Precision Drilling Corp (PDS) 2009 Q2 法說會逐字稿

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

Thank you. Good afternoon, everyone. I would also like to welcome you to Precision Drilling Trust's second quarter 2009 conference call and Webcast. With me here today are Kevin Neveu our Chief Executive Officer and Doug Strong our Chief Financial Officer. Through our news release earlier today Precision Drilling Trust reported on the second quarter 2009 results.

Please note that the financial figures are in Canadian dollars unless otherwise indicated. Some of our comments today will refer to 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 on the trust's business, operations and financial results. 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 afternoon with a review of our strength and balance sheet and a recap of our financing activities during the quarter. I will then follow with a quick recap of the quarter results, and then Kevin Neveu will provide an operations update and our outlook. After that, we will open the call up for questions. Doug, over to you.

Thank you, David. Ladies and gentlemen, to begin, we draw your attention to Precision's balance sheet for an overview of our financial position. During the second quarter, we successfully closed a sequence of financing initiatives that we announced during April as a complete package. These transactions have significantly lowered Precision's long-term debt, reinforced our liquidity and lowered annualized financing costs going forward. Given the difficult market conditions for the North American Oil Field Services sector, Precision's new capital structure along with customer term contract visibility puts us in a solid position to operate through the trough and consider new opportunities as the sector rebounds.

Specifically, as reported this morning, Precision raised C$380 million through placement of a combination of C$205 million in new equity and C$175 million through an unsecured note. The proceeds were used to retire the entire unsecured bridge loan balance outstanding and helped fund the repayment of amounts drawn under the revolver. In conjunction with these transactions, the secured facility was fully syndicated resulting in pricing certainty. After syndication, Precision entered into an interest rate swap and cap transaction to effectively fix the interest rate at current levels for about 80% of term loan borrowings within the secured facility over the remaining term and scheduled repayments. Through the first six months of the year, Precision has repaid C$472 million in long-term debt and as that June 30, 2009 reported long-term debt of C$1.06 billion. Before reduction for the current year portion and the offset of deferred debt issue cost and the cash balance of $180 million.

Our cash balance in combination with our US $260 million secured facility revolver which is currently undrawn except for US $28 million in letters of credit provides attractive liquidity for Precision. As of June 30, 2009, trade receivables were C$213 million, a reduction of C$388 million 65% from December 31, 2008. The reduction is indicative of lower sequential business activity in Canada and the United States in combination with the usual seasonal disruption in Canada for spring breakup. As we move into the third quarter of 2009, we expect a pickup in Canadian operating activity although significantly less than Q3 2008, and the two month flattening trend in Precision's United States drilling rig activity as Kevin will speak to in a moment that in combination on an overall basis is expected to moderately increase working capital and cash requirements in the quarter.

For the 2009 second quarter, capital expenditures were $90 million with C$86 million of that amount for expansion capital. Our capital expenditure estimate for 2009 remains at C$210 million is comprised of C$40 million for upgrade capital and C$170 million for expansion.

During the first half of 2009, 14 new drilling rigs, 7 for Canada and 7 in the United States, were completed and two are scheduled for completion in the third quarter for deployment to the United States. This completes the delivery of all rigs in Precision's 2008 new super series rig build program.

As announced during the first quarter of 2009, cash distributions to unit holders are suspended indefinitely, given industry operating fundamentals and the trust objective to reduce debt leverage. We remain focused on debt reduction, liquidity, and the business platform that drives toward a return to investment grade status in the credit markets.

David, back to you for an overview of the key to earnings.

Thanks, Doug. Precision Drilling Trust reported net earnings of C$57 million or C$0.22 per diluted unit for the second quarter of 2009, compared with C$22 million or C$0.16 per diluted unit for the second quarter of last year. This quarter's results include a foreign exchange gain of C$74 million which equates to C$0.20 per diluted unit. Absent that gain, Precision's quarter was generally in line with consensus expectations.

EBITDA for the second quarter was C$59 million, an increase of 67% over the prior year quarter. The growth in EBITDA is related to Precision's organic and acquisition expansion in the United States over the past two years, and is also supported by a strong portfolio of term contracts. EBITDA as a percentage of revenue was 28% in the second quarter of 2009, compared to 26% for the same quarter last year, and 38% for the first quarter of 2009. Revenue in the second quarter of 2009 was C$210 million, an increase of C$71 million or 51% compared to the second quarter of 2008. Again, this increase was attributable to growth in the United States and our term contracts.

If you look at this quarter's earnings before the foreign exchange gain, it was lower than it was a year ago as our revenue growth, EBITDA growth, and the larger asset base were offset by low equipment utilization, lower day rates, and our debt service cost. Our financing cost for the current quarter are detailed in Footnote 8 to our financial statements which are in our press release and total C$45 million. They include a one time charge of C$10 million related to writing off of the deferred financing cost associated with the closing of the unsecured facility as Doug mentioned we paid off the bridge loan.

Precision's term contract position remains one of the strongest in the industry. It is expected that Precision will average 92 rigs working under term contract for the full year of 2009, as three contracts have been prepaid through lump sum payments in the first half of the year. With the additional term contracts we recently entered into that Kevin will provide more detail on, our 2010 total is expected to rise to 59 rigs. And introducing our 2011 averages, we expect 34 rigs to be working under term contract. The split of the term contracts between the US and Canada as well as details on our operating segments and utilization days are detailed in our press release.

