Precision Drilling Corp (PDS) 2010 Q3 法說會逐字稿

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

Thank you. Good afternoon, everyone. I would also like to welcome to you Precision Drilling Corporation's third quarter 2010 conference call and webcast. Participating today on the call with me are Kevin Neveu, our Chief Executive Officer; Doug Strong, our President of Completion and Production Services; and Rob McNally, our Executive Vice President and Chief Financial Officer.

Through a news release earlier today Precision Drilling Corporation reported on third quarter 2010 results. Please note 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 Corporation's business, operations, structure, balance sheet, 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 and these risk factors.

Rob McNally will begin today's call with a brief review of the second quarter operating results -- excuse me, third quarter operating results and our capital expenditure plans. Kevin Neveu will then provide a drilling operations update and our outlook going forward. Doug Strong will follow Kevin with a brief overview of the Completions and production segment, and after that we will open the call up for questions.

Before I turn it the over to Rob, I'd like to comment that we are pleased with the quality results of this quarter, despite the overhang in the market of low natural gas prices. Oil and liquids rich natural gas drilling and service activity are driving these results for Precision in both the United States and Canada. Our comments today will reinforce that and provide examples of the importance of oil in the markets today. Rob, over to you.

Thanks, David. As David mentioned, Precision had a very solid quarter. We reported net earnings of CAD61 million, or CAD0.21 per diluted share on revenues of CAD359 million for the third quarter. These results do include an CAD18 million foreign exchange gain, which equates to about CAD0.05 per share, related to our debt being primarily US dollar denominated. Our Q3, 2010 EBITDA was CAD113 million, which represents a 31% increase over the CAD86 million achieved in the third quarter of 2009.

The improved third quarter results primarily reflect increased utilization. Activity levels have increased meaningfully with the continuation of positive momentum building from the beginning of the year. Drilling days increased 62% in Canada and 76% in the US while service hours were up 42% over the third quarter 2009.

Abnormally wet weather in Canada restricted rig mobility and operating days for Precision's Canadian drilling and well service operations. Otherwise Canadian results would have been meaningfully better.

In the US, the average land rig count for the third quarter of 2010 was 1,590, compared to 927 in the third quarter of 2009. The average rig count in Canada was up 94% with the Q3 2010 at 359 versus 185 in the prior year period. Combined Precision averaged 176 rigs operating in the third quarter of 2010, versus 130 in the third quarter of 2009.

Currently in Canada Precision's active rig count stands at 119 rigs after averaging 82 during the third quarter. Precision's US and international rig count is currently at 101 after averaging 94 rigs working in the US and Mexico during the third quarter.

In the quarter, we had 35 rigs working under term contracts in Canada, representing 42% of our active Canadian rigs. In the third quarter of 2009, Precision also had 35 rigs working under term contract, although it represented 69% of our active rigs, in third quarter of 2009. In the US for third quarter 2010, we had an average of 53 rigs under term contracts representing 57% of our active rigs versus 41 rigs under contract and 77% in the prior year period.

In the third quarter Precision further strengthened its balance sheet. Following the CAD75 million debt repayment in the second quarter, the Company made a voluntary debt repayment of CAD13 million, reducing our total debt to CAD773 million. Net of our CAD209 million of cash, Precision's net debt position is currently CAD564 million. Liquidity increased with positive cash flow from operations, partially offset by debt reduction, an increase in working capital and the addition of CapEx, resulting in a cash increase of CAD23 million for the quarter.

To capitalize on market opportunities, Precision has increased its anticipated capital expenditures by CAD29 million, to a total of CAD218 million for the full year of 2010. That's broken into CAD60 million planned for maintenance and infrastructure spending, CAD84 million for rig upgrades, CAD74 million for expansion capital spending, and then there's an additional CAD82 million that will roll over into 2011 for expansion projects which was initiated in 2010.

I want to comment briefly on our conversion to IFRS. As it's been previously disclosed we'll transition to IFRS as of January 1, 2011. We are on schedule with the project and progressing well. There will be a number of changes, which are primarily non-cash, to our financial statements, once IFRS is implemented. As outlined in our press release, the largest impacts will be the following.

Under IFRS 3, we intend to restate the December 2008 acquisition of Grey Wolf. This is expected to reduce goodwill on Precision's balance sheet by the amount of the goodwill recorded on the acquisition of CAD465 million with an equivalent reduction in shareholders capital. The difference arises in the accounting for the purchase consideration under IFRS versus Canadian GAAP. Under Canadian GAAP purchase consideration is valued based on Precision's share price on the date at which the acquisition was announced, while under IFRS it's valued based on the share price on the closing date.

The second change I wanted to point out is that for some of our largest drilling rigs located in the US, that represent a very small fraction of our overall rig fleet, we intend to record at fair value the deemed cost upon transition to IFRS, which is in accordance with IFRS 1. We're in the process of determining the values for the rigs, but we currently anticipate that there will be a one-time reduction in carrying value in the range of CAD125 million to CAD175 million. The offsetting entry will be recorded in retained earnings.

As you are aware the potential changes due to IFRS are generally non-cash changes and are expected to have limited impact on our income statement down to the EBITDA line. Kevin, that concludes my comments. I will turn it over to you.

Thank you, Rob. I will begin by congratulating Precision's employees for delivering an excellent quarter in terms of safety, operational performance, and financial results. Now that we are three weeks into October, we are continuing to see strong customer demand for oil drilling opportunities, and this is continuing at the pace we have seen for most of the year.

This positively confirms our prior statements on the re-emergence of oil as a key business driver for Precision Drilling. There should be no doubt in anyone's mind that oil commodity prices in the $60 to $80 range provide ample economics for the long-term development and the redevelopment of vast acreages across the well-understood traditional US and Canadian oil fields.

As we mentioned earlier on the call, our North American business is over 60% oil, and a large portion of this business is horizontal completions utilizing our high performance Tier 2 and our Precision Super Series Tier 1 Rigs. Precision's recent growth in the Permian Basin truly highlights this point. At the start of the third quarter Precision had three rigs drilling in the Permian. Today, our rig count stands at eight with several additional prospects under negotiation.

