Precision Drilling Corp (PDS) 2012 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Precision Drilling Corporation's second quarter 2012 results and 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 2012 second quarter earnings conference call and webcast. Participating today on the call with me are Kevin Neveu, our President and 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 second 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 views about events and their 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 materially differ from those indicated by such forward-looking information and statements. Please see our press release and other regulatory filings for more information on forward-looking statements and these risk factors.

Rob McNally will begin the call with a brief discussion of the second quarter and operating results and a financial overview. Kevin Neveu will then provide a business operations update and our outlook. Rob, over to you.

Thanks, Carey.

Precision had a very solid second quarter, notwithstanding the headwinds from lower oil prices and continued weak gas prices and a wet Spring in Canada. We reported revenues of CAD382 million, and net earnings of CAD18 million, or CAD0.06 per diluted share. Earnings per share were positively impacted by CAD0.01 by foreign exchange gain. Second quarter 2012 EBITDA was CAD97 million, which is the highest level of EBITDA the Company has ever achieved in the seasonally slow second quarter. The improved Q2 results primarily reflect stronger pricing both in Canada and the US versus the second quarter of 2011.

EBITDA margins were 25% this quarter, versus 27% in the second quarter of 2011. Margins were impacted by international startup costs, increased maintenance costs in the US, and costs associated with directional drilling in Canada. We did not generate positive EBITDA in our international business in Q2 because of the startup costs associated with mobilizing five additional rigs, but we are optimistic about the outlook for our international business in Q3 and going forward, with eight rigs currently running.

In the US, during the second quarter of 2012 drilling revenue improved by over CAD1,000 per day versus the second quarter of 2011. Year-over-year margins declined by CAD400 per day, largely driven by a wage increase in late 2011, a higher percentage of rigs working at high-cost basins like the Bakken, and higher maintenance costs. Versus the first quarter of 2012, US drilling day rates were essentially flat.

In Canada, in the second quarter of 2012, drilling revenues improved by over CAD2,000 per day year-over-year, and margins improved by almost CAD1,300 per day. Drilling days in Canada were down 5% in the second quarter of 2012 versus 2011, due to an earlier Spring breakup and wetter Spring than we had in 2011, which was somewhat offset by higher pricing.

Our completion and production segment also had a strong quarter, with revenues increasing to CAD52 million or 10% above the second quarter of 2011. EBITDA in the second quarter of 2012 improved to CAD9 million, which is a 9% increase above the second quarter of 2011. Service rig revenue per hour increased by 13% to CAD728 per hour versus Q2 of 2011, and well servicing activity was up 9% in the second quarter.

In December, we announced our 2012 capital spending plan totaling CAD1.14 billion. Due to industry conditions on our expectations for the remainder of 2012, we are reducing our capital spending to approximately CAD875 million, of which CAD443 million has been spent in the first half of the year. This reduction in capital spending is indicative of our expectation of lower-than-expected second half activity, and demonstrates our ability to adjust capital spending to market conditions. We expect our capital expenditures to consist of CAD613 million for expansion capital, CAD130 million for rig upgrades and long lead items, and CAD132 million of maintenance and infrastructure spending. We expect approximately CAD751 million of the capital to be spent in contract drilling and CAD124 million to be spent in the Completion and Production segment. The revised CapEx forecast still includes all announced and fully contracted new build drilling rigs.

Turning to the balance sheet, we are very pleased with the financial strength, stability, and flexibility that it provides. As of June 30, total debt was approximately CAD1.25 billion and net debt was 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 totaling over CAD900 million of availability.

The tax rate for the first half of the year was 18%. We expect the tax rate to be in the low 20s -- 20% to 22% for the year. As a reminder, this year we started depreciating our Tier 3 rigs that are not expected to be upgraded on a straight-line basis over four years. This increased our depreciation expense by approximately CAD8 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 that our current Tier 3 rigs will be upgraded or retired.

Our drilling fleet is currently comprised of 160 Tier 1 rigs, 131 Tier 2 rigs, and 62 Tier 3 rigs. After completing the announced new builds and upgrades, we expect to have 181 Tier 1, 136 Tier 2, and 57 Tier 3 rigs. Currently we have an average of 122 rigs committed under term contracts for the third quarter of 2012, and 113 under contract for the fourth quarter.

That concludes my comments, so I'll turn it over to Kevin.

Thank you, Rob. Good afternoon.