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

Thank you, David. There's no doubt that we are pleased to have our financing activities behind us. Personally, it's nice to get back to running this business and I find interacting with our employees and our customer far more gratifying than interacting with the debt side bankers. That said, as Doug reviewed the balance sheet and our current debt and cash positions, I think you can all see that Precision has sufficient liquidity to ride out a prolonged industry downturn. In a few moments I'll cover the markets in more detail but clearly today we do not see any near-term new build opportunities and our primary use of cash will be to reduce net debt, reinforce our liquidity and continue to drive towards investment grade status.

With that said, it is highly likely that sometime in the next 12 to 18 months we may have further new build opportunities, particularly for emerging shale gas opportunities in the Marcellus region, Horn River, possibly the Utica shale or potentially some of the international opportunities we're currently exploring. The current drilling and completion technology has certainly lowered the gas price threshold for many of these emerging areas and I expect our customers will continue to exploit and expand these resource plays. Precision's policy for new build contracts has not changed. Should we consider a customer request for a new build rig? We will ensure that the contract provides for full cash payout of the assets.

Turning for a moment to current business, as we said in our press release, the Canadian spring breakup was dismal. Industry activity was off almost 50% from 2008 which Industry activity was off almost 50% from 2008 which you may recall we categorized as a terrible spring last year. Fortunately for Precision, we entered Q2 2009 extremely well positioned both in Alberta heavy oil and Northeastern British Columbia shale gas plays. These areas are able to operate to a large degree through the spring thaw and as such our year-over-year activity held up better than industry falling over all 26%. It may sound strange that I'm highlighting a 26% drop as something which I view as encouraging but it's important because it really demonstrates how well positioned we are in these strategic regions and how this will prove important going forward for Precision.

In Canada today, we have 53 rigs drilling. I'll point out that that is less than half the level of a year ago. Also important to note that 30 of those rigs are well to well contracts. Suffice to say, we consider all of these rigs to be profitable operations consistent with our high performance, high value strategy. Our customers and our competitors would enjoy hearing more specific guidance from Precision on the spot market day rates these rigs are working under. Not today.

Looking forward for the balance of 2009, unless commodity prices significantly improve, the current Canadian industry projections are reasonable. The CAODC recently projected a total of 8,787 wells for total of 78,455 drilling days for 2009. As we have said many times, it's not Precision's strategy to sacrifice margins simply to sustain utilization levels. We will remain focused on providing high performance, high value drilling and well services and being appropriately paid. However, in this highly competitive market, those service providers with the lowest internal cost structure are at a significant advantage. We believe that Precision's scale, our vertical integration and our lower cost structure provides us the flexibility to participate in the most competitive situations and still achieve profitable results. While we will not be leading day rates down, we will expect to sustain our share of the business and do so profitably.

Now, our well servicing business in Canada is facing similar challenges, but with increased pricing pressure. As most of you will understand the well service business in Canada does not have a significant term contract base to support pricing. The full sector pricing is completely activity-sensitive and pricing power often lies with the smaller independent regional players. This dynamic works very well in up cycles. Rig rates respond very quickly to activity increases with strong margin level, margin leverage achieved across the sector but when faced with prolonged down cycles as we have been in well servicing for the past five quarters and now considering the bread and butter, well completions activity segment is off 40% from last year. This is a very challenging business. As with our drilling business, size does matter.

Our scale, vertical integration importantly the cost reduction activities our people have implemented over the past couple of quarters all help to provide a cash buffer. To say that I'm pleased with EBITDA of $3 million of our second quarter would be an over statement. I am very pleased with the efforts and progress our guys have made reducing cost while ensuring we continue to provide high value, high performance services to our customers.

Looking forward, our Canadian completion and production services business will rebound seasonally but to much lower levels then 2008. However, this will be our first business unit to respond positively with improved rates, margins and utilization when commodity prices rebound.

Now, moving to our US operations, as we discussed in our press release, we believe US land drilling activity bottomed out during the second quarter of 2009. Now, we believe this will be a rocky bottom and significant activity swings are not to be unexpected. However, we believe that we will see land -- US land rig count oscillate in the current range during this trough and this trough will continue right through the third quarter. The eventual rebound will only be driven by strengthening natural gas prices. When our customers have confidence in sustained gas prices over C$5, I think the activity will respond nicely.

Today in the United States, we currently have 52 rigs operating. It's important to note that only 41 of those are on term contracts. We have an additional 20 rigs idle but contracted earning margins and of the 52 rigs operating, 10 are those in well to well contracts. There's also a lot of talk about rig rates plummeting down to driller cost or zero margin. My comments regarding Precision's size, scale, cost leverage and vertical integration are fully applicable to our US operations. I believe we have the ability to compete profitably for the most competitive drilling opportunities in the US region. Today, all ten of our well to well rigs are running at positive profit levels and we expect that to remain the case for the balance of this trough. As we pick up additional well to well contracts over the coming weeks, certainly expect that to say consistent.

