Precision Drilling Corp (PDS) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Precision Drilling Trust first quarter 2010 conference call and webcast. I would now like to turn the meeting over to Mr. David Wehlmann, Executive Vice President, Investor Relations. Please go ahead, sir.

Thank you. Good afternoon, everyone. I would also like to welcome you to Precision Drilling Trust's first quarter 2010 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 here today is Gene Stahl, the President of our Drilling Operations.

Through a news release earlier today, Precision Drilling Trust reported on the first quarter 2010 results. Please note that the financial figures are in Canadian dollars unless otherwise indicated. Some of our comments today will refer to non-GAAP measures such as EBITDA and operating earnings. Please see our press release for additional disclosure on these non-GAAP measures.

Our comments today will also include statements reflecting Precision's views about events and their potential impact on the trust's business, operations, structure and financial results, which are forward-looking statements. There are risks and uncertainties that could cause actual results to differ materially from those indicated by such forward-looking information and statements. Please see our press release and other regulatory filings for more information on forward-looking statements in these risk factors. After a few opening comments from me, Doug Strong will review the March balance sheet, as well as the first quarter financial results. Kevin Neveu will then provide us an operations update and our outlook. After that, we will open the call up for questions.

As we announced several months ago, Precision is planning to convert to a corporation. That process remains on track and Precision is seeking approval from unit holders in conjunction with its 2010 annual and special meeting to be held on on May 11, 2010, and if approved, to complete the conversion by the end of May. Further details about the timing and mechanics of the conversion are included in our notice of annual and special meeting of unit holders and the information circular, which is available on our website, and that's www.precisiondrilling.com, and it's under the Investor Center tab.

After fixing our balance sheet in 2009, Precision's priorities for 2010 were threefold. I am pleased to say that we have made progress on all three during the first quarter of this year. The first of these priorities is to be the high performance, high value provider of oil field services. We never lose sight of the need to provide our customers with value. 93% of our operations ran safety recordable-free during the first quarter of this year. Also, Precision was named US Contractor of the Year by a major oil company for 2009, and I extend my congratulations to the people of Precision for these accomplishments.

The second priority that we have is to seize market opportunities during this year. During the first quarter, we have signed two term contracts to build two new Super Single rigs for deployment in Canada later this year. Kevin will discuss this in greater detail in just a minute. Thirdly, we want to continue to build on the accomplishments of 2009 with regard to our financial flexibility. This flexibility allows us to take advantage of market opportunities today, such as the two new rigs I just mentioned. Throughout this year and into years that follow. We ended the first quarter with reduced debt, along with cash and revolver availability of about CAD400 million. Doug will have some more comments on this, and Doug, over to you.

Thanks, David. As David highlighted, our priorities remain consistent and focused on flexibility and opportunities. In terms of flexibility, first quarter 2010 financial highlights include cash management, whereby Precision continues to work within its cash from operations, maintaining liquidity of approximately CAD400 million, as at March 31, 2010, comprised of CAD132 million cash and available credit facilities. During the quarter, Precision made a voluntary long-term debt prepayment of CAD12 million on its term loans, spent CAD6 million on net capital spending and applied CAD82 million towards the quarterly change in non-cash working capital. The working capital increase was the result of a steadily increasing active rig count in the United States and seasonal activity increases in Canada that surpassed our internal expectations. Kevin will speak to second quarter trends in a moment, and as we cycled through the second quarter and collect winter trade receivables, we will build cash and be in a position to consider further voluntary payments to meaningfully reduce long-term debt.

Finance charges on the statement of earnings were CAD29 million in the first quarter of 2010 as compared to CAD39 million for the first quarter of 2009. Over the past 12 months, Precision has reduced long-term debt by CAD577 million. The cash component of interest this quarter was CAD19 million, a reduction of CAD14 million compared to a year ago, or a decrease of 42%. The vast majority of our term debt has fixed rates through cap-and-swap instruments and as we pursue further debt reduction through 2010, we expect our cash interest to gradually decrease. Capital expenditure flexibility was demonstrated in the first quarter of 2010 as net spending of CAD6 million was CAD9 million lower -- was 91% lower than the first quarter of 2009. The actions taken last year in response to low customer demand put a high priority on cash conservation. As we gain greater visibility for 2010 operating cash flows, investments will be made to seize opportunities.

Based on first quarter results and positive second quarter momentum, the 2010 capital expenditure plan has been increased by CAD47 million to CAD122 million. The increase aligns investment and equipment to a more normalized level, given increases in customer demand and confidence in the recovery of drilling from the trough established second quarter of 2009. In terms of opportunity, our focus is to continue to seek high margin, high performance work with customers in regions with sustainable growth. There's positive market momentum that Kevin will speak to in a moment that has led to the increase in the capital expenditure program.

The 2010 capital program now estimated at CAD122 million and is expected to be entirely incurred this year. This will further strengthen our rig tier capabilities with deployment late in the year for the benefit of 2011 results. The program consists of CAD19 million in total capital for expansion for 10 new Super Single drilling rigs and equipment for the completion of production segment, namely, Precision rentals and Terra Water Systems, CAD48 million for rig tier upgrades. The number of rigs impacted and customer contract arrangements will be disclosed in future quarters as contracts are signed and CAD55 million for fleet maintenance capital expenditures to existing equipment.

