Precision Drilling Corp (PDS) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Precision Drilling Trust 2009 fourth quarter and year-end conference call and webcast. I'd like to turn the meeting over to Mr. David Wehlmann, Executive Vice President Investor Relations. Please go ahead.

Thank you, good morning everyone. I'd also like to welcome you to Precision Drilling Trust fourth quarter 2009 conference call and webcast. Participating today on the call with me are Kevin Neveu, our Chief Executive Officer and Douglas Strong, our Chief Financial Officer. Also here with us today is Gene Stahl, President of Drilling Operations. Through the news release earlier today Precision Drilling Trust reported on the fourth quarter 2009 results. Please note the financial figures are in Canadian dollars unless otherwise indicated. Precision also announced this morning in a separate news release its intention to convert to a corporation. Precision anticipates seeking approval from unit holders in conjunction with its 2010 annual and special meeting in May and to complete the conversion by May 31, 2010. We believe the conversion will occur on a tax deferred basis. Further details about the timing and mechanics of the conversion will be communicated over the next two months.

Some of our comments today will refer to non-GAAP measures such as EBITDA and operating earnings. Please see our press releases 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 the potential impact on the Trust business, operations, structure, 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 releases and other regulatory filings for more information on these risk factors. Doug Strong will begin the call this morning with a review of the fourth quarter financial results and our year-end balance sheet. Kevin Neveu will then provide an operations update and our outlook for going forward here. After that we will open the call up for questions. Doug, over to you.

Thanks, David. For Precision the fourth quarter of 2009 was positive on many fronts and in financial terms went according to plan. Our financial overview focuses on four key developments, the sequential quarterly improvement in operating results, balance sheet strength and liquidity, 2009 cash flow and our pending unit holder vote to convert from an income Trust to traditional corporate structure.

First, the sequential improvement in Q4 2009 operating results. As reported in our news release earlier today, unaudited current quarter revenue and EBITDA compared favorably to the third quarter of 2009 as industry fundamentals continued their gradual rebound from loads experienced earlier in the year. Our current quarter business mix while continuing to be supported by solid customer demand from oil wells reflected higher demand for natural gas wells in both Canada and the United States. Precision benefited from rising equipment activity as the fourth quarter unfolded and this lead to stabilization in customer pricing. In a moment Kevin, will comment further on customer demand and tightening supply for high performance assets and opportunities that lie ahead for 2010.

fourth quarter activity was higher than the third quarter of 2009 as Precision averaged an active drilling rig count of 72 in Canada, an increase of 21 rigs or 41%. In the United States, the active count averaged 64 rigs an increase of 22% over Q3. Precision service rig fleet in Canada generated 60,108 hours an increase of 10,527 or 21% over Q3 2009.

Overall this drove the 13% revenue increase and 8% increase for Precision in the current quarter. Profit margin as an EBITDA percentage of revenue was solid as the decline of 1.4 percentage points of 140 basis points to 32.4% was primarily caused by revenue mix, as strong term contract rates comprised 48% of drilling utilization days versus 61% in Q3 2009. Traditional winterization revenue from northern operating areas and cost reduction initiatives helped to mitigate the decline.

General and Administrative expenses were CAD24 million in the fourth quarter, a favorable sequential decrease of 4% over the third quarter. In the current quarter, Precision recorded a pre-tax non-cash charge of CAD82 million for the decommissioning of assets as previously announced on December 16, 2009. The decision to take underperforming assets out of service is a necessary step to reduce equipment supply and high grade Precision's overall fleet to a line up that's high performance, high value brand and the more demanding customer requirements associated with unconventional resource plays. The reduction and capacity is expected to be accretive to earnings through lower fixed operating cost and the use of productive spare components from the decommissioned rigs.

Second on the agenda today is the balance sheet. Liquidity and debt reduction remain high priorities. During the fourth quarter Precision made 81 million and voluntary early payments and in the process took further steps to improve its credit quality by lowering its long term debt to long term debt plus equity ratio. The ratio at December 31, 2009 is 0.22 and represents significant deleveraging compared to the ratio of 0.37 on December 31, 2008.

During 2009, Precision made CAD565 million in cash repayments and benefited from favorable Canadian US dollar exchange rates on the translation of its US dollar denominated debt. As at year-end, Precision reported long term debt of CAD749 million. This compared to CAD1.37 billion at December 31, 2008, a reduction of 45%.

fourth quarter debt prepayment also reduced scheduled long term payments for 2010 to a nominal amount. This provides added financial flexibility to a liquidity position of about CAD400 million on December 31, 2009. At year-end, Precision carried a cash balance of CAD131 million, and undrawn operating line of CAD25 million and had 232 million available in this secured facility revolver.

Third on the agenda is 2009 cash flow. Annual cash flow for 2009 aligned with our stated corporate strategy to reduce debt integrate Grey Wolf and execute the 2009 business plan.