Now, I'd like to highlight a couple of success in the United States. First off, one of our 1200-horsepower advanced technology AC super singles. Now remember, that this rig would typically be specked for 12 to 14,000 feet. It is currently employed in the Bakken oil region in North Dakota and it's drilling 20,500-foot wells. Remarkable for a singles rig but even more remarkable it's performing 20% ahead of the operator's drilling curve and setting records for these type of wells. These are phenomenal results for a singles rig. It's important to note that Precision's super singles rig racks pipe horizontally, not vertically. It's not limited to any given rocky capacity so it is able to compete with rigs that typically would be 1500 to 2,000-horsepower to drill these long reach horizontal complex wells. Obviously, this puts us in a very strong competitive position.

Moving over to the Marcellus, clearly we are very pleased with the six additional rigs we contracted for 2009 and 2010 during the second quarter. And rest assured, these day rates are not at cost on these rigs. I'll note that our sales team has worked very closely with the major customer who operates several of our new build rigs and developed several of these contracts for the Marcellus. I'm very pleased to have this rapidly expanding footprint in the Northeast and we expect our Pennsylvania operation center to be open later this quarter, cementing our presence in this very important growing gas shale play. Now, the improved oil prices of recent weeks have certainly caused some customer reaction, both in the Permian Basin and the Bakken region in North Dakota and we certainly expect a few more rigs to come to work to pursue these opportunities if oil pricing remains over C$60. Now, day rate pricing of these rigs will remain very competitive. Precision will not be driving day rates down but expect us to compete as we see appropriate in these competitive markets.

Moving to the international market, it's fair to say we reduced our emphasis for these opportunities on the first half of this year; however, I believe what we missed in the first months is probably worth missing. Currently we have several bids outstanding for projects in strategic regions for Precision. I'm pleased with the geographic mix and how this fits our strategy but I will discuss this activity in more detail when we have something more material to report.

Stepping into the integration of Grey Wolf and Precision. This is proceeding ahead of schedule and we are very pleased. As I have said before, integrating competitive businesses is always easy and sharply affecting markets, be that up or down. Clearly, these market conditions have facilitated organizational change and integration at a faster pace than we might have planed 6 or 8 months ago. We have successfully limited our enterprise-wide financial and operation software system in June and we closed our second quarter on one business operator environment Company-wide. This was a huge and significant, notable accomplishment for our accounting, our finance and our IT teams both in Canada and the United States.

Also, I'll point you or direct you to our website and you'll notice as you click on our rig locator, it's now North American-wide rig locator. You can find details on all of our rigs across the region. As we proceed through the integration, we are capturing and implementing many Company-wide best practices and systems from both organizations, particularly in the operations and safety areas. These systems will begin to yield cost savings in the fourth quarter of this year. But importantly, our integrated supply chain operation commenced US operations in July, almost one full quarter ahead of schedule and is now providing partial supply to all of our US operations. We expect to continue this implementation through the course of the third quarter and again compliment our people for an excellent job on both sides of the border for getting that operation up and running, well ahead of our expectation.

Now an element to the combination we anticipated was the combined purchasing power our size would provide. I'm delighted that all of our vendors have been very proactive, both with respect to market conditions but more importantly to the size and scope that Precision offers a vendor. We know how tough this business is for our supply chain and we appreciate how our vendors are stepping up and helping us with pricing due to our size and market conditions.

All right. I'd like to now spend a moment on Precision's views regarding the gas storage and gas supply [Macko] for the 2009 gas injection season. There's no question that North America has too much gas supply and too little demand. This storage season will end in October at record storage levels both in Canada and the United States. Now, you may recall the last time this occurred was October 2007, only two years ago. I'll come back to that in a few moments.

It's our belief that gas production will drop and we may already be seeing the early signs of this decline although we recognize there's a lot of noise with gas supply today with the talk of shut-in wells, L&G imports and the uncompleted inventory of wells. The fact remains that gas drilling activity is off 50% in the US and each greater in Canada. We know there is always lag time between increased drilling and increased gas production. We should also appreciate there will be a similar lag between decreased drilling and decreased production. Some might suggest that this lag time is as great as one year. Certainly, Canadian gas production is already off 15% from peak production levels of just a couple of years ago. I view this as a very conservative proxy for what will happen in the lower 48 over the coming months.

Now just going back to that 2007 record storage level in October, you may also recall that by April 2008 storage levels are back at the bottom of the 5 year average. We recognize the economic conditions were completely different back in 2007. But it's surprising just how recently those peak and bottom events occurred. So we're now prepared at this point to call a turn. But I will comment when these declines become evident, it will take several years to recover production and shale drilling will not come on fast enough to be the only solution in this looming supply deficit.

Now, before I turn the call back to the moderator for questions, I just want to express both my, our Board's and our management team's sincere thanks to all of the employees of Precision Drilling for their efforts to control cost, integrate the operations, and continue to deliver high performance and high value services for our customers. On that note, I'll turn it back to Matt for questions.

Thank you. (Operator Instructions). There will be a brief pause while participants register and we thank you for your patience. The first question will be from Kevin Lo of First Energy. Please go ahead.

Good morning, guys.

Good morning, Kevin.

Can you -- I know it's almost a moot point but can you kind of talk about the covenants right now and where you stand on those?

Kevin, could you repeat that question? You were coming in rather --

Sorry. Sorry, Doug. I was just saying that I know you guys have done -- you guys have paid off a lot of debt now but can you kind of still talk about covenants and whether you're close or how close you are in any of them now.