Debt markets have opened considerably since we placed our secured debt facility in the fourth quarter of 2008, and we took the opportunity to gain flexibility by successfully amending certain terms within the financial covenants. The opportunity to maintain high margins are always a top priority. The first quarter of 2010 was indicative of the tough market conditions from the second half of 2009 for new work. For Precision, it was important to position for winter work early and to get crews engaged with customer opportunity.

On a sequential basis, comparing the fourth quarter of 2009 to the first quarter of 2010, overall operating cost per utilization date were roughly flat. Average daily costs in Canada lowered by 3% and costs in the United States higher by 2%. This performance is noteworthy given rig activations and Precision success in expanding to new markets, such as the Bakken. Vertical integration of supply chain and equipment repairs serving to control costs through vendor management, process efficiency, to product standardization. Average dayrates are a combination of term contracted rates, idle but contracted revenue and the pure margin contribution, well to well current market new work and concentration of turn key work for the United States. Averages are obviously a combination of mix and current customer pricing. Yes, it's a modeling challenge.

The first quarter in Canada is our busy quarter on a seasonally adjusted basis and therefore with new work demand, the high margin term contract concentration is relatively low. There's 27% in the current quarter and 28% in the first quarter of 2009. In the United States, 40 rigs were active under term contract, and about six rigs were idle but contract for the first quarter of 2010, for term contract concentration of 51%. Compared to the first quarter of 2009, there were 16 fewer rigs under term, 11 fewer rigs idle but contracted, and the term concentration was 17 percentage points lower. With reference to income tax, please note that with our planned conversion to a corporation in the second quarter of 2010, the effective income tax rate will align the corporate statutory rates on the blended basis in Canada and the United States, based on operational results. On this basis, we expect effective rates to range between 25% to 30%, given mid cycle profitability.

In summary, we continue to carry a flexible approach to strike the right balance between new investment towards organic upgrade and growth while working within operating cash flow to carry liquidity at current levels with added flexibility to further reduce long-term debt. Kevin, that concludes our financial overview for what has been a straightforward quarter.

Thank you, Doug. Good afternoon. I will provide some color to the first quarter and discuss some of the trends we see going forward.

I'll begin by stating the obvious. The backdrop for Precision's improved utilization during the first quarter was the oil and gas liquids-based work performed by our customers. Gas liquids and oil based drilling started to pick up last summer and has continued to gain momentum in 2010. US industry oil drilling utilization exceeds the 2008 highs and Canadian oil-based drilling activity accounts for approximately 50% of the active drilling rigs. We believe this provides a strong foundation and good visibility for the balance of 2010. The important characteristic of this liquid based drilling is the well profile. These are generally complex horizontal wells requiring Tier 1 or Tier 2 rigs to economically drill. So whether we are deploying rigs for the Eagleford gas liquid opportunities, Bakken oil or Alberta Cardium plays, these top tier rigs have the best utilization and the best opportunity for dayrate leverage over the coming periods.

Despite the recently low commodity prices, dry gas activity remains firm, but it's important that we keep in mind that today it's driven less by the commodity price and more by leasehold requirements and the hedging programs executed by many of our customers last year. Yet some customers see the current depressed oil services pricing environment as a good opportunity to drill and complete their wells at the lowest cost in several years, and we believe this remains an important factor supporting some of the current activity. Now, I'm not in a position to resolve the debate regarding natural supply versus demand or to conclude whether the current gas rig count balances this equation. But I remain a firm believer that CAD4 gas is the best solution for CAD4 gas, and we all know that natural gas is one of the cleanest energy solutions available to the United States and Canada. And while in the short-term price volatility remains a concern, the mid to long-term potential for natural gas drilling remains a very, very good prospect.

Now, turning to regional breakdown, the Canadian winter drilling activity outstripped the industry's expectations. In many ways, our customers received a benefit of dayrates based on the much lower activity expected last fall. In December, Precision projected rig activity would peak in the 100 to 110-rig range. By early January, our forecast increased to as much as 120 rigs, yet by mid-February, our peak rig count actually hit 140 rigs, trending much like winter 2008. But fair to say, the real surprise was the 50% oil mix and a reemerging oil drilling industry.

Some of the legacy oil fields economically depleted by economically depleted by conventional drill such as the Cardium, the Viking, Nodakian are all benefiting from the unconventional drilling techniques developed in the Bakken and effectively reducing the well spacing and recovering oil previously economically unrecoverable. We estimate the Canadian industry had an additional 40 rigs drilling these Cardium wells this winter compared to the summer of 2009, and we expect this activity will rebound and may even increase up to breakup. The Horn River, the Motany and northern Alberta region was drawn for Precision this winter with our deeper Tier 1, 2 rigs approaching full utilization for a few weeks. This activity was driven by both gas and natural gas liquid-rich targets. We see good potential for normal seasonal recovery in this market segment. As we look forward through Q2 and to the balance of the year, we are confident that the liquids-based activity will return as soon as the ground dries and we should see a normal spring or normal summer/fall drilling profile, certainly much better than 2009.

