Precision Drilling Corp (PDS) 2013 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Precision Drilling Corporation's Q3 results conference call and webcast. I will now 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 would also like to welcome you to Precision Drilling Corporation's third 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 is Doug Strong, President of Completion and Production Services. Through a news release earlier today Precision Drilling Corporation reported on the third quarter 2013 results and the announcement of a fourth 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 third quarter operating results and a financial overview. Kevin Neveu will then provide a business operations update and our outlook. Rob, over to you.

Thanks, Carey. Today we reported our third quarter 2013 results and announced a 20% increase in our dividend, taking the quarterly dividend to CAD0.06 per share. For the third quarter of 2013 revenues were CAD488 million which was 1% higher than the revenues reported in the same quarter of 2012. Net earnings were CAD29 million, or CAD0.10 per diluted share versus CAD39 million or CAD0.14 per diluted share in the third quarter of 2012.

Third quarter 2013 EBITDA was CAD138 million which is 9% lower than the prior year period. EBITDA margins were 28% this quarter versus 31% in the third quarter of 2012. The lower Q3 margins primarily reflect lower industry activity, both in Canada and the United States, versus the third quarter of 2012, partially offset by higher average day rates and increased international profitability. Margins were also impacted by our Canadian C&P business which has seen a significant decline in activity and margins largely due to reduced work over activity and an oversupply of assets in the surface rental equipment market. Consolidated margins were also negatively impacted during the quarter significantly by two events. A supplier went bankrupt causing a loss of over CAD3 million, and we had a difficult turnkey well that cost us almost CAD4 million. These losses are contained in the third quarter results.

The vendor issue is one that we and other industry participants have been actively managing for some time but the vendor finally had to throw in the towel this past quarter. We may ultimately recover a portion of our loss but there is no guarantee. In our turnkey business we generally run somewhere between two and five rigs at any given time and on average will generate a little over CAD12,000 per day in EBITDA. But it is a volatile business with some wells generating in excess of CAD20,000 per day in EBITDA and others where we lose money. During the third quarter we had a very difficult well operationally that cost us approximately CAD4 million. We have seen this happen before, and it will likely happen again but overall we generate very strong returns in our turnkey business.

In the US during the third quarter drilling revenue declined by CAD500 per day versus the third quarter of 2012. Year-over-year margins declined by a little less than CAD500 per day and the US's operating costs remained about the same Sequentially margins declined by over CAD1,000 a day but this was largely driven by the turnkey results that I just discussed. Versus the third quarter of 2012 US rig utilization days were down 11%.

In Canada in the quarter drilling revenues improved by over CAD750 per day year over year, and margins improved by approximately CAD300 per day. Drilling days in Canada were down 1% versus the third quarter of 2012. Please note that we did not have any lump sum termination payments in the quarter. In fact, we increased our rig count in the US by seven rigs during the quarter. Our completion and production segment revenues were CAD79 million, or 2% above the third quarter of 2012. EBITDA in the third quarter of 2013 was CAD12 million which is 47% below the third quarter of 2012. The decline in margins was driven by lower activity, business mix, and training and growth associated with our US service line -- our US and service line expansion.

We're pleased with the growth in our USC&P business where we expect to see significant improvements in the coming quarters. The increase in SG&A in the third quarter was driven by the vendor bankruptcy that I previously mentioned, and an increased stock-based compensation expense caused by a higher share price. Our international drilling business has also had significant growth as we have gone from 2 rigs running at the beginning of 2012 to 11 running currently with the 12th rig expected to be up and running in the next few weeks. The two 3,000-horsepower rigs that are going into Kuwait will be operational in the middle part of 2014.

