Precision Drilling Corp (PDS) 2011 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Precision Drilling Corporation's first quarter 2011 results conference call and webcast. I would now like to turn the meeting over to Mr. David Wehlmann, Executive Vice President, 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 first quarter 2011 earnings conference call and webcast. Participating today on the call with me are Kevin Neveu, our Chief Executive Officer; Rob McNally, our Executive Vice President and Chief Financial Officer; also present are Gene Stahl, the President of our Drilling Operations; and Doug Strong, President of our Completion & Production Services unit.

Through a news release earlier today, Precision Drilling Corporation reported on the first quarter 2011 results. Please note that the financial figures are in Canadian dollars, unless otherwise indicated. Some of our comments today will refer to financial measures, such as EBITDA and operating earnings.

Please see our press release for additional disclosure and reconciliations on these financial 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 the first-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 very pleased with the quality of the results for the quarter, and especially the interest that we are seeing in our new build Super Series rigs.

A year ago, I thought that the North American new build activity would mainly be centered on US deployments. However, not only is the US new build market strong, so is the Canadian new build market. This just speaks to our customers' view on the positive outlook and sustainability of oil- and liquids-related drilling. Our comments today will reinforce this point. Rob, over to you.

Thanks, David. Precision had a strong first quarter, reporting net earnings of CAD66 million, or CAD0.23 per diluted share, on revenues of CAD525 million. Please note that these results include a CAD27 million, or CAD0.07 per share after-tax financing charge, related to the repayment of the CAD175 million 10% unsecured notes that were repaid during the first quarter.

First quarter 2011 EBITDA was CAD186 million, which represents a 58% increase over the CAD118 million achieved in the first quarter of 2010 and a 28% improvement over the fourth quarter of 2010. The improved Q1 results reflect stronger utilization and increased pricing.

In the US, the first quarter of 2011, drilling margins improved by CAD584 per day sequentially, and by CAD766 per day year-over-year. In Canada, the first quarter of 2011, drilling margins improved by CAD618 per day sequentially, and by CAD2,022 per day year-over-year.

Well servicing margins improved by CAD18 per hour sequentially, and CAD51 per hour year-over-year. In December, Precision announced its 2011 capital spending plan, totaling CAD405 million. We updated that plan in February with an increase of CAD18 million, for a total of CAD423 million in capital expenditures.

With the addition of seven new build rigs taking our 2011 new build program to 12 rigs, two coil tubing units and other new equipment, we expect total CapEx in 2011 to be CAD514 million, with an additional CAD81 million carrying over into 2012. We expect the capital expenditures to consist of approximately CAD121 million of maintenance and infrastructure spending; CAD242 million for expansion capital, which includes the cost to complete 5 of the 9 2010 new build rig program.

And 12 additional new builds contracted in 2012; and CAD151 million for 8 - 12 rig upgrades and long lead time components, that can be used for North American or international new build opportunities and rig tier upgrades. We expect the capital spending to be split, CAD442 million in contract drilling and approximately CAD72 million in production and completion.

In the first quarter, Precision further strengthened its balance sheet through the issuance CAD200 million of senior unsecured notes, due 2019. These notes bear an interest rate of 6.5%. Effectively, the net proceeds were used to repay our CAD175 million, 10% senior unsecured notes.

As of March 31, 2011, total debt is approximately CAD832 million, and net debt is approximately CAD702 million. Precision's liquidity is more than adequate with cash, operating facilities, and our undrawn revolving credit facility totaling approximately CAD700 million of availability.

As of January 1, 2011, Precision transitioned to International Financial Reporting Standards. In our annual MD&A, we gave guidance on the expected impact to our financial statements. That guidance remains unchanged, but has not yet been subject to audit. Due to IRS, the Alberta Securities Commission has extended the deadline for first quarter filings to June 15 of this year, and we expect to file our full financial statements close to that deadline. That concludes my comments, so we'll turn it over to Kevin.

