Precision Drilling Corp (PDS) 2010 Q4 法說會逐字稿

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

Thank you. Good afternoon, everyone. I would also like to welcome you to Precision Drilling Corporation's fourth quarter and year-end conference call and webcast. Participating today on the call with me are Kevin Neveu, our Chief Executive Officer, and Rob McNally, our Executive Vice President and Chief Financial Officer. Also present with us in the room is Gene Stahl, the President of our Drilling Operations and Doug Strong, the President of our Completion and Production Services unit. Through a news release early today Precision Drilling Corporation reported on the fourth quarter 2010 results. Please note that the financial figures are in Canadian dollars unless otherwise indicated. Some of our comments today will refer to non-GAAP measures, such as EBITDA and operating earnings. Please see our press release for additional disclosure on these non-GAAP measures. Our comments today will also include statements reflecting Precision's views about events and their potential impact on the 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 the call with a brief discussion of our fourth quarter operating results and a financial overview. Kevin Neveu will then provide a business operations update and our outlook. After that we will open the call up for questions. Before I turn it over to Rob, I would like to comment that we are pleased with the quality of the results for this quarter, despite the overhang in the market of CAD4 natural gas prices. Over 60% of our rigs today are drilling for oil targets and when you throw in the liquids rich natural gas targets, the percentage goes even higher. In my many years in the business, I never thought I would say that oil is the driver in the North American land drilling business, but today it is. Our comments today will reinforce this point. Rob, over to you.

Thanks, David. Precision had a good fourth quarter. We reported net earnings of CAD6 million or CAD0.02 per diluted share on revenues of CAD436 million. Please note that these results include a CAD91 million or CAD0.29 per share noncash financing charge related to our long-term debt refinancing that was completed during the quarter. Fourth quarter 2010 EBITDA was CAD145 million, which represents a 57% increase over the CAD93 million achieved in the fourth quarter of 2009 and a 29% improvement over the third quarter of 2010. The improved Q4 results primarily reflect much stronger utilization and modest pricing gains. Activity levels have increased meaningfully, with the continuation of positive momentum building from the beginning of the year. For the year ended December 31, 2010, Precision posted revenues of CAD1.4 billion and EBITDA of CAD435 million, which compares to revenues of CAD1.2 billion and EBITDA of CAD407 million for 2009.

Higher activity levels in 2010 were offset by lower average pricing, as more Tier 2 and Tier 3 rigs went to work in 2010. In December Precision announced its 2011 capital spending plan totaling CAD405 million. We've updated that plan and currently expect to spend a total of CAD423 million in capital expenditures during 2011 consisting of CAD117 million of maintenance and infrastructure spending, CAD184 million for expansion capital which includes the cost co complete five of the nine new build rigs from the 2010 new build program, and CAD122 million for eight to 12 rig upgrades and long lead time components. We expect the capital spend to be split CAD371 million in contract drilling and approximately CAD52 million in completion and production. In the fourth quarter Precision further strengthened its balance sheet through the issuance of $650 million of senior unsecured notes due 2020. These notes bear an interest rate of 6.625%.

The net proceeds were used to repay our term loan A and term loan B credit facilities in full. In conjunction with the closing of the notes offering, we terminated our existing revolver and entered into a new senior secured CAD550 million revolving credit facility. At December 31, 2010, total debt is approximately CAD821 million and net debt is approximately CAD565 million. Precision's liquidity is more than adequate with cash, operating facilities and our undrawn revolving credit facility totaling more than CAD800 million of availability. As discussed in our press release, yesterday the Corporation received a notice of reassessment from Canada Revenue Agency for CAD216 million relating to a transaction that occurred in 2005. Precision intends to vigorously defend what we and our advisors believe to be a correct filing position that has been well researched over a number of years.

The fuel process requires the Corporation to pay or post security of approximately CAD108 million. Now turning to IFRS, as we previously discussed, Precision will transition to international financial reporting standards, or IFRS, as of January 1, 2011. Our IFRS project is on schedule and progressing well. There will be a number of changes which are primarily noncash to our financial statements once IFRS is implemented in the first quarter. The largest impacts will be as follows. 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 $455 million with an equivalent reduction in shareholders capital. Secondly, for our larger drilling rigs in the U.S. and a few select rigs in Canada, which together represent a small traction of our fleet, we intend to record at fair value as the deemed cost upon transition to IFRS in accordance with IFRS 1.