As Rob mentioned, despite headwinds in our core markets and flattening customer demand, Precision delivered its strongest EBITDA cash flow performance in the second quarter in our history, and, unsurprisingly, our highest revenue following the mid-2000s divestiture of the Technology Services and International Drilling groups. As we look back at the second quarter, there are some important take-aways that speak to the effectiveness of Precision's growth strategy. Resilience and continued demand for Precision's growing Tier 1 rig fleet was validated during the quarter. I'll speak more to that in a few moments. Precision's inherent ability to reduce capital spending in light of abrupt market change was demonstrated well in 2009's downturn and again in the first half of this year. Most importantly, the sustainable shifts in Precision's second quarter cash flows versus Precision's historic Q2 cash flow as a direct result of our strategic growth outside Canada.

Before I move to our regional performance update, I'm going to speak to these take-aways and help you understand how our growth initiatives are delivering results for Precision. So first of all, regarding the Q2 seasonality in Canada -- operating solely in Canada is a serious challenge for oil service companies. For Precision, our Canadian activity simply plunges between 60% and 70% from the first quarter peaks to second quarter troughs, while our cash flow reduction is even more severe. This abrupt seasonal cycle and activity drop has taught Precision's people to develop systems to deal with the rapid, abrupt changes in customer demand. Following breakup, our forward visibility often remains cloudy and subject to the vagaries of rainy Canadian Spring and Summer weather. As a result, our Canadian-based activity is often handicapped by two quarters of seasonally depressed and unpredictable activity.

With our recent and evolving, and now well-established US market presence, combined with the sustained demand for Precision's Super Series rigs and our emerging international footprint, we've achieved great strides in mitigating the seasonal Canadian plunge while retaining the flexibility and responsiveness to Canadian seasonal cycles that (inaudible) over the past decades.

Now, despite the market uncertainty and flattening overall rig activity, customer demand for Precision's new Super Series rigs remains encouraging, with an additional five new build Super Triples contracted during the second quarter. It's important to note that Precision's traditional fiscal discipline for new build rigs remains unchanged. We're not relaxing margin, contract term, or fiscal expectations to book these rigs. And to further exemplify Precision's flexibility and responsiveness, including the addition of these five new rigs, we reduced our expected 2012 spending by CAD270 million from our originally announced budget. I'm particularly pleased to have the flexibility, both financially and operationally, to ensure we seize good investment opportunities at all points of the business cycle as we continue to build on Precision's long-term strategy.

Moving to our market update, I'll begin with Canada. What began as an early and possibly shorter Spring breakup was extended by heavy rains throughout June and now into July, severely impacting our expected summer ramp-up. Throughout late May, June, and now into July, we've had anywhere from 15 to 25 rigs constantly waiting on weather or waiting on location construction. So I don't believe our second quarter activity accurately reflects total customer demand. However, let me be clear about the outlook. With WTI dropping momentarily below CAD80 during the quarter and the continued economic uncertainty, we expect our customer spending will be under close scrutiny and certainly lower than our earlier expectations.

Now currently activity levels as of this morning are at 84 rigs, up a couple from yesterday, with 8 rigs waiting on weather. This is versus about 98 rigs this time last year, which puts our activity off about 6 rigs. From a pricing perspective, spot market rates are under pressure. But you have to realize that about 80% of Precision's Q3 Canadian activity was covered by fixed pricing agreements and those prices should stay firm through the Fall, as we get into 2013 pricing negotiations.

During the quarter we delivered five new builds to the Canadian market and a further two in early July. Four of the recently announced new build rigs are for Canadian markets with deliveries scheduled for two in Q4 and two in Q1 2013.

While we remain cautious regarding further commodity price softness, I will point out that WTI price remaining stable near CAD90 will prove very constructive for activity later in the year and certainly into 2013 budget planning by our customers. For those of you who don't follow Canada as closely as some, you need to understand that, due to oil transportation constraints Canada, like the US Bakken, suffers a price discount to WTI. But it's our view that WTI prices in the range of CAD85 to CAD90 provide solid returns for Canadian customers drilling both light sweet crude and heavy oil targets.

Turning to the US. Precision's sequential rig count has [underperformed] the industry, particularly as the Marcellus has pulled back more than we expected. Our conventional drilling activity in the Gulf Coast and the Rockies is a little softer than we expected. Some of our new builds to the Bakken are replacing or displacing some of our lower tier rigs operating those areas.

