Precision Drilling Corp (PDS) 2013 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Precision Drilling Corporation's second-quarter 2013 results conference call and webcast. I would now like to turn the meeting over to Mr. Carey Ford, Vice President, Finance and Investor Relations, please go ahead.

Thank you. Good afternoon, everyone. I would also like to welcome you to Precision Drilling Corporation's second-quarter 2013 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 Doug Strong, President of Completion and Production Services, and Gene Stahl, President of Drilling Operations. To our news release earlier today, Precision Drilling Corporation reported on the second-quarter 2013 results, and the announcement of a third-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 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 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 second-quarter operating results, and a financial overview. Kevin Neveu will then provide a business operations update and our outlook. Rob, over to you.

Thanks, Kerry. Despite continued constrained gas drilling activity in the US, and a prolonged spring break up in Canada, we reported a solid second quarter with revenues of CAD379 million, and net earnings of CAD500,000 or CAD0.00 per diluted share. Second-quarter 2013 EBITDA was CAD88 million, which is 9% lower than the second quarter of 2012. The lower Q2 results primarily reflect lower industry activity both in Canada and the US, versus the second quarter of 2012, partially offset by higher average day rates. EBITDA margins were 23% this quarter, versus 25% in the second quarter of 2012. Margins were impacted by lower activity levels across North America, again partially offset by higher average day rates.

In the US, during the second quarter 2013, drilling revenue improved by over CAD700 per day versus the second quarter of 2012. Year-over-year margins improved by a little over CAD300 per day, versus the second quarter of 2012. Rig utilization days were down 17%. In Canada, in the quarter, drilling revenues improved by over CAD1,600 per day year-over-year, and margins improved by over CAD900 per day. Drilling days in Canada were down 10% in Q2 of '13, versus Q2 of '12, and we're very pleased with the strength of our day rates and margins in the face of softer year-over-year industry demand. Our Completion and Production segment revenues were CAD55 million, or 6% above the first quarter of 2012.

EBITDA in the second quarter of 2013 was CAD2 million, which is 74% below the second quarter of 2012. The decline in margins was driven by lower activity, business mix, and training and on boarding costs associated with our C&P business in the United States. We're pleased with the growth in our US-based completion and production business, where we expect to see significant improvements in the coming quarters. Our international drilling business has also had significant growth, as we have gone from two rigs running in the first quarter of 2012 to 12 rigs running currently. We have contracts in place for another three rigs to be moved to international markets over the next 12 months, and expect to see more opportunities over the next few quarters.

In December, we announced our 2013 capital spending plan which we updated in our press release this morning. Planned capital expenditures for 2013 are now CAD654 million, including CAD330 million for expansion capital, which includes the cost to complete two rigs from the 2012 new build program, six new build rigs for North America, the cost to complete approximately 60% of the two new build rigs for Kuwait, and long lead-time drilling equipment in Completion and Production assets, which also include eight large diameter coil tubing spreads for the Marcellus. Upgrade is expected to be CAD139 million, which includes the cost upgrade approximately 20 rigs, including the 2 rigs going to the Kurdistan region, and the 3,000-horsepower rig going to Mexico for an IPM provider. Sustaining and infrastructure expenditures are expected to be CAD185 million, and include utilization-based maintenance CapEx costs, and the costs to consolidate and upgrade our operating facilities.

Turning to the balance sheet, we are very comfortable with the financial strength and flexibility that it provides. As of June 30, 2013, our total debt was approximately CAD1.3 billion, and net debt was approximately CAD1.2 billion. Our blended interest rate is just over 6.5%, and our earliest debt maturity is in 2019. Our senior secured revolving credit facility has availability of CAD850 million, and a maturity date of November, 2017. The facility is currently undrawn, other than CAD27 million in outstanding letters of credit. We also have operating facilities totaling CAD80 million, primarily for international operations. Precision's liquidity is more than adequate with cash, operating facilities and our undrawn revolving credit facility totaling over CAD1 billion of availability.

