Precision Drilling Corp (PDS) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Precision Drilling Trust second 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.

Thank you. Good afternoon, everyone. I would also like to welcome you to Precision Drilling Corporation second quarter 2010 conference call and webcast. Participating today on the call with me are Kevin Neveu, our Chief Executive Officer and Doug Strong, our President of Completion and Production Services. Also with us here today is Gene Stahl, the President of our Drilling Operations and our new Executive Vice President and Chief Financial Officer, Rob McNally.

Through a news release early today, Precision Drilling Corporation reported on the second 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 there corporation'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 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 and these risk factors.

After I give a brief review of the second quarter operating results, Doug Strong will review the changes to Precision's debt during the quarter and summarize our capital expenditure plans for 2010, as he transitions out of his role as CFO. Kevin Neveu will provide then provide an operations update and our outlook and after that we will open the call for questions.

On June 1st, 2010, as the results of a plan of arrangement approved by the holders of trust of Precision Drilling Trust on May 11th, the Trust converted into Precision Drilling Corporation. More information is available in our press release and on our website at Precision Drilling. com, under the investor center tab about this conversion. Precision reported a net loss of CAD67 million or CAD0.24 per share for the second quarter. These results include a CAD26 million foreign exchange lose related to our debt being US dollar denominated. Also with the financing amendment that Doug amendment that will detail in a minute, Precision had noncash charges of CAD24 million during the quarter, related to this amendment. For more on the quarter, please see the details in our press release.

Also during the quarter, Precision Drilling strengthened its term contract position. We now expect to average 78 rigs on term in 2010 up from 75 average rigs when we reported last quarter. For 2011, Precision increased four average rig years to 45 from 41 at our last report. Two of these are related to the new build contracts, and others are for and the others are for rig that have been upgraded for the US Balkan. Current market conditions has Precision's Canadian rig count at 77 working this morning, with 20 rigs waiting to move to location once the rig dries. A year ago at this time, Precision was working 51 rigs in Canada.

Oil drilling is leading the way in areas like the Cardium where Precision has 11 rigs running and the Viking where we have nine rigs runs. Today we have 91 rigs working in the US, two in Mexico and one rig that is contracted but stacked that we are still receiving margin payments on. This last stacked contracted rig is expected to return to work in the next few weeks. A year ago in the US we were working 52 rigs so you can see the improvements in utilization that Precision has achieved. Kevin will detail some of the major resources that led to these improvements. Now I will turn it over to Doug for his comments.

Thanks, David. Precision's financial position continued to strengthen in the is second quarter of 2010 as the recovering customer demand experienced in Q1 carried through the second quarter. Strengthened oil fundamentals, improved capital markets and Precision's debt reduction focus over past year led to favorable opportunities to enhance liquidity, reduce debt servicing costs, and secure new rig build and upgrade opportunities with customers. These developments enhance future cash flow visibility and reinforce Precision's brand promise to provide high performance, high value customer service.

Specifically, Precision's pleased to highlight the following developments consistent with our theme to seize market opportunities. First, we were able to amend our existing secured debt facility to lower current interest rate spreads on term loan B on the term loan B by almost 3%. This was accomplished through a 1.5% reduction in the LIBOR floor to 1.75%, and a 1.45% reduction in the weighted average LIBOR margin to 5%. This in combination with the $74 million repayment associated with nonconsent debt holders, lowered annual debt service by CAD15 million. Second we were able to increase liquidity by $150 million, by adding borrowing capacity in our secured facility revolver. This in combination with cash on hand of CAD186 million is at June 30, 2010, provides Precision with liquidity in excess of CAD600 million at quarter end. Third, as we planned forward, we have expanded our capital expenditure by CAD122 million as announced in the news release this morning. We expect the vast majority if not all of the spending to be funded from operating cash flow. Precision's marketing teams and operating performance continues to build customer demand for high performance, super series drilling rigs.

We also continued to generate upgrade opportunities to enhance horizontal drilling capabilities. The adjusted capital expenditure plan is now estimated to aggregate CAD244 million with 2010 spending of CAD189 million, and the carry forward of CAD55 million to the first half of 2011. In a moment, Kevin will speak to regional deployment of the new super series rig build program which now stands at nine rigs. As emphasized last quarter, we continue to carry a flexible approach to strike the right balance between new investment toward organic upgrade and growth, while working within operating cash flow to carry strong liquidity. Further debt reduction remains an important priority for Precision as we balance capital allocation with creative organic growth economics. As recently appointed President of Completion and Product Services, I look forward to transitioning to CFO Office with Rob McNally and working with the tremendous people of Precision in my new role. Kevin, that conclude my remarks.

