Precision Drilling Corp (PDS) 2012 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Precision Drilling Corporation's first quarter 2012 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 would also like to welcome you to Precision Drilling Corporation's 2012 first quarter 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, President of Completion and Production Services. Through a news release earlier today, Precision Drilling Corporation reported on the 2012 first quarter 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 view about events and potential impact on the Corporation's business, operations, 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 first quarter and operating results and a financial overview. Kevin Neveu, will then provide a business operations update and our outlook. Rob, I'll turn it over to you.

Thanks, Carey. And thank you all for joining. Precision had a strong first quarter, reporting revenues of CAD640 million, and net earnings of CAD111 million, or CAD0.39 per diluted share. Earnings per share were negatively impacted by CAD0.02 by foreign exchange. First quarter 2012 EBITDA was CAD246 million, which represents a 32% increase over the first quarter of 2011, and a 7% increase over the fourth quarter of 2011. The improved Q1 results primarily reflect stronger pricing and margins, both in Canada and the US, versus the first quarter of 2011. First quarter 2012 EBITDA margins improved to 38% versus 35% in the first quarter of 2011.

In the US, during the first quarter of 2012, drilling revenue improved by CAD2,300 per day versus the first quarter of 2011, and margins improved by over CAD2000 per day. Versus the fourth quarter of 2011, US drilling revenues improved by CAD215 per day and margins were essentially flat. Precision had 4% more drilling days in the US in the first quarter of 2012 versus the prior year period. In Canada, in the first quarter of 2012, drilling revenues improved by over CAD3200 per day year-over-year, and margins improved by CAD2300 per day. Sequentially, day rates improved by CAD1100 and margins improved by over CAD700 per day.

Drilling days in Canada were essentially flat in Q1 2012 versus Q1 2011, due to a slower ramp-up in earlier spring breakup than we experienced in the first quarter 2011 that was somewhat offset by higher peak activity levels in the first quarter of 2012. Our completion and production segment also had a strong quarter, with revenues increasing to CAD111 million, or 7% above the first quarter of 2011. EBITDA in the first quarter improved to CAD39 million, which is 14% above the first quarter a year ago. Service rate revenue per hour increased by 14% to CAD819 per hour versus the first quarter of 2011. EBITDA margins in the segment improved to 35%, which is 200 basis points higher than the Q1 2011 results. Well servicing activity was down 2% in the first quarter of 2012 versus the prior year period, driven primarily by an early spring breakup.

In December, we announced our 2012 capital spending plan, totalling a little over CAD1.1 billion. Due to industry conditions, our expectations for the remainder of 2012, we're reducing our capital spending plan by CAD152 million to a total of CAD975 million. We expect our capital expenditures to consist of CAD584 million for expansion capital, CAD173 million for rig upgrades and some long lead items, and CAD218 million of maintenance and infrastructure spending. A substantial portion of the expansion and upgrade spend is backed by contracts. We expect approximately CAD816 million of the capital to be spent in contract drilling, and CAD159 million to be spent in the Completion and Production segment.

The revised CapEx forecast still includes all of the previously announced and fully contracted new build drilling rigs. As we have a number of late stage discussions ongoing regarding new build rigs, we believe that it is possible that our expansion CapEx for 2012 could be increased in the coming months, as we are likely to fill the remaining few rig manufacturing slots for 2012 delivers. We are very pleased with our balance sheet and the financial strength, stability, and flexibility that it provides. As of March 30, 2011, total debt was approximately CAD1.25 billion. And net debt is approximately CAD850 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 totalling over CAD900 million of availability.

As a reminder, we started depreciating our Q3 rigs that are not expected to be upgraded on a straight line basis over four years beginning in the first quarter of 2012. This increased our depreciation expense by approximately CAD5 million during the quarter, over what the current unit of production method would have provided. This depreciation policy 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 entirely comprised of Tier 1 and Tier 2 rigs and our current Tier 3 rigs will either have been upgraded or retired. Our fleet is currently comprised of 280 Tier 1 and Tier 2 rigs and 65 Tier 3 rigs. After completing the announced new build and upgrade programs in 2012, we expect our fleet to be comprised of approximately 313 Tier 1 and Tier 2 rigs, and 58 Tier 3 rigs. In terms of contracts, we currently have 136 rigs under term contract. Since our fourth quarter earnings release, we have added term contracts that increased the contract rig average for 2012 from 112 rigs to 122 rigs. That concludes my comments.