In Summary Precision generated CAD505 million in cash flow from operations due to positive in flows from both operations and changes to non-cash working capital balances. These cash in flows were used to fund the completion of Precision's 2008 new rig build program but significantly reduced sustaining upgrade capital expenditure program while the remaining cash together with net proceeds from equity offerings during the first half of 2009 were used to reduce long term debt, meet remaining cash distribution obligations prior to the indefinite suspension, and increase cash on the balance sheet by CAD69 million. Capital Expenditures were limited CAD193 million with CAD163 million on expansionary customer commitments for new rigs and equipment. The CAD30 million for required infrastructure spending to integrate United States drilling operations and make necessary upgrades to existing rigs and equipment.

During the second half of 2009, cancelled projects and favorable variances to estimates lead to the sizeable reduction in capital expenditures from our previous guidance of CAD210 million. Most capital expenditure projects were completed in the year and our capital expenditure guidance for 2010 remains at CAD75 million. The past year was extremely challenging. The sudden decline in first half customer demand was met by Precision with solid EBITDA margin performance that demonstrated Precision's variable cost operating structure, ability to reduce sustaining capital expenditures to match equipment utilization levels and our rig manufacturing teams capability to complete the 2008 committed new rig build program on time and on budget pursuant to high margin term customer contracts.

For United States operations, the integration success associated with the Grey Wolf acquisition is characterized by improved safety performance, high employee retention, standardized systems and controls, global orientation for land drilling operations and strengthened rig position in growth basins throughout North America to start 2010. Access to a large customer base has strengthened Precision's positioning in both United States and Canada.

To close, I'd like to draw attention to our separate announcement earlier today addressing Precision Drilling Trust's intent, subject to uni- holder vote to convert to a traditional corporate structure. As stated in our December 16, 2009 news release, Precision expects to convert to a corporate structure well ahead of the government of Canada's legislative income tax measure scheduled for January 1, 2011. Over the past two years Precision has established a significant presence in the United States line contract drilling market and in so doing has demonstrated a growth strategy that is leveraged towards new exciting unconventional resource play exploration and development opportunities. The clarity and administrative simplification of a traditional corporate structure is expected to reduce administrative costs and make capital markets more accessible, especially debt and equity markets outside of Canada. Kevin, that concludes our financial overview.

Thanks, Doug. Well certainly I am pleased we've kicked off the formal process of converting Precision out of the Trust structure to a growth oriented corporation. This transition facilitates fully aligning our corporate structure with our well communicated high performance high value strategy. And I'll comment a little more on that later. With regard to our fourth quarter, and how we see things shaping up in 2010, let me start by reporting our activity in Canada as currently in the 130-140 rig range.

When we look projected our Q1 back in December, we were thinking that Precision's rig count would peak around the 110 rigs. In the United States, where Precision is currently running 78 rigs our projections in late 2009 had us around 70 rigs for January. So the good news is that we underestimated our customers desire to get back to the drill bit as commodity prices recover from the lows of mid 2009. We believe that Precision's current position as the busiest driller in North America is due to our geographic footprint, our asset mix, and especially the quality of our people. Currently, virtually all of our Tier 1 rigs are utilized.

Our Tier 2 rigs are 60% utilized and our Tier 3 rigs like most of the industry are lagging with utilization under 20%. However, encouragingly we're working with customers on opportunities to upgrade some of our deeper Tier 3 rig toss Tier 2 level and some of our Tier 2 rigs up to Tier 1 capability. All of these specifically for unconventional drilling opportunities. We expect that the 15 rig tier upgrades we announced in our December press release will be fully utilized by our customers and it's likely this number will increase if customer demand continues at the pace we've seen so far this year.

I'd also point out that while our 2010 capital plan excludes any provision for new builds, we are in the final stages of negotiations with several customers for new build Tier 1 rigs on favorable economic terms. As we pursue these opportunities and while debt repayment remains a priority, I'll highlight Precision has the financial strength and flexibility to be aggressive and capture additional customer demand for new builds or upgrades on our current fleet. From a regional perspective during the fourth quarter, we strengthened our positions in the Montney gas play and rapidly developing (inaudible) oil play we continued our strong presence in heavy oil drilling in Canada. Two of the three super singles were redeployed to Canada from the United States in late 2009 are specifically for heavy oil applications. We are late in the Saskatchewan Bakken and Horn River. We expect to see our Horn River position improve as we complete our rig upgrades later this year.

In the United States, our Bakken position has increased from two rigs early last year to 10 in the fourth quarter, soon to be 14 rigs. The North Dakota Bakken is a deeper trend that Saskatchewan and generally requires larger rig which is aligns nicely with our US fleet. Our positions in the Barnett and Marcellus remain strong and we like our geographic presence as Eagleford play develops.

Our Alice, Texas operation center has recently taken on three Tier 1 rigs to support this play. Our Haynesville and Central Rocky positions to be strengthened and we'll increase our focus on these regions in 2010. Day rates (inaudible) generally started to move up bottom during the fourth quarter. Geography and rig tier have a large impact on rate leverage. Daily improves for Tier 1 rig class as much as 3,000 per day in some markets. And even our Tier 3 rigs are gaining modest improvements on sequential wells. Certainly we see light in the tunnel for day rates for the first time in several quarters.