Last December we announced our 2013 capital spending plan which we updated in our press release this morning. We believe that our capital plan demonstrates a focus on high return growth as well as fiscal discipline as we have added three additional Super Series new build rigs to the program while reducing the overall capital budget by approximately CAD45 million. We did this by reducing activity based maintenance and discretionary CapEx. Planned capital expenditures for 2013 are now estimated to be CAD609 million which includes CAD322 million for expansion capital, which includes the cost to complete two rigs from the 2012 new build program, 85% of the cost for the nine new build rigs for North America, and the cost to complete approximately 60% of the two new build rigs for Kuwait, long lead time items and completion and production assets which include eight large diameter coil tubing spreads for the Marcellus which have now all been delivered. Upgrade capital is expected to be CAD145 million which includes the cost to upgrade approximately 20 rigs, including the two rigs now in the Kurdistan region of Iraq and the 3,000-horsepower rig going to Mexico for an IPM provider. Sustaining and infrastructure capital expenditures are expected to be CAD142 million and include utilization-based maintenance CapEx costs and the cost to consolidate and upgrade a few operating facilities.

Our balance sheet remains strong and stable. As of September 30, 2013, 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 over CAD800 million. We extended the maturity date of that facility to November 2018. Precision's liquidity is more than adequate with cash, operating facilities and our undrawn revolving credit facility totaling approximately CAD1 billion of availability. We believe that our balance sheet is in excellent shape and positions us well to address high return growth opportunities, return capital to shareholders in the form of our dividend, and thrive in a downturn if necessary.

Turning to taxes, we expect the tax rate to be approximately 12% for 2013. As for contract coverage, we have increased to an average of 115 rigs committed under term contract for the fourth quarter of 2013, 106 rigs under contract for the first quarter of 2014, and 89 rigs under contract for the full year of 2014. Importantly, this is 10 more rigs under contract for 2014 than what we had at the end of the second quarter. As a reminder, in December we effectively exited the Tier 3 drilling market with retirement of 52 rigs. We're 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 rigs that are capable of drilling high quality, efficient horizontal wells. Including today's announced new builds, we will have 205 Tier 1 rigs, up from 91 rigs just four years ago. That concludes my comments so I will turn it over to Kevin to comment on the business.

Thank you, Rob. Good afternoon. I'm going to begin by drawing your attention to our high-performance high-value strategy and how we're performing with that strategy despite the weakness in demand for some of our services. Our investments in our Tier 1 rigs, our geographic expansion and our new services like coil and directional drilling are all key elements of our strategy. Underpinning every decision we make at Precision is our strict fiscal discipline that Rob mentioned earlier. Our uses of cash for expansion must always meet our long-term internal investment hurdles and guidelines, our expenses and maintenance spending must line up or down with activity and we always seek to achieve optimum financial returns for investors. Precision's response to customer demand for new build Super Series rigs, our capitalizing on international expansion opportunities and our desire to continue to return capital to shareholders, all while managing softer than expected cash flow environment demonstrates the value of our strategy.

Now turning to our business units for a moment, in our Canadian and US drilling groups we continue to see strong interest in our Tier 1 Super Series rigs which is clearly evident in our strengthening US rig count up 9% to 87 rigs since the start of the fourth quarter. Today's announced three new build rig commitments and the visibility we have for further Canadian new builds reinforces the success of our high performance, high value strategy with respect to our rigs. In Canada drilling activity was restrained during the quarter with many of our customers challenged by cash flow constraints and limited access to new capital due to the impaired Canadian natural gas prices. However, the interest created by the Duvenay liquids play and the prospect for drilling related to potential Canadian LNG exports continues to strengthen. We see significant long-term and stable up side driven by a combination of foreign investment and large integrated customers pursuing these long-term opportunities.

We are in the final stages of negotiations for several new build Super Series rigs for mid-2014 deliveries and we are confident that further new build and upgrade opportunities are present for Precision and the Canadian industry. The long-term prospects for Canadian growth driven by gas and even potential oil exports continues to gain momentum. The political environment in Canada is very supportive in seeking multiple paths to expand Canada's export energy potential. In short, the headwinds of low natural gas prices will continue to be a drag on Canadian activity, so for Precision keeping a keen eye on operating expense and discretionary capital will be the order of the day while we ensure we remain our customers' preferred provider. Regarding our US operations, as mentioned earlier, our activity is up to 87 rigs today from 80 at the beginning of the quarter, while overall US industry activities remain generally flat. So clearly I'm pleased with our market share growth but I'm much more satisfied by how and where we've gained that share.