If the service industry responds appropriately, pricing leverage and pricing discipline will return this fall. Precision fully intends to do our part. While we do not anticipate any cost increases should these occur, we would expect to pass these through to our customers. It's important to note that our two newly contracted Super Singles are both for oil drilling applications in Canada, and we see continued customer interest for Tier 2 to Tier 1 rig upgrades and continued customer discussions for new build opportunities for both oil and the longer-term gas opportunities of northeastern British Columbia.

For Precision, the Saskatchewan Bakken play remains very price competitive and less likely to see significant growth. Our Canadian well servicing production and completion business experienced a nice recovery in the first quarter, again, driven by oil and liquid-based activity. While this work is not as complicated as, or as profitable as deep gas, we are pleased to see activity approaching twice leverage levels. We are hopeful the price increases should be achievable later this year as annual pricing agreements are renewed. We are also planning organic expansion through rig upgrades and geographic expansion in both Alberta and Saskatchewan, and we'll provide more details on future conference calls.

In the United States, our Q1 activity is substantially stronger than we expected late 2009, and we see several opportunities emerging for new builds and continued interest in customer-funded upgrades. However, growth in the Bakken is not a surprise. From the beginning of 2009, we focused on the Bakken and the Marcellus regions to establish a strong presence in both markets. We expect to add as many as six more rigs in North Dakota in the coming weeks. And our established presence in south Texas serves us well for continued growth in the Eagleford as it continues to ramp up.

With our current US rig count at 87, up from 68 at the start of the year, the Haynesville, Eagleford, Bakken, the Rockies and our turn key operations all contributed. Further activity increases will come primarily from oil and liquids-based gas drilling. We believe some of these plays will include additional Tier 1 new build opportunities in the coming months. Pricing leverage on our Tier 1 rigs has been in the CAD1,500 to CAD3,000 day range as rigs have rolled over from the trough pricing we experienced in 2009. We expect these tight supply conditions to continue through the second quarter. Tier 2 rig renewals have also been in the CAD1,000 range during the first quarter and will continue into the second quarter.

On the international front, I believe we have heard from several other service providers about the weakness in these markets. That weakness is well evidenced by the highly price competitive bidding we are seeing out there. Precision remains in the game, actively pursuing these opportunities, but we do not intend to put our rigs to work in economics, which are inferior to what we can achieve in North American markets. We remain convinced that Precision's well known high performance capability and our superior safety record has value to those international customers. However, it remains a priority that we are adequately compensated for that superior performance.

As I mentioned earlier, Precision's capital budget increase displays our confidence in the sustained -- and our view of the sustainability of current activity levels. However, we remain fully poised for either a sharp pullback in activity, or for that matter, a rapid increase in demand. The cost saving measures we put in place in Q1 2009 remain aggressively in place today. And most importantly, as we have said many times, we have both the rigs and the people to respond to increased demand, should that be required. This flexible, highly variable business model is essential to our success. Dayrates and dayrate increases are on everyone's mind. It's a top of our agenda for a sales team and serves to create constant tension with our customers and our competitors. However, we must consider the context of the past 18 months when creating pricing models.

Let me recap some of the salient facts. The decline in US activity experienced between October 2008 and June 2009 rivals the early 1980s. For the first time in my memory, the 2009 winter drilling season in Canada was actually less active than the preceding summer. While last year's spring breakup was brutal, and the 2009 summer rebound failed to occur. Currently, the drilling industry is only two quarters into recovery in the United States and frankly, only one quarter into recovery in Canada, and we are all sensitive to the fragility of this recovery. Yet Precision came through this exceedingly well positioned as evidenced by our strong North American activity over the prior two quarters. We are very satisfied with our geographical footprint, our customer mix and our asset mix and we are ready to respond appropriately through 2010.

Just one final comment, I want to say that our thoughts and our prayers are with the families of our friends injured and missing off the Louisiana Gulf Coast. On that note, I will pass it back to Jenny for questions.

Thank you. We'll now take questions from the telephone lines. (Operator Instructions) Our first question is from Kevin Lo from FirstEnergy. Please go ahead.

Hey, guys. This question's probably more for Doug. Can you kind of talk about why you guys wanted to ease your bank covenants? Clearly, it doesn't look like you're in breach of -- or any -- with how much cash you have in breach. Can you shed some light on that?

Kevin, quite simply, it was an opportunity that was too good to pass by. It was inexpensive, and how could we not pursue something that gave us the chance to get greater flexibility?

But notionally then, it would be either the -- you would either expect a -- more of a down drop in EBITDA, which I'm assuming you're not, or you tend to ration up your debts for either expansion organically or otherwise. Is that the thought process?

We look at all scenarios. We're in a state of wanting to be flexible, and we want to seize opportunities. So, we see -- clearly, we see positive momentum currently.

Yes.

There again, we're poised and ready to react to any circumstance.