Kevin, I'll turn it over to you.

Thank you, Rob. Good afternoon.

I'm going to begin by expressing my thanks to the employees of Precision Drilling for the hard work and the outstanding results of their hard work delivered during the first quarter of 2012. These strong revenues and margin performance for Precision achieved during the quarter came as a result of excellent execution from all segments of our core business. Concurrently, we are reporting success and progress in our strategic growth initiatives. By the end of April, we'll have delivered 10 of our new build Tier 1 drilling rigs, with the 23 additional rigs to be following later this year.

On the International front today, we announced a multi-year contract to deploy three additional rigs for an integrated service provider in Mexico, and our directional drilling business continues to gain momentum, both in Canada and the United States, highlighted by the recent opening of our Houston motor repair center. Now, I'll speak more to our growth initiatives in a few moments, and I'll start by looking regionally at the core businesses and the relative -- the relevant market trends.

In Canada, the winter drilling season, as Rob mentioned, was shorter in duration than 2011, but proved very successful for precision, with activity levels touching on decade highs, driven by strong customer demand for oil and liquids drilling, while a virtual absence of dry gas activity was present. The Canadian transition from a gas-focused basin to an oil and liquids-directed industry was fully realized prior to the start of 2012. But at precision, we remain mindful of the reduced cash flows, cash inflows for our customers due to low gas commodity prices.

Nonetheless, we have remarkable vision forward into the year and expect to have a strong summer -- spring and summer leading to the fall season drilling for the oil and gas liquids targets in Alberta and Western Canada. The early spring breakup in all appearances should lead to an early start to summer drilling season. Rig bookings and customer well planning are pointed to a ramp up in May and the very busy summer and fall for Precision.

Pricing and customer demand remain constructive, to the point that we expect several opportunities to contract additional new build rigs and upgrades. By the end of this month, we will have deployed 6 new builds and expect the balance 12 in the current plan to be deployed over the coming months. The pricing structure that was established with our customers last fall should remain in place through the third quarter, allowing us to contain cost pressures and sustain margins, which Rob mentioned are up CAD2300 per day year-over-year.

Looking later in the year, it's possible that with the continued strong economy in Western Canada, we might see further labor cost pressures, but we'd expect those costs would be considered as we enter customer negotiations for 2013 pricing. Now, looking to the US, we continue to see strong regional oil and liquids markets. However, they are overshadowed by dire views on natural gas.

As in Canada, approximately 75 of Precision's US rigs are drilling wells that are licensed for oil. With our current rig count hovering in the 100 to 105 rig range, we believe that we've weathered this gas slowdown remarkably well. Precision's deployment away from dry gas to oil and gas liquids began early in 2011, and has proven timely and effective, positioning our rigs with strong well-financed customers, allowing us to continue to build our reputation as a preeminent provider of high performance, high value services.

By the end of April, we will have deployed four new builds to the Eagle Ford and Bakken regions and are on track to deliver the remaining 11 rigs as we scheduled. New build interest remains positive, and we expect further new build Tier 1 rigs will be contracted this year, particularly in 1200- and 1500-horsepower categories. Cash margins, as Rob mentioned, trended similarly in the US, as we have in Canada, up more than CAD2000 per day year-over-year, and we expect to sustain this increase.

Now, looking forward for a moment, customer demand remains strong in the established oil and liquids plays, such as the Permian, the Bakken, Niobrara, and the Eagle Ford and we are seeing continued customer interest and increasing demand for potential new builds in new plays, such as the Mississippian line and the Utica. Now, speaking to the oversupply of natural gas, the resulting very low natural gas commodity prices, these will continue to concern those not well acquainted with Precision. However, one needs to look very closely at each element to understand what the real implications to Precision are.