Some of you on this call attended our recent investor day in the Marcellus. We visited Precision rig 533, it was drilling on eight well pads executing 14-day wells with 90-minute moves between those wells. We showcased how Precision's highly optimized drilling and moving efficiency has improved the well economics, and especially, how this has resulted in a deeply satisfied customer who called our rigs and our people the industry benchmark in the Marcellus. This result has meant that we've doubled our market share in the basin and we expect further increases through additional rig deployments later this year. So at Precision we don't fear the industry impact of improved drilling efficiency. In fact we are aggressively driving drilling efficiency and reaping the spoils of the increased market share that comes with that efficient reputation.

As we look across the other unconventional US basins, both oil and gas, such as the Bakken, the Permian, the Eagle Ford and the Barnett, Precision enjoys a strong or growing market share in each of those horizontal well activity regions. When you combine all of our horizontal activities, we have roughly double the share in horizontal activity work relative to our full US market share. As Rob mentioned earlier, we have not experienced any early contract termination payments during the quarter. Combine that with the three new builds we announced today for our customers which are all headed to west Texas. We're confident that our reputation as a high performance driller is being well recognized by our customers and will have increased our market breadth, picking up two more of the top E&P active drillers in the US while maintaining a meaningful market position in all of the US unconventional plays.

Looking at our international business I'm very pleased with the meaningful footprint we've established with rigs drilling for the integrated project management segment. With additional rig deployed in the third quarter we'll have seven rigs under long-term commitments for multiple IPM providers. When this rig is up and running during the first week in November our active international rig count will be at 12, up from 8 at the start of the year. We see good potential to see more of Precision's Tier 2 rigs redeployed from the US to Mexico for the upcoming IPM tenders we are participating in, and we'll provide updates on that business as it unfolds.

In the Middle East we're looking forward to deployment of the two new builds for Kuwait that Rob mentioned in the first half of 2014 but I'll remind you that these are large, complex, high-technology rigs. Currently our build project remains well on budget and very importantly on schedule. Completing the construction and executing the rig deployment on plan is our top priority for the first half of 2014. Overall, Precision's rig contract position increased to 115 rigs from a low of 107 in the second quarter. The Canadian and US international activity have all increased and we have no early terminations to report, along with the three new builds and visibility on further new builds all show strong evidence of our customers' satisfaction with our high performance, high value services and the quality of our assets and the excellent people on those assets.

Now turning to our completions and production services group, the challenges in Canada have proven acute. Demand for our services remains soft, also a direct result of the weak natural gas prices. Our forays into the Northern US could not have come at a better time. Geographically diversifying this important service line to North Dakota and Pennsylvania, adding another service rig to North Dakota bringing our total to seven, all well utilized, adding the two large coil units to Pennsylvania, totalling eight units now, also well utilized, has proven to be very good timing for us. Nonetheless, we'll continue to tightly limit capital spending and very carefully control expenses as we see how 2014 unfolds for these services.

I'm very pleased with our traction in our directional drilling initiative. Despite the competitive pressures, we continue to see additional opportunities to grow our integrated business. Through the third quarter we performed integrated directional drilling projects for 10 different customers and will add three more customers during the fourth quarter. We know the integrated model offers meaningful economic benefit to our customers and we have the opportunity to increase revenue and profit per rig. We're well on the way to developing the customer confidence and successful reputation we need to fully develop this business.

In summary despite soft Canadian gas prices and flat rig counts in the US we continue to gain market share, we expand Precision's scale with new Super Series rigs, we're deploying additional rigs internationally, adding coil units, all while very carefully managing our capital spending and our expenses. Our fiscal discipline combined with the long-term visibility that we see in our high-performance rigs and the momentum in our international expansion established a platform to implement a dividend late last year. So today we're very pleased to increase that dividend, further demonstrating the value in revenue sustainability created by our geographic footprint and strong asset base.

Finally, the trail-off in activity we saw in 2012 late in the year is not materializing this year. In fact, the bright spots we see in the US and Canada, particularly for our Tier 1 Super Series rigs, seem to be pointing to a stronger year in 2014. So to close, I sincerely appreciate the hard work, the effort, and the results delivered by all the people at Precision Drilling. I'll turn the call back to the operator for questions.

Thank you.

