Precision Drilling Corp (PDS) 2011 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Precision Drilling Corporation's third quarter 2011 results conference call and Webcast. I would now like to turn the meeting over to Mr. Carey Ford, Vice President, Finance and Investor Relations. Mr. Ford, please go ahead, sir.

Thank you. Good afternoon, everyone. I'd also like to welcome you to Precision Drilling Corporation's third 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 Stahl, President of Drilling Operations, Doug Strong, our President of Completion and Production Services and David Wehlmann, Executive Vice President, Investor Relations. Through a news release earlier today, Precision Drilling Corporation reported on the third 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 on these financial measures. Our comments today will also include statements reflecting Precision's views about events and the potential impact on the Corporation's business, operations, structure, rig fleet, balance sheet, and financial results which are all 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 third quarter operating results and a financial overview. Kevin Neveu will then provide a business operations update and outlook. Rob, over to you.

Thanks, Carey. Precision had a very strong third quarter, both from a financial and a strategic point of view. We achieved a number of positive milestones including contracting 12 more new-build rigs with long-term take-or-pay contracts bringing our total to 42 rigs in 2011. We also signed long-term contracts for 3 large rigs to be deployed to Saudi Arabia in the first quarter of 2012. We completed the acquisition of Axis Energy Services. We opened our Houston Tech Center that will help drive operating efficiencies and margins. And we raised an additional [$400] million of long-term unsecured debt. Kevin will further discuss these positive steps in his comments.

We were also successful financially, reporting net earnings of CAD83 million, or CAD0.29 per diluted share on revenues of CAD493 million, versus earnings of CAD56 million or CAD0.20 per share on revenues of CAD359 million for the third quarter of 2010. Third quarter 2011 EBITDA was CAD186 million, which was represents a 65% increase over the CAD113 million achieved in the third quarter of 2010. The improved Q3 results reflect stronger utilization and margins, both in Canada and the United States. Third quarter 2011 EBITDA margins improved to 38% versus 31% in the third quarter of 2010.

In the US, during the third quarter of 2011, drilling revenues improved by $2,100 per day versus the third quarter of 2010. Due to lower turnkey drilling activity, average revenue per day decreased by approximately $1,000 in the third quarter versus the second quarter of 2011. Absent the turnkey drilling effect, in the third quarter, day rates continued the upward trend of the past several quarters.

In Canada, in the third quarter of 2011, drilling revenues improved by CAD1,900 per day year over year. Well service revenue per hour increased by CAD73 year over year and EBITDA margins for the segment improved from 27% to 34%. The addition of 12 newbuild orders since our second quarter conference call takes our 2011 newbuild program to 42 rigs. In the past 18 months, we have now booked 51 newbuild rig orders. We expect 27 of the 51 newbuild rigs will have been delivered by year-end with the remaining 24 to be delivered in 2012. With the opening of our Houston Tech Center this summer, we now have capacity to produce 3 rigs per month.

In December, Precision announced its 2011 capital spending plan totaling CAD405 million. We have updated that plan several times due to very strong demand for our super series and upgraded rigs, and now expect total capital expenditures to be approximately CAD880 million in 2011, with an additional CAD413 million of carryover into 2012 to complete the 2011 newbuild program. We expect our capital expenditures to consist of approximately CAD508 million for expansion capital, CAD228 million for 20 rig upgrades and long lead time components that can be used for newbuild opportunities and rig tier upgrades, and CAD144 million of maintenance and infrastructure spending. We expect approximately CAD790 million of the capital to be spent in the contract drilling segment and CAD90 million in completion and production. Please note that the CAD228 million of upgrade capital does include the capital to upgrade the 3 rigs going to Saudi Arabia in late 2011 and early 2012, to drill oil wells in the Manifa Project.

Turning to the balance sheet. During the third quarter of 2011, Precision issued $400 million senior unsecured bonds due December of 2021 with a fixed coupon of 6.5%. This was an opportunistic capital raise that provides additional dry powder for organic growth and acquisitions. We are very pleased with our balance sheet and the financial strength, stability, and flexibility they provides. As of September 30, total debt was approximately CAD1.3 billion, and net debt is approximately CAD790 million. Our blended interest rate is just over 6.5%, and our earliest debt maturity is in 2019. Precision's liquidity is more than adequate with cash, operating facilities, and undrawn revolver totaling over CAD1 billion of availability. Kevin, those conclude my comments. I'll hand it over to you.

Thank you, Rob. Good afternoon. I know all of you are keenly interested in the tone we set regarding our views on 2012, and I will be crystal clear on this point. We are highly encouraged by the trends, the plans, and the actions we see from our customers. I'll refer to these indicators throughout my discussion today. As Rob mentioned, our current newbuild schedule has 24 rigs slated for 2012 delivery. The last 12 of these rigs have been negotiated and contracted over just the last few weeks during the height of our customers' 2012 budgeting process. There should be no question in anyone's mind that this is a highly positive indicator on 2012 demand. I also think there's more to this when you consider that these rig contracts are spread among 7 different clients who are all among the top 20 Canadian and US exploration companies. And even more importantly, the 2012 newbuilds have a broad geographic mix with rigs slated for North Dakota Bakken, Texas Eagle Ford, West Texas Permian Basin, the Utica in Ohio, Canadian heavy oil, and several rigs slated for the Canadian Cardium play. All of these rigs are intended for oil and gas liquids targets. We also have 4, 2012 newbuilds slated for the Marcellus targeting dry gas. When you consider the breadth and depth of these contracts, I view this as a good set of future indicators of the expected tightness in rig supply. And further to that, we still have very high customer interest, and our inquiry list is at peak levels. And we should not be surprised if we see further newbuild additions announced by Precision or our competitors later this year.