We had three financial covenants. The leveraged covenant. We have our fixed charge coverage and our interest coverage. And the fixed charge is a level of one times and our leverage and interest coverage are three times. So I think you can look at our current debt levels, certainly look at our trailing EBITDA and, Kevin, you can anticipate the industry as well as we can. I think you can see that we've got plenty of head room with the close to half a billion dollar reduction in debt from the end 2008 that we mitigated that risk significantly.

With the amount of cash you have on the balance sheet are you tempted to buy back some of the debt that's outstanding that could be trading at a discount to their par value?

We're taking a very analytical approach to that. We're watching it carefully. Liquidity is very valuable and we intend to hang on to it and use it constructively in the business but we are taking a net debt approach and if required, we'll certainly look hard at that.

Okay. Just some operating questions. Can you kind of talk about -- I think there's three rigs in the Marcellus that you guys have right now, is that correct? And after this build-out will you have essentially three plus six.

This is Kevin, will be built under the existing rigs transferring into the Marcellus for us and this will bring us to nine rigs which are contracted currently and we're still looking at other opportunities. We think we'll be possibly closer to 12 rigs by the end of the year.

Okay. So you think that nine could be a little bit higher by the end of the year?

Contracted rigs for the Marcellus, recognizing some of those six rigs actually come into play in 2010 but we expect that we'll have further opportunities that will be in front of us over the coming couple of quarters.

If I look at Canada right now and I think it's pretty consensus view that there's too much supply, do you foresee any sort of pricing power this winter perhaps for the deeper rigs or is it already -- is there basically a lack of pricing leverage throughout.

I think there's actually some pricing you power right now for deeper rigs. The deeper rig segment is actually running at a pretty high utilization level. We think we might have an opportunity to bring a few more rigs on. It might even include some customer funded upgrades of those rigs. Recognizing, that's a very long horizon. Our customers are not planning based on today's spot market price. They're looking at that as a three, four, five year development so it certainly gives us likelihood of longer term contracts and just generally better full cycle economics.

Even right now you're seeing -- not making gob of money but you're actually seeing some pricing power?

Use that term quite loosely. I'm not sure who's listening besides our investors right now. I would tell you I think there certainly is stronger pricing in the areas of the market that have tighter rig supplies. Not just applies to Northeastern BC, applies across the US also.

Thank you, Kevin.

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

I wanted to start with G&A and the number came in a little bit higher than we were expecting but you also noted in the press release that there were certain severance or other I guess restructuring costs. Could you quantify those for us such that we can back them out and get a better idea of what the run rate may be through the balance of the year?

Dana, it's Doug. We're not going to quantify the number. It's not a huge number. If you look at our run rate on G&A through the first half of the year, between 7 and 8%, obviously the environment has revenues moderating. And you've seen for two sequential quarters our G&A in around that $25 million mark. We expect going forward to see it moderate lower. It will be a gradual reduction as our cost reduction measures take seed. But as far as one-time items, we're not going to fixate on a number.

May I ask why not?

Pardon?

I said, may I ask why you will not quantify that? Most companies, I mean it's pretty standard to break out that one-time number.

It's not a material number that would influence your analysis.

Okay. Perfect. With respect to Q3 and Q4 margins, you guys are doing a good -- I think a really good job at breaking out margins by country and very much I think making yourselves comparative to other drillers, which is great. But can you maybe give us a sense for how you're looking at margins in the back half of this year by country? Is there any forward indicator you can give to us?

Certainly we model out our contract position and I'll restate those contracts are signed back in 2008 and 2007, so those are margins that are quite strong. You get a bit of a sense from our current day-to-day or well to well contract activity looks like right now and it's still -- it's not zero. There are rigs operating both in Canada and the US, total of about 40 rigs right now operating off contract that are on well to well contracts. My guidance has been those aren't operating at cost and frankly don't plan to give anymore guidance currently. We'll give that in arrears when we finish up the quarter.

With respect to your forward contract position, you've noted that you feel like it's one of the better ones in the industry. Can you maybe give us a sense for the prospect of renewals? You quantify what it currently is in '010 and in '011 contract position. What do you think your chances are at bumping those numbers up materially as we work through the back half of this year?

The chances of bumping those contracts up materially in the back half of this year would be zero. Those contracts are signed at 2007, 2008 day rates, substantially stronger than today. The tide's lower today. There's no question that the high quality rigs, drilling tough applications will get better day rates than a rig that might be biding into a shallow gas or conventional gas opportunity somewhere. As some of those contracts come off I do expect them to be resigned but they'll be resigned at lower day rates and the tide will come down. If we were getting $12,000 before for a high spec rig, the tide's come down but it has not come down to anything approaching cost on that type of rig.

I should have asked that question a little bit better. I'm sure you can't get the same rates, but given that part of the investment thesis around your Company is that you've invested in technology, probably more so than most and presumably that would give you an advantage in a renewal process, even if those rates can't be extended. Presumably you believe that the technology itself at least gives you the upper hand in terms of getting that renewal, even if the rates come off.

Yes, I can -- in the second quarter we actually didn't have any specific long-term contract renewals in the second quarter but we had a couple of new high performance rig contracts signed up and those margins were in the high single-digit range, not low single-digit, so we're talking 5, 6, 7, not 1, 2, $3,000 a day.