We currently anticipate that there will be a onetime reduction in carrying value in the range of CAD145 million for these rigs. The offsetting entry will be recorded in deferred fax and retained earnings and will not be an income statement item. For all other assets Precision has rebuilt historical PP&E records, as if it had always followed IFRS principles. As a result, there is expected to be a reduction of the opening IFRS net book value for PP&E of approximately CAD110 million. The offsetting entry will be recorded in deferred income tax and retained earnings. So in summary the opening IFRS balance sheet will show a reduction in goodwill of $455 million and a reduction in PP&E of approximately CAD255 million.

The most significant change on income statement will be an increase in depreciation expense due to componentization of rigs for depreciation purposes that effectively shortens the useful life of the rig. Depreciation is expected to increase by approximately 20% going forward. As you are aware, the changes due to IFRS are generally noncash changes and are not expected to have -- and are expected to have limited impact on our income statement down to the EBITDA line. Due to IFRS, the Alberta Securities Commission has extended the deadline for first quarter filings to June 15 of this year, so it is likely that we'll file our quarterly report later than usual for the first quarter. Kevin, those conclude my comments. I will turn it over to you.

Thank you, Rob. All right. The growth and sustainability of oil related activity we highlighted last quarter is propelling us through the Canadian winter with very strong demand for our services. This oil and gas trend is also continuing to support strong demand for Precision's Tier 1 and Tier 2 rigs in the lower 48. As David mentioned earlier, in the fourth quarter over 60% of Precision's total activity was oil related. We believe this fundamental shift in core activity significantly expands our mid-term and long-term visibility. Our confidence in this view, supported by oil prices remaining firmly in the CAD60 to CAD90 range, with most global economic models supporting the long-term sustainability of this price range. Further, we know that even with intensive North American drilling, we will not materially impact the global oil supply.

Over drilling for oil is a far lower risk than the multiple gas drilling boom/bust cycles this industry has experienced over the past 15 years. In the United States we continue to see this pullback in gas activity, particularly in the Haynesville and Barnett shale plays. The Marcellus remains strong, even with the possibilities of new build demand continuing through 2011. But more importantly, every Precision rig released from gas drilling targets in the Haynesville and Barnett have immediately been redeployed to either the Eagle Ford or the Permian Basin areas at the same and in many case higher day rates. It is our view that a strong pullback or a sustained pullback in gas drilling would prove constructive. We believe Precision's high performance Tier 1 and Tier 2 rigs will easily demand strong day rates and remain utilized, as they redeploy to oil.

Importantly, a sharp pullback in gas activity quickly rebalances and would likely lead to under balanced gas supply, as the rapid shale gas decline rates begin to over shadow the moderate conventional gas production decline curve. Ultimately, we would like to see gas prices trend closer to CAD6, which we believe will ensure stable and predictable supply of natural gas for the North American markets. Now turning back to oil, I am pleased with Precision's growth in the Eagle Ford, the Bakken and the Permian Basin.And we continue to see good opportunities in the Niobrara. Our combined rig count in these regions has doubled from 23 to 45 today during the course of 2010 and we remain very excited about the potential for growth in these oil regions. Currently, we're in various stages of discussion with seven different US customers for multiples of new build rigs, mostly intended for these plays.

These rigs could be delivered later this year into early 2012 if or when these opportunities develop into firm contracts and you can well expect that any of these rigs that should develop into contracts will have to meet our economic requirements. The winter drilling season in Canada is playing out nicely, with our current rig count at 155 active rigs, well ahead of last year's rate and well beyond the rates we saw in 2009. We expect our customers to stretch the winter season out, including running rigs and to breakup where possible, as we continue to see a building backlog of oil drilling opportunities. Our 2011 Canadian day rates are, to a large part, driven by long-term pricing agreements. We commented last fall that all -- that we expect that all labor cost increases would be fully passed through to our customers and that we would be seeking additional day rate increases commensurate with the expected activity levels.

It is fair to say that we have been successful on both fronts and we will see improved day rates flow into our results with these increases beginning back in November and layering on in January and some of those increases dragging out until May. But you can expect the operating leverage that was evidenced in our Q4 results to continue into 2011, as winter activity drives operating efficiencies and we are looking for a strong start to 2011, both for activity and operating margins. We continue to see the merits of our directional drilling initiative in both Canada and the US, where we are slowly winning over our customer's confidence. Expect us to significantly step up our investments in this growth opportunity during 2011. Internationally, the markets remain in the very, very early stages of a rebound. Pricing remains constrained and the bids are highly competitive. We are in the process of opening our offices in Dubai and Bogota during the first quarter.

