Precision Drilling Corp (PDS) 2012 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Precision Drilling Corporation's Q4 and year-end results conference call and webcast.

I would now like to turn the meeting over to Mr. Carey Ford, Vice President, Finance, and Investor Relations. Mr. Ford, please go ahead, sir.

Thank you. Good afternoon, everyone. I'd also like to welcome you to Precision Drilling Corporation's 2012 fourth-quarter and year-end earnings conference call and webcast. Participating today on the call with me are Kevin Neveu, our Presidential 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 Corporation reported on the 2012 fourth-quarter and year-end results and announcement of a first-quarter dividend. Please note that the financial figures in these results 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 differ materially from those indicated by such forward-looking information and statements. Please see our press release and other regulatory filings for more information on our forward-looking statements and these risk factors.

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

Thanks, Carey. Despite fairly constrained oil and gas drilling activity in the fourth quarter, we have reported revenues of CAD534 million and net earnings of CAD63 million, excluding the effect of the non-cash asset decommissioning and goodwill impairment. For the year ended December 31, 2012, revenue was just over CAD2 billion, up 5% versus 2011. EBITDA decreased from CAD595 million (sic -see press release CAD695 million) in 2011 to CAD671 million in 2012. Fourth-quarter 2012 EBITDA was CAD177 million, which is 23% lower than fourth quarter of 2011. The lower Q4 results primarily reflect constrained activity, both in Canada and the US versus the fourth quarter of the previous year, partially offset by higher average day rates. EBITDA margins were 33% this quarter versus 39% in the fourth quarter of 2011. Margins were impacted by lower activity levels, higher turnkey activity, and increased maintenance and crew costs.

In the US during the fourth quarter of 2012, drilling revenue improved by over CAD2,200 per day versus the fourth quarter of 2011. Year over year, margins declined by approximately CAD100 per day, largely driven by wage increases in late 2011, a higher percentage of rigs working in high cost basins, higher turnkey activity, and crew costs associated with stacking rigs. Versus the fourth quarter of 2011, US regularization days were down 19%. In Canada in the quarter, drilling revenues improved by over CAD2,000 per day year-over-year, and margins improved by over CAD1,200 per day. Drilling days in Canada were down 23% in the fourth quarter of 2012 versus Q4 2011 due to lower industry activity, primarily driven by low natural gas prices, volatile oil prices, and constrained producer budgets. Our completion and production segment revenues were CAD85 million, or 11% below the fourth quarter of 2011, largely driven by a decline in activity in all of our service lines. EBITDA in the fourth quarter was CAD22 million, which is 34% below the fourth quarter of 2011. Well service activity in the fourth quarter was almost entirely oil driven, with approximately 95% of well service hours on oil wells.

In December, we announced our 2013 capital spending plan and gave an update on our 2012 capital spending plan. Precision concluded 2012 with CAD868 million in capital expenditures, which is CAD52 million less than what we had expected. Approximately CAD41 million of the shortfall is targeted for specific projects and will be carried forward into 2013. So planned capital expenditures for 2013 are now CAD526 million, including CAD205 million for expansion capital, which includes the cost to complete construction of two of the remaining rigs from the 2012 new build program, one new build from North America, and the cost to complete approximately 50% of the two new builds for Kuwait and various completion and production assets.

Upgrade capital is expected to be CAD127 million, which includes the cost to upgrade approximately 20 rigs, which includes the two rigs going to Kurdistan. Sustaining and infrastructure capital expenditures are expected to be CAD194 million and includes utilization-based maintenance CapEx costs and the cost to consolidate and upgrade our Nisku operations and training facility. We expect the CAD526 million of total CapEx will be split CAD434 million for contract drilling and CAD92 million for the completion and production segment.

Turning to the balance sheet, we are very comfortable with the financial strength, stability, and flexibility that it provides. As of December 31, 2012, total debt was approximately CAD1.2 billion and net debt was a little bit under CAD1.1 billion. Our blended interest rate is just over 6.5% and our earliest debt maturity is in 2019. Our 2012 EBITDA to interest coverage was a very comfortable 7.8 times. As we previously announced, we renewed our senior secured revolving credit facility in 2012, increasing the amount available under the facility to CAD850 million and extending the maturity date to November of 2017. The facility is currently undrawn. We have also increased our operating facilities from CAD40 million to CAD80 million, primarily for international operations. So Precision's liquidity is more than adequate with cash, operating facilities, and our undrawn revolving credit facility totaling over CAD1 billion of availability.

