Precision Drilling Corp (PDS) 2011 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Precision Drilling Corporation's second 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'd also like to welcome you to Precision Drilling Corporation's second quarter 2011 earnings 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 are Gene Stall, the President of our Drilling Operations, and Doug Strong, the President of our Completion and Production Services unit.

Through the news release earlier today, Precision Drilling Corporation reported on the second 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 disclosures 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, operation, structure, rig fleet, 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 second quarter operating results and a financial overview. Kevin Neveu will then provide a business operations update and our outlook. Rob, over to you.

Thanks, David. Precision had a very strong second quarter, reporting net earnings of $16 million or $0.06 per diluted share on revenues of $345 million as compared to a loss of $69 million or $0.25 a share on revenues of $262 million for the second quarter of 2010. In the second quarter, EBITDA was $93 million, which represents a 54% increase over the $60 million achieved in the second quarter of 2010. The improved Q2 results reflect stronger utilization in margins, particularly in the US, partially offset by an extended spring break-up in Canada.

In the US during the second quarter of 2011, drilling revenue improved by $3,347 per day versus second quarter of 2010, and $1,216 per day versus the first quarter of 2011. In Canada, in the second quarter of 2011, drilling revenues improved by $2,199 per day year-over-year and $641 per day sequentially. While servicing margins improved by $39 per hour year-over-year and decreased by $77 per hour sequentially due to spring break-up.

The addition of 18 new rig build orders since our first quarter conference call, takes our total 2011 new build program to 30 rigs. In the past 12 months, we have now booked 39 new build orders. We expect 27 of the 39 new rigs will have been delivered by year-end with the remaining 12 to be delivered in the first half of 2012. With the opening of our Houston Tech Center this summer, we now have capacity to produce three rigs per month and expect to have a full order book going into 2012.

In December, we announced our 2011 capital spending plan, which totaled $405 million. We have updated that plan several times due to very strong demand for our super series rigs and upgraded rigs, and now expect total capital expenditures to be approximately $841 million in 2011 with an additional $183 million of carryover into 2012, to complete the 2011 new build program. We expect our capital expenditures to consist of approximately $484 million for expansion capital, $216 million for 15 to 20 rig upgrades and long lead-time components that can be used for new build opportunities or rig upgrades, and an additional $141 million of maintenance and infrastructure spending. We expect approximately $755 million of the capital to be spent in the contract drilling segment, and $86 million in completions and production.

We are pleased with the shape that our balance sheet is in, and the financial strength and stability it and flexibility that it provides. As of June 30, total debt was approximately $827 million, not including unamortized debt issue costs, and net debt is approximately $620 million. Precision's liquidity is more than adequate with cash, operating facilities and our undrawn revolving credit facility totaling over $750 million of availability. We also have additional debt capacity we could access if we continue to have high return opportunities to invest capital backed by take-or-pay contracts.

During the second quarter, we also amended our revolving credit facility. We are able to extend maturity to November of 2015, reduce borrowing costs across the pricing grid, remove restrictions on additional unsecured borrowing and widen our covenant tests. That concludes my comments, so I'll turn it over to Kevin.

Thank you, Rob. Good afternoon. As Rob has just briefed us, the second quarter was a very good quarter for Precision. In broad terms, customer demand for Precision's high-performance services targeting horizontal drilling for oil and liquids-rich gas continues to grow. Obviously, this trend is underpinned by the resilient oil commodity price, but it's also driven by the success our customers are achieving using horizontal drilling to develop these resource plays previously viewed as technically or economically unfeasible. Precision's rigs enable our customers to optimize drilling cost, minimize performance risk during the construction of these complex horizontal wells. Today, we are drilling these horizontal wells faster than even three years ago, and although our rates are increasing, the economic and productivity gains we provide benefits our customers by reducing the overall well cost, which in turn lowers the commodity price threshold for their financial return.

As we look at the second quarter, I believe the key indicators for Precision are the impressive day rate improvements that we're showing, the EBITDA leverage that Precision demonstrated, and of course, the demand for new build super series rigs. As we've always said, size matters in this business, and leveraging that size is what Precision is all about. If you compare Precision's Q2 2011 results with Q2 2010, you'll see that operating days were up about 15%, revenue increased 30%, and most importantly, EBITDA in the drilling group increased 52%.

As mentioned by Rob, day rates are up an impressive $2,200 per day in Canada and more impressive $3,300 per day in the United States. This, combined with the activity, explains the 37% revenue rise. The increment to a 52% EBITDA is driven by cost control and operational leverage inherent due to the scale of our business and our vertical integration. I'll speak more to the day rate trends in a few moments, but I believe the leverage is one of the elements of Precision that's not very well understood. Hopefully, during the quarter we've demonstrated the power of that leverage at Precision.

Regarding new builds, you may recall, we started 2011 mentioning about 20 customers with interest in up to 30 new build drilling rigs. As of today, we have announced 30 new build drilling rigs with 27 of these now fully contracted. It's also important to note that 28 of these 30 rigs are for oil and liquid targets, only two went in for dry gas. We believe that while the volume of new rigs is impressive, the real message is the fact that Precision's average contract duration of 3.5 years and payback on these contracts of over four years is excellent returns, and these rigs are a very good investment for Precision. But more importantly, we believe that this really demonstrates long term commitment by our customers and demonstrates their view that we are in the very early stage of a long oil and gas -- oil and liquids drilling cycle.

