Precision Drilling Corp (PDS) 2013 Q1 法說會逐字稿

Welcome to the Precision Drilling Corporation's first quarter 2013 results conference call and webcast. I would now like to turn your 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 first quarter 2013 earnings conference call and webcast. Participating today on the call with me are -- Kevin Neveu, our President and Chief Executive Officer; Rob McNally, our Executive Vice President and Chief Financial Officer; and Doug Strong, President of the Completion and Production Services. Also present is Gene Stahl, President of Drilling Operations. Through our news release earlier today, Precision Drilling Corporation reported on the first quarter 2013 results and the announcement of a second quarter dividend. Please note that, the financial figures are in Canadian dollars unless otherwise indicated.

Some of our comments today will refer to financial measures such as EBITDA and operating earnings. Please see our press release for additional disclosure on these financial measures. Our comments today will also include statements reflecting Precision's views about events and their potential impact on the Corporation's business, operations, structure, rig fleet, balance sheet and financial results which are forward-looking statements. There are risks and uncertainties that could cause actual results to differ materially from those indicated by such forward-looking information and statements. Please see our press release and other regulatory filings for more information on forward-looking statements and these risk factors.

Rob McNally will begin the call with a brief discussion of the first quarter operating results and a financial overview. Kevin Neveu will then provide a business operations update and our outlook. Doug Strong will provide an overview of our Completion and Production Services activities. Rob, over to you.

Thanks, Carey. Despite relatively constrained oil and gas drilling activity, we reported a strong first quarter with revenues of CAD596 million, net earnings of CAD93 million or CAD0.33 per diluted share. First quarter EBITDA was CAD215 million, which is 12% lower than the first quarter of 2012. The lower Q1 results primarily reflect lower industry activity both in Canada and the US versus the first quarter of 2012, partially offset by higher average dayrates. EBITDA margins were 36% this the quarter versus 38% in the first quarter of 2012. Margins were impacted by lower activity levels across North America, again partially offset by higher dayrates. In the US during the first quarter of 2013, drilling revenue improved by over CAD750 per day versus the first quarter of 2012. Year over year margins declined by approximately CAD250 per day, largely driven by turnkey and fixed costs being spread over a lower activity base. Versus the first quarter of 2012, US rig utilization days were down 23%.

In Canada during the quarter, drilling revenues improved by over CAD1,200 per day year over year. Margins improved by almost CAD1,000 per day. Drilling days in Canada were down 10% in the first quarter of 2013 versus the first quarter of 2012. We are very pleased with the strength of our dayrates and margins in the face of softer year over year industry demand. Our Completion and Production Segment revenues were CAD104 million or 7% below the first quarter of 2012. EBITDA in the first quarter of 2013 was CAD30 million, which is 23% below the first quarter of 2012. The decline in margins was driven by lower activity and business mix.

Well Service activity in the first quarter was, again, primarily driven by oil -- oil related work, which made up 85% of our Well Service hours. We are pleased with the growth our US-based Completion and Production Business, where activity was up approximately 6 times over the prior year period. Our international drilling business also had significant growth, as we have gone from two rigs running in the first quarter of 2012 to eight rigs running in the first quarter of 2013. We currently have contracts in place for another five rigs to be moved into international markets over the next 12 months and expect to have more opportunities over the next few quarters.

In December, we announced our 2013 capital spending plan, which we updated our press release this morning. Planned capital expenditures for 2013 are now a total of CAD533 million, which includes CAD237 million for expansion capital, which includes the cost to complete construction of two rigs from the 2012 new build program, one new built rig for North America and the cost to complete approximately 50% of the two new builds for Kuwait, long lead time equipment and various completion and production assets. Upgrade capital is expected to be CAD119 million, which includes the cost to upgrade approximately 20 rigs including the two rigs going to the Kurdistan region. Sustaining the infrastructure, CapEx is expected to be CAD177 million and includes utilization base maintenance CapEx costs and the costs to consolidate and upgrade our operating facilities.