Our tax rate for the year was negative because of the asset decommissioning, but would have been in the 20% to 22% range otherwise. We expect the tax rate to be in that same range for 2013. As a reminder, in December we effectively exited the tier-three drilling market with the retirement of 52 drilling rigs, 30 in the US and 22 in Canada. We are retaining 26 of the legacy rigs for seasonal stratification and turnkey work. Exiting the tier-three market is consistent with our belief that the industry will continue to migrate towards tier-one and tier-two rigs that are capable of drilling horizontal wells. We now have 188 tier-one rigs, up from just 109 three years ago. We have an average of 109 rigs committed under term contracts for the first quarter of 2013 and 104 rigs for the second quarter of 2013. For 2013, based on current drilling rig contracts, we have term contracts for 52 rigs in Canada, 36 rigs in the US, and 8 international. That has increased by 10 since our third-quarter earnings release.

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

Thank you, Rob. Good afternoon. 2012 was a transformational year for Precision. We continued to upgrade our drilling rig fleet. We exited the tier-three rig business. We demonstrated excellent progress in achieving our goals of geographic expansion, and we entered several service lines. And all of this despite the persistent economic uncertainty and risk aversion, which seems to overshadow all thinking. During the fourth-quarter investor meetings, one of the most common questions we heard was, how bad is it? Well, I hope our fourth-quarter results put that question aside, at least for now. So I believe it's important to review Precision's transformation over the last 12 months to better understand our strategic positioning as we enter 2013.

Last year Precision manufactured delivered 36 tier-one rigs, but we upgraded 11 more rigs, all of those into long-term contracts. This wraps up our most ambitious and successful build program in Precision's history. These rigs have been deployed into virtually every oil and gas space in North America, from the Montney and Duvernay plays in Canada to the North Dakota Bakken, the Niobrara, the Utica, the Marcellus, the Eagle Ford and Permian Basin. The 2012 fleet additions, combined with new upgraded rigs from 2011, have shifted our tier one rig count from 109 rigs just three years ago to 188 rigs today.

Now our exit from the tier-three rig market late last year was a decision to accelerate the guidance we provided a year earlier when we suggested a four-year remaining life for those assets. What changed our view in 2012 was the dismal natural gas markets that emerged over the course of 2012. We firmly believe the land drilling market remains greatly over supplied with legacy underperforming tier-three assets, and there is no light in that hole. We believe others may be arriving at the same conclusion, or at least they should be. With 188 Super Series tier-one rigs and 107 tier-two rigs, we can address any horizontal or vertical opportunity in any basin in North America.

Now turning to our international footprint, which a year ago was just two rigs in Mexico, as of today we have 13 rigs under contract with 8 running; 3 more will be mobilized in the coming months, along with 2 new builds to be commissioned in 2014. Now the key point is in our global expansion and diversification to date, this was our most successful quarter. And this wasn't happening while the Canadian-US markets were in recession. So following on that theme, Rob mentioned earlier our turnkey group had a strong quarter. This group operates primarily in the Gulf Coast region. And again, while our conventional day-work markets where customers are finishing off our 2012 budgets and activity was waning, the opposite was happening in turnkey. At one point in the quarter, we had six rigs on turnkey projects delivering very good results, again, demonstrating the importance of Precision's diversified revenue base.

As mentioned earlier, in the fourth quarter, demand for both our Canadian, US operations dropped, as customer drilling budgets wound down, and probably more than we would have anticipated. What became evident was that like at Precision, our customers were exercising strict fiscal discipline, and they're not topping out budgets, nor were they pulling forward 2013 budgets to keep rigs running. As a result, brought productivity and customer demand receded during the quarter. Beginning in 2013, the seasonal ramp up Precision is experiencing in Canada has been surprising. Today we have 153 rigs running, sightly better than the higher end of our projections. While I believe we will see this activity begin to taper off as we approach spring break up, it's fair to say that Precision's strength in Canada mitigates a slow start in 2013 in the US, where currently we have 84 rigs operating.