As far as taxes go, we expect the tax rate for 2013 to be approximately 18%. And for contract coverage, we have approximately 104 rigs, an average of 104 rigs committed under term contracts for the third quarter of 2013, which is comprised of 53 rigs in Canada, 40 in United States and 11 internationally. For the full year, based on current drilling contracts, we have term contracts for 106 rigs, comprised of 54 in Canada, 42 in the United States, and 10 internationally. As a reminder, in December, we effectively exited the tier 3 drilling market, with retirement of 52 legacy rigs, 30 from the US, and 22 in Canada. We are retaining 26 legacy rigs for seasonal stratification and turnkey work. Exiting the tier 3 market is consistent with our belief that the industry will continue to migrate towards tier 1 and tier 2 rigs that are capable of drilling horizontal wells. Including today's announced new builds, we will have 198 Tier 1 rigs, which is up from just 109, three years ago.

That concludes my comments, I'll turn it over to Kevin for further discussion on the business.

Thank you, Rob. Good afternoon. Well, I'll begin by saying that I think most of you understand the short term weather factors which limited our second-quarter results, particularly in Canada. Now, while the flooding in the Calgary area, the flooding disaster affected thousands of families and businesses, and in many cases damaged or destroyed their homes, we are intensely proud to have supported over 130 employees who contributed directly with the hands-on cleanup efforts. Also, together with our employees who have donated over CAD150,000 to the relief fund, along with providing the equipment and supplies for our employee volunteers.

Now, from a business perspective, our business operations in both Calgary, and around the field, functioned uninterrupted during and after the flooding disaster, including our Calgary administration staff processing a full payroll run when most of downtown Calgary was fully shutdown and without power. And this is a testament to the dedication of Precision's people, and the effectiveness of Precision's high-performance businesses systems, sustaining full business continuity during and following a natural disaster. Now, that said, while the flooding itself did not affect operations, I believe it's also understood that the poor weather throughout the month of June delayed the typical summer ramp up.

As we experienced firm customer demand, with often 30 to 40 rigs constantly waiting on weather for most of the month of June. And while conditions are improving in July, we're still experiencing delays due to wet conditions, limiting access to rig locations. As of today, we have 77 rigs running right now, and still 20 rigs waiting on approved weather to get access to locations. Now the important take away is not about weather delays, but it is clear that we are seeing initial third-quarter demand ahead of last year, and we expect this trend to continue for most Canadian areas, as the ground dries and the seasonal weather stabilizes.

From a macro perspective, for our Canadian customers, natural gas and oil commodity prices have been stable and strong compared to last year. And very importantly, the regional price differentials have narrowed dramatically, as rail transport is easing the transportation bottlenecks. We believe our Canadian customers are benefiting from these improved commodity prices, and this should eventually be evidenced by increased demand for our services. And while it's a little early to say, indications look good, that we expect to see this modestly improved customer demand continue through the third and fourth quarters. And the unusual tail-off that we saw in the fourth quarter of last year, may prove to be a once off and only.

Now, we are also very encouraged by the early customer activity out in front of potential Canadian LNG exports. Significant rig specification and pricing work was discussed with customers during the second quarter, particularly by the perspective LNG participants. The two contracted new build Super Triple 1500s we announced for Canada are a direct result of some of this early interest. As mentioned in our press release, both the industry, and Precision in particular, will see increased rig activity the summer and fall, in Northeastern British Columbia and Northwest Alberta, related to the delineation drilling as some of the LNG participants prove up their resource lands.

We also expect the Montney gas and Duvernay liquids drilling will see improved activity, in the second half of this year, driven by strong demand for liquids, and the recently invested foreign capital. Now, while it's too early to consider the LNG prospect a business certainty, we are encouraged by several factors. The political willpower firmly supporting this development is strong, following the re-election of the British Columbia provincial government. The large, international LNG players, players such as Shell, Chevron, Exxon, Petronas, to name just a few, have invested to acquire the operating interest in geology, and they all have a strong interest in exporting this gas. At Precision, we will closely monitor and participate as the opportunity emerges.

