Precision Drilling Corp (PDS) 2012 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Precision Drilling Corporation's third 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.

Thank you, Melanie. Good afternoon, everyone. I'd also like to welcome you to Precision Drilling Corporation's 2012 third-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 news release earlier today Precision Drilling Corp reported on the 2012 third-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 the 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.

Robert McNally will begin the call with a brief discussion of third quarter and operating results and a financial overview. Kevin Neveu will then provide a business operations update and our outlook. Rob, I'll hand it over to you.

Thanks, Carey. During the third quarter we, along with the rest of the North American oil service industry, fought the headwinds of weak natural gas prices and NGL prices and volatile oil prices which caused continued softening in the North American drilling activity. Despite the challenging environment, we reported revenues of CAD485 million and net earnings of CAD39 million or CAD0.14 per diluted share. Earnings per share were negatively impacted by CAD0.01 by foreign exchange loss. Third-quarter 2012 EBITDA was CAD151 million, which is 19% lower than the third quarter of 2011. The lower Q3 results primarily reflect constrained activity and higher cost both in Canada and the United States, versus the third quarter of 2011, partially offset by higher average day rates. EBITDA margins were 31% this quarter, versus 38% in the third quarter of 2011. Margins were impacted by lower activity levels, international startup costs and increased maintenance and crew costs in the United States.

In the US during the third quarter of 2012, drilling revenue improved by over CAD2000 per day versus the third quarter of 2011. Year-over-year margins declined by approximately CAD250 per day, largely driven by wage increases in late 2011, a higher percentage of rigs working in high-cost basins, crew costs associated with stacking rigs and higher maintenance costs. Versus the third quarter of 2011, US rig utilization days were down 15%. Turning to Canada, in the quarter drilling revenues improved by over CAD2400 per day, year-over-year and margins improved by over CAD1500 per day. Drilling days in Canada were down 26% in the third quarter versus 2011, due to lower industry activity primarily driven by low natural gas prices and volatile oil prices. Our completion and production segment revenues were CAD78 million or 7% below the third quarter of 2011, largely driven by a 15% decline in activity, partially offset by an 8% increase in revenue per hour. EBITDA in the third quarter 2012 was CAD23 million which is 17% below the third quarter of 2011, well service activity in the third quarter was almost entirely oil driven with 98% of well service hours on oil wells.

In December we announced our 2012 capital spending plan totaling CAD1.14 billion. Due to industry conditions, our expectations for the remainder of 2012 we have continued to adjust our capital spending which is now expected to come in at CAD921 million for the year of which CAD681 has been spent in the first three quarters of the year. The increase of roughly CAD45 million since our second-quarter conference call is primarily due to two new contracted service rigs and additional rig upgrades. We expect our capital expenditures to consist of CAD631 million for expansion capital, CAD151 million for rig upgrades and long lead items, and CAD139 million of maintenance and infrastructure spending. We expect approximately CAD802 million of the capital to be spent in the contract drilling group and CAD119 million to be spent in the completion of 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 September 30, 2012, total debt was approximately CAD1.2 billion, and net debt was approximately CAD980 million. Our blended interest rate is just over 6.5%, and our earliest debt maturity is in 2019. As we have previously announced, during the third quarter we renewed our senior secured revolving credit facility increasing the amount available under the facility to CAD850 million and extended the maturity date to November of 2017. The facility is currently undrawn. We've also increased our operating facilities from CAD40 million to CAD80 million primarily for international operations. Precision's liquidity is more than adequate with cash, operating facilities, and our undrawn revolving credit facility together totaling over CAD1 billion of availability. Our tax rate for the three quarters -- over the first three quarters of the year is about 18%, and we expect that rate to be in a pretty 18% to 20% range for the remainder of the year.

As a reminder, this year we started depreciating our tier three rigs that are not expected to be upgraded on a straight-line basis over four years. This increased our depreciation expense by approximately CAD6 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 one and tier two rigs, that are capable of reliably and efficiently drilling horizontal wells. Our expectation is that, in a little over three years time, we will have a fleet entirely comprised of tier one and tier two rigs and that our current tier three rigs will either be upgraded or retired. Our drilling fleet is currently comprised of 171 tier one rigs, which has grown from 109 tier one rigs at the beginning of 2010. We have an average of 119 rigs committed under term contracts for the first -- fourth quarter of 2012, and 100 rigs under contract for the first quarter of 2013.

With that, I'll turn it over to Kevin for further discussion of the business.