For 2013 fiscal discipline by our customers on both sides of the 49th parallel remains the order of the day. During 2012, our completions productions group initiated several service-line geographic step ups. We opened a conventional well service and rental operation in North Dakota by relocating Canadian assets. We started up some of our managed pressure (inaudible) operations in Pennsylvania. We entered the high-volume centrifuge and power-generator markets in the Canadian drilling industry through new investments, and we deployed a base [camp] with a long-term customer contract in Canada. But most importantly, we entered the coil tubing completions and service business with the addition of new coil tubing units in Canada and two units into Pennsylvania. All of these moves follow our strategy to grow and diversify the revenue stream for Precision.

Now looking back a little farther, during 2011 we acquired three directional drilling companies. Last year, we expanded our footprint, particularly in the US, by adding motor repair centers in Houston, Casper and Midland, along with adding new drilling motors to display some [principal] motors in our fleet. While the goodwill write down in Canada was disappointing, I believe we are very well positioned for growth in Canada and the US in 2013. I expect our directional drilling business and Precision's integrated directional drilling solution will demonstrate excellent value for our customers and provide solid financial returns and growth for Precision in 2013.

Now we're often questioned about our ability to staff our rigs and operations to meet the seasonal and highly volatile cycles the oil and gas service industry experiences. Our 2012 roughnecks recruitment program processed over 54,000 employment applications, and of those, we on-boarded over 3,000 people worldwide. Our training programs touched over 8,000 people in our Houston, Nisku, Red Deer, Dubai, and our field training operations. So indeed, it's been a very busy year at Precision Drilling, building and upgrading rigs, transforming our asset base, expanding globally, adding service lines, hiring and training people. And this repositioning has been at times challenging for our people, and in some cases financially, but I trust Precision's fourth-quarter operating results demonstrate the strengths and resiliences and diversification has afforded Precision in these volatile and uncertain times.

However, I believe the best result of 2012 was Precision's outstanding operational and safety performance. We had over 260 drilling rigs, 150 well service rigs that operated recordable, injury-free in 2012. At Precision, we are keeping our people safe, and we know that a safe operation reflects not only the training and experience levels, but also the asset quality of the fleet and the customer quality. And it's clear that safety and safe operation is a single metric that qualifies -- quantifies Precision's high performance, high value of service capability. And there is no question, our safety performance is viewed universally by our customers as a key differentiator in the principal reason why Precision is considered a high-performance premium service provider.

During 2012, as Rob mentioned earlier, we continued to evolve the capital structure and balance sheet to ensure that we have got the financial firepower to seize market opportunities, while always remaining prepared to weather any storm. Today we've got the financial capability to accelerate our build program into any level of customer demand. However, despite competitive pressures, we do not intend to alter our long-term and narrow fiscal hurdles for investment in new (inaudible) rigs and assets. And we believe our exceptions on financial return and contract duration are an important cornerstone to our investment strategy. It is this fiscal discipline, our fleet quality, and our geographic expansion which has given us the confidence and long-term visibility to implement a dividend late last year and to begin the process of returning value to our investors directly, while maintaining firepower for growth.

Our short-term outlook for Canada and the US is similar. And like most, we are mindful of commodity price risk, global economic concerns and the North American pipeline infrastructure bottlenecks. Mid-term we believe the liquids transportation issues will be resolved. Rail will continue to be a short-term positive. The pipeline expansion will ultimately prove the best solution to reduce the bottlenecking in energy transportation. Now, if those who are projecting US energy independence are correct that deed will be excellent for land drillers. The rig intensity needed to achieve and sustain energy independence will be phenomenal. So dreaming aside, we remain very bullish on the mid- to long-term potential in Canada and US markets. We believe our fleet quality, geographic expansion, and product line (inaudible) will help mitigate short-term volatility, and our high-performance, high-value strategy will continue to win the game in our customers' eyes.

So on that note, I will turn the call back to the operator for questions.

(Operator Instructions)

Jim Wicklund, Credit Suisse.

On the international side, Kevin, how big do you need to be, and how big do you think you will be in about five years?

Jim, I'll tell you that so we'll be at three rigs in Saudi; we'll be at two rigs in Kuwait. A few more rigs in Kurdistan mid-2014 at the very least. But I would still call that a startup for us. I need to see something like 12 to 15 rigs in the Arabian Gulf region to call that a sustainable business. So we still have a ways to go.