Just to touch on natural gas for a moment. Gas storage this morning at 3.683 tcf is approaching last year's record storage levels. Unquestionably, this will continue to pressure the commodity price and will filter down to reduced gas drilling at least over the short-term.

However, I remain highly encouraged by the longer term prospects for Precision. With our well established footprint across all North American unconventional plays, the proven reputation of our Super Series Rigs, we are well positioned as the shale gas resource continues to grow in importance as a fundamental component of North American natural gas supply.

Now looking at our key markets, I've already mentioned the excellent progress we achieved in the third quarter re-establishing presence in the Permian Basin. Moving a little bit east to the Eagle Ford we see this play continue to develop as a hybrid shale with dry gas, gas condensate, and oil bearing trends. Customer demand for additional rig deployments particularly in the wetter Eagle Ford trends remains firm and has even served to absorb most of the softening we've experienced in the Haynesville play.

Not surprisingly, Precision's activities in North Dakota's Bakken have surpassed our Haynesville rig count during the third quarter to become our leading US region. Precision remains focused on the Bakken as we see this as a market having strong customer demand for further rig tier upgrades.

Moving farther east to the Marcellus in Pennsylvania, this also remains a very important play for Precision. Two of our new Super Singles and one of our new Super Triples are slated to mobilize to the Pennsylvania Marcellus in the first half of 2011 and we remain in discussions with several customers for further newbuild opportunities.

Now turning north to Canada for a moment. Much has already been said about the wet summer and the reduced activity that resulted. While our average rig count in the quarter was 82, we had some drilling days with over 105 rigs running while others were as low as 65 days, or 65 rigs. This demonstrates how challenging the summer was.

We expect our customers to make every effort to fully spend their 2010 drilling budgets and we expect continued strong activity through the end of this year. It's likely that our current rig count of 119 will continue to increase through this quarter.

Now, importantly, as we look forward to winter 2011, all indications are for a strong rig demand driven by oil activity. We expect peak activity in the first quarter likely will exceed 2010's first quarter. And this year we have not been caught out with depressed pricing. We are confident the CAODC labor increases will be fully passed through to our customers along with general price increases indicative of the high demand we are experiencing in this region.

Looking at Canada on a regional basis, the Saskatchewan Manitoba Bakken remains strong. The re-emergence of the Cardium and Viking plays late 2009 and through 2010, driven by horizontal drilling, is a large component of our increase that we're seeing right now and into 2011. We also expect continued strong activity in the Montney this winter and good heavy oil activity. No question that Alberta shale oil gas remains quiet in this low price environment.

We remain in conversation with several customers for further newbuild opportunities both in Canada and the United States. While some of these opportunities are for our new Marcellus Super Triples, most others are for oil plays in Canada and in the US, particularly the Eagle Ford. Precision continues to exercise tight fiscal discipline, demanding firm payback economics and generally long-term contracts for our newbuilds and certainly longer term than some of our competitors.

I think it's interesting to note that Precision's blended US average day rate, which includes our Tier 1, Tier 2, and Tier 3 rigs, is approaching the day rate some of our competitors will accept for newbuilds. Further to that point, Precision provides exceptional transparency on the average duration of our newbuild term contracts and most others don't.

We know that while Precision's disciplined capital strategy allowed some competitors to accelerate newbuild programs, we believe the contracting philosophy we've executed over the course of 2010 is well aligned with our stated objectives to seize opportunities, execute high performance, high value services while maintaining maximum financial flexibility. That said, we have stepped up capital spending three times this year to fulfill customer opportunities and today we announced further capital spending with additional tier upgrades and long lead time component purchases, which roll on into 2011.

We continue to see strong customer demand with excellent economics for upgrading our Tier 3 and Tier 2 rigs. In December, Precision will give its traditional year forward capital spending budget, at which point, you'll get more clarity on our views regarding newbuilds and upgrades into 2011. I will, however, reiterate that Precision will not build spec rigs. The rigs we build will be built against customer contracts.

Our directional drilling initiative is coming along nicely. Currently, we have a seven job capability and are earning the respect and reputation of several core strategic customers. I am very pleased with how our reputation and performance is developing and I expect to see this business break out in 2011.

International remains highly competitive for Precision as we continue to pursue several promising opportunities. Now, certainly our drilling operation in Chile in September and October at the Copiapo mine provided Precision some high-level visibility. I am very pleased that the rescue was a total success and I congratulate the Chile Government for setting the benchmark for disaster management. I'm especially proud of the 18 Precision employees who interrupted their lives and their families to assist in this project.

On that note, I'll pass the call over to Doug Strong for our Completion and Productions update.

Thank you, Kevin. Our Completion and Production Services segment had a successful quarter on all fronts -- safety, operations, and financial. Q3 2010 activity rebounded over prior year and we look for that trend to continue as we close out the year. As Kevin and Rob touched on, all product lines, including well services, control pressure, rentals, and water treatment have benefited from strength in oil prices, and we have positioned people and equipment to benefit from resource play activity.

This week we have about 100 service rigs active or 50% based on our 200 rig fleet. This is higher than our Q3 2010 utilization of 42% as weather conditions have improved from the wet summer. Roughly 90% of service rig activity is related to oil wells and two-thirds of that is situated in East Central and Northern Alberta and in Southeast Saskatchewan and Southwest Manitoba -- heavy oil and the Canadian side of the Bakken.

For the winter we expect additional demand as our customers broaden their focus on winter drilling locations in the west and northern regions of the western Canadian Sedimentary Basin. Precision's Completion and Production Segment is positioned to benefit from horizontal drilling trends through its diverse and mobile well servicing rigs, controlled pressure snubbing units, and rental equipment including tanks for fluid handling.

Looking to 2011, we are focused on market opportunities to increase the duration and service intensity levels with customers to grow and maximize equipment utilization. This type of market opportunity was exemplified by the 500 man base camp that we secured and set up north of Fort McMurray in the oil sands region late in Q3 and expect to operate well into 2011.

In terms of Q4 2010 customer pricing for our service rig fleet, we did pass through a field labor increase of about 5% and additional margin, albeit modest. We continue to work with customers to keep their cost of production low through high performance, high value services in the highly competitive western Canadian market.

That concludes our brief Completion and Production overview. I'll throw the call back to operator, Camille, for questions.