Now, much of what I've described sounds encouraging. It's important to understand that if this really is a recovery at best I recall it fragile and full of risk. Last year, we saw how dramatically this business can reverse directionally. Any one of several factors such as gas storage, commodity prices, further global economic concerns could easily impact this recovery. We remain mindful of this risk and continue to tightly manage our expense and the capital spending in 2010 as we did through all of 2009.

As we look forward, commodity prices and to extent producer hedging success ultimately drives our business. And it seems that oil prices in the CAD65 to CAD75 range appear to be very helpful. Natural gas prices steady in the CAD5 to CAD6.50 range are constructive, particularly when the commodities futures contracts allow our customers to hedge and protect our cash flows.

Looking at the gas macro, I think some were surprised at how quickly US gas storage fell from historic record of 3.837 TCF in November to slightly below the five year average by mid January. And todays reported gas of 191 Bcf is encouraging. However the apparently sticky US natural gas domestic production data as published by the EIA are not yet showing significant production declines. Before Precision has any real confidence in the second half of the year for the gas perspective, we'll have to see how these gas production and storage trends play out. Over the last decade, gas activity has been the prime driver for our business. The shift to conventional drilling techniques to unconventional drilling techniques and strengthened oil prices in 2009 have restored oil importance to our business.

Well drilling activity in both the US and Canada is robust. In a price stability it continues to CAD65 to CAD70 range there is increased activity as unconventional drilling techniques gain water acceptance even for older conventional fields. Alberta is a very good example of the growth of horizontal drilling techniques to older conventional fields to exploit further production capability from those fields. The Cardium play in Alberta is a very good example of the growth of horizontal drilling techniques to older conventional fields to exploit further production capability from those fields. Now, we are in the very early stages of understanding the potential of Cardium play, but so far the results are encouraging and the accelerated drilling activity is a good business for Precision.

Just changing gears now to Precision's production and completions business. As Doug mentioned earlier, we are sequentially up 21% in the third quarter. While this improvement in activity is welcomed the rig rates did not show much pricing response in the fourth quarter. Much of this activity increase is in the conventional oil and heavy oil Markets which tend to be less complex than the more profitable gas completions business we enjoyed most of the last decade. We do believe that the momentum in the well service market continues through 2010, pricing leverage will improve. If the Alberta government is effective at its next redraft of the provisional royalties and in fact stimulates the Alberta gas drilling business, we could see very good leverage in our completions production business not to mention our drilling operations.

Turning back to our conversion process for a moment, for Precision, as the most active North American drilling contractor, and with international aspirations there's no question that a conventional corporate structure provides us better access to capital and expanded investor base and ultimately better value for investors. We're anxious to complete this important step in the global transformation of Precision.

Now I'd like to thank the employees of Precision for their hard work, persistence and results they achieved during a very difficult year for all of us. This performance is best exemplified by the fact that 86% of Precision's rigs, service rigs and operations operated the full year of 2009 without a single recordable safety incident. Congratulations to our employees and thank you all for your contributions. On that note, I'll pass this back to Alyssa for questions.

Thank you, (Operator Instructions) The first question is from John Daniel from Simons & Company. Please go ahead.

Hey Kevin, just a couple quick questions. The first one is a little bit color on the Tier 3 rigs in terms of commentary on pricing. And recognizing the utilization as low at this point relative to the premium rigs, are there any opportunities in any of the basins to lock those rigs up under perhaps six-month or one year arrangements?

Good morning, John. There are some emerging opportunities, right now. Our customers are trying to lock in pretty favorable day rates on those rigs. A couple of contracts out there that we've achieved at our one year contracts that will roll through in our contract charges as we put those out there. But I think frankly, probably the better opportunities are really Tier 2 rigs and upgrading some of those Tier 3 rigs for unconditional drilling.

Are you seeing of your competition on sort of the Legacy rigs, are deals being marketed at this point?

There are still really competitive geographies right now. There's some areas right now that are still a real serious oversupply and other areas geographically speaking where two or three rigs are picking up better price interaction. So it really depends where in the market you're looking.

Okay, and then just one more if I may. On the well service business, down here in the states we've seen a few companies fail and get liquidated primarily the small mom and pops. What are you seeing up in Canada?

I think a couple things. I think there might be a little less leverage on the Operators here in Canada. And I think they're used to running through sharp cycles. So we haven't seen quite as much of the distressed asset possibilities in Canada as we might see in the US.

Okay, that's it for me. Thanks guys.

Thanks, John.

Thank you. The next question is from Victor Marshan from RBC Capital Markets.

Thanks, good morning everyone.

Good morning Victor.

First question Kevin on the new builds. How are you guys looking at that or how is it as it relates to payback period returns as you're looking at some of these new build opportunities?