Thank you, Rob. Good afternoon. As you have heard from both Rob and David, 2011 is off to a very good start, and the long-term indicators are all very encouraging for Precision. I will begin by discussing the winter drilling season in Canada. You may recall back last year, we commented that the Canadian drillers were caught off guard by the strong activity, and that last winter's day rates did not appropriately track the high activity that ensued.

So, I want to draw your attention to Precision's first-quarter Canadian day rates. Our average day rate of CAD17,820 is up over CAD2,300 in the winter of 2010 -- a big step upwards, and demonstrates the pricing power Precision enjoys in this market. Further, to our improved pricing, we contracted an additional 7 new build rigs for Canada, and currently 9 out of our 11 Canadian new builds are for oil targets. And all of these rigs are on take-or-pay, four-year contracts.

Additionally, we contracted 6 tier upgrades on full cash payout basis during the quarter, a very nice start to the year indeed. As the Canadian spring breakup hits full stride, we continue to see a large backlog of work that was not started this winter. We have several clients working with us to secure crews through the summer, fall, and next winter drilling season, and we have already begun to reserve rigs for the fall.

All of these indicators suggest a continuation of the strong oil-driven momentum through 2011 summer, and into the winter of 2012. This, coupled with the four-year contracts for the new builds, the upgrades, all strongly suggest that we are likely in the early innings of a sustained long-term oil-drill cycle for Canada and for North America.

Looking to the short-term, in the spring in particular, we fielded many questions regarding the Canadian snow pack and the wet spring; and I will say that this is a real concern, a real issue, but a low concern for Precision. The snow pack is well above average. The long winter delayed the thaw, and we expect very wet conditions, with the prolonged spring breakup.

Nonetheless, we expect to have more rigs running compared to last year, and whatever work is delayed by the wet conditions likely increases Precision's Q3 utilization. The message is, expect a wet Canadian spring breakup, but the resulting activity rebound, should be strong.

The second area of concern to many seems to be around the industry's challenge to continue staffing rigs at these high activity levels. My response is the same as always. It is our job to staff our rigs with the appropriate levels of skill and experience. We have a variety of internal systems and processes to meet this challenge; and while I know it's not easy, I also know that our people are dedicated and completely focused on this issue.

You will not hear Precision complaining about people shortages; and in fact, ultimately, an industry human resource shortage should result in good opportunities for Precision and may further enhance our pricing power.

Just turning over to our Completions and Productions business for a moment, obviously they experienced a very strong winter, also driven by oil activity. Well service activity was up 17% year-over-year, and rig rates are up CAD80 per hour. Activity in our camp catering businesses, our water treatment business, and our rentals business also followed a similar trend, and we expect strong performance for the balance of 2011 and into the winter of 2012.

We're also encouraged by the consolidation in the ell service industry -- one announced today, as a matter of fact. It is our view that this will lead to improved pricing discipline in the area, and should bode well for that segment of the business.

Moving to the United States, I will begin once again by drawing attention to our average day rates. Currently, Q1, we're reporting day rates that are up more than CAD2,000 per day year-over-year, and even CAD1,400 per day versus the fourth quarter of 2010. I hope this alleviates some of the concern that was expressed last quarter, when Precision seemed to be lagging the industry on day-rate increases.

It all comes down to a matter of when rigs roll off, and whether it's rigs that were 2009 contracts or 2010 contracts rolling off. Clearly, the step-up in Q1 is very encouraging for us. It remains our view that average day rates will continue to trend up through 2011, as term contracts signed in late 2009 and early 2010 continue to roll over to today's much higher market rates.

With Tier 1 utilization effectively 100% and Tier 2 utilization over 60%, we continue to see strong interest in new builds and rig tier upgrades, and we will maintain upwards pricing pressure in all regional US markets. It's important to note that our 2011 full-year average term contract position has increased from 50 that we reported back in February to 61 now in middle of April. And these rigs are all being contracted at today's stronger spot rates. The oil-based momentum we discussed in Canada is equally evident in the lower 48.