Thank you. (Operator Instructions) The first question is from Kevin Lo from FirstEnergy. Please go ahead.

Hi, folks. I think when Kevin was talking he was pretty adamant about not building rigs on spec, but can you hint at what 2011 investment might be in a general sense? Doug was just talking about building that base camp. Do you have appetite to build more of that type of equipment?

Great question, Kevin. Certainly we'll be a lot more transparent come December. But to give you a bit of a sense of what our thinking is right now, no question the way our customer spending budgets rolled out in 2010 by far exceeded what we saw early in 2010. So, we started last year with a very conservative budget and really we were running just at maintenance CapEx plus a few upgrades.

As I commented, we do see newbuild opportunities still on the table right now with a variety of different customers. And if those start to develop into serious discussions or contract negotiations, you could certainly see that move up our level of importance. Rig tier upgrades remain high on our list of importance. And routine capital maintenance.

Now with Doug moving into the Completions and Production Business and putting real focus into that business, we're uncovering opportunities for investment in that business also. We mentioned the camps. Doug talked about trying to capture more of the spend on the Production and Completions business. Frankly, we see some exciting opportunities looking forward to next year. But really rather wait until we run through our budget process first before we give a lot of guidance.

Okay. In terms of your contracted rigs, can you give us a sense of how many of those rigs are focused on natural gas versus oil?

Well, Kevin this is David, obviously all of the rigs in the Marcellus are on oil, and we've got eight of the contracted rigs there on gas, excuse me. Sorry, got that wrong.

And then it's going to be by area. In Haynesville we have several rigs on contract, I don't have that right here in front of me, but I would say in general contracted rigs today are probably 50/50.

50/50, but maybe a little bit of shift -- some of these rigs shift around and move from the Haynesville to Eagle Ford.

I would have said before it was 60/40 gas, and now I'd say 50/50 oil/gas.

And of course, all the Super Singles in Canada will be all oil related. So, we actually don't break it out that way because it's so hard to track some of these plays. But we'll go back and look at it for future calls.

Great. And just last thing, when you guys are looking at your rig rates right now, and you alluded to the rates at the margin -- or at the level where you can actually see newbuilds. What's the hiccup right now, or what's the negotiation point? What do we need to change in order for some of those newbuild contracts to proceed?

Kevin, great question. As 2010 sort of rolled through, we saw -- we started 2010 with six or seven customers having conversations. And through most of the first quarter, particularly driven by some of the uncertainty on debt in Europe, those conversations just stayed flat for a while. Then second quarter came. Commodity prices looked a bit better, oil particularly, and it loosened things up.

So I think we're at a point now where with the gas injections, storage, and gas prices softening, I think some of these conversations are going to go flat for a while. But I think what will change isn't necessarily our pricing or contractors. I think what will change is when our customers get a better visibility on winter gas prices and winter drawdown. That will help set direction for our customers.

But I don't think we need to change much. I think our typical economics, both our rates and our terms are appropriate. And I was saying about a year ago that we were CAD1,000 or CAD2,000 away or maybe a year or two away in contract terms. That's not the case right now. I think we're just waiting for a stimulus in the market. I think that winter gas prices could help that or they could hurt that. We'll have to see.

Okay. Great, thanks.

Thank you.

The following question is from Nima Billou from Bloom Investment. Please go ahead.

Thank you. First of all, I'm glad you highlighted your participation in that Chile rescue. You guys should be proud, because you never know who actually knows your level of involvement. So, that was I thought very neat participation.

Thanks, Nima.

I wanted to ask mainly about the CapEx program. Has that number slightly trended higher given your more positive outlook and the shift towards oil shale plays and NGL drilling? Because it seemed that was sort of hovering around the CAD200 million mark but it's starting to creep higher in terms of CAD218 million for 2010.

It's been creeping higher throughout the course of the year. Virtually every quarter we've bumped it up a bit. We've been throttling our capital very carefully against customer demand. So generally when we've throttled up the CapEx it's because we have firm customer demand.

Okay. Now, when you break it out in terms of the odd CAD140 million with respect to maintenance and then CAD70 million for growth, but CAD140 million in terms of newer rigs, wouldn't that still enable your ability to take greater share? It almost seems like it's all growth CapEx in a way, in the sense that they are more efficient rigs, you'll be able to start taking share from older rigs and displacing older rigs in the marketplace.

That's not a bad characterization of both the upgrades and the newbuild CapEx. The upgrades are in many ways as good as, or even better, than the newbuild CapEx because we get great returns, likely almost always covered by payout or near full payout contracts on terms. Usually less than three year payout economics.

The upgrades are excellent. You are right, it does allow us to take market share. It does allow us to displace other lower tier rigs. So viewing it as growth CapEx, we haven't talked about it that way, but in many ways it behaves the same way.

Okay.

Maybe just one thing to add to that, Nima, is that in my comments -- this wasn't in the press release, but in my comments I mentioned that the breakout of that was about CAD60 million for what you would classify as real maintenance level CapEx or infrastructure. Then CAD84 million was towards upgrades, which clearly is expansion-type CapEx, and then CAD74 million for newbuild rigs and true expansion CapEx.

Thanks for the clarity. That actually helps a lot. I guess the final thing is, interest expenses have been trending lower, especially sequentially. Can you just describe what contributed to the massive decrease in interest CapEx, given that debt levels didn't shift too much?

I know part of it has to do with your floors and spreads, but it went from CAD50 million to like CAD21 million. So just wanted a little bit further clarity.

Certainly in the second quarter, there was two big events. One related event but two pieces. One is we paid down about CAD75 million worth of debt and we lowered our interest rates. We went back and lowered our interest rates on our term A and term B loans, and effectively lowered by 150 basis points. Is that right?

That's right, term B loans only.

So, there's a significant decrease in interest expense and then in this quarter we paid down another CAD13 million. You won't see the effect of that in the third quarter but rather in the fourth.

Okay. So, that 150 bps spread out over the CAD200 million was what really caused that shift then?

Yes.

In addition to close to CAD100 million of actual total debt pay down?

That's right.

No, the situation's looking better and better. Thanks very much.

Thank you.

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

Thanks, good afternoon.