Finally, some of the industry growth this year has been in regions where Precision is a relative newcomer, such as Kansas, Oklahoma, and West Texas. Now that said, we have several rigs mobilizing to Kansas from the Marcellus. We believe that our Super Singles rig will prove to be a winner as the Mississippian Lime Play matures and evolves to a long-term development drilling play. I am also pleased with our position in West Texas as we have over 20 rigs operating in the Permian Basin. Looking forward, we expect modest utilization improvements due to our new build deployments and redeployment of some of our idle rigs to Kansas and West Texas. For the quarter we delivered three new builds to the Bakken and since delivered a further two new builds, one to the Bakken, one to the Eagle Ford.

In the US, while we expect to see pressure on day rates and particularly for lower tier rigs, you should expect that Precision will resist the urge to prop up our utilization by aggressively cutting day rates. As always, we remain focused on maximizing long-term cash flow margin while putting less emphasis on short-term utilization. We are confident, with the combination of rig performance and contract coverage for our Tier 1 fleet, we'll continue to sustain strong day rates and margins for the balance of the year.

Our international operations are starting to hit stride in the third quarter. I am personally thrilled to have eight rigs running by mid-year, as I previously suggested aspirations of eight rigs by year-end. As Rob discussed earlier, through the startup costs this business did not generate any EBITDA during the second quarter. However, most of the startup and commissioning issues are behind us, and the latter half of the year we expect to deliver results as planned. I'm surprised by international customer interest and the strong bid activity we're experiencing. You should expect further developments from Precision in this important growth initiative. However, as we've said in the past, international growth will proceed at a measured rate as we prudently grow this presence and as in other areas we'll focus on cash flow and margin growth, not utilization.

Now turning to our directional drilling business for a moment -- I think Canada in general is in for a bumpy period, which could in fact turn out very good for Precision over the long haul. A large portion of the Canadian directional activity is executed by small independent directional drilling contractors, who often demonstrate little pricing discipline in down cycles, but generally have higher tool costs than the larger players. While this creates short-term pricing pressure, expect our low cost integrated model to be a sustainable solution for our customers over the longer haul.

In the US, our directional activity was strong for the quarter with West Texas being a particular bright spot for us. We expect to open our Midland motor repair facility later this quarter, and should optimize our repair costs and reduce our freight cost on those tools in that sector. Directional drilling, integrated drilling, remains a key growth initiative for Precision. Although softening market conditions dictate lower growth expectations than we [communicated] earlier this year, it's a key focus for us going forward.

Now, as Rob mentioned earlier, despite a wet Spring our Completions and Productions business actually showed increased activity when compared to 2011. This was driven by our US deployment of [stubbing] service equipment, our well service rigs being deployed to the United States, Canadian coil tubing [rig] deployments, and then locally drier weather than last year's flood conditions in the (inaudible) Bakken.

Pricing is up over last year but labor costs remain a concern for this business unit. Looking forward, pricing will be very sensitive to commodity prices but our customers understand the cost pressures we face and have been cooperative in this regard. I remain optimistic that the positive momentum of this business will continue in the stable oil price environment. Later this year, we'll deploy an additional (inaudible) coil tubing [unit] in Canada and two more to the US. We remain very encouraged by the potential for that product line.

As we think about the outlook for Precision, there are some macro issues worthy of consideration. First of all, the US gas rig count continues to whittle itself down, even as gas prices have somewhat stabilized. I'm sure we can all agree that current gas and gas liquids drilling appears to be under-supplying a rising gas demand. However, it will take several quarters to work off the severe gas storage glut. Long term we expect to see more rigs drilling for gas than are today, yet short term we expect continued easing of gas activity. More importantly, Precision has carefully monitored the remarkable growth in unconventional oil activity.

Now, we were not surprised that a momentary oil price dip below CAD80 at WTI halted the growth profile. However, with oil prices seemingly resilient despite persistent European debt concerns and global uncertainty, our customers are still benefiting with strong cash flows, excellent returns, and business outlook remains encouraging, with prices hovering closer to CAD90. Demand for high performance, high value service continues. We remain poised to seize opportunities for long-term growth while maintaining the capability to immediately dial back operations and investments in the event short-term concerns lead to meaningful pullback.

It remains our view that Precision's high performance, high value services provide the safety, the predictability, the consistency, and cost-efficiency our customers seek to exploit resource opportunities globally.