Now, let me move to our regional updates. In Canada, we experienced a prolonged break-up, forest fires, rain, snow, and flooding, all conspiring to frustrate our customers' plans to drill and complete wells. These conditions impacted our completions and production business most, with service rig activity down almost 12% from last year. Yet, due to product mix and some price improvements, revenue was up almost 19%, and EBITDA was up almost 59%, again demonstrating Precision's leverage. Our rental and camp business had a very strong quarter, and contributed significantly to this improvement.

Our service rig rates are up about 11% over last year, but we believe we're in the early phase of a significantly stronger pricing environment over the coming quarters, and we'll have more to report on that later this year. In the last quarter of 2011, we'll be deploying our first coil tubing completions rig, and we have a high degree of customer interest, expect to be adding four more units in the first half of 2012, possibly more. Also, during the second quarter, we deployed our first snub unit to Pennsylvania. This unit is performing very well, and we think this may prove an interesting opportunity to grow our snubbing services into the United States.

Now, turning to Canada, to our Canadian drilling activity, it was up year-over-year and this comes as no surprise, as demand remains very strong. However, June was a challenging month as we have customer commitments for over 100 active rigs but seldom were we able to mobilize more than 60 due to the wet weather. The good news is that our customers did not cut or reduce their annual drilling budget because it rained in June. We expect they will make every effort to spend that money during the balance of 2011, further stimulating rig demand. Our current activity as of today is 98 rigs drilling with the further 20 rigs waiting on location and we have 140 rigs -- more than 140 rigs booked for summer activity. We believe this will be the busiest summer in several years.

Certainly we expect the momentum will carry forward into the fall and next winter, and as such Canada remains in a very productive pricing environment. We are currently seeing spot market rates of $500 a day or more compared to last winter, very unusual and very productive, and we expect spot market pricing to strengthen further to the fall. There's no doubt the labor costs will go up this fall. We will pass that cost through along with any cost increases we do experience, but I do believe our people are doing excellent job maintaining cost control.

Nonetheless, overall pricing momentum that we've demonstrated this year will flow through into 2012 and we expect to see improved margins flowing into the Winter of 2012. Of our 30 new builds, Rob mentioned that 16 those are for Canada, that includes the two new builds we booked in July. We continue to have many customer inquiries for additional Super Singles, particularly for 2012 deliveries. I will not be surprised if we add several additional Super Singles later this year, to our build plan.

Now, turning to the US, we deployed our Precision Super Triple ST1200 to the Marcellus at the end of the second quarter. Our customer is extremely excited about this rig and they've already indicated an intent to purchase at least two additional rigs likely for the Utica shale. Another customer has converted an existing order with Precision to two of these Super Triple ST1200 models. We believe this compact, highly-mobile Tier 1 Super Triple has potential to become a market leader, much like our very popular Super Single. Throughout the year, particularly in the Bakken, Eagle Ford, Permian Basin, the term contracts we signed up in 2010 are rolling over to substantially stronger 2011 pricing, and we're seeing spot market pricing in our Tier 1 and Tier 2 rigs continue to strengthen. Our current average day rate of about $22,000 has significant room to increase, and we expect to see a several-hundred dollar step up every quarter, looking forward for several more quarters.

I'm also very pleased with the cost management efforts and the overall operational results of our US team. Believe that when we have fully implemented our Houston Technology Center, later this quarter, that cost control momentum will continue through this year and into next year. Booking 14 new Super Triples during the quarter was good, but it was not a surprise. We've worked very hard with our customers building the Precision brand, demonstrating our value, we've achieved very good day rates and excellent contract terms. Our efforts in the US are clearly paying off.

In general, the US demand for Tier 1 and Tier 2 rigs remains very strong, and we see more new build opportunities today than we have at any point earlier this year. It's likely we'll book further US new builds in the second half of the year. We're pleased to have the financial capacity to meet this demand and seize these opportunities, continuing to expand our North American footprint. We mentioned that during the first quarter, we acquired Drake Directional and MWD companies.

Our current job count for directional drilling is running in the 20 to 24 range and we expect to do something similar in Canada shortly to build critical mass in this business. This will allow Precision to leverage our size and expand our directional service to many of our customers across North America. I'll make a couple quick comments on the international operations, as I'm sure you know because we've mentioned before, the [rev] marketing our capabilities aggressively in Latin America and the Middle East. I'll comment with the international cycle. It's just beginning to rebound, and pricing is still very competitive.

We are making very good progress in the Middle East and should have something meaningful and material to speak about next quarter, but I think the key take away right now, is that Precision could accelerate our growth internationally, by winning tenders with the low price as others have, but that is not our strategy. We'll continue to position ourselves at the high end of the market as the high performance, high value provider and will seek customers and financial returns commensurate with the value we provide. We are patient and we'll persevere. Precision has no plans to drive international growth with the loss leader strategy. I also know many of our employees are investors in Precision and they too listen to these calls. I want to thank all of the Precision employees for an excellent quarter with improved safety performance and great operational results. On that note, I'll pass the call back to David Wehlmann.

Thanks, Kevin. I'm also pleased to announce that Carey Ford has joined Precision as Vice President, Finance and Investor Relations and he is here with us today. Carey joined Precision two months ago from Simmons & Company International, where he was an investment banker for the past six and a half years. I will be transitioning out of my role with Precision over the next few months, and moving on to the next phase of my career. In the upcoming months, you can reach out to either Carey or me and we will do our best to answer your questions. Carey is now going to provide some details on our Analyst and Investor Day.

