Precision Drilling Corp (PDS) 2009 Q3 法說會逐字稿

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

Thank you. Good afternoon everyone. I would also like to welcome you to Precision Drilling Trust third quarter 2009 conference call and webcast. Participating today on the call with me are Kevin Neveu, our Chief Executive Officer and Doug Strong our Chief Financial Officer. Also with us this afternoon is David Crowley, President of US Operations and Gene Stahl, President of our Canadian Operations.

Through a news release earlier today, Precision Drilling Trust reported on the third quarter 2009 results. Please note that the financial figures are in Canadian dollars, unless otherwise indicated. These are certainly interesting times in the natural gas markets, but NYMEX 2010 strip price for natural gasoline as of yesterday was CAD6.33. This is a rather robust strip price given that natural gas storage levels are at all time highs. Noted by this mornings report of 3.73 TCF, which is about 12% above year ago levels. Storage is also 13% or about 530 BCF over the five year average.

The next few months should provide more clarity on the price of natural gas as we work through winter and see the extent of the reductions in the supply of gas because of the lack of drilling. Kevin will elaborate further on our views.

Some of our comments today will refer to non-GAAP measures such as EBITDA. Please see our press release for additional disclosures on these non-GAAP measures.

Our comments today will also include forward-looking statements and information reflecting Precision's views about events and their potential impact on the Trust business, operation and financial results. Forward-looking information and statements include, but are not limited to items that is we have detailed in our press release. There are risks and uncertainties that could cause actual results to differ materially from those indicated by these forward-looking information or by this 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 our call the this afternoon with the review of our September 30 balance sheet and then our financial results for the quarter and then Kevin Neveu will follow on and 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 let's start with Precision's balance sheet for an overview of our financial position. Throughout the current quarter Precision benefited from refinancing activities in the first half of the year, as reduced long-term debt levels resulted in lower finance charges and reduced leverage. As at September 30, 2009 the long-term debt-to-book capitalization ratio was reported at 0.23, a reduction of 38% as compared to a ratio of 0.37 at the end of 2008. The reduction was attributable to debt repayments of CAD479 million and US dollar currency translation.

Financial costs in the quarter were CAD27 million, of which cash interest was CAD22 million, and the amortization of debt, deferred debt issue cost made up the remaining CAD7 million. Cash interest expense of CAD22 million in the quarter is indicative of future service outlays subject to principal reduction for a scheduled payments and any voluntary prepayments.

As at September 30, 2009, Precision continued to carry good liquidity through access to reported cash of CAD178 million and available credit facilities of approximately CAD275 million. The third quarter marked completion of our new drilling rig expansion program, and with the support of high margin term contracts, Precision expects to generate free cash flow in the quarters ahead to pursue debt reduction priorities and fund changes in noncash working capital accounts as activity in the North American oil field service sector rebounds.

As of September 30, 2009, trade receivables were CAD267 million, a quarterly increase of CAD54 million over June 30, 2009. The increase is indicative of higher sequential business activity in Canada and the United States, due to the usual summer resumption in Canada and the gradual increase in our United States rig count as Kevin will speak to a moment.

During the current quarter, customer bad debt expense on trade accounts receivable was nominal and for the first three quarters of 2009 was CAD12 million.

As we move into the fourth quarter of 2009, Precision expects a modest pick up in Canadian operating activity to levels significantly less than Q4 2008 consistent with current trends and the slow rise in Precision's United States drilling rig activity over resulting in an increase in noncash working capital at year end similar to the change this quarter.

For the third quarter of 2009, capital expenditures were CAD14 million with CAD10 million for expansion capital. The capital expenditure estimate for 2009 remains at CAD210 million and this comprised of CAD40 million for upgrade capital and CAD170 million for expansion.

During the first three quarters of 2009, the remaining 16 new drilling rigs from our 2008 build program were commissioned. Seven were deployed in Canada and nine in the United States. Throughout the quarter, cash distributions to unit holders remain suspended given weak industry fundamentals and the trust objective to reduce debt leverage. We are pleased with our measures to control cash outflows. We are keeping tight fiscal reins on spending as we maintain focus on debt reduction and liquidity.

In terms of the statement of earnings, we are pleased to report that the third quarter came in as we expected. We experienced a sequential improvement over the second quarter of 2009 and consistent with the deterioration in industry fundamentals, lower quarterly results on a year-over-year basis. Our near seven fold growth in available rig count in our United States operation helped to mitigate the significant drop in equipment utilization due to the dramatic decline in economic condition, commodity prices and resulting demand for our oil field services.

We are pleased with our level of General & Administrative expense. We set challenging targets and we are entirely on track. Our operational, finance and administrative teams are making excellent progress toward an integration of the expanded United States operation and process improvements throughout the Company. These initiatives are designed to make Precision more customer service oriented with underlying efficiency to handle significantly higher rig counts and activity.

As released earlier today, Precision Drilling Trust reported revenue of CAD253 million for the third quarter of 2009, and 11% an decrease from the third quarter of 2008. Earnings before interest, taxes, depreciation, amortization and foreign exchange were CAD86 million for the third quarter of 2009, a 28% decline from the third quarter of 2008. The decrease in revenue and EBITDA is due to significantly lower customer demand on an industry-wide basis partially mitigated by Precision's acquisition in December 2008 of Grey Wolf.

Precision reported net earnings of CAD72 million or CAD0.25 per diluted unit for the quarter ended September 30, 2009, a decrease of 13% compared to CAD82 million or CAD0.61 per diluted unit in the third quarter of 2008. Earnings in the quarter of 2009 were reduced by a CAD27 million increase in finance charges, earnings were increased in the quarter by a CAD63 million foreign exchange gain or after-tax CAD0.19 per diluted unit.