Turning for a moment to our international announcement. I'm very pleased to report that by the end of Q1 2012, we should have 5 rigs running internationally, 2 in Mexico, and 3 in the Kingdom of Saudi Arabia. These Saudi rigs are deep, 2,000- and 3,000-horsepower rigs from the United States fleet which are going through substantial upgrades and conversions for the desert operations. This is particularly important for Precision as we will be pursuing deep, high pressure oil targets.

Now, I need to correct a comment in our press release which referred to these as gas wells. In fact, this is primarily an oil play but with significant high pressure associated gas. Clearly, our customer desires Precision's high performance, high value services to manage this risk and control the cost of these high pressure wells. We are pleased that our brand has become recognized in this important region, and this provides Precision with the revenue base and credible presence to continue growth in the Arabian Gulf region.

Later this year and into next year, Precision will significantly increase our focus on Poland and Romania, particularly with our newly introduced European compliant Super Triple EC1500. But I remind you that while international growth remains a high priority for Precision, the rate of growth will be significantly slower than our traditional North American markets.

During the third quarter as Rob mentioned, we closed the Axis directional drilling acquisition. Today, we are running flat out both in US and Canada. Our only limitation is the availability of directional kits and drilling motors. We expect to increase our current capacity to around 70 jobs by year-end. Now more importantly, we believe that Precision's enhanced value and the lowered risk profile we offer our customers gives Precision excellent growth potential across the 215 Precision rigs that are today engaged in directional horizontal drilling, utilizing traditional third party services. You can expect we'll continue to focus on expansion of this important high performance, high value service for our customers.

Now shifting to North American rig operations. Let me begin with Canada. We are very busy today with seasonal activity levels setting 5-year highs. But the key takeaway should be that the seasonal oil rig count is actually close to a 3-decade high. Since the mid 1980s, Canadian drilling and service cycles have been, to a large extent, driven by natural gas activity. Today, unconventional oil and unconventional resource is the primary driver, and this is a capital intensive oil and gas exploration development that is a purview of the well capitalized E&Ps. And while we understand that ultimately commodity prices play a key role in drilling budgets, the E&Ps have shown good discipline remaining focused on long-term development programs and not responding to short-term price volatility.

This is a good moment for me to digress. I think it's important to understand the nature of unconventional drilling programs when analyzing how E&Ps consider commodity price volatility. Unconventional programs are often referred to as factory-style, or mass production style programs, and I personally believe these are not the best terms. I would draw a closer analogy to industrial farming as opposed to factory manufacturing. Nonetheless, whichever analogy you prefer, the full industrialization of any process involves isolating and focusing highly concentrated capital, highly concentrated physical resources, well defined procedures, specialized machinery and techniques -- all which are designed to be predictable, repeatable, with the desire to drive down unit costs and reduce all forms of risk. That's the prime underlying principle in factory production or industrial farming.

Unconventional resource development is no different. The intensity and concentration of sunk capital in land and facilities, the importance of specialized machinery and defined process, optimized cost and reduced risk, and smooth industrial process flow are all necessary to effectively develop unconventional resources. These industrial processes are difficult and expensive to ramp up, and importantly, very difficult to ramp down. It takes a large balance sheet capacity and a reasoned long-term perspective to fully exploit these capital and service-intensive unconventional resource programs. We understand this investment style. And this field development profile plays right into Precision's high performance, high value strategy and is clearly reflected in the 210 rigs we have today drilling horizontal directional wells.

Now coming back to Canada, we are effectively booked up for the balance of 2011, and we should see fourth quarter rig counts touching last winter's highs with typical weather related variability during this last quarter of the year. Winter 2012 will exceed winter 2011 both in utilization and total activity as we've added 9 additional rigs over last year's rig count.

We are in the midst of negotiating 2012 Canadian prices. As such, I really don't want to comment on the progress of these negotiations. As always, it's an interactive process with our customers. I will say that my sales team frowns when I refer to Precision's pricing power in our conference calls. I think the key message is we are working closely with our customers on the labor and cost increases, and we view this negotiation as a demand and activity-based pricing scenario. From that, you can draw your own conclusions about 2012 pricing.

In the United States, I'll dispense with any concerns about average day rates. There should be no surprise that Q3 was a slow period for our turnkey group. That group is typically driven by conventional gas, and this revenue reduction had the effect of reducing our average blended US day rates. Inside that average rate, we still see a positive trend in our non-turnkey rig fleet as 2010 rig contracts roll into stronger 2011 pricing, and further newbuild deployments will influence the average day rates. We fully expect this trend to continue for several quarters and easily overshadow labor cost inflation.