Our Super Triple 1200 and 1500 pad rigs are designed specifically for this type of application, and are already well proven in several unconventional basins including the Montney, Duvernay, Marcellus, the Bakken, the Permian and the Eagle Ford. Our ST 3000, developed initially for Kuwait, is the perfect rig design for the deepest unconventional gas under consideration in Fort Liard. Precision's opportunity for further new build contracts later this year, and through 2014 and beyond, looks positive as these opportunities further develop. For Precision, we do not need to invest capital in rigs or equipment ahead of, or in advance of, any of these opportunities. In fact, we don't need to make any bets at all. As always, we will commit capital to new build rigs only when firm customer contracts with the appropriate economics are in place. Continuing our long-term strategy of full-cycle strict capital discipline.

Now, moving to our international operations for a moment. As we mentioned in our Press Release, we were successful at contracting a seventh rig for IPM work in Mexico. This rig will mobilize to Via Hermosa in the fourth quarter, to join the other six rigs drilling deep oil wells, all under term contracts to the IPM service providers. And these IPM service providers continue to recognize the safety, the value, and the technical capability we offer, while shielding us from the local market vagaries.

During the second quarter, our first rig began operations in Kurdistan, and by the end of July -- I'm sorry, during the second quarter, our first rig began operations in Kurdistan, and by the end of July the second Kurdistan rig will commence full operations. Both of these on schedule and on budget. Now, it's important to remember, that the first quarter of last year, we only had two rigs operating internationally. This time last year, our active rig count was 5, versus the 12 rigs which will be operating end of July. All these rigs have been redeployed from idle stacked status in the US, to fully contracted internationally. We remain very pleased with this progress. Today, we have ongoing active bids in several countries, but we continue to be highly selective, focusing only on those customers who clearly value the performance and technical capability Precision offers. And we continue to expect this well-managed path of targeted, careful, and steady profit-focused growth will continue for Precision.

Turning back to the domestic US operations, the industry rig count in the US is stubbornly flat, with gas activity still easing down during the second quarter, and oil activity remaining (inaudible). There's no doubt that our customers who are unhedged are achieving much improved cash flows when compared to last year, again due to the stronger commodity prices, and the reduced transportation differentials. But this additional cash flow is has not yet making it to the drillbit, as fiscal discipline remains the common thing among most of our customers.

Our customer drilling budgets remain essentially flat year-over-year, and while the drilling efficiencies are helping our customers bring wells on ahead of plan, it seems less likely that the fourth-quarter slowdown we experienced last year will be repeated this year. Our current activity expectations are flat to biased slightly upwards through the end of the year, providing commodity prices stay in this range. While not conclusive, we also believe the new build customer contracts we announced are positive indicators of expected stable demand. If our customers were anticipating a fourth-quarter slowdown, why would they be committing to new builds today?

Now, of these new builds, we will further expand our position in Niobrara by one rig, and two are intended for West Texas. One of these has already been delivered, and the other two are delivered during the third quarter. Now, we're excited that one of the Permian rigs is with a major E&P who has not previously run a Precision's Super Series rig, and we believe this is a great time to develop new customers for our highest performing rigs.

Now, looking in focus at the Marcellus. Despite a significant drop in industry activity over the last 12 months, Precision is experiencing high demand for our Super Series rigs. Over the last 12 months, Precision's rig count has doubled, going from 6 to 12 at the end of the second quarter. We expect to continue growing this business, with at least two more rigs planned to be added during the third and fourth quarters. Most of these are pad walking rigs, delivering the highest efficiencies to our customers. We believe Precision's market share growth fully demonstrates how the service providers who drive safety, efficiency, and environmental performance stand to win in the complex resource drilling environment. Production line or factory style pad drilling is simply the best way to economically develop, and produce particularly environmentally sensitive areas. And this has been a core competency of Precision Drilling for two decades in Canada. We are proving out our capabilities in most US unconventional regions today, and we are realizing the rewards in the Marcellus.