Our sales and business development teams will be boots on the ground and we expect to see the opportunities continue to develop, but again we'll be staying within our firm economic expectations. When we have material developments in rig contracts we'll keep you informed. Our oil service business is having an equally strong winter with 130 rigs currently running and an additional 10 to 15 rigs pending, with modest sequential pricing improvements through the winter. Extremely cold weather in early January affected utilization, but the demand remained strong. We expect these delayed projects will further strengthen demand, as they are moved forward, and will continue to support demand in pricing throughout the year. Currently we have 45 camps running, a significant improvement over 2010, along with one 200 mine camp and one 500 man base camp, both operating in northeastern Alberta. Our rentals group continues to enjoy excellent growth, supporting our drilling and work-over operations.

In our press release we commented that all five of the new build rigs we initially announced for 2011 have been fully contracted. Four of these are headed to Canada and one will end up in the US. All are intended for oil or liquid rich gas targets. As with the US, in Canada we're in the final stages of negotiation for several more rigs for Canada and we are in early discussions with at least ten other customers for multiple new builds. Now clearly, we did not anticipate all of these opportunities developing into new build contracts. However, an increasing demand for new build rigs and the willingness of our customers to enter long-term contracts with most of these rigs intended to target oil, strengthens our confidence in the sustainability of this business over the mid-to longer term. On a final note, I want to thank the people of Precision for their hard work and the excellent results we achieved in 2010 and especially now in the middle of the winter season when many of our operations are running flat out. On that note, I will pass it back to the operator for questions.

John Daniel from Simmons.

Hi, guys, good quarter. The press release mentioned that Canada pricing should essentially hold from here. Is there any material difference from the call at the Q4 exit rate versus the Q4 average?

First of all, we commented on my comments that the day rates would be stepping in on an annual basis in November, some in December, some in January and some straggling off until spring. So do expect that there will be some further day rate enhancement in Canada through the winter.

Okay. All right.

You should be thinking about that in terms of hundreds not thousands.

Fair enough. There we go. You mentioned multiple opportunities for new builds, which is good, off also a desire to grow directional drilling in international, possibly via acquisition. Now I know you would look at all of these things on a returns basis, but with lots of opportunities out there, what's your preference if you had to rank these things?

If we lock down the list of priorities, our highest return in the Company is typically on a rig upgrade, upgrading a Tier 3 rig to Tier 1 status. We can get some fantastic returns. Though those tend to be limited opportunities, like 10 to 15 per year. Obviously, our new build super series rigs rank very close, in the second position had excellent returns. But I think what we'll see develop over the course of 2011 that likely directional drilling assets and investments will deliver returns on the same order as the new build rigs and maybe even as good as some of the upgrades. But I will say that nothing touches our rental business right now for returns.

Fair enough, but as you think about the acquisitions going international, just for the strategic beach head, would that supersede any of the new build opportunities?

Would it supersede? I don't think we'd have to displace a new build opportunities to consider international.

Okay. Then just one housekeeping for David. Contract coverage by quarter for '11, between US and Canada possible?

Yes. I've got it somewhere.

Digging through a pile of papers to find it. Interesting note as David is looking for that, our contract coverage for 2011 is almost doubled during of the course of 2010. I think that really helps us understand this direction the business is taking. Go ahead, David.

John, I have it now. What do you want?

Just by quarter US Canada contract coverage for '11?

Yes. In Canada by quarter it is 40 in the first, 34 in the second, 31 in the third, 27 in the fourth, 33 average. US is 68 first, 57 second, 41 third, 33 fourth and 50 on average, and two in Mexico for the whole year.

Got it. Thanks, guys. I will turn it over.

Thanks, John.

Doug Becker from Bank of America. Becker, your line is open.

Matt, just put him back in the queue and go to the next one, please.

Andrew Bradford from Raymond James.

Listen, I got a question about your new builds or your strategy around new builds and how that might be changing now because historically what you have done is you have gone ahead and started building rigs in anticipation of contract even at some point in the future and now, in the language of this press release, it seems to be running the other way where you are going to wait until you can get contracts before you start initiating new builds. Is there something different about the ten that are in the market that you're trying to convey here?