We believe newbuild interest will remain strong in the Marcellus, the Utica, the Bakken, the Eagle Ford, Permian Basin, and will also begin to materialize in the Niobrara. Rig count additions for these unconventional plays will be fulfilled with newbuild rigs and some rig tier upgrades. And should any excess Tier 1 rigs become available from dry gas -- dry natural gas activity, it's unlikely that any of these rigs will be suitable for Northern regions like the Marcellus, the Utica, or the Niobrara and the Bakken. It's our view that rig supply tightness will remain into 2012.

Our Canadian Completion and Production Services business experienced a strong third quarter and will have excellent momentum as we finish out 2011 and roll into the winter of 2012. As we have explained in the past, this business generally lags drilling activity by about 1 year. The resurgent oil drilling activity is a strong driver for this business. I expect the demand for all CMP product lines will remain strong. The expected busy winter drilling season will certainly drive our camp, catering, and water businesses. Unconventional drilling will continue to drive our rental services past prior highs, and our well service business is in for a busy winter. I'm very excited to get our new coil tubing completions unit field deployed as I believe this service platform gives Precision the opportunity to get a larger bite of the completions market in Canada.

I'll close out these comments with our thoughts regarding the economic uncertainty which is clouding the capital markets. We, like all of you, are keenly watching the European debt situation, and we share a cautious view on Asia growth. Notwithstanding these concerns, we have firmly positioned Precision as a high performance, high value driller with a global footprint, diverse customer base, and as a premiere, unconventional resource driller. We have the financial capability to fully exploit organic growth opportunities, and probably more importantly, the capacity to exploit market volatility. I want to thank the employees at Precision for their hard work, and the efforts to protect and keep our people safe. We're coming up on our busiest season in Canada. I know that challenge only increases. Thank you. And on that note, I'll turn it back to the operator for questions.

(Operator Instructions) Our first question is from John Daniel from Simmons. Please go ahead.

Hello. Good quarter. Just a couple from me. I want to focus on the US rig business. Can you share with us about how many of your US rigs will reprice in the Q4, Q1 time period?

Hey, John. It's Kevin. We really don't usually give that specific detail out. If you look back at sort of our previous trend of rig roll-offs and rig announcements on some previous presentations, you'll see how that trend typically in the forward months rolls down.

Yes.

That would give you a pretty good indication of the rigs that are rolling off contract for renewal.

Okay. Fair enough. Let's turn to outlook for a second. You talked about modest increases in the US rig activity in the near-term. You're building -- call it 3 rigs a month. So call it maybe 5 to 10 new builds at the US market in the next 6 months. You're also upgrading rigs as well. When you talk about modest growth in the rig count, does that contemplate any of the existing working rigs being parked and replaced with the new rigs?

No, we think the current mix of rigs we have running right now will likely stay running through the cycle.

Is it safe then to assume that the modest is a conservative outlook? The commentary of modest growth? Given the newbuilds and the upgrades?

I think what we're doing right now is giving you a sense of just the current booked newbuilds rolling forward. Really not projecting beyond what's currently in the bucket for contracted newbuilds. Should the newbuild cycle ramp up and the demand [raise] stay strong, that modest could become a little more aggressive.

Fair enough. One for Rob, and then I'll turn over to others. Any thoughts on G&A and depreciation for Q4?

I think that G&A -- we ought to look at that kind of CAD25 million to CAD30 million range. The variability largely driven by stock price because we have to mark-to-market our stock-based comp each quarter. Depreciation is activity-based. And so, based on number of days, I would expect a modest increase in depreciation as we have an increase in activity.

I'll turn it over to others. Thanks.

Thanks, John.

Our next question is from Dave Wilson from Howard Weil. Please go ahead.

Hey, Dave.

Good afternoon, Kevin. Wanted to touch on the international side here just real quick. In addition to the 3 rigs that you're upgrading this year for the Middle East, how many more of those types of rigs do you have available that could be upgraded that could be used overseas. Then, as connected to that, how big do you think the Middle East opportunity could get for you over the next couple years?

I think there's a fair amount of runway to run there. Easily for us, to be thinking about something in the low teens for upgrade capacity for rigs over there would be about the right range. But beyond that, I do think you're going to find there will be newbuild opportunities in the Middle East that we'll be looking at and considering and moving into Europe later next year also. But I'll stop short of giving you a projection about how many rigs that might be.

These will take time. A bid cycle usually is 3 to 4 months to bid something. Another 3 or 4 months to get awarded the contract. So it could be months before we have further announcements. We're pursuing a number of bids right now. There's lots of activity, certainly for us, getting these rigs on the map raises our profile and opens up doors for us to more opportunities.

Thanks for the color there. Switching back to Canada and coil tubing. In regards to your plans for coil tubing -- I know it's just a focus for you in Canada right now. But was wondering, given the delivery time for new equipment and where we are in the year. Is a possible expansion in the US a more likely a 2013 event? Or could we see you starting doing some work in the US in 2012?

I'll be a little more direct in that answer than usually I would be. I think you'll see us push hard into colder regions in the US with probably all of our Completion and Production Services, which could also include coil tubing in the not too distant future. We'll be focusing heavily on the [cold air] regions for sure, and keep your eyes open in other areas.

Thanks. I'll turn it back over.

Thanks, Dave.

Our next question is from Jeff Spittel from Global Hunter Securities. Please go ahead.

Thanks, good afternoon.