Thank you, David. Precision will be hosting its 2011 Analyst and Investor Day in Houston on October 4th and 5th at our new Tech Center, the headquarters of our US manufacturing, repair and maintenance operation. The schedule of events will consist of a cocktail reception on Tuesday evening, October 4th and an investor presentation and facility tour on Wednesday, October 5th. We invite all analysts and investors interested in learning more about Precision to attend. Please let me know if you'd like more information. We hope to see you in October. I'll turn it back over to the Operator for questions.

Thank you.

(Operator Instructions)

Our first question is from John Tasdemir of Canaccord.

Good afternoon, guys. I was going to ask Carey a bunch of questions, but I'll probably lay off on him for now. In the US, margins were awfully impressive. I think if I do the math right, your margin per day was actually -- sequential growth was almost CAD1,700 a day, and your revenue per day there was only up CAD1,200 a day. What I'm trying to triangulate a bit is -- was there anything that helped in that particular quarter? How do we think about margins progressing from here?

John, I'd say that what we're really seeing is the complete integration of our US operations as of Precision operation right now; and as I commented during the call earlier, that we put a lot of focus on cost, I'm very impressed by the results we received in cost control, and we think as we implement our Tech Center later this year, that that momentum should continue.

So, really, cost control on your side -- and did I hear you say that you would expect, did you expect day rates to increase by CAD700 a day per quarter?

Well, I think I said several hundred.

Several, okay. I thought you said CAD700, and I didn't think it was likely to say something like that.

If we had that kind of increase, I wouldn't be surprised; but it will be anywhere from the CAD300 to CAD700 on a quarterly basis going forward.

John, this is Rob. I think I would think about it as kind of CAD500 per quarter increases in day rate for the next few quarters is reasonable.

Would you say 75% of that goes straight to you guys? In other words, is that all margin?

I'd say 90% or 95%.

Okay, so good. Then, switching gears to Canada -- obviously the weather is really screwing things up right now, but if we look historically, the third quarter running in the mid-40% range in terms of utilization levels, is kind of where things have been historically. Are we at a point to where -- you said you had maybe 120 rigs that could go to work right now; and if you had 120 rigs and you only have 202 rigs in Canada, that's nearly 60% utilization.

John, we actually have 140-plus of our rigs committed to customers for the summer right now. And of course all those places aren't built yet, and all the roads aren't ready yet, but much like the winter, virtually every rig that's available to drill these types of wells will be drilling these types of wells this summer.

So okay, then that's 70%.

The limitation right now is just a combination of weather, getting leases built, and getting access to locations. We won't average 140. In fact, I'll be surprised if we average 120, but we might get in that range.

So does that mean utilization in the third quarter, depending on weather, could be 50%-ish?

Yes.

Oh, yes.

It should be over 50%, but it's really going to be weather-driven. The demand is there; it's just a question of how wet the weather is.

And [Appaloosa] is built and ready; they just can't get them to build leases when it's like this right now. But utilization will be what it's going to be, but the pricing model will be like at 70% utilization if you think about it in those terms. The rigs are committed.

Right. Just one other clean up question on your CapEx number. You said CAD841 million in CapEx for 2011, and then you said, I think, an additional CAD183 million for 2012? Is that right? So CAD841 million plus [212], or CAD183 million?

Yes, that's correct, and that will be to finish out the rig build program that we've announced in 2011 but won't get completed until the first half of 2012.

Got you. Okay, I just want to make sure, I'm not double counting. Okay, that's all I have for now guys, thanks.

Thanks, John.

Thank you. Our next question is from Chad Friess of UBS. Afternoon guys.

Hi, Chad.

I was wondering if you could provide some flavor on how the international market is looking? Whether you think the rigs that you might move into the Middle East, or build into the Middle East, will they be new builds or will they be existing rigs for North America?

Our current plan right now is to upgrade rigs that we have in the US, some of our Tier 3 and Tier 2, 2000 and 3000-horsepower rigs; and we've got about 24, 25 of those rigs right now that are all very good candidates for upgrades.

And so they are not necessarily working right now?

No, they're not working right now at all, and when we upgrade those rigs, for something like between CAD15 million and CAD25 million, we end up with a rig that brand new would be closer to CAD60 million.

Interesting. And so this initial foray into the Middle East -- will it serve as a beachhead for further growth, or will your next piece of growth come from another jurisdiction?

I think we're looking hard at both Latin America and the Middle East. But clearly, in the Middle East, the drilling is deeper, the pressures are higher, the need for high-performance, high-value drillers is greater; and the likelihood that they will get better returns, I think will come sooner. That said, we're quite anxious to see what happens as Brazil develops; we found a couple of interesting opportunities there. But we're going to stay very disciplined on what we expect for pricing returns. So my view is, likely we'll grow organically, probably faster in the Middle East and Latin America, at least through the first half of next year.

Okay, great. You mentioned that the rigs falling off contract into the spot market are getting quite a bit better pricing; but what about the new build rigs? Are they incremental additions to your margins, or are they kind of at a similar run rate to what you're earning right now?