Turning to the balance sheet, we're very comfortable with the financial strength, stability and flexibility that it provides. As of March 31, 2013 total debt was approximately CAD1.2 billion and net debt was approximately CAD1.1 billion. Our blended interest-rate is just over 6.5% and earliest debt maturity is in 2019. As we've 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 to support our international operations. Precision's liquidity is more than adequate with cash, operating facilities and our undrawn revolving credit facility totaling over CAD1 billion worth of availability.

Our tax rate for the first quarter of 2013 was 16%. We expect the tax rate for the year to be approximately 20%. We currently have an average of 105 rigs, which is constituted of 55 in Canada, 40 in the US and 10 internationally that are committed under term contracts through 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 10 internationally for the balance of the year. That concludes my comments. So I'll turn it over to Kevin for further discussion of the business.

Thank you, Rob. Good afternoon. To reiterate Rob's comments, we are pleased with our first quarter results. But, like most of you, we are more focused on how the balance of 2013 will shape up. So, I'll begin by reviewing some of the notable first quarter indicators, which should provide some good context for our outlook going forward. So, several encouraging themes emerged during the first quarter for Precision.

First and foremost, despite the continued global uncertainty and the macro economic risks, which seemed to pervade all thinking, the commodity prices have held up remarkedly well. The narrowings of the WTI and Brent spread's encouraging. Roughly expanding use of train transport to arbitrage down the regional differentials for light sweet North American crude are positive trends. While the final rhetoric on pipeline expansion continues, we believe industry and the governments of Alberta in Canada will find ways to debottleneck Canadian crude.

Beyond that, the growing customer inquiries and bid activity for gas and gas liquids drilling rigs pointed towards Northeastern British Columbia. The Northwestern Alberta continues to increase our confidence that LNG export projects on Canada's West Coast will materialize. The Canadian Service industry can count on long-term stability, supported this new business segment.

Continuing on this gas theme. While I'm not a fan of betting on hot or cold weather to solve natural gas storage issues, there is no question that the cold end to winter's brought US natural gas storage back inline. I am confident that while US natural gas production remains strong, the current depressed gas rig count, including the associated gas produced from the oil plays, does not balance gas supply with demand in North America. Inevitably, the US gas drilling activity will remain cyclic. But I believe -- sorry, I guess we have a microphone problem -- but I believe we are currently at the activity bottom. The recent gas price trend over CAD4 is helping provide improved customer cash flows. Some of this cash is likely to make it to drill [bit].

At a regional level, over the last few quarters, Precision has experienced a resurgence in the Marcellus activity, while industry at Marcellus rig counts have remained flat, we have reactivated several rigs and deployed two of our new builds to the region, along with four recently deployed new build coiled tubing units. As the gas price trended up from the low CAD3 range, now into the CAD4s. So it appears that our customers are high-grading to the best assets and the best service providers in the region, in anticipating of a tightened supply for those services going forward. Our Canadian winter drilling season finished at the higher end of our expectation for activity levels but still below 2012 levels. While our strong dayrates and margin performance was not a surprise, we're pleased that the aggressive repositioning of Precision's fleet over the past several years is demonstrating the returns we expected. It will provide these returns -- excellent returns for the long-term.

So, looking forward to Canada. I believe little will be learned from that rig activity or repricing during the second quarter. Precision's second quarter activity should be aligned with last year. A heavy snow pack in Eastern Alberta and Saskatchewan may prolong break up in those regions. But what we're really watching for is new rig contracts and rig upgrade awards, later this quarter -- or mid-year pointed towards the natural gas and (inaudible) liquids plays in Alberta and DC. Several E&Ps have active RFPs out running for bid inquiries. Most of these are supported by large, foreign capital direct investments. Realization of these contracts and the subsequent deployment of those rigs are meaningful, long-term drivers of the Canadian market and a positive for Precision Drilling.

Now, while the transportation differentials remain a challenge for heavy oil producers and the SAGD projects, train car transport is beginning to have a positive impact on Canadian light sweet crude. While it is too early to call for a meaningful increase in Canadian drilling demand, any initiative or factor that provides our Canadian customers with increasing cash flows is a positive driver for the service industry. Providing that commodity prices sustain current levels, our previously stated view that 2013 customer spending tracks 2012 remains valid. So this would point to solid or strengthening Canadian activity later this year.

