Precision Drilling Corp (PDS) 2011 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Precision Drilling Corporation's Fourth Quarter and Year End 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 2011 Fourth Quarter and Year End 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, and Doug Strong, our President of Completion and Production Services. Through a news release earlier today, Precision Drilling Corporation reported on the 2011 fourth quarter and year end 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 their potential impact on 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 fourth quarter and year end 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 fourth quarter, reporting revenues of CAD587 million and net earnings of CAD104 million or CAD0.36 per diluted share, excluding the one-time, non-cash charge associated with the decommissioning of assets. Fourth quarter 2011 EBITDA was CAD230 million, which represents a 59% increase over the fourth quarter of 2010, and a 24% increase over the third quarter of 2011. The improved Q4 results reflect stronger utilization in margins, both in Canada and the United States. Fourth quarter 2011 EBITDA margins improved to 39% versus 34% in the fourth quarter of 2010. For the year ended December 31, 2011, revenue was just under CAD2 billion versus CAD1.4 billion in 2010, an increase of 36%. EBITDA increased from CAD435 million to CAD695 million, an increase of 60% for the year.

In the US, during the fourth quarter of 2011, drilling revenues improved by almost CAD3,600 per day versus the fourth quarter of 2010. Versus the third quarter of 2011, US drilling revenues improved by approximately CAD2,000 per day. In Canada, in the fourth quarter of 2011, drilling revenues improved by CAD2,800 per day year-over-year and over CAD2,300 sequentially. Importantly, the vast majority of rate increases fell through to the bottom line with margins improving by CAD2,700 in the US and almost CAD2,200 per day in Canada versus the fourth quarter of 2010. We are very pleased with the effects of our efficiency and cost control efforts that were undertaken in 2011. Completion and Production also had a strong quarter with revenues increasing to CAD95 million or 16% above the fourth quarter of 2010. EBITDA in the fourth quarter of 2011 improved to CAD34 million, which is 33% above the fourth quarter of 2010.

Service rig revenue per hour increased by 10% to CAD748 per hour versus the fourth quarter of 2010. In December, we announced our 2012 capital spending plan, totaling approximately CAD1.1 billion. We expect our capital expenditures to consist of CAD702 million for expansion capital, CAD182 million for rig upgrades, and CAD244 million of maintenance and infrastructure spending. A substantial portion of the expansion and upgrade spend is backed by contracts with strong economic returns. We expect approximately CAD950 million of the capital to be spent in contract drilling and CAD178 million to be spent in the Completion and Production segment. Please note that a significant portion of the capital spending plan is utilization based and will be adjusted based on activity levels. It is our expectation that we will be able to fund our capital expenditure program with cash flow from operations and cash on hand without incurring more debt or drawing on a revolving credit facility.

We're very pleased with our balance sheet and the financial strength, stability, and flexibility that it provides. As of December 31, 2011, total debt was approximately CAD1.3 billion and net debt is approximately CAD800 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 our undrawn revolving credit facility totaling over CAD1 billion of availability. As highlighted in our press release, we decommissioned 36 rigs and 13 well service rigs in the fourth quarter and took a non-cash charge of CAD115 million. Beginning in the first quarter of 2012, we plan to start depreciating our Tier 3 rigs that are not expected to be upgraded on a straight-line basis over four years. We estimate that this will increase our depreciation expense by approximately CAD17 million per year, above what the current unit of production method would have provided.

This is consistent with our belief that the industry will continue to migrate towards Tier 1 and Tier 2 rigs that are capable of reliably, repeatedly, and efficiently drilling horizontal wells. Our expectation is that in four years' time, we will have a fleet comprised entirely of Tier 1 and Tier 2 rigs and that our current Tier 3 rigs will either be upgraded or retired. Our rig fleet is currently comprised of 273 Tier 1 and Tier 2 rigs, and 66 Tier 3 rigs. After completing the announced new build and upgrade program 2012, we expect our fleet to be comprised of approximately 313 Tier 1 or Tier 2 rigs and 58 Tier 3 rigs in December of 2012. We currently have 145 rigs under term contracts. Since our third quarter earnings release, we have added term contracts that increased the contract rig average for 2012 from 89 rigs to 112 rigs. With that, I'll conclude my comments and turn it over to Kevin.

Thank you, Rob. I suppose I should begin with my dissertion on natural gas activity. The overabundance of natural gas is, once again, pervading all thinking. But what truly surprises me is that it took a warm winter to bring this to most peoples' attention. You may recall that during Precision's fourth quarter 2010 conference call last February, we highlighted the slowing of dry gas activity and we specifically pointed to the Haynesville and Barnett shale plays, but we also talked about Precision's growth potential and the sustainability of oil and gas liquids directed drilling. Today's dismal natural gas drilling environment comes as no surprise to Precision. As we mentioned in our press release earlier today, over the last two years, we have positioned Precision as the high-performance driller for horizontal drilling and we specifically targeted oil and gas liquid markets.

The result is that today, 75% of Precision's 274 rigs drilling are on wells licensed as oil and the balance of our rigs are positioned very well, many of those rigs targeting national natural gas liquids. I'm very pleased with the success of our strategy. Nonetheless, like most, we remain very mindful regarding the oversupply of natural gas and the negative impact this may have on the land drilling business. Most of the concern centers around the gas volumes now produced as associated gas with the oil and liquids drilling. And until these production volumes are better understood, this uncertainty will continue. But like a year ago, Precision remains of the view that dry gas drilling must continue to pull back and we believe this may lead to some sloppiness in rig pricing over the next quarter or two. However, some of the strong belief in natural gas supply and demand will return to balance and this will come through a combination of reduced drilling activity, increased consumption, and if necessary, production shut-ins and all are driven by the same severely depressed natural gas commodity price.