Net earnings per unit were impacted by the 119% increase in units outstanding in the one-year period ending September 30, 2009. For the nine months ended September 30, 2009, net earnings were CAD187 million or CAD0.75 per diluted unit a decrease of CAD24 million or 11% compared to CAD210 million or CAD1.56 per diluted unit for the first nine months of 2008.

Net earnings decreased due to increased financing charges and lower utilization rates throughout North America, partially offset by growth in Precision's rig fleet in the United States. Earnings were supported by higher margin term customer contracts and a CAD105 million foreign exchange gain or after-tax CAD0.36 per diluted unit, but these favorable factors did not entirely offset lower earnings from the sharp reduction in equipment utilization and customer pricing compared to 2008 results.

Rig utilization days for the first nine months of 2009 were 4% higher than the same period of 2008, due to growth in Precision's United States operations. EBITDA for the first nine months of 2009 totaled CAD314 million, a 4% increase from CAD302 million for the first nine months of 2008.

General and Administrative expense of CAD25 million in the quarter was in line with our expectations. The increase over the prior year was attributable to our growth in the US, one time expense recoveries last year and higher professional fees for legal, tax and accounting, as we undertake initiatives such IFRS, our 2011 conversion to International Financial Reporting Standards.

The effective income tax rate was 20% in the quarter and 9% year-to-date compared to an effective tax rate of 12% for the nine month period ending September 30, 2008. The quarterly bump was related to certain withholding and income taxes.

Turning to the statement of cash flow for the 2009 third quarter, operations generated cash inflows of CAD20 million. Our cash flow demonstrated more stability this year as the seasonal swing in working capital change associated with Canadian operations was mitigated by our growth in the United States land drilling market.

For the third quarter operating cash was reduced by CAD40 million to fund changes in noncash working capital as compared to CAD113 million in the third quarter of 2008. Net spending on investing activities was CAD10 million as cash conservation measures have taken foot and we have completed the expansion of our 2008 new rig build program. At June 30, 2009 Precision's drilling rig fleet stood at 226 rigs in Canada, 161 in the United States, two rigs in Mexico and one in Latin America for a total fleet of 390 rigs. Growth of 57% in fleet capacity over one year ago.

That concludes our financial review. Kevin the floor is yours.

Thank you, Doug. I will spend a few minutes to review our operations and provide some sense of the opportunities Precision is pursuing and then discuss some of the leading indicators we are monitoring in today's market.

And just before I move into our operational briefing, I will just discuss, I think a point that deserves special attention. And I want to draw attention to the fact that during the third quarter Precision averaged 93 rigs on term contract and it is important to note that 36 of these rigs are new build rigs, including the last one delivered during the third quarter. These rigs are all operating today. None of these rigs are on idle or on standby services. They're all rotating to the right right now.

These rigs were contracted out in 2007 and 2008 at the very strong peak of the market day rates and they will continue to operate on contract through 2010 into 2011. This is a very important indicator, as it reinforces our contention that the high performance rigs have remained in strong demand right through the market decline and market bottom. This encouraging customer demand, combined with the higher industry utilization levels and high performance rigs continues to support significantly stronger pricing and margins for these rigs. I will say a little more on this and some of the early indicators later on in the call.

Turning back to our operations briefing, let me begin with the Marcellus. I believe many of you are well aware of the challenges of operations in the Marcellus region. We are very pleased with the progress Precision has achieved in the Marcellus area. Our Williamsport operation center has opened and Precision is providing our customers and our rigs with a very traditional 24-hour, 365-day, high intensity operations and technical support that our customers have come to accept and understand in all other typically mature regions. But, frankly it has been locking as activity in the Marcellus is out paced the drilling support industry.

Precision's rig activity growing from two rigs to eight rigs this year is important, but with the opening of the Williamsport operation centers our customers know that we can support significant growth well beyond the eight rigs we currently have running and the four additional rigs we have contracted over the coming months. The Marcellus will become a very important source of energy for the United States and Precision will remain the premier driller in this environmentally and logistically challenging region.

As we move back to the mid continent, in the Haynesville, Precision has seven rigs running today, spreading over several customers. This includes two recently reactivated rigs that were deploying two additional rigs for one major customer, which will shortly bring us nine rigs in the Haynesville. We are also in detailed negotiations with other customers in this region and expect to further bolster the market presence in the coming months.

Shifting north, to the Bakken oil shale resource in North Dakota, this continues to also be a very important region for Precision. We drop to a low of four rigs earlier this year, but today have eight rigs operating. We see further customer opportunities here and expect we will continue to grow our presence.

Of special note is a performance of Precision's Rig 825. This is a Precision Super Singles Rig and we often make special note of our Super Singles rigs. This particular rig moved into the Bakken back in late February and has now drilled eight horizontal wells to measured depths of over 20,000 feet with several of these wells exceeding 21,000 feet. And Rig 825 has consistently beat the customer's drilling curve providing this customer with significant savings on total well cost, but I must say the 21,000 feet smashes Precision's previous Super Singles record by several thousand feet and exemplifies the performance capabilities of people and rigs.

I will also point out that in the Lower 48, roughly 61% of the industry's rigs are drilling horizontal directional wells, while Precision's market share has our fleet at a little over 80% engaged in these complex drilling operations, further highlighting Precision's preeminent market position as a high value, high performance contractor.

In Canada, we have just completed the slowest summer after the weakest spring following the poorest winter in the last two decades. I am going to run out on adjectives for the word poor if this cycle persists much longer. The current indications from our paying customers are that their 2010 drilling budgets will likely look much like 2009 budgets. So, it is hard to find much optimism in this outlook.