Kevin, I'll add that if we think back even 12 months ago, there were those that doubted Precision's financial stability. And frankly, having the chance to push back at the banks for the first time in a long time was something that we appreciated the opportunity.

Right. Can you kind of allude to how much visibility you guys have in maybe US and Canadian markets? And where you the think rig counts are going to peak out at, as per your visibility right now? Obviously not in a year or so, but.

Yes, Kevin, it's -- obviously it's a little hard to say, but as we talked about during the call, the oil-based activity is looking very robust right now, and I think all of us are, I won't say that we're 100% confident oil prices will stay strong, but certainly, it's got far less risk than the gas drip appears to have. And this drilling is proving quite productive. At prices north of CAD50 to CAD60 for oil, that liquids-based activity, oil and gas liquids looks very, very good. On that basis, I feel pretty good about the visibility through the second half of the year right now.

So you think that there's still some rig growth on both sides of the border?

Well you know, I think we were all surprised a bit by how quickly the activity picked up in Canada, particularly for the oil activity. I do believe there's potential to see this horizontal drilling with multi stage frac persisting through our growing some of the conventionally depleted fields in Canada. And it's expensive, it's a bit of a step change for the operators, but as witnessed in Calgary with some of the other operators, there's been very few disappointments so far in that drilling direction. So we're hopeful it continues and see potential for it continuing. So, yes, I do think that we could see some growth later in the year on additional oil drilling in Canada and certainly in the US right now. If there's been any weakness in gas, those rigs have found a home in oil very quickly.

Okay, last question. Can you talk about what you're seeing in dry gas drilling and whether that's come down yet?

Frankly, we expect that we might have one or two rigs roll off some time during the second quarter, and that's not an encouraging sign. But we expect to find homes for those rigs, and other than that, our customers out there right now are taking advantage of some pretty good rig rates in some cases, and the other ones are hedged for the foreseeable future. And one of our large customers reported a couple days ago, and they seemed quite confident they are going to continue drilling.

Okay. Great, thanks.

Thanks, Kevin.

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

Thanks, good afternoon. We've seen a pretty bifurcated market in North America with respect to higher spec, higher capability ranks drilling long horizontals and all that kind of fun stuff in the shale gas plays and then some of the more liquids-oriented plays. With the oil prices being what they are, and you obviously highlighted a number of oil plays that are looking promising, are there enough conventional oil plays out there or shallower oil plays to kind of get some of the non-Tier 1 rigs or lower spec rigs working? Because you still, again, you've got very high utilization decent pricing at the high end of the fleet and then not so great market at the low end of the fleet, not necessarily just for Precision, but across the industry, and I was wondering if you saw that changing with the oil price dynamic.

Mike, that's a very good question, and let me try to give you some sense of where that's heading. There are some kind of micro issues happening, like geographic location of rigs gets pretty important, and there can be more pricing leverage if the right rig is at the right place at the right time. But generally speaking, the Tier 3 category of rig is about 20% utilized. And the likelihood of short to mid-term or even kind of two, three quarter out pricing leverage on the Tier 3 rigs, unless, frankly, unless conventional gas really fires up aggressively for some reason, we see less likelihood of pricing leverage on the Tier 3 rigs through the course of 2010. Now, there might be cases where is a rig at the right place at the right time can get some kind of a premium, but I wouldn't view that as a trend.

Okay. And shifting over to the international side, was wondering if you had an update there, your thoughts on moving more aggressively internationally and in particular, any interest in what may happen in Iraq.

Yes, Iraq is starting to open up a little bit, and my first view is that it's an area we're going look at pretty closely. We have some contacts, we're doing some of the front end work that many companies are doing. I don't think that Iraq is going to be the first place that Precision moves internationally.

Okay.

I think there's enough challenges with Iraq that there are probably more established drillers that can move in there quickly, and I'm not sure that it quite fits our risk profile yet. Now, moving off that for a moment, we are very aggressive on the marketing front internationally, no question about that. We're not backing off a bit, but we are far from aggressive on pricing. We don't tend to buy our way into those markets at this point. And we see better opportunities for our capital right now in the best of markets. And with two new builds for Canada on economics that look, frankly, very appealing, I'll tell you again that we're not backing off our marketing efforts, but we're not in a position where we think we have to go buy market share.

Okay, so for now, we shouldn't expect any big forays into the international markets, given the domestic opportunities picking back up at good returns?

I think you'd put it a little different way than I would. It's not a trade-off. We're still looking for those opportunities. If we find the right opportunity with the right economics, we'll be there, and we're not bidding out there just for the practice of bidding.

Okay. So it doesn't have to be one or the other. It could do both -- be both, as long as you're getting the appropriate return?

Much better put. Thank you.

Okay, thanks. That's all for me.

Thank you. The following question is from Roy Ma from Stonecap Securities. Please go ahead.

Hi, good afternoon, guys. Just first question, Mexican operation, can you give us, maybe elaborate what your plans are for the operation given the challenges which has been publicized?