So, moving on to the oil and gas liquids plays, like the Bakken, the Eagle Ford, and Permian, all remain very strong for Precision. We continue to see new build economics in all three regions, and are currently in the final stages of negotiating contracts with several customers for multiples of new build, 1,500-horsepower super triple rigs. If successful, all of these rigs will be deployed in the US later this year. More on that later.

In June, we'll be opening our new Houston Technology Center. This facility brings Precision's full rig maintenance crew training and rig construction capabilities into play in the United States. Besides reducing our maintenance costs and improving our operating margins, the facility will bring our new build capacity to over 35 rigs per year. And I believe David Wehlmann is planning our fall Investor Day to showcase this facility.

Moving to the Marcellus for a moment, the recent frac spill event in Pennsylvania is disappointing for the industry, but it does not reduce Precision's positive outlook in the Marcellus. We know that when properly executed, horizontal drilling, multi-stage fracs, and these advanced completion technologies are environmentally responsible, they pose no short-term or long-term stakeholder risks.

All of the environmental issues related to shale drilling, whether blowouts, spills, or water disposal issues, have been operational disappointments or operational failures, not core technology application issues. We believe these recent events highlight the opportunity for operators to select service companies who exemplify high-performance services through their people, their systems, and their processes, and those who deliver consistent, predictable, responsible results -- attributes Precision is well known for.

Ultimately, we believe Precision will benefit, as our customers will look to companies like to us to mitigate the operational risks facing shale gas development. Looking to the Haynesville and Barnett for a moment, we still believe the activity in these regions needs to further pull back to rebalance gas supply and demonstrate the highly sensitive nature of shale gas decline curves. And on that front, we've done our part, remobilizing 25 rigs away from dry gas to liquids plays in the Eagle Ford, Bakken, and Permian since the middle of 2010.

Currently, our North American footprint is heavily weighted towards oil and gas liquids, with over 70% of our rigs on these targets. And probably more important is the fact that over 80% of our rigs are drilling horizontal and directional wells, which brings me to our recently announced Directional Drilling and MWD acquisitions.

We are thrilled to welcome the great teams into Precision. Currently, as of today, we're running 17 jobs, primarily in the United States, but expect to be up to over 23 jobs when the summer season kicks off in Canada. The progress we are seeing post-acquisition is very encouraging, and you can expect continued focus on this important element for our long-term growth strategy.

Turning to the international markets for a moment, as we mentioned last quarter, we are up and running with regional business development offices in Dubai and Bogota. The competition remains intense throughout most international regions; and even while activity is picking up in Columbia and Brazil, we're still seeing small competitors continue to underbid these opportunities. In the Middle East, Saudi Arabia is planning a significant increase in both oil and gas drilling.

We see good opportunities beginning to emerge there for Precision; but more to come later in the year on those areas for Precision. I will repeat what I have said before. We do not intend to enter new markets halfway around the world by being the lowest bidder on a long list of qualified local and international drillers. And we will not leave thousands of dollars on the table by under pricing our services.

We remain confident that there is a market for high performance, high-value services in those markets, and we'll be the provider of those rigs when we achieve rates and margins consistent with the value we provide. On that note, I want to thank the employees of Precision for their hard work, their efforts, and their results in the first quarter. Excellent start to the year for Precision. I will turn the call back to the Operator now for questions.

Thank you. (Operator Instructions) John Daniel, Simmons & Company.

Kevin, when you were talking about international, you mentioned that in some of the markets you have seen undercutting by smaller players. Can you characterize -- are these smaller players, are these local players for those particular markets, or are these smaller public players competing against on you the bid?

I think the market is just starting to recover right now, and I think everybody out there is trying to get a foothold, trying to get some operations running. Certainly, new entries into the markets have been very aggressive, companies coming into markets.

Yes.

I think the local drillers in the areas understand their costs quite well, and understand that they're not going to go away, so they don't need to buy their way into the market. So, it's early days in a recovering market right now. I think my real point was that Precision is not going to be the low bidder on a long list of bids. We are going to be in there looking for the best value opportunity for the Company, and moving responsibly.