Thank you, Rob. Good afternoon. As I believe it's been well measured and should be well understood, customer demand for our services ebbed as our customers have drilled deep into the 2012 budgets. Any spending additions that might have been anticipated failed to materialize as global economic concerns, political issues, oil transportation bottlenecks, all caused our customers hesitate when it came to increasing 2012 spending. Nonetheless, during the third quarter, the performance of Precision's tier one rigs was exemplary as we delivered 11 new build rigs to the market, several of these with newly developed customers. Precision's -- Precision has not experienced any customer early terminations and just two of the rigs in our North Americans fleet are currently idle but contracted earning full standby rates. Our customers appreciated the value we provide, and they prefer to hold these rigs for longer-term access despite their short-term budget concerns. I think this is a good time for me to recap Precision's pricing strategy, particularly our strategy in periods of softening demand and particularly on our tier one rigs.

During these periods of demand reduction, competitive pricing pressure intensifies, and more than ever Precision's pricing discipline is a paramount element of our strategy. We know that Precision creates economic value for customers that well exceed the price we charge. This value is realized in the efficiency gains we consistently deliver, the environmental responsibility we provide, and the safety we ensure for our customers. Our evidence is that, over the past two years, Precision has contracted new build rigs at a rate roughly twice our current market share book in Canada and the United States. And we continue to see customer demands for upgrades to tier two and tier one rigs up to tier one capability. And while at times it may be tempting Precision, we are reluctant to support or drive-up utilization by lowering price on our tier one assets. Even in the case where an idle but contracted rig has full margin coverage by the original counter-party, we're reluctant to drop pricing to generate higher utilization.

The result is that during these periods of softening demand we don't panic. We don't under price our tier one rigs, and we don't drive day rates down. We believe Precision's superior value demands a premium price in the market. And, most importantly, we know that when the cycle turns and customer demand strengthens, lifting our price from a higher base delivers far better full cycle returns to Precision and our investors.

Now the second key point I want to draw your attention to is the profound transformation of Precision over the last few years. Five years ago, Precision was principally a Canadian gas driller. Four years ago, we were working hard to finance a Gray Wolf acquisition in the middle of a dire financial and banking crisis. Three years ago we emerged with the challenge to refinance and solidify the Company in a deep trough following the severe activity collapse of 2008-2009, and while many questioned our survival, we emerged from that period with customer relationships intact and disciplined pricing strategies in place with the rigs and people well-positioned for the rebounding market of 2010. Over the past two years we have delivered on our high-performance promise while transforming our North American platform from 109 tier one rigs, as Rob mentioned, two years ago, to over 180 tier one rigs by the end of our current build program early next year. We've driven this transmission without spec building rigs but adding 61 new tier one rigs and upgrading lower spec rigs to tier one capacity all supported with firm customer contract protecting these investments. And all of these at tier one pricing levels.

Today Precision has the high-performing asset base, the for North American market breadth, the customer mix, the contracted rig fleet, the high-performance reputation and of course the balance sheet strength to thrive through a down cycle. Whether that's down cycle is a budget driven slowdown or a more serious fundamentals driven slowdown, whether these slowdowns or short-term or protected periods, Precision is well-positioned for these downturns and troughs and of course inevitable rebound in customer demand. Now, turning to our regional update, let me start with Canada. The seasonal recovery that we expected in the third quarter was less than expected for all of our service lines. For our drilling, well servicing, rentals, the demand was driven by customer fiscal discipline and restraint. We expect this trend to continue through the fourth quarter with little possibility of 2013 capital being pulled forward to cause an early ramp-up for winter. So our expectation is that the ramp-up will not begin until early January and push on into mid-January as would be more typical. Currently we have 95 rigs active with 6 or 7 waiting on weather, well below our earlier expectations.

Winter 2013 looks good as new customers budgets -- as customers new budgets kick in. However, we're expecting some softness relative to last couple of years particularly in the heavy oil strait market. And while this market segment is important relative to the long-term heavy oil activity, it's far less relevant to conventional light oil and gas liquids activity which principally drives Precision's Canadian revenue. We're remaining encouraged by the continued customer interest in tier upgrades and pad moving systems and the favorable financial terms we are able to achieve on these upgrades. This customer demand is positive indicator for long-term sustainability of the Western Canadian sedimentary basin despite the near term uneasiness in the region. Our completions of productions group deployed two additional coil tubing units of bringing our Canadian fleet up to three units. All of these units have been well accepted by our customers. We expect to deploy one more unit in the fourth quarter and two more in the first half of 2013. We also deployed two coil tubing units to the US, and we expect to begin running those units late this quarter and into early 2013 with one more planned early next year.

We will deploy the first of several ring type fluid containment tanks during the fourth quarter addressing the large capacity water storage market. Also, our conventional well service and completions activity, like drilling, is being severely handicapped by the similar customer budgetary concerns. But during the quarter we did contract to our newly introduced rack and pinion cylindrical service rates. And interestingly these two service rigs are a long-term take-or-pay contracts, and I think as all of you know, these take-or-pay contracts are unusual for this business segment but does speak to the long-term confidence our customers are placing in Precision. Currently, well service activity stands at 90 rigs with 15 waiting on weather, following the early arrival of the winter in southern Alberta with several inches of snow blanketing southern Alberta and Saskatchewan.