All right. Okay. Just one final question. You mentioned that one of your goals was getting back or getting back to investment grade status in the debt market and I wonder if you have a goal as to when you would like to achieve that by or when you think it may be possible? Any markers out there that you might put out?

I'll turn it over to Doug, but highly dependent on activity in 2010 and '11. No question about that. Doug?

That comment from us, Dana, really is a broad-based comment in that it's going to take a sector rebound. In terms of Precision Drilling's operations it will take a platform that mitigates some of the gas risk in North America and gets a track record behind us to that effect. So when that happens, I think it ties in with the inflection of gas prices and in turn for us, eventual diversification away from gas.

Great, guys. That's all I've got, thanks.

Thanks, Dana.

The next question will be from John Tasdemir from Tristone Capital.

Just have a quick question on the six rigs you've find for the Marcellus. Can you give us some color on the size and the horsepower of those rigs that are going there? And are any being transferred from Canada or is that organically US stock?

Yes, I think one of those rigs is a super single. I think there are a couple 1200-horsepower rigs in there and some of our lighter super triples are in there. Actually, it looks like we have one super single, two super singles, two super singles in that mix and then some of our one 1200-horsepower rig and a couple of other light super triples.

Are you guys kind of targeting that market right now, given we're seeing greater demand there and better economics?

Absolutely. We've been targeting the market now really for the course of this year and it might be one of our most direct strategic priorities for 2009 at the operations level.

One more question. Can you guys give us a bit of an update on your efforts to expand your directional drilling and how that's taking hold with your customers.

Great question. This is a really tough market. We're performing several jobs both in Canada and the US at any given time. Certainly behind our expectations, where we like to have been, what we're finding right now is that our customers are quite happy to keep many vendors and suppliers in place and it's clear to us our customers want to see maximum competitive tension today and when the market rebounds. So we're certainly offering excellent value. Often some of the small independents we're trying to knock off will come in and match our price. Our customers right now in the intent to keep a broad base of suppliers when the market turns will spread the work around. So operationally it's going well but from an activity level, it's behind where we would like it to be right now. Considering the marketing considering how tight it is out there, I think we're doing okay.

All right. Thanks a lot. I'll turn it over.

Great. Thank you.

Thank you. The next question will be from Jeff Mochoruk with Cormark Securities. Please go ahead.

Good afternoon, gentlemen. Just want to go back to those Marcellus, those contracts. It's for six rigs. Are those rigs coming from Canada or the US?

David, maybe you can help me with that one. I don't remember that.

They're coming from -- most of them are coming from the US. I think all of them are coming from the US.

Okay. And then --

And they are existing rigs.

Yes. Okay. They're from your existing fleet so they're not part of the new build that's coming out?

That's correct.

So if I just go back through your Q1 and Q2 press release, you state that you have 59 rigs under contract on average for 2010. And in Q1, you had 57. So I'm guessing this 59 includes the new six so I'm just wondering what happened to the other four or how that changed.

Well, those are averages that we're dealing with and that's a great question. But what it boils down to is that three of those six new rigs start this year and they're basically a one year contract and so half of them go into this year. And then when you look at this year, we've had three lump sum payouts so that's how you get back to those numbers and then the other three start first quarter, second quarter and third quarter of 2010. So they're really not in there for the full year on average so that's why it's just two instead of maybe six.

Okay. Okay.

It's really just math.

Yes. That makes sense. And then just touching a little bit on if you could give us a little more detail on the contracts that were terminated through Q1 and Q2. Are they from the same customer or are they from separate customers?

There were three terminations. Two were from the same customer and one was for a different customer. And I'll have to say that the customer that terminated two, we have several rigs still working for that customer.

And these were all in --

Two in the second quarter, one in the first quarter.

And those were all in the US market; is that correct?

That is correct.

Perfect. Thanks a lot.

Thank you, Jeff.

Thank you. The next question will be from Kevin Lo from First Energy. Please go ahead.

Sorry, guys, this is a follow-up on something. Can you kind of tell us --

You have to speak up.

Just a follow-up question. Can you guys tell us what you expect your exit 2009 rig count will be in Canada?

Exit 2009, contracted rigs will be about 30 rigs, I believe.

No, no, your fleet. Do you expect to take any out of commission or move them or -- ?

Kevin, the fleet will pretty much be the way it stands right now at 226 drilling rigs.

Okay. Great. Thanks.

Thank you.

Thank you. The next question will be from Nimal [Bloom] from [Bloom] Investment. Please go ahead, your line is now open.

Thank you. Very good job defending the day rates and good commentary on the macro. Just wanted to get a sense, Kevin, do you have when day rates normalize a little bit more, do you have a fixed percentage in your mind that you would like dedicated to long-term contract, whether it be 25 or 50%? Or does that fluctuate depending on your outlook for the market in terms of your exposure to spot day rates?

That fluctuates depending where we're at on the cycle in the market. And this cycle downturn effectively October 2008 and that was kind of our peak contract position was October. It has rolled off since October. That is the way we like it to be. Peak market condition when we expect the market to roll. Would I have liked to have a few more rigs on the contract, yes I would.

You're very excited when the non-compete was coming off August of last year. But I guess the international has proceeded a bit more slowly. Is there not increased activity in terms of Mexico, given where the oil prices are, increased opportunity, or are you just proceeding slowly because the US side has more potential?