Before I conclude, I'll take a moment to thank the employees of Precision once again for their hard work, their dedication, the results, and their impressive focus on safety. On that note, I'll turn the call back to the operator for questions.

Thank you. We will now take questions from the telephone lines. (Operator Instructions). There will be a brief pause while participants register and we thank you for your patience.

The first question is from John Tasdemir of Canaccord Genuity. Please go ahead.

Hi, good afternoon, guys. I guess I just had a couple questions. A couple of cross currents in the US. You said that you do expect some modest utilization improvement as some of those rigs get redeployed from the Marcellus, but also said that spot rates are coming down a bit. How should we think about margins progression from second to third quarter? Same? Get better? Help me out.

Hey, John, this is Rob. I think you really have to think about it in terms of the tier of rigs and where they are. I think that the Tier 1 rigs are going to hold up better than others, although there may still be some pressure but the Tier 2 and Tier 3 rigs is where we would expect to have the greatest pressure. And then I think it's going to also vary by basin. My overall sense is it's going to be flat to downish for blended margins and not likely that we're going to see it move up.

Okay. And ultimately that persists until the activity starts to pick up and utilization across the board for drilling activity improves?

Yes, John, I think that's a safe assumption. I'll tell you that every customer call we make these days, with conventional oil price hitting below CAD80. So it's a great opportunity for the customers to work harder, leveraging down prices, and Precision will maintain discipline and focus on our margins, focus on our margins returns, with less emphasis on utilization.

Okay. I think one of your competitors said they were saying 10%-ish drops on spot pricing on the Tier 1s and maybe 15% on the lower end. Is that consistent? Is there a difference between Canada and the US?

John, I think it does become quite regional.

Okay.

I think you can expect pretty firm markets in places like Bakken and West Texas, a little more softness in Eagle Ford [with liquids prices.] Certainly, anything that's remotely gassy will be under a little more pressure. Spot markets in Canada that are un-contracted, gave some guidance on that. We've got a pretty good lock on Canadian prices through the third quarter right now. All short of giving you clear guidance on what the drops are going to be. But I do think our Tier 1 rigs will hold up quite well.

Okay. And then I guess just one other question and I'll turn it to someone else. Would you remind me on the international, the eight rigs working internationally, when they show up in your results are they counted in the US operating days and operating cost per day? Or is that other?

It falls into the other category, John.

Perfect. That's all I had.

Thanks, John.

Thank you. The next question is from Jeff Spittel of Global Hunter Securities. Please go ahead.

Thanks. Good afternoon, guys.

Hi, Jeff.

I wanted to ask a little about your repricing exposure as contracts are set to expire. Are there any particular areas, given the different dynamics regionally, where you have a disproportionate concentration of rigs that are set to expire in either a basin, where things are holding up a little better, or an area where things are a little weaker?

Jeff, good question. I think we've come through the quarter where our Marcellus rigs were mainly set to roll off. Then we're pretty well balanced around the US and Canada right now, fairly equally balanced among all the areas.

Good to hear. And then switching over to the new build, too. Could you maybe give us a little refresher on the progression of what's left to deliver and the disposition between Canada and US the next few quarters?

So far year-to-date we've delivered 11 out of 20 of the rigs that are going to Canada and we've delivered -- I'll just make sure I have the number right -- 8 out of 15 that are going to the US and then we'll have 2 additional rigs delivered early 2013 in Canada and 1 in the US.

Great. Thanks, guys. Appreciate it. Nice quarter.

Thanks.

Thank you. The next question's from John Daniel of Simmons. Please go ahead.

Hi, guys. Just wondered if I could get some color on the components of the sequential US cash margin decline. Were there any one-off increases for things like workers' comp or the like?

No, John. It's a combination of things. It was the increase in wages that went through at the end of last year. You have a higher percentage of our rigs now working in higher cost basins like the Bakken and then it's more extended reach horizontal drilling that drives up cost. It's harder on the equipment than some of the simpler wells. So it's nothing that I would characterize as a one-time item that's going to come out the next quarter.

Okay. And then although you've not given financial guidance in the past, the last couple quarters as you talked about your CapEx you would make the comments, generally speaking, that the CapEx spend wouldn't be significantly higher than cash flow in terms of (inaudible) significantly. Now that CapEx is dialed back to CAD875 million, same logic holds, I presume?