Hi, Jeff.

Hey, Jeff.

Kevin, wondering if you could give us some color about the 4 incremental newbuild rigs that were announced today in terms of which basins that they're destined for?

The last 4 -- 2 are Marcellus and 2 are Utica.

Okay. And then switching gears to Canada. Correct me if I'm wrong, but roughly 1/3 of Q3 utilization [days] related to rigs that are working on term contracts up there. Obviously, the market's pretty firm. You've got some positive long-term stuff like Kitimat and the Oil Sands. Can you give us a sense strategically of what the optimal mix of term versus spot exposure is given the upward trajectory of day rates up there?

In Canada, term contracts are only common usually for upgraded rigs and newbuild rigs. The balance of the market is -- it's not really a US spot market, but we have large customers that we'll negotiate annual pricing with, and that pricing comes up typically in this time of the year -- like the September, October time frame. As they're setting their 2012 budgets, we're negotiating 2012 service rates. That's quite common. Those rates will kick in -- in some cases -- November 1. Some cases, January 1. Some cases as late as May 1.

It's collaborative with the customers. We almost always get labor cost increases pushed through in these high utilization markets it gives us opportunity to work hard and see if we can gain a little bit more for ourselves. It's always a tough battle in Canada.

All that said, generally speaking, the majority of the rigs other than newbuilds and committed upgrades are not on a fixed contract, but they will be on a negotiated price. Does that give you any clarity?

That's very helpful. I appreciate it. Thanks, great quarter.

You did raise another element there which I want to speak to, if you don't mind.

Sure.

You mentioned Kitimat. Something that we haven't factored into our thinking at this point is a successful LNG export facility in the West Coast. My personal view is the likelihood of that happening now has gone up dramatically over the past quarter, 2 quarters. I'm a believer now it's going to happen. It's going to happen some time in the next few years, and I think we'll see increased drilling in Horn River and Montney for natural gas and dry natural gas to supply that facility down the road. I'll tell you those rigs right now don't exist. Those will be newbuild rigs for Horn River and newbuild rigs for Montney. So, we're keeping our eyes on that. It's a little too early for us to project newbuilds for those. But, we certainly have the rig designs in our back pocket right now.

That's good news. Thanks, and congrats on a nice quarter.

Thank you.

Thanks, Jeff.

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

Good afternoon, Victor.

Good afternoon. Just had a couple. First, I just wanted to hit on the US on the turnkey business and just wanted to get a sense on a go-forward basis with the turnkey revenue being down in the third quarter, is it fair to assume that looking forward to the fourth quarter and the first quarter that you are back on track in that up about CAD500 a day sequential improvement on margins?

Yes, so in terms of turnkey -- as you know, it's a bit of a lumpy business. And we fully expect third quarter -- fourth quarter and first quarter of next year that we'll be back to normal run rates in turnkey revenue. And yes, for the underlying contract drilling business, we expect that sort of CAD400 to CAD600 a quarter of margin -- or sorry of revenue increases to continue.

So it will be the benefit of the turnkey coming back, and then on top of that the CAD400 to CAD600 as those terms roll to current spot pricing?

That's correct. And it's really the turnkey in the third quarter just masked the effect of what was going on with the underlying contract drilling day rates.

Got it. Thank you for that. And also just wanted to ask about what you are doing on the Euro shale? And Kevin, just wanted to see where you were at. I know you talked about it at the Investor Day. But just wanted to see if there's anything you can provide an update on as to discussions with customers? Where you may be at? And from a timing standpoint?

Yes, Victor, probably a little bit early yet. That may be better placed on us in December as we get ramped up on taking this design out to our customers. You were among the first group we showed that design to.

All right. Good deal. And last one I have, just wanted to ask Rob about tax rate expectations for the full year? And any sense as to what we should be modeling for next year?

So, 2011 full-year tax rates will be a bit higher than what we told you in the past because of the settlement with the CRA. So think about something in the 24% range. And then for 2011, it would be back down more like 20% as a good estimate for tax rate. Sorry, in 2012.

Got it. All right. Great, thank you. Congrats on the quarter.

Thanks, Victor.

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

Good afternoon, gentlemen. A couple of questions. First of all, just want to start off with your directional drilling business, and how you're accounting for that? Is that included in the day rates that you're quoting in your press release? Or is that separate?

No, it's not -- the directional drilling revenues are not a part of the day rates that we're quoting in our press release.

Okay. And then just on your rig building manufacturing, you announced additional 4 more today. Whereabouts are you in terms of the delivery of those 4 rigs? And if somebody was to come to you -- if you were to make more announcements later on this year -- when would you expect those rigs to be delivered?

Jeff, we're well into 2012 now. So, there's still a couple of slots open in the first half -- late in the first half -- and really looking now at second half deliveries for 2012. We are looking at the possibility of adding another line that might help shorten up some of those lead times, but -- and if we have demand, we'll find a way to shorten some lead times. But, I really think you're looking at well past Q1, late Q2, Q3 for next [lots].

Just lastly, on your rig mix in Canada -- I didn't see anything in the press release. Would you be able to give us a breakdown of your tier utilization for Canada? And, maybe how that compared to Q2?

I don't know if we have that detail right now. Carey, do you have anything on that?