In the US we remain encouraged by the continued high utilization of our newly deployed tier one assets across most regions. We have experienced more weakness than we expect in the Marcellus. However, we believe the Marcellus will be the first to rebound as the gas market re-balances. Softening demand for gas liquids in the South has also pulled down Precision's utilization. However, I believe we are stable for the balance of 2012, with an expectation that activity will pick up when customers begin to execute on their 2013 budgets. In the US Balkan we have experienced some tier two rigs displacement as our tier one rigs have entered this market, and the total rig count has at least for now plateaued. This region is a little bit more difficult to read as it is extremely sensitive to oil transportation differentials, while we expect the commencement of 2013 budgets should stabilize customer demand.

The emerging regions including the Niobrara in Colorado, the Mississippi and Lime in Kansas and Oklahoma, and, of course, the Permian basin in West Texas are still in the early stages of unconventional resource development. As these fields continue to evolve from delineation and exploration drilling to multiple wells and pad type horizontal drilling, the demand should improve for our tier one and tier two rigs in these regions. Our current US rig count stands at about 90 rigs.

Moving to international activities, exiting the third quarter all five precision rigs in Mexico are running efficiently, satisfying our customers and generating the financial returns we expect. Our Saudi operations however continued to experience growth and startup pains during the third quarter, failing to meet our expeditions. I believe we are ramping up the performance in our operation support services to fully implement the Precision model in Saudi Arabia as we exited the third quarter. We are hopeful to see much better performance moving forward. Our opportunity set for additional international deployments has grown during the quarter. We continue to see additional opportunities for contracts over the near term, but as always caution you that our international expansion is a marathon, not a sprint. And, as such, a meaningful impact will take some time to be realized. We carefully -- or continue carefully -- to carefully select the opportunities where our skills and strengths will create the best value for Precision, our investors and our customers.

Our directional business continues to gain ground in what was also a highly challenged North American price-sensitive market. Today we have 41 jobs running. Our third-quarter activity delivered revenue in excess of CAD33 million. But again, this is also a long slow process to build customer confidence in Precision's integrated model. We need to repeatedly deliver reliability, and demonstrate the cost savings we're professing. We are succeeding on a job by job basis, and we know this business model will prevail in the new world of mass production style resource drilling. Now, lately we've received a significant amount of investor interest in, even concern, about the impact of rig efficiency as a consequential risk of total reduced total rig demand. What has been demonstrated in shale gas is that improved rig efficiency leads to fewer rigs needed to supply the market with produced gas. And this is exasperated in natural gas by the closed nature of the natural gas market in North America. Oil is a different matter. Drilling efficiency has significantly increased US oil production and likely will continue to increase production. However, the US still imports millions of barrels per day.

In most, if not all of the North American regions, light oil F&D costs allow economic returns at WTI prices well below CAD70 a barrel. In our view, the runway for continued growth in oil -- North American oil drilling is long and those companies that drive the efficiency gains will be the winners. Now, I think it's really important to remind you that Precision drilling was the first adopter of high-performance drilling and driving step change efficiency improvements through rig design. The introduction of our first Canadian front rig in 1989 followed by our first super single introduced in 1992 was a decade before any other drilling contractor introduced or branded a high-performance drilling rig. From the start, the very beginning of our super series rigs we've been designed specifically for increased efficiency, reduced mobilization times, safety and environmental responsibility.

Today, Precision remains at the leading edge of rig performance, with our super single and our super triples rig still leading efficiency, safety and environmental stewardship. And Precision's strategic investments in directional drilling is the next step in this drive for efficiency and cost savings for our customers. We deeply understand the high-performance market, rig efficiencies, the implications, the risks, the rewards and the potential for growth created for Precision. And we'll continue to exploit this growth where and when it's financially prudent.

On that note, I'll wrap up my comments. I do want to thank the employees at Precision Drilling both in Canada, United States, Mexico and Saudi Arabia for their hard work over the last quarter and tell them we're looking forward to finishing out this year firmly. On that note, I'll turn the call back to Melanie for questions.

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

(Operator Instructions)

Dana Benner, AltaCorp capital.

I wonder if you could give us a little bit of color on pricing right now. One would infer from some of the comments made by some of your US competitors with respect to say, Q4 outlook that things could in fact be weakening quite a bit and yet, interestingly, the rate trends, the day rate and margin trends amongst the various reporters so far has not really borne that out. Maybe you could give us a bit more color as we head into Q4?