Hey, Mike.

So, Kevin, you've talked about your international strategy for 2011 as kind of being a boots on the ground approach, so to speak, and just kind of getting a feel for the market, perhaps putting some infrastructure in place. Is there something that could cause you to accelerate that? Are there any opportunities out there that would allow to you do that, or is it just not really feasible without putting those initial efforts in place?

Yes, Mike, certainly there are things that could occur that could accelerate that, but even an accelerated international strategy is still going to be a much slower process than we're used to in North America.

So, I wouldn't be modeling a lot of activity in 2011 that moves the mark for Precision, either on the expense side or on the revenue side. I'm hopeful there will be lots of activity, but relative to the size of the Company right now, I think in 2011 it has minimal impact. It's been a long-term play for us. We're talking years one, two, three, four, and five, not just year one.

Sure. Would it be reasonable to expect to hear more about it next year in some of those opportunities, and then be a longer term, maybe a 2012 and beyond, revenue opportunity?

Yes, and I'd really prefer giving a lot more detail once we have something to give detail on. So that would be customer contracts.

Okay. That was all I had. Thank you.

Thanks, Mike.

Thank you. The following question is from Dana Benner from Stifel Nicolaus. Please go ahead.

I wanted to start by focusing on Canada if we could. Given the amount of wet weather we saw in September, late August, your numbers ended up coming in better than at least I have would have thought. I wonder if there was maybe something else that may have also contributed, maybe client mix, maybe the types of wells that you're increasingly working on, if that may have helped you.

And really the same comment on the service rig side. I was very pleasantly surprised at how well you were able to do overall.

Dana, a couple things about weather, expectations for the quarter. I gave that range of as low as 65 rigs, as high as 105. We were disappointed. We would have like to have seen that run at about 105 through the full quarter, so it was disappointing for us, the weather, no question about that.

But I think this really demonstrates the leverage in Precision and our minimal fixed cost and the leverage we have when activity picks up. And it's tough for you guys to try and model our margins when activity swings this quickly. Clearly -- what was it David, 62% over last year increase on Q3 activity in Canada?

62%, yes.

That's a huge swing and, frankly, I don't think we've added much in the way of fixed costs. It's all been leverage on the organization. So we've always boasted about our great margins and our vertical integration. I think it really played nicely in Q3 for us.

And the variable cost model, being able to add expenses when you need them and take them out when you don't.

Great. Looking at that contract drilling segment in particular in Canada, if I look -- if I back out what I think were your strict drilling revenues, that other category was also higher than I was expecting. I wonder if could you maybe give us some more granularity on -- you mentioned the camp, et cetera, but where beyond drilling in Canada are you really excelling in your opinion?

Doug, I'll let you take that one.

Yes, Dana, I'll run at that. I think if you look at the number of horizontal wells that are being drilled, there's nice pullthrough as you've seen from many of the service companies around that. We're certainly seeing it in the rental side of the business, under surface tanks. We're seeing it in some of the infrastructure areas like our camp business, and that extends through to our wastewater side of things with air/water solutions.

So we're certainly seeing it there. We also see it on top drives. The majority of rigs out there now have top drive capability with them. That's a nice revenue piece for us.

Right. I guess no reason to think that you won't see continued growth in that in Q4 and '11 versus '10, all else equal?

Yes.

Dana, we've taken some steps with those businesses, particularly rentals, to really focus on the fracking business with frac manifolds and with tankage on location. Again leveraging off either Q2 or last year's numbers, we can add not many assets have great operational leverage.

Right. My final question is a two-part one. I understand that you don't want to quantify this, but maybe could you give us some sense. Right now as you get back to better utilization in Canada comparing it versus the US, are your drilling margins higher in Canada or the US, given your current run rate of rigs?

And the second part is, maybe just give us a sense for any leading edge trends on day rates heading into winter in Canada or in Q4 in the US.

I don't think that the margin differential between Canada and the US is a material difference. Now, that said, our operational tech center in Canada is fully functional, fully supporting the rigs. In the US, our tech center is coming on line later this year, into next year. That will help with our costs in the US.

So if there's a difference, it would be driven by our tech center. It wouldn't be driven by much else. Other than that most other margins are going to be in line or consistent.

Then leading edge comments for Q4 in either jurisdiction?

Leading edge comments about activity or about pricing?

Day rates, pricing.

Oh, day rates? So, certainly I'd say that we've seen some pretty good uptick in day rates through the course of 2010 in the US. That's slowing a little bit right now -- the gas pricing, end of year. While in Canada, I think the operators have a little bit of extra budget to spend, I think they've done a pretty good job in the US, grinding through the budgets.

Between the combination of gas softening up a little bit, we might see things, I won't say pricing has softened, but the growth in pricing has slowed down in the US. In Canada we're just getting into the new pricing set by our sales team over the past few weeks, and I think they've done a very good job. And it's been competitive out there, but I think the industry is anticipating this business level far better than last year.

I gather from that, that means an upward bias.

Oh, yes, absolutely. We were priced last year for a market of 100 rigs and we ran 142 rigs.

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

Thanks, Dana.

Thank you. The following question is from John Daniel from Simmons & Company. Please go ahead

Just a couple for you. You mentioned that you're still in discussion for some newbuilds. I think at the time of analyst day there was something like nine customers looking. Is that still the case today, in terms of the numbers of people looking?

I didn't ask the sales guys that question this morning, but I'd hazard a guess that it's probably at least eight.

Okay.

But I'll tell you, John, from early October at the analyst day 'til now, I'd say that we're kind of sliding into more of a quiet period. None of these are going away. We saw the same thing happen last year when things slowed down a bit in the first quarter, nothing went away, but then it came back.

The customers we are talking to are large cap customers, big projects. Some of is it a bit gas sensitive, but some of it isn't. So, I would say the conversations remain alive and in our forefront. We'll get better sense early in the winter season.

Okay. Just one more on drilling and a quick one on workover. But as you look at the rigs that are under term contracts today, particularly those in the traditional gas markets, and let's say for some of those rigs that might see contracts expire in the next quarter or two, are any of the operators of those rigs telling you at this point that they don't intend to keep the rig once the contract expires?