No, I think when we were in Q1 and very first part of 2Q our utilization was pretty much full utilization for Tier 1 rigs, which is going to be a little bit less than 100%. For Tier 2 rigs, we were 60%, 65%, and for our Tier 3 rigs, we were at about 35% utilization. Obviously, those went down quite a bit in Q2 just with the seasonal drilling activity.

And how are those for Q3?

Those are going to be ramping up from a slower period, up to probably the high end of those utilization rates.

I guess what I'm trying to -- I guess the incremental activity days that you had in Q3 compared to Q2 were the bulk of those generated from the ramp-up of Tier 3 rigs?

No, I get what you're getting at. Actually, really the day rate went down Q3 to Q2. Just because of the blend of size of rigs. Not so much the tiering. Even some of the more capable Tier 1 rigs that are smaller in size than the big rigs running through the spring are what brought the average day rate down a little bit, Q over Q. Jeff, if you go back and look at previous years -- like '06, '07, '08 when we had highly active years -- the same trend is evident.

Jeff, we did look back. We had 10 years worth of data, and there's not a single year in which Q3's day rates weren't lower than Q2. And, it's purely a function of mix.

Okay. And when you say mix -- Kevin, you said that's more to do with the size of the rig and not necessarily the tier of the rig?

That's right.

Okay. So I guess if we took a look at it on a rig per rig basis, how did day rates change between Q2 and Q3?

Well, we had a pretty good spot market for windows in Q2, and that spot market still exists in Q3 except for we're probably getting less windowed work now and probably getting more just regular contractor work. So the percentage of our days that might be Canadian spot market might be a little lower this quarter than last quarter. But it's really hard to say.

Perfect. Thanks a lot.

Our next question is from Dana Benner from Altacorp Capital.

Good afternoon. I wanted to follow up on Jeff's line of inquiry and just take it one small step further which is that can we then assume that -- notwithstanding the fact that it is generally very busy out there in Canada. Presumably some of that Q3 work was backlog work just from wet weather. And so, your discussion that things are moving to term -- more of the otherwise term contracted or master service agreement work. So presumably, you cleared off some of that spot backlog then? And now, it's a little bit more run rate?

I don't know that we've actually cleared off any of the spot backlog. We had a few slots that did spot work during the summer. I would be of the belief right now that some of that backlog still exists. Just that the guys who have the rigs committed to for the fall and winter are now using them.

So it doesn't loosen up any, really?

No, it doesn't.

Okay. Perfect. Secondly, I guess moving to Saudi Arabia. Good to see you were able to finally get that signed, and obviously, marks a great expansion opportunity for you. Be curious if you could give us a bit more color. I'm sure that was fairly hotly contested work. And, what were some of the parameters that you think client would have been looking at to ultimately award Precision that work?

Dana, we actually think that we were a preferred choice. They're always contested, but we think the customer really wanted to get us in there. And, that's not uncommon in that particular market where they will encourage high performance players to come in. We understand that. This is deeper and higher pressure than most of the rigs that are on the ground can handle. These are big BLPs, big casing loads. They're very big rigs. Something we're well known for. It really was down our midway this type of work, and it would be a bit of a stretch for some of the other drillers maybe. But clearly, they're anxious to get us in and see how we can do.

We know we'll do well. It's an excellent market entry for us. We didn't have to loss lead ourselves into the market. We were able to take a reasonable day rate, and certainly, recap our investment inside our normal investment curves. So we're pleased with the quality of the pricing and the type of work.

All right. That's terrific. Third and finally, wonder if you think there's any potential upturn coming in Mexico? You're already there. Is this something that could surprise us in 2012? Or is it too early to say?

I have no idea.

Okay.

That's a tough one for us to read. We're not planning on any step change in Mexico.

Okay. I'll turn it over to others. Thank you.

Our next question is from Chad Friess from UBS. Please go ahead.

Hello. Wanted to return to the international side of things. Can you characterize how the economics in Saudi Arabia compare to North America? And, maybe how long are the contracts for the initial 3 rigs you're sending there?

Give you some broad guidelines. Generally, Chad, we're looking for -- as we said in the past -- cash on cash payback inside 5 years. These rigs meet that requirement. Typically, we're looking for multi-year contracts to recover a good percentage of our capital. These rigs meet that requirement. We're not allowed to and not intending to give out specific contract details.

So are you -- do you plan to get payback on these rigs? Or is that a little bit too much information?

We plan to get payback on every investment we make.

Okay. And what is the cost of the upgrades? Are you allowed to say that?

In our 2011 budget that we previously announced, we allowed for in the range of CAD70 million to CAD80 million for those upgrades. So be thinking along the lines of about CAD25 million per rig in upgrade capital, and that gives us a rig that brand new with the drill pipe and BOPs would be CAD50 million to CAD60 million per rig. So we're really pleased with the efficiency of the capital we're able to deploy in these rigs.

Okay. Great. Thanks, Kevin.

Thank you.

Our next question is from Mike Urban from Deutsche Bank. Please go ahead.

Thanks. Good afternoon.

Hi, Mike.

So these days it seems like long-term is anything beyond about a week, but I'm going to ask you to look out a little further than that -- maybe say, 5 years down the road. You've got a lot of attractive investment opportunities, moving in a lot of different directions. Internationally, expanding the service profile. Moving the C&P business into the US in selected opportunities.