(Operator Instructions)

Dana Benner from AltaCorp Capital.

Good afternoon, guys. I just wondered if you could provide some additional color on the new build announcements that you alluded to in the press release, and then more specifically you also referenced, I believe, the potential delivery of several more rigs as it relates to west coast BC LNG which would lead me to believe that there may be some imminent announcements.

Dana, first of all, the three new builds we mentioned are all for the US and they're all for oil targets, likely all headed to the Permian Basin. Ultimately, the final deployment decision by the customer is made at the last moment and we have seen rigs redeployed previously, but these rigs are intended for the Permian Basin and we think that that's where they will go. The deployments will be in Q4 and Q1, and we're utilizing a lot of components in our long lead time program to get those rigs ready in a hurry, so we are quite pleased with that business. And because we're capturing two new large accounts in the US, we're also quite happy about that. So that's been good for us. The business we're referring to in Canada that could result in further new builds announced later this year, early next year, I'd say that we're well down the path of negotiations. There can always be a last-minute left turn or failure but it's looking good, and we have a lot of work to do yet to complete those contracts. But I feel pretty good about that. Obviously, through what you picked up, between the hinting we threw out there, we're talking about rigs that are going to be going to northwestern Alberta, northeastern BC, these are deep, high capacity pad-type drilling rigs. I will tell you that ultimately they will be drilling for projects that are funded either by foreign direct investment or by large integrated E&P companies.

Excellent. Secondly, the gain in US market share is well noted and was very evident during the analyst day in the Marcellus. And I wonder if you see the potential for a continuation of that momentum in that play particularly over the next couple of quarters.

Dana, I know that my sales team is also on the call listening, so I'll make sure they hear me loud and clear that we have a strong expectation to keep the pressure on and grow our reputation as a horizontal driller, but I'll stop short of forecasting forward -- that kind of success going forward.

Great. Just one final question. I wonder if you could give us an update on the progress of the upgrade of the Tier 2 rigs? You've got -- I don't have the number in front of me right now, but there was I think 20 rigs being upgraded to Tier 2 rigs, maybe some color on that.

Dana, this is Rob. It's kind of progressing on schedule. It's been pro rata throughout the year in upgrading those rigs. I think that we're right on schedule to deliver. I don't know if it is going to be 20 or it's going to be 19, but it's right in that neighborhood.

And you are as optimistic on being able to place all of them and get the necessary returns on that capital then I would imagine?

Yes. We're not doing them on spec. We're doing some of the long lead items on spec, but we're not completing rigs and stacking them in the yard. They're all contracted before they're completed, and at good returns.

Okay. That's great. I'll turn it back. Thank you.

Thank you, Dana.

Jim Crandell from Cowen.

Good morning. Good afternoon, sorry. Kevin, could you give a little bit more information on your turnkey business, what your historical record has been in turnkey and how many rigs you normally have drilling turnkey wells?

Hey, Jim, I sure can. The turnkey business for us is -- I'll probably describe it as a niche market. It's sort of South Texas, Louisiana, generally drilling for private type capital where we go in, and using our knowledge and our background and our history, we drill the complete well, we very carefully rate those based on risk, and most of the time it works out very well. We end up utilizing generally Tier 2 or some of our special purpose rigs. We achieve day rates for those rigs or returns for those rigs that are very strong. And, I tell that you that 9 out of 10 jobs go extremely well, and 1 out of 10 jobs ends up being a speed bump for us. But I'll let Rob cover in a little more financial details.

It's a business where, I said it in my comments, but we typically, on average, will make a little over CAD12,000 a day of EBITDA, which is kind of Tier 1 kind of returns. But we're using Tier 2 or legacy assets to do it. And the difference, though is that there's a high degree of volatility in that business. We have lots of times we'll make CAD20,000 or CAD25,000 a day in EBITDA, but other times if we have a well problem like we did in this last quarter where we can end up losing money. It's a good business, but we have to live with the lumpiness that goes along with it.

Jim, I'll add on. Does it cause a bit of noise in our day rates so we try to help you out by giving you some clarity on what it means.

Rob, if you looked sort of across quarters over a longer period of time, could you give us an estimate as to the percentage of US EBITDA that turnkey accounts for?