However as I consider the outlook, I believe there are some bright spots we will watch out for, particularly oil will continue to get extra attention into Canada along with the emerging gas shale plays in the (inaudible) areas in particular in British Columbia. The positive oil price sentiment bodes well for Precision's heavy oil market presence. Both our drilling and well service businesses -- business segments stand to benefit from increased spending on oil. Certainly, Saskatchewan's Bakken activity will remain strong, but that region remains a highly competitive market with intense pricing pressures and frankly one that Precision has chosen to let others fight out at a low pricing.

At this point, the outlook for conventional Alberta gas and especially the shallow gas market remains bleak. However, before we fully discount shallow gas, consider that with the right combination of commodity prices, service and drilling costs, royalties, and currency exchange rates, shallow gas is a viable commodity. And shallow gas will be an interesting low capital intensity and rapid-to-market source of gas in a gas supply crunch.

So, let me be clear on this point, I am not expressing optimism just suggesting a possibility in the event that we do have significant declines in North American gas supply. And on that tone, I think another possibility that has potential is that Canadian producers respond to strengthening commodity prices in the first quarter, by accelerating 2010 spending. As I said earlier the winter of 2009 was the poorest in almost two decades, we are certainly looking hard for any indications in 2010 and will continue looking.

On this rather somber note, I will move on to some of the early indicators we are experiencing. I opened our discussion today with the mention of the strength of the contract position, especially the new bill rigs. Sound customer demand coupled with high utilization is yielding significantly stronger day rates and margins for these rigs. For Precision, there's no question that our customers appreciate the performance of these rigs and there should be no question that these rigs create sufficient value for our customers to sustain these significantly higher day rates even through the steepest market decline since 1982. Frankly, any lingering doubts regarding the bifurcation of the US market should be gone.

Moving beyond that, the second positive indication we are experiencing is regional pricing strength. Let me highlight this point with the firm pricing we are achieving in recent rig activations, redeployments in the Marcellus, the Haynesville, Montney and the North Dakota Bakken shale plays. Our operating margins on these rigs are CAD3,000 to CAD5,000 higher than the best conventional spot market rigs are achieving today.

There's no question we are talking about complex horizontal drilling and shale plays, but my point is that we are well above the break even point with these existing rigs moving back into these markets.

The third positive signal that we need to consider, is frankly the rapid response by our customers both in Canada and the United States redeploying capital and increasing drilling activity to take advantage of the strengthening oil commodity prices. In the US, the rig count has risen 73% from a low of 179 rigs in June to 309 rigs last week targeting oil opportunities. In Canada, remarkably, 55% of Precision's drilling days in the third quarter were directed at oil targets, likely the highest percentage since the early 1990s.

This is more than a signal. It demonstrates our customer's willingness to reinvest in the drill bet when commodity prices return. Now, I don't want any interpretation, be it positive or bearish on these views, but I see this as a relatively simple equation. Stronger gas commodity prices will drive a meaningful recovery. While commodity prices have firmed up over the past few weeks, it does seem that further indications of production declines are going to be necessary before gas commodity prices return to adequate levels to encourage our customers to return to the drill bit.

But there should be little doubt in anyone's mind that the significant reduction in drilling in Canada over the past three years and the dramatic decline in US drilling over the past year has tipped the supply balance. Production decline is inevitable.

To close out my comments, I would like to say a few words about our field operations. Over the last quarter, rather than spending my time visiting banks, fortunately I was able to direct my energy to visit our customers and our rigs. For me it has been a rewarding use of my time visiting, for example Rigs 527 and 529, northeastern BC, Rig 371 in southern Saskatchewan Bakken oil, Rigs 531, Rig 821, Rig 209 in the Marcellus, two of our Super Singles in the Barnett, one of our rigs, Rig 77 in Northwest Louisiana, and Rig 93 in south Texas. I am very excited by the attitude and the performance of our people in the field right now.

Happy to report that the integration is going very well. Frankly, our rigs across North America are precision rigs and our people on our rigs make me proud every time I go to see them.

More importantly, as I travel to these rigs with our customers, the customer compliments have been unanimous on the exceptional performance of our people and our rigs. Our year-to-date safety record is remarkable. 90% of our rigs, drilling rigs, service rigs in our operations are incident free, an exceptional record. I conclude these comments by reaffirming that Precision is ideally positioned as North America's high performance, high value provider of drilling and oil services. And on that point, I will turn the call back to the operator for questions.

(Operator Instructions). The first question is from Kurt Hallead from RBC Capital Markets.

Good afternoon.

Afternoon, Kurt.

Kevin, I just wanted to -- one of your primary competitors yesterday was talking about the prospect of average cash margins declining through the first half of the year specifically, in the US land market. Just want to get a general sense from you as to where you see the direction of spot market pricing from this point going forward?

Thank you, Kurt. Very complex question because certainly as I outlined during my comments, both regional, regional demand and technology demands will mean that there may be a couple of different spot markets over the course of early 2010. So, just beginning with the significantly oversupplied, conventional straight hole type application. Clearly, that will be under the most pressure because the supply excess is huge. Maybe a thousand rig supply excess and so those markets likely continued pressure, but frankly, I believe rates bottomed out during the second or third quarter. So, I don't think we will see further rate erosion, but clearly, in Precision' case, as our contracts roll off. There is no question the tides lower and we will still see further pressure on average day rates for Precision as we replace these contracts with rigs that come on to spot market.

But, as you can see by our efforts during the third quarter, we are working hard to see that our rigs get placed not into conventional spot markets, but into the emerging shale plays where we see still stronger margins and we are guiding to CAD3,000 to CAD5,000 a day, lift on those types rigs and we think we have a lot of opportunities in those areas. I think the assertion that there will be continued overall margin pressure over the coming quarters is a reasonable assertion.