So the new builds are at the highest margin, and so you can think about new build triples your margins -- maybe CAD12,000 a day or better -- and where the rigs that are rolling off a contract -- particularly the Tier 2 rigs -- we've seen quite a bit of movement; where in some cases it can be as much as CAD4,000 a day that some of these rigs are rolling off term contracts into the spot market, or renewing another term contract.

Okay, great. And, lastly, are the best opportunities still the new builds and upgrades, or are you seeing anything interesting from an acquisition perspective?

Well, we're doing very well in the upgrades and new builds, no question about that. Our eyes are wide open to the acquisition market right now. Clearly we haven't done 1, so I think so far, the opportunity's been better on new builds.

Okay, great. Thanks, guys.

Thank you.

Thank you. Our next question is from Steven Karpel of Credit Suisse.

Good morning.

Good morning, Steve.

Can you talk about -- and it's probably a little harder to do given all of the upgrades, and given how the fleet has changed -- can you talk about how day rates in your portfolio look compared to a couple years ago? Peak rates, and how you would adjust for different style and different rates we're receiving today?

I think probably a couple ways to think about this. 2 years ago, when the rates bottomed out, activity was already 1 year off bottom. So the blend of assets we were using a year ago is quite somewhat of the blend of assets today. So the mix hasn't changed a lot in the past year. We've done a few upgrades. We've had a few additions. I think year-over-year -- David, I can't recall the number -- but it doesn't really move the needle on overall day rate does it?

No, we've got about 11 rigs in the market today; new rigs that we didn't have at that time.

So that can be factored in at the higher ratio that Rob mentioned earlier. But generally, if you just look at the increments that Rob mentioned year-over-year, that's pretty much measuring bottom of the market over where we are today. So about CAD3,300 in the US, around CAD2,100 or CAD2,200 here in Canada.

And there was a couple comments, first off. There was a comment in the press release that I think said, -- I might be misquoting this, but I think it said -- well completions were down 54%? I want to make sure I followed that correctly. My question is, in that segment, what are you seeing on well completions, is maybe the way to say it. Maybe I'm misquoting a bit.

Well, you might have been referring to our completions and productions business, which in the second quarter was down year-over-year because it was so wet this year, we couldn't access locations.

And I guess I wanted to follow, how much of an impact that was, and is there a way to quantify that, to say that the activity was better, but maybe weather adjusted or something like that?

The right answer is that the demand remains quite high right now, and like I quantified the rigs earlier, during the month of June we had customer commitments for about 100-plus rigs; and we could only get between 60 and 70 working because of weather. So we failed to meet customer demand by about 30% to 40% during the month of June, in Canada. In the US right now, I think we're doing a good job staying balanced with customer demand on the drilling side; and I think for Canada, the trends on drilling and production are quite similar. There's a bit of a lag time delay just due to seasonality of the business.

And Steve, what you were looking at is that the 54% is the Q2 hours during spring breakup, compared to Q1 hours in the height of the winter drilling season. So that's typical spring breakup, though this one has been wetter, and it's cost us a little bit more in time.

Understood. And in the other part of that, to clarify, was the spending number -- and you gave the CapEx number, but how much of that is actual cash? I know there's going to be some of it deferred until next year, but what would be the cash spend in 2011 on CapEx?

I'm sorry, Steve. I missed part of your question.

It's the CAD841 million.

Yes, so the total cash spend that we expect in 2011 is CAD841 million, and then we'll have made commitments for another CAD183 million that won't get spent until 2012.

So the way to think about it is, you've spent CAD175 million, CAD180 million of cash; and you'll spend CAD840 million minus that number that will be the actual cash number to spend?

Yes, that's correct. We expect to spend in the low CAD300 million each of the third and fourth quarter.

So then, finally, if we fast forward now two quarters, and you upgraded obviously a number of the fleet, what will be left in terms of the Tier 3 rigs?

Well, I think we're projecting around 100 rigs by the end of the year.

And how many of those will be -- I guess what I'm getting at is, how many upgrade candidates will you have left at the end of the year, do you think?

We go through that pretty carefully every quarter, and generally speaking, we've been guiding people towards about half of those being upgradeable. As the drilling evolves, and the types of drilling and applications evolve, that number may move around a little bit. But clearly, at least half of those rigs are truly shallow gas Canada, shallow gas US rigs that have no upgrade potential.

And given some of the overseas opportunities, does that change it?

Well, you know, a few of the bigger rigs, as I mentioned earlier -- if you look at the schedule that we have in our presentations, there's -- I think -- it's 8 or 9 Tier 3, plus 2000 horsepower rigs?

Yes, something like that; and then there's several Tier 2s that are that size.

The Tier 3s that are all large in size -- are all -- sorry, what's the count?

6.

Those are clearly all upgrade candidates.

Okay, and then finally, just a working capital number, given the growth here. You've stayed in, as we look at it, maybe the DSOs and what have you. What's the way to look at this now, given the growth? Still consistent with previous numbers, whether it's 90 to 100 days or something like that?

Yes, the numbers shouldn't be quite that high. Canada we run in the mid 60s for DSO; and in the US, it's maybe more like 80. And then I would expect that to be consistent. No reason to think that's going to really materially shrink or grow.

Okay, and then same with payables?

Yes, so payables would be in the 40-day range.

Okay. Thank you, guys.

Okay. Thanks, Steve.

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

Hi, guys.

Good afternoon.