So it's important to note that the gas drilling decline preceded the storage surplus by several months. In fact, it started early in October of 2011. And the actions taken by our customers have been quick and decisive, with customers reducing dry gas activity expeditiously. We believe it's remarkable that over the past seven months, more than 350 rigs -- or 315 rigs have moved out of dry gas. Most of those rigs have redeployed to oil and liquids drilling, and encouragingly, the day rates for the best rigs, the Tier 1 rigs remain at peak levels, largely unaffected by this influx of redeployed rigs.

Now, as we have said before, we continue to see weakness in pricing on the lower tier rigs. But we expect this pricing on these lower tier rigs will stabilize quickly, as gas drilling winds down and the better rigs continue to be redeployed. Precision's early move to redeploy the liquids puts us ahead of this shift, allowing us to build -- to continue building a reputation, and prove our value to those customers.

Now, I believe it remains a second concern on rig rates, and there's pricing stress right now that's being talked about in other services, particularly services where there was a large build or potential overbuild for capacity. The market needs to recognize that Precision Drilling and the land drillers as a whole have exercised strict fiscal discipline during this strong demand cycle for high performance rigs. We've been building these rigs into long-term customer contracts. We've been adjusting our build programs down when demand softens and responding appropriately in strong demand.

And, as a result, I think the balance of these rigs -- the majority of these rigs are all going to long-term customer contracts. I feel that very few, if any at all have been built on spec. So it's hard for us to build a case where we'll see an excess supply of these rigs in this current environment. And most importantly, these Tier 1 rigs have demonstrated strong pricing and strong utilization throughout all cycles.

Moving on, as I mentioned during my opening, we're pleased with our progress in directional drilling. We opened our Houston motor repair facility during the quarter and expect to open similar facilities in West Texas and the Bakken during the second quarter. These facilities will significantly improve or reduce our dependence on third party service providers. They will improve our quality and, importantly, enhance our margins on the directional drilling element of our business.

Our field operations continue to perform very well, building customer confidence and enhancing our ability to grow this high value service. Now, just turning for a moment to our Completions and Productions business. As Rob mentioned, we are seeing strong pricing traction now finally flowing through in this business, driven by the shift to oil. I'll comment that it's a vital business segment to Precision. It gives us an opportunity to participate in our customers' full lifecycle of oil and gas wells and to supplement drilling operations with other ancillary services, like combinations, camps, water treatment, well site rentals. It's a key business plan for Precision Drilling. And we're really quite excited that we were able to deploy our first coil tubing unit. Just a little bit of a shame it was so close to breakup. I think we were able to squeeze a couple of jobs in before road bans hit.

The second unit is in the final stage of the commissioning. And I know chatting with our guys this morning, they are anxious to see road bans lifted and get these units out and running and get the remaining six units yet to be delivered in the field and operating for our customers. But early results in the first unit are very encouraging and we're excited and our customers are pleased to see us in this segment.

Our 80-man camp that we installed in Williston late last year is fully at capacity right now. We've deployed a second stubbing unit for Marcellus. We're moving some of our rental people into the Williston area, and quite excited about our early initial entry into these Northern colder regions of the US and the potential value we bring to our customers in those areas.

Now, turning for a moment to our international segment, I mentioned earlier the three additional rigs contracted in Mexico. Two of these are US rigs, being redeployed. And one rig has already been moved into Mexico from Colombia, and that rig should be up and operating on the weekend. And the later -- the remaining rigs should be running later this quarter.

So this brings our international fleet up to eight rigs, and currently, we have, of the three rigs in Saudi Arabia, one rig is up and running and has been for several weeks now. The second rig should be running I either today, tomorrow or on the weekend. And the third rig will follow a few days after that. But I want to be very careful not to create any false expectations. Precision's growth in the International arena will be a slow process. We do not expect to be reporting multiple rig additions every quarter. We remain highly selective and will pursue only those opportunities where our high value, high performance capability is recognized by the customers and the day rates capture that value.