And in the same context, I just want to get a general sense of relative positioning, the same competitor referenced something like north of 50% market share in the BC shale plays. I wanted to get a sense as to -- I would assume that would give you the other 50%. But wonder if you can comment on that?

I didn't hear the comment and I am not sure who made the comment, but I think there's about 35 rigs running northeastern BC right now. I think Precision has about 8 of those rigs in that area right now. And I haven't checked the numbers lately. It might be a little less than 8, 7 or 8 rigs, but we are pretty happy with the position up there. As I commented earlier, it is going to continue to get attention over the winter of 2010, and we think we are well placed with that market.

And then finally I am getting a lot of indications that the varying players in Canada are looking at the first quarter of 2010 being on par with the first quarter of 2009 from an activity standpoint. What kind of visibility do you have at this stage?

We are right in the middle of negotiating contracts with customers for rigs and it is really clear that our customers don't want us to have much visibility because they're trying to get the best day rates they can. I can begin by saying visibility is pretty foggy in first quarter. I did guide that we believe that their budgets will be roughly on par with 2009. That's the sense we are getting right now.

But, if you go back to the winter of 2008, the winter in Canada began very slow in 2008 and then picked up as commodity prices firmed up through the winter. That's indicative of Canadian companies accelerating their annual spending in the first quarter, when they see the opportunity to capture the full cycle, the full-year cycle on the gas commodity. So, my view right now is that it is going to be very commodity price dependent. If we see a cold few weeks here in November and storage falls off quickly and prices firm up a little more, Q1 has some likely surprises on activity, sort of like 2008 did.

Okay. Great. Kevin, thanks.

Thank you Kurt.

Thank you. The next question is from Mike Urban from Deutsche Bank. Please go ahead.

Thanks. Good afternoon. Clearly, if you look at the US market as a whole, I guess really North America by extension, the land rig market is oversupplied. But, as you said and I would agree with this you have some bifurcation, some differentiation setting in, so arguably probably not now, but may shortly soon be undersupplied in some of the high performance markets or rigs -- sorry markets that require high performance rigs. The question is how quickly do you see the industry getting back to new building and is that spec new building? I know it sounds crazy, but if we are going be undersupplied I have to believe somebody will go out and do it.

Mike, thank you. I like that question. Having been in the rig building business for a long time. It is one that is close to my heart. As Precision Drilling as somebody who can build rigs, we think quite efficiently, it's close to our heart. It has been an interesting conversation around Precision and with our customers about when the next new rig gets ordered. First of all, my belief is there's probably still -- I am not sure if it is 10 or 15 rigs that are out there suspended that people have commitments to build or deliver that are suspended. There's probably still a few new rigs that idle, but contracted. None of Precision's. So, I think those have to come back to work first. I think some of the rigs that have been suspended by other rig providers have to come back to work first. It is again dependent on commodity price. If my views on declines are reasonable and we are already at an imbalance right now. If that were the case, my view is you can see new builds being ordered maybe as soon as late 2010.

And where are the economics of the margins and some of the more complex plays relative to what you think it would take to build a rig also considering the cost to build has likely come down?

Come down a little bit, but I don't think there has been a huge drop in the cost to build new rigs. My view is there is probably some excess inventories floating around right now that you can build the first couple of rigs relatively inexpensively, but then quickly the price probably returns not far off where it might have been a year ago. So, I think that's one issue to keep in mind, but and I'm sorry I missed the first part.

How far are the economics away from what you would consider pricing that would generate a return where you can justify seeing builds into the higher end markets?

Probably no more than a few thousand dollars per day.

That's all for me. Thank you.

Thank you. The next question is from Jan [Sunni] from Macquarie Capital. Please go ahead.

Good afternoon, guys. Just a followup on the last question. You haven't announced anything on your -- on your CapEx for next year, but if you had to build three more rigs on spec, what type would they be?

Okay. A couple of points there. First of all, we will announce our capital plans in early December and we will be fairly clear on that. Unlikely, you will see Precision Drilling building rigs on spec. Unlikely and I can't speak to any of our competition, but it is not common for land drillers to build any or many rigs on spec.

Now the question on size. Highly determinant on our customers. I think there will be need for rigs in the Horn River longer term, but short term, I think there will be needs for rigs in the Marcellus Region and likely in places like the Haynesville. All different specs. All three of those rigs are different specs, different sizes and different logistical requirements.

What I wanted to move away from is fit-for-purpose for just a moment. In fact, whether it is Precision's supersingles rigs or some of our competition's rigs, these new technology rigs have a wide range of purpose not a narrow range of purpose. We talked earlier about a supersingles rig in North Dakota drilling out to 20,000 feet. I can assure you that rig wasn't designed for a 20,000-foot well. It was designed to drill 14,000-foot wells in the Rockies. So, generally these newer spec rigs actually have wider ranges of opportunity rather than narrow ranges, but that said, the rig that gets built for the probably does look different than the rig that is built for the Haynesville, but that's as much as anything a depth issue rather than a purpose issue.

Alright. One more question. You mentioned that you intend to spend about to CAD30 million in Q4 on CapEx. Can you give us any color on where you guys plan to spend that since you finished your 16 rig build out in Q3?

Jan, it's Doug. That will be a mix. I think you will find that the majority of that is toward rig upgrades, and not -- we have plans in place for it. Don't know we will spend all of it. There's a chance we will come in a little less than that. It will really come down to the opportunities that we see as we get into the winter drilling season in Canada and opportunities as we close out the year in the United States.

One of the, I would say relatively encouraging signs that I didn't mention during my briefing, about this time last year we had customers that were prepared to pay for upgrades on the rigs and we have some of those same conversations going on today.