We are going to continue cherry picking the opportunities and looking for places where our big, deep, high-capacity rigs have good market opportunity, strong day rates, strong margins. So it's going to be a very slow, steady process for us, and I am really thinking about this in terms of low single digits per year and working at it over the next, three, four, five years to get there. So if you do the math on that, that puts us at 30 or 40 rigs over the next five years.

There are always opportunities to jump-start growth through acquisition. And I know it depends on price and type and all sorts of different things. But just in concept and in general, could you see the possibility of jump starting that, accelerating that growth through acquisition?

Jim, that's a very good question. Certainly, one of the cornerstones of Precision Drilling is leveraging our size and our systems, our processes, our people. So, critical mass for us is always important. If there was the right type of accretive acquisition that helped us accelerate that growth in the Middle East, we would look very hard at that. Key points, they're right size, accretive, and at the same time, we are going to be very careful making sure that we are not the consolidator of tier-three assets, but start pushing on the high-performance, high-value side of the business.

That's a great business plan to follow. My follow-up is looking at the Land Rig Newsletter here in the last couple of months, it shows that the leading-edge day rate for rigs in the US -- and this is even higher capacity rigs, because you've got the horizontal rig count having rolled over -- but they show that day rates are, instead of growing, they are now shrinking just a little bit. Can you tell us what you think of that trend? Whether you agree with that trend? How long that trend is going to last? When will start seeing day rates, leading-edge day rates start to move up?

Probably when the rig count starts to move up, that's the short answer. I think the day-rate story is getting quite granular. Land Rig Newsletter has an average in there. That's one piece of data, but we look at it a little bit differently. The rigs that we have under contract have been doing a very good job for our customers. Those rigs will at some point in time roll over on the contract. If the market is soft and the tide is still ebbing, we will be flexible with our customers' rollovers, and we'll show that we're willing to be a little flexible and offer whatever we need do to keep our customer happy.

I can tell you, our customers aren't anxious to replace a rig they've paid for over the last three years with an unknown quantity of a new rig coming in. I don't think we are going to see rig-on-rig competition on rig rollovers. It's more a matter with somebody starting a new drilling program or a new program that doesn't currently have a rig where there's going to be more competition on rig rates. Until the total rig count starts to go back up again, which it will at some point, between oil and gas, at some point in time, those day rates are going to stay in a tight range, but with some negative pressure.

Kevin, that helps, and it's my experience that they want to keep the rig and they want to keep the crew, so that's just critical. Your points on education were well made. Thank you, Kevin, very much.

Jeff Spittel, Global Hunter.

Maybe if we could talk about it sounds like you are off to a flying start in Canada on the drilling side of the business. Could you qualitatively share some flavor with us about the specific basins and/or a cross-section of the customers that are driving the uptick in activity?

First of all, we haven't released our Q1 results yet, so I'd be a little bit vague. We have got 153 rigs running today. Fair to say that we're pretty active across the basin. It's probably a little slower in southern Saskatchewan than most people would have liked, southeastern Saskatchewan, but throughout Alberta right now, very busy. We are busy in the Durbin; we're busy in the Montney; we're busy throughout the Viking and the Cardium regions. Heavy oil is going well for us.

We have seen a little bit more activity in the heavy oil coring operations, the winter, seasonal work than we might have expected. I don't know this is indicative for the year going forward. We are still thinking that the year overall will be flat with 2012, with risk around pricing differentials and across the global commodity risk that pervades everything. But, we are pleased with the start.

Okay. And then thinking about the Permian, some of your other competitors alluded to reduced demand for vertical rigs as people kick off their horizontal programs there. I would think that would play right in your wheelhouse with regard to your high specification fleet. Would you characterize that as a potential opportunity to maybe pick up some additional market share in that region as people accelerate those programs?

I'd just say that the Permian is in our crosshairs.

That it's fair to say that the move towards horizontal drilling, whether it's in the Permian or wherever it is, plays to our strength. And then that's why you saw us in December exiting the tier-three business. We don't see that as a long-term, profitable business, and our focus is on the higher-end, high-performance horizontal drilling.

Congrats on a nice quarter.

Dan MacDonald, RBC Capital Markets.

Maybe just touching or switching gears over to the [pressure] and services side, do you think given the sequential increase we saw in service rig demand here for Q4, do you think maybe the Canadian market has fundamentally turned a corner after softening up through most of '12? Given at some point, we would expect an inflection here with the number of producing oil wells we continue to put in the ground?