Our focus for the coming quarter will be to ensure these rigs start up and operate efficiently and that we deliver the performance our customers expect. While we do remain encouraged by the number of opportunities and the bid activity we're seeing, we'll still guide you to expect slow and measured growth. In summaries -- in summary, in many ways, this was a typical quarter for Precision, the highlight being our solid execution in all aspects of our business. Our recruiting efforts were successful, to fully staff our Canadian operations for the peak winter activity. Our Construction and Project Management teams have been busy and continue to deliver our new builds.

Our Operations groups and our Drilling, our International group, our Completions Productions groups have performed superbly. And very importantly, our men in support functions ensure that our business flows smoothly. I'm very pleased that our balance sheet, our financing activities and our fiscal discipline have given us the financial flexibility to capture the new build growth opportunities over the past 12 months, but more so, that we have the capability of continuing to seize opportunities when they become available in these uncertain markets looking forward.

On that note, I'll pass the call back to the operator for questions.

Thank you. We will now take questions from the telephone lines.

(Operator Instructions)

Scott Treadwell, TD Securities.

Congrats on the quarter. I just wanted to maybe touch a little bit on directional first off. I know you talked about adding a dozen kits a quarter. Is that still the plan, and can you give us the number of kits you're got in the field either at the quarter end or today?

Yes, thank you, Scott. Appreciate the comments on the quarter. Yes, we are still planning to be adding directional drilling kits at that rate of about 10 to 12 kits per quarter. You know, I'll tell you that response from the vendors has been a little bit less than overwhelming. I would say that right now, we're getting close to 80 kits, probably 77 to 80 kits, in that range. I'm really quite hopeful that as we get our own motor shops up and running, they will be a little less dependent on the vendors. But we've been having to swap between some of the new kits and some of the rebuilds in order to satisfy customer demand. So, we're hoping that with a little bit of a pause here at spring break, that we can get caught up a little bit.

Okay, and then secondly, on the CapEx reduction, I haven't noticed a contract announcement. So fair to assume that the European rig has been shelved for the time being?

You know, I don't like to use the term shelved because we're not shelving anything. We have deferred capital -- the capital we've deferred includes the European rig at this point. I'll go back to my comments earlier about ensuring that our startups in Mexico and Saudi Arabia continue on at a high level. So I would say our focus right now is to get those eight rigs fully running, fully servicing our customers, and once I'm comfortable that we're there, then we'll put focus back on the European rig. And, you know, luckily, it's not an urgent need for us right now. That market's evolving slowly in Europe, and I don't think we're missing anything right now. We'll be ready for it when it comes.

Okay. The rigs that are going to Mexico, is there any capital allocated for those, or are they kind of rigs that are just moving and are close to being ready to operate? Obviously, the first one is.

Scott, this is Rob. Yes, there's a little bit of capital going to those rigs, but it's relatively small. Those rigs coming out of the US were operating rigs. There's some minor upgrades that we need to do to get them fit-for-purpose for the work they are going to do, but it's relatively small dollars.

Okay, perfect. And it might be a little bit early days for this, but is there line of sight that the super coil units might start to move your rates up in the service rig division, you know, regardless of what the industry is doing? Or is it kind of too early for that, you're going to need 20 or 30 of them before you can really see a difference?

Yes, Scott, it's Doug. You'll see a slow migration on it. It's going to take some time. You'll see that we have two rigs going at the end of the quarter. It will be the third quarter before you see some momentum, and we expect to add eight by the end of the year, three in Q3 and three in Q4.

And I know sometimes the field hands would say differently, but I'm just wondering, is the staff transferable between the service and snubbing units you've got now on the coil, or have you had to kind of go external for some key guys?

We've gone external with key guys and our staff is definitely transferable. It's heavy on the training end up front, but we've got a ready work force internally as well.

Great. Okay. Thanks for the color, guys. Congrats on the quarter again.

Jeff Spittel, Global Hunter.

Just thought maybe we could touch on coil tubing units again. I know it's very early in terms of just having a minimal amount of spreads deployed in the field. But could you talk a little bit about the appetite for people to absorb standby rates? Is it kind of similar in terms of the economics there, as what we've seen in lower 48 for coil tubing and a completion application?