Well, couple of things. I think US side has good potential despite the tough market but I would tell you that when we, internationally there will be some CapEx tied to the rig and it may be just the cost of moving the rigor may be a little more modifications or temperature or geographics or moving systems, things like that. Clearly for the first half of this year our primary objective was to get our debt situation and stabilized and minimize any CapEx. I'm not telling you that we've opened the tabs up and considering CapEx today but frankly we have our debt situation stabilized and we've got our cost certainty behind us now and we're out in the international marketplace right now and frankly quite aggressive.

And finally, how many -- you're talking about oil prices stabilizing and nice growth area would be the Bakken. How many rigs do you have dedicated to the Bakken right now and is that medical reportedly in North Dakota or is that the Canadian side as well.

We're on both sides of the Bakken. On the US side I think we're running four or five rigs right now in the Bakken. I think we'll see that number come up a little bit with the current prices.

Is that tied to sort of all players, big and small or is it the larger players like an EOG versus a continental resources.

We're kind of hitting both ends of the spectrum there.

Well, thanks very much.

Thank you.

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

Thanks. Hey, guys.

Good afternoon, Andrew.

I'm going to ask all the exciting questions here. So Doug, cash or cash taxability for the balance of the year, what would you guide us to think about there?

It will be -- we expect it to be very similar to what you've seen in the first half.

Now, in the first half -- that's cash taxability, right? So I'm a bit curious about this foreign exchange gain in the after tax figure there, because as the press release indicated or the financial statements indicate, you had C$74 million or so of which that resulted in a C$0.20 impact per share, right, on earnings?

Right.

So -- and that's an after tax figure. So would you have had a -- were it not for that recovery, would you have had a huge tax recovery in the second quarter?

The short answer is no.

Okay.

It wouldn't have altered the cash tax number.

No, I'm now thinking taxes.

It would have swung the feature back into a recovery if that's where you're going; that's correct.

Okay. So on a full -- so for the full balance of this year, you'll still be around the same rate you've been for the front half.

That's right.

Okay. The next question is on the -- can you describe the future of your turnkey work?

Andrew, was the question can we describe -- ?

Yes, can you give us a little bit of a narrative around the turnkey work for the balance of the year.

Okay, so the turnkey work for us is primarily a US operation and right now a lot of it's centered in Texas and a lot of it is South Texas which tends to be conventional gas which is certainly part of the market right now which is currently soft. We currently have one rig on turnkey and we have several other opportunities in the pipeline right now but nothing else we're prepared to speak to at this point.

Okay. It's been a -- it was a fairly big part of what Grey Wolf was doing. Is it going to be a fairly big part of what Precision does going forward?

Well, you know, it ranged --

Under the right circumstances, obviously.

It ranged from one to six rigs, at times a few more than that with Grey Wolf. I think what you'll see with. I think you'll see the turnkey market kind of come back as a leading indicator of a turn in the market, much like another indicator we talked about is when we start seeing customer try to sign long-term contracts and I mean contracts longer than a year at day rate prices that are right now, I think those will both be good leading indicators of a turn in the market.

Well, that's all I have. Thank you very much, guys.

Thank you, Andrew.

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

Thank you. Just a couple of quick questions. You have two more super rigs coming on in the second half of '09. Is that a third quarter or fourth quarter?

All the new rigs will be delivered during the third quarter of 2009.

Third quarter. Okay. And you mentioned your covenant package earlier. Is that on a consolidated basis including your AIMCO notes or is that on a senior level?

That's on a total debt basis, so it includes.

Okay. And your term -- under your long-term debt, I know your term B has two components to it with different LIBOR floors. Could you break that out further, the balance between those two levels?

Essentially, we have two term loans, and A and a B the B has a floor and we also put in place in the second quarter interest rate and interest rate cap that would apply to that LIBOR rate.

Okay.

Essentially, we've locked in the current interest rates terms.

You paid down some debt. I'm just curious. So you're saying that -- it doesn't matter on the interest rate.

Right.

Okay. Thank you so much.

Thank you, Teresa.

Thank you. The next question will be from Brian Purdy from National Bank Financial. Please go ahead.

Hi, guys. Doug, I just want to ask about the financing government cost. Obviously you had a fairly large portion that was non-cash in the quarter. I was wondering if you could give us a bit of guidance as to going forward on the financing cost side, what do you think the cash cost will be and what will be the non-cash.

Take a good look at note 8 to the financial statements. I think you'll find that we've got our amortization of debt issue cost and we're running approximately close to $7 million a quarter so you'll find that that rate will continue through the term of the debt. We've got approximately 4.5 years left on the term debt. So you'll see that non-cash amortization happening each quarter.

Should that largely eliminate the liability on your balance sheet then? Seems to be a bit larger than a 4.5 year term.

No, no, I think you'll find it runs outs that way.

Okay. Perfect. And just in terms of spot market dynamics, I'm just wondering either in Canada or the US, is there much of a spot market going on at the moment or is it still pretty dormant. Sounds like you have a you few rigs working in the spot market.

I think it's emerging right now. The spot market is emerging. Once it's fully kind of in place we'll have a good saddle on the pricing. There's still a huge amount of competition for the huge jobs that pop up here and there, both in Canada and the US. We're into development of the market right now. It's bifurcated. There are parts of the market right now that are getting substantially better rates than other parts of the market. If you look at the areas that are heavily over supplied, a lot of pricing pressure. Some of the other areas, Bakken or Marcellus, those day rates are looking a lot better.