So the way you phrased the question, I haven't actually asked that specific question of the sales team, but we have gone through our contract list and looked at a gas sensitivity. We don't believe we're heavily exposed to contracts rolling off in gas.

Okay. Fair enough.

I think it's fair to say, though that we have seen some rigs out of traditional gas areas over the last month or three weeks being let go when moved to oily areas. So like south Texas, straight gas holes being moved to more of the Eagle Ford; and some Haynesville rigs have moved a couple. We've seen two or three rigs in that. No different than what we actually saw probably second quarter, late first quarter of this year.

And, one of those large drillers in the Haynesville reported earnings yesterday and talked about a reduction in spending in 2011. We're mindful of that and we'll watch that carefully.

At this point are they being kind enough to pay for rig relocations to oil markets or are you guys bearing the brunt of that?

All of the rig relocations to oil markets have all been covered by the operator, all.

Okay. Last one, very quick. Just on the workover business for Doug. Can you remind me what the peak count was back in prior cycles, and just give me some perspective as to where we are today, the likelihood of getting back to those levels if at all?

The peak back in the peak, which would have been two to three years, we had a fleet of 230 rigs and all rigs worked. So on a call-out basis, on any given day, we'd have 80% to 85% of the fleet that could work on a given day. Just based on logistics with the customer.

Is it unrealistic to think that could happen again as you get into winter season?

The perspective to keep there is that the deeper gas market is weak, frankly. You've got the shale plays going on, but it's not enough to sustain the amount of skidded double service rigs that are out in the market. So, I think will you find that will be the area of weakness going through the winter.

Okay. Thanks, guys, good quarter.

Thanks, John.

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

Good afternoon, guys. First question is for Rob. Really easy question for you.

You're going to pitch Rob a softball?

Yes, it's for Rob, what's the precise tax rate we should be modeling for the fourth quarter and all of next year?

I would say I would guide you towards 25% to 30% is the right place tax rate. Sorry, John, I missed the end of your question. Did you say for this year or going forward?

Well, actually, just going forward, fourth quarter to next year.

Fourth quarter is going to be low, in the same range as it was this quarter, and then as we move forward it's going to move back towards that kind of 25% range.

Okay. Moving on. Wanted to ask you guys about, we're obviously seeing a lot more stuff going on in the Permian Basin. Bone Springs is really popping up. We think there'll be a lot more rigs going to work in that area.

Have you guys looked yet much at that area and seen what type of rigs that area in particular might need? Are they going to need some of the higher performance rigs or have you really figured that out yet?

I spent two weeks ago touring around the Permian Basin, visiting a bunch of our rigs with a couple of our big clients up there. So yes, we have looked at them pretty closely. I've talked with our sales team, operation team about 10 times in the past three weeks. Does that give you some sense of our focus?

That said, you know what's interesting is, there are lots of good vertical straight holes being drilled right now that use Tier 2 and Tier 3 assets very effectively, and there is some horizontal drilling going on using Tier 1 assets right now, so it's interesting.

I understand they're even doing some multi-stage fracs, two, three-stage fracs on vertical wells. So I think that the operators are getting much more comfortable with, let's call it 2010 production and completions technique that's working lots of other places and starting to apply it back in the Permian. My conversations with the customers tell me that we've got years of work ahead of us out there.

Okay. So it sounds like lots of different kinds of rigs are going to be needed in that area.

I think you are going to see it's going to be market for Tier 1 rigs in some of these new plays. They've drilled through a few shales. There are some shales out in the Permian Basin. Some of it will be horizontal work but a lot of it will be Tier 2 and Tier 3 work also.

Okay, that's helpful. The other thing I was going to ask you was, just a little more clarity on as we roll from 2010 into 2011, when we think about margins for your contracted rigs. Just because of the roll-off and how they got repriced, would we expect to see the contract, the rigs you have on contract, would we see those prices migrating higher or margins migrating higher in 2011 than 2010? And will you get a bump?

We don't have a lot of the newbuilds rolling off in 2011, not it lot. But our experience has been quite positive at least that same day rate type rollovers on newbuilds that are performing well.

So it's hard to -- so then you go back to the contracted rigs that aren't newbuilds, but they're upgrades. If they're upgrades, likely they have good, firm pricing, maybe a little bit of room to move up, depending on how well they perform.

I think overall I wouldn't expect it to change a whole lot.

Yes.

Okay. And then one final one, just I guess following off of one of the previous questions. Sounds like when you guys are talking about growth potential, just because Canada is coming off of a much harsher bottom, that Canada might show a little more incremental growth for you guys than the US. Did I read that right?

The bottom in Canada was so brutal last year, John, that yes, that's right. But in the whole scheme of things, the US is still going to dominate this [what].

If you're talking about newbuilds, John, of our nine newbuilds, I think we have three going into Canada, and six in the US. So Canada still has some growth opportunities for the Super Single rigs. So, I'm not sure how you meant the question but hopefully we answered it.

The benefit in Canada will be operational leverage.

Yes, I hear you. Okay. That's all I've got. Thank you.

Thanks, John.

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

Good afternoon, everybody.

Good afternoon, Roger.

Good quarter. You certainly beat us on margins and I think everybody else which leads to some of my questions. So on the day rates that you're getting, are they similar now Canada to the US?

Getting closer. Recognize the US fleet's deeper and little bigger rigs. In Canada a lot more shallower rigs. The average depth is shallower. So generally the day rates are probably appropriately proportional.

Okay. So apples to apples they're fairly close.

Yes. A similar rig in both countries would be about the same.

Okay. And can you give me range of day rates Tier 1 to Tier 3?

We're still seeing -- Dave, go ahead.

Yes. Tier 1 rigs are -- they're going to be anywhere from probably CAD18,000 plus. I mean, we don't have anything at CAD30,000, unfortunately, but we've got stuff in the low to mid-20s.

Tier 2 rigs are going to be in, and these are pretty broad ranges, but probably CAD14,000 to CAD18,000, depending on where the customer, who the customer is, and then the Tier 3 are going to be CAD14,000 or lower, and not obviously just a couple thousand (multiple speakers) dollar range there.

But there are some local areas where we're getting rates higher than those ranges. If there's a rig at the right place at the right time it doesn't need a mobilization.