That's an excellent question, a good view to carry it forward. What we're seeing right now is natural gas clearly bottoming in the Canadian market. It's been pretty remarkable how our customers, as a whole, have pivoted to oil wells. As they drill out these horizontal wells, they are letting initial decline rates play out and really looking closely at how they need to work the wells over and come in with stimulation intervention. So that's certainly ahead of us. Timing will tell. We got some of the macro issues that Kevin referred to. But regionally, I think we've got a lot of underlying strength.

I guess that probably means it's still a few more quarters away from starting to see some resulting pricing power along that business line?

That's right. We'll go through our traditional breakup period, and then we'll see how the world looks going into the second half.

John Tasdemir, Canaccord Genuity.

Nice quarter. I missed the first two minutes of the call, so if you said it already, we can go back to it. On turnkey work and turnkey expectations in the US, can you give me -- give us some feel as to how that may look in the first quarter? Is there a trend to doing more turnkey work versus day work in this type of environment and the resulting impact on margins? Can you help us through that one?

John, it's a fairly complex answer. In fact, I'm pleased to see the strength we had in Q4 on turnkey. It's a lumpy business, because it's a project-management type business. The margins are going to remain quite strong, because we are only targeting deep wells where we get to use our big, deep rigs, so it works very well for us.

We have got a really good team that is able to plan and execute those wells for us in Houston. It's regional for us; it's along the Gulf Coast. And it's with the really small customers who generally raise capital and drill wells. So it's really tough to predict and it tends to be lumpy for us. In a $3 gas world, it seems like there is a little better possibility for us than there is in a $2 gas world.

The only thing I'd add to that is that this is a business that can be anywhere from an average of two rigs to as many as five or six. There is not a trend that you should -- you shouldn't extrapolate the fourth quarter and take that five or six to eight or 10 rigs. It's not going to get that big. And, in fact, it's more likely that it will just bounce around between two and five rigs. So nothing -- no meaningful trend that you should be trying to figure out.

Okay. So somewhere between third- and fourth-quarter levels is what we should be thinking about? And then --

John I would be thinking more like third-quarter levels. It may be the case where we had several customers line up at the same time and some nice timing for us in Q4. I wouldn't think that's a routine quarter for us.

Okay. That's fair. And then, Rob, sorry, one other question just to clean up a bit. Did you talk about depreciation at all or an expectation in the first quarter or going forward? Things just seem to be moving around on that in a little bit.

There is quite a few moving parts. Part of it is that we've delivered a number of new rigs. So as we have added new rigs that are going to work, they are working full time, and there is more depreciation per day on those new rigs. We had a loss on a sale of assets that was in the fourth quarter that made up the bulk of the difference between Q3 and Q4. Going forward, you will see that the accelerated depreciation on the tier-three rigs largely goes away because of the assets we decommissioned in the fourth quarter. I would say that the fourth quarter was abnormally high on depreciation, but it is a little bit complicated.

That's why I asked. Anyway, that's fair enough. Thank you, guys. That's all I got.

John Daniel, Simmons & Company.

Just a couple housekeeping ones first. Can you say how many of the tier-one rigs are idle today?

No, John. We don't report utilization by tier, but what I would tell you is that our tier-one fleet has been consistently utilized. It's at the high end of the utilization spectrum, and that has been the case for years. We just don't see many tier-one rigs being laid down. So if you look at the 240-something rigs that we have running today, and our tier-one rig count is 188, and the bulk of those rigs are running.

Okay. Question for you, Kevin. Can you walk us through your coil-tubing expansion objectives in the US? I think you mentioned two units in Pennsylvania. Curious if you can say how many units are on order for the US market. And in light of the commentary from others, publics and privates about a bit too much capacity on the coil front, at this point, does it make sense to keep ordering units or is consolidation the right growth avenue for you guys?

What we're doing in Pennsylvania and North Dakota with our completion and production group is taking our cold weather expertise and high-performance, high-value capability and moving to those markets and carving out a high-performance model for our customers.

I'm not going to comment on southern region supply or oversupply of coil tubing. We are very pleased with the progress we are making in Pennsylvania right now. We expect to add a few more units over the course of the year. Again, like I have mentioned for international, when we move in organically, we move in slowly, carefully, and we pick the best opportunities to make sure we support our margins.