It's relatively small, right. It's kind of between two and five rigs, probably an average of three. So you're talking about your single digit percentage of EBITDA in the US.

And you drill this, are you self insured in turnkey?

No, we have outside insurance as well.

Okay. So you would be limited -- would $4 million, in terms of a loss, be about the maximum you would ever -- you have ever had from a turnkey job?

It's probably close to the most that we've ever seen.

Okay.

It goes back quite a ways in history.

But I think the way to think about that Jim is, we're certainly limited through our insurance to a loss that might be a catastrophic type loss but just general operating issues aren't covered by insurance.

Okay.

I'm not sure if that was very clear, but the huge risk isn't, the risk doesn't go beyond just operational issues for us.

Kevin, one other quick question. Do you have somebody that's sort of a geologist on staff to help evaluate the risk going into one of these?

Jim, we do. We've got a pretty good team that's been doing this business now for a couple of decades. So deeply experienced. And I'll tell you that I am always bothered by anything we have where we have to report a special item to you and talk about something that's a one-time event, that sort of confuses the results for the quarter. I'd like to have our business stable enough so we don't have these one-time events popping up. In any event, the way we recognize that revenue, the day that we recognize there's a problem, we take the full hit for the risk. What happens is, the negative events end up being rather lumpy, and the positive events in that business end up just kind of flowing through the income statement on a regular basis. So it is what it is. Over the course of the year it's a pretty good business but then there's these little negative bumps every so often. And in a soft quarter like this it's just a little bit more evident.

Okay. Second topic, Kevin. Is it too early yet to talk about how you see the winter season shaping up in Canada?

Well, we're kind of in the middle of our price negotiations with our customers so our customers are trying to guide us toward a softer winter so that we don't jack prices up too hard on them. And we're trying to assess through all of that. When we give our capital projections in December we'll have a pretty good sense at that point, Jim, but I would tell you, the information we get from our customers at the front line right now is always biased negatively as they're trying to give us reasons to not raise the day rate.

Yes.

So not very helpful there, but it's a bit too early in the cycle for us to be constructive. What I would tell you is broadly speaking, we're not hearing about customer budgets being pulled down in 2014. In fact, if anything, it might be a slight bias upwards. The pull on Tier 1 rigs looks pretty good. That would be a positive indicator. So I think to think about winter 2014 being at least as good as winter 2013 is not unfair.

Got it. Okay. Thank you, Kevin.

Scott Treadwell from TD securities.

Thanks. Afternoon guys. Maybe just to follow up on that last question with customer interaction. Are you seeing any downward pressure on day rates or is it more trying on their part to limit the upside?

Scott, great question. I think the simple answer is we've become a fairly small wedge of the pie of drilling costs. So you know, what we used to get for what I'd call absolute intense day rate pressure five or six years ago, it hasn't gone away entirely, but if they save CAD1,000 a day on the rig it's still a minimal cost on the well cost. So I think they're more focused on making sure they get the right rigs, right assets, limiting price increases. They don't want to see all the economic rent for that well flow through to us. So I think kind of your option B is the way it feels more, trying to limit increases as opposed to really trying to squeeze this downwards.

Okay, perfect. A little bit of a housekeeping question. Can you just update how many rigs in US proper you expect to exit the year with, and then you answered the second part of that for the timing of new builds.

Scott, we have two new builds that will be delivered this year. One is going to the Marcellus, one is going to west Texas, then the other two new builds will be delivered in the first half of 2014.

Okay. And post those new builds what will the US rig fleet number?

I'll catch up with you after the call. I think it is going to be about 129.

Okay. That's what I had. I just wanted to double-check. Perfect. And the last one from me is, it's probably a pretty minimal impact but I guess if I look back a year ago, the rig count in certainly the Marcellus was falling off. Fast-forward a year, you've got a very strong presence in the Marcellus, yet the day rates are down. I just want to make sure that sort of everything you have seen in terms of negative pressure in the US is basically market and regional based, and that there hasn't been -- because everyone stampeded back to the Marcellus there hasn't been a sort of bargain basement pricing for the rigs that have gone there.