Thank you, Doug. I would like to start by congratulations Doug on the new appointment. Most of you on the call well know Doug's passion for excellence and focus on Precision's business. I am excited to see Doug now apply his expertise to operations for Precision's production to completion business and expect to hear more about this business segment in the future. Also ask you to join me as welcoming Rob McNally to Precision as our new Executive Vice President and Chief Financial Officer. As with all Precision new recruits, Rob has met Precision's internal requirements and besides his comprehensive finance and operations background, he has also passed our physical testing and drug screening, I can asure Rob that with his operations background should the position of CFO not work out, we will have a position for him on one of the super series rigs. Now on a more serious note, Rob's experience both in finance and operations combined with his extensive personal network and his visibility in the US capital markets, will have prove invaluable for Precision as we continue our US growth plans. We will work out our schedules with all of you to insure you get a chance to meet Rob in person over the next few weeks.

Now turning to the quarter, reporting a loss for the second quarter be it cash or noncash is very disappointing for me. Clearly, our operating margins have room for improvement. While some of the developments I will describe later in this call bode well looking forward, I am confident that our people are well focused on the current business, and we expect to improve these margins going forward. For several months, I have been talking about on going conversations and opportunities with customers both in Canada and the United States, to provide new build rigs, but for a variety of reasons the economics were well below the range to lock in contracts. I want to compliment our sales team for pushing two of those over the line with signed contracts and of the remaining five we clearly would not be announcing the spend without a high degree of confidence that our economically acceptable contracts are expected shortly. As is our policy, we will not spend the funds until the contracts are finalized and all of these contracts will fall within our expectations for term and economic return.

Turning back to second quarter and our views looking forward, there should be no doubt in anyone's mind that oil-based drilling is very strong indeed. We continue to see additional demand for rigs in the US Balkan, the Saskatchewan, the Cardium and Viking heavy oil plays in Alberta and particularly the recent revisions to the Alberta provincial royalties have proven helpful and continue to stimulate customer interest in horizontal and multilateral drilling, which from Precision's perspective is right down our fairway. We expect to with very active in the Cardium and Viking through the summer and for that matter through the course of 2011. That is of course once the most range, Alberta and Saskatchewan abate. One of the new super singles we announced today will be deployed for oil drilling Alberta early next year.

Looking for a moment at the US Balkan, Precision has activated four additional rigs during the second quarter, bringing our total to 16. The Balkan is proving to be our fastest growth area in the US and we see further expansion potential as high performance rigs become available. Despite the continuing soft natural gas prices and recent concerns of potential gas drilling slow down, during the second quarter we added three rigs to the Barnett region and three rigs to the Haynesville, bringing the totals to eight and 18 respectively. In early July, one of our rigs completed its drilling commitment in the Haynesville but was immediately redeployed to the Eagleford, without missing a beat. This seems to support our view that the strong demand for tier one and tier two rigs for oil and gas liquids should had help mitigate potentially softer demand for high performance rigs currently targeting dry gas. Three of the seven new builds we mentioned earlier will be going to Eagleford for two different customers, targeting natural gas liquids. All three are Precision super triple 1500 horse power rigs with AC power systems, pipe handling mechanization and most importantly, range three drill pipe to insure high performance horizontal drilling. The first rig should be deployed later this year and the balance in the first quarter of 2011. We are confident these super series rigs will perform very well in Eagleford and we will see further demand as we have on going discussions with several customers.

Now, we have talked about the Marcellus on many occasions. Today we have 10 rigs in operation. Two of the new build super singles announced today are fully contracted and will be deployed in the Marcellus for a new Precision customer. These rigs are sequenced for deployment late this year and early 2011. It is our view these contracts show how tight the available supply is for rigs capable of economically drilling in the Marcellus. On that note, included in Precision's new build plans is a new design Marcellus super triple configured specifically for pad drilling and designed for the compact mode restrictions needed for transportation in Pennsylvania. Notably, the rig will have benchmark mobility with pad to pad relocations of under 3.5 days and well to well moves of under two hours. We believe no other pad walking rig will come close to this benchmark. Of course like other super series rigs, this rig is equipped with an AC drilling suite, pipe handling mechanization, range three drill pipe to insure predictable, high performance horizontal drilling. We believe this rig is a real winner and like the super single that has a potential to become a category leader for shale drilling. We are excited about the rig design and have several interested customers. We expect this rig to be ready for deployment in second quarter of 2011.