Yes, John. I mean, we're conscious of trying to keep CapEx within a reasonable distance of what we think cash flow or EBITDA will be.

Okay. And then just the last one from me. Housekeeping, more than anything. You provided the contract coverage for all of the rigs for the next three quarters. Can you share with us the breakdown between the Canada, US, and international?

Carey's just taking it out right now.

And that's it from me.

I'll go through all of them, repeat what Rob said. In Q3 2012, we'll have a total of 122 rigs, 66 in the US, 48 in Canada, and then 8 internationally. In Q4, it's 113 total, 57 in the US, 48 in Canada, and 8 internationally. And then full year for 2012 will be 129 total, 70 US, 54 Canada, and 5 internationally.

Booked at this point.

Booked at this point. And then for full year 2013, it's 84 total, 31 US, 45 in Canada and 8 internationally.

All right. Thanks a lot, guys.

Okay, small point here. We still see customers renewing contracts, renewing those contracts on terms. So we're not expecting that contract to fall off at that rate.

Right. That's fair.

Thank you.

Thanks.

Thank you. The next question's from Dan MacDonald of RBC Capital Markets. Please go ahead.

Good afternoon, guys. I've got Kurt here with me as well. Just wondering when we look at the new build schedule here and the upgrades, what portion of those you think might be at risk to displace some of your existing equipment, as you've alluded to, has been seen in the Bakken versus likely or your expectations to be incremental to your rig count here in the back half of the year?

Dan, [I'm sure there's] a comment my prepared comments around we expect modest increase in utilization. I'd be surprised if we see a lot more attritions of the current fleet. So I think most of the new builds should go to the market to add on to what's going on now. Now, let me qualify that. If we see further pricing softness, I'm wrong.

I think if we're in an CAD80 or sub-CAD80 oil world then I think it's likely that we see the existing rig fleet, the utilization, continue to deteriorate some. If pricing is more robust, then I think Kevin's comment is right, that we're likely to seen the attrition that we're going to on our current rig fleet.

But I am really quite certain that we're not very good at forecasting forward energy prices. We were quite good at responding to them.

You and us both. Just looking at the new build market given with four of the five that you just announced being in Canada versus the US, can we read through that the appetite perhaps for contracted new builds is a little bit healthier up here in Canada? Or was it just a matter of customer mix and it's more or less equal on both sides?

Dan, good question. It might just be timing more than anything. If you're in Canada, you want a rig for winter 2013, you've got to order it right now. We're at the point in time when it's really important to get orders in from Canada so you can have rigs for next winter. That's may be the issue there. We have an inquiry list for customers discussing new builds and I've always given that information in the past. You'll notice I didn't give it out today. But I'll give it right now. We still have a bunch of customers, I think it's 10 or 12 customers looking at somewhere like 25 new builds.

Now, my expectation is probably none of those get booked in the third quarter. But maybe some of those conversions to upgrades or things like that. The discussion on new builds has not gone to zero. Large customers are looking at long-term plans, are still intending to use Tier 1 rigs. If they can't get them on the open market, they will build them.

Great. That's all I've got. Thanks, guys.

Thanks, Dan.

Thank you. The next question is from Dana Benner of AltaCorp Capital. Please go ahead.

Good afternoon, guys.

Hi, Dana.

Perhaps I missed it but with respect to the five new builds that have been added to the tally, can you give us a sense as to when those ultimately will hit the field and is there any portion of the CAD875 million that -- I would imagine there's some long lead time items, et cetera, but is that mostly an '13 spend?

Dana, this is Carey. We expect two of those rigs to be delivered in the back half of 2012 and the remaining three to be delivered in the first part of 2013. And the cost associated with that are split about the same way, with the majority of the new build cost for the three rigs that are delivering -- the two rigs that are delivering in 2012 will be captured in the CAD875 million and there will be carry-over cost to complete those additional three rigs in 2013.

Actually I think, Dana, the number's about CAD40 million or CAD45 million that's going to carry over into 2013 to finish those rigs.

Great. One of the interesting stats you've given on prior calls is you've talked about the counter-party risk or lack thereof with respect to the E&P client signing these contracts up. And I seem to recall CAD25 billion market cap was the average counter-party market cap. In any case, does that number change materially with these five new builds? Or are the clients who are signing these up still very much in that vein?

Well, the first part of the answer is with the oil price pullback, the market caps have shrunken a little bit. But go ahead.