No, Scott, it's actually just the opposite. We've seen very strong pricing in the Marcellus. The rigs that we have reactivated or relocated to the Marcellus this year have been at very good day rates, and the softness in average day rates has largely been driven by the turnkey issues that I described earlier. Particularly the Marcellus has been stronger than other regions.

Okay. And my last one on the supplier issues, I'm pretty sure I asked this on the analyst day, but can you refresh -- the equipment you had on build there, that wasn't for the US coil tubing business, was it?

No, it was Canadian C&P assets.

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

Thank you, Scott.

Dan MacDonald from RBC Capital Markets.

Hi, good afternoon, guys. Just wondering if we look at the international business how many rigs do you think you might have left that are suitable for upgrade in the US fleet, and then can you perhaps maybe give us some goal posts to quantify what Mexico could mean for you as we look forward?

We're right in the middle of a bid right now for Mexico so I don't want to speak in too much detail for Mexico. But of the larger rigs, of our larger sort of 2,000, 3,000, and 4,000-horsepower rigs, thinking about that in terms of between 8 and 12. And I think there's potential for even some of our smaller rigs to move. As we're in the middle of a bid right now, I don't want to give a lot of clarity on what's happening in Mexico.

Understandable. In the context of the roll out of your coil tubing business, a lot of your US competitors have cited weakness in coiled tubing in various areas of the US. How is the rollout of that going in the Marcellus? Are conditions better or worse than what you would have expected when you initially decided to make that endeavor?

Dan, this is Doug. We got into the coil business in 2011, and certainly the industry was at a relative peak then. There's been a lot of supply come on the market. I think you've seen some of the pressure pumpers comment on their coil business. No question it's come off, but it has reinforced our strategic view that the coil is a complement to our well servicing capability, and sequentially for the customer we've got an excellent opportunity to sequence in coil into our core expertise, and lower the well costs in the process. So strategically, no, our views on that have not come off at all.

And the fact that we've come in late with the large coil units and brought in really high quality crews on those rigs, I think we're very well positioned, Dan.

Great. That's all I have. Thanks, guys.

Thank you.

Jim Wicklund from Credit Suisse.

Hello, guys. Forgot whether it's been morning or afternoon. I'll just go with hello. Directional drilling, that's going to be a growth business for you guys going forward. Tell me about the CapEx requirements, where you're going to be, where you are going to push, who you are going to displace?

When you look at CapEx for directional drilling it's relatively modest, Jim. You're really talking about less than CAD1 million to fully kit out a rig with all the redundancy and backup that you need. So it's not really a CapEx issue. It's getting customer acceptance of the integrated model that is really the gating item for us. As Kevin mentioned in his comments, in this last quarter we worked for 10 different customers running an integrated model. That's going increase by a few in the fourth quarter. While progress has been slow it is moving. And the types of guys that we expect to displace are the smaller kind of mom-and-pop directional drilling providers which when we look around the marketplace think that they make up at least half of the directional drilling days on our rigs. So there's a good size target market for us without having to go after the Schlumbergers and Halliburtons and Bakers of the world.

So bundling is a definite positive, you talk about integrated projects, we kind of look at it as bundling services. That's definitely a positive for you guys then?

Jim, bundling services is often having two or three or four co0mpletely different services at different times comes out. What we're doing is we're actually trying to reduce the headcount on the rig. We're using our current staff to off-load some of the tasks that are done by third party independent people that come on the rig. It goes beyond bundling into a more efficient model. Jim, if you recall back to the early days of the top drive, the top drive used to be a third-party rental service with a couple of top drive hands that will come out to the rig. Today virtually all of our top drives run as an integrated part with no additional crew and no special expertise. Our rig crews are trained and capable of running the top drive, yet we have retained all of the return on capital for that top drive on the rigs. We think the same thing will apply to the non technically complicated directional drilling which is the majority of resource type drilling.

So do you morph into running casing and tubing as well, or do you already do that?

Hard to say. It's not high on our screen, and the returns are a little different than they might be for directional drilling, but there are jobs where we run casing occasionally.