On the pricing front, we see pricing continuing to firm up particularly for the top tier rigs, we continue to see strong interest for upgrades on tier three and tier two rigs. In the United States, our pricing is under fixed by a term contract, we are negotiating on a rig by rig basis. As a result, we have continuous opportunities to inch up pricing on the negotiated rigs, particularly in the more active geographic regions like Eagleford, Marcellus and the Balkan. As our rigs roll off term contracts, the renewal rates are not as strong as those signed back a couple of years ago but again, the prices have rebounded well of the lows of 2009, and we believe that the blended average of the day rates and margins have troughed. In Canada, our largest customers negotiate pricing arrangements on a yearly basis each fall. The opportunity to increase pricing during the year are fewer and limited to smaller customers with less developed drilling programs. As I said before our customers benefited last winter, with pricing far below what the actual utilization would have suggested. As we look toward to 2011 and consider our pricing strategies and based on the current strong demand for high performance rigs, we expect substantial pricing pressure this fall which will set us up nicely for 2011.

The international market continues to be a focus for Precision but as all of you know, it is very only competitive. We remain active pursuing high performance activities. Currently we are in the running for a deep high pressure, multi rig bid in the Middle East. We are not the low bider and would not intend to be. The customer has indicated a strong desire bring in a high performance international drilling contractor. We believe our pricing is appropriate. This process has lasted six months so far and may be several more months before the contract is awarded and deployment would be 18 months later.

Our two rigs in Valle Hermoso in Mexico continue to operate for major service company and have not been directly impacted by the uncertainties evidenced in the (inaudible) field. We are actively pursuing several other Latin America opportunities but have nothing to report at this time.

In our productions and completions business, activity continues to improve in oil plays both conventional especially in heavy oil and unconventional particularly the Balkan, and of course the emerging growth in the Cardium and Viking plays. Earlier this year, we initiated plans to capitalize on the unconventional trends, and redeployed about 14 rigs to areas that were previously underserviced by Precision. Not with stabbing the difficult weather so far in the summer of 2010, activities running about 30% ahead of 2009, and a more importantly spot market rates have begun to improve and as with our Canadian drilling business, we expect to see material margin improvement in Q4 following the annual pricing agreements with our large clients.

At Precision, we remain poised to respond and seize opportunities as we have during the second quarter with the new build announcements. We continue to reinforce our high performance, high value reputation with our customers. Over 80% of the wells Precision drilled in the second quarter were horizontal or directional, and importantly, Precision's liquidity and debt reduction focus remains paramount. We have steps taken to reprice debt, reduce debt and increase our revolver capacity during is second quarter, both reduces Precision's on going carrying expense and further strengthens our balance sheet. While we have doubled our capital spending plan in the second quarter debt reduction is a key consideration. As a closing note I want to recognize the Precision team in Canada and the United States for efforts and hard work to insure we continue to deliver the high performance, high value services our customers desire across North America. And with that, I will open the call for questions.

Thank you. We will now take questions from the telephone lines. (Operator Instructions). There will be a brief pause while the participants register. Thank you for your patience. Our first question comes from John Daniel from Simmons and Company. Please go ahead.

Hi, guys. A couple of questions first on the Canadian drilling market, you talked about pricing opportunities as you head into the winter season, can you give us a sense of what the magnitude might be? Is there any talk right now with customers?

Thank you for the question. I don't put a lot of guidance out on our strategies and our pricing this fall, word gets back to our customers very quickly and it just makes the conversation that much tougher. Certainly the utilization last winter point us to where we think things will be this winter, and there was substantially lower than the market would have expected having known we would see that much activity. It will an interesting October for our sales team, but I think they'll do the best they can to get the rates pushed up for us aggressively.

How about look at it this way, can you look at the US market from say rates troughed to where they are today as an indication of possible change up in the Canadian market?

I will have to leave it to you guys to draw your mobiles on that. Sorry, John.

The completion of production services segment is we look back in '08 and '09 revenues were up about 50% quarter-over-quarter, Q2 to Q3. You are tracking 30% above now. Is that, is that fair with 30% on revenues or activity?

Yes. John, it is Doug. We like the momentum we are carrying out of the month of June.

Yes.

The activity pick up would be higher than the 30% currently.

Okay. All right. One more and I will let others go. Can you remind us how many of the rigs in your capital program, how many you have upgraded? Is it 15 this year on the drilling side?

We guided originally to something in the range of 10 to 15. Looking for the scope of the upgrades that number might come in closer to ten.

Closer to ten, thanks, guys.

Thank you, John.

Thank you. Our next question is from Mike Erman from Deutsche Bank. Please go ahead.