All right. Thanks a lot, guys.

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

Hey, fellas. Can you talk about how many of your rigs right now that are not working that you would classify as the maybe not a supersingle, but inclusive supersingle,like the high-tech ones. You and everybody else is talking about the higher (inaudible) of that side. Do you, hazard a guess?

Yes. We sure will, Kevin. I will start and turn it back to David in just a moment here. I did comment earlier that we are sitting with about 80% of our rigs in the US drilling horizontal directional wells and that does speak a lot to our ability. So, as David describes our rig play, he will keep in the context of the rigs that can drill horizontal directional versus those that are less effective for that type of drilling.

Yes, Kevin. About over 390 rigs, about 64% of them are what we consider the type of rigs that a customer would want to drill directional or horizontal wells and so that is about 249 rigs. And we have 125 plus or minus a couple working today. So, we have got another, about double that that we could put to work on that type of arrangement, horizontal and directional.

Right. And how many of the 125 that is remaining that's not working do you think you can get, garner some of these higher day rates and higher margin work from these, from these shale plays,whether it is Marcellus or Bakken or Haynesville?

There's a couple of possibilities. First of all, if we are going to be drilling just straight holes and just up against other straight rigs, that's a hugely oversupplied market and a component of those 125 rigs are shale to gas rigs in Canada, which that market is going to be at this point, I would say indefinitely oversupplied. So, for sure, lower day rates for that group of rigs. Now, there are some opportunities for us to go into the Haynesville shale and drill a vertical section with some of these rigs and then step in behind with our superseries rig to drill the horizontal section. We are looking at those possibilities right now in the shale plays and that is a way for us to garner some additional value out of these rigs. Also, it is fair to say we do have upgrade potential on a number of those rigs that could increase our capacity on top drives and make them more capable rigs and again when we find the customer who is prepared to pay for those upgrades we think we have some more leverage in that bottom part of the plate.

Okay. And same question. In terms of maybe more of a macro call from your end, how many rigs do you think are oversupplied how many rigs are left that you think control the deeper plays in Horn River and Monteney and even some of the Bakken plays that are idle? Is there some point that we are going to run out of rigs that do that kind of work in Canada?

Well, I think we will run out of rigs that can do that, but we are probably still a year or two away. I think that both plays are exciting and all of us in Canada are that are certainly deeper contractors are focused on those plays, but I think as Horn River moves from exploration into development, the rig count up there will grow quickly past Canada's capacity.

Okay. Last thing is can you talk a little bit more about your intervariable strategy and whether you are growing in either Mexico or South America or somewhere else?

Yes, thanks Kevin. You'll notice that I didn't say much in my comments. David?

Well we have two rigs drilling under long term contracts with Slumber Jay, down south and we are actively pursuing any opportunities, particularly in Mexico right now.

Bur, our feeling right now is that we will come back to you in our investors and give you a better sense once we have something material to report on.

Right. Okay. Thanks, Kevin.

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

Hi. Thanks. So, if you were a betting man, Kevin, where do think the demand for these high performance rigs would surface first? Where do think you are going to see the strongest draw from the customer base for these higher spec rigs?

Andrew, I'm a betting man, but I bet in very small portions. Moving beyond that, obviously I really think that likely first place we would see something happen that will run out of rig supply will likely be the Marcellus.

Okay.

But, the Haynesville is not far behind.

With the Haynesville not too far behind.

There's still some ability to take some of the deeper rigs around and move them in there and do some modifications and things like that, but as you move into mature long term drilling programs it is important to note that most of the rigs that we are drilling in the Barnett when the Barnett was going full blast, most of the rigs were new rigs. The efficiency of a new rig just (inaudible) the old upgraded rigs so much that as that market matures there will be new builds going into the Haynesville in the future.

Are we going to see the same thing in the Marcellus because I understand for the most part that the rigs that are active in there aren't necessarily tailor built for that play? Is that right?

Fair comment. I think we've got some rigs in there that are some of our superseries rigs that perform in there excellently and aren't tailor built for the play, but in fact are performing as tailor built rigs for the play.

I do believe that I think the emergence of a smaller footprint, but highly capable rig will emerge for the Marcellus and frankly, the only difference between that footprint and some of the rigs we have in Canada right now is transportation width. Our supersingles rig right now, is frankly an ideal Marcellus rig. The only issue is that on some of the bridges and some of the loads it is a little bit wide. It is not a huge modification for us.

Is that the kind of thing you can modify existing rigs for?

Well, we could or as that market picks up. Right now I think every one of our supersingles in the fleet is spoken for right now. Probably running to the right.

Okay. With the rigs you have in the Marcellus right now, how many of those are contracted rigs and how many are in shorter contract terms?

Andrew. We have 8 contracted and 1 idle right now in southern New York state. I would build on Kevin's earlier comment that you talked about what's the ideal rig for the Marcellus. The industry is still learning that.

Right.

So, as this evolves, like the Barnett it took several years to actually figure out the best rig for the Barnett. I would say we are a little behind as an industry on the Marcellus.

Sorry to hog the puck here, but when I look at your US segment it looks like your spot rate moved up reasonably smartly here on a quarter-over-quarter. Am I right and is there is anything I can attribute that to or is that just a general getting more of your high performance but idle rigs back to work?

Andrew, I wouldn't draw that conclusion. I would attribute the increase more to rig mix because we did continue in the quarter to carry a significant contribution from the idle, but contracted rig.

Yes. I was looking on the spot market, there Doug, the one that is weren't contracted.

Right.

Did that rate move up?

No.

Okay. Doug, while I have you on the line, you are pretty aggressively paying down debt here, kudos for that. Is there a debt level that you and the Board are fairly comfortable with that you figure just doesn't have to be a priority as much anymore?