Our early insight into that would be the appetite would be a little less in our core markets here in Canada than what you historically have seen in the US, but still very strong and very keen interest, as we emerge into this service segment.

Okay, good. And then switching over to the drilling side of things, maybe a little bit of qualitative color, if you would care to provide it on body language and I guess disposition of who is out there and I guess most interested in continuing along with a new build program. I'm assuming it's probably a little bit more weighted toward the larger operators, with the larger drilling programs. Is that a fair assessment?

That's a fair assessment. We don't disclose, you know, specifically who we're negotiating with, for all kinds of reasons.

Sure.

But they're definitely -- think about this in terms of large integrated companies, large intermediates -- but the companies that have long-term thinking, long-term programs.

Understood. All right thanks, guys. Nice quarter.

John Lawrence, Tudor Pickering Holt.

Just a question on new builds for 2013. I know it might be a little early, but just given the strong comments you had today, do you think it would be reasonable to assume another 30-plus new builds in '13, or is it just too early?

John, it will probably be easier to comment on that once the -- once the gas count bottoms out. My thinking right now is I believe we'll see that gas rig count bottom out during the second quarter. It might bleed into the third a little bit. People are laying down the gas dry rigs as quickly as they can and orderly, and they are getting moved over into liquids plays if it's appropriate. But it will be easier for us to really think forward. I'm thinking maybe 8 to 10 weeks from now. All that said--

[I guess I'll] ask you that next quarter?

Yes, but all that said, it's hard to figure out what's going to slow down the demand for oil rigs. I'm shocked at how effectively the demand for oil rigs has absorbed the new builds, plus all of the rigs have come out of gas. So, if you just believe that that demand continues, then believing that Precision's looking at building 20 or 30 new rigs next year is very easy to understand.

Great. Well, that's good to hear. And then just on the terms on the new builds, have you seen the duration drop at all maybe from one to two years to three to five years, or is it still three to five years?

You know, customers are always trying to, you know, get the lowest price for the shortest term, unless the market's bottom out and then they want the longest term with the lowest price. But there's a lot of dynamics going back and forth all the time. The simple answer is Precision is not answering its fiscal curves period. We're not changing our contract durations. We're not accepting shorter terms for larger pay backs. We're keeping firm on our pricing and firm on our expectation for return. Rob, do you want to add to that?

Yes, John, I would say that we haven't seen any movement on our part on the duration of the contracts. We're typically three years-plus in the US and four years in Canada, is typical and we're not -- that hasn't changed.

Okay, great. Then Rob, just one housekeeping item, just could you give us some tax rate guidance for 2012?

Think about low 20%s. You know, in the sort of 22% to 24% range.

Okay, great. Thanks a lot, guys.

Dave Wilson, Harold Weil.

Just a quick question on the pullback in the CapEx. Any thought of redirecting that capital into some type of share buyback program, given where the stock is trading?

You know -- probably the cleanest answer -- I'll start off here, and I'll let Rob jump in any second now. Returning value to shareholders is something we talk about with the board, every single board meeting. And, you know, you mentioned share buyback with the Canadian investors. We often hear a lot of requests for us to think about -- think about dividends. So we're very thoughtful. These are things the board's very -- takes very seriously and thinks about heavily. But, you know, right now, we're still in the middle of an aggressive build program. The builds are all contracted, but we're using a lot of capital to do that. I would like to see us get through this capital program a little further before we start thinking about the various ways we might look at using any excess cash flow. Rob, how do you feel?

Yes, I am consistent with that thinking, Dave, is we are out spending cash flow. We did in 2011 and we're going to do it again in 2012 by a little bit. And so, you know, with high return projects, and so thinking about using some of that capital for share buyback or dividend program is probably just a little bit early. But certainly, we are considering it and, given where our stock has traded recently and the multiples that it's traded at, it is certainly tempting to want to do that.

Okay. Thanks for that. And then, you know, kind of a question about the back half of the year for Canada -- I know you mentioned that you're encouraged by customers' plan post the breakup, but wondering in terms of rig count, can you hazard a guess at what that can be? Do you think we'll be back to record levels?