The axiom low gas prices fix low gas prices, the song is still the same. Don't read this as dismissive on my part or bullishness, it's just a simple fact. Moving on for Precision, our early exposure to the emergence of Canadian Cardium horizontal drilling in 2009 gave us a unique insight to the vast potential for oil-directed drilling. By the beginning of 2011, Precision was fully focused on oil and liquids opportunities and we achieved remarkable success as the early leader repositioning gas rigs to oil. We achieved higher day rates, our mobilization costs were fully recovered, and we successfully repositioned the Company. Our Super Series rigs, which are renowned for horizontal drilling excellence, have experienced a banner year with strong customer demand resulting in contracts for 47 new builds. The two remaining rigs in our 2012 budget, as always, will require customer contracts before we commence final construction, but we remain confident, as we have a number of clients in discussion for those delivery spots.

The success of our directional drilling investments are evident in our fourth quarter results and I could not be more excited about the opportunity Precision has to grow in this business and the potential for growth is truly independent of total rig demand. Our directional drilling people, our tools, and our systems are already delivering the reliability and economic efficiency our customers need and desire. We have high expectations for the value directional drilling brings to our customers and the growth this business will deliver to our investors. I look at this business in very simple terms. I look at it as three directional jobs roughly equating to one new build Super Single rig in EBITDA terms, but requiring only a fraction of the capital investment compared to that same Super Singles rig. This is an excellent way for Precision to leverage our vast market position in horizontal drilling. Soon, our Houston drilling motor repair facility will open and we're also planning additional motor repair facilities in the Bakken, both in Saskatchewan and North Dakota.

These facilities will help reduce our cost and they'll ensure that we can deliver the best efficiency, reliability, and economics to our customers. Now, in Canada, the winter season is off to a very nice start. While there was some concern of weather-related days during January, Precision was up operating over 160 rigs by the middle of the month. We have a few rigs currently drilling shallow gas in Southern Alberta, but our customers are expecting to be for these rigs to oil targets over the next few weeks. As is usual, in the midst of the winter drilling season, it's tough to predict post-breakup activity. But I think we have good visibility in Canada for the balance of 2012, with our 18 new builds to be deployed later this year, all intended for oil and liquids drilling targets. Coupled with the progress we have made high grading our fleet through 14 contracted rig upgrades and with the Tier 3 rig retirements, our market strength is clearly reflected in the Precision average day rates in Canada, up CAD2,800 a day over last winter.

All of this bodes well for the full year drilling activity. Ultimately in Canada, oil price stability in the CAD75 to CAD100 range is very constructive for Canadian activity. As I mentioned earlier, I'm excited about the performance of our directional drilling group and I believe the potential to continue to grow this Canadian segment in 2012 is excellent. We are adding additional tools, we continue to train our people, and we are continuing to expand our integrated directional services throughout the year. Once our customers gain based on wide confidence in our capabilities, I know this service will transform the business, as the economics are just too compelling for our customers to ignore. Turning to our US operations, we expect to deliver 16 new rigs, almost twice our current market share, over the coming several quarters to primarily the Bakken, the Niobrara, the Utica, and the Eagle Ford plays. I am pleased that our sales team has been successful adding several new large ENP customers, focused primarily on liquids drilling, to our client mix.

It's evident that Precision's high-performance, high-value brand awareness is gaining acceptance across the United States. As I mentioned in my opening comments, I believe the dry gas drilling needs to further slow down. We even expect to slowdown to develop in the Marcellus, but we believe that our Marcellus fleet of Tier 1 and Tier 2 rigs are ideally sized and delivering excellent performance to our customers, and as such, our exposure is limited. But like in previous cycles, the rigs that are proving to be the best rigs in any area are the ones that remain running. Our dry gas exposure in other basins like the Haynesville, East Texas, and Barnett, is down to only 7 rigs from a peak of 28 rigs just a couple of years ago and these remaining rigs are primarily Tier 1 rigs under term contracts. Looking to the Permian, the Eagle Ford, and Bakken regions, we remain very encouraged by the performance of our rigs and our customer satisfaction with our performance, and the continued discussions for new builds for these oil and liquid plays. We expect to see further emergence for the Niobrara and it's still early, but the Mississippi Lime in Northern Oklahoma also holds promise for additional drilling demand.

It's our view that very few of the potential surplus rigs from the gassy regions are suited for the shallower nature of these plays. The precision Super Single will provide deal for these new resource plays. I mentioned the imminent opening of our Houston drilling motor repair facility, which will serve to significantly lower our cost and improve our margins. But more importantly, it will eliminate our reliance on third parties and supports Precision's strategy of vertical integration. We have a high degree of confidence in the ability of our people to grow Precision's directional drilling, United States, the reputation of the Precision's Super Series rigs, and our comprehensive oil and liquids drilling geographic footprint will fuel the growth of our directional services in the US, as it will in Canada. Now, moving to the international front for a moment, in Saudi Arabia, first of our three rigs will begin operations in a few days with the two others following closely behind. I'm particularly pleased to have Niels Espeland on board with Precision.

He brings over 35 years of international experience and adds substantial capability to Precision as we embark on our international operations. Today we have a number of bids out in the Gulf region in Latin America, but for the time being, we are focused on ensuring our Saudi rigs start up and progress flawlessly. Our Completions and Productions group finished a solid year with oil firmly driving the business. Now, we all know that pricing leverage in this segment generally lags drilling activity by several quarters, so it's nice to see our rigs and margins beginning to respond. While all product lines in the group experienced strong oil-driven growth in 2011, our Rentals group delivered a banner year achieving record revenue and earnings. This business is virtually 100% driven by our oil activity and has good prospects looking into 2012. Now, the labor cost inflation we experienced in drilling has also driven up our costs in our Completions and Productions segment.