So, as you again look out longer term in let's say 5 years, what would you see the mix of the Company looking like? I'm assuming you've at least thought about that. Is there an ideal mix? Is there something you're targeting from a diversification or market standpoint? Just some thoughts -- either product line? Or geographically? Or whatever you're willing to talk about?

Mike, we have a 5-year plan which is 100% rock solid. We know exactly where we'll be.

That's what I figured. That's why I ask. (laughter)

But the fact is, we actually do some fairly robust 5-year planning. We, along with our Board, put a lot of thought into this. It's an area we talk about virtually every month and refresh almost every month. It's an ongoing conversation within the organization.

But Mike, think about it this way. Right now today, we've got a strong -- very strong footprint in Canada. We've got a good and growing footprint in the US for land drilling, and we've got the beginnings of a footprint internationally with our rigs. So, that's drilling. We've got a very strong footprint in Canada for our Completion and Productions business. We've made some in-roads in the US right now in the Northern areas that we're hoping to grow. But come 5 years down the road, I would love to see that business have a broader footprint in the US. And a footprint internationally, and I'd love to see our US drilling business on a much higher market share.

So did I hear you right? I think some of the service business or the C&P business international as well?

I'm sorry. Repeat that. You broke up for a moment.

Did I hear you right in terms of moving some of the service businesses -- the C&P businesses -- internationally as well? Was that --?

My sense is that as we develop the European shale plays as a drilling contractor, there will be good opportunities for us with those same international E&P companies to come in behind and help out with the completions business, too. So yes, I do see that as a strong focus for us over the next 5 years.

Mike, I'd say -- this is Rob. I'd say the other area where we'll likely see really strong growth over the next 5 years is on the directional drilling business. I think we'll see further growth in directional -- both in third party work -- but particularly, as we integrate directional on to our rigs. That's going to be a very meaningful part of our business 5 years down the road.

That's all from me. Thank you.

Thanks, Mike.

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

Thanks. Good afternoon. Just a couple of cleanup ones here. I know you talked about integrated jobs at the Analyst Day. Just wondering if you can give us a sense today how many integrated jobs -- directional and drilling -- are happening both sides of the border?

The information we gave you at Analyst Day hasn't changed much. We're limited by tools right now. So, we're still out there trying to -- we're out placing orders right now for more drilling motors and more directional kits. Very pleased with the pickup right now and very pleased with our customer satisfaction levels and the quality of work, quality of people. The business is going very well for us. It's performing nicely.

Okay, and I assume at some point it becomes material and gets broken out as its own line item on the income statement?

Maybe not. We'll see. (laughter) It will become material. I'm not sure if we'll break it up, but we'll decide that later.

Okay. Another thing from the Analyst Day. You talked about your great relationship with [NOV]. Taking the next derivative -- are you hearing anything from [NOV] that lead times are maybe getting shorter? Or guys are maybe being a little bit more contingent with spending for the back half of '12? Or what's the read-through from there?

Our needs are being met very well by all of our vendors. We work with the vendors -- the big ones, the small ones, [NOV] included -- on a regular basis around deliveries. We're not sensing any change in the ability for our suppliers to support us.

So, no one is shopping extra build slots or anything like that for you? Not to us. Actually, that's all my questions. Thanks.

Great, Scott. Thank you.

Our next question is from Brad Handler from Credit Suisse. Please go ahead.

Hi, thanks.

Hi, Brad.

Just a couple of things we haven't touched on yet. In the customers that you have -- the customers that you have booked rigs -- perhaps the last 12 that you've signed up for newbuilds and your ongoing conversations. How would you characterize the mix between, say, your major -- your integrated oil companies and somewhat smaller E&Ps?

Probably the best way to think about it is, all of these customers are very well capitalized. So, large balance sheets. Carey has done some work for me in that just recently, and it's 20 of the top 20 E&P drillers in Canada. And, Carey was at --.

Actually, 8 out of the top 10 in the US.

Great. Thank you.

I think that the -- as a rule, it's really the mid- and large cap guys that we're the most active with signing up newbuild rig contracts.

Clearly, as I discussed during that section on unconventional drilling, if you're going to be entering a meaningful unconventional program, you've got to have the capital capacity to handle that. This is not the purview of a small, micro-independent type E&P company.

Right. That makes sense. Presumably, that's really where the newbuild opportunities lie is with those better capitalized and larger guys?

Yes, no question.

Okay. Makes sense. Unrelated follow-up, please, on turnkey days. Maybe I could position it around 2012. How might you see that evolving year-on-year? Or as a percentage of total days? Does it stay at 2% of the total? Or does it --?

Brad, maybe think of it this way. The opportunities for turnkey are limited to a particular geography and a particular type of well. We don't see this business growing substantially. We would expect to run anywhere from 2 to 5 rigs at a time drilling turnkey wells, and there would be some fluctuation in that. So we'll see some quarters like the third quarter of this year where it's 1 to 2 rigs, and we'll have other quarters where we'll run 5 rigs throughout the quarter. And, that's kind of the boundaries, and it would expect to have some continued noise in that because it does make a big difference in revenue whether you're running 2 or 5 rigs in turnkey.