Victor, it's Doug. We stick to our economic fundamentals throughout the cycle, so we are looking for terms that are two to four years. And we're looking for paybacks on the original capital frankly before tax with interest within a four year period.

And from a geographic standpoint, are there opportunities both in the US and Canada or is it mostly just in the US?

Actually, Victor, it's both US and Canada. And I think I used the term several customers. It's about an even split right now. No question it's Tier 1 type rigs. And David Roman and I have a little bit of a bet going about when the first contract gets launched for new build. Likely, the first one will be in Canada but it's not material whether it's Canada or the US frankly. We're within, the economics are very close within a thousand or two a day or within around a year on contract term before one of these terms for us.

Thank you for that. And a follow-up is looking at potential upgrades going from Tier 2 to Tier 1. What would that entail and what sort of cost would that be on a per unit basis?

Very broadly Tier 2 rigs are highly capable rigs already positioned to drill horizontal wells. The Tier 2 to Tier 1 upgrade is a mobility issue and in most cases it will be converting an existing rig to a patent type configuration. And CapEx could range from as low as CAD300,000 to maybe as much as CAD3 million or CAD4 million per rig depending on the scope of the upgrade.

I'm sorry if you said this but did you have any commitments to do that right now from Tier 2 to Tier 1?

We have 15 in the plan for 2010. Some of those are in the process right now and if there's customer contracts tied to those they will be reflected in our contract as we provide that information.

Got you. Great.

My view is all those upgrades will be taken up and likely providing the market stays where we see it today, likely will be adding more beyond that.

Great. That's all I had. Thank you guys.

Thank you. The next question is from John Tasmir from Canaccord Adams. Please go ahead.

Good morning guys.

Hi, John.

A question on your CapEx. I mean, obviously you're very prudent and conservative on capital spending plans in 2010 of CAD75 million. And that hasn't changed but you said it sounded to me like it's more of just waiting on contracts rather than maybe specifically focusing on a debt pay down or something else. Did I get that right?

John, this is David. We're going to be opportunistic in 2010 as far as ceasing what the market gives to us. And what we can take from it so there will be opportunity for us to build new rigs and upgrade rigs. So I would say our top priority for 2010 is to seize the market opportunities. And we do have the financial flexibility now to do that on a pretty large scale.

So I guess my next question, I think some of your couple other guys are out building rigs and have pretty big CapEx programs. But I guess my question is how many rigs, like if there was a pick up in demand for rigs, some people are in front of it, but how many rigs do you think you could see building or starting to build in 2010 if the market is right? Is it a 10 rig number? Is it a 15 rig number or is that, I mean what's the scope of what your capacity is?

John, it's Kevin. So right now, we could probably produce our first rig by as early as May. We probably produce our second rig probably about a month to two months behind that. I think that we could probably deliver maybe one or two more before the year is out, but into 2011, we could be back up to something like four to six a quarter, providing the demand is there.

We have our project team and manufacturing support and most of our operations right now were designed and are sustained through the downturn so we feel pretty good about our ability to respond to a rapid upturn in the market. We think we can build rigs as quickly as our customers will take them. Okay, well that gives us a scope of CapEx. We also believe we've got the financial capacity to do that, John. We don't think we are limited financially either.

That's clear. The other question as of the press release you said you have four rigs in the US getting paid but not working. Are those still not working. And that's a bit surprising to me they aren't working and why.

John, right today we're at four. That's down from eight at the end of the year but those are still not working. A couple of those expire this year and a couple go out to next year so hopefully things continue to improve, they will go back to work here.

Are those particular for it sounds like they've got to be new rigs. So my question is I guess I'm assuming those four are new rigs.

Actually, they are not. They are existing equipment that were in the US.

Just haven't had contracts with them?

That's right.

Got you, that explains it then. I guess thirdly or last question before I turn it to someone else, as you said in the press release you had 75 rigs that are on contract on average for the first quarter on term. Can you remind me what that number was in the fourth quarter and I'll have a follow-up to that.

Yes, John, we're 81 in the fourth quarter of 2009 on average under term contract.

What about the fourth quarter? Do you know that? 81 for the full 2009 is that what you said?

No, 81 for the fourth quarter of 20009 and 94 for the total year of 2009.

And then you said 66 for the full year and that 66 number hasn't really changed a whole lot since you last released.

That's correct.

My question is is that number, have you actually gone out in terms of more contracts and dropped some contracts or is that number just not changed?

No, we were 63 when we reported in the third quarter for 2010 and now we're at 66 so it's up three rigs. Those are all existing equipment. And so yes, there is some opportunities out there.

Okay, thanks guys.

Thanks, John.

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

Hi guys. Just wanted to ask with respect to your US rates. There was a large drop obviously from Q3 to Q4. And I think Doug kind of alluded that that being revenue mix. What do you see going into 2010? How should we look at that? Do you think the rates will trend up because the demand is higher and pricing sounds like it's going higher. Or do you think it's flat because more of the older rigs will be working?