Okay. And I just wanted to ask about the dynamics of you winning the contracts in the Marcellus. Obviously, this would be a very hard time to get any sort of contracts and is there just such a limited supply in that area that the customer wanted to sign up rigs or had to to get them into the area or maybe can you give us some background on that?

Yes, certainly it's actually currently spread across three customers. All three customers are mature players in the area. They understand the market well. They understand that type of drilling well. They know exactly what kind of asset that want to use in that area and the Precision assets are very well aligned in that drilling. Our experience operating on tight locations and moving rigs in really challenging geographic areas plays into the Marcellus exceedingly well.

Okay. And then finally, I just wanted to ask about operating cost trends. You mentioned some of the system work that you've been doing to try and bring cost down. I'm just wondering if you can quantify any savings you might expect on the operating cost side in terms of either crew cost or any other cost.

Couple of things. As crew costs come down, a good portion of that gets passed through the customers. Some it gets held by us. A a lot of it goes through our customers. We do believe that our supply chain will bring cost savings to the rigs and we've been public in saying that's in the order of magnitude of hundreds of dollars per day per rig so it's significant. As you look at our costs right now, there's a little bit of a misleading indicator. As the rig work gets more complex, the well gets deeper in Canada, say. Those rigs are obviously slightly more expensive to operate than small rigs. It may look like cost is going up a little but really it's just a matter of the mix, the product line mix.

And are you seeing much of any interest on the shallower side? Certainly sounds like all the interest is deep. You mentioned some of the heavy oil which I thought might be shallow. Could you give us an idea if there is any interest on the shallow side at all.

Nobody asked me at all about the revisions to the royalty plan either. I don't mean that humorously. Frankly the shallow gas side right now is fairly slow and my answer is going to be I don't think it's a royalties issue entirely. I think it's still a cost issue. It's a spread on the gas price and a. Doesn't help that business either.

And since you led me into it, have you seen any impact from your customers due to the new royalty programs?

I think certainly there are some of our smaller customers right now that are finding a way to take advantage of that but it's not going to be a material difference for Precision's numbers.

The next question will be Roy Ma from Blackmont Capital. Please go ahead.

Hi, good afternoon.

Good afternoon, Roy.

Hi. So just first question, is it fair to say that if we back out the lump sum early termination payment and also couple, had the idled rigs had been working instead of receiving stand-by revenue, I calibrate that your EBITDAR margin would have been somewhere in the low 20% range. Can you elaborate? Is that accurate?

I guess, Roy, if you go to normalize the revenue line that way, really you could also normalize some of the cost line, which bad debt expense, the $10 million David mentioned on the amortization of finance costs and as we note later on in our disclosure this morning, there's a little bit higher state commodity tax as well. So take all those factors into consideration, I think you'll find the margins are not in the 20s.

Okay. Well, I was looking at EBITDA. So I wouldn't have considered financing and so forth. Okay. Just moving on internationally, your competitors have made some in roads, sick particularly to Mexico. What is your view as far as that market. Seems like one of the few places in the world where we can expect to see rig count increasing certainly in '09. Certainly the prospect of 2010 looks pretty strong. What's your views given that you're currently in that market?

Roy, the Mexican market is certainly very interesting to Precision. We have two rigs working in Mexico. Working under one of the IPM contracts for one of the major service companies. But the IPM business right now is going through a transition and certainly, certain new -- not new players but certain players have brought themselves into that markets and they're now relying on the oil service sector to support their lower pricing and that's not going to be Precision's Forte. Just bringing in rigs and helping somebody else improve their margins. We're looking for places where our high performance and. Both IPM or even directly, direct type contracts.

Just lastly, and apologize if advance, I heard that you currently have 41 rigs working in the US and 20 that are contracted but idle. Slightly different from the press release. Did I hear that correct? 41, 20.

Current numbers right now in the United States are 52 rigs running, 41 of those on term contract, 20 are idle but contracted.

Thank you very much.

Thank you, Roy.

Thank you. The next question will be from Jeff Fetterly with CIBC World Markets.

On the SG&A side, Doug, could you give us some more color in terms of order of magnitude of percentage of revenue as to where you think SG&A might go in the back half of the year?

I think, Jeff, take a look in absolute dollar amounts, I think the first half is indicative so if you talk percentage, it's more a function I think of where you think the revenue line is going. We're in that 7 to 8%. I think we're 7.6% for the first half and if you take a look at some seasonal bounce in Canada and the US market holding out pretty flat with where we've been in the second quarter, I think you can pretty much stick in the upper end of that range as a percentage of revenue.

Okay. Kevin, did I hear it correctly, you said the contract renewals you're seeing in the US in recent months have been margins in the 5 to $7,000 per day range?

What I said was really didn't have any contract renewals but we've had some contract signings and particularly when you look at the parts of the market where there are very tight rig supply, the margins will not be low single-digit margins. They'll be generally above 5.

Is that a good barometer for the six rigs you signed in the Marcellus?

We'll come back on that at the end of the quarter or when those rigs are operating.

What would you say the differential is between the contract signing on the Marcellus rigs, other stuff that you're looking at and the contracted legacy fleet that you have right now from a day margin perspective?