Now, turning to our Completions and Productions Services group, the Marcellus is also a highlight. By early August, we will have eight large diameter coil units performing complex completions work for our customers, delivering the same promise of safety, technical capability, and environmental performance now well established with the Precision brand. This new coil business the Marcellus built in our deployment of three stubbing units last year. Also the six service rigs, a base camp, and [summary] rental products, we demobilized North Dakota late last year, are beginning to produce solid financial returns. And we expect that as the year progresses those returns will look much like they do in Canada. We believe our high-performance capabilities, the safety we provide, the mobility, the logistics and our adverse weather operating excellence, gives us a significant competitive advantage in northern US regions. We expect additional equipment may be mobilized from Canada later this year, as we continue to grow our reputation, and customer base.

Now as with our drilling business, our Canadian C&P business was also very slow during the second quarter, due to the prolonged spring break-up, with 20 or more rigs often waiting on weather. Coming into July and Q3, it remains difficult to provide a helpful outlook, due to the [call of] nature of this business, and the continued weather challenges, even today we have 20 rigs waiting on locations. We do expect that during this quarter we will be deploying the fully contracted [slat] service rigs we announced last year. Currently, we have 70 service rigs running, as the quarter gets underway.

Now, looking forward for a moment. Much like the LNG potential for Precision's drilling rigs, our well service rigs, our coiled units, our rentals, and camp businesses all have excellent growth potential linked, if the LNG potential is realized.

So, one final comment, I want to thank the employees of Precision Drilling for their excellent quarter of operational and safety execution, despite the many challenges and distractions we all faced. Thank you, and I will now turn the call back to the operator for questions.

(Operator Instructions)

Jim Wicklund, Credit Suisse.

Hey guys, this is Britney in for Jim.

So, congrats on the new builds this quarter. How is this going to affect free cash flow guidance for the rest of the year?

This is Rob. It pushes our capital budget to CAD654 million, and likely means that we will spend the majority or a bit more of our free-cash flow for the year between dividend payments, interest payments, and capital build.

Okay. And, as far as the upgrade that's going to be launched at the end of third quarter in Mexico, are you expecting the revenues to come on in the fourth quarter? I know there's, obviously, been some slowdown in Mexico recently.

Yes. This is separate from Chicontepec, which is where most of the slowdown has occurred. We will have revenues in the fourth quarter. With this rig we'll be under contract and operating by late third quarter, early fourth quarter.

Okay, great. Thank you.

Dana Benner, AltaCorp Capital.

I wonder if you could put a finer point on something that you said relating to the new builds in Canada? The specific question is -- the ones that you've announced, were those rigs part of the widely talked-about set of tendered rigs? Or would these be, notwithstanding the fact that they could be operating in areas that could one day supply a project, may have been more of a conventional new build announcement that you could have been working on with or without one of these projects?

Dana, the simple answer is, this project is going forward due to foreign direct investment.

Okay, so you're not willing to say, then, whether this is a tendered rig?

Well, there's still a lot of work going on right now; there's a lot of tenders that are still open, negotiations ongoing with customers. And really, don't want to turn any cards on which or where or how these rigs are deployed.

Maybe it collapses all to the same point, which is interest in these levels and the need to build high-quality rigs. Maybe you would at least agree on that?

Again, there's no question. As that region evolves into more and more pad drilling -- and that all applied to the Duvernay, the Montney, and the prospective Horn River development. Pad drilling will provide similar benefits there, that we are seeing in places like the Marcellus in the US. And between the footprint that you require for the rig, and the efficiency of moving well to well with the rig, we think this is a trend that we're on top of, and going to be leading the curve on.

Right. Help us understand -- you've got five new builds announced; I'm sure working on a number of other types of projects like this. Maybe update the way that we should be looking at the balance sheet? How you think about managing the balance sheet? Obviously you've got great capacity still, but do you start to take a little bit different approach, maybe look at certain projects, maybe dethrottle a little bit on interest in any acquisitions? Help us understand this.