All right. On the contract coverage, you mentioned the total number for Q1 and Q2. Any chance you could break that down between Canada, US?

We break that down by Canada and US in the press release for Q1 and Q2. And then for full-year, we break it out by Canada, US, international. And I can get back to you on the breakdown between Canada and the US in Q1 and Q2.

The last one for me, Kevin, on the Middle East, follow up on Jim Wicklund's question, to the extent that it's the right size accretive from an acquisition opportunity, how would you characterize the fleet quality of the folks that are currently in the Arabian Peninsula?

There is a pretty wide range, but the contractors that are working for the -- I'll use a term for the NOCs that behave like IOCs. Those companies have high standards and high expectations. Generally speaking, those rigs are in pretty good shape. Whether it's our rig or somebody else's rig, there is a high expectation of high-quality [national] oil companies, particularly in the Arabian Gulf region.

Dana Benner, AltaCorp Capital.

I wanted to start with the US market, if I could. Coming off a number of the US driller conference calls, and even some of the other companies, there was a sense that the US rig count may have bottomed here fairly recently or about to, and that we may see a slight tick higher, and perhaps even a broader move higher, as we head into the summer. Your guidance is more or less flat in the US. I wonder if you're just being conservative. Is it too early to tell? Maybe you could give us a bit more insight.

Sure, Dana. I tell you that our activity level right now is probably a little less than we would have expected, because like Canada, we are expecting overall spending in the US to be roughly flat year over year. But there is some things going on right now, several large-cap E&P companies haven't released their 2013 budgets yet. That's beginning to happen now throughout the end of this month into early March. We should see most of that clear its way through.

What's actually more interesting is most of our customers are behaving with a high degree of discipline. The drilling manager model of spending capital when you have it seems to be a little more moderated this year. So even companies that have 2013 budgets are very carefully ratcheting up their activities. I think you will see it gradually ease up. If the projections are right that year over year is flat spending, activity has to come up, because it started last year high and finished low. There was some midpoint where it makes sense.

I don't believe all the talk around rig efficiency means that you will see substantially fewer drilling days this year. I think the high performance rigs will be as active this year as they were last year, maybe more active. So we are going to be careful not to create some expectation that might get dashed by pricing differentials or by some macro event. I think it's fair to expect rig count to ease its way up.

That's very interesting color. Second question, maybe from a little bit higher level, in a market that arguably is either side of flat in Canada and the US, and we'll see how things shake out, it then becomes incumbent on a management team to make other strategic moves, either work harder at efficiencies internally or what have you to find growth. If you think about the things that you did in '12 and what you're currently working away on, what do you think is probably the most important move that you've made in the last 12 to 15 months that ultimately sets you on a stronger long-term growth rate, not only in terms of top line, but bottom line?

Dana, that's a bit like asking me which one of my children are more important. But jokes aside, I really think that the decision to exit the tier-three market was very important and a strong signal to where we're heading with this Company. That decision isn't unique to drilling rigs, whether it's investing in coil-tubing rigs or moving into Saudi Arabia, it's indicative of our desire to be out there as a high-performance, high-value provider; to have rigs that run safety-incident free, so that whether you are a mid-cap or a large-cap E&P company, there is no risk in taking PD.

Right. Okay. Well, that's great. And then just one final question here. There seem to be only very selective new-build announcements going on amongst the ones that have been most successful at landing them here in the last 12 to 18 months. Maybe an update on the prospects on that front would be great.

Dana, there is still a surprisingly broad number of conversations going on around about new builds. There are a lot of E&P companies that, frankly, do have three- and four-year drilling programs and they do have a long horizon of geology to drill and geography to drill. But they're wise, like we are, and they are fiscally constrained. Most are not allowed to sign up long-term contracts today for whatever reason. Most are trying to keep as much flexibility as they can to respond quickly to changes in the market. So there is an overriding shortening of financial commitment happening. So there is that it going on.

You are seeing also very good discipline on the side of us drillers. The industry has, whether it's earned or unearned, it's got a reputation for over building. Largely, most of the building in the last four years has been 80% in North America has been down to four or five drilling contractors. We are all public companies. We are fiscally responsible. You are seeing that discipline playing itself out right now.

I can promise you if we want to lower our contract term down to, I don't know, a year, we could book new-build rigs today as fast as I can build them. That strong day rates -- the day rate is not the problem; it's the commitment period. We just think that discipline around capital recovery is so important, we are not about to do that.