I think that as we see the industry turn and give more visibility on future cash flows, we will gradually modify our position around debt repayment, but currently, as Kevin indicated with visibility the way it is, we will stay the course. In absolute debt level terms, you saw us a year ago, we were 0.14 as a percentage of debt to capitalization. Today we are 0.23. We like to be in the middle.

Thank you very much.

Thank you, Andrew.

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

Hi, guys, congratulations on the quarter. I just wanted to verify something. I thought I saw here in your press release that you still had 10 idle, but contracted rigs, but in your comments I thought I heard you say that they were all working. Can you just update me on where you are with the idle, but contracted?

Hi, Brian. Go ahead David.

We do have 10 rigs in the US that are under long term contract, but not working and we are being paid the margin rate, so we do in fact have 10 idle, but contracted rigs.

Okay. And --

My comments earlier were referring to 35 of the rigs which is are contracted or 36 of the rigs, which are new build rigs and I was clarifying that all of our new build rigs on long term contract are working.

Okay.

We don't have any new builds waiting to come back to work.

Okay. And so when you are seeing reactivations or contracts here in the Marcellus or the other one you talked about in Louisiana and then north Texas. Are those rigs that are -- not previously contracted and are working on the spot market rather than someone taking one of these idle, but contracted rigs and moving it to where they want to use it?

That particular customer doesn't have any idle, but contracted rigs, and those rigs that are coming in to the Haynes -- to the north Louisiana Haynesville area are -- some of them were not working, a couple of them weren't working and we are bringing them back, a couple of them were working for other customers and now they're going to work for this customer. So, it is a mix of -- the answer to the question there's a mix of those type of rigs.

Okay. And have you seen the number of idle, but contracted starting to come down or has it stayed at a steady place?

It is coming down. If you recall in our last call I believe we had 17 or 18 and we are down to 10, and that number will progress downward as we move forward. We seen a couple of them go back to work -- 2.

Yes and we have 2 more scheduled to go back to work.

Yes. Some of the people that had them idle are putting them back to work and then the rest are kind of rolling off. So it is coming down and will continue to come down.

Can you give us a breakdown by country? I noticed in the quarter you had a contribution from both Canada and the US.

A break down of what?.

The sort of the rigs in each country idle, but contracted?

They're all in the US. There's 10 in the US.

Okay.

I think we average 13, Doug, is at that right for quarter? I believe idle, but contracted. All in the US.

Okay. Great. Just changing gears. I wanted to ask about some of the oil directive markets that you have mentioned. Obviously there is some new plays, you call them unconventional horizontal, horizontal drilling, but I imagine they are also a good component of that market that is sort of more conventional vertical wells. Can you give us a break down of where you are participating in the oil markets today?

In the US, we are participating with a few rigs in Texas. We have got -- I commented earlier on our Bakken play in North Dakota. We have a couple of rigs in Bakken Saskatchewan, but as I commented earlier, that's very price competitive, and Gene do you want to elaborate a little further on the heavy oil presence we have?

Yes. Today there's probably about 10 rigs in the oil sands area, working 60 in the heavy oil area -- of that we would have our market share -- probably a little bit more on the -- more of a market presence on the oil sands area. Again, over 55% of our days this quarter were focused on oil targets.

And we have taken a lot of questions lately from people asking us what we know about going back into conventional oil plays and drilling horizontal, drilling multistage fraction, applying these shale-type principles. Frankly, we don't have any visibility of that happening.

Is it fair to say that the heavy oil type wells would be still sort of vertical, conventional style?

Yes.

Great. And finally I wanted to ask about the directional drilling business, you talked about it on your investor day, I was wondering if you could update us if you are seeing anymore progress in the service you guys are offering in that space?

Yes. I think our progress is tracking activity right now, nothing remarkable. As recently as a few days ago, one major customer in Calgary told us that we really want to try you guys out we only have X number of rigs running right now and we signed X number of contracts for directional companies, so we can't bring you in quite yet. It is as simple as that. The rig counts came down so sharply, there are customer's obligations out there. They're managing their obligations with the current vendor base much the way they are with our rig base. This is not a growth market where we can go in and gain mark share in a new service as a new entry. We understand that. We are using this time right now to pick our places and learn our business.

From those comments, is it fair to say you are hoping to grow faster than the rig count if we get a recovery in the market here?

Absolutely.

Okay. That was it for me. Thanks.

Thanks, Brian.

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

Good afternoon, guys.

Afternoon, Dana.

I wanted to start with the Marcellus play and just get a bit of a clarification. Just so I understand better, in your second quarter conference call you mentioned you were hoping to be at 12 rigs by the end of this year and you are suggesting now it will be 6 months, so it sounds like it has been pushed out a quarter. Is that in fact correct and this is just presumably related to CapEx plans of the customer itself?

A couple of misaligned data points there. We actually have 4 additional rigs contracted to go into the Marcellus in the first half of the year. We are still hoping to see our rig count increase in the Marcellus before the end of the year, but those are different customer targets. So, as we talked about those 4 additional rigs in the Marcellus, those are commitments for rigs to go to work in the first half of next year, but we still expect to have growth beyond the 8 rigs before this quarter is out.

Right. Okay. Secondly, again just trying to close the circle, with respect to your term contract position, in Q2 you mentioned that in Canada for 2010 you were at 27 rigs and if my math is correct I think you are suggesting it's 34. So, it looks like you have signed up another 7 rigs in Canada, but maybe lost -- it looks like maybe a couple of rigs next year in the US. So, A is that correct, and B, maybe just a bit more color?