I guess a couple of things, Andrew. First of all historically, depending how far you go back, we generally only announce new builds when we have contracts. About two or three years ago we announced a bit of a new build program and we have kept consistent with that now since 2008, '09, '10, '11. And we announced a new build program for 2011 back in December of five rigs and we're confident we can contract them, but they have all been -- and they were all contracted within the first two weeks of January. I don't think we expected that. We're pleased with it and we have a behind now we have got five additional long lead time projects in place. As looks right now, those will be contracted during the course of this first quarter late.

Okay. So fair to say that on some of these other prospects you're reasonably close on terms?

Well, I did mention that we're in sort of final stages of negotiation on several of these rigs, so, yes, we're very close.

All right. All right.And I am just -- I am looking at, your utilization rate in Canada in the fourth quarter was quite good and I am looking outside the window and there is a lot of snow on the ground in the first quarter here, so I am wondering what you're anticipating for breakup and maybe we see -- is it possible that maybe we see not much of a delta on either utilization or rate in the first quarter sequentially?

You mean first to second quarter?

No, do you think we're going to have an earlier breakup than usual, I guess?

I still think that weather will determine a lot of this, but there will not be an economic breakup, it will be a weather-based breakup. And I think there's a number of our customers have gone out and purchased their own matting to map roads into leases and things like that. I think that will help extend activity into breakup, but there is a lot of snow on the ground. So when it starts building it is going to be very wet this spring and it could prove to be a difficult period through late March, early April, depending how the ground dries out. But what we find interesting is that there is still a huge amount of demand right now and a lot of work that we think wasn't done this winter that will bring the work back when the ground dries out. So I am not sure if I answered your question completely, but I think the timing of breakup will be driven by, strictly by weather and there will be a fair amount of work that will carry over when the ground dries and we have every reason to believe that the summer looks pretty good for us.

Okay. I am wondering if as well is there any particular rig configuration or node, given the change that we saw in the rate sequentially here, is there any particular rig size, configuration, depth range, or type that where most of that delta took place?

I don't think so. I think looking at our utilization for a quick moment, we mentioned 155 rigs running. That should really be viewed as 155 out of 170, with probably 30 rigs that would shallow gas rigs, although they aren't being utilized. So, outside of those 30 shallow gas rigs -- effectively most of the [league] is being utilized right now across the board. So obviously, the Cardium is taking up a good draw on that and so is some of the winter gas drilling that is going on.

Was there any change that it surprised you?

Not really. I think we had some pretty good visibility in this back in October.

Okay, last question then. With respect to the guidance, Rob, for the higher D&A going forward on what's going to end up being a lower PP&E base, is there some sort of a offset as well to this, because if you have higher D&A because your depreciating components of the rigs more, does that mean that you're capitalizing more components going forward as well?

No. The answer is a little bit complicated. There is a bit more capitalization, so for things like replacement engines that in the past may not have been capitalized and may have been expensed, they will now be capitalized, but overall I would say the capitalization base per rig isn't going to change much. It is going to be pretty similar. It is just that we're going to depreciate the rigs on average, call it, 20% faster than what we're depreciating them now. So I wouldn't look for it to be a big increase on the capitalization side. I think as we've worked through those numbers it really just going to be faster depreciation.

And you suggested there shouldn't be any discernible change to the EBITDA line?

Yes. The changes at the EBITDA line are going to be pretty small.

So you're not really expensing all that much today that you will be capitalizing going forward or you haven't been expensing all that much that you are going to be capitalizing -- ?

That's a fair statement, Andrew, and there is some other things that we'll be capitalizing and there is several things that are moving around, but it is not going to be a big change at the EBITDA line.

All right. Well, thanks a lot for your help, guys.

Thanks, Andrew.

Kevin Lo from FirstEnergy.

Was wondering if you can articulate your international strategy a little bit more, office in Dubai and Bogota. Is the strategy there to build rigs into the market and then find customers or is it to sign long-term contracts? How do you think about what's going into those different markets?

Kevin, if we could design this perfectly, we'd win contracts to take some of our bigger rigs from North America into places like Dubai or maybe Columbia and get an established base of three, four, five, six, eight rigs running organically and then look for acquisitions to expand our footprint, if we could design everything perfectly, much the way we moved into the US. So, that way we move in, we learn the market, we learn the people, we understand the dynamics and then we're a much smarter buyer at that point. That's if the world is perfect. Don't know if it will work out that way, but that's the way we see it.