Yes, sure, Dana. So, we clearly keep a close eye on the balance sheet, but as I mentioned in my comments, we are pretty pleased with where we sit today, both from a stability point of view, and from an availability and capacity point of view. And our capital budget, while it will move around a bit more before the end of the year, it's not going to increase significantly as we're more than halfway through the year now, and it's pretty clear what projects are going to get done in this year, and what things we push until 2014. And we are generating real cash flow. So I don't think that there's any real restructuring of the balance sheet that has to happen to address the projects that are in front of us, to make our interest payments, and to continue making our dividend payments. So, I think that we will be able to manage it with the balance sheet that we have.

Great. Just one final question -- I'm sure there lots more to follow. With respect to the two rigs in Kurdistan, the rig in Mexico -- should we be expecting material start up costs? And does that maybe impinge the growing profitability of that group for a little while? And maybe it's not until Q4 that we start to see the real power that is emerging there?

Dana, I would not expect unusual start up costs. However, when you've only got a handful of rigs operating in each region, even a tough drive down for a couple of days, waiting for parts or waiting for start up or something, can cause some notchiness in the early start-up of a new rig. So while we're not anticipating any unusual costs, I would not be surprised by a little bit of downtime in the first few days of a new rig being deployed. Not a new rig, but an upgraded rig being redeployed, halfway around the world.

Maybe, put a little bit differently, we don't expect to see nearly the start up costs that we had with our Saudi Arabian operation last year, as we have critical mass in the Middle East now and the deployment of the Kurdistan rigs has gone a lot smoother. In Mexico, we're adding to a base of rigs. We're just adding another rig to an existing fleet. So while there may be some additional costs, don't expect it to be significant.

Okay, well, that's very helpful. I'll turn it back, thank you.

Scott Treadwell, TD Securities.

Thanks, afternoon guys.

Maybe just a little more detail on that US business? Obviously a bit of a win there to get a new customer. I'm just wondering if you could maybe give a little bit of color -- is that a new customer to the Tier 1 rig market? I.e. -- they were running older rigs and have moved up? Or, is there some level of displacement, where you were competing against an incumbent who had Tier 1 rigs for that customer, and managed to supply a rig?

A fairly careful nuance you're asking us to clarify there, Scott. It's a good question. Let's just say it's a new customer to Precision Super Series of rigs. I think they've had a chance to experience a few other premium rigs. But we're thrilled to get them on as a Precision Super Series customer.

Okay, so they've drilled horizontal wells in the Permian, is a high level way to ask that question?

They are a deeply experienced, fully integrated, international E&P.

Okay, perfect. And, in the US, I know the messaging had been for flattish outlook in terms of recount and things like that. The fact that you guys have managed to put some new builds to paper -- is there still a level of interest there that Precision is able to capitalize on in a general sense? Or is there something specific that you guys have targeted -- some of these customers or some of these plays -- to gain these results?

I think the answer is kind of yes to both questions. I mean, we've really got our head down right now on marketing, and taking customers, showing them our high-performance rigs. We've done more rig tours the past quarter than I've seen the past couple of years, taking customers out to see the rigs that are performing. So we're really pushing the gas pedal down on marketing efforts, and I look at what we're doing in the Marcellus right now as validation that the high-performing companies do succeed, even in moderately competitive environments.

So, I think some of the things we've been doing for quite awhile now are starting to pay dividends for us, Scott. Three rigs spread out in the Western part of the US, between the Permian and the Niobrara, is nice. But I'd like to see more activity. I'd like to see just more demand for our rigs. I think it's going to take a combination of the marketing efforts we're putting into things, more validation of our performance, and likely some improvement in drilling activity in general.

Okay. Perfect.

Turning to Canada -- I know you said it's hard to characterize what the short term is going to look like. But if I looked at the backlog, and the interest that is there today, obviously there's been delays through the latter part of Q2. Do you get a sense that, at least some of the activity that you're seeing today is structural, where guys are delayed and they're just pushing things to the right., and then they will start when they can start? But is there a level of it that there's a bit of catch-up being played, where guys are already far enough behind that instead of a three-rig program they're going to four for the summer? Have you seen any of that yet, or is it really just things moving to the right, and there hasn't been incremental demand yet?