Well, I would hate to use the term "record levels," but, you know, my guess looking forward might be that we could easily see activity levels that are, you know, high single-digit percentage points higher than last year -- you know, 7%, 8%, 9%, maybe 10% higher than last year, and it could start a little earlier. As I commented, we could see the ramp up in May rather than June. I hate to be too bullish, but, you know, things look pretty good. Okay. Thanks for that.

John Daniel, Simmons and Company.

Rob, a question for you on the CapEx. You just mentioned that you'll probably only outspend cash flow by a little bit. That's been a fairly consistent message. With the budget coming down, you know, CAD150 million, I'm assuming we shouldn't take that to mean that your cash flow forecast is coming down by a similar amount?

No, John. Those things are loosely correlated, not tightly correlated.

Okay.

That is not at all a signal that we think that our cash flow's off by CAD150 million. Those are just the projects that made sense to defer.

To defer. Fair enough. And then you noted the ability to sustain margins. As you look towards just the US market specifically, as you get to the second half with new builds coming in at better margins, et cetera, is your bias higher or lower towards the second half this year for cash margins relative to Q1?

You know, just based on the dynamics in play right now today, I would say the bias is slightly higher.

Slightly higher, okay. Thank you.

Kevin Lo, FirstEnergy.

I'm hearing a lot of excitement in Canada about [dubonais] shales and whatnot. Can you quantify what kind of opportunities that could be for you guys and whether that's sufficient to overcome maybe the weakness in more dry areas?

You know, so far, Kevin, it's actually completely overcome weakness in dry areas. I'm just looking at some reports that Gene slipped my direction here. You know, for Precision, we're kind of looking at that -- kind of running in the range of as many as 25 to 30 rigs, depending on where we are in timing.

Right, and so given that and potential oil projects, what you're seeing is that the second -- it sounds like the second half for you isn't weakening as much as when we think given the lower gas price?

You know, again, kind of looking forward again, Kevin, great question. It sure doesn't feel like it, and it doesn't look like it. The indications are that it's not weakening. But I'll comment, we're extremely mindful of the cash flow our customers are facing right now with increased cash inflows due to gas. Obviously, we'll hear our customers talk about their budgets again before June or I think around the June timeframe. So if there is to be any rebalancing happening, I think the effects of strong liquids prices, strong oil prices and then the negative effects of weak gas prices, we'll have to see how it all shakes out, but from what we're hearing and planning right now, it doesn't appear to be pulling us down.

Okay, great. Thanks, guys.

Jeff Mochoruk, Cormark Securities.

I am just wondering if you would be able to touch on what you're seeing in the spot day rate market, both in Canada and how those markets are differing right now.

So, Jeff, we've been out visiting investors quite a bit the past few weeks. When someone says what do you see in spot day rate markets, my first question is, well, which one where? Because it depends heavily on the geography, like where you are. It depends on the tier of the rig, and it depends on the size of the rig. So, for example right now, leading indicator of day rates in the US Bakken for our bigger rigs, Tier 1 rigs, are holding firm. Whereas if you look, you know, on you our lower Tier 2 rigs up in the Marcellus, those rigs are getting a little pressure right now. Move down to the Eagle Ford, Tier 1, Tier 2 rigs remaining strong -- West Texas very strong -- Tier 1, Tier 2. And there remains to be some strength even in Tier 3 pricing in West Texas.

So it's a very regionally separated market. It's really hard to talk about spot day rates in any kind of average or global way, and my comments about Canada are that the pricing we put in place last fall is holding strong for the summer. Now, there was a few contractors that were willing to offer rigs at pretty good rates during breakup, but that's not indicative of any kind of trend in Canada. I don't know if I've answered your question, but it's a very reasonably fractured answer. And the oil liquids plays on the higher tier rigs -- prices remain strong.

Are you seeing any of the typical spring breakup pricing weakness happen here in Canada? We didn't experience last year, but--.

Like I mentioned a few moments ago, there might have been a few contractors trying to keep couple of rigs working and offering some pretty good rates. You know, it didn't change our rig count.