Kevin, I would say that we're going to have to be a little bit opportunistic, but we certainly have parts of the world, and Kevin mentioned a couple of them, that we're more interested in and we're aggressively pursuing organic growth opportunities, but as you know acquisition opportunities don't come around on our timing always and so we have to work with what the market gives us.

Okay. To go back to the whole depreciation issue, can you kind of talk about what parts of the rig are being depreciated a little bit faster and I guess a second question on that is when you talk about [highly] depreciation, I am assuming it is a number. Now given that your asset base is a bit lower, does that mean the percentage goes way higher as a percentage of assets?

No. It is not. I think that we'll expect it to increase by about 20% based on the asset base that we'll have, which is not -- the IFRS revaluation isn't going to make a material difference to our asset base. So it is really broken up into three categories, the structure, the power system, and the mud handling system in broad terms, which will be depreciated at different rates. But on average instead of depreciating the rig over 5000 days, it is going to be kind of blended average 4000 days.

Okay. And last thing is on the service rig side, can you talk about a little bit about how -- and it looks like the pricing come up and everything looks a lot better. Do you see opportunities to pull out more capital there as well and where do you see about doing that, whether it is Canada, US?

Kevin, it is Doug. The sequential improvement in margin was 280 basis points between Q3 and Q4. As you know, that's really a mix of three things. We did have some rate increase and winterization and some higher activity. We are seeing some nice activity pick up in heavy oil and the traditional lighter horizontal drilling oil areas, which certainly do provide more opportunity, but I wouldn't say it is a lot of incremental rigs for the industry. We think it is more greater utilization of existing.

Okay. Great. Thanks, guys.

Thanks, Kevin.

John Tasdemir from Canaccord Genuity.

So just want to ask you to clarify this again. The way you're now reporting, you will be reporting your depreciation expense, how does that compare relative to your US peers? Do you know that?

Well, there is a variety. Not everybody does it the same and our US peers are going to be reporting under US GAAP where we're going to be under IFRS and my general sense is that we'll be a bit more aggressive in the amount that we depreciate. We're going to depreciate a bit faster than most of our peers, but you really -- there is a lot of moving parts in that, because people have done acquisitions. They have written assets up. So you really have to take it on a case by case basis, but overall I think we're going to be depreciating our assets a bit faster than people reporting under US GAAP.

John, let me add to that. With all my US experience, nobody does componentization unless they have to. It is extremely difficult. And I can tell you that none of our US peers are doing that at this point in time. And they're depreciating rigs anywhere from ten years to, in some cases, eighteen years on the total cost of that rig. So, yes, we will be faster.

In general we'll be something more like nine years. So we'll be kind of on the low end of that depending on -- but we do it by days, but it works out to about nine years.

So, it just makes the case that we need to be looking probably at EBITDA for valuation rather than earnings per share when we compare the two.

Yes. I would definitely weight towards EBITDA.

To compare the Canadian companies who report under IFRS with the US companies, your best bet is going to be EBITDA.

Yes, that's what I suspected. The other question, maybe just some clarity here, Rob, I think you answered this last quarter. Best guess for tax rate 2011?

Yes. It is going to be -- it still be low in 2011. I think I would guide you towards mid-20s is the right place to model. But it could be a bit lower than that.

Okay. That's good help. Also, Kevin, on your -- you mentioned 8 to 12 rigs that you are going to be upgrading. Are those rigs working now?

Gene, can you help me with that question?

Just repeat the first part of that.

Sure. The 8 to 12 rigs that you're upgrading in your CapEx plans, are those rigs currently working? We have to take them out and upgrade them or are they going to be incremental if they go to work?

There is a mixture in there. There is a few that already working and at the next break between well, we'll upgrade them. And then there is a few that are down that we're getting after today.

Okay. So okay, that works. Also, let me ask about the margins in the US. I know we saw a couple competitors of yours in the US show some pretty healthy guidance on margins for their US land rig fleets. Are you guys seeing some potential margin improvement over the coming quarters?

We're quite hopeful. A little early to say for sure, but we've got some initiatives in place right now, both on the cost side and on the day rate side. So I would say we're hoping to see margins improve in the US right now and planning for it, but a little early to guide you forward on that.