Good afternoon.

Hi.

I had a question on the CMP side, obviously moving Doug over there as you said indicates an increased focus on the business. Should we expect to see the, in that emphasis, does that employ a geographic exposure sounds like you have moved assets, organic growth? Do you need or want to add some product and service lines or all of the above?

Mike, tomorrow is Doug's first official day on the job.

Let him get settled first.

Yes, we'll let him get settled first. Certainly, we understand that our position in Canada is, is very strong and our production and completions business. I think there's a lot of challenges in the US market. So I wouldn't want to lead you to believe that we have immediate growth plans to the US. That's not on the short horizon for us.

And I mean are there opportunities to do more within Canada where you already have a strong market position again as you said moving assets or adding products as you stay focused within Canada?

We have a core focus on the existing business lines and we see rising momentum opportunities there to, to insure that we continue to provide safe and reliable service, completion production is a little more of a call-out service and we have got the 24 hour momentum if you will, that drilling has. So, the industry over the past couple of years contracted hard and we will be sticking to our sewing here in the short term, to continue to bolster both the human capital and the equipment within our C&P business.

That makes sense, and may be difficult to answer at this point, but as you look down the road and this may be more of a big picture strategic kind of question, but if you think that ultimately Precision can remain more or less a drilling-focused contractor? Do you see a need on the horizon to be more integrated to offer more services? Are customers requiring that or more for bundling of services maybe even from the higher end plays or just stay focused on drilling market for now?

Great question, Mike. I think it really depends geographically where you thinking, outside North America the integrated services model as a lot of traction in countries and places where the injury groups and the national oil companies don't have the depth they have in North America. But the North America, the drilling departments of most of our customers have depth but if there isn't depth, there's a local third party that provides like that Canada, so the business has remained quite fractured and even those drillers that have drilling rigs and service rigs and some even have pressure pumpers a very of that is actually combined in a degree of service business in North America. I think our customers are quite comfortable keeping the business fractured and if, if one plus one equals two and they can save a lot of money they will put them together.

Got you. Okay. That's all for me. Thank you.

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

Thank you. Great afternoon, guys.

Hello, Victor.

First question is on the new builds, and I wanted to get your sense as to the other publicly traded companies talk about adding some rigs in the US, and just wanted to see if you had a sense as to what the total industry order book looks like right now, and what is your sense in the demand that you see for these tier one assets into the opportunity set for industry say over the next six to 12 months?

First of all are you referring to the full order book across the sector?

Right.

That's a tough one to give you exactly because some people are building rigs on speck, some people are building inventory that can turn and some have announced full rig builds, we have and US peers have discussed full rig builds. So what I would point you first of all are the clearly announced rig builds, that appear to have customer charge is probably less than 25 or 30. There may be more rigs in process either as you know, speck or loosely specked rigs or parts, don't know for sure, and again it is a real tough number to get your arms around but if you think 25 to 50 in the range. I don't think I would argue it will be less than 25 or maybe not more than 50.

Now what I see for demand going forward, it is remarkable that considering what we have been through there's even one new rig being talked about yet. These are good signs about how effective the tier one and tier two assets are in the marketplace but more importantly, whether it is tight oil or convention oil in terms of oil drilling or unconventional gas or shale gas, clearly, the tier one and tier two rigs are required. The rigs are heavily oversupplied. They have opportunities for maybe regional drilling opportunities or maybe some vertical wells or low cost wells but the growth areas in North America will copresident to be unconventional style drilling. So the game on rigs is far from being finished.

You had mentioned the interest in upgrading the tier two assets. Is that driven by customer demand or is that just, you guys doing it, in anticipation or just in look at how tight the tier one market is?

We generally try to tie all CapEx improvements in a rig customer contracts. We have a fair amount of discipline in insuring that they're getting certainly near full term pay out terms on new rigs but even on the upgrades we are looking for big contractors that insure we get back most to all of our capital. So very broad terms virtually all of our upgrades will be contracted rigs.

Just switching to pricing, to something you had mentioned earlier on the blended margins in the US have troughed. And is I was just trying to get the sense as to how that looks coming out of the other, other side, just given the mix of term contracts and the spot market today. If the blended average were at or near the low, what is your thought as to the progression going forward given the mix between term contracts, the spot market and as some of these terms rollover? Is it something that we are looking for some improvement in the say fourth quarter, first quarter of '11. And is it look more of a gradual improvement or is it something more and something not a hockey stick, but something more significant based on the mix?