Hi. Can you guys talk about -- one of the things you alluded to was potentially increasing capital, and for new builds in various oil and liquids plays. If you were to commit, when you commit, I guess later on the share, when do you expect delivery of those rigs?

Sorry, were you saying creeping costs or creeping deliveries, Kevin? I missed the first part.

Oh, no. In your commentary you were talking about the potential to increase your capital program further than we have already; so I'm just trying to understand when, if you were to commit today or relatively soon, when those rigs would arrive into your fleet.

So the balance of the current 2011 Bill program will be shipping pretty much in the first half of 2012. We still have more capacity for additional first half of 2012 rigs, and if you look more than a handful, we'll be into the latter half of 2012 for deliveries.

Kevin, so today, we're pretty well booked up through 2011. We won't be able to add; we might be able to squeeze 1 or 2 rigs into the schedule, but probably not. It's probably all we're going to be able to deliver; and then the rest will go into 2012, and we'll have capacity in 2012 to build about 3 per month.

Right, and then with the first 1 of those rigs kind of rolling in the second half of 2012? Would that make sense?

Well, think about 2012 this way -- that we'll be able to build 3 rigs per month, deliver 3 rigs per month. We've already got 12 spots committed, and so that leaves another 24 spots that we can fill through the year.

Okay, and in your capital program, it looks like, if our math is right, that you guys are increasing CapEx by about CAD50 million but only building 2 rigs. Can you kind of talk about how much of your capital is spent on upgrades, or are those rigs just really expensive rigs?

No. Those aren't expensive rigs. Those are Super Singles at about CAD10 million each, but also included in there is some additional CapEx on the C&P side for some coil tubing units; and then there's some odds and ends, some infrastructure. But it's primarily growth CapEx for C&P and those 2 rigs.

And I will mention that we've included the operating center base in the US Bakken in North Dakota; and we'll get planning on that and get something kicked off later this year.

Okay. And looking at the service rig market, it looks like the margins were okay, but the pricing has come up, as you alluded to, 11%. What are you foreseeing now in the latter half of this year and in terms of into the pricing. Do you think it's going to steadily move up as the rest of your drilling fleet, or is it more subdued than that? What's your sense right now?

Well that's a loaded question so I'll let Doug take that one.

Thanks, Kevin. With the oil trend, where we see demand right now, and the logistics around the second quarter, certainly we're going to work with our customers in the second half of the year. And as we get the opportunity, certainly with our major customers there's opportunity to increase pricing. As you know very well, we don't have the leverage that the drilling side has, so we'll work tightly with them and make sure they get the operational execution they need to be efficient and to keep their production cost low. But certainly, we've got some lift.

Great. Last question -- can you talk about cost inflation on both sides of order, and what you expect to see in terms of labor, or supply cost?

I'll let Gene speak to labor costs.

Yes, so right now, I know in Canada, there's a lot of discussion going on. I think we'll look for October wage increase. I can't give you the magnitude of that yet, but I think the CODC is going to be announcing something shortly here on that. And the rest of the componentry side, we've really tried to work hard at committing to long term deals with our major vendors.

Okay, well great. Thanks guys.

Great. Thank you, Kevin.

Thank you. Our next question is from Scott Treadwell of TD Securities. Please go ahead.

Thanks. Afternoon, guys. Congratulations on the quarter. I wanted to touch base on the upgrades. It looks like that number has crept up a little bit here. Can you tell me how many rig upgrades you've got back by contracts, and are you doing any on spec at this point?

Scott, we're probably 1 or 2 or 3 rig year upgrades ahead of contract signings, but that's a lead time discussion, not so much a speculative build. Every rig upgrade that we do will be covered by a contract.

Okay, and those are still typically better returns when they're backed by contracts than the new builds?

The returns are typically anywhere in the range of 1 to 2 years.

Yes, Scott, the returns are generally better on the rig upgrades, but it's a much smaller dollar exercise, and there's not as many opportunities with the right rig to upgrade for the right project. So I'd still expect that the vast majority of our capital is going to be spent on new build rigs.

Right, and then I caught that you'll be about 100 Tier 3 rigs if I caught that right. When you finish this build program -- just the stuff that's announced and the upgrades that are under way -- how many Tier 1 rigs do you think you'll have, end of 2012?

End of 2011, we'll have 148, and then there will be 12 more in 2012; so we'll be at 160.

Plus whatever other new builds we contracted in for 2012 that are not yet announced.

And further upgrades.

Perfect. That's all I've got, guys. Thanks very much.

Thanks, Scott.

Thank you. Our next question is from Dana Benner of Altacorp. Please go ahead.

Good afternoon, guys.

Hi, Dana.

I wanted to start on the Canadian day rate side. If we think about the amount of backlog work that we have coming out of the spring, I wonder if you think that might add some additional impetus in terms of rate pressure upward than we might otherwise see?

Dana, I wish I could check the roster and see if we have any customers on the line right now, but I would expect that there will be good price [tension] this summer and fall. We're seeing it in the spot market rates right now. We have opportunities on the windows, the rigs on the windows that are not committed. People need to get wells drilled, and we're not going to be ridiculous, but the returns last year were substandard and we want to make up some ground.

Right. I guess moving to the US -- and you've been nice enough to try to quantify or give us a sense for what several hundred dollars per day per quarter might entail -- but presumably that would be a fleet-wide average that would show up on a reported -- say, a corporate number -- with a broad mix there; so rigs coming off contract going into the spot market, et cetera, is that how you would best define that number?