I'll start, and if Gene or anybody else wants to pop in here, please feel free. But, Dana, there's a lot of moving pieces. It's a very complex question. Starting in Canada to begin with, day rates into Q4 of course our government generally for Precision by our annual contracts. We've gone through the renewal process over the past few weeks. There was a slight increase in labor costs that were passed through in the pricing. And we think that stands for Q4 in Canada. There's a smaller part of our business in Canada which is spot market based, and that will be [notchy]. People out there will be trying to create some utilization in the fourth quarter, so there will be some sloppy rates in Q4 for land rigs in Canada.

Now, moving to the US, it's a region by region question mark, really. Day rates in West Texas are firmer than they would be in the Marcellus for example. There are a handful in various markets right now of high spec newly built rigs that don't have work. And, while they may or may not be tier one rigs they certainly are high-quality rigs, and, depending on the size of the competitor, those rigs might be going out at some really low prices. So we'll have to face that, and we'll deal with that. As I mentioned during our strategic update earlier, our intent is to maintain discipline and not support utilization by cutting our day rates. So in our case, we're kind of looking forward for fairly stable pricing through the quarter. Because not a lot of our business will be supplementary spot market work. Gene, do you want to add anything to that? I guess not. Carry on. I'm not sure if that answers your question, Dana.

I think it does. For example, one of your US competitors was talking about a significantly weaker Q4. Of course, you can't compare companies and fleets, apples to apples. But I guess your comment would be that you feel that your exposure is strong enough among your higher performance rigs that what you may lose say, on the margin, with some of the tier three's isn't enough to change the major trend line that we would have seen established in Q3. Is that fair?

Dana, this is Rob. I think that's a fair comment. I think that the strength of the tier one rigs will carry the day even if we see some weakness in the tier three's and the bottom end of the tier two rigs.

Great. Two more questions if I may. Firstly, on completion, your completion and production segment, with respect to the -- with respect to service rates, a little bit weaker than I would have thought. Naturally, it has its own market dynamic in the move to oil. Were you surprised that utilization wasn't a little bit higher this quarter? Given the move to oil and the need to maintain and just keep wells onstream, or what would your feel be there?

Dana, if you'd asked me how to guide things forward back in July, I would have guided you higher. We live this everyday. We watch utilization day by day, so it's hard to be surprised when it's an erosive type decline from your expectation. So, your question was am I surprised? I would have guided you probably higher, as my expectation was higher, but, again, as we live it day today, it just never got going. The activity and pick up we thought would happen just didn't materialize. And as the drilling has pulled off now or slowed down, you'll really get a lag in completions now, so that's going to further protract this softer rate well servicing.

All right. Just one final question if I may. If we -- obviously drilling and service rates are the major business, but if we think about the various ancillary businesses that you have around that, is there any one of those that was inordinately strong or weak or is worth providing additional color on that may be meaningful as we think about 2013?

I don't think anything stands out by self uniquely. We're doing really well in rentals. We continue to do well in rentals. It is still a derivative of drilling activity, but we had such great growth in 2011 and early '12 that our position is strengthened in rentals. There may come a day when it actually becomes a standalone product line. It's been a good run, but it's driven by drilling fundamentals which are off right now. So that cloud is messing things up for everything.

The only thing I'd add to that, Dana is we've had a good start to the coil tubing business, and we've been pleased with the utilization and performance of that business. But again, that's relatively small so it doesn't move the needle for the overall Company. But it's been a nice start to that add-on business.

That's great. I'll turn it back.

Jeff Spittel, Global Hunter Securities.

You touched a little bit on areas like West Texas and the Permian specifically starting to transition to more of a horizontal play. Can you give us a reminder of what the specifications will look like on a typical rig for horizontal application there? And then in what sort of availability do you have today within the precision fleet to maybe mobilize some rigs from some softer basins into that play as that starts to pick up some speed?

So you're speaking specifically to Permian basin, Jeff?

Yes, Kevin.

These are generally going to be 1200hp to 1500hp rigs for the horizontal drilling. They're going to be tier one or tier two rigs depending on the program. If there is a move towards more pad type drilling, then tier one rigs will be the norm. But the location and construction out there isn't very expensive and not a lot of farms to worry about. So tier two rigs might also play an important role for us. As it stands right now most of our tier one 1500-horsepower rigs are fully committed and fully booked. So that's an area where, if there's a long-term plan, we may have an emerging opportunity for new builds early in 2013. So that's on that front. On the tier two front, we've got rigs in central Texas and South Texas that are not a long move way, just a few hours away. We have our own trucking fleets both in West Texas and South Texas that can move those rigs around. So, as we see demand continue to improve for horizontal drilling rigs, we can get in there pretty quickly with rigs. We can man those rigs up, and we can be an effective driller.