Victor our view on how it might move up in the aggregate going forward is, it is as visible as we see our customers drilling plans right now. Frankly their plans kind of run out at the end of the year with 2011 budgets yet to be announced. So that's one factor that makes it hard for us to guide forward on day rates. The trough in activity kind of, kind of lagged or dragged on from some time in April through July. It was almost a two quarter type of lag. So as you know, the day rate will stagger a little bit in aggregate. It wouldn't surprise me but we are working hard to push them up. The top tier rigs are doing very well right now, we talked before in the past CAD2,500 to CAD3,500 day. We have talked about a little less of the tier two, CAD1,000 to CAD2,000 unless we do a tier upgrade. That is the type of thing we are looking for. Again we are rolling off contracts from 2007, that were some very good contracts even on some lower tier rigs. So if it takes a while to wash this out, I think by the end of the third quarter when we report earnings in the third quarter we will start to see the front end of the curve, but I am going ask for some time on this and come back to you in October.

Sure. Sure. And just the last one, any guidance to provide on the G&A side as well as tax rate going forward.

First of all SG&A, we are still running this business, and I will use the word as late as June 2009. We are running lean and keeping things lean on the G&A side. I will turn to Doug on the tax side.

On the tax rate, as a corporation, the statutory tax rate is between our Canadian and US operations is as we guided last quarter in the 25% to 30% range. As you get down to the underlying effective tax rate, there are some, there's variables in play that reduce it. But on long term basis, continue to guide in that 25% to 30% range. Not all of which is cash obviously and as we continue in a low pricing environment, you will find very little of that is cash.

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

Thanks, Victor.

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

Hey, guys. Just k looking at your balance sheet, can you talk about why you needed to explain your bank line?

The short answer on it is we are getting back to liquidity we saw back in Q4 2008. And broadening of the lending relationships. The markets opened considerably since then, and it was a great opportunity very little cost to get the relationships that quite frankly match our underlying market and platform for platform for growth going forward.

A round about way of asking a different question would be do you see those as being a little more aggressive in terms of spending capital if there's opportunities available, I guess, in the next six to 12 months.

Not at all. We think the size of the credit line is right in line with the scope of our operations.

Right, okay. In terms of what Kevin was talking about in terms of the Middle East and South America. It sounds like maybe tone it sounds like you are a little more enthusiastic or optimistic that the Middle East is a little more imminent or the probability is a little higher, would that be safe to say?

I wouldn't go that far, Kevin. That particular bid I was mentioning is the public opening in the Middle East. And I don't want to giver a lot of specifics but we are in public record in the Middle East on a particular bid as having been a qualified bidder that delivered a compliant bid. What's happening right now in Latin America, until we have something substantial to report, I don't want to give a lot more detail right now.

Okay. I guess, if we look at the cycle right now, and you know you are saying that the rate versus troughed and we should see a little improvement from these level, how far away do you think we are from mid cycle pricing?

On a bi-tier basis, the fact we are announcing some new builds right now, it might be fair to say those tier one rigs are not far off of pressure, and cycle. Replacement pricing on this has contracts, you know our discipline on contracts.

Okay. And remainder is below, like materially below? Or --

Well, obviously tier three rigs are CAD1,000 or CAD2,000 a day EBITDA margin, that's about it. Tier two rigs are doing good and if we can upgrade to tier one, they're in that same range. We have guided you in the past to think about the step to the tiers being CAD3,000 to CAD5,000 a day in the EBITDA step range. That guidance still stands.

Okay. And last question you guys have -- you build rigs here and there, what do you see in terms of rig decommissions from yourself or the industry, in Canada?

Decommissioning we decommission a lot of rigs back in December as you all know, and we do it when they we the time is right. We look at our fleet and utilization and things like that. And look at opportunities down the road. I can't speak to competitors and how they analyze their fleets.

Okay. Thanks, guys.

Thanks, Kevin.

Thank you. Our next question is from Dana Benner from Stifel Nicolaus. Please go ahead.

Good afternoon, guys.

Afternoon, Dana.

I wanted to follow up I think it was Victor's questioning with respect to day rates and margins, mine is on the day rate side, you had given some day rate deltas, for tier one and two rigs principally and I guess I wanted to maybe put a finer point on it. That is if you think if you look at the second quarter results, can you give us a sense for how much those rates may have moved by tier in the second quarter in the US? Can you give us a bit more color on that?

Dana, this is David, I'll take a shot at that. The tier one rigs from the bottom of the cycle in mid 2009 to today have probably moved in the CAD2,500 to CAD5,000 range. This last quarter, they're up a little bit of that increment I would say 10% to 15% would happen in this quarter. They're still moving up we have cost replacement economics because we are building new rigs. Does that answer your question?