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

Scott Treadwell, TD Securities.

I wanted to touch again on the turnkey side. You said you had a few more rigs this quarter than last. Is it reasonable to expect then that, as you alluded to in the news release, that the US day rate may move back down towards Q3 levels if the turnkey operation resembles quarters past? Is that fair to say?

To think about it, this year we did $32 million in the quarter in Q4, which is the highest quarter in the last two years. And that has ranged between $7 million and $32 million. So we're definitely at the high end. And if you think about day rates, if we had a normalized turnkey quarter in the mid part of that range day rates would have still been up a bit, but definitely were impacted by the turnkey activity this year.

Okay, that's good enough color there. On the international side, I know you are loathe to get into too much detail at this point in terms of setting expectations, but is it fair to say that the one-time costs that you talked about on previous call, whether it's visas or delays and things like that, had a material impact on the profitability of the overall international business, and that you would expect that to be substantially better in 2013?

Short answer, yes. In more detail, we certainly have had a chance to learn all the aspects we need to learn about deploying new rigs into new markets internationally. We have applied those lessons back on the projects we are building right now, the new builds, both the new builds and on the rigs we are redeploying from Canada to western Iraq. There is still going to be start-up issues; there always is, Scott, with a whole new country, new region. But I wouldn't expect they'll be anywhere near the magnitude they were in 2012.

Yes, I think, Scott, you'll see the profitability of the international business get significantly better in 2013, as we work through a lot of the early days issues.

Okay. Good. That's what I was after. One of the competitors has mentioned on a call that at some point there may be a necessity to build rigs on spec to keep people engaged. Fair comment to say that given your ' option value in international and with rig upgrades that you would be much further down that road in terms of you would be much later in terms of having to make that decision than, say, a pure-play North American new-build-only driller? Is that fair?

Scott, I hate to say -- I never say never. But our fiscal curves and the strengths that we have in place, we have kept them firm over a number of years. It would take a pretty significant exception for us to move off that. So we're just not inclined to be investing capital with no firm commitment.

And as you rightly point out, Scott, we do have plenty to do. Just because we are not building 35 or 36 new build rigs like we did in 2012, we still have a pretty active program between upgrades for domestic and international and a few new builds. So I don't think that we are going to have an issue with what to do with our manufacturing capacity.

Okay, my last one is surrounding CapEx. If I go back to the original announcement and then today, the entire $47 million carryover looks like it's put into expansion capital. Is all of that committed? Or does that resemble the upgrade capital, where if you get the contracts or there is some contingency around that $41 million that's moved into '13?

No. That $41 million is for specific expansion projects, and it will get spent in early 2013.

So those are underway today?

Yes, or will be shortly.

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

Todd Garman, Cormark Securities.

Just a follow-up question on the capital program side. So the $41 million of increased expansion capital is not necessarily carryover capital from the 2012 capital program, is that correct?

No, that's not correct, Todd. We just didn't spend it in 2012. Back in October and December, we thought that money would get spent in 2012, and it's just carried over into 2013. In fact, the overall budget, 2012 plus 2013, we're flat. Actually, we are down $10 million or $11 million. So it's just moving some dollars that we thought would be spent in '12 into '13.

I understand. And then in Canada, could you characterize current demand for rigs, and how easy it is to window them out? And then provide us with some insight in terms of what pricing is like for those rigs that are windowed out, given that you are running as many as you are currently?

Todd, that's a fairly granular question. Right now, we have got pretty much everything out running. If a rig becomes open, window available, whether it's because a location isn't ready, it's likely to go out to a customer, maybe at a lower rate. Where we are most successful with windowing rigs is typically with our super singles rigs. Those rigs, when you put them into another window, they usually stand a pretty firm day rate. We are not maybe as exposed to that type of market driver as some might be.

Okay.

I can tell you that in Q2, it's going to be a very sloppy market.

Sure. And then could you provide us with some insight in terms of your client's or your perceived sense of their urgency to execute work on an ongoing basis?

It's wintertime right now. It's been cold. There is lots of urgency. The people are -- the long-term thinking right now is more about northeastern BC, northwestern Alberta long term. Summertime talk, I think, is guarded. So I think that the urgency we're feeling in the market today isn't really relevant to think about the full year.

Okay.