So moving to the US for a moment, there is a bunch of talk about pricing pressure and aggressive market share strategies. Most of this is contractor specific and the results of a flatten demand for oil targeted rigs and a continued decline in gas going demand in the first quarter of 2013. I think many of us still believe customer spending in US like Canada will mirror 2012. But the first quarter improvements we all expected were subverted by the declining gas rig count. I believe the gas rig count's on bottom. Hopefully the firming gas prices should at least stabilize this activity. It's my view that if commodity prices stay in the current range for the balance of the year, we can expect utilization improvements throughout the year despite the slow start. I think barring a commodity price collapse, our customers are likely to spend out their announced 2013 drilling budgets.

Now, at Precision we keep a cool hand on the wheel. We avoid short-term market share price battles while ensuring our customers receive high-efficiency and the performance they expect from Precision's high-performance rigs. This often means that for short periods, especially during these pricing skirmishes, Precision's rig utilization may lag. We believe that over the long-term, focusing on high-performance and exercising pricing discipline commensurate with the rig performance we deliver to our customers, provides better full cycle returns for Precision and our investors. On that note, we have increasing visibility on several potential US new build opportunities and believe it's likely we'll have further new build contracts to announce as the year unfolds. For these new build customer contracts, Precision's long-term economic hurdles remain unchanged.

Looking for a moment to our international business, it's great to report a solid execution to this quarter. With eight rigs running, with yields in our international bases well-established. As mentioned in our press release, the lessons we learned last year in positioning and start ups have been applied to the three rigs currently in deployment, we expect to build on this good start in 2013. By the end of the third quarter, we will have redeployed 11 rigs for our North American fleet to long-term stable international contracts demonstrating the success of our strategy. We believe other underutilized large horsepower rigs in our US fleet will continue to be good candidates for international deployment.

Construction on our fleet rigs is on budget and currently running ahead of schedule. You may recall those rigs are scheduled for mid- 2014 deployment. We make accelerate this deployment. We'll update you later this year. Bid activity is surging internationally particularly in Saudi Arabia. At Precision, we will stick with our conservative but steady strategy for growth and ensure we deploy capital carefully and generate our expected financial returns while delivering the high-performance our customers demand. On that note, I'll turn the call over to Doug Strong to discuss our Completions and Production business for a moment.

Thanks, Kevin. As Kevin and Rob mentioned, the first quarter was balanced with reasonably positive strengthening and stabilizing of energy fundamentals. In Canada, the first quarter for C&P Services came in close to where we expected, with winter service work in the East and North on track and the slow January is starting to sell picking up with drilling completions and production work. The year over year profit margin compression we experienced was associated with the impacts of a slowdown in Canada and a short-term [call of nature] of the business as well as early-stage growth initiatives. As Rob emphasized, mix was an important factor, as our rental business declined, from near peak pricing and utilization to our more normalized range. Further costs associated with the serviced line and United States growth weighed in, as we build critical mass in these new markets. Markets like pressure controlled coil tubing and snubbing in the Marcellus.

For Precision's C&P Service suite, the past 12 months have seen investment and positioning that will add earnings capacity going forward. Our Service offering has expanded to meet the growing needs of customers associated with the shift towards long reach horizontal well bores. This applies throughout our entire Service line up from well servicing to rentals and our remote camp and catering logistics business. Well Servicing has added medium to deep coil tubing capacity in the United States and Canada. Rentals has added power generation and solids control centrifuges to strengthen and diversify our equipment offering. In our camp and catering business, we have begun to transition from a renowned rig camp provider to larger, remote work sites, up to 500 beds.

In terms of United States expansion, we now have operation infrastructure established in certain northern regions. We are actively staging Well Servicing rentals, operations from operating centers in North Dakota and Pennsylvania. We have 12 Service rigs positioned in US, this includes five work over Service rigs, three snubbing rigs and four coil tubing rigs. The eight work over and snubbing rigs were relocated from Canada and the four coil tubing spreads are new. In the first quarter, the US Service rig fleet generated 7% of overall hours as compared to about 1% in Q1 last year. We began 2012 with a single rig and now have established a market foothold and workforce to deliver Precision's brand of high-performance, high-value Services.