This is David. We signed up one additional rig and we have moved some contracts between countries. We are up about 3 contracts in total, but it just has to do with one customer. We reallocated between Canada and the US on where their rigs are going to be working.

Sounds less dramatic.

It's actually a nonevent.

We're up about 4 rigs in total for 2010 and it's one new one and moving some stuff around and a couple of other things that have happened. So, we have changed some days around and things like that. So, it is not that dramatic. There's one new one is all.

Sure. I guess any color you can provide us on pricing, presumably you would have to come off the prior levels but was it a big hit or how did you do?

On those contract adjustments, nothing no hit.

No hit. Super. If we return to one of the themes raised on one of your competitor's calls yesterday they were able to bring more costs out of the system as it were, which allowed their margins to go up and like I said given your size the fact that you are bringing two pretty significantly, two large companies together, do you think you have done all you can on the cost side in preparation for move the higher in activity?

Dana, we think we are still doing a lot of things, we have rolled out our supply chain in the US. It is running now, but it is still not supplying 100% of all of our rig needs all of the time. So, it has some traction to go. We are still looking to be moving forward and getting our technical services support group running in the US where we will do a lot of our own in-house repairs, remanufacturing. We know there's additional costs as we complete the integration. We will pull out of the operation in the US. And you know, it never fails to amaze me about how our guys in Canada just continually in these down markets find ways to save a few pennies here and a few pennies there and it adds up to a nickel and a dime and more. So, the cost mantra right now is as strong as it is, ever.

Right. So, but presumably those would be 2010 realizations. Is that fair?

I think later this year and into 2010, absolutely. I don't like to try to explain away margin erosion, and margin gains and all the noise that goes along in there. Our margins will speak for themselves and they are holding up well in this quarter, and Spring Break up in Canada was particularly brutal. So, our Q2 was a tough quarter for this company to hold strong margin when you have a certain amount of fixed overheads to carry in the operations side of the business, but I think our Q3 margins will speak for themselves and so will Q4.

Most of us would agree you have done well. But, it was surprising to see one of your major competitors, I think pull, I think another CAD 1,000 a day out of op costs, which was pretty interesting. One final question, in the US, has your approach to turnkey drilling changed at all now that you've combined the companies, you think about the market that's there today and the one that probably emerges in 2010, 2011? I am curious to know your thoughts.

Yes, turnkey is usually a business in these down markets does quite well, usually, but this has been a dramatic downturn and frankly those customers that typically use turnkey as a way to drill their wells have had no access to cash. Even that market has been beaten up badly. That said, we have had surprisingly a pretty good year on turnkey, great success in the field. We've got a really good group of guys right now. I think that once that customer base gets access to capital again, I think turnkey will do very well for us. Even in this tough market, turnkey is still delivering strong EBITA for the Company.

That's all I have got. Thank you.

Thanks Dana.

Thank you. The next question is from Todd Garmon from Peters and Company. Please go ahead.

Good afternoon.

Afternoon, John.

If we look at the daily maintenance spend and sort of assume that your -- you have done a good job stripping out cost on a daily basis in your operation. What does it look like going forward in terms of a daily cost increase say if activity levels were 20% higher? How does that maintenance cost rise with the increase in activity levels? What's your sense of at that?

It is actually a great question that leverages back into the last question that we were talking about around how you can take a thousand dollars a day out of the cost of a rig. We can take another thousand dollars a day out of the cost of our rigs right now. And the fact is as soon as business picked up, we would be spending a lot of capital to get those rigs to keep the other rigs running back in business. So, the fact is our rig fleet is in excellent shape and we have gone through and analyzed the rig fleet right now. We are confident we could put to work right now 3/4 of this fleet without any abnormal capital impact.

Okay. Just moving to is the international market here, if you exclude Mexico, what would be your general sense of demand internationally, say by South America, North Africa and the Middle East now and how has that changed in the last three or six months? I realize it's a broad question.

I guess if we look regionally, so South America, excluding Mexico, we are having some inquiries in from Bolivia, Columbia, Brazil, Argentina, Venezuela seem to be flat. We are not hearing much there. But there could be certainly incremental demand there, really can't put a number to it right now, but we are looking at a multi rig package in Columbia and a few ones and twos in Bolivia and in Brazil.

North Africa. We would really be focusing on particularly Algeria, Libya. There is some pent up demand there, they haven't been doing much contracting over 2009 or really since fourth quarter 2008. Again, I really can't give you a numbers there. We are really in an exploratory mode there for North Africa.

And in the Middle East, particularly the areas of interest Oman, Kuwait and Saudi. There does seem to be some multi rig demand there, but we are really just trying to flush it out. I think as Kevin mentioned earlier, when we have some specific news for you we will be the first ones to send it through. Did that answer the question?

Yes. Do you think it is increasing in those countries? Like if you exclude North Africa and if you just looked at the Middle East and South America. Do you think there's incremental demand for rigs in those countries or is it flat?

From discussions that we've had and in particularly some markets surveys and invitations that tendered, the countries I mentioned Oman, Kuwait, Saudi, yes, there is incremental demand increase. Now in the case of Saudi, there is idle supply there. So, that puts a different light on it.

Right. Okay. Thank you.

Thanks, Todd. We are running a little tight on time here. I want to get everybody in. So, we will try to be as contact as we can through the rest of this call. Thank you.

Thank you. The next question is from Mark Thomas from Simmons & Company. Please go ahead.

Hey Kevin. John Daniel from Simmons. Just one quick question. Just one quick question because I know we are short on time. Can you give us your thoughts on your workover business pricing, heading into Q4 and any opportunity to move some of those rigs down to Marcellus with your drilling?

Yes. Thanks. I will let Gene speak to that. Go ahead Gene.