That would be tier one. What about tier two?

tier two are probably up CAD1,500 to CAD3,000 bottom of the cycle to today. And again, some of that took place earlier, I'd say 10% to 15% of that increase in the last quarter as well. I think that's standard across the tiers.

There's a fair bit of utilization that plays into that.

Right. I guess as we think about Q3 leading edge rates, would that more in keeping with the trend line established in Q2. Do you see any type acceleration or is there too much uncertainty with respect to stronger oil drilling and a backing off of gas?

Yes, you know, as Kevin said earlier we have as much visibility as we have with our customers. So we don't want to get into projecting Q3, right now we are running 91 rigs and 77 in Canada. Which is well above last year's pace we don't see anything today that tells us it is going to shrink but it is a long time to the end of the third quarter.

Right. The second and final question, relates to the I guess the trepidation that you and so many others feel right now on the natural gas side, and notwithstanding the cautiousness that you and other oil service companies have had on the gas market this year, the gas rig count continues to go higher and I wonder if you could maybe give us your sense as to why you think it has moved as high as it has given gas prices stalling out? Lots of reasons out there we all know about, but how would you prioritize those reasons for why the gas rig count has moved higher than the service companies and even analysts and PMs would have thought.

There's no question the Marcellus probably makes sense at these pricing levels. I think Marcellus continues to have good fundamental value. When you move into the other shale plays in the US particularly, obviously hedging and drill to hold are drivers, no question about it. And one view might be eventually the drill to holds run out. Another view might be that the drill to hold continues on because there's other lines being bought that have to be held. So these are hard things for us to model, and it is, there's also talk about how the inventory wells are drilled, but not completed or not tied in. Those are hard to model too. We are in touch with our customers and work closely with them. We are drilling for in those shales for large companies with solid hedging programs, some are going against the grain on their CapEx spending for gas and we are part of that play with them.

It is good to see the utilization, but it has been an interesting year. I will turn it back.

Thank you, Dana.

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

Good afternoon, guys.

Afternoon, Mike.

Just before I get to a couple of quick questions, I missed something earlier. What are the specks on the Eagleford rig?

Sorry on the - -

The rig moved to Eagleford, was that a super single?

The rig to Eagleford was a Super triple 1500-horsepower, three of them, the new builds, the new build rig for the Marcellus was 1200-horsepower Marcellus super triple.

The one from Haynesville to Eagleford was a 1500-horsepower. That's what he is asking.

That's the one I am after, yes.

1500 horsepower super triple.

That's terrific. Secondly here, was there something weird in depreciation this quarter?

Not particularly. What's your observation?

It is $11 million higher than Q2 '09. I realize utilization was a little bit better, but it is more than what Q4 or Q3 '09 were too.

What's in play is the if you model up the activity increase and where we experienced the increase between the US and Canada, it is based on the unit production method.

Right. So I would have thought with lower utilization it would have been lower, but okay. So but there is not a write off or anything in there.

No, no.

Okay. The directional business can you give us an update on that?

Sure can. I think the last call, disappointed with the progress so far and right now we have several rigs in Canada on two customers specifically that we have partnered with, the customers, strategic we are going through, and frankly we are convincing the customers we can do a great job. And it is going well so far. In the US, we are doing the same thing focusing on a couple of customers, and establishing close rapport, close relationship and changing the world one drilling image at that time at this point.

So you haven't materially expanded the capacity in that business yet.

Well, we are acquiring some more tools and things like that along the way but no acquisition, nothing major.

Okay finally because I have to ask, any update on the thoughts on the dividend on or reinstating a dividend or views on potential dividend.

Mike, the answer remains the same, our debt level isn't where we want it to be ultimately.

Right.

Until we get there we will just hold back conversations about how to deal with the cash after that.

Okay, fair enough. Thanks guys, that's it.

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

Thanks. First of all, Doug and Robert, congratulations on your new moves.

Thank you.

I have most of my questions have been answered. I have one question and it relates to, if you can look at Q2 '09, I didn't knows and say Q2 '10 margins, 5% to 6%, if you can break it down, you gave language in the Press Release, but what portion was comprised, can you break it out a little bit?

The biggest piece of the difference was Q2 2009 still had a lot of 2008 contracts through in the US. So it was really just, the exceedingly strong contract position we had from the downturn, that helped support Q2 margins.

Okay.

You also seen the US operation that we had significant idle but contracted revenue, and we also, that amounted to CAD15 million we also had CAD6 million of lump sum pay outs in Q2 '09.