In 2012, we are driving intense focus on cost control and margin enhancement for this group and looking to continue building pricing leverage. We will be deploying our first coil tubing unit this week, with nine more planned for deployment later this year and into early next year. Our comprehensive geographic footprint is second to none in Canada and we expect to continue to push our services into the US during 2012. Our second snubbing unit is mobilizing to Pennsylvania and our Camp and Rentals group have begun operations in North Dakota. Now, just speaking for a moment to our 2012 capital plan, I think it's important to remember that Precision will always adjust capital spending appropriately. In 2011, Precision increased capital spending several times, as customer demand dictated. For 2012, we remain poised to adjust capital spending up or down as market conditions and customer demand plays out.

I've spoken to the portion of our expansion capital, which is covered by firm contracts and the favorable returns these contracts deliver. The balance of our capital spending should be viewed as utilization-based and generally discretionary in nature. Rest assured, that on a moments notice, Precision can turn off the tap should the need arise. I'd like to wrap of these comments with some comments on our 2011 strategic successes. Early last year, we told our investors we would focus on three priorities. First, that we would continue executing our high-performance high-value strategy, second, that Precision would focus on organic growth, and lastly, that we would ensure that we had the financial flex ability to capitalize on opportunities, including new builds, upgrades, international expansion, and directional drilling.

As mentioned in our press release, we delivered (inaudible) on all three objectives. Looking forward to 2012, Precision will remain focused on our core strategy of delivering high-performance, high-value services. We'll continue to pursue organic growth opportunities when that growth is supported by strong customer demand, namely -- upgrades, new builds, potential high-value international expansion, and, of course, directional drilling. Finally, we will strive to expand Precision's brand awareness within the communities we operate, with our customers, and with the investment community. On that note, I will pass the call back to the operator for questions.

(Operator Instructions) Jim Crandell, Dahlman Rose.

Kevin, how would you characterize the level of conversations now with customers regarding new builds? Maybe you could break that down into Canada and the US and compare it now versus what it's been over the past six months?

Great question, Jim. This is pretty early into the 2012 budget for most of our customers right now and they're really focused on getting their 2012 drilling plans underway. It's really hard for us to draw a conclusion from what we're hearing and seeing and talking to our customers about today around new builds, and that's typical in the first six to eight weeks of every year. In Canada, we've got that winter drilling season getting fired up in the US, we're getting to the 2012 budget year now, so I don't know that the conversations we are having right now are indicative of general demand. We did get three of those seven rigs from 2012 signed up in the last few weeks.

That's a little surprising, considering all the noise in the market right now, so I'm pleased about that. We saw the pretty active inquiry list ongoing and customers are continuing to work with us in upgrading that and making sure the specs are right. It would be unfair for me to say that there's any change in conversation that's meaningful right now, up or down.

Okay. As a follow-up, Kevin, of the 25% of the rigs that you have that are drilling for gas, have you attempted to break down the percentage of those that are drilling for wet gas or how many are on term contracts that extend, let's just say, beyond 2012?

Obviously, we know that number internally quite carefully, we don't disclose that level of detail, Jim. But we feel pretty good about our position, both on the liquids front and with contract expiries. I can tell you the uncontracted gas rigs that we have that are just well to well will be Tier 3 rigs.

Okay.

Rob, do you have anything to add to that?

The only other comment I'd make, Jim, is that of the 25% that are drilling gas, I think that industry-wide, more than 0.5 of those, of that percentage, would be liquids-focused and I think that, that is true for us as well. When you boil it down, it's only a handful of rigs that we have that are really exposed to dry gas.

Really, by us being really clear on the 75% oil-licensed wells, that's eliminating any noise about whether it's oil or liquids or what. Those are oil wells.

Okay. And, Kevin, last question I have is when I was down in Houston earlier this week, I heard from one source, who was treating it as if it was a fact, that one of your major contract drilling competitors was combining or forming a joint or some kind of a venture with one of the leading LWD companies to where that company would provide rotary spear [bulls] on as many of their rigs as a customer required. Would that sort of strategic move surprise you if it was true? And would that affect your strategy that you had on the directional side?

It doesn't really impact of the strategy of our directional business, because still the largest component of our wells that are being drilled right now are not the high-cost, high-spec rotary [steerable]. An alliance like that would not be necessarily uncommon. Probably a little bit surprising, but you're linking together a very high-cost, high-risk tool that there's really only one or two good technical solutions running in the marketplace with the rig. Seems to me there's more risk for the large-cap surface companies than there is for the driller.

And I think that it's true that it's a very small portion of the US land market or North American land market that's using rotary steerables, so the vast majority is just DNI, maybe gamma ray and mud motor.

Okay. Good. Thank you, guys.

John Daniel, Simmons & Company International.

Good quarter. Just was hoping to get some help understanding what's exactly going on as the rigs are shifting from the gas market to the oil market and specifically, how long from the time when a rig is let go does it take to find a home, and what price is that happening?

John, we've been doing this over the last, really, 18 months and the rig lays down, gets redeployed, is back up and running as quickly as we can mobilize the rig, which just could be a couple of days or a few days. Over the last 18 months, we've actually stepped into higher day rates, generally, pretty much across the board. As you can see in our average day rates, substantially higher day rates, so we've gotten ourselves positioned already. I don't think we have to concern ourselves too much going forward. But as it stands right now, I'm talking to customers everyday and if we have a rig coming off of a gas well soon, I can promise you, we've got a couple customers that we're talking to right now to redeploy the rig to.