Kevin, this is Doug. I'll ask David to join in. One thing of the factors you look at Q4 rates to Q3, the decline in our US turnkey business, turnkey rates are obviously significantly higher. So we had less of that type of work in the quarter that would have explained a good part of the decrease.

Yes, and Kevin, the other part I would suggest is that it has to do with term contracts. We have about let's see, about 11 rigs less working on term contract in the fourth quarter than in the third in the US. And so those rigs continued to work but they went to work at lower rates as they rolled off contracts. So the combination of turnkey where we average one rig working as Doug mentioned in the term contract roll off is the main factor in the decrease there in the US.

I would like to point out though that our turnkey business is picking up in the first quarter. We averaged one in the fourth quarter, we are working three rigs today and it looks like it's going to move a little higher as we move through the quarter.

And as we progress through 2010, I mean what's the expectation for yourselves in terms of the day rates going forward in the US?

We don't guide too much forward on day rates in the US, but like I was saying earlier, we are seeing sort of regional leverage in certain areas, Kevin, so if the demand continues, we're hopeful. And I'm sorry to be a bit vague there.

Oh, no no no.

But Kevin, we're still going to have a run-off of term contracts during the year. I mean we end the year at 23 and we're at 37 today approximately, so you're still going to have that run-off offset by increased activity and small day rate increases on those rigs. So the reason it's hesitant we don't really know that answer either at this point.

Okay, now according to Canada, a similar type of question. You guys did approximately 16,500 in Canada in Q4. From what you guys are suggesting, it looks like the Canadian rates are going up as well, not slightly in Q1. How does it look in Q1? Is it looking inclusive like the rates are going up as well compared to Q4?

Kevin, as you consider Q1, factor in the additional activity that we will get seasonally and a lot of the new work that obviously gets put in play is the current market rates, so that will have a downward influence on the average so here again we don't put all guidance on pure day rates but I'd give that serious weighting.

Okay, so one would presume then the current rate then is below 16,500 or is it within that range as well?

Here again, the rates will be supported by ancillary equipment to deal with winterize specialization higher activity covering fixed costs. In terms of whether it's higher or lower, I think you've seen our comments around we stabilize pricing. It will be pure mix between contracts and new work.

Last thing is it sounds like you're enthusiastic on new builds right now. Where are you guys seeing opportunities? Is it in the gas side? Or is it oil side, presuming it's mostly gas but are you seeing opportunity in oil for new builds?

Yes, Kevin, it's Gene here. And all of the unconventional areas really both unconventional gas and oil and both in Canada and the US. So opportunities in the Wisketta area which is the Canadian Bakken and the Pemena area, which is the Drayden Valley area in Canada and then Marcellus as well.

Great. Thanks, Gene and guys for the answers.

Thanks, Kevin.

Thank you. The next question is from Chad Frees from UBS. Please go ahead.

Hi gentlemen. Just a quick one for you. How are you looking at the international market? Are you seeing opportunities to move rigs out there?

Hi, Chad, thanks for the question because I forgot to include that in my prepared notes. Frankly, first comment I'll make is I'm disappointed with the fact that we only have two rigs running in Mexico right now by the end of 2009. We would have liked to have seen us a little stronger internationally. Now, that said, we've got a pretty good focus on our international operations right now. We've got people out there and got a good team right now pursuing. My short answer is several irons in the fire and it's still going to be a slow growth process. And we're talking quarters, not weeks or months.

Thank you.

Thanks, Chad.

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

Good morning guys.

Good morning, Dana.

I wanted to come back to Kevin's questioning on day rates. And I guess I'll just maybe pick up where you left off in the press release which is you talked about a modest day rate increase in recent spot market activity. So I guess my question is can you give us a sense for which particular areas that this may apply to. And given that you're referencing the spot market in your comment, are we talking CAD500 a day in terms of a base spot market increase or how would we quantify that?

Well obviously we're getting to really competitive data I don't want to be too transparent on. But probably best categorized it is I mentioned tier 3 rigs being modest. So we're thinking there on a well to well basis 100, 200, 300 a day, maybe 500 depending on the geography. And I'll be vague with the geography. With the Tier 2 and Tier 1 rigs, increases in 1000, 1250, 1500, 2000 and in some cases 2500 or 3000 on what we're achieving. And no surprise.

It's going to be the areas where the tighter supply is like in the Marcellus, that's proven to be quite good for us. We're doing very well right now in the Bakken on the US side and , generally speaking unconventional plays right now where those high speck rigs are in very tight supply. As I think as you listen to these conference calls you'll hear probably across the spectrum or the sector that the Tier 1 premium performance rigs are pretty much

Great, and new for that. Secondly, your recontracting strategy, obviously not an ideal forum for you to discuss how you recontract your fleet. But I guess are there, is there some color you can give us on your strategy for whether you sign up a rate to lower rates than what it may have been working on versus maybe play the market a little bit and see if those trends recover? How do you approach that in a year like 2010?