Sure, Roy, it's Gene here. Our current operation is two rigs drilling in the south of Mexico. It's a higher horsepower operation for us, 2000-horsepower and greater. And there's a shorter supply of those style of rigs in the country, and that continues to be where we see the best bidding opportunities for Precision. I think it's well storied what's happening in the Chicontepec area and in the Bergos area, some challenges as we sit here today as well. So that's going to be Precision's continued focus for the short-term.

So in terms of visibility, I understand those contracts are rolling off, at least for one of the rigs. What kind of signs are you seeing from customer demands?

We're seeing positive signs and working through negotiations right now.

Okay. Just to dwell on some numbers for just a second, calculating your -- what you release here in terms of your day margins, the US day margins, does that surprise you in terms of where you are right now? It came out to about 6500 a day, 6600 a day in terms of the trend, also compared to what your competitor reported yesterday. Could you maybe give us some color in terms of what you are seeing in the US margins at this point in time?

Roy, I'll start off by throwing a couple of comments out there and let Doug fill in the blanks for me. But first of all, the margins in the US don't surprise us at all. The activity level surprised us a little bit. And recognize that as the activity level exceeded our expectation, generally speaking, those were the rigs that were coming out with the lower dayrates. And, Doug, go ahead and help us with the numbers here.

I don't have any further to add, really. The quarter came in on a straightforward basis, right in line with where we expected it. Clearly, it's a question of mix. We had a lot fewer idle but contracted days, our term contract position as we know was continued to roll over into the current market. Puts a downward draft on it. But we're clearly seeing signs that the current dayrate environment is stabilized, and as we've indicated in our release this morning, we've got some modest increases underway.

And this is David. We had talked about, and we have been for several quarters, that as these contracts roll off of term that were signed in 2008, that there was going to be some degradation of the average dayrate and these things roll off. Now activity is picking up and rates are starting to pick up on the spot, but there's still effective averages going down.

I will add to that, Roy, that our operations guys have done an excellent job managing costs, and I don't think we have any surprises or any real negative indications on the cost side. So I think we're getting all the right levels of execution right now in the US market.

Okay. Well, maybe if I could come at it from a slightly different angle, can I -- perhaps elaborate a little bit in terms of what -- I realize there's different elements they may have gone into that numbers, but what would be the difference between, say, the contracted rate versus the one-size coming off the shelf and working the spot market? I'm trying to look for some -- I'm guessing there's actually a fairly wide difference between what you have under contract in the US versus the rigs that probably gave you a positive surprise in terms of going back to work. Maybe a little bit of color on what the difference in the margins are.

Yes, Roy. I'll try to answer that, at least give it a try. Really today, we have about 40 rigs working under term in the US, and most of those are going to be newly built rigs that are going to have high margins. These are upwards of 10,000 plus a day in margin. The stuff that rolled off last quarter, some of it was some new builds from early on, but some of it was also just some Tier 2 rigs. So for example, a rig signed up, a Tier 2 rig in 2008, which would probably have a margin, say CAD8,000 to CAD10,000 a day. In today's market, when it was re-signed, that number's probably in the CAD3,000 to CAD5000 range and could be -- depending on when it was signed, it could even be less than that. So that's what's happening here, as you roll some of these off. As Doug mentioned in his comments, we had a lot more rigs working under term and we had a lot more stack -- or idle but contracted rigs a year ago than what we have today. And we're down to two rigs that are idle and still being paid for, and that's pretty low relative to what I heard from some of our other competitors yesterday.

Okay. That's very helpful. Thank you guys.

Thank you.

Thank you. The following question is from Victor Marchon from RBC Capital Markets. Please go ahead.

Thanks, and good afternoon. First question I had is just on utilization. I know with your guys' Tier 1 equipment being essentially spoke for, just wondering if you could speak to the operator thought process when they are looking at coming to you guys for a new build versus trading down to, say, a Tier 2 rig.

Victor, it's Kevin. Great question actually. They have a couple of choices. They could look at upgrading a Tier 2 rig to Tier 1 status and helping fund that. But there's also cases where that rig might be so far from the market that the additional mobilization costs might start approaching new build economics. That's one consideration.

Another consideration is that even if we have excess Tier 2 rigs of the right horsepower capacity, they might be physically unsuited to the area, like the Marcellus, for example, or like the Horn River, for example. So those are some of the considerations. And generally, the length of their program. If they are thinking about a four year program, not a one to two year program, then they will be thinking about going out and buying a brand-new rig with top of the market Tier 1 specs. Right now, today, I would say that between US and Canada, we have about a half dozen customers that we're having those types of discussions with. And it's fair to say those projects are, with the customers are in the two to four year timeframe, and it's a case where there are potential, rig Tier 2 to Tier 1 upgrades or new builds and the same kinds of considerations.

And you had said that was both US and Canada?

Yes.

Okay, and I apologize if you had spoke to this, but just wanted to get your sense on the Canadian market here coming out of breakup and what you're seeing from customers split between all directed work in gas and how you see that progressing through the summer.