Okay, and just moving on to -- did you have any standby revenue during the quarter on your contracted rigs, and do you see that, you know, potentially happening as we move forward here in the next couple quarters?

There was a de minimus amount in the Marcellus, but nothing meaningful. And we don't expect to see much of that rig -- it was more of a frictional issue and we don't expect to see much of that in the rest of the year.

Okay. Thanks.

Thank you. John Tasdemir, Canaccord.

Good afternoon. I'm going through some volume rig data overload today, so forgive. A couple of these questions you might have answered.

You mean you can't handle three line rig contractors all reporting on the same day?

Oh, it's difficult. I just lost my associate, too. So in the US, can you remind me a bit on what happened with your US margins, say, going from fourth quarter to first quarter and how to think about the margins going into the second quarter? And, particularly, I guess I would add on to that, and as I think about your rig count in the US, you went from say, 106 rigs -- you 104 rigs working in the first quarter. Now you've got 101 rigs working in the US. I would expect some of those -- all at the same time, you're adding new high end rigs to the fleet. So I'm just I guess back to the original question, can you just help me think through margins?

Yes, so margins Q4 to Q1 in the US were essentially flat. And we had a bit of a day rate increase that offset -- that offset a small price increase -- sorry a small cost increase. We are kind of in that 100 to 105 rigs running on any given day, which has increased some due to new rigs being added, but then we've had some rigs at the bottom of the fleet that are struggling to find work. So, on balance, I think to think about kind of flat margins in the US and a slow growing or kind of static number of rigs running, until we see what happens here with natural gas activity is probably a reasonable way to look at that business, John.

Okay, and just a small thing, the rigs that you have -- well, Mexico that's mainly captured in US business right now?

Yes, that's reported in the US segment of business.

All right. All right. Anyway, that's ultimately all I had. Thanks, guys.

Victor Marchon, RBC Capital Markets.

Most my questions have been asked. I did have one on just the contract in Mexico. I just wanted to get a sense as to the margins for that contract. Is it fair to assume that those margins are going to be north of what you guys are getting in US and Canada in the first quarter?

They are going to be comparable kind of margins. I wouldn't make any assumptions that they are going to be up way above or way below our typical margins.

Great. That's the only one I had. Thank you, guys.

Jeff Fetterly, CIBC World Markets.

First question, rig additions. Can you give us the breakdown by quarter and by region, what's coming in? And then specifically, how -- where your idle capacity is in terms of potential new additions this year?

So, Jeff, I'll give you, just for 2012 by country. We've got 18 that are going to Canada and 15 that are going to be in the US. And you can think about those, you know, split for the 33 rigs for the year. It's going to be 16 or 17 in the first half of the year, maybe a little bit higher than that, one or two rigs higher, and 14 or 15 in the second half of the year.

And, Jeff, this is Rob. They are going to go to the areas that you would think they would. You know, in the US, to the Bakken, and to the Eagle Ford, or West Texas. They are clearly not going to the Haynesville, they're not going to the Marcellus. So they are going to go to the places that you think they would go, because these are all Tier 1 rigs that are being built specifically to horizontal drilling programs.

What do you anticipate is your available capacity to add new builds for 2012 delivery right now?

It's just a couple more rigs. We could add, you know, call it three or four, maybe five rig if his we really stretched in 2012. Then they are going to start spilling into 2013.

So it's safe to say that what you're talking about in terms of negotiating right now is only a couple rigs. Are discussions ongoing for '13 deliveries yet?

They--

Jeff, we've got probably rigs that stretch into -- well into 2013. They are in discussion right now.

Okay. So how should -- the commentary through the release about negotiating with customers for new builds and being in a position to announce additional builds in coming quarters, do those -- are those focused on a handful of 2012 deliveries, or is that something that could be much more meaningful that hits '12 and '13?

It could hit '12 and '13.

Okay. CapEx wise, you've talked -- you talked on the Q4 call about living within your means in terms of cash flow and cash on hand. Is that still the approach to the revised capital program, or are you giving yourself some breathing room by taking that -- taking the program down by 150?