In Canada, we continue to see our business focus on all targets, a remarkable pivot by our customers over the last few years and our near-term outlook is steady at current activity levels. Well Servicing, the second quarter Canadian breakup is expected to be prolonged in certain regions, due to weather and significant snowmelt. To date, we have not experienced an uptick in demand for natural gas wells, an area for improvement as customer cash flows improve with higher gas prices. We see our Service rig market as balanced in term of supply and demand. With a little labor cost escalation in Q4 2012, cost control remains well in hand.

We continue to invest in systems and people to further improve safe operational execution. Safety performance is a hallmark of Precision. We are pleased with our Target Zero performance. No recordable injuries by C&P Services for the month of February. Further, Precision Well Servicing this past weekend was awarded the CAODC industry 2012 Class A Safety Leadership award. Congratulations to the entire team. Well done. Kevin, that concludes.

Thank you, Doug. So, just before I turn the call back to the operative for questions, I would like to summarize our outlook. The first quarter for Precision was an execution quarter, where our new rig investments, fleet repositioning and international deployments began to demonstrate our sustainable, long-term returns. Our view forward, while I believe encouraging, must be viewed, on the less than expected customer demand we experienced during the first quarter. But with the continued view, the customer is spending for the full year, we'll remain on track. We will keep a keen eye on commodity prices, as we remain poised to respond to sharp market changes. But we also believe that Canada has the potential to be a bright spot, sooner than some may have expected. So, like Doug, knowing how hard our people work during the first quarter and during the winter season in Canada, I want to thank all the employees who listened in on our call for the great efforts and hard work during Q1. I'll now pass the call back to the operative for questions.

(Operator Instructions)

Byron Pope, Tudor, Pickering, Holt.

Kevin, I just had a question for you. You mentioned that although there's nothing to announce now, you're still in conversations with customers about potential incremental new builds for the North America market. Could you just speak to some of the rig characteristics that E&P operators are talking to you about? As you think about those potential contracts?

Byron, that's a great question. I would tell you that most of the new build discussions right now are centered around pad type drilling rigs that have capabilities to walk around the pad either in a straight line or in X/Y direction, both directions. So these are highly sophisticated Tier 1 drilling rigs. They range in capacity from between 1,200 and 1,500-horsepower. They come with all the current levels of both automation and control systems to maximize performance for horizontal wells.

Then second question for me. Just -- you touched on the Saudi market, but it also seems like there might be some incremental opportunities in Mexico. I know you have rigs there. Could you speak to the potential UC maybe the back half of this year and into next year for incremental work as those PEMEX tenders come out and get rebid?

Up to this point, we've been probably a little more focused on the integrated project management work in Mexico and supporting the largest service companies that are doing that work. So, on the direct PEMEX tenders Precision's been a little bit less focused. I still think that likely, the better places for Precision are with the IPM providers using our deeper high-capacity rigs as opposed to some of the shallow work that PEMEX may be pursuing directly with drilling contractors. Scott Treadwell, TD Securities.

I wanted to look at the contract base from a sort of age perspective. I mean we're coming up now as we go through 2013 to where some of that new build focus that you guys had in the past three years is going to come up to end of contract. Is there anything we should be thinking about as we go through 2013 about substantial numbers of new builds rolling off? If so, where are they kind of relative to spot pricing?

So, Scott, I'll give you a little bit of color first. Then I'll see if Carey can fill in the back pieces on contracts. But generally, if a customer has contracted the rig from day one, on a new build rig. They'd run the rig for three or four years. They've likely paid for all of the capital -- or most of the capital. The rig's likely done a very good job for them over the last three or four years. They're quite happy with it. They know the crews. The rig knows the drilling program. The fact of the matter is customers aren't anxious to change out that asset. So, while the spot market plays a role in overall rig pricing, I would tell you that a high-performing rig that was owned from -- or used from day one by a given customer -- if they have continuing needs then likely renews at some price that's more a function of the original contract dayrate rather than the spot market dayrate price. So, I'm not going to guide you to -- down to spot market prices or that we'll hold prices flat on renewals. But we do have some contracts that have rolled over. The rigs were renewed at the same dayrate. We have others where there's been a little bit of a pull back on dayrate, maybe CAD1,000 to CAD2,000. But it's not like we're faced with those rigs rolling down to spot market price -- if they've done a great job for the customer. Carey?