Okay. As you get contracts rolling over, what are you seeing for pricing? Because those would have generally been Tier 2 or Tier 3 and newer builds. Are you getting flat pricing, pricing increases relative to the trailing contract prices?

Roger, our average blended rate in the US has been up now two quarters in a row. More substantially this quarter over last quarter. Short of -- and then saying that we think that might be flattening a bit for the rest of the year, in the US, is probably a fair statement.

Okay.

But I don't want to give a lot more clarity because just there's too much going on in the marketplace right now.

No, that's fair. So you made the point that your costs, fixed costs haven't really moved up much. So I'm just trying to get a sense here, so if we go forward and we're looking for a modest pickup in either Canadian or US activity, how much could you see in terms of activity pickup without having to add much in the way of fixed costs? I'm just trying to get a sense for torque on your margins on a go forward if activity picks up a little.

On the fixed cost side, there's some things we're doing in the US right now with our tech center that will add a little bit of fixed cost to the US, but it should be leveraged out in operating costs on the rigs. So there will be a little bit of trade off on that next year, but we'll sort of explain that as the year goes on, that it will be a trade off with substantially better margins hopefully to follow on that.

But I don't think we need to add a lot of fixed cost for domestic operations.

It's pretty small. I think there's quite a bit of leverage ability to increase revenues without adding much to the fixed cost line at all.

Now as we talk about our international footprint, likely if we get a few rigs going, that might be a net-net for the next year or two as we grow internationally. That's why I caution against modeling much incremental in for international in 2011.

That's it for me. Good quarter. Thanks, guys.

Thanks, Roger.

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

Congratulations on a good quarter, guys.

Thanks, Brian.

I was just wondering, you're obviously increasing the capital budget on the upgrade side. I was just wondering if you could give us the top two or three upgrades that customers are looking for. If you're taking a rig from one tier to the next, what is it they're really looking for that you need to fix up?

It kind of falls into two categories. One category being top drive mud pumps. To make a rig a highly capable horizontal drilling rig you need to have a top drive, you need to have high hydraulic horsepower.

The other significant upgrade is making the mobility shift for a rig that -- and likely, we've taken quite a few of our Tier 3 rigs and made them into Tier 1s by converting them to Pad rigs, rigs that can move in a couple of hours well-to-well on a pad.

So those, just to give you a sense of cost on the mud pump, top drive upgrade, you might be looking at something less than CAD3 million. On the moving system upgrade, somewhere in the range of CAD1 million to CAD3 million, maybe CAD4 million depending on the scope of the upgrade.

Okay. Given those expenditures don't seem exceptional, are there rigs in your fleet that you couldn't just add that type of technology to and upgrade them to a better tier?

Absolutely. Right across the North American fleet, let's just throw some numbers around. Say there's about 1,200 Tier 3 rigs in North America. My guess is that probably only 25% of those could ever be upgraded because the master is so small or the sub-substructure is so small.

In our case, our Tier 3 fleet, we think that number is probably less than 50 that will never see tier upgrades. However, inside that 50 a few of those can still take top drives.

Okay, great. And just shifting gears for a second, I wanted to ask about one of the IFRS changes that you mentioned there. The CAD125 million to CAD175 million reduction in the carrying value of drilling rigs, how was that new carrying value being determined? Can you give us some idea of what the real metric is that is being discussed?

It's just taking another look at the valuation of some of these. It's a handful of the larger rigs, 2,000 horsepower-plus rigs, that just aren't seeing activity like they were a few years ago when this transaction took place. And so we're forced to go back and look at those rigs and determine whether we've got too high a carrying value for them.

So, we'll use normal valuation techniques for those rigs, which, of course, is as much art as science. But it leads to us believe that the right answer is somewhere in a reduction in those carrying values of call it CAD125 million to CAD175 million.

But I remind you, it's only on a handful of rigs.

This is 20 rigs, thereabouts.

Okay. Is that what you have to look at, a multiple of EBITDA given a lower utilization rate or is it some sort of market value?

It's combination of, you look at a discounted cash flow, you look at asset values, you look at what's the order of the liquidation value of the rigs. So it's -- and we'll get outside help. We'll get outside advisers to help with us that, which we're in the process of doing.

Okay. Great. That was all I had. Thanks very much.

The following question is from Andrew Bradford from Raymond James. Please go ahead.

Good afternoon, guys.

Good afternoon, Andrew.

The question I want to focus on is on these upgrades. So, Rob, I think you heard you say, make sure I got this right, CAD84 million is in your capital budget for upgrades?

Yes. That's the total 2010 number for rig upgrades.

Okay. So am I to understand, then, you're upgrading something like 25 to 30 rigs? I'm just working with the CAD3 million number.

We're all looking at each other. They pointed at me to answer. The reason we don't want to give you a number, Andrew, is because it's dependent upon what the customers need. We're doing a lot of these upgrades just like we do our newbuilt rigs. We're getting contracts first.

In other words, a customer needs a rig for, let's just pick a US Bakken application, and then we say -- okay, well, what do you want? And then we'll go in and we -- okay, we've got to spend CAD3.5 million on that rig.

So, it's quite a few upgrades. We're also looking at some international type upgrades as well. So the point being, I don't want to give you a number because I don't know. We will give you the number at the end of the year.

As we book rigs to contracts.

Yes.

Okay. So it will all come out with the contract changes as we go forward, is that right?

Yes. As you look at our tiers of our rigs, too, you'll see not all of our upgrades are tier moving, but a lot of them are. So as you watch us, you will see some upgrades, or additions to our Tier 1 and Tier 2 out of Tier 3 and Tier 2 respectively.

Okay. It just seems to me like this is the sort of thing that can very quietly move the needle for you guys. So are you -- of most of the upgrades that you're doing, where you're actually taking a rig to the next tier, is it mostly Tier 3 to Tier 2?

Most of the -- well, it's not mostly anything, but they're all tier changes. There will be a handful of the upgrades that keep the rig within -- moving from kind of a lower Tier 2 up to an upper Tier 2. But the majority of the upgrades are all tier changes. Tier 3 to Tier 1, and Tier 2 to Tier 1.

Okay. So I'd be right in assuming that you're doing about 100% or fairly close to full utilization on the Super Series rigs.

