenants that we weren't allowed to compete outside of North America for a period of time. And these restrictions when do they expire, and will the Company be able to take advantage of that in moving some of their rigs outside of North America to international markets?

As a matter of fact, great questions, those covenants expired August 31st, 2008, and they were specifically in two areas, one was competing outside of Canada and the United States. The other area was on services anywhere in the world on drilling or wire line. We have done two things certainly moving on the Grey Wolf front was something that because Grey Wolf had international operations, was something that we did, and secondly we have checked out the directional drilling business inside our drilling operations inside Canada and United States. As we begin to look at other places and look forward down the road, certainly we are not encumbered by any noncompete issues from prior deals.

Okay. As far as the financing is concerned, the 10% notes, will the Company have any recourse to redeem those notes on both before the full term of the notes or are they just, there's no provision to redeem or refinance the notes? What was it eight year notes, 10% note.

Yes, they're eight years and they're principal payments in years six, seven and eight, 1/3 of the outstanding principle balance each year.

So they're amortized to last three years?

That's correct.

I see. Okay. All right. And the finally, I would like to know if the rights, the rights, are they going to be transferable, the rights, will they be a market for them that the shareholder also have the option to share them if they don't want to use the rights to get additional stock?

Yes, sir, they will be tradable.

Okay. All right. Well, thank you very much and I think it is very commendable that you took the time to face the music and it is a very difficult market environment. And I look forward to the Company's recovery.

Thank you.

Thank you, George. We share your sentiments.

Yes, sir.

Thank you. This concludes the question-and-answer session. I would now like to turn the meeting back to Mr. Wehlmann.

I'd just like to thank everyone who participated on the call today. We appreciate your support of Precision and we ask that you have a great day. Thank you.

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