But it is -- today it's busy, right? And we ramped up pretty quickly at to above what we thought we were going to see in the first quarter in terms of number of rigs running. But I fully agree with Kevin's comment that that doesn't -- I don't think that's really a reflection of what to expect in the second half.

Todd, I think I know where you are heading with this question. I would like to tell you that we have got strong demand right now building for Q3. What we are getting right now is pretty cautious views in Q3. That doesn't mean strong or weak. Last year Q3 came on softer than we expected. I think that a lot of things happened to cause that. I think our customers built their 2013 budgets with that knowledge in mind, like pipeline differentials and commodity price risk. So I think we're neutral on Q3, Q4 and thinking it's going to look like a rollover of last year.

Thank you for that information.

Mike Urban, Deutsche Bank.

I did want to follow up a little bit on the longer-term question about the scope and scale of your international business and maybe where you stand a few years out. Would you -- in the context of that bigger market, you said ultimately, maybe you would like to see 30 or 40 rigs. Would you also layer in a service component or any ancillary businesses, any things you are in today in North America, anything like that?

Mike, that's a really good question, and think about it this way. Today we have two theaters of operation open. We have got Mexico, which we run from Houston, and we have the Arabian Gulf, which we run out of Dubai. So if I was to open a second product line, even if it's in overlapping areas, it's like a third theater of operations for us. It's a different group of people to manage that business and different group of assets. So I am just not ready to open a third theater of operations.

But inside five years, absolutely. I think that as we grow our mass in the Middle East, the Arabian Gulf, running rigs and get a couple of years into that and show some good results, that opening a third theater -- and whether that's another product line, like completion, production, like service rigs, coil tubing, or when it's a new drilling market area is well within our scope.

(Operator Instructions)

Brad Handler, Jefferies.

I am going go international, too, please, but shorter term and less strategic. I'm wondering what you can tell us about the opportunities for additional rigs. Perhaps you won't feel that you are ready to pursue them. Maybe they are the wrong type of rig, and or maybe you have filled your plate a little bit near term. But I am curious what you see in the marketplace about opportunities for additional rigs in the Gulf area?

Brad, right now I can tell you that our inquiry list is the longest it's ever been. That's -- we're looking and our eyes are open, and we're learning globally not just in the Arabian Gulf, but our real focus right now is in the Arabian Gulf. But literally ranging from Argentina to India and everything in between, there is a lot of demand for the types of services Precision can bring into play with our bigger rigs or horizontal drilling rigs, for that matter. It's getting to be a more and more active market.

I think our timing coming in was good. I like our growth right now. We have bitten off a bit with a couple of big new builds and deployments going on to Mexico and to western Iraq simultaneously. So there is lots going on. I would not be surprised to see Precision continue to pick off one or two rigs at a time in these two theaters of operation over the course of 2012 -- 2013. And the opportunities are there.

Interesting. I'm curious, maybe you'll indulge me, between Iraq and Kurdistan, it feels like there might be rigs rolling off in southern Iraq and there are opportunities to chase after -- that the rigs might be chasing after in Kurdistan. I am wondering your view on whether the aggregate is more demand in 2013 relative to what we've seen in 2012 or 2011, and maybe some order of magnitude if it is bigger.

Brad, it's really hard for me to speak to southern Iraq. It's a market that we -- for many reasons have not put a lot of intelligence into. I am not well-positioned to talk about southern Iraq. I do think that Kurdistan, that region of Iraq, is going to be a healthy region for a while.

Got you.

And most people -- most analysts expect northern Iraq or Kurdistan to see pretty meaningful growth in the near term, 2013, 2014.

Interesting. If I switch gears to your other international theater, how much -- maybe some perspective would be great. How much does additional rig demand stem from Chicontepec bids, which are due out at some point here this year, which suggests it's a little further down the road? Or is it things that already in place in the south, onshore in the south?

When the Chicontepec bids comes out, we will have a look as we're looking at a lot of things. Frankly, we have been more successful marketing our services to the international integrative service providers. It's a little less about price. It's more about asset quality and performance quality, and that speaks back to where Precision really markets itself. High performance. High value. We will look at the Chicontepec opportunities. For our super singles rig, it's an ideal market. I have a gut feeling the super singles will likely have better opportunities north of the Rio Grande.

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

On behalf of Precision, I would like to thank everybody for joining us on the call today. Have a good afternoon.

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