Okay. I understand trend over the last 18 months, but in the last, call it, four to six weeks, there hasn't been any type of concessions on price as rigs are relocated?

Absolutely not.

Okay.

A big part of that is because we had moved most of our rigs that were dry gas exposed previously, so we just don't have much volume of rigs moving from dry gas to liquids right now.

Fair enough. Kevin, you were helpful in the discussion on the outlook calling for more activity declines in gas regions which makes sense, particularly when you hear the comments from BG Group today. But at this point in the US market, do you see the gains in the oily areas offsetting the declines in gas areas?

On a full rig count basis, I don't know. What I do see is that the guys that are drilling for the oily targets right now are large-cap players. They're well-capitalized, but they're also looking for the larger service companies that can manage the risk for them, be it environmental, be it safety, so I think that points the business more towards the bigger drillers like ourselves.

Yes.

What you might see happening is that rig count may stay flat, may come down, but I actually think the high-quality drillers will benefit from this. And like every pressured cycle, generally, the better contractors do better. Do well.

Okay. Fair enough. Last one for me and I'll turn to the others. Just on the Canada rig count, I think you said low 160s is where you are today. Do you expect the Q1 average to be in excess of that 160 level or do you expect that the margin backs off?

Actually, I said we were at 160 by mid-January. I think we're probably closer to 170 or even over or thereabouts right now.

Okay.

But that said, the Q1 average weighed heavily on just how breakup flows. There's been some talk or some concern about an early breakup, it's far too early to be thinking about that. It's still cold, the ground's frozen, our rigs are busy drilling and moving right now. But betting on weather, is something I won't start doing. I do believe there's probably quite a few meteorologists looking for work right now, but we're not going to hire any.

All right. Fair enough. Thanks, guys.

Dave Wilson, Howard Weil.

Quick question on day rates -- in the past, you've mentioned average day rates sequentially increasing by a few hundred dollars per quarter. This quarter seems like we got a little more than that. Just how we should think about these going forward, into 2012, given the negotiations ongoing in Canada during the last call, and how much of the increases will actually fall to the bottom line or to the margins?

I think what we've shown you for the fourth quarter is pretty straightforward, both US, Canadian day rates up very strong, most of it going through to the bottom line. We did take the labor cost increases in 2011. We think that carries us through the course of 2012. We'll see how things look in the fall in Canada. But I think you can take those day rates right now and have a high degree of confidence that we're going to stay in those into 2012. We're actually well ahead of our forecast.

We were suggesting CAD300 to CAD500 a day per quarter rolling forward and I think we jumped that by several quarters here, so we might have gotten a bit ahead of the curve. Just depending how you model rig activity for the next few quarters, we have a lot of new rigs coming on that are at higher day rates. You've got factor those in as they come in. Those are coming in, in the CAD24,000 to CAD27,000 range, strong day rates. Likely, we'll lose some of our Tier 3 rigs, some of those might drop off, lower day rates. I'll stop short of suggesting that we'll see sequential increase for the next few quarters, but we're in good shape.

Okay. Thanks for the detail there. Kevin, if I could follow on with a kind of related question, on the three rigs per month delivery capabilities, you had 36 possible slots for 2012. Just wanted to get some clarity on the slots that were left, and how many of those slots, and where in the timeframe they are? Can they still realistically get filled, meaning, are those empty slots more towards the back end the year? Are there some here in the earlier half that might not get filled?

We really are filled up through, call it, the first three quarters of the year. We've got a few slots left in the fourth quarter and the three rigs a month guidance that we've given is true today and if we wanted to increase that to four rigs, we could do so and we'll make that decision when it's necessary. There's a handful of slots available at the back end of the year, but nothing currently. The production schedule is full and the guys are working full out to deliver the rigs right now.

Great. Thanks for that, Rob. And I think that's it for me. I'll turn the call back over.

Andrew Bradford, Raymond James.

I just wanted to ask a question or explore the issue of the flexibility of your capital program, if we could. This is kind of a tricky one, because, as you said, it's utilization-dependent. he question would be then, if utilization were to start declining, and it would most likely start declining on Tier 3s and Tier 2s before you would notice it on Tier 1s, but there wasn't the contract or the demand behind the contracts that you have to build these rigs didn't go away, would you still proceed?

Andrew, a bunch of components there and we've got a long lead time component built into that, we've got upgrades built-in. We've got the maintenance CapEx built in, we've got some facilities built-in. I think it's fair to say that the portion of our capital which we don't classify as expansion CapEx, that portion has a high degree of flex ability.

Okay.

I haven't give you a you a hard answer to your question, but you saw what we did in 2009. We just shut things down, turned the taps off, and depending how the market trends out, I would tell you that it's not our intent to be hundreds of millions of dollars on line with cash flow. Rob, do you want to speak to that?

To finish on the second part of your question, Andrew, would we continue to build rigs to contracts if things slow down? I think we'll have to evaluate the facts and circumstances at that time, but our inclination would be to do that. These are our high-return projects, they're good contracts. Every one of them stood up in 2009, and it's right down the fairway of what we do. But, as Kevin mentioned, we will manage cash flow to make sure that we stay in line or pretty close to in line with what our cash flow is. We'll manage both the expansion upgrade and the maintenance CapEx to be sure that we keep it close to the cash that we generate.

Okay. Do you notionally have some percentage of the total, 1.1 spend that you can toggle?

Think of it in the range of CAD400 million that we could pull back if we decided that the market's is going to fall apart and we don't want to spend it.

Okay. Thank you very much for that. The second question is, with respect to the decommissioned rigs, just in terms of are there salvageable components to these pieces of equipment?