Fair enough. But, to that point, the smaller guys that are out there, the locals, can you -- what's your sense, in terms of the equipment quality? Are they building new equipment for these bids? Are they using the legacy stuff of lower, questionable quality?

There is still a surplus of legacy equipment in some markets. There is a surplus of rigs coming out of Mexico right now, that have been laid down recently. And those are better quality than the local quality rigs, so I think there is a bit of a mix out there. I think it will be another quarter or two before that all settles out and we're back into a little more predictive markets in Latin America.

Okay. Fair enough.

John Tasdemir, Canaccord.

Nice quarter and nice outlook. First question is on your rig fleet. And you talked about tier1 rigs being 100% utilized and tier 2 rigs being 60% utilized, and assuming tier 3 are less than that. And obviously, the market is very strong for tier 1. Are you seeing an improvement for the tier 2 rigs? And specifically, if we look at, let's say, US drilling rig utilization, should we think better utilization has tier 2 rigs go to work, or as they're upgraded to tier 1 rigs?

John, a very complicated answer to the question. And very good question, because a lot of moving parts in that. The piece to play into the answer would be, first of all, where the rigs are located. The second issue is, clearly, any time we can upgrade a rig to tier 1 capability, it will be achieving tier1 day rates, no question about that.

Utilization has been creeping up on tier 2 rigs now for several quarters. I think it will keep on creeping up in general terms, so there is still room for margin enhancement of tier 1 on the tier 2 rigs, just as they stand.

I think the biggest question comes down to the horizon the operating company has. If they have land that they know they are going to be drilling for the next four years, then likely they will be looking at us for a new-build tier1 rig. But if it's a short-term project and they're a smaller company, and they want to do a shorter-term contract, maybe one or two years, then maybe upgrading a tier 3 to tier 2, or just securing and locking in a good quality tier 2 rig for a two-year program usually gets us a better day rate. So, I am not sure if I answered your question completely there, but I think those are all the moving pieces.

Yes, that's fair. It wasn't a very clear question anyway, but good answer. Let me think of it -- let me ask you another way. Can you tell me about where your average rig count was for the first quarter, and kind of where it stands today for the US?

I think David has the details, but we're up to about 107 rigs in the US right now. David?

Yes, we averaged 100 rigs working in the first quarter in the US. Today, we're at 107 working in the US.

Okay. I think that answers it. Let me move on to -- just the -- you highlighted your, I guess, camps of this quarter, and kind of peeled them out and put them in different operating segments. Is there -- are there things developing there? You talked about a camp that is going to be on contract to 3Q. Is that something that's going to stay busy, or what's the deal for the camp business?

Doug, can you take that call -- question for us, please?

Yes, the camp business has been following the drilling trends. And we did shift it over to the Completion Production segment, in part because it does tag into, increasingly more, the production completion side of the business, in terms of how we're finishing off the wells. And we are pivoting our business. We're a traditional rig camp provider, with increasing capability for base camps.

So, just want to think about the camp business. I think -- should I just be thinking about the contribution it's making coinciding with drilling rig count, or is there -- the CAD500 million camp, is that a rig camp? Is that going to stay busy?

I would continue that line of thinking, where really it follows our rig business, our drilling rig business. Our motivation is primarily to provide good accommodation, good food for the employees and the rig workers at Precision. And that is still the base strategy. Increasingly, there's a bigger concentration of rigs in any one region, which does necessitate a different asset mix. So, base camps do come into play, but the entire thrust and the size and scale is with regard to our drilling rig and operation.

Okay. That's helpful. Thanks, Doug. And then, I guess, finally, my last question will have to do with the acquisition market, M&A market. And clearly, we have seen some uptick recently, and some of the things going on, you guys have -- balance sheet is looking good, cash is moving up. Are you guys seeing more opportunities on the M&A front, and is that something you guys will look at?

John, we're definitely seeing a big uptick in opportunities on the M&A front. Our strategic screen remains the same as it has been for several years now -- we're going to look at the quality of the assets, the quality of the people and systems, and then the quality of the customers. And if we can find one of these candidates popping up that happens to hit all three of those, we're willing to have a really close look at it and get the value right.