Yes. I'll just point out that we have 105 rigs in our fleet that are under contract for the second quarter. Then 98 for the full year. So not much of a drop-off throughout the year.

To kind of further that point, Scott, the new builds that we're looking at right now in both Canada and the US are still falling well within our long-term economic hurdles.

Okay, good. That's good color there. I wanted to turn to the international side. It certainly looks like you guys have had some pretty strong success there in getting the rigs up and running. The next step is obviously the profitability and margins. But I'm wondering if at this point now that your -- 6 rigs in Mexico and looking to have your rigs in Kurdistan and then Kuwait next year, do you think that you've got the experience and the critical mass that you start to look at other options for expanding? Or are you still very firmly in organic growth there?

I think right now, at least for the time being, we're in organic growth. I'm pretty sure we haven't learned it all yet. There's a lot more to learn. But I think the big lessons have been -- are behind us now. Getting rigs up and running, getting them staffed up properly and dealing with customers, we've done -- made a lot of progress on those fronts. There's -- there are -- you're referring to acquisitions. That's kind of the question you're asking directly here, I think. We're going to be very mindful and very careful about how we deploy our capital. Looking carefully at the risk profile, I would tell you that it seems like there's a number of international contractors right now that are either for sale or running some kind of a sale process. We'll have a careful look, but I'm not expecting anything on the short-term in the way of attractive transactions for Precision.

Okay, great. The last one is kind of on upgrades, 20 is the number. I know 2 of those are Kurdistan. Has the trigger been pulled on any of those yet from a customer contract point of view? Are you still in waiting mode here, as you move into the second half?

I don't think we talked about that on the press release or on the call. But we've had a couple of upgrades contracted out. One, for example, is a couple of existing Tier 1 rigs that the customer is paying for a full natural gas conversion. Those rigs are going into the Marcellus. Those are full -- going to be fully natural gas fired rigs. We're pleased to be involved in that. So we've had some upgrade activity. Rob, do you have any more color?

So, Scott, we have been contracting rigs for upgrade throughout the year. I expect from a modeling perspective, you ought to think about it as kind of rateably across the entire year. So yes, that's underway and lots of discussions going on with different customers on a variety of different upgrades.

Okay. I guess maybe just a stitch more color if I can? Are the rigs that are contracted today for upgrades -- sort of to this tier 1 example, working today and getting improved? Or are they kind of idle rigs that are getting upgraded and will go to work?

It's a mix of both, Scott.

Lara King, Stifel - Canada.

I'll just return to the contract questions again. Are there rigs you've got in your fleet right now that aren't contracted that you're actively seeking contracts for? What's the environment for those kind of rigs?

Lara, it's Kevin. I think the answer is yes. We have rigs that aren't contracted in our fleet today. Our contract flow has been rolling down a little bit with time. So, we're out actively seeking contracts. We're not anxious to lock in long-term at a trough level dayrate. So, I think that's the key. We have several of our Tier 1 rigs right now that are operating on short-term contracts or day-to-day contracts, at very high dayrates, at near original new build dayrates. Our customer is not wanting -- doesn't want to lock in that rate for the long haul. We're not anxious to lock in at a substantially discounted rate for the long-haul. So I think we're happy to let things kind of roll the way they are right now. When demand starts to pick up, whether it's driven by commodity prices or by activity demands as customers start to spend out their full budget, I think the contract environment will become more clear. A great indicator is when customers are trying to lock in these rates, these bottom rates on a multiple basis.

You mentioned the RFPs for the developing plays in Canada later this year. Do you believe that there is existing rigs either amongst your fleet or your competitors that could fulfill these contracts? Or will they sort of undoubtedly be new builds?