Good. That's great color. And then maybe shifting gears a little bit to the Exxon transaction, I guess that was last week, kind of interested in seeing what your initial interpretation of that is. I would assume most of the ramifications for Canadian drilling is going to be a little bit longer term, but kind of curious to see what your thoughts were.

There's a transition that's a little different. Years ago you might look at acquisitions of Canadian companies as meaning likely less drilling going on. But with the highly intensive horizontal type wells that are being drilled, usually now when a larger cap company takes on Canadian junior or midsize company is always almost always means more drilling. So that's encouraging sign for us. It's capital pulling into the area. It's long-term thinking capital, very deep, thoughtful, strategic capital. And we're quite well-positioned for large cap customers with our safety and environmental programs and of course the performance on our rigs. So for a company like Precision, it bodes well.

Appreciate it, Kevin. Thanks.

Dan MacDonald, RBC Capital Markets.

Just wondering, if we look at the horizontal directional business for you guys and the size of that fleet in comparison to your tier one and sort of -- do you think you're getting to a right size the for the horizontal directional business now? Or do you think you can still have some good growth prospects as you look forward into next year?

Dan, first of all, we slowed down our investment in that area because the market slowed down. We thought we might have finished the year out closer to 110 or 120 kits. I think we are 90 -- Gene, are we at 90?

90.

90 kits right now. So, we're probably 20 kits behind where I hoped we'd be right now a year ago. But, that said, we are at 90 kits. We've got 41 jobs running. Typically, 90 kits would give you capacity for about 50 or 60 jobs in that range. So we're doing pretty well, but we have a ways to go yet.

So then I guess your near-term outlook is still a little cautious then on that business?

Well, my term outlook is positive but it's going to be slow growth until we get something point. Much like unconventional drilling took a few years to gain traction. Once it gained traction it became widely accepted and with 90% of the wells drilling drilled horizontally now, I think we'll get to that point in Precision's integrated directional service, but it's still -- we're still talking about a year or two or three not a quarter or two or three.

Okay. And then on your comments on entering the ring style storage tank market, is that going to be with your own proprietary Precision product, or are you going to be sourcing that from a third-party?

I won't use the term proprietary. We're buying and building and assembling ring containment units. I'm not sure there's a real competitive advantage on the technology. I think it's more about your physical footprint, your scope and scale and your customer relationships, so we've got lots of those.

Great. That's all I've got. Thank you.

Dave Wilson, Howard Weil.

Kevin, with regard to the recovery in the Canadian rig count in the fourth quarter still appearing to be less than a return to normal activity, how should we think about the first quarter of 2013 with the E&P companies resetting their CapEx budgets? Can we get back to a more normal level within the first quarter? Is the ramp going to take longer? Basically what I'm asking is do we need another reset I.e like a spring breakup to get things back on track as far as rig activity?

I'd actually say I don't think so, Dave. I think what you'll see during the first quarter is a pretty aggressive spend pattern by our customers. I did comment earlier, but I think there's going to be some softness in the coring and strat type of business. And that's a big number like it could be, Doug, typically industry -- 100 rigs? Yes. So that could be off by 100 rigs, but then the balance of the activity in Canada, which -- let's call it the light sweet and sweet and the liquids-based drilling across the rest of the basin looks pretty positive and should be a real good strong start. A typical ramp up wold be over the first two weeks of the month. So we get fully going by mid-to late January. And then drill to breakup.

And that's what I'm expecting to see happen. The last couple of years we've had very quick ramp ups. Two ago, we hit peak I think 9 or 10 days into the month. I don't expect that to happen this year. I'm thinking that we ramp up on the more traditional basis over the first two or three weeks. I think what will happen is I think the rig count is going to look a bit low because of this reduction in strat well drilling. But I think it's going to be less troublesome than that number will show.

Okay. Thanks for the insight there. Another question, if I can, of your 60 or so tier three rigs, that are possibly upgradable, any guesstimate on the total cost of those upgrades over the next year or so or collectively how much is it going to cost to upgrade those rigs?

Dave, this is Rob. There's probably call it 25 of those tier three rigs that are reasonable upgrade candidates to find the right situation and the right customer and to do it. Typical upgrade costs will be in anywhere from CAD3 million to CAD7 million. And average maybe CAD5 million or CAD6 million for those rigs. The rate at which we do it, the number that get done in 2013 will be really dependent on what the demand is from customers to do it. So maybe we'll do 50% of those or one-third of those next year would be my first cut at that.

Okay. In total, not too much capital expenditure, CAD125 million or so for that. And sneak one in here, I know I've asked about it before, but as far as the dividend goes and the way things are right now, might not seem like an ideal time, but any change in the thoughts on a dividend or something like that heading into 2013?