But I would also say that we're not out there looking for strategic, transitional-type acquisitions like we did with the Grey Wolf deal. That moved us into the US in a big way. Most of what we have been looking at is maybe more on the tuck-in or step-out opportunities, rather than [depreciate] the Company.

Okay, helpful.

Kevin Lo, FirstEnergy.

Just wanted to ask you quickly about a costs in the US, and I guess, whether the Q1 numbers were abnormally high compared to other quarters, or -- and then, what kind of cost run ratio we are going to see on a per-day basis in the US market?

Hi, Kevin. This is Rob. I would expect that from the first-quarter results that costs will start to trend down a bit, notwithstanding whatever labor increases that we may see. But I would expect that they'll start to trend down in kind of -- measured in hundreds of dollars per quarter.

Okay.

The first -- Kevin, the first quarter included a labor increase that we put in, in December that was probably CAD500 to CAD550 a day.

So, that number would -- okay, so jump from Q4 to Q1, CAD550 a day. But then, did you also get the commensurate push to currency increase to your customers, as well, during that time?

Yes, we did. Revenue was up CAD1,440 versus that. So yes, absolutely, we got that, plus a bunch more.

Okay. Just following up on John's question with the M&A market, we saw Savanna did a very small services deal. If I look at your business, whether it is drilling or service rigs or camps or whatnot, what do you see the best return capital? Or where do you like to -- where are you thinking that you want to deploy additional capital, as you head into '11 and '12?

That's a good question, Kevin. There's a lot of opportunity to deploy capital right now. If you look at it just on a pure returns basis, the highest return for us is upgrading rigs. The payback on that investment is very quick, sometimes one- to two-year cash-on-cash payback. Then building new rigs -- whether super singles, which have a higher return; or the bigger rigs, which are still upper teens, low 20s returns, all of which are good opportunities.

If you look at the M&A space, I think it's really dependent on the particular deal, none of which are cut the same way So, I don't know -- to compare that to organic growth opportunities, I think that in general we'll find that organically we can grow it at better returns, but in smaller steps than we can in the M&A market.

Okay. Great.

Steve Kammermayer, Cormark Securities.

I would like to touch on the Canadian day rates for a second here. I think you mentioned there -- you were seeing recent improvements in the spot day rates in Canada. Now, are we to assume that they were -- we have already seen them in Q1, or have we seen more rises during April?

Hi Steve, good question. We did comment back in our last conference call that some of these day rates are sort of staged in over the year. Generally, we renegotiate every fall for the coming year, but some don't become effective until April, some in May, some in June. Expect a little bit of a dip in -- during spring, as there's a few more rigs in the spot market.

But everything being equal right now, expect day rates to step up a little bit in Q3, and a little bit more in Q4. And certainly, we're going to be aggressive on the pricing front. If the demand that we see right now stays in place, there will be some very interesting conversations with customers over the coming quarters.

Okay. So, we should probably expect to see the normal drop in Q2 day rates from Q1, then?

A little bit. I think we're in pretty good position, but there will be rigs out there right now that are available. So, it will be Q2 -- whatever happens in Q2 is not a trend for the year, and certainly not at this point.

Right, okay. I think you said the rebound here, post-spring breakup, is going to be -- will come really fast. Is there -- what are we looking at, Q3 bookings, say, in Canada, versus Q3 of last year?

At this point, we have been suggesting to be thinking about 2011 like it's 10% to 15% stronger than 2010. I think that's a reasonable place to start from. Indications all look very positive, all look very good. It's easy to get caught up in enthusiasm in this market sometimes, but the indicators look strong.

Okay. That's great. Thanks.

Victor Marchon, RBC Capital Markets.

Just wanted to follow up on the day rate question in Canada. And Kevin, in your remarks, is it fair to assume that as you laid out activity for the rest of this year and the demand that you're seeing, that we could see another price increase put forth for next winter and next year, come October and November? And I guess, any comment you would be willing to say, as it relates to -- would it be a sense of similar order of magnitude that we saw this year?