Lara, it's pretty early right now in this process. Some of these will be contracts, I think, fairly soon. But I think what's happening right now is everybody's kind of estimating sort of mid to maximum needs. They're sending tenders out to see what kind of pricing they can get for these large volume needs. If you think about gas development in BC, just in very broad terms, 25 to 40 rigs per BCF of export. If you think about it like that, then probably the first B of rig requirements can be met by the existing fleet. After that, I think there will be new builds required.

So, I don't know if I've really answered your question. But I would tell you, I think there's 25, 30 maybe 40 rigs available in Canada to meet all of the northeastern BC needs. Then after that, it becomes new builds. I don't think it's going to take all 25 to 40 rigs to be contracted before those first new build gets ordered. I think it will happen sooner, depending on customer needs. So, a complex environment. What I'm less worried about are rigs coming in from the southern US up to Canada to participate in some of these plays. We put some talk about that. The conversion cost to take a rig from South Texas to make it competitive for pad drilling in northeastern BC, would likely make a new build look very competitive.

That helps. Thanks. Then just turning over to the Service rigs side in the US. Are you happy with your pace of growth? Or could we see you taking any steps like acquisitions or something to accelerate that?

Well, I'll put the expectation out there. The pace of growth is cautious to conservative, which is probably the right thing to do. But Doug, go ahead and answer.

Yes. Lara, I would just round that out with a comment that, we're just getting started. We've got 5 work over Service rigs. They're positioned in North Dakota and Montana. Excellent customer base, albeit small. We're just cutting our teeth. We're beginning to learn the market. Is there opportunities? Certainly, it's a multiple times market bigger than Canada.

But, I think we're going to remain focused on those northern regions, where our capabilities in cold weather really come into play well.

Mike Urban, Deutsche Bank.

Kevin, you had made a comment about not being willing to engage in, I think you called it, pricing skirmishes. I'm pretty sure I can guess here who you're talking about in the US. How far does that go? In other words, if we continue to have a flat overall rig count, you continue to see new capacity coming into the market -- how far do you let your utilization fall before you are worried about share or fixed cost absorption or things like that? Just trying to get a sense for your ability to kind of stay out of the skirmishes, which is certainly advisable but not always possible.

So, Mike, great question. It's hard for us to predict how long these things go on for and what the trends look like. We're not ignoring market share position. I would never suggest we do that. We certainly do not want to be the contractor out there leading dayrates down. We want to ensure that we can always achieve a premium for the services we provide. So, it's a careful balancing act. We've been through sustained periods of downturn and done a pretty good job managing the combination of our fixed costs, our utilization and our coverage. So, short of giving any clear guidance that my competitors might be able to jump on, we'll juggle this carefully. We're going to make sure we get a premium for our services at all times in the cycle.

Got you. Any particular regions that are better or worse in terms of that pricing dynamic that you described?

Yes. I think some of the focus areas right now for a lot of people are places like the Eagle Ford in West Texas. It's a pretty good focus. Obviously there's been a lot of movement up in the Bakken. Again, as -- we've gone through almost 2.5 years of amazing demand growth for rigs. Just a flattening of that and a pull back in gas has created competition in a bunch of areas. There's no question though that high-quality rigs still win out the day. It's not just a case of it being a new [AC] rig. It's a high-quality rig crew -- that with proven performance, existing crews, high-performance safety. If you've got the right combination of people, assets and proven performance, that price competition factor is a little less of a concern for us.

John Daniel, Simmons & Company.

A couple for me. Kevin, you noted a pickup in the Marcellus. Is this a case where you're displacing existing rigs? Or a case where your customers are now adding rigs? Then separately, are these customers, when you're putting the rigs to work from up there, are they seeking shorter-term arrangements? Or longer-term arrangements?

John, first of all, I think the overall rig count in the Marcellus has stayed fairly flat, as we've gone back to almost our peak activity level in the Marcellus. We're quite pleased with our own progress there. That would suggest that we're displacing other rigs. I think, also fair to say that these are all sort of mid to longer-term contracts. A couple of these are new build assets that are being deployed over there. So I think we've become a pretty well-established driller in the Marcellus. Beyond drilling, I'm really pleased with the growth we're having in our coil tubing group. So I think that Precision high-performance high-value message that's well known in other areas is really grabbing hold in the Marcellus.