Okay. That's helpful color. Thanks.

Thanks, Brad.

Our next question is from Jeff Fetterly from CIBC World Markets.

Good afternoon, all. First, on the turnkey part, Rob, up to 5 rigs. If those 2 or 3 rigs are idle like they were in Q3, are they redeployed into day work contracts? Or are they sitting idle.

It varies. Sometimes, they'll do day work. Other times, they'll sit. One of the benefits of the turnkey business is we're often able to use Tier 3 rigs and generate Tier 1 kind of profitability with those rigs doing turnkey work. So if they're not doing turnkey work, there definitely will be a decrease in profitability on those particular rigs even if they are working day work.

Did I hear clearly earlier that you expect to be basically back to 5 rigs by the first half of 2012?

No, I didn't say 5 rigs. I said that we would be back to more normal run rates. Think of it as, on average, 3 rigs running turnkey.

Thank you. Rig additions --.

One comment. The turnkey business is quite sensitive to the price of natural gas. If we're in a sustained low gas price cycle, then we'll be at the lower end of that range.

You define low as lower than where we sit today?

Q3 was a good indicator of a soft part of the turnkey business.

Okay. Newbuilds -- could you give us a breakdown of additions by quarter? Ideally, by geography as well?

Don't have it handy, but if you give us a call back afterward, we can give you detail. I'm not being evasive. We just don't have it in front of us right now, Jeff.

Okay. I guess that ties into the capital program, the 2012 piece. As you think about your 2012 program, what -- are you essentially looking at spending opportunities that are in the back half of the year next year? With spending close to CAD500 million in Q4, and obviously, a fair amount in the first half of the year. Does the business have the capacity logistically to handle more capital spend in the next 3 quarters?

Well, [Dan], so our capacity for producing newbuild rigs is not capital constrained, but it's facility design. So, we're running at 3 rigs a month right now, and that would be our Q4 rate. It will be our Q1 rate. It will be our Q2 rate. Our capital spending will parallel that run rate for newbuild rigs. So, if in fact, we increase our capacity which would come mid- to late next year, then that capital spending could ramp up mid- to late next year. If demand doesn't fill the back half of the year, then capital spending comes off. It's proportional to the rig deliveries. Can you add anything to that, Rob?

I think that's fair. I think, Jeff, you could see us kind of in that CAD400 million a quarter run rate in capital if we're fully booked on rigs in 2012, and particularly, if we open another line. That's probably about maximum capacity for us in terms of throughput.

Okay. The size of the spend in Q4 -- is that just some lumpiness associated with the Saudi and long lead time items on top of the rig build?

Yes, it's a little bit of that, and some of the equipment will have some lumpiness on deliveries. We'll commit to all the top drives and all the engines. And, they all come in at once. There's a big lump in capital spending. We book the expense when we receive the goods, right?

Yes.

So there's just -- receiving lumpiness with large shipments of raw materials and finished goods like top drives and pumps and control systems. Things like that.

As you think about the 2012 program, is it more what you're going to do on the C&P side than it is on the rig side?

I think that there will be opportunities in C&P that probably outstrip what we've done in 2011 in C&P. But, it's still going to be a fraction of drilling. There's no doubt that it's -- even if it doubles, it will still be a fraction of what we do in drilling.

Last thing, Saudi. The contract details -- are they materially different than what you talked about a couple weeks ago in Houston?

No.

Okay. Thanks for the color.

Thanks, Jeff.

Our next question is from Dan [Healy] from the Calgary Herald. Please go ahead.

Hello. I had a couple of questions surrounding the international part of the deal today. Precision Drilling sold its international operations back in 2005. From a strategic point of view, what has changed since then? And why is the Company looking at going international to a bigger extent now?

Great question, Dan. It's been a while since I've been asked that question. I'm happy to give you more color on that. A couple things have changed. The Company has a new CEO. But, that happened about four years ago. More importantly, when we sold those rigs back in 2005, they were actually sold as part of a much bigger sale. We had the Technology Services Group for Precision that we sold, and the buyer also wanted international rigs for part of their IPM strategy at the time. So it was a smaller part of a much bigger deal.

I don't think the Company would have sold those by themselves by choice, but they did. In any event, part of that sale was a noncompete that expired in the summer or fall of 2008. Then, we got focused on the US. We've been growing in the US aggressively. But we've been clear all the way along that our intent is to grow three legs to our drilling business and to be focused, also, internationally.

So, we've been marketing and out pursuing opportunities. This is our first material success. We're excited about it. It's right down our midway with large, deep, high pressure rigs in an area where customers regular recognize the value of high performance and will pay for it. So it's just a -- it's an excellent adjunct to our North American service.

Are you saying who the client is in Saudi Arabia?

Well, we're not specifically saying who the client is, but there's really only one client in Saudi Arabia.

Okay. And the other thing I was wondering about on a more specific thing, what do you need to do to modify these rigs for Saudi Arabia? What kind of things do you have to change on them?

Quite a few things. First of all, these were legacy North American rigs. They're being desertized, and they're being converted to high temperature operations. They're having larger radiators installed. We're opening up more air circulation through the equipment. We're refreshing the diesel engines. We're putting much larger drill pipe, much larger BOPs. We're making the Control Systems 2011 series.