Dave, no change on thoughts. We're still out-spending cash flow right now. When we have the longer horizon of free cash flow, we'll start thinking about it and communicate with market what our thoughts are then. But it's a topic our board talked about every board meeting, and I will tell you that we are intently focused on creating value for shareholders.

Okay. Great. I'll turn the call back over.

John Daniel, Simmons & Company.

Kevin, you mentioned that your objective is to not chase the market on pricing. And you'll have a few incremental new build that into this quarter. Should we take that pricing commentary as an indication that cash margins should be flat quarter over quarter?

John, I would say that that's probably generally a true statement, and you may see because of mix that it up a little or because the tier three and tier two rigs are impacted more than we think, that it's down a little. But you shouldn't see a big movement either way.

Okay. And then, Rob, for you just on the credit facility, you guys increased it I think -- what is it, CAD850 million or something like that?

That's correct.

Can you just walk us through -- I know it's nice to always have more liquidity when you can get it, but aside from that, how actively are you guys pursuing acquisitions and looking at things right now?

John, we're always in the market. We're always looking at deals that are relevant to us. But we're pretty selective about deals that we'll transact on. They have to be the right fit between people and asset quality and quality of the customer base. And this is a business that is inherently unpredictable and having more liquidity rather than less, whether that's to be able to be opportunistic on acquisitions, or whether it's to make sure that we're always in a safe place when it comes to liquidity, is good in a business that's as volatile as ours. And we've gotten to a place now with a very nice syndicate of banks that we have good relationships with and a credit quality that allows us to have that additional liquidity at a relatively low cost. And so it was just prudent to do it.

Okay. And then just one final one from me just educational on international, Kevin, I know it has moved slower than people like, but when you're talking with customers, are the discussions at this point, are these tenders that are coming out that you're looking at that are the opportunities? Or are you trying to pursue direct negotiations with customers? And that a simple one is just the rigs that you have international are they all horizontal or just the nature of the work?

Right now I think some of the rigs are drilling directionally. I don't think any are drilling horizontal wells right now, John. I think we are drilling -- in all cases we are drilling deep high-pressure directional wells both in Saudi and in Mexico. Our opportunity list internationally -- international includes pre-quals that we're doing right now. We are pre-qualifying to tender for a number of customers. We are tendering customers. We've got bid bonds in place. We've got other contract out there that we think there's imminent decisions coming. But we are still waiting on these things. I've been doing international business for 20 years. It never fails to amaze me how three-month becomes six months, becomes nine months.

Okay. That's it for me, guys.

Kevin Lo, FirstEnergy.

Just want a quick clarification. With increasing CapEx, is that all backed by, in addition to the service rigs of course, are the upgrades backed by the clients in terms of contracts?

Yes, they are, Kevin.

Okay. And can you give us a sense of how much of those service rigs cost?

We're not going to give you a number, but what I'd say is they are more expensive than traditional service rigs and less expensive than super single drilling rigs. So take from that what you might. We don't want to share the number.

Somewhere between 2 to 10?

Yes. That's right.

Okay.

Kevin, I think the remarkable thing is whatever the price is, those are long-term take or pay contract in the well service space for new technology. We're quite excited about that, and our guys are really quite primed on that opportunity and the potential growth in that slant heavy oil servicing market.

Right. I know there's been quite a bit of commentary on the tier one rigs, but I'm going to ask the same question in a different way. Do you see any available tier one rigs in the market in general right now?

We don't have any that are available. They're all either being utilized or spoken for right now. We've got a few rigs waiting on various things like location, weather, but all of our tier one rigs are spoken for one way or another. You know, I do know that a couple of our competitors are reclassifying their rigs as tier one have some tier one rigs available, but I don't think the number is actually very big. I think the bigger number is on recently new build rigs that are very, very good rigs. They may not have quite the mobility of what we call tier one, but they're still pretty good rigs. I think there might be more of those, but even that number, Kevin, is certainly less than 100, and I'd be surprised if it's maybe lower double digits, not higher double digits in the broad market. But it doesn't take much looseness for people to get nervous.

Right.

We're not nervous. We're not afraid. This is a business where we're quite used to these ups and downs. We're driving our strategy straight through it.

Right. And last question going back to Rob's comments about rates and cash margins into Q4 here, is that just the US, or where do you see cash margins coming up in Canada?

I think the comment holds for Canada as well. There in the spot market. People may be a little bit more aggressive, and, as we're getting crews back to work to get ready for winter, there could be a bit of margin compression on some of those rigs that come up, but again I don't think it is going to move the needle much.

So, even with the inclusion of boiler revenue, you're expecting margins to be flat if not down?

No. Boiler revenue will pick it up in the winter.

Okay.