Scott, there's a little bit of both happening. It's kind of the two ends of the market. Obviously, smaller companies that have tighter access to capital are happy to let things slide a little bit. And the larger companies that have firm plans are behind the eight ball trying to catch up.

Okay, so -- (multiple speakers)

Now, you have to remember that for a long time most of Canada was the juniors that were drilling off cash flow. And there's been a huge shift, where a lot of the drilling now are by the well-capitalized companies, so market positioning is really important in this market.

Okay, and it's not the part of the market that's been the catch-up -- the guys that are maybe layering on some extra activity? Are they starting to run into, in general terms, some sort of shortage of equipment or windows to get rigs or equipment lined up? Are you getting that sense? Maybe not panic, but certainly some supply availability issues there?

Is there pricing tension -- is, I think, the question you are asking?

That's the follow-on, for sure.

Yes, in some places there is; other places, no. So, Southern Saskatchewan right now, I don't think there's a lot of pricing tension down there. When you get into deeper horizontal plays, I think it's a pretty healthy environment.

Okay, perfect.

And the last one, just a quick one. I saw in the news release, you talked about, by specifically mentioning integrated directional drilling jobs. Is there any change there? Have there been any marketing successes? Or is this just a continuation of the slow grind of convincing customers that this is a useful way to save some money?

It feels like there is a little bit of a momentum shift happening, Scott. It's a little early. But, just the interest we are feeling right now, feels a little bit different. And we are not the only company doing this. I know there's other -- one of my competitors is doing the same thing. I think we're both doing a very good job in the market place. I think we are both proving that there is real value for our customers, and the message is getting heard. It does feel like there's a shift going on. I'm probably more encouraged about the transition of the customers now than I've ever been. I remain a big believer. This is huge value for our customers, and we're getting a chance to finally prove it.

Okay, perfect. As always, guys, appreciate the color. I'll turn it back to the queue.

Kevin Lo, FirstEnergy.

Can you guys talk about the pricing trends in both sides of the border? I mean with the pricing tension that Kevin just alluded to in some areas, but lack of in others, what should we expect in terms of pricing, heading in the Q3, Q4?

Kevin, good question. Let's start off with the US right now. Demand remains flat. And when demand is flat, we've talked often about the fact that our Tier 1 rigs have good customer acceptance, it's all going nicely. But when the rig renews, we have to show some flexibility with the customer. We can't just be hard on the price, and not back off. So, I expect that until demand starts to improve, in general the pricing in the US will stay flat, with us being careful around our renegotiations. And we might give up CAD500 or CAD1,000 a day renegotiating contracts. But, between mix and good performance on our rigs, until demand goes up we're in a relatively flat to slight downwards pricing trend in the US, in line with our guidance from previous discussions.

Now, look at Canada. It's a tale of different areas in the market, and different spot markets. We were quite effective in our negotiations last year, we will be starting that process later this year for 2014. As we watch how drilling plans roll out during the year, we will get a better sense for pricing going into 2014. It's probably fair to say there might be some labor cost pressure, because labor is still tight in Alberta. That is quite constructive in our conversations with our customers while passing through those costs. So what we'd really say -- I'd say that the risk of a really soft spot market for Precision is not hitting us this summer. We feel pretty good about summer pricing. I hope that is enough color?

Oh no, that's lots of color, that's great.

And could you talk about what the contract dynamics are in the US? We noticed that your contract size is down a little bit. Is it because you don't want to renew at certain pricing? Or is it just because the contracts' simply not there?

Yes, there is a bit of a mix. I can tell you that if we're giving a customer a break on the price right now in this market, we don't want to lock it in for a long time. We'd be happy to go well to well, if we could, on some of these renewals. Generally, our customers really want to keep the rig, Kevin -- that's important. And if it's drilling a resource play, which 95% of our rigs are right now, our customers don't want to lose that rig if it's been drilling there for the last three years. So, they might like to try and lock us in at a lower day rate. We'd prefer to give them a bit of a break for a short time, and watch how utilization goes. So, it's an ongoing pull and tug between us and our customers.