I don't think my marketing guy is in the room because they manage that all the time and they can tell you the full bottle they use but Yes, there is no simple answer. It depends on the area, depends on the customer and what our relationship is like and what we're trying to accomplish our growth plans. But the answer is we are very creative in our Marketing, we'll trial types of things to make sure we provide the best value to our customers and create the highest margin of the Company. So no easy answer for it.

I guess looking at the US right now, can you give us a sense for the relative uptake in utilization between what would have been the prior Precision drilling rates. And those would be newer rigs for sure versus the acquired Grey Wolf rigs, just to give us a sense whether those Grey Wolf rigs are being taken up at the same rate say as the newer rigs that were built from the prior Precision drilling?

What I would tell you is that our tier 3 rigs are at about 120% utilization. Our Tier 2 rigs are 60% and our Tier 1 rigs are fully utilized and we are not classifying rigs by their historic background anywhere.

Let me ask you this. Are you happy with the uptake in utilization of the Grey Wolf fleet? You sit back now with the years worth of study and of data. Are you happy with the uptake in utilization?

The real simple answer is yes I am. But beyond that, I'm really happy with the way the Company is shaping up post the integration. And it's not just the fact that we've got some good assets but frankly our growth in the Marcellus, our growth in the Eagleford, our growth in the Haynesville, our growth in the Bakken are all due to the combination of some excellent relationships that Grey Wolf had with customers and the Precision assets and in other cases some relationships that Precision had with the Grey Wolf assets. It's not just an asset play for us.

Okay, and then just one final question. I guess no new news on distributions as it were still suspended but maybe is there a way for the street to think about a dividend policy once you convert. Is that something that you would look to instantly put in place? Or do you work your way through 2010 and do further good work on the Balance Sheet and then look at it? How would you give us color on that?

I guess there's two answers, Dana. The first answer is we're providing no guidance on distributions.

The second, but more important answer, I think you people need to think about longer term is that this industry has just come through, maybe one of the worst slowdowns we've ever seen. Certainly the second worst. And what we've been through in 2009 in the cycle and the fragility of the recovery I commented about earlier, we're a long ways from true certainty in cash flows and cash flow cycles. So I don't think it's appropriate for the press to be thinking a lot about how did employee excess earnings at this point.

That's a great answer, thank you.

Thank you.

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

Good morning. All of my questions but one have been answered. Could you give us a break down, you talk about your Tier 1, Tier 2 and Tier 3 rigs. Could you give us a break down as to what component of your Tier 1 rigs are in Canada and US and likewise Tier 2 and Tier 3?

Yes, I can give you that, Roger, it's David. And this is today before our upgrades that we plan on doing this year. We have 61 Tier 1 rigs in Canada, 48 in the United States, for a total of 109. Tier 2 we have 72 in Canada, 60 in the United States, three internationally for 135, and Tier 3 we have 70 in Canada, 38 in the US for a total of 108.

Must have been expecting that question.

I get asked that question pretty often.

Thanks very much. That's all I have.

Thank you, Roger.

Thank you. The next question is from Roy Moth from CI Capital. Please go ahead. Please go ahead.

Hi, good morning gentlemen.

Hi, Roy.

Just one question. Everything has been answered. What proportion of rigs which have the contracts coming due over the course of 2010 would you consider to be Tier 1 versus Tier 2? I assume there's no Tier 3 rigs coming due?

Good question. A really good question and actually we don't have that answer. What I can tell you is that none of the new builds that we have the last couple years come due in 2010. Those all push out into 2011.

Okay, and I mean maybe help me with the proportion, just ballpark, you're going from 77 to looks like if I do just backwards math somewhere in the 50s by the back half of the year, maybe even down to the 40s so you're talking about somewhere in the 20 number of rigs that's coming due over between Q1 to Q4, care to just split it in terms of a percentage wise?

Roy, this is David. You're right. We go from 75 rigs working on term companywide in the first quarter down to 53 in the fourth quarter so that's a drop of 22 rigs. As far as what's coming due, I'm going to speculate here just a little bit. But in the US, the rigs that are coming off contract are not the new builds as Kevin mentioned.

Some of those are Tier 1 rigs, some are Tier 2 and there's a few Tier 3 rigs in that mix as well signed during the peak of the cycle. Let's you and I talk off line and I can maybe help you a little more. I just don't have that information here with me today.

Okay, thank you.

Thanks, Roy.

Thank you. The next question is from Brian Purdy from National Bank Financial . please

Hi, guys. I realize you probably don't want to be too specific but I was just wondering if you could generalize or average for the rigs that you have sort of coming off contract now and the prices you see them sort of going back to work out or staying at work, what's the delta there? Is it a few thousand dollars a day or can you quantify it at all?

Brian, actually we're not qualifying the number right now.

Okay.

It's something to do internally but you guys trying to model it out from what you're hearing in the marketplace.

Okay, in terms of your Canadian customers obviously the Canadian recount picked up a lot. Are you getting any indications about how activity will be either through breakup or after breakup?