Okay. I want to turn to a modeling question. US cash margins have been guided down by all of your peers from as little as CAD200 to as much as CAD1,000 a day. I know you guys don't typically like to give specific financial guidance, but can you provide some framework as to whether the low-end, high-end what's reasonable for us to expect in Q2?

Yes. Hi, John. This is Rob. We've seen a bit of margin compression in the US the last couple quarters. I'm not going to give you a number, but I think that you might see that continue. But it's going to be a moderate amount. I don't expect to see a step change in margins.

Okay. Sounds good. Then the last one for me. On the coil tubing business, Kevin, can you just walk us through the long-term objectives for the business? I know, obviously it's always to grow, but is it an organic growth strategy? New market strategy? Just elaborate a little bit on that?

John, I'd tell you, broadly speaking, we want to grow this business organically both in Canada and in places in the US we can be competitive. We're very aware of some of the regional price competition going on and activity competition in certain areas. I'm not anxious to jump into those areas right now. We do think that larger market cap customers that want high-quality services will find ways to use the better quality service providers. That's our focus. Generally, organic right now. Building our capability, building a reputation as we go forward. But as for us, I wouldn't say we intend to be the largest coil tubing Company in Canada. It's more about having the full package of well Completion and Production support after the well's been drilled.

Is it a case though where the customer is coming to you and asking you to partake in the coil tubing business? Or are you guys going out, building and then trying to market that unit?

I would tell you that in the market, the customer always wants more value and price competition. So they're always asking us to add more services. While that's an interesting consideration, for us, it's more about ensuring we can provide the level of service that gets our returns in line.

Dave Wilson, Howard Weil.

Kevin, regarding the prospects for the LNG exports, I know it's kind of like predicting the spring breakup. But could you hazard a guess as to the timing of those exports? Backing into what that means for rig demand and when that could occur for you guys?

We're not the right people to ask about the likelihood and the eventual success of building a terminal, building pipelines. But what we are seeing right now, are -- many of these Canadian companies that have foreign direct investment -- the one people talk about often is PETRONAS and Progress Energy. These are billions of dollars invested in Canada by foreign -- both national oil companies and foreign direct investors into existing oil companies. A lot of it is being invested by the buy side of the LNG trade. So, you've got money coming into Canada, investing in gas properties. The same money is on the buy side of the LNG trade. So, that's one the most important elements in getting a LNG process going.

A lot of this work will happen in the Province of British Columbia. That province is about to go through a provincial election. But I think the politics in BC are supportive of resource development that has benefit for British Columbia. The gas work certainly does. So, we think that we've got those really important factors lined up. Technical capability, both in the geology and the rigs. Political willpower and capital intensity. Our history is -- when we see those three things line up, these projects go ahead. So now, we combine that landscape with real inquiries happening right now, from a number of companies for rigs designed to drill these walls. I'm sensing a high likelihood of some awards occurring maybe as early as during the second quarter or into the third quarter. Now, still, these are predictions. A great indicator will be some of these rigs being awarded.

Sure. Okay, great. Then just kind of unrelated follow-up. As far as the back half of this year goes, how should we be thinking about that? I know you guys don't give EPS guidance. But in terms of comparison, should we be thinking that this is hopefully better than 2012, but maybe not as good as 2011, given the lower rig count in the US?

The best guidance I can give you on that is that I think it's still our expectation that -- our customer's drilling budgets that were approved late last year and actually, well into 2013, kind of late on the cycle. There's no indication right now they're not going to spend that money. Now, it has been a really slow start to 2013. There's no question customers are exercising almost usual fiscal discipline in how they're putting their money out there. But until we hear somebody cut a capital program, it's really hard to believe that they're not going to spend the money they've already approved.

(Operator Instructions)

John Tasdemir, Canaccord.

Nice quarter. Just kind of big picture. Kevin, if we did see gas prices strengthen or stay where they are, where do you think you would feel it first? Would it be in Canada or in the US?