So would I add those and say CAD20 million of right to the bottom line numbers that didn't show up this year.

CAD21 million, yes.

Yes, 21. That's good for me. Thank you very much.

Thank you, Roger.

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

Hey. So I guess just looking at the rig count in Canada, and seeing how the staggering growth we seen in the cardium and looking at what's going on in the Viking and lower shaw and upper Balkan, there has been a pretty big reemergence up there. Kevin, what inning you think we are in with that stuff and is that reshaping what's going on in Canada?

Its batting practice.

You almost feel the batting practice, I chuckle at David's comment there. First inning was last summer, and it went from a hand full of rigs to 85 last winter industry-wide. That's a big jump in six months, and right now today I think we have more rigs drilling Viking than cardium both nicely. As I have listened to the companies talk about their line positions and how long they can drill for, they're talking about years and years. Not Q1 2011 but they're talk about years and years. So I think we are very early in this game.

Okay. What -- when you look at those plays today versus what was driving the Canadian activity three or four years ago. Obviously we need to get more rigs utilized before major changes in pricing but how is it different in are those more profitable or same type of rigs? Is that changed at all?

John if you look back three or four years ago, the only oil drilling that wasn't horizontal well let me say another way, the only wells that were horizontal were the heavy oil wells, virtually every other oil well being drilled in North America three or four years ago would have been a vertical well, tier three rig. Today, these are tier two and tier one rigs required to drill these ten, 11, 12 stage horizontal fracs, even through the conventional Cardian and Viking type wells. So it is really helping with the rig fleet right now.

So a bit of a transformation in the sense of what's going on in Canada right now. I guess that's really all I had to say or I guess that was my only question. That's all. Thanks, guys.

Thank, John.

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

Hi guys on the CapEx side the CAD121 million, how is that split wean upgrade and maintenance?

Of the additional capital that we announced, CAD106 million of that is expansion. The balance is upgrade.

Okay. If you put it pro forma the number of rig upgrades coming back to about ten rather than toward the 15 side. So do you have a sense in terms of the overall component, what would be upgrade versus maintenance.

Yes, that ten upgrade number, those are significant rig upgrades refurbishments, that does not include some of the top drive additions within the upgrade capital number. So, bear that in mind as you think about the rig count.

Okay. The rig builds, that are coming in, give us a sense whether those are incremental additions for producers to their programs or whether they're displacements.

The -- our sense would be all incremental.

Do you have a sense in terms of what percentage of your fleet today would be running ton lease for tension or drill to keep basis?

I commented earlier I said 8 and 18 rigs drilling in the Haynesville and Marcellus, some percentage of those rigs, but it is not a big number relative to the activity across the fleet.

So you have -- in the numbers you lived off earlier I counted just over 70 rigs that are operating in resource plays, do you know what that number is in total for your fleets? And maybe contrast in terms of the type of drilling they're doing within those resource plays?

David, do you have that detail? I think over the course of the quarter, more than 80% of the rigs drilled horizontal directional. That's probably not a bad proxy for resource plays, and heavy oil combined.

Okay. And lastly, your comment Kevin about debt repayment with the doubling in the CapEx program, and the working capital requirements for the business in the back half of the year, do you believe you have the capacity to pay off debt in the second half of 2010?

What I can tell you is we are paying for our CapEx completely within our means. And I would also tell you that we still have optionality on how we decide to pay down the debt. If you will notice in past, in the past payments we have made, long-term each time we have done that we used it to seek some form of amendment to the debt terms or further relaxation or further space, and I think we have been strategic about we applied that cash to the debt. So it is not just pay down debt but intelligently and improve our banking terms, and its worked well for us so far, we're not backing down on that.

Outside of using the balance sheet do you believe you will have free cash flow to continue debt repayment or is that a 2011 initiative?

I think the 2010, I think that we are balanced, deploying the free cash flow and it will go toward our capital expenditure program. 2011 comes down to where we will see what kind of momentum we carry out of Q4. We have a flexible plan. We have CAD55 million committed on expansion and a lot of flexibility around the upgrade capital that continues to carry significant free cash flow to apply against debt.

Okay. Thanks for the color

Thanks, Jeff.

Thank you. The next question is from Jeff Mochoruk from Cormark Securities, please go ahead.

Good afternoon, gentlemen. Most of my questions have been answered but can you help us with the timing on the new rigs?

I did throughout the course of the conference call. David, do you have it at your fingertips?

Yes, basically, they start here the earliest rigs will go out in the third quarter, I think we have one and a couple more in the first quarter and then they will spread out the first half of next year.