This wouldn't move the needle on that, on the size of our average customer signing new builds.

These are right in the sweet spot.

Right. So no material change?

No.

Moving to your service rig business, I guess in one sense a very pleasant surprise given the weather, but there may be some broader structural trends emerging with respect to the move to oil versus gas wells. Maybe you can address whether you think that this was simply -- or whether it was more a case of where the rigs were, in relation to bad weather or in fact this is part of the emergence of that structural trend of the move to oil, and what it implies for the strength of your service rig business, as part of the corporate whole?

Dana, you've got Doug smiling here so I'll let him answer the question.

I think it's real good indicator -- it's early -- but a real good indicator of underlying strength in the production work. Yes, we had good weather in southern Saskatchewan that enabled it but it really, the quarter represented a shift where we had reduction in abandonments, completions and a nice increase in production work, consistent with the number of oil wells that are coming online continuously. So, a good development.

That's great. And then just finally, you've teased us a little bit more with respect to your international business, obviously good progress moving to the eight. Should we conclude that it's more likely that we would see growth in current international areas? Or could it just as likely be a move to perhaps a third country?

Dana, at this point we'll be focusing in the areas we're currently in and try to build out larger bases. I'm really pleased with where Mexico's gone. We'd love to see our Middle Eastern, Arabian Gulf footprint extend. But remember that even if I sign a contract tomorrow, it's six months to a year before rigs get deployed, just depending on the spec of the scope. This will be a small growth story for us but very nice business. We're not out chasing rapid growth. We're not out chasing what we call low margin, high utilization type jobs.

That sounds great. Thank you.

Thank you. The next question is from John Lawrence of Tudor Pickering Holt. Please go ahead.

Good afternoon, guys.

Good afternoon, John.

Kevin, maybe a bigger picture question for you. On outlook for the US gas rig count, does it feel like we've seen the worst so far? Or do you think there's another leg down?

Well, it's been pretty down so far but my sense is it'll just keep on whittling itself down a little further. I'm a little surprised (inaudible) the end of June. But I think we're close to the bottom.

Okay. Good. And then on the Tier 1 assets that are rolling off contract in the back half of the year, would you expect all those to find work or could some of those potentially go idle?

I think it's really sensitive to commodity price. If prices are staying closer to CAD90, I expect all those to go back to work. If we see another dip down into the CAD70s -- we all know what the risk of that is -- then some of those rigs go idle.

Sure, but you'd say in the current environment, most of them find work?

Those are very good rigs. They're doing a good job for our customers. Most of those are on long-term drilling plans. I think they'll do just fine.

Great. Just the last one. Any customers trying to back out of contracts for Tier 1 assets?

No.

Okay. Good to hear.

That's an early indicator you always watch for. Last time in 2009, we didn't actually have any back-outs. We kept all of our rigs going. I think we had one early buyout in '09. What they do often is, if they're a little tight the way to break down is to pay to standby for the rig, the margin standby. No indications of that. In fact, the rigs we have in our yards, the customers (inaudible) to location.

Great. Good to hear. Thanks for taking my questions, guys.

Thanks, John.

Thank you. The next question's from Scott Treadwell of TD Securities. Please go ahead.

Thanks. Good afternoon, guys. Just a couple of maybe housekeeping questions. When I think about the rig fleet and the potential as you've talked about the spot prices continue to weaken, is it fair to say that the legacy contracts you've got today that may be one, two, or three years old were probably signed at rates that are below where the spot price is today, or has been for the last six months? And then even if these things roll over the next 18 months, it's going to take a while for the impact of that to be felt on the Tier 1 day rate? Is that a fair broad assumption?

Scott, you're kind of right. There's always lag time between spot markets and contracts lining themselves back up again. If we're early into a long-term soft period, it will take a while to wash itself through. But I wouldn't model in stable day rates Q3, Q4, Q1 in a softening environment.

Okay. No, that's what we've got.

The other thing, on the G&A side, I know you mentioned in the release that there was a reduction in stock-based compensation. It looked like the corporate EBITDA or G&A contribution was a CAD5 million drop. Was that all due the stock-based comp or was there some sort of structural savings that we should be thinking about going forward?

The majority of that was based on the stock-based comp.

Scott, we hope that number reverses itself in Q3.

Yes.

Good for investors.