I think the gas prices give increased cash flow to our customers on both sides of the border. So I think they both benefit. But I think the likelihood of increasing exports of Canadian natural gas to the US is quite low. The more likely play for Canada is still this LNG play and domestic needs for gas. So I really think that for us, the upside for gas likely develops in the US first.

Okay.

You just walk around the US basins from the lowest-cost basins up from there. That's how you'll see it play out. Now, John, interestingly, we are seeing an increase in demand on our turnkey business in South Texas and Louisiana. Most of that's usually -- almost usually gas-based.

For LNG and the rigs that you may build for that -- I may have blanked out and you may have answered this already, but is there -- have they figured out what type of rig is going to be best suited for that? Is it platform? What type of rigs? I mean, I've heard there's some guys looking for really big rigs. Do you know what the formula is?

Yes. I think we have a pretty good sense. Certainly, we're involved in all those discussions with customers. Rigs in the range of 1,200 to 1,500-horsepower will deal with the majority of the drilling. Now, some of the really deep gas in northeastern BC will require rigs that are bigger than that. There might be a small number of rigs built that are bigger than 1,500-horsepower -- in the 2,000 to 3,000-horsepower range. But I think they'll be a limited part of the market. The broader part of the market, it'll be a 1,200 to 1,500-horsepower rigs.

Gregg Brody, JPMorgan.

If you could just tell me -- question's on the international side, not just on the other side of the ocean. I guess maybe South America too. What are you -- on the drilling side, what if you can grow outside of Saudi Arabia and Mexico? Where do they -- what are the real drivers to being able to enter those markets?

Gregg, what we're looking for is not to be a broadly diversified international driller with 15 or 20 countries. We want to stay fairly concentrated. So, we like our footprint right now in the Middle East -- principally, within a four hour plane radius of Dubai. So, I think that opens up most of the Arabian Gulf region for us. So that's a regional perspective. But probably more importantly is really looking for customers that are either international oil companies, where they truly value high-performance quality, safety, environmental responsibility. Or national oil companies, that behave a lot like international oil companies. So you can look at Saudi Aramco, acts and behaves and expects performance, very much like an Exxon or a Shell does.

Same thing in Kuwait. Very similar, KOC is a sophisticated long-standing international oil company owned by the Kuwaiti government. But their expectations and their performance measurements are really played well into Precision strategy. Now, there are -- the emerging country oil companies, I'm not going to name any of those particularly. But it's often shallower. It's often shorter sighted. It's often highly price competitive. Frankly, technology and performance are less a differentiator in those areas. That's less interesting for us. Is that helpful?

Yes. I think that's really helpful. The one follow-up, along those lines. So obviously, you have higher horsepower equipment. The shale game seems a bit further out over there. As you look at that opportunity, how do you -- what's the timing you see that playing out over?

Well, I think the whole concept of unconventional horizontal drilling for tight sands gas and oil is gaining worldwide credibility. So that's the first phase. But still, if you've got a long-standing reservoir type drilling program, I still think shale drilling or tight oil drilling or tight gas drilling may be a little farther away. Again, companies like Saudi Aramco are looking at it now. I think you'll see Saudi Aramco in the not too distant future, probably inside 18 months, beginning their first horizontal programs to begin testing the technology. Obviously, a lot of talk about Argentina and gas. Tight gas plays down there. It's interesting.

Dana Benner, AltaCorp Capital.

Actually, it's Brodie, Dana's associate. Just a quick question. Maybe you went through this earlier. I couldn't quite hear earlier on, it was a little staticy. But just wondering, with the colder weather a bit longer here and a bit of a delay in breakup -- just wondering if you guys benefited in March, whether it had any impact on your operating days in Canada? Any impact on margins? The weather activity was kind of erratic and sort of starting and stopping instead of more of a continuous activity level.

I think the short answer is, that little bit of cold weather at the end of March helped support activity levels a little longer. It didn't create any sort of whipsaw for us. So that was not a problem. I think we probably had 30 or 40 rigs that hung on a week or two longer than we might have expected. So it was helpful, no question about it. It didn't create any special dayrate pricing or any pricing tension. It helped support a year that ended up being 9% less than last year for activity.

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

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