Okay. Then one final question and I will turn it over and it is on the workover business in Canada, oil service business. You guys are operating, I think, 84,000 hours or something like that in a quarter. You have been as high as 100,000 or so in the fourth quarter. How is the workover or the well service business developing in Canada? Can we expect to get back to those levels or is that really based on the shallow gas stuff that we were doing years ago?

I think the short answer is that, John. I think we need gas to come back on and in particular we need our skedded doubles to get back on wells we're sitting on the well for ten days to two weeks continuously, getting those kinds of hours. The oil work that we're experiencing today is very positive. But there is a lot of windows in there where you have got to wait on coil on occasion and some other services, so with the horizontal drilling trend, the sequencing of a lot of the services on location begins to erode our utilization somewhat. So bottom-line, strong gas prices would get us back to those kind of levels.

Okay, but it sounds like you're still seeing some growth with all that?

Most definitely.

Okay.

Absolutely.

Okay, thanks, Doug. That's all I had.

Thank you, John.

Victor Marchon from RBC Capital Markets.

First just wanted to ask on the new build side, just wanted to see if you can talk to the change in terms over the last twelve months on the new builds as it relates to payback period or length of term. Can you take us to what they were when you guys first started building new and then where they are today in your conversations?

Victor, not a lot has changed because we keep a fairly tight collar on what we'll accept for contracts. And we have been fairly clear in that. We're looking for payback terms generally around four years and we're looking for contracts to cover most of that or all of that investment. So we're looking for contracts three to four years in duration. On occasion we might take a little bit less, but we have got to trade it off with something else that brings the average back up closer to full payback. So we'll go through a bit of an ebb and flow on how quickly we book contracts. Actually 2010 worked out quite well. We have had a nice start to 2011. But we haven't changed our criteria and we don't plan to change our criteria. I think we're pretty good with what we do. We do know that others will build new rigs on much shorter terms and we have lost some opportunities because of that. I think that's fine.

I apologize. I think you had said this earlier, Kevin, was the number of conversations, did you quantify the number of rigs or was it just a number of conversations that you had mentioned as it relates to additional new builds going forward?

I'll tell you, I've actually intentionally not done that this time, but the genesis of this number goes back to about a year ago when we had six clients talking about nine rigs and then about mid-year we had five rigs booked and nine clients talking about 12 rigs or 20 rigs. Right now today I can tell you that probably if we add up the rigs we're talking about and number of clients, probably 15, 20 clients, probably maybe up to 30 rigs. Now, all of those are not going to get built. We know that. But it does show us a good trend of increasing confidence in the oil commodity. And the other comment I will make is that a year ago probably a third of those were gas. Today one or two of these are gas.

All right.

Out of a much bigger number.

So --

It reinforces our customer's commitment to long-term investments for oil. That gives us better confidence.

Okay. And just wanted to ask you about the weather that we have been seeing here in the US the last couple of weeks and really through the first quarter to date and you guys had mentioned, I believe, you are operating 102 rigs today in the US. Has that had any amount of volatility or do you expect any volatility in the near-term because some of the weather that we've had in the states?

Victor, it is Gene here. No, haven't impacted our operations to date at all.

Okay. Great. That's all I had. Thank you, guys. Congrats on the quarter.

Thanks, Victor.

Roger Serin from TD Securities.

Just a couple, I think, easy questions. Rob, you gave as guidance for 2011 tax. Could you stretch a little bit and give us a view on 2012?

I don't think it will be a lot different.

Okay. What would be the limiting factor from a lead time point of view from components for any new rig builds? What sort of timeline are we talking about and what is the equipment that's a limiting factor?

Roger, great question. Typically the longest lead time might be a top drive. So we work carefully with our vendors to shorten lead times on top drives by entering into a long-term planning and purchasing agreement. So I think we have got our lead times very manageable for that particular component. Then you move into a whole bunch of things, electrical components and BOPs, things like that. Right now our lead time for new build rig for a triple would be in or around six months and for a new build super single, just looking at the booking rate and the contracts we have that are pending right now, it might be closer to 10 or 11 months.

Okay. Thanks very much. I got one other question, so I might as well ask it. The Encana sale joint venture, recently we saw Talisman do something a little bit similar. Can you give us a read through on what you see from business opportunity for Precision.

Both Talisman and Encana are very good customers of ours and we watched their capital planning processes carefully. We watch how they generate their capital carefully. Clearly, this is a good deal for Encana, very good deal for the investors of Encana. It does injects a lot more cash into their balance sheet. And I think it gets them back into balanced spending for the year and maybe with some room to increase spending. Obviously, for a company like Encana that plans ahead and does a lot of maximizes their size in drilling. It is good for Encana. It will be very good for Precision.