Yes, Dana, this is Rob. That's right. It's a fleet-wide average, and it will be a mix of many rigs staying at the same rate because they are under contract, and then some rigs that are rolling off and going to significantly higher day rates. And then the new builds that come in will be on top of that.

Perfect. If we think about the 30 rigs you've talked about in terms of new builds, how many clients would be behind that? And if you think about that, how many would be existing versus perhaps even some new clients?

I'm sorry, obviously, we don't disclose client names, but be thinking on the order of about 20 clients, 15 clients roughly and there are two new US clients that were neither Precision nor legacy group of clients. We're quite pleased about that, and in the interest list right now, we've got an additional 4 or 5 large major or super major type clients that we're working with and hopefully be successful.

Great.

We really feel like we are in great traction right now on communicating the Precision brand in the US. We think -- I hate to use the term tipping point -- but we certainly have made some big headway there.

Great. Two more questions. Moving over to the service rig side -- and Doug has given us some color -- but, given the size of your fleet in relation to the industry -- realize that this can be a bit more of a mom and pop industry than drilling -- but having said that, with the sheer volume of oil drilling going on right now, I would think that perhaps the upside is even more than what you may be alluding to. So I just wondered if maybe we could get a little bit of additional color, and I'd also be curious to know whether you would also make a stronger -- or make a move into service rigs in the US?

You know, a couple things I'll say before Doug jumps in here -- but I did comment that we think we're entering a much more productive phase for service rig pricing. I made that comment, and I'm really shy on giving you a lot of guidance, because it is such a relationship-based business, and we don't want to mess up any great relationships our guys have with our customers right now. So we'll work that on a day by day basis, person by person basis. Doug, what are your thoughts on service rigs in the US?

I agree with that wholeheartedly. No question, when we look at the number of oil wells being drilled, number of completions, the amount of production work that we have going ahead -- that certainly we've got a real positive trend developing. I think the opportunity is to really meaningfully increase pricing in 2011; and like I said before, certainly going to be in the right direction, and there's good opportunities for 2012. So I'd tempered, Dana, where I'd put some of your context into the 2012 before you see it.

With respect to the US?

The US, as Kevin mentioned in his comments -- we've successfully deployed 1 pressure control unit -- snubbing unit in Pennsylvania, operating very successfully. So we look at our existing capacity. It's reasonably booked up for Canada, so we will exploit opportunities organically, learn the market, understand customer needs, and set our capital priorities for 2012 accordingly.

But you won't see us pursuing conventional service rigs in the US in 2011 and 2012.

That's what I was after. And then, finally, can you update us on your dividend policy, given the improving -- how well you've done improving the balance sheet?

Nothing's changed, policy-wise. We're still not paying a dividend. As you can see from our capital budget this year, we're out-spending cash flow; and as long as we have high-return investment opportunities, we won't be paying a dividend. But we will revisit it periodically with the Board, but I think as long as this build cycle continues and we're deploying capital as quickly as we are right now, we won't be paying a dividend.

That was spoken like a true IR veteran. That's all, thank you.

Thanks, Dana.

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

Thank you. Good afternoon, guys.

Afternoon, Victor.

First question was on day rates that you guys are getting for new builds; and I wanted to see if there was any upward movement or potential for upward movement as we see additional orders being booked industry-wide? Because it seems that earliest deliveries, from an industry perspective, is now pushed out into the second quarter 2012, and wanted to see if there was that sense of urgency from customers to secure capacity, where you're able to push pricing or day rates on new units going forward.

There's probably a little bit, Victor, maybe CAD1,000 a day of room to squeeze a little bit harder on day rates and new builds. But we're not rolling forward on CAD3,000 or CAD4,000 or CAD5,000 increase on new builds. We don't think that's likely. Our customers right now are giving us contracts to pay back rigs inside 4 years, and we think that's a pretty good place for the market without getting too greedy.

And the second one was on coil tubing. Over the last number of months, it has become increasing conversations about that, the applications, particularly in the US; and knowing it's small for you guys. But wanted to get your updated thoughts regarding that business, and how you see it evolving for Precision over the next few years?

We're going to focus our coil tubing service work on the horizontal completions, much like in the US, but we'll do that in Canada. It's an area where we have a strong infrastructure for well servicing, and our bases and our people are well-located; and we've got a good customer base here. We don't intend to use it as a break into the US market; not at this point. But stay tuned.

And last one -- and I think, Kevin, you had mentioned this in your prepared comments; I may have missed it -- but I wanted to get an update on the directional drilling side, how things are going there, additional acquisition opportunities, organic growth, and how you see that building through the rest of the year.

Victor, we really need to get our Canadian operation up to the same level as the US is now, after doing the Drake acquisition. The Drake team is inside Precision now; they're doing a fantastic job. We're really pleased with the customer pick up, and, frankly, the quality of our service now is second to none in the US, and we have great hopes to grow that business. We need to get Canada ready the same way, and we're well on the path.

Great. That's all I had. Thank you, guys and congrats on the quarter.

Thanks, Victor.

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

Afternoon, all. Kevin, you mentioned earlier in the call the strength you're seeing on the rental and camp side of the business. Can you talk to what's driving that from your perspective, and how important or meaningful has that camp in the oil sands you deployed been?