Good clarification, Kevin. Thank you.

Perfect. Thanks, guys.

Rhett Carter, Tudor Pickering Holt.

Just talking about some of the startup costs associated with the international business, could you go qualitatively into some of the areas where that under-performed your expectations, and was that segment EBITDA positive in Q3?

I was afraid someone was going to ask the question, Rhett. So we deployed three rigs halfway around the world. We did a pretty good job breaking the rigs up over here, and we were running late, so we rushed the rigs off, and we had some additional rig up on location that wasn't anticipated. We had to air freight some parts in. We had air freight some specialists in. And then we got kneecap. We're trying to run the Precision model as we do everywhere else, and a lot of those experts, whether they're accounting or whether they're operations-based are Canadians. We've had a real tough time getting visas for Canadians, go figure. To Saudi Arabia.

We think that the diplomats are slowly resolving those issues, but it's been a big problem. And even for other non-Canadian nationals be it American or other third countries around the world, we've had a tough time with visas. They've really slowed down the visas. And as part of the Saudi initiative to create more local jobs, we understand that and we recognize that. But during a start up, we can't be training people while we're rigging a rig up and doing that with local people who don't know the Company. We have to have Precision experts in to do that work. And that cost us a lot of money.

Right. Okay. And then last call you guys highlighted that 60 some odd tier three rigs that you'd plan to retire over the next four years. Has the market slowdown accelerated this plan at all? Just kind of distinguishing between upgrades and retirement?

Brett, we look at it every year, and we'll do that again this year in the fourth quarter. So we may see some acceleration of that, although we're not finished with our work yet, but it's -- frankly it's not going to be material to our business. The tier three -- the portion of EBITDA that comes from the tier three rigs today is low single digits. And so whatever happens with that set of rigs won't be material to our results going forward. And I don't expect that it's going to change the number of rigs that are good upgrade candidates. I think that's going to remain pretty consistent, and that's actually where the real economic value in that group of tier three rigs lies.

Right. Okay. Thank you very much, guys.

(Operator Instructions)

Scott Treadwell, TD Securities.

Wanted to if I could touch on maintenance capital. You've obviously announced what it's going to be for this year. Do you think there's a drop next year if activity sort of stays that you've maybe gotten ahead of a few things, or does that same level in relation to activity sort of hold for 2013?

I think if activity were the same in '13 as it is in '12 that you should expect maintenance CapEx to be in the same ballpark. It really is activity driven. And we've got to buy things like drill pipe and -- that are consumable items, so I wouldn't expect it to be a lot different if the hours or the days are the same.

Okay. Coming back to margins, a little bit backward looking, it seems that everybody expected a bigger quarter out of Canada and to a lesser extent the states than we got. Is it fair to say that there was some either startup costs on some rigs or some hiring of staff that may be in hindsight weren't needed that's likely not to happen again in the fourth quarter and that may offset some of the pricing pressure that you might see on the margin?

Scott, I'd say in, particularly in the US, as we had some rigs come off, that we expected to go back to work sooner than they did and some crew training for rigs, some of the new build rigs that we had coming on that we were a bit heavy on the crew side and didn't get our foot off the gas quite quick enough. And just as that transition went on so we'll see some savings there in the fourth quarter versus the third quarter. But it won't be a huge number. But you'll see some cost savings in the fourth quarter.

In Canada, I think that what we saw happen during the third quarter you can expect to see it roll forward into the fourth quarter similarly. I believe there were no special one timers in Canada in Q3. I think it's just a function of our fixed costs with a slightly fewer rigs running, Scott.

Okay. Great. Last question, I'm not sure how detailed I'm going to get on this, but you talked about new technology in the service rig side. You're not going to talk about a number. Is it a hybrid rigs? Is it coil jointed pipe? Is there some other level you can give us on what this rig is?

I can for sure. It's a slant design service rig that greatly automates pipe handling so it's not coil, not hybrid. It is slant design service rig with push pull capability using a rack and pinion drive. We're taking a lot of the technical technology we use on our super single slant drilling rigs and applying it to our slant service rig.

Okay. And when do you expect the first one of those to hit the field?

Doug Strong, I think you're on the call. I'll let you commit to that.

That will be mid-next year, Scott.

Okay. And they're at this point both going to Canada?

Correct.

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

Jeff Fetterly, Peters & Company.

Just a couple quick follow-on questions. In terms of margins, can you please help me connect Q3 of '11 to Q3 of '12? In the drilling business, the 600 basis points of margin contraction year over year, how much of that was cost base? How much of that was price-based? How much of that was international expansion? Can you quantify some of this for us please?