Yes, it's Gene here. And the thing we look at just the shift in the mix from gas to oil and we look at the price of oil staying strong, our view is that when Ro-Bins come off and the ground dries up we can get back after any of our oil opportunities. General view is typical breakup and working closely with all of our customers to try and service their needs in the second quarter.

Okay, now I was going to ask a question on breakups so you kind of lead me into it. When you say typical breakup, obviously 2009 breakup was not typical so it sounds like you're expecting a fairly decent improvement over 2009 breakup?

Yes, it's going to be a function of weather.

Okay.

And I'm not going to predict any weather yet.

Okay, and a couple others here. I wanted to just ask if you had any progress with the directional drilling product and service that you guys were providing. And obviously more of the markets moving in that direction. I'm just wondering if you've had much traction with your service?

Brian we're having some traction. We did close a small acquisition in the fourth quarter to by some assets to help with our cost basis. And we're just watching this market as it grows right now. We think we're well positioned but we're still with a handful of jobs.

Okay, in terms of your cost trends, do you see costs coming up for you at all heading forward? Do you think things are pretty stable there at the moment?

Oh, good question. We think they're pretty stable at the moment right now. And nothing on the horizon that has me concerned about costs particularly.

And then finally, I wanted to ask about the goodwill that you guys incurred with the Grey Wolf acquisition. It sounded with your press release you put out maybe a month or two ago that you would look at writing some of it off but I didn't see anything here. Is that something you're still reviewing with your auditors and we might see more with the release of the Annual Report or is it something you've decided you don't need to write-off at the moment?

Brian, we do not have a write-off at the end of fiscal 2009, that's been determined. We will continue to look at the fair market value of Precision based on the unit value and the underlying carrying value of all of our businesses, not just our US operation but goodwill that goes back on the Canadian side as well. But there is no impairment at this point.

Great. Thanks very much.

Thank you, Brian.

Thank you. The next question is from Jeff Fetterly from CIBC World Markets. Good morning Jeff.

US day rates, the 2,500 sequential decrease, can you be more specific in terms of how much of that was attributable to contract rollovers? How much of it was turnkey? How much would have been spot based?

Yes, Jeff, the simple answer is no. We're not going to expand on that.

Can you give us directionally which would have been the more meaningful of the factors?

The most meaningful was the roll off or the reduction in the amount of rigs we had running on turnkey.

Yes, that's exactly right. As David mentioned we had one rig in the quarter returning on turnkey. That's increased significantly in the first quarter of 2010 so that was a significant influence on the trend. And as you've seen in our average rig count we've picked up a significant amount of activity some of which came off the idle but contracted rigs. But a lot of new rigs coming to work at new market-rates so that clearly has an impact on the lower average as well.

Yes, Jeff, in the release, there is data in there on the amount of idle but contracted revenue turnkey revenue. You can work through those numbers and get a pretty good idea of where the decrease comes from.

Okay, great. The questions earlier on the new build side, you talked about capacity from a logistics perspective. Financially, how much are you comfortable committing to new rigs whether it be in 2010 or 2011?

Jeff, great question. I talked about having capacity both logistically but also I said we have financial capacity to handle the new builds. Doug alluded earlier or commented earlier that our liquidity in Q4 was about CAD400 million between revolver, our credit lines and our cash on hand. If you just think of that in terms of the business and if business were to trend upwards and upwards sharply, you might use up CAD100 million to CAD150 million on working capital.

That may lead to surplus of CAD200 million to CAD250 million we could apply to new builds if the economic are there but with our leverage on manufacturing cost and just be thinking about a super single mechanical for heavy oil, in that CAD7.5 million range and maybe big heavy duty triple for the Haynesville in the CAD18 million to CAD20 million range, that gives us a lot of capacity to build rigs. Financial capacity.

Priority wise, where does domestic opportunities rank relative to international opportunities?

I'm sorry, what was the first part of the question?

In terms of your growth priority where do you rank domestic opportunities, call it North America, relative to international?

We actually don't look at it that way. We look at each opportunity and the possible return. So whether it's an existing rig or a new build or a modification or international opportunity, they're ranked effectively by the return to the Company.

Is it safe to interpret your tone as being seeing greater opportunities in the near term domestically versus internationally?

Well, the velocity of the domestic opportunity is much faster. I mean certainly we can quote a rig from Canada for a need and have it deployed within five days. In the US, it might be a little longer maybe 10 days. Internationally, quote to deployment could be nine months even for a fast one.

So, no question that the velocity of the inquires in North America mean we get rigs operating faster. It doesn't mean they have more or less priority.

Okay, Doug, a couple of quick questions. Is there any carryover on the CapEx side? And how should we be thinking about tax ability post conversion?

Great question, Jeff. As far as carryover, it's minimal, less than 5 million on the capital expenditure side. And as far as income tax, effective rates, view us as a traditional corporate structure with very balanced operations between the United States and Canada. So you can take a blend of those corporate statutory rates and it will be very indicative.