I'll let Doug speak to that.

Yes, Jeff. The question on the camp -- from a Precision overall perspective, it's not particularly significant, but it is a good indication of our camp capabilities beyond the traditional rig market. And we are doing some things there to build out our base camp capabilities; and particularly in that 100- to 300-man camp market, but we can rapidly deploy and take on larger opportunities. On the rental side of the business, that's a function of the carry over that we've seen with a lot of the horizontal drilling. Fluid handling requirements in particular, its been a nice growth area for us, and one that is going to continue with the horizontal well licensing trend. And, frankly, the (inaudible) land acquisitions by our customers recently is going to drive that as well.

Is it safe to say that the experiment in the large camp side has gone well, and it's a business you're looking at pursuing more aggressively going forward?

I think our people within our camp catering operation did an outstanding job; and our large customer has taken notice of that, and no question we'll get further opportunities.

Gene, I think you touched on it earlier from a cost perspective, but when you put together the labor side, or over top of the labor side, what else are you seeing, or where are you seeing the pinch points in terms of cost pressure right now? And, ultimately, how do you expect that to be an order of magnitude?

Jeff, it's Kevin. So I'll tell you, we have great leverage right now purchasing; and I think costs are going to creep in primarily from steel prices. I think that will have some impact. We've done a great job leveraging our purchasing across all of our major product lines,[locking in] indexed off 2009 pricing. Our guys are working on this every day real hard, but we are not really concerned about cost this year on the material side.

So what's your biggest concern right now? Is it component availability? Obviously you've built in a chunk of your CapEx program to buy some long lead times. Where is the biggest pinch point in your business right now that you're seeing?

We're managing a couple of balls right now -- staffing up the ramp up for the summer in Canada; staffing up new rigs for the Bakken in the US -- those are all big challenges for us. We're pretty good at that; we've got a lot of people both here and in the US right now busy recruiting and training people to get ready for these rigs. It's not easy work, but it's something we're good at. But we have to get it right, we have to get good people on the rigs, we have to perform well -- so those are all things that we're all watching carefully every day; we're measuring the performance metrics. We're building 30 rigs. That's a pretty big ramp up. We've got a really good team on that right now; they're working hard. We're monitoring that carefully. I'd say that all the things we're doing right now we are quite good at doing. The volume's increased, so the scrutiny is a little bit higher; but on this part of the cycle, blocking and tackling and getting things fired up right now -- these aren't the things I lose sleep over.

Last question. A couple years ago, you guys talked about vertical integration, to the full extent that you have in Canada, not making sense in the US. Has the view there changed? You're starting to dribble some of the vertical integration services in. Does it make sense to accelerate that, whether it be rentals, whether it be service rigs, whether it be--?

You mean the sort of step outs for us, like the other services into the US?

Taking the Canadian model into the US to a greater extent.

Well, the vertical integration, the supply manufacturing, that's what we're doing on a very aggressive base. Taking production completion and production to the US is something we're sort of dribbling in a little bit, and we're doing it in areas where there's a real service shortage -- North Dakota and Pennsylvania.

So is it safe to say that that's a model you would want to pursue more aggressively, given the dynamic of the market today?

I think we'll keep our eyes on the market in the US, but fair to say that there's been less consolidation in those businesses in the US than Canada, and I think we don't want to stretch ourselves too thin.

You guys might be a consolidator.

We're starting off capital right now on new drilling rigs.

Thanks for the color.

Thanks.

Thank you. Our next question is from Jeff Mochoruk of Cormark Securities. Please go ahead.

Good afternoon, gentlemen. Just wondering if you would be able to provide us with a schedule of your remaining rig deliveries over the course of this year and into next year; what you'd expect for the next couple of quarters, or 3 or 4 quarters -- how they are going to roll out, both in Canada and the US.

I think we have that Jeff. I think David, or Carey, would you have that? They are digging through their papers right now.

This is Carey. It looks like for 2011 in Q3, we'll have 6 rigs delivered; in Q4 we'll have 10 more. In Q1 of 2012, we'll have 8; and then 3 in Q2 and 1 in Q3.

Okay, and then, wondering on contracts, and as they roll off here -- they are obviously rolling off into higher day rates. I'm wondering, can you give us a sense of how many contracts you were to have that had been signed at the bottom of the market in 2009 and maybe the early part of 2010, and are going to be subject to as they roll off here to potentially higher day rates and spot market around new contracts?

Jeff, this is David. I'll take a shot at that. No, we don't have exact numbers here in front of us, but we weren't building a whole lot of new rigs at the bottom of the cycle, because customers obviously had other opportunities to get rigs to work. So, really, we don't have a lot of contracts that were signed at the bottom in 2009. We have some that were signed in 2008 that are still carrying forward; but the ones -- then we signed more, late 2009, early 2010, and those are what are rolling off now.

And so those ones that would have been signed in 2008, I'm guessing, most of those were signed when things were rocking and rolling both in Canada and the US. So are those rigs now that are rolling off contract, are you able to sign those at higher day rates, than they would have been signed back in 2008?

Any contracts from 2008 that are still in place are all new builds, and those will all run into 2012. And those will be coming into a high day rate market. They will probably renew at the same or higher day rates. We have found that the rigs that came off contract that were Tier 1 new builds in the Haynesville moved into the Eagle Ford at higher day rates than the original new build contracts. We're quite pleased with that progress.