Yes. So, from a pricing standpoint, I think base pricing has remained steady second quarter to third quarter. We watch it real closely. Obviously, with our size and our reach we can be pretty selective about our pricing, but also pretty clear on protecting our market share. As you know, it is not a contracted business so everything is at the spot market. Probably 2/3 of our business is more focused toward oil, so that means it's busier in the eastern part of Alberta, as well as in Saskatchewan. Quieter in the north and the west in the gas areas.

Are you looking at opportunities to move some of those rigs down to the states, or is that too soon?

John, frankly we have no aspirations to move any rigs down to the US. Nothing on the horizon right now.

Thanks. That's it for me.

Great. Thank you, John.

Thanks, John.

Thank you. The next question is from Mike Lock from Sur Capital. Please go ahead.

Hi, gentlemen. I will make it quick too. Can you give us a rough sense of how much EBITDA or gross margin is locked in under the long term deals in 2010 and 2011? Thanks.

Mike, we actually don't guide forward specifically on EBITA by period, but we have been given guidance on our contracted position and suggesting that -- using a range of between CAD8,000 and CAD10,000, maybe around CAD9,000 per day, EBITA on those contracted rigs and we have guided to a number of rig years we have in there. So, I think you can just modeling based on that.

Got it. Thanks, gentlemen.

Thanks.

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

Hey guys, just two quick things. One is latching on to Kevin's comment about the thousand rig overcapacity or not to quibble with that number, but -- or the long term in definite oversupply in the Canadian market in the shallow side. To what extent does that impact your fleet specifically and have you identified equipment for rationalization in your fleet?

Mike, great questions. There's no question the tide's low and low tide affects all rates across all markets and so that's not helpful. But, I think as the high performance markets quickly max out, those rates will come up quicker than the rest of that fleet, so I don't think it is a long term liability on a high end rig, but it certainly does raise the question about how do you or what do you do with rationalization on that lower performing end of the scale, and we are certainly strong believers that there are too many rigs in Canada and still too many rig in the US. The industry has to get their arms around that. Certainly, after we combined Precision and Gray Wolf, we know that our fleet has in fact, all but two rigs have worked productively and profitably the past three years, but we will go through our fleet again and determine which rigs we think are the most efficient and have the most value and if we see opportunities to be part of that rationalization. We will take those steps, but no guidance at this point.

Sure. Fair enough. Lastly, what's your current kind of view or sense of what day rates are doing in Mexico? It seems like there are an awful lot of rigs moving down there, I recognize spending money if there is demand down there, but there's a lot of equipment that seems to be migrating down there. Have you seen any impact on rates?

There's a lot of noise in Mexico right now, a lot of (inaudible) noise, certainly the ipm business is still rather uncertain. I know that some of the service companies that run the IPM business have been reporting earnings with some challenges down there. But, frankly, we've got our two rigs in Mexico. David you can comment on those two rigs, but they're on a long term contract.

They're contracted through Q3 next year, and yes, I will take your point, there is some little more pressure on recent bidding of similar rigs. Certainly two years ago pricing wise. But yes, I don't see a lot of significant excess supply that's capable of drilling the type of wells that are being bid right now.

Great. That's it, guys.

Thanks.

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

Hi guys. On the -- just to clarify earlier statements you talked about contracted revenue, or revenue from idle rigs. In your release you say CAD9 million coming out of Canada. Can you give some color what that's related to?

Jeff, that revenue relates to term contracted rigs, and when you think of our activity in Canada, bear in mind it is anywhere from 200 days to 250 days in the calendar year. So, as those contracts hit their anniversary dates, terms are all a bit different, but when they hit the anniversary, say on a one year basis, there will be points in time where an operator may not have all their days in and there's an opportunity for a lump sum billing. So that what you saw in the third quarter.

Is that something to expect in subsequent quarters?

Not to that extent, no.

Internationally, the opportunities that you are looking at whether it be Middle East or North Africa or South America, are you bidding existing equipment into those opportunities or are those new build?

To date existing equipment.

Are you bidding against rigs in the market already or are you again bidding against someone willing to build a new build rig?

For the most part, we are bidding against rigs that aren't in the market where our competitors are bidding new builds or existing rigs.

To be competitive on those bids do you have to be putting new equipment or high performance equipment in?

No, not for all of these, it is very very much dependent upon the bid. A lot of the community, you have some looking for technology looking for capacity in wells.

Okay. Last question, Doug, tax rate given the bump up in Q3, I know you made comment, what should we expect in Q4 going forward?

Yes. Going forward, we are consistent. Expect the year-to-date number you saw last year of 12%. That's more indicative of an annualized run rate.

What would the split be?

Between future and cash?

Yes.

Consistent with what you see year-to-date through the first three quarters of this year.

Thank you.

Thanks, Jeff.

Thank you. The next question is from Dan Haley from Calgary Herald. Please go ahead.

Hi, Dan.

Hi guys. My questions have mostly been answered, but I was going to ask quickly if any rigs been moved from Canada to the US or from the US back to Canada in recent times and if there's any plans to do anything like that in the near future?

Great question Dan. Right now there haven't been up to this point in time, but we have interesting opportunities that might see us move back one or two weeks back to Canada for oil directed targets.

Maybe if I can just on the Mexican side. Is the reason you are not bigger in Mexico because of strategy or finances theory?

I'm not sure if you picked up on our earlier conference calls this year, but we were less focused on international and more focused on our balance sheet. We weren't pursuing those international opportunities with aggression to the first half of the year, but then the last quarter, we are in there and we are in there competing hard. There has been some tightening of pricing. So, it's a competitive market.

Okay. Thanks.

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

I want to thank everybody for participating today. We will see you and talk to you again as soon as possible. Thanks.

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