It's a little tough to give that guidance because I don't want to turn our cards out particularly with our competitors or our customers too directly, frankly, and we do think Precision brings some margin enhancement to the existing contracts be it spot or long-term contract through our integrated systems. What I can tell you is that if the market's heavily over supplied in a particular category size or specification, clearly the margins are the lower end of the thousands, be it 2,000, 3,000, something like that. If the market's tightly supplied, they can still be towards the high end of that single digit range.

But it's safe to say the stuff you have under contract is day margining, something north of 10,000?

On day -- I'd argue that probably nothing is more than 10,000 that's on day-to-day.

I mean under contract right now.

That's what we've been guiding people towards.

Okay. If I look at your US rates in Q2 on a sequential basis, backing out the buyout, backing out the idle revenue, looks like rates were down 15%, 23.5, just under 20. Is that indicative of what's going on in the spot market? Is there a mix issue that's at play there? Can you give me any color on that?

Jeff, this is David. I would say that it is a mix issue. We did average somewhere between 10 and -- oh, 10 and 13 rigs working under spot contracts or well to well contracts during the quarter and as the quarters trend down, those numbers are going to come down. I would say that that's probably just the math and the averages with our term contracts.

Okay. Lastly, Kevin, you've been -- last year you were fairly vocal in terms of overcapacity in the Canadian market and Precision doing their job in terms of rationalizing that. Have you got to the point now where you look at rationalizing the Canadian fleet once again this year?

We look at it pretty much all the time, Jeff and really felt the fleet we had in place at the start of this year was the appropriate fleet. Something that I'm concerned about is the future of shallow gas in Alberta. Now, the gas is there. It's not going away. It's fairly low risk, low physical risk, it's easy, well-understood, easy to get to but it's quite marginal. You have to have the right combination of exchange rates, royalties and gas differential to make it work and my sense is that there's going to be such a supply problem at some point in the future because of the under drilling right now that there might be another window for that shallow gas market, probably sooner than we expect.

Does that incline you to rationalize or does it incline you to keep it against the fence?

It inclines us to keep it against the fence right now.

I'll turn it over. Thanks, guys.

Thank you. The next question will be from Richard [Ratilainen] from [Canariis] Capital. Please go ahead.

Hi, good afternoon, everyone. I just wondered if you could expand slightly on your outlook section. Given the second quarter in Canada was significantly worse than anyone expected, where do you see results for the full year 2009 versus your internal expectations? I mean, should we read into your outlook section that you're not going to reach the kind of internal benchmarks you had thought because it's difficult to make up for this quarter?

I missed a little bit there but I think you're asking about winter -- was it winter 2010.

No, no, I'm just talking about for the rest of this year. Do you think you're going to have some strong quarters that kind of make up for second quarter or do you think sort of the outlook you had for 2009 has been -- is going to have to be sort of brought down a notch or going to have to be sort of brought down a notch or two for the rest of the year?

We don't actually provide a firm outlook on the year but I did quote the CAODC estimates for the year for wells and for rig days and I commented that we felt we would get our fair share of that business, we have the financial power to do that. I don't think anything has changed materially from that forecast that the CAODC produced for how we view the business.

Thank you very much.

Thank you.

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

Hi, guys. Thanks. Just a quick follow-up here. I'm kind of curious if you could share your thoughts, Kevin, about how quick -- let's pretend for a moment that we do enter into some kind of a recovery in North America and people want to get drilling rigs back to work. Given how long the labor pool's been allowed to disburse, how quickly do you think you could ramp up the number of rigs that you would have working?

Great question, Andrew. You're the first guy to ask us that in a while so I appreciate it. Precision is a recruiting machine and when I joined the Company two years ago, I was astonished out how effective this company recruited people and then following that, the HR department, the organization, the recruiting department developed a branded recruiting process that we branded Tough Necks. We actually won a couple of awards earlier this year for the effectiveness of that marketing campaign and community affect. Even last fall we brought in 6,000 potential employees and hired 1,500 of them to handle winter drilling season. So I think one of our real core strengths is recruiting and hiring labor for the rigs. I think we'll do very well in a recovery cycle.

Most importantly, though, we focus heavily on retaining our drillers and our rig managers and clearly each quarter this downturn persists we lose a few. They're moving to other things. But I will tell you that as it stands right now, we But I will tell you that as it stands right now, we have an extremely high level of drillers and rig managers and we could certainly power up for a 2007-like winter if need be this year and on the US side I think we're equally well positioned with the leadership for the rigs in place and the ability to recruit.

Okay. Thank you very much. That's good color. And the last question I had is is your trust structure providing you with any advantages at this point in time anymore, given the distribution?

Andrew, you're hitting all the good ones. As Doug Wehlmann, our tax status this year, clearly this year we're not paying distributions, don't have a significant taxable position this year and as we get better visibility on 2010, we'll better be able to evaluate what kind of tax value there is to the structure for 2010. If we get to the point where we believe there isn't significant tax value in 2010, you can expect us to become probably a little more assertive with our plans for a conversion but no doubt that we'll convert sometime before the end of 2010.

Okay. Thank you very much. That's all I had.

Thank you.

Thank you. And there are no further questions registered at this time so I'll return the meeting back to you gentlemen.

Just like to thank everybody for joining us today and have a great day.

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