Yes, Jeff, so there wasn't -- it wasn't -- the amount that we have reduced our deferred CapEx was not driven by that particular math, the math trying to stay within cash flow and cash on hand. But we have given ourselves a bit more breathing room on that front.

Okay, and am I correct in assuming that you're not necessarily cutting anything out of the CapEx program, you're just deferring portions into 2013?

The majority of it is deferral. So things like the European shale rig has been deferred to 2013. And so the majority of it is deferrals, of things that were -- that we didn't have obligations for contract purposes to deliver new build rigs.

Okay, and apologize if my numbers are incorrect, but I have in my notes that you said on the Q4 call you were going to add 10 coil tubing rigs this year, and it looks to me like you're going to be adding eight. Is there a reason why you've trimmed that program?

Actually--

Go ahead, Doug.

Yes, Jeff, no, our initial program was always nine, so you're right -- you're all around it. And we'll deliver eight this year and one early in 2013.

Okay. So your coil tubing build out hasn't changed. It's just timing wise?

That's correct.

Okay. Last questions. Day rates, the Q4 call you talked about expecting CAD300 to CAD500 per day of potential upside in coming quarters. How has your view changed in light of the gas price weakness and some of the cautionary comments in the release?

Yes, actually -- sorry, Rob. Let me jump in here. Actually, I think it was probably before the start of this year we were guiding toward that type of increase, but as we've gotten into 2012, we've been taking a more cautious approach and guiding -- after we reported Q4, we talked about that pricing traction we saw in Q4 holding through into 2012 and carrying on. We're not guiding forward on further increases at this point.

Okay. On the US side, I know your comments earlier about it being a very regional rig-specific market, but when you put all of that together, you're expecting a fairly flat pricing trend for the balance of 2012?

We supplied earlier flat to bias by the upwards as new rigs at high margins come in and hit the fleet.

Okay, and how concerned are you about pricing in the back half of the year on the Canadian side? I know you're having discussions now, but it sounds like customer programs are still fairly fluid. Is your bias downward or upward, in terms of day rates for the back half of the year?

Jeff, it's Gene here. Without coming out and guiding on pricing, I think generally what we're seeing from demand for our customers for the types of rigs that we have is leading to good, healthy pricing discussions.

Okay. Thanks for the color. Appreciate it.

Thank you. (Operator Instructions) Mike Urban, Deutsche Bank.

So you've had some good success in rolling out the directional drilling business and with a little bit of experience under your belts here. How has that gone relative to your expectations? I guess specifically, is it playing out the way you would have thought in terms of who you're taking share from, the pace of the growth there? I guess where have you been pleasantly surprised? What more do you need to do? I guess just a general feel for that now that you've got, again, a little experience with the business.

Mike, we're -- so the pieces moving here, first of all, we're pretty much smack on our plan for directional drilling growth. We're happy about that. Tool deliveries and things like motor reliance have been a little disappointing. I think that's kind of the theme across the directional drilling space right now. That's probably holding us back a little bit. I'm really excited about our expansion of our motor shops in the US and possibly in Canada, also. So lots of good things happening. I'm particularly pleased by the traction I'm hearing with the customers right now. We've done some initial programs early this winter with some Canadian customers and US customers around remote drilling and reduced staff drilling, and the early results have looked really encouraging. So, on track, things look good. When you're drilling down hole issues, you always have the offset back here, but nothing that's surprising us.

Got you. And have you run into any cases where there has been entrenched relationships or difficulty dislodging a customer? Or has that been less of an issue since you made the acquisition you did, I guess it was last year?

You know, hard to say less of an issue, because that entrenched relationship is a very strong driver throughout the entire space. We're coming up against that all the time. But we now have a good base of experience to put out there to customers to give them more confidence. So it's coming.

I guess same question on the people side, as you've been ramping up, have you been able to source the kind of technically competent people you need to, to match the growth that you've been able to drive?

Our guys have done a really good job of recruiting good people and getting them trained up right now. I'm really pleased with that front.

Okay. That's all for me.

Thank you. We have no further questions registered at this time. I would now like to turn the meeting back over to Mr. Ford.

Thank you all for joining us on our Q1 conference call. We look forward to talking to you next quarter.

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