Yes. There are salvageable components. There's a number of things that we're doing. We're taking some of the components off the rigs. There's some components that we'll sell or in some cases, we'll sell a whole rig, but that'll be only a few cases. The CAD115 million was the net value, the net loss, and we did have some salvage value on those rigs.

Perfect. Thank you very much.

John Tasdemir, Canaccord.

Great quarter. I just want to follow up a little bit with what Andrew was talking about, when you make the implication that your CAD1.14 billion will be funded by your operating cash flow. I think where the street consensus is now would imply that they're probably 20% short of that cash flow number for you guys for 2012. The street just seems a bit conservative on their cash flow outlook and you have the ability to cut even more. One of the questions is, and I guess you really answered this throughout the call, but today, what gives you the confidence of meeting that cash flow expectation? Secondly is, would a reduction, if you were to start to reduce your capital spending, would it really impact 2012 cash flow much? It seems like what you're spending is revenue-generating. You're spending money on revenue-generating assets and to the extent you reduce capital spending, I guess just my question is, what gives you the confidence level in that cash flow number?

A couple things, John. First of all, the way to think about our spending at the end of the year is we don't intend to increase our borrowing to cover what our plans are right now. That's the first comment I'll make. Beyond that, what gives us the confidence? Our customers didn't wake of a couple days ago and see CAD2 gas prices and decide things were shaky. The rig count began to slow down back in October. Our customers that were booking our rigs for Marcellus and some of our peers in the last quarter of last year were booking rigs for late deliveries in 2012, knowing full well that there might be other rigs coming out of the system from gas, yet they still booked Precision's rigs and some other competitor's rigs in that timeframe.

As late as just a few days ago, when we signed up the last few of these 2012 budgeted rigs to firm contracts. They're still booking rigs, we're re-signing rigs in the last quarter of last year, early this year at very strong day rates. These are things that customers don't do in markets where they think they're going to be laying down rigs six months from now. Either we've got the right customer mix or the right geographic positioning, but I'd say we feel pretty good about our cash flow, but we're always mindful that this market has a habit of turning quickly and we can turn those taps off quickly if we have to.

Okay.

John, just to add one comment to that, John, the other piece I think that gives us some confidence is our contract position as well, today we've got 145 rigs or so under contract. The contracted rigs make up a disproportionate amount of EBITDA because it's the Tier 1, Tier 2 rigs that are under contract. As we roll things forward through 2012, and we're not being overconfident, but I just think when you do the math, that it works out with relatively robust numbers, even if you don't make any real assumptions on pricing increases or utilization increases, in kind of a flat world, just with the new rigs coming on and the rigs that are under contract is kind of the way it works out.

Got you. That's a good answer. I appreciate that. Then just a couple other quick things, the US operating days on the rig side, I think it was up maybe 1% from the third quarter. Were you happy with that or is there more upside to utilization, it just looked a little flattish?

I haven't really thought about it that way. I'm happy with the results in the US were very good. We got our day rates coming in nicely, renewals going well, retired a few rigs. I don't have any real observations on US activity. It's where we thought it would be, John.

Okay. That's fine. I'm just -- as I model the rig roll-out-- that's fine. How about for Doug, when you think about the well-servicing side, in the third quarter, the well servicing hours were up like 20% year-over-year, and then in the fourth quarter, we just saw a couple percent increase on a year-over-year basis. Well servicing on the fourth quarter could be impacted by weather, but were you guys happy with well servicing hours?

I'll start, Doug, we saw all of our business slowdown for a pretty good Christmas break. Things wrapped up about mid-December, and that took a bit of a cut out of the fourth quarter, but Doug, go ahead and speak forward.

Generally, John, the increase quarter-over-quarter compared to 2010 was 3% higher year-to-date, 7%, so you're right, there was a year-over-year improvement slowdown. A little bit of that was dry gas on the snubbing side. But generally it came in where we thought it would, very nice distribution throughout the Western Canada basin, and all the oil there is that you'd expect, so no, it came into where we thought. As Kevin said to begin the call, we do tend to lag drilling a little bit, and the work between completions is strong, and we've got a rising base of production work, which is real positive.

Okay. All right, guys, that's all I had. Thank you very much.

Scott Treadwell, TD Securities.

Congrats on the quarter. Just wanted to maybe dive a little bit into day rates. You said you got a great jump here. You didn't really go any much further than that. But I'm just wondering if your view on day rates balances that you're bringing in a bunch of Tier 1 rigs that are probably going to be at the high-end of day rates and that the asset you've got today could be flatter or even down slightly, but the corporate average looks flat to slightly up? Is that a scenario that plays out in your mind?

It's early to see how this is all going to play itself out. I think the way you've described it's a very plausible scenario. But we still have some rollovers happening right now and the next few days, that are still rolling over from day rates a year ago, which are still below spot market pricing.

Okay. Secondly, just on the contract numbers that you gave, when you talked about an average of 112 for the year, does that include the rigs that are coming on, projected throughout the year or is that just the rigs that are working today, you'll have 112 average working?

Scott, it's the contract that we have in hand today. We're not projecting any new contracts, but it does include contracts that we have in hand for rigs that aren't yet working, that are still to be delivered.

Okay. Perfect. That clears that up. Finally, just internationally, sounds like Saudi is going well. Any further update on the European Super Triple and also by Latin America, can we infer that, that's strengthening Mexico or is that going a little bit further south?

It's actually going a little bit further south than Latin America. From an operations standpoint, which would include the European rig, we have all hands focused on getting our three rigs up and running. Our prime focus right now is to get the three Saudi rigs running, prove to Aramco that we are a high-performance, high-value driller.