Okay. Perfect. Last one. The rigs that you've talked about having been displaced or seeing some noise in the Bakken, those are all spot rigs? Or are those contracted rigs, the customer's waiting for a new location or a new play to get them back to work and so you've got really strong visibility? Are they spot rigs and you're just marketing them as we speak?

The majority of those are on the spot market now. We're looking for work for them in the Bakken and other places. They're typically Tier 2, good Tier 2 rigs, that have been replaced by new Tier 1 assets and so we'll find a home for those eventually because they are good rigs.

Okay. And on the CapEx reduction side, you talked about the lowering in terms of long lead items. Fair to say that with low appetite for new builds, the lead time for some of these large capital items is probably going to be shorter going forward than it is looking back?

A little bit. But actually the rig build side of the business right now, whether it's Precision or the suppliers, is actually still quite backlogged. They're quite busy. Other service lines like coil tubing and things like that, it might be slowing down a little more. But things like top [drives and mud pumps] are still quite busy. As we get later in the year and our current program winds down, the industry winds down a little bit, those lead times will shorten a little.

Okay. That's great, guys. That's all I've got. Thanks for the color.

Thanks, Scott.

Thank you. The next question is from Tom Curran of Wells Fargo. Please go ahead.

Good afternoon, guys.

Hi, Tom.

Kevin, how would you currently define Tier 1 in Canada, and based on that definition, what do you estimate is the total industry-wide fleet?

We (inaudible) definitions. Our Tier 1 rigs are the rigs that are designed for horizontal drilling with the control systems, top drives and [mud] pumps, to be highly efficient to drill a horizontal wells but they also have extremely high mobility, meaning they can relocate, break down, break up and relocate, typically in hours in Canada.

I'd tell you that in Canada a much larger component of the Canadian fleet is Tier 1. Many of our peers, fast moving rigs that drill horizontal wells, we do. It's almost a result of the short winter season that requires so many wells to be drilled in such a short period of time. I feel pretty good about the Canadian fleet being well suited for its (inaudible) generally than US drilling, but fast moving, deployable. It's interesting that over the last 18 months, I haven't run the numbers this quarter but I did in Q1. I think we booked 55% of the new builds in Canada over a 12-month period. And our Super Singles rig is so well suited for Canada that -- Carey, can you refresh me our rig count in Canada for Super Singles? He'll check that while I'm finishing out my comment here.

66.

66 rigs. In that category, we have a very strong position on market share.

Would you estimate it's roughly in line with what your win rate has been for new builds?

Probably a little less than that. Our win rate on new builds, probably out steps our share of Tier 1 rigs because we've been so successful with that Super Single. But the last four rigs through Canada were all Super Triples so we're not a one-horse show here.

Right. That's helpful. Thanks for the overview.

Rob, please remind us, when it comes to your standby rates, how do those work and what's the range? And then in Canada, how much flexibility do you have on labor-related costs between now and when you would renegotiate wages with the unions? And when is that next renegotiation period?

[It's Doug.] I'll answer the question backward, Tom. There [aren't] unions that we're dealing with in Canada and the wage rates are recommended by the CAODC and that happens in the fall each year. I think it's in October. So that will be the next time that we look at wage rates and that will move coupled with what's happening in the market, both in the labor market as well as for rigs. That won't be addressed until the fall. Sorry, what was the first part of the question? Standby rates, sorry. It speculates the margin. So if we're going to set the rate down, they'll pay us the margin and the costs essentially go away.

But it is 100% of the margin expected in a contract at full utilization?

That's correct.

Okay. And then last one for me. Could you please give us an update on how your growth expectations for the directional drilling business over the balance of 2012 has changed, if at all, as a result of the second cut to your CapEx budget?

Tom, we've pulled that down to reflect the market conditions and also to show that we can be flexible on our capital spending. It's a couple of important strategic moves for us. Carey, remind me, we began the year at about 70 [kips].

It was a little shy of 70. Now we're at 81.

81 now. We'll likely finish the year out below 100 kips.

Great. Thanks.

Tom, I just want to have one clarifying point. In Canada, our Tier 1 rig fleet is just shy of 90 rigs. I think we're at 87 rigs today.

Including Tier 1 and Super Singles.

Right. The Super Singles would be in the low 70s. High 60s, low 70s.

So, the total industry's probably at somewhere between 180 and 200?

I'll have to go back and look but that's not a bad estimate.

Using round numbers, 200's probably a good number.