Okay. Thank you.

Thanks, Jeff.

Thank you. The next question is from Corey Ren from Pico & Company. Please go ahead.

Yes, all my questions have been answered but I have one question about LNG Imports. What is the long term impact on rig rates that you see from these LNG Imports?

A tough question to answer in isolation. It's a macro question and the LNG tends to pose where pricing is at a preferential to European Market. Certainly we have the storage capacity and the market don't have storage capacity. My personal view is that LNG is not a low cost gas molecule. But in fact North American gas is a low cost gas molecule. So my view is North American gas stays very competitive relative to natural gas full cycle.

Great. Thank you.

Thank you. The next question is from Todd Garmon from Peters & Company. Please go ahead. Good morning.

Regarding the supply chain rollout in the US, can you give us a sense for how that might improve US margins relative to Canadian margins over the coming months?

Todd, generally speaking, we're supplying right now all of our rigs in the US with our US supply chain. And we're hitting about 80% of the requirements. So that's pretty good. In Canada, we're a 100% to a 100%. So we're getting there almost with the full (inaudible) across the US, and that hits the operating cost of the rig at the daily operating expense. And the savings on that would be in the order of about 15% on those daily operating expenses, not the major CapEx or the major components but the daily operating expense. So, on the order of several hundred dollars a day.

And I gather that your 80% there, you're most of the way there then. Is that fair to say?

I think we are, but I think there's a second step up to come for us. And that's when we start getting full leverage across the supply chain in North America.

Okay.

And fair to say we're not there yet but we've got a real good team of people working and expect to get good results over the coming weeks actually.

Okay. And then Kevin, you mentioned that you were at 10 rigs in the North Dakota Bakken going soon to be at 14. Are those 14 or the incremental four rigs included in the 15 rigs that you're going to spend the CAD25 million of upgrade capital on to get them from Tier 2 to Tier 1 or are those incremental rigs that will be signed to contract or are you going to transfer rigs?

Those are Tier 2 rigs we're transferring up that are already capable of drilling the wells so there's no CapEx required.

Okay. That's all I have, thank you.

Great, Todd, thank you.

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

Thank you. You did a very good job of deleveraging and working through this tough operational environment so I was curious to see that you received covenant relief and it seems like you're well within your covenants. So I was wondering if you could provide clarities as to why you proceeded to do that?

Theresa, we pursued relief on the simple principle that we want to be opportunistic going into 2010 but we are also driven to have flexibility and so as you've heard the comments today, that's not necessarily a downside reflection. It's indicative of how our cycle works. How trailing EBITDAs look> And how in a rebound we've got significant opportunities to upgrade rigs and potentially to secure very attractive term economics on new build opportunities.

Okay, but your covenants do not restrict your CapEx; is that correct?

That's correct. They don't.

Okay, thank you.

Thank you, Theresa.

(Operator Instructions) The next question is from Jeff Machurik from Coremark Securities. Please go ahead.

Good morning gentlemen. Just wondering if you could give us a little bit of a break down in terms of what your oil and gas drilling break down is in both Canada and the US. And maybe how you see that going out for the rest of the year?

Very good question, Jeff. I'm going to hand you off to David who we have been arguing with these numbers for a couple of days.

Yes, in the fourth quarter here, Jeff, in Canada, we had 60% of the wells we drilled were for oil and 40% for gas and in the US, it was 70% gas and 30% oil. Going forward, I might turn it over to Gene here for after the breakup in Canada you said there's a lot of oil drilling that probably will come forward?

Just give you a function of where customers have confidence in commodity prices.

Yes. Yes, Jeff, the other sort of emerging trend we're seeing right now, some of these shale wells have high liquids production. They're also very profitable so it's a bit of a mix and blend between gas and liquids. And Eagleford is becoming quite popular for that.

Okay, and now just kind of the Q4 numbers, David that you quoted have you seen a shift so far in Q1 to more of an oil weighted balance to both US and Canada or is it similar to Q4 levels?

No, I don't think so. I think today they would probably be about the same. Maybe with the uptick in Canada, it maybe a little bit more towards the gas side as we move through here. The industry in Canada right now is about 50/50 oil and gas. But I don't see any dramatic change in those numbers.

Okay, and then just maybe lastly, can you give us a break down of how many of your rigs are drilling direction. Or if I saw that in the press release or not?

You broke up at the end. Could you repeat a little louder please?

Yes, I didn't see in the press release, if you could give us a sense of how many of your rigs in Q4 were drilling directionally horizontally during the quarter.

Yes, I actually have that too. In both in Canada and the US about 80% of our rigs we're drilling directionally and horizontally during the quarter versus an industry average around 60%. So again, Precision is out distancing with our crews and our rigs there, so about 80% of the rigs, excuse me the wells we drilled in the fourth quarter were directional horizontal.

Okay, thanks.

Thanks, Jeff.

Thank you.

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

I'd like to thank everyone for being with us today and go and have a great day.

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