I won't give you the exact numbers, Jeff, but the majority of this was cost driven. Because if you look at the revenue line, we were up significantly in revenue per day in both the US and Canada, and that was offset by wage increases both in the US and Canada. And then we had some additional crew costs in the US that were driven by being effectively over crewed in the quarter so we had more crews than we had rigs running. And then additionally, we had -- we were running a very low margin business internationally because of the startup costs in the Middle East. So all of that combined is what cost the 600 basis points or so. And I think you'll see a good bit of that work out in the fourth quarter as we get the startup costs behind us in the Middle East and things like additional crew costs in the United States we'll have fixed.

So is it correct to assume that if you're removing a significant portion of those headwinds from the cost structure in Q4, that your expectation for pricing pressure is fairly significant if you're guiding to margins being flattish quarter over quarter?

No. We are not expecting to see -- there will be some pricing pressure particularly on the lower end of the rig fleet, but it's not our expectation that we'll see real movement in topline in day rates. So, I guess what we're saying is we'd expect us to see some margin improvements in drilling primarily in international and the US.

Okay. And what about on the completion of production services side?

Doug, do you want to handle that?

Dan, I think you've seen some nice pricing increases year over year through 2011. In general, 75% of those pricing increases have gone towards costs and there's a rig mix elements there as well. With the introduction of coil in Canada. And a reduction in snubbing with the natural gas market being week. But the underlying cost structure maintenance in particular on service rigs we've got a very good handle on. And as we look forward into next year, we think we have good cost containment. The wage increase for service rigs in Canada will be zero going into next year. So I think the industry has got a good handle on cost containment for customers.

Okay. So just so I'm 100% clear, if activity is flat to up in Q4 versus Q3, your cost structure should be more favorable in the quarter. Margins should see some improvement on a sequential basis heading into the winter?

That's correct, Jeff.

Okay. Thank you. Appreciate the color.

Mike Mazar, BMO Capital Markets.

Just more of a high-level question I'm wondering what the vision and strategy is for the international expansion, the international markets generally. And I ask because you mentioned getting the knee-capped -- recognizing you're just starting but these kinds of things seem to almost inevitably take not just yourselves but competitors as well take longer, cost more, returns don't seem to be as good as people always were expecting when they get into these things. And I'm wondering a couple things. One, what PD is going to do to avoid some of those missteps, and, given the almost inevitability of some of these challenges of international expansions, is the size of the prize ultimately worth it here given that you alluded to a very long runway as far as North American land oil directed activity goes?

Mike, good complex question that's got a lots of pieces involved. So the bigger picture on what our vision is for international is to have a meaningful part of our revenue and activity driven by not weather cycles, removed from North American natural gas cycles, and with customers who think about things over the long haul, three- to five-year contracts. So what that means is to achieve that, we've got to be dealing with people who look beyond the NYMEX price today for oil. And that's precisely what the international market gives us in certain areas. So then once we say we want to be on to a large cap or large type customer with long planning, long projects, that points you towards international oil companies operating in places they know very well or national oil companies that behave like international oil companies. So hence, whether it's Saudi Aramco, or Kuwait Oil or Shell operating around the world or Exxon around the world, any of those companies like that, when they move in somewhere, when Shell moves into Kurdistan, it's a four-year project. When Saudi Aramco kicks off a program they are signing three-year contract with options for years four and five. So that's what we're looking for as kind of the first piece.

And they generally want larger suppliers. They are really looking not for the small highly variable type suppliers. They want stable safe risk mitigating type suppliers. Hence, a lot of those projects end up becoming IPM projects with the Schlumberger Halliburton or someone like that running the project and that's where we can come in also. So looking for jobs where we can get superior margins because we provide risk mitigation to long-term thinking customers. So that eliminates lots of international markets. And places like Mexico for IPM work look pretty good. There may be some opportunities in South America's for guys on longer-term but it's not the broad South American market that were thinking about there. I do think as unconventional starts to emerge in South America that may change the landscape there, but you need to see stable capital moving first.

Moving back to the Middle East, easily the most mature, big picture long-term planning market for us. I think as the majors moving to places like Kurdistan and other areas, that has opportunity for us. That's what we're thinking. Now, the second half of your question was how do we avoid the pitfalls of international business? Planning is important. Having deep systems, having the capacity and the depth to handle the mishaps is important. Having strong engineering is important. And even with all of those things, it's still a challenge. It's been a challenge for us, it's been a challenge for some of our larger peers. We do think that full cycle long-term the prize is worth the risk. But we will step in very carefully, and we don't plan to grow this 10 rigs a year, 20 rigs a year. So I'm not sure if I answered your question, but I've tried to hit on most of point.

No. I think that's perfect. That's what I wanted to hear. Thank you very much.

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

Thank you, Melanie, and thank, everyone, for joining us on our third-quarter 2012 conference call. Have a great afternoon.

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