Yes.

And so you went through the day rates, so the other side of that is the utilization rates. How are you doing on the Tier 2's and Tier 3's utilization wise?

Right now Tier 2's are around 55% to 60% and Tier 3's are 25% to 30%.

And actually with the Canadian rig count that might be a little higher in Tier 2.

It might be a little higher than the 60%?

Yes, because the rig count is coming up quickly in Canada.

Yes, that's a good point.

So most of the swing comes in the Tier 3 in Canada.

Tier 2 and Tier 3.

Okay. All right. That's really helpful. Thank you, very much.

Yes, Andrew, but that's a good point. The leverage we saw in Q3 is driven by those assets getting back to work.

And when they come back into work, there's not a lot of price sensitivity, they usually come back in at those rates that you quoted, Dave, is that right?

They come back in at good rates. The other point that we said before, our rig fleet is ready to market. We don't have to have go through a lot of CapEx upgrades on these rigs that are not going through tier upgrades.

Even our -- I'll just kind of draw a story back on the rig in Chile. That rig was stored for two years, and yes, the wiring was ripped off the rig, like happens in a lot of these places, and beyond that the rig fired up and ran with no other CapEx other than getting the rig rewired. The engine started on the first attempt and the rig ran and drilled.

Our rigs are ready to market. There's drill pipe and they're in good shape.

Okay, thank you very much. Just one last housekeeping question for Rob, I guess, why is it that the tax rate was as low as it was, and why will it be that again in the fourth quarter?

It's a combination of things that are fairly complex. But it's some revenue that's just taxed at lower rates. The FX gains have different tax regime. It's fairly complex, and it's a good deal of tax planning that goes into it. So I don't have a simple answer for you.

Chalk it up to accounting jiggery-pokery then?

It's real stuff, but it's -- it is more complex than a one sentence answer.

Andrew, I would also throw in there, as you look at the cycle, we are at comparatively low earnings levels still. So I'd factor that in as well.

Okay, guys, thank you very much for your help.

Thanks, Andrew.

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

Good afternoon, everybody.

Hi, Victor.

First one, just on Mexico, realizing that it's a small position for you guys; but just wanted to get your thoughts there near term on the contracts and how does that market come into play as you guys look at your international opportunities? Is that going to be a two rig market for the foreseeable future? Or are you guys looking at opportunities down there over the next two, three, four years?

Victor, we've got the headlights on. We're watching the market. I don't think the -- I don't think we have a lot of clarity of what really plays out in 2011 in Mexico yet. My sense is that the Chicontepec field will become active again, but boy it's been a price dog fight up there, and we're doing really well with our Super Series rigs in other places right now.

So we're not going to focus on Chicontepec likely. We're happy with our deep work in the south. That work, it's either been signed off, renewed, or it's being renewed. But we know it's secure for the next couple of years. So I'd say we'd be focusing more on deeper plays rather than getting into the mess in Chicontepec.

Yes. As it relates to the opportunity set, as you guys look around the world, whether it's the Middle East or so, Mexico would be another market that you guys are eyeing to build out a more significant presence, or would you put it behind, say, what you guys may be doing in the Middle East?

Victor, there's a limited number of bids out there right now, and if I give any indication whatsoever, everybody that competes with me knows what we're talking about. So, I'm not going to give any guidance, unfortunately. Not much to talk about until we have something to talk about. Middle East, Latin America.

Got you, okay. Understood. And the other question I had, just as it relates to the comments on pricing potentially flattening out in the near term in the US and just wanted to get a sense. Is that across all tiers where you guys think that could occur?

And I guess what would be driving that, particularly when you're looking at that the Tier 1 fleet essentially sold out and Tier 2 starting to push up to that 70%, 75% marker, where things start to get tight and start to get some pricing there? So just trying to understand the dynamic of pricing in the US going forward and how to think about that in relation to where utilization is.

I think 3.683 tcf on gas in storage is going to put some pressure on the commodity price. And could we see a pullback in gas drilling that would just affect the market? Absolutely. I think that risk is there.

And I think there's enough demand in the oil side to probably take up most of the rigs, but probably the likelihood of having price leverage, or leverage from the supply side, gets a bit looser for a while.

Okay.

I think we need to see, need to get some clarity on what your gas price is before we get back into a price inflationary market on the big rigs.

And where would you say the greatest price increases have occurred over the last three months? Has it been the Tier 2 as utilization has started to move there? Or has it been Tier 1? Any color behind that?

It's been Tier 2 and Tier 1, both. Tier 1 remains strong pricing. But as the Permian picks up a little bit, there's been a little bit of movement on Tier 3 pricing even up there. So across all levels but clearly still the greatest in Tier 1.

It's somewhat market geography specific, because like the Bakken has been a great growth area for Precision and we've been able to push Tier 2 rates up there quite a bit, and obviously Tier 1 as well.

And would you guys see a benefit of that? Again this could just be a transition period, but if rates do flatten out could your average day rates still push higher? Basically the reverse of what had happened going back six, nine months ago as higher rates were rolling over to lower rates. Will you see that on, going other way if rates were to flatten, where your average rates would still push higher?

There will be a little bit of carry on, for sure.

All right. Great.

Victor, the rate flattening, I think that's question that will sort itself out over the next few weeks, between now and the end of the year.

Okay. Great. I appreciate that. Thank you, guys.

Thank you.

Thank you. The following question is from Jim Crandell from Barclays. Please go ahead.

Hi, Kevin.

Hi, Jim. How are you?

I'm good, thanks. Kevin, could you talk about your investment in MWD and what you hope to achieve with this longer term?

Absolutely. We have seven kits on the ground right now. I think four or five are drilling today. I know our guys are having some great success out there.

We currently have three strategic customers that we're working with, and we've done work for as many as about a dozen different customers. We're changing the paradigm. What we're doing is we're including directional drilling on our rigs as part of our service, like we include top drives in our rigs.

Now, we charge extra for the top drive, so we'll charge extra for the directional drilling, but we'll save the operator the cost of two directional drillers eventually and two MWD hands out on the rig full time.