As we said earlier in the comments, I think the oil directed work comes back as quickly as the ground dries. And we could see a much more normal rebound to our activity. And I've been talking to our sales guys on a pretty regular basis here, but last year 2009, sort of May, June, July, we barely came back. We hit a horrible bottom and barely came back. This year is going to look much more normal relative to history and certainly, year-over-year sequentials for Q2 on activity will be very encouraging.

We averaged 27 rigs working in Canada in Q2 last year. And we got 30, 30, 31, something like that today.

And I know we've got a couple of rigs coming up this week, one going down. But this might be our bottom right now, and our bottom might be higher than the average was last year.

Okay, and the last one I had, just as it relates to debt paydown plans, if you guys have anything planned for the rest of this year? And the second part of that is how are we looking at interest expense for the full year?

Victor, you're right. This year we have no mandatory payment requirements, but we will look at voluntary repayment to further reduce debt. So in the quarter, CAD19 million cash interest, I think is a -- we made a CAD12 million payment late in the quarter. So you'll continue to see that decrease very gradually.

So, Doug, as we reduce debt, what's the ratio of interest reduction to debt reduction?

Yes, so that effective interest rate is 8.4% on that, so that -- it's a meaningful reduction as we go.

Right, okay. Great. Thank you, guys. That's all I had.

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

Hi, guys.

Hey, Roger.

Just a couple questions on the capital side. So your rig upgrades are now CAD40 million, if I got that from Doug's comments on the call, was CAD25 million. How many rig upgrades are you going to be doing for the incremental CAD15 million?

Yes, Roger, it's 48.

48, okay.

And I'll turn it over to David to carry on.

Yes, I can honestly tell you that it will depend on what the customers want. We're going out on these upgrades and we're talking to customers about moving up, moving a rig up a tier, adding top drives, doing that type of thing. So depending on what the customers want and what they are willing to pay for will depend on how many we do. So we really don't have a number for you right now. As we do it, we will continue to update you on a quarterly basis.

Okay, so --

-- guidance on the range of the upgrades, Gene, maybe a dollar value range, sort of minimum to maximum type upgrades?

Yes, they are generally anywhere from a CAD500,000 to CAD3 million. Again, focusing on improving efficiencies, whether that's by reducing the days to move, reducing load counts, just increasing overall rig automation is the focus of the program.

Okay. So the last time you were 10 to 15 rigs with 25, doesn't look like that's changed materially on this next tranche of upgrades.

Again, that's probably a fair comment. As I said, we will update you as we move through it, as the year goes on.

Okay. So on the same team, in terms of capital spending, you historically have talked about kind of payout terms for new builds. What do you -- are you in the similar timeline in terms of plus or minus four year payouts for upgrades?

Roger, on the upgrades, tier upgrades, we do see term contracts. They start term, traditionally start at six months, and we do expect capital recovery. We don't necessarily always get full, but we do expect partial.

Okay. Can you give me a sense of what it costs to build Super Series single?

Less than CAD10 million.

Okay, and are they both similar in terms of makeup?

Those are identical. There are -- actually, our Super Series -- Super Single mechanical series right now, they're identical rigs, similar to a number of other rigs we have operating in the fleet.

Okay, and I think that's it for me, just one thing, Doug. Thanks very much for the post conversion tax guidance.

You're welcome.

Thank you. The following question is from Dana Benner from Thomas Weisel Partners. Please go ahead.

Good afternoon, guys.

Hey, Dana.

I wanted to start with dayrates in Canada. I was a little surprised. Given the fact that I think activities, the extent of the move-up surprised all of us. Perhaps more in the US than in Canada, but notwithstanding that, given the rather marked rise in activity in Canada, to see dayrates go down 1,000 sequentially, I can't remember that happening before, not in -- just in my career. So it seems like the delta there was about 2,000 versus what we would have normally seen. Just wonder if you could provide us a bit more color? For example, a year ago, I think even though things were much weaker, we still saw a bit of a winter uptick quarter-over-quarter, and yet this year went down quite markedly. I would think those extra rigs would go into the spot market and maybe command a bit of a premium.

Doug, do you want to start with the detail and I'll come back to a bit of an overview.

Yes, I think the thing to overweight as you model and look at the numbers is that our Canadian rig activity quarter -- year-over-year for the quarter increased by 36%. Our concentration of term work really stayed the same, 27 versus 28. So we got a lot more days at current market pricing, which clearly is a lot lower, which significantly influences that overall average.

Yes, and I think sequentially, as Dana talking was about, that half of our rigs working in Canada in the fourth quarter were on term sequentially.

Right.

And then so first quarter, it's a 36 out of 113. So it was about a third -- well, less than 30%. So it really has to do with mix, is the reason the average went down.

And, Dana, there's no question that the activity level outstripped -- by far outstripped our expectations and the industry's, because we're not -- we didn't have work by being the low bid out there.

Right. So given the rapid increase in demand, presumably you weren't able to turn the screws a little bit and gain any measure of pricing increase. And were you even able to pass through the normal winter premium, or was that not possible?

We passed through some of the normal winter premium, but I'll come back and say that it resembled 2008's winter and that the activity outstripped expectations and price increases you would have normally seen for that level of activity simply didn't have a chance to gain traction.

Right.