Do you have any sort of sense of how that might play out in terms of activity, Kevin?

Far too early to say. Better question for the Encana team.

Okay. Thanks very much, everybody. Good quarter.

Thank you.

Jeff Mochoruk from Cormark Securities.

Just want to touch a little bit on the day rates we're seeing here in Canada and how it is changing between the different tiers of rigs you have. Are you seeing a bigger increase on the Tier 1 rigs or is it similar across all three tiers of rigs?

Jeff, you are probably asking for level of detail right now that we don't have at our fingertips. I am not sure --

Maybe, Jeff, ask the question one more time. I just couldn't quite hear what you said.

I am just trying to get a sense on the spot rig market day rates, how they have changed or are changing across the different tiers of rigs? Are you seeing a bigger increase either dollar wise or percentage wise in the Tear 1 rigs or is it a very much a similar increase across all three different tiers of rigs.

Probably fair to say first of all that Tier 1 rigs remain in very high demand and the price is fairly stable at about new build economics. So the Tier 1 rigs are strong pricing remains strong pricing and that's good. The Tier 2 and Tier 3 rigs have seen the price accretion. And again, when you think of how it layers in over time and through the season in Canada right now and throwing on top of that the labor costs, be thinking in terms of a few hundred, several hundred dollars per period.

For the lower tier rigs.

That's right.

Okay. And then can you just give us a breakdown on your Tier 1 rigs in Canada, how many of those will be contracted and how many of those will be exposed to the spot market?

We don't usually give that guidance, do we?

No. In Canada we have -- let me get this right. We have 67 Tier 1 rigs and right now in Canada we have 40 term contracts working, so not all -- there is going to be some other rigs and some Super Triples that have some contracts, but I would say based on that it is probably around half of them.

Half are split between contract and half are exposed to the spot market.

I think that's fair.

Perfect. Thanks a lot. One more question. Just on the tax charge you'll be having of CAD108 million, how should we be modeling that or how is that expected to impact your Q1 results?

We just got this yesterday, but you ought to think about that as taking up CAD108 million of liquidity, whether we do it in the form of a LC that takes availability away from our revolver or we post it in cash.

And how will that impact the income statement during the quarter?

It won't have any impact on income statement and likely will have no impact on balance sheet other than the cash position.

Okay. Thanks a lot.

Thanks, Jeff.

Todd Garman from Peters & Co.

In terms of the work that may be or has been deferred or delayed in Canada here in Q1, is there anything that you can put your finger on as to the type of well or even maybe area where the work has been deferred? Or is it pretty -- is it every where?

I think it is across the basin, but I think it is also fair to say that the bigger customers have gotten more attention.

Okay.

I don't like that put that out there, but I think that's what's happened.

Okay. And then could you give us a sense of how many of your currently active 155 rigs in Canada are coring wells? Do you track that?

Coring. We don't track it, but it is a minimal number if any at all.

Okay. Thank you.

Thanks, Todd.

[Eddie Herbert] from PPM.

I just had a couple quick questions. Apologize if I missed this, but can you give a little more detail about that tax liability and kind of the plan and if anything's changed? I think last we talked about it you had maybe one or two opinions from law firms supporting your original accounting back in 2005 and have there been any changes in there or it's status quo? Can you give any update?

Yes, sure. So the first answer is no, there has not been any changes. Our advisors still are of the same view. We're of the same view that we're on the right side of this and that ultimately that we'll prevail in that. What's changed is the CRA has made the decision to assess us as their statute of limitations was about to run out and so we'll post a bond or cash, as we need to, and then we're going to vigorously defend this. We believe we're on the right side of it. It is going to tie up a little bit of our capital for a while, but we think at the end of the day we'll regain that.

Okay, how does this impact the timing? You mentioned they were running out of their timing, so they had a come up with a decision, CRA being they. So how quickly do you guys have to respond? When should we expect to hear something?

So there is a 90 day period for us to appeal, which we will do and we'll give updates, I think, each quarter unless there is something material that happens and we'll update in between. I think this could really happen two-ways. There could be a -- it could be very long and drawn out or if there was a -- if they decided to assess for a smaller amount, which I think it unlikely, then maybe that would happen in the short-term. But I think you ought to be thinking about this in terms of years and we'll keep updating people as it progresses and if there is anything significant that happens between quarters, we'll let you know.