Our drillers on our Tier 1 rigs are highly qualified drillers and so far the training on our drillers has gone very, very well. So we think that knowing that 80% of our rigs are drilling directionally about 70% of the time, and half of that business is independent directional companies, we see great opportunity for us over the next few years.

And you're just measuring, Kevin, direction plus gamma, or is it more than that?

Really, we're doing the infill style directional drilling, nothing special. Maybe gamma, we'll not do -- won't be doing any LWD, not going to get into R&D. This is going to be the vanilla directional work.

It's just off the shelf technology doing directional inclination and gamma at the most. No LWD tools, no porosity, no resistivity.

Disappointed you're not taking on Schlumberger.

We're targeting the independent mom-and-pop directional companies that are right across North America.

Okay. Is part of your vision here with Precision to create a significant oil service company? Taking a three to five year view?

Jim, our view is to be, certainly a pan North American and a well-positioned international high performance, high value drilling contractor and then we have optionality on several other product lines that we're very good at in Canada.

Okay. And lastly, Kevin, can you talk a bit about what your plans are internationally and where your focus is today?

Jim, we've had a slow start internationally and that market was sort of troughing itself out in 2009 and '10. It's back on the uptick right now. That's all good. But, frankly there are only a handful of opportunities out there right now.

There are some bids coming up in Colombia, there are some bids in Saudi, there are some bids in Kuwait, there's some bids in Iraq. But all of my competitors are bidding on the same jobs. So we are out there in a competitive marketplace. Places where customers are looking for high performance, looking for safety, looking for maybe horizontal drilling.

We obviously have our eyes very closely on Poland for shale gas. We have an engineering team right now which is working on a high performance rig design that will be mobile and transportable inside Europe. So a lot of things like that going on.

But short of lots of good work and putting some boots on the ground in a couple of places, until we have some work to actually talk about, it's hard for me to get too strategic on what we're doing internationally.

Okay. I don't know if you can address what the strategy is in Iraq, but that's one market that could be a lot of rigs, looking forward. Is your strategy to bid in conjunction with a big oil service company on integrated packages or what?

We're exploring those avenues right now.

Okay.

Jim, there's lots of ongoing activity in Iraq that I don't want to be too specific. That's why we're -- it's a very small marketplace.

In general, with the projects that you're bidding on, how do you think the returns compare internationally versus what you can get here in North America today?

Are you on my Board? Frankly, I would tell you that I think that the peak prices in North America, because we have these sharp cycles, both in Canada and the US, the peak prices in North America are really attractive pricing. But then at the same time those troughs come quickly and sharply.

I think what we see internationally is a much smoother revenue stream, lower peaks. But certainly much higher troughs. As we look at these markets, Canada is a substantial market, US is a larger market. International is a very substantial market, even if you exclude China and Russia.

It's still a substantial market with large cap players that have long-term plans that don't drill season-to-season, but they drill for three, or four, or five years. It's very attractive business for us. The thought of being in there as a high performance driller supporting international oil companies, large service companies, and some of the national oil companies is very attractive to us.

Got it. Okay. Thank you, Kevin.

Thanks, Jim.

Thank you. The following question is from Jeff Mochoruk from Cormark Securities. Please go ahead.

Hi, Jeff.

Good afternoon, gentlemen. I'll be really quick here. Just wanted to get a little clarification on your CapEx number that you bumped it up. So you have CAD218 million for this year, and CAD82 million for next year. Is that CAD82 million in addition to the CAD218 or is that rolling over and it will be CAD136 million for this year?

It's in addition to the CAD218 million. So total capital from projects started in 2010 of CAD300 million, but we won't get it all spent this year.

Okay. Of that CAD82 million for next year, there is no maintenance CapEx in it, that's just completely rig upgrades and newbuilds? Is that correct?

That's correct. That's all expansion CapEx and so, of course, we're not to the point of announcing our 2011 capital budget, but there will be maintenance CapEx on top of this and then other things that we'll talk about in December.

Just on the -- you've seen a pretty sharp ramp-up here in your rig count in Canada in the past month, kind of 25 rigs above your average for Q3. Can you kind of give us a mix of what those rigs that have come on are in terms of tiers and in terms of singles, doubles, and triples?

Don't have that information at our fingertips, but if you want to call David later he can try to dig some of that up for you.

Okay. Perfect, thanks.

Thank you. The last question is from Todd Garman from Peters & Company.

Good afternoon.

Hi, Todd.

I just wanted to ask, you mentioned in the release that there's a chance that your US labor cost would rise. I guess I would be interested to know if that is, if the Company is playing catch-up for lower labor costs or if it's just keeping up with where US labor rates are. Then I'd be also interested in knowing, if that labor cost increase were to happen, if it could be passed on to the rigs that you have drilling for gas right now.

Hi, Todd. Very -- actually very technical question, frankly. Highly regional on labor rates. The labor mart pool is not mobile in the US like it is in Canada generally. So labor rates in North Dakota is a little different than it is in west Texas and otherwise. So it is going to be a regional sort of group of increases.

And the short answer is yes, we'll pass everything through to customers. However, the longer answer is that when that rig comes up for renewal we'll have to decide whether or not we're still competitive. So I'd say our likelihood of being successful in passing that through ranges in that 50% range. It's a little different than Canada.

Would it be fair, based on current utilization levels then, that your margins should be flat to where they are now? Or do you think there's actually a chance that they might decline, given the prices are likely to be flat?

I don't think they will decline. I think we will be fine. I think we'll be able to -- between small increases here and there, regional bump-ups in price, if there's a competitive region, then we have to increase the labor rate, likely we're increasing the rig rate there a little more; so it tends to wash itself out.

But I don't want you to walk away believing it's like Canada where we can push most of it through. It is different.

Okay. Thanks for that. Then just lastly on the CAD84 million of upgrade capital. Can you at least give us a sense of which business line it's focused to? Is it focused to the drilling side or to the completion side?

Most of it towards drilling.

Okay, thank you.

Doug wasn't happy with that answer. Thanks, Todd.

Thank you.

So pass it back to the operator?

Operator, I think -- are we done with questions at this point?

We have no further questions at this time. I would now like to turn the meeting back over to Mr. Wehlmann. Please go ahead.

We just want to thank everybody for being on the call today. We appreciate your support. Talk to you soon.

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