Okay. And just the last thing is, if you can give some clarity on the delivery schedule on the new rigs, that would be great. Like when do we expect them to come on?

So maybe, Carey, you can fill those blanks in for us.

Sure, Kevin.

So, one of the new builds to the US went in the second quarter. The other two will go in the third quarter. And the two in Canada will go at the end of the year.

That's great. Thanks, guys, thanks for the info.

(Operator Instructions)

John Daniel, Simmons & Company.

Just a question on the expansion in US with respect to the well service business. First, can you remind me what the total rig count is today? I thought I heard you say six? And -- (multiple speakers)

So we have six coil-tubing units running in the US today, going to eight here shortly, within a number of weeks. And then we've got seven well service units as well.

Okay. Can you share what that well service rig count is?

Yes, hold on one second, we will have Doug update you on that.

John, in the US, we've got a total fleet of 15 -- 6 coil tubing units and 3 snubbing units, that forms our pressure control group in the Marcellus. And then today, we are operating six service rigs in the Bakken.

Got it. What is the rig potential, if you will, over the course of the next three to four quarters? Is that something you can lay out in terms of a growth initiative?

We're not giving a lot of guidance forward on how we plan to deploy those rigs. With just a handful of rigs right now in North Dakota, we're most focused on making sure we continue to deliver high performance, high value to our customers. And so we will be adding in there, John, kind of a one rig at a time.

Okay.

So purely slow, steady growth. We're pretty careful about moving into new areas and not getting over our skis.

Okay. So, I guess the intent is to continue to focus on North Dakota before hitting the other markets. Is that just a --?

We have, right now, no plans to hit any other markets. We're really focused on the North.

Okay, that's good.

Good.

Rob, any chance you could give us a reasonable range on depreciation guidance for Q3?

Yes. So, it will be a bit higher than Q2, as activity levels will be higher in Canada, obviously; and most of our depreciation is based on utilization days. So, it will be a bit higher than where we were in Q2.

Got it, okay. Congrats on your new rigs. Thanks, guys.

Todd Garman from Cormark

Good afternoon.

I'm just wondering if you can provide us with a little more detail on what your major customers may be doing in the oil or heavy oil-specific areas year over year? What does demand or rig activity look like for those clients relative to what it was last year? Is it up and increasing, or flat? Anything you can share with us there?

The winter season, Todd, for delineation or [accord ian] work was a little bit off last year. For us particularly, we are off a little bit from last year. But, I think summer/fall activity will be pretty much in line with 2012 in heavy oil.

So, you don't see your clients increasing activity there, is the short answer?

Not right now. There's actually one or two bids floating around. We might be successful, but it's not a needle mover.

Okay. Thank you.

Brad Handler, Jefferies.

Maybe I could ask you to follow up a little on some of the Completion and Production conversation? I'll key off of your comments. Kevin, you said you expected significant growth in C&P over the coming quarters. Let me just ask you to elaborate on that? I know you've got a couple more coil tubing rigs coming into the market, and obviously you've got the seasonal recovery. But, I don't know if you were speaking about something broader than that? So, maybe you can help me drive where we should be thinking about the growth?

Yes, Brad I may have misspoken there a little bit, or maybe I was referring to the US market. So, in the US market we're certainly growing pretty significantly, going from zero coiled units now to eight units. That's significant growth. And same thing with our well servicing business in the US. But this is still small wedges relative to our Canadian business, which is going through a seasonal recovery right now in July. And my comment there was, the visibility is a little bit murkier, because of -- call it the nature of the business -- the lack of contracted work. And, I think most of the well service business in Canada, I've been a little surprised the past couple of years how the completion business that usually tracks drilling pretty well, just seems to be lagging a little more than usual.

Interesting. That is interesting.