And we didn't know whether the rig we were booking in January 20 would have a second job to, it did. We didn't know if the rig that we picked up on February 1 would have a second well, and it did. So the customers played a great game, and they won.

Okay. That's very interesting. Just one more question, as it relates to the US market. Your turn key work, the percentage of work that is turn key is rising, as I guess we would all expect. And I wonder if you could give us some color as to your strategy in that part of the market, given the still competitive conditions out there. Do you maybe seek more turn key work, knowing that you're a very competitive player in the marketplace and presumably know how to manage that risk better than maybe, say, others and thus increase your margin? Or do you stay away from that and just wait for the broad market to slowly improve?

Well, I'll -- that's a great question, and I'll try to answer it. We use a very scientific approach with the turn key stuff. It's all done from a geological basis and an engineering basis, and we risk factor each well that we bid on. And so we don't -- we stay within our risk parameters, and that's the kind of work we bid. Now, we've had more opportunities to bid lately and we've picked up a few more jobs.

And visibility on how that part of the market, operator preference, might progress through the back half of this year?

Yes, it will just -- that's really dependent on cash flows. Right now, we're working, I think four rigs on turn key, and I think we should be up to five here in the next couple of weeks, and it looks like it could stay at that level. Of course it's dependent. Some of that's going to be dry gas drilling, and it could be dependent upon what happens there.

Right, okay, guys. That's all I've got. Thank you.

Thank you.

Thanks, Dana.

Thank you. The following question is from Chad Friess from UBS Securities. Please go ahead.

Hi, guys. Looking at the second half of the year and the balance between debt repayment and new builds, would you say that your preference has changed in the past few months between those two options? Balancing the fact that the winter drilling season was stronger than expected, but gas prices are continuing to be fairly weak?

Good afternoon, Chad. It's Kevin. So if I read the question right, would we change our priority about debt repayment versus new builds into the winter drilling season change our view? So I don't think we've changed our view on debt repayment versus new builds and don't intend to. Our view is to maintain liquidity in a fixed range, we've been evident around CAD400 billion of liquidity. We've also said we would be opportunistic and if we had a chance to seize opportunities, we would do that. Which means that if we have a four year payment on new build rig, we'll do that in a heartbeat.

Okay. Thanks, guys.

Thank you.

Thank you.

Thank you. (Operator Instructions) The following question is from Todd Garman from Peters and Company. Please go ahead.

Good afternoon.

Good afternoon, Todd.

On the cost side in both Canada and the US, were your margins negatively impacted by higher start-up costs than you otherwise would have incurred had you known you were going to be as busy as you were? And if that is the case, could you quantify it?

The broad answer is generally speaking, no. They were not impacted by higher start-up costs. There was a, maybe the odd case in the US where rigs took a little bit more work to just paint up some parts, but nothing that shows up in the numbers.

And then conversely, were there any things that positively impacted your margin in either country on an operating day basis, whether it's WCSB claims -- or WCB claims, excuse me, for the quarter?

No, there was not, Chad. That's not a quarterly event for us. Todd, sorry.

Okay.

No, the only thing is that we just worked more rigs than we expecting, and that helps lower that average daily cost.

The usual winterization in Canada, but there was a pretty good blend of winterization in the fourth quarter '09. So it was a pretty straightforward quarter.

Okay, thank you.

Thanks, Todd.

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

Good afternoon, guys.

Afternoon, Dan.

A year ago at this time, the Company was talking about a 14% reduction in permanent staff. With the uptick in activity, have some of those people been hired back?

I don't have those numbers in front of me right now. We're running this business extremely lean, Dan. We put in place the measures in Q1 last year that were aggressive measures and we're -- frankly, we're keeping things very tight right now. The -- our variable field staff is certainly up with the activity in winter and activity in the US, and our guys are working out there very hard right now and doing a good job for us, so we appreciate that. I also know that our Houston office, our Calgary office right now, everybody's quite committed, and they are all working very hard. But we're very careful about expenses.

Okay. Are you hiring right now? Do you expect to hire as the year goes on?

Dan, once we got through the first quarter last year, we -- normal sort of attrition, we backfilled. We've continued to backfill attrition throughout the year. We'll continue looking at those moves going forward.

Okay. Just on the rig fleet itself, if I'm reading the press release right, it appears that there are fewer rigs. Can you tell me what has happened with the ones that aren't being counted anymore? And have you moved any rigs from one country to another?

Yes, this is David. We decommissioned 38 rigs in the fourth quarter of last year, and that's the difference, if you're looking quarter-over-quarter, the difference in rigs.

Okay.

What was the other part of your question? I'm sorry.

Wondering if you've moved rigs from one country to another in the first quarter.

Yes, we do that on an opportunistic basis. We moved three rigs earlier last year from US to Canada, and we're actually looking now at moving two rigs back the other way. So we will continue to do that where market opportunities present themselves.

Okay. The other thing that came up last year as a cost saving measure was some of the executives took a lower bonus or declined a bonus. Is there anything like that going on this year?

I think our proxy information discloses all of our actions around compensation pretty thoroughly.