Thanks very much, guys. Appreciate the color.

Jeff Spittel, Global Hunter.

Maybe to follow on that question about the potential opportunities in Latin America, a little bit further south in Mexico, is that an area that's potentially fertile for unconventional applications, in your mind, and new builds, or is that more reactivated rigs?

I think likely Precision's going to have the most success South of Mexico, so Mexico will be a chance for us for some more of our deeper rigs, reactivated rigs. But south of Mexico, getting into Latin America and thinking about Colombia, Brazil, maybe even at some point a few other countries there, that might be more of an opportunity for Super Singles kind of drilling and new builds. It's looking interesting to us, but right now, I'll just reiterate, our focus right now is on getting the Saudi rigs running.

Sure. Sure. Okay. Then switching gears on the LNG front, certainly the chatter sounds pretty good about some of these Western Canadian liquefaction facilities finally getting done. Are we still thinking along the lines that potential new builds for the Horn River and the Montney associated with those would be more of a 2013 event potentially?

Jeff, I didn't think I'd get any Horn River questions today. Thank you for bringing that one.

A little contrarian.

Yes. That pipeline has a high degree of likelihood of happening. You've got the right kind of players involved, they're working through the political issues right now, but you've got both financial, technical, and political will to make it happen. I think it's a high likelihood. I think that does bode well for BC, Northeastern Gas, down the horizon and that's going to be a new build market. I don't think it helps for me to be talking about new builds for gas today.

But honestly, that said, that pipeline is I think going to go ahead. I think that terminal will be built. And there'll be a couple of beads of gas that needs to be produced out northeastern BC that will require upwards of 20 new build rigs. But it is going to be -- we're talking about mid-decade.

Okay. Understood. Thanks very much, great quarter, guys.

Victor Marchon, RBC Capital Markets.

I just had one on the directional drilling business and how you guys are seeing continued to build out that business in 2012? Just want to get a sense, from an organic standpoint, potentially the number of kits you'd be looking to add this year? Also wanted to ask about the acquisition landscape, is that still a business segment that you guys would be looking for to add in some acquisitions?

I'll start off and then I'll turn it over to Gene to talk about the organic growth. Once we closed the second deal, we had every banker between Calgary and Houston bringing us structural drilling deals to buy more footprint. We actually think we've got a great base to build from organically right now. Gene, do you want to add talk about our plans?

Yes. We've been pretty clear about how we're going to tactically grow. We've actually put some commitments in place, we'd be looking at, if we're at 70 job operating capacity today, to be able to grow that by potentially as high as 40 or 50. Really what we're going to leverage on is our existing book of business in the precision rigs. The 270 that are operating in are known customer base and we think there's great opportunity because such a high percentage of the wells that we are drilling today are directional or horizontal.

Is that 70-job capacity split relatively evenly between the US and Canada?

Yes. 40 Canada, 30 US.

Just one follow-up, if I can, just on the new build manufacturing capacity and I think this was asked earlier, just wanted to see, and apologize if it was, your guy's capacity for 2012? What would lead you guys to increase that manufacturing cadence, what sort of visibility or backlog would you need to see before you went to, say, four rigs per month?

Victor, we don't require any capital investment to expand our capacity. It's really just expense-based. We have the framework in place, we have the systems. We just need to add a few project managers and a little bit of capital into the supply chain. But no facilities expansion, so it's an easy move for us to make. All it would take would be customer demand to sign contracts. For example if we had a demand come up for a group of Super Singles to drill this Mississippian play, we could be producing those rigs sometime inside 2012 for the first deliveries.

Great. I appreciate that. Thank you, guys.

John Lawrence, Tudor Pickering Holt.

On the coil tubing units, could you just walk through the timeframe of the additions there?

Yes. John, we're firing up our first rig this month. We expect to follow it with our second, and at least as we look at 2012, at least anywhere from five to nine on a steady pace from that point forward. And the second part of your question on crewing the rigs, we're not having any trouble crewing them. In fact, we're having a lot people come out of the way to join us.

Okay. Great. And then just on changing the depreciation policy on the Tier 3 rigs, why not just scrap those rigs now? Is it purely option value there?

No. John, many of those rigs are working today. Of that group of rigs that we're going to appreciate on a straight-line basis, they fall in a category that we're not going to upgrade, they're not the right rigs to upgrade for various reasons. But a good portion of those rigs are working today, making CAD6,000, CAD7,000 a day of EBITDA. We still want to run them, but we don't see that they're going to have a longer life than the next few years.

That makes sense. Thanks a lot, guys.

Todd Garman, Peters & Co.

If we could start with the US costs per day, it looks as though they're up sequentially and the release indicates that the increase in operating costs per day relative to the to the third quarter of 2011 was due largely to higher labor costs. I just want to be sure that there was nothing else in there that might have drove that operating cost per day number higher.

Todd, it's primarily labor costs and quarter-to-quarter, there's going to be some noise on repair and maintenance as well, but the vast majority of that increase was labor cost that gets passed through.

Okay. Going forward, that's a representative run rate or how should we think about maybe some of the costs that you can grind out of the system here in 2012 with your integration of facilities in the US?

The two competing factors are the labor market has been tight and that's been pushing wages up. We've made real progress, particularly in the US at implementing the integrated strategy of doing our own repair and maintenance, of opening a tech center, a running our supply stores, so that's helped and it's taken some real costs out of the system that get masked by the labor increases and so I think a reasonably good number. We'll continue to push down on that and do everything we can to be more efficient. But there's some limit to what we can ultimately take out. And then we'll see what happens with the labor market, if it softens a bit, then we may be able to get some of that back. But in places like the Bakken, I think it's going to be difficult.