Great question. I really have my fingers crossed. I hope it is. But, you know traditional increases look more like CAD500 per year, year-over-year, not CAD2,300. So, we're really pleased with the progress we made this year, coming off a bottom that was probably too low to start with. But all of that said, our weighting towards tier 1 rigs will continue to increase as these new rigs hit the market.

So, those rigs obviously have the best day rates in the market, so I think it gets a bit murky, looking forward. Short of me sitting here and telling you how much we plan to push through to our customers, which will create all kinds of acrimony for our sales team right now, we will do the best we can, and we'll be out there pushing hard.

And Victor, just to add to that for a second, what you have to realize, that all of the tier 1 and tier 2 rigs in Canada were working during the winter, so there was no additional equipment to go to work. There is still some tier 3 shallow gas rigs that weren't working for us and a lot of other people, but the point is that tier 1 and tier 2 were all working. And when you have that situation, you do have the price increases that you can put in effect. So, we're thinking that the fourth quarter will be strong, and leading us into a good winter next year, as well.

Thank you for that. Second one was, I just missed, Kevin, when you had mentioned that you had upgraded six rigs in the first quarter. Were they all for Canada?

Those six were for Canada. I didn't mention that we upgraded two additional rigs for the US. Both of those, I believe, Gene, are going to the Bakken, is that correct? The upgrades? Thank you. Yes. He said yes.

Okay, great. Thank you. And then, just the last one. Could you guys provide a schedule, by quarter, for the deliveries going forward from today?

Yes, I can. I worked through this with Gene earlier in the day. The deployments in the second quarter will be two in Canada, one in the US, which is the completion of the '10 build program, the last rig that we had left there. In the third quarter, we have two in Canada, one in the US. In the fourth quarter, we have four in Canada, none in the US. And then, in the first quarter of '12, we have three in Canada. So, that actually adds up to 13 rigs, which includes one rig remaining under the '10 build program and 12 rigs under the '11 build program.

Great. That's perfect.

I will add in that we think we have additional capacity for more deliveries this year yet, and that could be as many as seven or eight rigs before the year is out.

Okay. Great.

Roger Serin TD Securities.

Just a couple of questions, most have been answered. On the contracted side, you talked about 70% being contracted in the US in Q1. Can you give me a sense of what that is at, say, exit 2011?

Yes. In the US, we have about 41 rigs under contract, on average, for the fourth quarter of this year. So, it goes from 70 in the first quarter down to 41. But remember, this is a point-in-time measurement. If you look back, we added 14 contracted rig years between the last time we had a conference call and today -- most of that in the US. So, that 41 number is going to go up.

Right. And that's not a -- is that a percent number?

No, that's an actual number of rigs.

Actual rate. Okay. Rob gave a great summary of sort of the capital breakdown. So, when I look at that, I guess I am looking forward. Is it reasonable, at these activity levels, to think that you're going to have maintenance in that CAD115 million to CAD125 million range, and some additional upgrades beyond just the builds? And do you have a sense, is that -- at some point, you get diminishing returns on the upgrades? Do you still have a couple years left that -- close to CAD100 million, or is that too aggressive?

I think that that's reasonable, Roger. We -- of our Q3 rigs, call it half of the fleet of 108 are upgradable. So, we have several years left of good upgrades to do, and I think that you're thinking on maintenance CapEx levels is about right.

Okay. And one last question. So, with the addition of the directional tools, are we going to see that show up in higher day rates? Is that where it's going to show up?

That's correct, Roger.

Great. Good quarter.

Scott Treadwell, Macquarie Capital Markets.

Just wanted to follow up on the rig side of things. Doing some quick math here from the [India] report, plus the upgrades and the new builds. Looks like 141 tier 1 rigs at the end of the year, with what you've talked about this morning. Is that the right number?

David is pulling up the schedule.

Yes, today we have 126, and we're adding 13 more, which would be 139. And now, what they're -- we're doing some upgrades as well.

Three tier 1 upgrades, from tier --

Yes. So, 141, 142 would be the number.