Have you guys disclosed any number that you would be willing to pay or any settlement with them behind closed doors or public at all?

No, no, we haven't done that.

Okay. All right, thank you. The other question was just on cost inflation. It looked like your margin was down a little bit from Q4 in the US kind of cost inflation and sounded like you mentioned a lot of that is being pushed through now to your customers and all the way through May. Can you just give a little detail on the cost inflation that you're seeing and with workers and everything?

It is not significant. In the fourth quarter we had some maintenance expenses. We restarted some rigs, so there was some start up costs and there was a little bit of labor increase in some areas that are more expensive to operate just because of tightness in the labor market, but it is not too significant and we're working hard, particularly in the US operation, to drive those costs down, but that's what they're made up of.

Our margins were actually consistent between Q3 and Q4. The day rate increases in Q4 made up for the cost increases that we had, so margins were right on spot on quarter over quarter.

I'm sorry, I was looking at prior Q4 '09.

Yes and that has a lot of term contract revenue in it at higher rates, so that's why that is different.

And also some BICC in there as well which is just the margin and no costs.

Yes.

Oh, I got you. Okay. Thank you. That was it, thank you.

Thank you.

William Hank, a private investor.

I am calling with regards to the status with the purchase of Grey Wolf. Has that been -- when is that going to be fully paid?

When is it going to be what, sir? I couldn't quite hear you.

The purchase of Grey Wolf, when will that debt be fully paid?

The debt? Well, we refinanced the debt that we took on in that acquisition. We had some very high cost debt that's been refinanced now in the fourth quarter of last year at 6.625% and so our capital structure with a debt and the level of equity that we have and cash, we are very comfortable with at this point in time. We will continue to look at paying off debt as it is prudent, but right now we're very comfortable with our balance sheet.

I see. Okay. Thank you very much.

Thank you, sir.

Thank you.

(Operator Instructions) Scott Treadwell from Macquarie Capital.

Hi, guys, great quarter. Just wanted to touch on a couple of things. On the contract base that you have got here listed for 2011, any idea about how many of those were signed in the dark days that might have a couple of thousand dollars or more in day rate potential upside as they get resigned later this year and further on?

We're looking at each other. Some of the contracts that we have were for new builds that were done in 2009, but there were some of these contracts that were signed in early 2010 that will have some day rate upside in them when they become up for renewal, because they were for a year or eighteen months or whatever. So, yes, there is always -- you kind of got to look at it as a portfolio approach. You're always going to have contracts turning over. As Kevin mentioned in his call, we were looking at this this morning. When we first announced our 2011 contract position it was 45 rigs on average for the year. Today it is 85. So we've signed enough contracts to add 40 more average rigs working for the year since that time, which was about, I don't know, six months ago, nine months ago, something like that. So, we don't have the detail that you're looking for, but there is going to be some going both ways still.

Okay. If you started at 40 and you've added 45, fair to say those 45 are fairly closer at what the market is and the 40 might have some upside?

Scott, this is Rob. Some of the 40 could have some downside, too, because there is still a few rigs in there that were signed at the peak that will roll off that could have some downside, so there is a mix. My gut feeling, after having kind of gone through at least on the US side a review of the rigs, is that there is more that have upside bias than downside, but it is a mix and I am not sure I'd think too hard about that one.

Okay. And the other question, a lot of color about the Canadian day rate and the sort of way things roll out. Same sort of trend in the US or is it a little more secular there rather than just happening kind of Q1?

It is more secular, it's more regional. As we commented, we have seen that the rigs leaving the gas plays have been going to oil plays. If it is a right size rig, it is going in at a higher day rate. That's been very productive. We have taken some Tier 3 rigs, reactivated them out into the Permian Basin. Those are coming off of really low day rates, so there is some good movement going on. But across the boards, we're not talking about CAD1000 a day across the boards, not at all.

Okay. So that same trajectory may not be exactly the same slope, it is still an upward trajectory.

And fair to say that in Canada we got hung out for most of 2010 with no day rate increases. So we lost out on several quarters of day rates, but it picked up in Q4. In the US we saw sort of a sequential improvement quarter over quarter.

Okay. Good enough. Thanks very much, guys.

Great. Thank you, Scott.

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

Well, we just want to thank everybody for joining us on the call today and have a great day. Thank you.

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