Okay. The second question is you mentioned that you thought that the Marcellus would slow down and I'm just wondering if you can provide any sort of insight, whether it's from your clients or discussions with other clients or potential clients, what they might be thinking about or seeing for in terms of an activity level reduction?

I can't give you any specifics there, Todd. But I think the Marcellus will come under pressure. It's a relatively low-cost, but I can promise you, nobody's cost is CAD2.53. Hedges will be running off.

Thank you.

Dana Benner, Altacorp Capital.

I wanted to come back to the issue of contracts, notwithstanding the steadfastness of contracting through the '08/'09 financial crisis. There continues to be a lot of question marks around the sanctity of contracts amidst weaker variables like natural gas prices, et cetera. Can you give us a sense, how would you describe the counterparties to those contracts right now and maybe metrics or variable like that might assuage the street in terms of the protection on the other side?

Sure, Dana. This is a good question. It's one that, in fact, our Board was curious about here over the last couple of quarters and so we've done some homework on the counterparty risk. I think the first thing to say is we believe the contracts themselves are tight and we've had them reviewed by outside law firms and believe that they are tight contracts. In terms of counterparties, most of our customers that we're building rigs for under contract are mid- and large cap or majors. Of our top 20 customers, the average market cap is something like CAD36 billion and if you back out Exxon, because they tend to skew the numbers a little bit, it's still in the mid-20s, CAD23 billion or CAD24 billion of market cap.

There's only one on the list that's less than CAD1 billion. Everybody else is multi-billion market cap. Public companies with access to capital who pay their bills and are responsible counterparties. It does actually give us quite a bit of comfort that those contracts will be honored. On top of that, the fact that in 2009, that we didn't have a single contract breached is also a good data point.

Great. That's perfect. Secondly, I wanted to come back to the directional drilling business that you're growing quickly in. Would you say that the capital commitments, the orientation towards spending capital in this area would be maybe a little bit more fixed than even on the drilling side, i.e., you've identified it as a high-growth business and the capital maybe is stickier, or is that a fair statement?

Actually, Dana, I think that's a really good observation. I'm quite a firm believe that we'll grow that business independent of market direction. We bring very, very good value to the rig, and we can integrate the directional growth services as one of our rigs. It's a down market. I know our customers will try and protect a few directional drillers out there with some work, but we bring the substantial cost savings with our model and I would think that we have good room to invest even in a down market in that piece of the business. (technical difficulty)

Less than a year. The returns are very good, it's not big dollars in comparison with rigs. We're spending a fraction of the capital, but because it's pretty high return investment, we're generally good EBITDA with it.

As you know, Dana, we brought on board a couple of very high-quality companies that have great reputations and we just think we'll do very well in the business.

All right. Just one final question, coming back to Saudi. I understand that you want to get these first three rigs up and running and performing. But is there a group of contracts coming up that you'd be actively bidding on, such that even though you want to be focused on near-term operations, there may be other opportunities beyond that in a CAD90 to CAD100 world?

Yes. It's a pretty small market out there, and there's no question there's some interesting things we're bidding on now, Dana. I really don't want to get into details and I don't want to build up any expectations in the short-term, honestly, but I think we're going to have more success here, nationally. I know that I mentioned Niels Espeland, Niels put together a really high-quality team for us over there, we've got lots of good contacts. We're well-positioned now. As we've shown in the past, we don't make these positioning statements and then fail to deliver, we deliver on our positions.

Okay, guys. Thank you.

Mike Urban, Deutsche Bank.

I just had one more left on the CapEx and the flexibility there, and just wanted to ask a different way. It does look like you have a good bit of flexibility around that and you could flex that down by as much as CAD400 million, you said. Presumably that changes, though, as the year goes on. Another way of looking at it or what I'd be interested in is, at what point in the year do you get to a point where you're committed to the CAD1.1 billion?

Mike, obviously as we go through the year, you're right. We'll be spending some of that maintenance CapEx to upgrade CapEx that we could've squeezed out. But it's not quite ratable through the year, because during the first quarter, we're pretty busy working so we're not spending as much on maintenance CapEx, it gets delayed a bit. But then beyond that, then I think it's going to be pretty ratable across the last three quarters of the year.

But do keep in mind, Mike, that we're very conservative. Meaning we estimate high on capital spending and then generally, we lag. So even a normal year, we might come in several tens of millions of dollars late over the spending into the following year.

Right. Right. In terms of the CNP expansion into some of the colder weather markets in the US, it looks like you have made some progress on that front, and you've talked about deploying some assets. Is that progressing as you would've hoped or are there other things taking priority, just given that you do seem to have an awful lot going on in terms of the great new builds both in North America and internationally?

I'm going to answer before Doug does, it's progressing as exactly as we planned, but slower than I'd hoped. No, Doug, go ahead.

Exactly right. Yes, Mike, it's progressing exactly the way we designed it and it's along our philosophy of gaining experience in a new region with a new customer base organically first. I think the initial market entry is a little bit slow. But we're very encouraged in terms of our presence in Pennsylvania and the rentals and camp exposure we've got going in North Dakota. It's a very proactive and I think in the quarters ahead, at some point in 2012 here, we'll have more to talk about in terms of beginning to move the dial.

That's all for me, thank you.

Jeff Fetterly, CIBC World Markets.

What are your working capital expectations for 2012?

We'd expected it to follow a similar pattern as we did in 2011. Don't expect any real changes in terms of days payable or days receivable. We think we run that pretty tight and we won't expect much of a change. We'll build working capital here through the first quarter, get to our highest point late Q1 or early Q2, and then we'll start coming back out of the system in the second quarter, and then again start building more slowly in the third and fourth quarters.