Okay, and lastly, if you want to go back on the coil tubing service rig market. Did you say you had 1 rig in the field?

1 rig coming out later Q3-Q4; and I'd like to get 4 or more deployed in the first half of next year.

And where will those be heading to?

Doug? Can you speak to that?

They will be here in western Canada. The target market would be the Cardium.

Okay. And what's your plans -- obviously the demand for those type of rigs are very high right now, and my understanding is, margins are pretty attractive in that field right now. Is that a business you want to aggressively grow here over the next couple of years?

Yes.

Could you quantify that in terms of where you'd like to be in terms of the number of rigs?

Not this time around. Maybe next quarter.

Okay, thanks.

Great. Thanks, Jeff.

Thank you. Our next question is from Todd Garman of Peters & Company. Please go ahead.

Good afternoon. I wanted to ask, is it at all realistic to think that should field conditions in Canada in the third quarter not cooperate and allow equipment to return to the field -- could that possibly impact or lower spot market rates to levels that they otherwise shouldn't be at, absent poor field conditions? Is that even realistic?

Yes -- no, Todd. I don't think so. I actually think it would probably have the opposite impact, where you've got a pent-up demand and the wells need to get drilled.

So the feeling out there is still that, even though the utilization level might be unusually low, given where commodity prices are at, that the demand is that strong and that's well understood throughout the industry?

I'm not quite sure I understood the second half of the question, Todd?

I'm trying to ascertain whether or not there might be a risk to spot market rates going into the winter, just because utilization levels might be unusually low in the third quarter.

Well, Todd, the utilization will be whatever the (inaudible) might be. The demand right now far outstrips North American/Canadian supply, so there is very strong demand for rigs; and if the month of June hadn't been quite so wet, we might have been saying we had 132 rigs booked up for the summer. We actually have 140-some rigs now booked, because that demand just keeps pushing back. So if it ends up being a wet summer and we don't get 140 rigs running or 120 rigs running, there will be more demand for the fall; and when the ground finally freezes it will be a free for all.

Okay, and then the second question I have -- so when we look at how the spend per well has changed, from more drilling rate to more completion related; and the companies past history of operating other service lines -- what are your thoughts about trying to participate more significantly via other service lines?

We have no intent to buy a pressure pumping company right now.

And what about expanding into other service lines that the Company has previously been involved in?

Well, we're doing directional drilling, we're talking about coil tubing servicing for completion -- so those are expansion, and [to have] the service lines compliment what we're currently doing; but beyond the things we've talked about , we have no other

Okay, thanks.

Great, Todd. Thank you.

Thank you. Our next question is from Chris Theal of Kootenay Capital Management. Please go ahead.

Hi, Kevin.

Hi, Chris.

Just looking at the analyst consensus as far as free cash flow generation in 2012, it seems there's some capital that's going to move higher here, but likely the EBITDA numbers go up. What's your view on bringing back a dividend, and how has that been discussed at the Management and Board level to date?

Hi, Chris. A dividend right now is not something that we're contemplating, either at Management or Board level, primarily because of the level of investment that we have in front of us. So we are out to spend cash flow in 2011; 2012, I suspect that we'll have a pretty full plate of good opportunities, and until that changes, we won't likely institute a dividend. But it is something that we discuss on a regular basis at the Board level, and so we'll keep you posted.

All right, thanks.

Great. Thanks, Chris.

Thank you. And our next question is from Dan Healing of the Calgary Herald. Please go ahead.

Hi, Kevin. Hi, guys.

Hi, Dan.

Just a numbers question -- you're adding some new rigs this year. How many rigs are you going to have all together at year-end 2011, do you think?

We're at 362 today, plus 16 more, so that would be 378.

Okay, and I think you have 202 in Canada. How many would be in Canada at year-end?

Probably about 210, I think, does that sound right, guys?

Hang on just a minute.

Don't have that at our fingertips; and of course on top of the 202 drilling rigs, we have another 200 well service rigs and 20 well intervention snubbing pressure units.

Oh, okay. Are any rigs being retired?

Nothing planned at this point, but we look at that every quarter and look at the marketability and the range for the rigs; but nothing on the horizon right now.

Oh, okay. And one last question -- there's a little bit of talk about acquisitions. Did Precision take part in the bidding for the land drilling assets of Rowen Cos?

We're out there and we're looking at a lot of deals all the time. That was an interesting transaction and something that we had our eye on.

Okay, but is it too expensive to take part in those kinds of things? It's I think it's 510 for 30 rig?

I can't comment on the economics that that deal transferred for, but we think we've got some good opportunities to build new rigs that deliver some pretty good returns right now. So compared to that, we would rather be building new rigs.

Okay, and as far as the question whether you did bid on that -- you'd rather not say?

Yes, I'd rather not say.

Okay, fair enough. Thanks a lot, Kevin.

Dan?

Yes.

At the end of this year we'll have 209 drilling rigs in Canada and 220 service rigs in Canada.

Oh, okay. Thanks very much.

Thanks, Dan.

Okay, bye-bye.

Thank you. There are no further questions registered at this time. I would like to return the meeting back over to Mr. Wehlmann.

I'd just like to thank everyone for being on the call. We appreciate your interest in Precision and let us know if you have any other questions. Thanks.

Thank you. The conference has now ended.