Okay, great. Thanks very much, guys.

Thanks, Dan.

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

Sorry guys, one follow-up. So you talk a little bit about spot rigs and sort of utilization in the Tier 3 side and the Tier 1. Could you give me a sense of utilization for your Tier 2 rigs by country? And I realize it varies, but an average would be great.

Yes, I think obviously, with breakup going on in Canada, in the first, first quarter, the average utilization of the Tier 2 was about 60%. And in the US, it's pretty close to that as well. It's a little higher, 65%.

And is that kind of a run rate, would you think in Canada taking into account breakup, or a little bit lower?

Probably a little lower, yes. And I think in the third quarter, you probably won't hit the rig count. Never say never, but you probably won't hit the rig counts in the first quarter. So that utilization may be a little lower. Obviously, the Tier 1 rigs are going to have the highest utilization.

That's all I needed. Great. Thanks very much.

Thanks, Roger.

Thank you. The following question from Jeff Fetterly from CIBC World Markets, please go ahead.

Hi, guys. Kevin, your comments about up to six additions to the Bakken in the next few weeks, are those likely to be upgrades, new builds, any details you can give?

Jeff, those are likely to be our Q2 rigs, and some of those may have some upgrades on them.

Where did the economics from a new build perspective right now?

Generally speaking, I'll be fairly clear on this. There are regional considerations and there are technical considerations, so those both play in. But generally, within CAD1,000 or CAD2,000 a day on the dayrate, so that's the negotiating range, and we're within about a year of what we would like to see. So generally there's two levers. If we can get a four year contract, we would be thrilled. We'd take a slightly lower dayrate if we can get a three year contract, we'd like a little bit better dayrate. That's kind of our view on that and we're hinging those levers right now with a half dozen customers. I would say that we might have a contract signed today, if we backed off a little or if they back off a little, and we'll see how those negotiations go over the next few weeks.

How much of those economics changed in the last three months?

Not much. Just the number of conversations have gone up.

So in your mind --

Those economics aren't dramatically different than they were back in the peak in 2007.

So in your mind, what -- is this an impediment that's likely to gravitate upwards, just as oil prices hold in, or what's is the impediment to getting new builds done at this point?

I think it's pretty clear. I think our customers -- we're also caught a bit surprised on how quickly commodity prices came off in 2009. I think there are a lot of customers out there that are just concerned about having three and four year contracts. I think the impediment isn't commodity price on the oil side at all. It really is just longer-term thinking about whether they are comfortable with the three to four year contracts.

Okay.

And some of them are, as evidenced by our two rigs that we signed already in the first quarter.

The pricing metrics you've given for Tier 1 and Tier 2, in terms of the increases, how far off of trough rates are those today?

I would call those our step-ups over trough.

So the 1500 to 3000 and 1000 would be off the trough?

That's right, yes.

And what expectations do you have for the back half of the year, whether it be Canada or the US?

It's a little bit of a dice game. Canada, you know how the pricing goes in Canada. Likely, it's a Q4 event, so we're fairly optimistic about Q4 in Canada. Because of the oil-based activity, I'm not sure how much farther this rig count in the US is going to run. What we conceived in Q2 looks pretty good. If gas stays firm and if the dry gas activity stays firm and if oil continues to move up a little bit, we might see kind of a second round of that later this year. Might see. I don't think we would see a second round of another CAD3,000 a day, but might see a second round on the Tier 1s stepping up or maybe some more Tier 1s ordered.

And to be devil's advocate here, if gas prices go the other way, we could see it go the other way.

If that gas utilization ever drops dramatically, it will be a, kind of an end of the year looking more like 2009.

Doug, your comments in terms of contracted rigs, you were right around 80 rigs total under contract in Q1.

Yes, 81 to be exact.

Where does that number go to, exiting 2010 based on your current contract status and new build status?

I'll just give it to you by quarter.

You better.

81 first quarter, 83 second quarter, 74 third quarter and 63 fourth quarter. 75 for the year.

And you said 41 average contracts for next year.

That's correct.

And those numbers are all up over our Q4 contract flow, correct?

That's correct.

So sorry for the long winded way of getting to it, but you're guiding in the release about seeing sequential pressure on dayrates overall going forward in 2010. You're talking about, obviously seeing rates move up, obviously your contract profile looks pretty good. How should we be thinking about these rates continuing to fall on a sequential basis?

I don't -- we're not guiding on actual lower rates sequentially. I think we're guiding on is mix. You've got to carefully weigh all that out. And we've seen activity increases, we've seen rates stabilize, we've seen some modest increases. So that's what we're putting forward for consideration.

So is it safe to say that you expect positive momentum in weighted average dayrates heading into the back half of the year?

I think you've got to factor in the renewal of term contracts, right?

Yes.

Okay.

And the concentration of those term contracts, given seasonality, especially in Canada.

Okay. Thanks, guys.

Thank you.

Jeff, thank you.

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

Well, we want to thank everybody for participating today, and we hope you have a great day. Thank you.

Thank you, gentlemen. This concludes today's conference call. Please disconnect your lines, and thank you for your participation.