Is there anything driving the DSO increase over the last couple of quarters?

No. There's nothing in particular. Like I said, we expect it to be pretty consistent with what we've seen historically.

Okay. So when you talk about living within cash flow and cash on hand for the CapEx program for 2012, are you taking working capital into consideration, or is that just a straight cash flow before working capital assumption?

Yes. I'm assuming that we'll manage our working capital in the normal course and that we're not going to have to use our revolver to fund the build program. We'll have enough cash on hand plus cash generated from operations.

Okay. And given the commentary on the release around customer discussions continuing and the expectation that you'll have further new build announced as the year progresses, how does that go around in the context of living within cash flow given, based on the numbers I'm running you guys should be fairly close with the CAD1.14 billion CapEx?

I think that there's not a lot of room to spend more money in 2012, because we just physically won't be able to do much more than that. I think even if we filled out a handful more rigs that would be late in the year, it's likely that we wouldn't spend everything else, and so there's not really the opportunity for a big increase beyond what we've announced.

Okay. Tier 3 rigs, did I hear correctly that you have 66 remaining and 58 by the end of '12?

Yes. The reason that we'd be down from 66 to 58 is we'll upgrade a number of Tier 3 rigs to Tier 2.

Okay. Are any of those 8 planned retirements or are those all upgrades?

No, those are all upgrades. We don't have any planned retirements for the 66 that are remaining. As I mentioned, we're going to upgrade a portion, call it roughly half, and then the other half, we will depreciate on a straight-line basis over the next four years.

Okay. Am I correct in assuming that the 66 has a current book value in the range of CAD75 million?

We don't disclose that. We haven't disclosed that. But your too light.

Okay. So you do have some salvage value building for those rigs relative to the CAD17 million in depreciation increase?

Yes. There would be some salvage value.

Okay. Sorry, last thing. You talk about weakness in the Marcellus. Where are you seeing pricing pressure today? What makes you think you won't see pricing pressure if an area like the Marcellus starts to roll?

Great question, Jeff. I have to tell you, the pricing pressure really hasn't emerged yet.

Even the stuff in the Haynesville that you talked about rolling rigs out of?

We've been rolling rigs out of the Haynesville and out of everywhere over the last 18 months. If we're trying to renegotiate a rig, it's not for the Haynesville.

Those Haynesville rigs that we've moved out, we're down to maybe five rigs left in the Haynesville. The majority of those went the Eagle Ford and the majority that were taking to Eagle Ford were paid for by customers at higher rates. The balance of the rigs left are under term contracts, pushed out past this year.

Okay. The stuff in the Marcellus that you feel is fairly insulated, is that because it's under contract?

Partly under contract, partly because of performance. We have the right type of rigs, we're doing a very good job for our customers, and in these markets, it's typically the best rigs that run the longest. We think we've positioned ourselves for that.

Last question, back to the Horn River topic a few minutes ago. You've historically not been much of a player in the Horn River. Do you have a strategy to try to be more meaningful there over the next few years?

We have been a player in the Horn River like others have been. We maybe have priced ourselves out of that market a little bit early on when there it the right time to do that. But I think Precision's got a strong position across Canada for every basin. I'm not bothered by needing a special strategy to address the Horn River. We'll be in there bidding with our Super Series rigs like we would be in any other area. But if we're unsuccessful, it's because somebody else has been able to price themselves into the market.

Thanks. I appreciate the comments.

(Operator Instructions) Brian Purdy, Global Hunter.

Congratulations on the quarter. I just wanted to ask about the Tier 3 rigs. If we do see any meaningful slowdown, I guess I'm kind of expecting that you guys would feel it in that category. I'm guessing most of those rigs are working in oil today, but could get displaced. Does that sound like a reasonable scenario as higher specs rigs might come out of gas plays?

Brian, I think that's a reasonable scenario to consider. It's certainly one we're looking at and monitoring carefully. We just keep focusing on delivering great service to our customers, keeping the safety clean and keeping environmental responsibility clean. I think if there's Tier 3 pressure, it might come more heavy on the smaller drillers. I think the larger drillers are the better systems and processes. I'm not going to be totally isolated, but I think we'll have better legs in a market like that.

And you led into my follow-up here. Are there some kinds of plays where the Tier 3 rigs still fit well? Is it heavy oil or something like that where maybe a higher spec rig is not going to take much of a difference?

Referring to heavy oil, I'd talk about [Stratwell] as being an area where a Tier 3 rig can do the job. In the Permian basin, drilling vertical delineation wells, a Tier 3 rigs can do the job. There's no question that a good Tier 1 rig will out-drill a Tier 3 rig in those environments. It's going to take a high-quality Tier 1 rig coming in to really do a noticeably better job.

Okay. And I just want to ask along the lines of your depreciation plan for the Tier 3s, you're doing a four year straight-line, do you feel that's the kind of timeline where this refreshment cycle that we're seeing in North America will have taken out most of that lower end rig market? Is that the market study you've done or was maybe not that deep an analysis?

No, I think that's when we'll be out of the Tier 3 business. There might be some Tier 3 rigs kicking on here when I retire.

Okay.

Go ahead, Rob.

That's our best estimate of the useful life of those rigs for us, knowing well that, that's not the part of the market that we're focused on. We really are focused on the higher-end horizontal drilling Tier 1, Tier 2 market, so we purposely want to get those rigs off of our books over the next four years, as we think that piece of the market's going to shrink.

Okay. Great. Thanks very much.

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

On behalf of Precision, I'd like to thank everyone for their participation in our quarterly call and I want everybody to have a great afternoon.

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