That's right. Good math.

Even a blind squirrel finds a nut, guys. The other one is, just on the tier 3 side, I was talking to some guys in the States. Apparently a very tight market, and maybe Gene or you guys can give some color here -- the 1,500-horsepower mechanical's fairly quick to upgrade, in terms of just adding some pumping capacity for those rigs. How many of those rigs, ballpark, do you have? And is that something customers are talking to you about, over and above the color you have gotten so far?

You know, I think that's sort of mixed in the numbers we talked about, we talked about 8 to 12 new upgrades during the year. Some of those will be 1,500-horsepower mechanical rigs going through the cycle. I think that we're seeing a little more of that out in West Texas right now, in the Permian Basin. But I think the guidance we've given already captures that, and nothing additional to what we've said.

Okay. And then finally, on the service side, I'm just wondering if there is a thought about looking at these long laterals, the clean-outs, and drilling out of plugs. How relevant the service iron you guys have today is for that sort of burgeoning market, and if there's a thought that there needs to be an increase in capital over and above what you've talked about so far?

This is David, Scott. We have actually, in our budget -- if you look back, we've added, about CAD20 million or so to the C&P, our Completion and Production segment that Doug runs. And included in that is two coil tubing units and two more snubbing units, so we're seeing some more of that activity. And so, we're meeting that activity with some new builds and just putting some more capital in there, I think CAD72 million in total. Is that right, Rob, for that -- ?

Yes, CAD72 million for C&P.

For C&P.

Okay. And then the model would likely be building that sort of stuff on spec, or would that get backed by some contracts?

That's -- Scott, that's a part of the business that really doesn't lend itself to contract work. It's usually day work that's called out. And so, we expect that to be done on spec, but we won't jump in with both feet. We'll get our foot in the water, we'll figure out the business, which we're in the process of doing. And then, as we get traction, then we'll add to it. And I am confident that our guys on the C&P side know how to run that business.

Right on. Thanks for the color, guys. Good quarter.

Thanks, Scott.

Jeff Fetterly, CIBC.

On the spending side, the growth pace, what are you comfortable building, from an organic perspective? Kevin, you talked about 35 rigs being the capacity, post the new facility.

You know, that would be the CAD550 million question today. It might go higher before the year is out. Jeff, we're getting some very, very good contracts for these rigs. The rigs in Canada right now are getting four-year, full payback terms on those rigs. In the US, we're getting levels that approach that As long as our sales team is able to achieve economics like this for us, I think we're going to be successful finding funding for these rigs.

So, what are you comfortable deploying, either from a capital perspective or from an organic build perspective?

I think if we had capacity to build 35 rigs, then I think if we had contracts to support 35 new build rigs that were on four-year, cash payback terms, I would be comfortable with that. These are high-spec rigs -- through the loss downturn through 2009, we saw our customers, frankly, selfishly protect those rigs. They wanted to keep -- control those rigs right through the downturn, so it worked very well for us. And I think that strategy has worked well over the past five years, and as we have customer demand for the rigs, and as we can see that we're not building rigs on spec but are building rigs into customer need, we're good with it.

Assuming you add another seven or eight rigs to the build program this year, is that 19, 20 about the capacity that you can run at currently?

I don't know that it's finite. I think we have some more flexibility.

Okay. How do you think about M&A, in the context of organic capital generating these type of returns?

The short answer is that if we're building a rig covered by a contract, it's a great investment for the Company. But it's going to be delayed by the time it takes to build the rig. If we have a chance to buy rigs that are fully contracted, with long-term contracts that meet our economics, and the rigs are high-quality rigs with good customers and good people, we'd look at those rigs. But it would be hard for us to pay a premium over a new build price, other than the time value of money between the lag time and getting that many rigs going. Pretty straight math.

It's safe to say that four years from a payback perspective is your threshold today?

Most of the economics of new builds run in the three- to five-year range, and we're comfortable with that range.

Okay.