On the cost, things are heating up a little bit. Are you seeing any cost pressures, you look like your costs on a sequential basis were up about CAD500, are you seeing any cost on where those are coming from?

Gene, are you on the line? Can you just --

Sure, as we've grown our rig count off of a low of 40 in the US up to 91 today. So we are putting rigs to work that some of them haven't worked in a little bit. And as such there's some start-up costs associated with that. But something as we project forward don't intend to see rising.

Is there any -- I guess incremental or positive cost working in some of these regions such as the Marcellus, backing off of the start-up costs.

Not particularly, Jeff.

Okay, thanks.

Thanks, Jeff.

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

Hi guy, congratulations on the new build. I was wondering if you could give us any guidance on what the pay back period is for these new rigs. Would it be under four years?

Brian our guidelines are in the four to five year range. And contracts are generally cover between two thirds or between three quarters and full pay back. So that's the, the guidance of the contract.

Okay. Perfect. And then, just ton completion and production side, I just wonder what the pricing trends are, you know it seemed like it slipped from a year ago levels.

Yes, Brian, I think if you look harder at the second quarter results, you'll see our margins are relatively Q2 2009 over the current quarter. As we come out of June, we've had some weather delays, we are carrying strong momentum. We saw activity up significantly in the quarter, we are carrying higher levels of activity compared to last year at this point, so the industry went through significant rate reductions and we're working with our customers to get some the value back and to have opportunities to reinvest in the equipment and bring some technology back into play as well.

Okay. So it sounds like that's a bit of a work in progress for a while.

It will take time.

That was it for me. Thanks very much.

Thank you, Brian.

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

Good afternoon.

Hi.

In the US on the cost per day side, if I look at the sequential in US operating costs per day, of say CAD400 to CAD500, is that entirely related to the reactivation of the rigs because I am, the turn-key revenues are also up say 50% and I'm wondering what the cost impact there would be on a per day basis.

Yes, Todd, its David. Turn key does affect that. We had more rigs operating in the quarter of ten over second quarter of '09. So in turnkey costs are going be higher because you pay more well costs, course you have offsetting revenue.

So the -- if I look at -- Is that a cost increase all because of turnkey costs, or is it rig reactivation?

There's a little of both but the turn key is a big component of it.

Okay. And then if we just flip over to Canada, what would with the Precision sense of activity in Q1 of 2011, and what percentage of the tier one assets that you have might be applicable to that type of activity?

I didn't catch the question, can you repeat it.

Based on what you see for sag D activity in Q1 2011, how many tier one rigs do you think you can put to work as it stands right now?

I think in tier one 2011, every tier one rig Precision has will be running.

My mistake, tier three rigs, excuse me.

Oh, tier three rigs.

The real question might be how many more tier rigs are you considering upgrading for Q1 2011. That be more helpful because frankly, unless its a horizontal well, and it would likely won't get a lot of work. We do have a couple of tier three rigs drilling horizontal wells so its not an absolute, but our tier three fleet, I think 18 or 19 are working. We could double that if we needed to. We could put twice as many to work or more and more, but we are not bullish in that being something we need to worry about for Q1.

Okay. Thank you.

Thank you. The next question is from Mike Clark from Star Capital. Please go ahead.

Sorry, guys, the questions were answered. Thanks.

Great, Mike. Thank you.

Thank, Mike.

(Operator Instructions). We have a follow up question from Jeff Mochoruk from Cormark Securities, please go ahead.

Hi. Just to touch on the service rig mark, you didn't really talk very much. What do you see with the change in the oil and gas mix in Canada and how is that impacting your utilization and how do you see that going forward and what else are you seeing opportunities to increase prices in that market?

Jeff I mentioned earlier during the call we had redeployed 14 rigs to areas that we were underservicing. That was specifically for oil. The activity right now in the Cardium, Viking and heavy oil, all oil driven, what we are missing is the old deep gas used to be really good for that business. That's not coming back right now or on the short horizon but a little more margins but it is good work for us.

How do you see pricing playing in the market into the winter fall of this year?

I would add that the on the service rig market our customers are frankly the opportunity right now, rates are comparatively low to where they have been as we came out of the second quarter, we see nice activity in north and west part of the western basin, no question oil is carrying the day. But we are seeing customers do things like working over abandonment type of wells and so we see that momentum continuing and as drilling persists, we expect our completion work to quarterly improve, as we saw in the second quarter of '10 versus '09.

Okay. Thanks.

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

I'd just like to thank everybody for participating on the call today and have a great day.

Thank you. This conference has concluded. Please disconnect your lines at this time and thank you for your participation.