So, there's a number of upgrades to the rigs. The core rig itself -- the mud tanks, the substructure, the mast -- all of those major components are being rebuilt back to effectively zero hours of life. But they're still quite usable long-life assets. Although we're putting about CAD25 million per rig into these rigs -- after that investment, we'll have a rig that's marketable at a value of around CAD50 million.

Okay. Do you have to do things for crew comfort like air conditioning and that kind of stuff?

Yes, we do. Things like the drillers cabin will be air conditioned. There will be some camps that go with the rigs that are desert-style camps We're having to supply those. Just various ancillary equipment that supports the rig.

Okay. Great. Thanks very much.

Great, Dan. Thank you.

Our next question is from Roy [Mo] from PI Financial. Please go ahead.

Thanks for taking my question. I don't want to hold you any longer. Just a follow-up on Saudi Arabia. Do those contracts contemplate additional options for call on additional rigs?

Roy, the contracts contemplate additional option period of time, but we're actively engaged in bidding other rig contracts. These contracts don't include options for additional rigs, just additional extensions. And, the normal operating mode in that region is that if you're performing well and performing appropriately and delivering the service you promise to deliver, they almost always exercise the extension.

And extension, you're referring to beyond the initial 5-year term?

Beyond the initial term. It could be 1- or 2-year extensions. Typically, it's 1-year extensions beyond the initial term.

And is the initial term 5 years?

We didn't specify. We just said it's within our normal expectation. We wouldn't -- we're not allowed to give out specific details on terms or on price. We're under a nondisclosure from our client.

Fair enough. Second question, just turning back to on this change in revenue per day in Canada -- in terms of sequential change? I recognize that the number -- I saw that you explained it. It dropped partly because of rig mix. But, in terms of the actual margin per day, it did actually see what appears to be a healthy increase from around the CAD6,600 per day to CAD8,700 per day. Can you confirm that's the number that you are calculating as well?

That's right, Roy. But remember, comparing Q2 to Q3, or Q1 to Q2, is always an exercise in futility. It's not a good -- it's really not a good comparison to draw any conclusions from. In Canada, because of the seasonality, you really need to look at things year-over-year to draw conclusions. But, those numbers are correct.

Yes. I recognize the seasonality, but I guess what I'm trying to dig up is in terms of if we remove -- obviously, it appears that there's heavier rigs at work in Q2 whereas in Q3 you have lighter rigs coming back -- but that your pricing is actually on the rise. That's what I'm trying to extract out of this.

Roy, there is a little bit of price increase from Q2 to Q3. But remember, during Q2, we're doing a lot of repair and maintenance on the rigs. That tends to increase cost a little bit. The Q2 to Q3 flow in those numbers is really not a relevant comparison on any respect.

It's also in Q2 you've got operating overhead that has less rigs to absorb it. So there's a number of moving pieces that make it difficult to compare. But in general, I would say that we're seeing increasing pricing in Canada. You can think about Q1 to Q3 as a better comparison. Things are moving in the right direction.

Okay. Thanks. Good quarter.

Thanks, Roy.

(Operator Instructions) Our next question is from Jim Mahoney from Daily Oil Bulletin. Please go ahead.

Hi, Jim.

Good afternoon, Kevin. Just wondering, you mentioned that you expect a strong winter this year, and I guess I'm wondering -- did you also say that you thought utilization rates would exceed last winter's?

Yes, everything being equal right now, looks like the utilization rates this winter should exceed last winter, and we have a larger fleet. So, it's going to be a strong winter for us.

I guess one of the things we were hearing last winter was that some contractors in Alberta in Western Canada were seeing some rig iron go idle for lack of crews. Is that a possibility this year? That some of your rigs may not be working because there's -- the crew situation is too tight?

Jim, I think the labor tightness in Alberta remains. Certainly, the economy is following our industry. Labor is tight. I think that all industries are going to be looking hard for skilled workers. Now, at Precision, we've been dealing with this for a long time. We're focused quite heavily on recruitment. We feel like we're in pretty good shape for the winter. Gene, do you want to add any comments to that?

No, I think the question comes up this time of year every year. And really at Precision, we view staffing as a core competency. Whether it's through our recruiting programs in www.toughnecks.com. Or, whether it's through our retention tools and tracking key retention. We have a great team that's set up to execute and deliver on the demands for our labor.

I was going to say we'll have a few rigs -- we'll have a couple rigs at the end of the winter running on two rigs, rather than three. That's all part of the balance.

Are you doing anything different in terms of recruiting and finding new sources of crews? Are you doing anything different than some of the other contractors in Western Canada?

I can't speak for the other contractors, but it's an area that Gene highlighted as a core competency for us. We're doing a lot. We've got a very strong team both in Red Deer, Nisku, and Calgary focused on recruiting. About 7 different recruiting initiatives ongoing right now across Western Canada, Eastern Canada. Everything from partnering with the Saskatchewan Rough Riders which has been very successful to our internal referral programs. I'd never say it's easy. It's not easy. But it's what we're paid to do.

Sounds good. I think that's about it from me. Thanks.

Thanks, Jim.

There are no further questions registered at this time. I would like to turn the meeting back over to you, Mr. Ford.

Thank you. I want to thank everybody for joining us on the call today. Have a good afternoon.

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