But just to finish off on the M&A front right now, I don't know that the perfect -- the absolute perfect financial model ever lands in your lap, and we just have to look and say, this makes sense and fits all the criteria. But I will tell you, what we're looking at very closely always is the quality of the asset, the quality of the people, and the customers we're gaining, and then see how that fits our strategy.

Just a housekeeping question -- the CAD65 million of CapEx in the quarter, does that include the Drake acquisition?

It does not. The Drake acquisition was on top of that.

What is that amount, if you don't mind?

We didn't publish it --

We have never disclosed that, Jeff.

That's something that will be included in the Q2 report?

Yes. It will be in -- actually, it will be in this -- in the Q1 report. So, it's going to be disclosed here at the end of the quarter, so, and I don't mind telling you that it was a CAD40 million acquisition.

Okay. Great. Thanks, guys. Good quarter.

(Operator Instructions) Michael Ainge, TIAA-CREF.

I want to understand, you have touched on this a couple times. The new-build rigs that you are working on right now, do those all have contracts on them, or are some of them sort of built on spec?

Michael, all of those rigs are contracted. They're fully contracted. At the beginning of the year, we announced a 2011 capital build program that we anticipated five new builds. And in fact, we have gone well beyond that. Those five new builds were contracted out in the first couple of months. And clearly, we had customers in detailed negotiations with us; otherwise, we would have been hesitant to announce that.

Okay. And when you think about acquisitions -- you've sort of touched on what your criteria would be, for whether an acquisition looked attractive. Do you have a thought in mind into how much leverage you would consider putting on the Company, in terms of financing and acquisition? Do you have an upper limit?

There is not a bright-line test here. It's a question of how do we look in another downturn, in terms of cash outflow obligations? And -- but that being said, we're very comfortable being anywhere kind of around two -- or a little over two times debt to EBITDA, in that range where we're comfortable staying there. If we stretched above that for an acquisition, we would very quickly look to get our debt to EBITDA ratio back in line, whether that's paying down debt or issuing equity, if it was a case where it made sense. But that's the sort of range that we want to be in. This is not a business where we feel comfortable trying to live with a high level of financial leverage, because of all the operational leverage that's in this business.

Right, right. Okay. And then, when you look at -- obviously, you're having great success in terms of putting on contracts for more tier 1 rigs. How concerned are you -- obviously, this industry historically, as many industries have done, has over-built at times. How concerned are you that that's a possibility in the near to intermediate term, that the industry becomes over-built?

It's a complicated question, because the industry has not over-built high-spec assets so far. And I will say that carefully. But the type of company that's required to run a high-spec, [AC], tier 1 level rig isn't going to be three non-industry investors investing in a rig, because it's a good deal -- like we saw back in 1982, 1983, when non-industry, non-technical people were investing in rigs. And the building of industry was over-built by a factor of three or four times.

If we look back over the past 10 years, the responsible, large-cap companies -- or small-cap in the big scheme of things, but large-cap oil service drillers, have been very disciplined with their new build programs, and building generally against customer need. So, we don't see evidence of an overbuild happening right now. Our industry and our peers are all building into contracts or into high certainty, at the best.

There are financial curbs, which in some cases are a little wider in some cases, a little narrow -- narrower. Our curbs are very narrow. We have been quite clear on saying we want contracts that average three to four years in duration, we want to get back 75% to 100% of our cash in the initial contract period. So, we have very narrow, tight curbs, and very disciplined around how we deploy our capital to new builds.

Okay, thank you.

Todd Garman, Peters & Company.

I am just wondering if you can provide a little more insight in terms of what the two coil tubing units consist of, and what it is that they will be designed to do when they're finished.

Hey Todd, we thought we'd slip that one in there under the radar screen. It actually would total to three coil tubing service units. These are going to be designed and built and deployed into the horizontal wells for a completions work.

And so, will you be supplying food pumps with those units, as well, or -- ?

Not frac pumping, just fluid pumping. But not -- we have no intent to expand to full-frac type pumping, no.

And to equipment?

Yes, just some (inaudible) equipment to support it.

Okay. Thank you.

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

Well, we want to thank all of you for joining today, and you all have a great day.

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