Terrific. Thanks for all the detailed assistance, guys.

Thanks, Tom.

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

Hi, guys. In your commentary you were talking about you have decent visibility into Q3 in terms of pricing. Can you share with us what that is in Canada?

Kevin, I think the pricing we established last fall will carry us through this fall. Unless there were a dramatic reduction in the oil price, and I mean a real collapsing, I think our pricing on our contract stays firm through the October renegotiation. You may recall that in the past, I generally think the activity and demand in Q3 is a good proxy for Q1 following winter. So that will help us understand what pricing looks like in October. So if we see the price stay strong around CAD1 million in activity, likely picks up a little bit and we have a pretty good summer, that's a good proxy for the winter which would forecast a strong winter, all driven by commodity prices. In that environment, you might see labor rates go up a little bit and day rates go up a little bit.

Okay.

You're not going to bet on that but certainly bet on continued muddling along, what we see right now, and likely flat labor increases in October and likely flat day rate increases.

Okay.

If you're modeling a (inaudible) oil, bets are off.

Right. In terms of your day rates and expenses in the US, how much of that was attributed to R&M versus pricing or other cost issues?

Depending on if you look at it sequentially, from Q1 to Q2, the majority of that is R&M. If you look at it year over year, where it's a bigger increase, then you have half or a little more is due to the wage increase that came through at the end of 2011.

In terms of utilization for the rigs in the Marcellus, and looking to deploy (inaudible) plus some those rigs, how many of those rigs do you think you can deploy in the next few months here?

I think it will be a handful. What's our current rig count in the Marcellus?

Seven.

Seven rigs? And we've got a couple of rigs that are being deployed right now. I think it's going to stay single digits, Kevin. I think we might be (inaudible) reaching the trough in the Marcellus. It remains one of the lower cost basins in the US. For our customers, that is.

I apologize if you guys answered this already because I was trying to scribble it down. How many of your rigs you're building right now are not contracted?

Zero.

So, all the rigs that you're building right now will have contracts by the end of it?

Yes. We have been very consistent in not building any rigs on spec. So there's zero rigs that are un-contracted.

Okay.

We did have earlier those long lead time programs that are now closed down and we did have a potential European spec rig. That's out of the budget. As far as our current build program, our current capital budget, everything is contracted.

Okay. So, in your commentary in your MD&A when you're talking about you do still see new contracts available, so any of that you would have to increase your capital program yet again?

I don't think any additions that we make -- if we book five more rigs in Q3 for example -- it's not impossible but I don't think it'll happen. If that were to happen, that's likely 2013 capital, not 2012 capital.

Okay. That's great. Thanks for that, guys.

Okay. Thanks, Kevin.

Thank you. (Operator Instructions). The next question is from Dave Wilson of Howard Weil. Please go ahead.

Good afternoon, guys. Just wanted to follow up on the international and the eight rigs working there. With the startup costs behind you, can you share what level of EBITDA you expect to be generating from the international business?

I wont give you specific numbers. But these are all good-sized rigs. Think of them like 1500-horsepower North American rigs or a little more than that.

Okay. And I know you mentioned it earlier but is it still too early to talk anything concrete about adding more rigs to either of those areas?

Well, we commented earlier we're seeing a very strong customer inquiry interest right now. We're bidding a lot of things out. We're going to focus on building out on our current bases in Dubai and in Mexico, unless something else came along that was a serious concentration of activity that would give us a third leg. But expect to see some growth in areas we're in right now.

Okay.

But Dave, it's going to be slow going because even if we found something in four weeks' time, likely it's months and months before the rigs are deployed and start up.

Right. Got you. One final one. Maybe this one's for Doug. I know last quarter you guys mentioned some pricing traction on the Completion and Production service side of things and then today mentioned some cost pressure as well. As we move forward, how should we think about margins in this business?

I think that will tie in with Kevin's and Rob's comments on commodity prices. Oil at CAD80 plus, I think we're in a good, stable environment and we've shown some nice year over year increases, partly rig mix, but there's a layer of profitability there that frankly reimburses us for a lot of the reinvestment that's come back into the fleet. So we're encouraged to keep the current pricing platform as it is but we'll see how commodity prices evolve.

Okay. That's it, guys. Thanks for taking my questions.

Great. Thanks, Dave.

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

I'd like to thank everybody for joining us today. That concludes our second quarter 2012 conference call.

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