Are there -- since you've opened that up, are there some theories you kick around as to -- does it relate to efficiency in some way? Or is there a lack of completion of wells in something?

Well, certainly the completions have gotten -- from a service rig business, they've gotten a little bit simpler for us, a little less than the horizontal wells. We understand all those moving pieces. But just generally the business seems to not gain the ground that drilling has picked up on. And I don't have any good reasons why. It just could be time lag.

Okay. Maybe an unrelated follow-up for me. There is potential activity, or I think there are rig tenders, I don't know how firm or real, maybe you can help us understand that. But, Saudi, for example, I think is kicking around a couple of dozen tenders for new build onshore rigs, and I'm sure there's some others. How would you characterize that new build potential internationally? And what do you see is your appetite to participate in those?

Yes, Brad, great question.

There's probably interest for new builds in several countries, Saudi being one of those -- maybe the largest interest in Saudi. Highly competitive market. For most of those new builds in Saudi there are a number of bidders that are qualified, not just Precision and one or two others. We're going to be a little more focused when the bid list is short, maybe two or three or four companies, but not when it's a long list of eight or ten potential bidders. So, we're not going to be announcing six or seven or ten new builds for Saudi -- that won't be Precision's model. We will be focused in more on the opportunities where we can really provide some meaningful, differentiable value. So, in Saudi that's one, two or three rigs if we're successful; not multiples beyond that.

Okay. Interesting. Would you mind touching on some other countries where it seems like there may be some opportunities?

What, I'll tell you is, we're really focusing on, if you took a plane diameter around Dubai, and circled about four hours inside that radius.

Okay.

And there's activity in several countries. I really don't want to draw too much attention to the areas we're focused on most, because it is quite competitive when there's only two or three bidders at the table.

Sure. Understand. Okay. That's good for me. Thank you, guys.

Jeff Fetterly, Peters & Co.

Good afternoon, guys, just a couple follow-ons. The C&P business -- can you help us understand on a year-over-year basis what impacts some of these start-up costs, and whether costs had from a profitability standpoint? Basically, I'm just trying to tie the 17% margins you did in Q2 '12 to the 4% in Q2 '13?

Yes, I think it's not a very representative quarter, right, because you have the slow down in Canada, and the Canadian business was slower. But you saw the revenue tick upwards, which is the growth in the United States, primarily. But that growth was without much margin, because of the start-up, on-boarding costs, training costs that really masked where that business is going to be.

So, what I would tell you is that third quarter and fourth quarter will be much more representative of what that business is going to look like from a margin perspective. Just with the combination of Q2 Canada weather-related issues, and then in United States, start up of new operations, it's difficult to see what it's really going to look like. So, I would say be patient for a quarter, and it's going to look a lot different.

Can you give us a sense, if you stripped out some of those start-up costs, what impact or what margins could have been?

I do not want to be that specific, Jeff, but here's what I would tell you, is that margins shouldn't be worse than what we've seen in past years. The margins with the new business are going to be as good as what we've delivered for the C&P business in past years.

Okay. So Q3, Q4 of last year are fair representations of your expectations going forward?

Yes.

Okay, last question. The commentary around the tax appeal in Ontario, and the future tax potential obligation there -- can you give us some color about that?

It's been out there for a long time, and we were in court in Ontario, and got a surprise ruling against us that we and our advisors believe is erroneous. We're appealing it. And we believe -- us and both accounting and law firms -- believe that it was the right choice to leave the receivable on the balance sheet and not run it through the income statement because, without getting into the details, the ruling was really outside of everybody's expectations in terms of the fact set and the prevailing case law.

Is there going to be any restricted cash while this is in appeal?

No. We paid Ontario CAD50 million-something a number of years ago. So, it's just a receivable for us, there's no cash impact. The only cash impact is if we prevail on appeal, then we will get our money back. If we don't, we then have to just expense the receivable that we have.

Great. Thank you very much. Appreciate the color.

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

That concludes our second quarter 2013 call. Thank you for joining us today.

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