I'm just trying to think of things your guys can do on the rig. And we used to have our roughnecks putting casing on uncomplicated wells. I just didn't know what else can you do in an integrated fashion if it's not going to be bundling of services and your point is well made? What's next?

Not a lot next really. We're kind of looking at the higher value end of the services, not the lower value end. If you think about directional drilling, it's almost redundant where a directional driller half the time calls our guy and tells our guy what to do with the rig phone, or occasionally he comes up and double checks to make sure we're indexed the right direction. But it's a redundant operation where there's just one supervisor telling another supervisor what to do. That's the efficiency we think we can gain.

It sounds like you are going to roll this out in Canada very much first.

We're doing it both markets right now. We've got jobs on both sides of the border, and this is a drilling engineer by drilling engineer prove it up exercise like most business model changes are. So it's taking slower than I'd like, but we're getting some of the right customers under our belt.

Okay, gentlemen, best of luck. Thank you very much.

Thanks, Jim.

Byron Pope from Tudor Pickering Holt.

Good morning, guys. I have a question about the three new builds for the US. Trying to get a feel for the types of rigs that E&P operators are migrating towards in the Permian, and since it sounds like all three of yours are scheduled to go out there, I was just curious as to the three announcements, are these super singles or super triples?

Byron, these are all 1,500-horsepower super triples.

Okay.

These are the top end of the performance range for the fleet, and they are fungible around the US for a lot of the unofficial plays.

Okay. And then it certainly feels like US E&P operators are realizing there's a shortage of high-end pad-capable rigs. It seems as though the delivery cadence or the cycle time for these three new builds is fairly short. If we continue to see more US E&P operators interested in contracting new rigs, what does that cycle time look like for you guys in terms of being able to deliver new build rigs into the US market, let's say if orders are placed around year end? When would those rigs realistically be able to be deployed?

Byron, first of all, I will comment that we referenced some possible new builds for Canada that we're negotiating on, and I would say those are also in the same size category as these rigs. I refer to those being mid 2014 deliveries.

Okay.

If we started from scratch today on a new build, we're probably looking at something like six to eight months to deliver it depending on the spec.

Okay.

We often have components in inventory, like Caterpillar engines, BLPs, and top drives for long lead time components, and that's how we're able to deliver some rigs a little bit faster. Fair to say that we've wound that program down this year as we've been trying to manage our capital spending so some of that long lead time that we might have been able to offer earlier may have eroded this year. We'll look into 2014 to see if we want to expand that program down the road.

Okay. Last question for me, it seems as though your Q4 US rig count is trending almost counter to what the overall US rig count is likely to do sequentially in Q4. You mentioned some of the horizontal conventional plays where you guys have a strong presence. Is it fair to think that this 9% increase you've seen in your rig count, your US rig count quarter to date has been fairly spread among those basins, or has it been concentrated in one or two plays?

No, it's actually been fairly spread out among the basins, Byron. I think it really does a couple of things. It really highlights, we talked about before, the winners and losers in the space. I know other drillers are reporting. There has been, there remains demand for Tier 1 rigs across the basins, and us and some of our peers are winning some of those, and I think you are seeing this market consolidate among the larger, stronger, more capable drillers.

Okay, thanks, guys. Appreciate it.

Thanks, Byron.

Doug Becker from Bank of America Merrill Lynch.

Thanks. Kevin you highlighted the favorable backdrop for Canadian natural gas exports. Just hoping to get an update on some of the major milestones you are keeping an eye on like pipeline approvals that might help define the demand in 2015 and beyond.

Doug, very complicated question. And the things we've been watching for are the firm approvals, like pipeline approvals, but I will tell you, the seminal moment will be when one of the companies announces an off-take contract for the gas. Now, it's pretty hard to achieve a contract without a pipeline approval. It's pretty hard to achieve a contract without a resource, and it's pretty hard to achieve a contract without a port. So we've seen the conditional approvals for the ports go in place. We see pipeline applications now in place. We haven't seen any public outcry of any meaningful amount against gas pipelines.

We know that there's a lot of behind the scenes work going on both politically and regionally with those pipeline approvals. We know there have been a lot of lessons learned by pipeliners in the US with public opinion and government support. So we think we're going to go at this at a very smart way. We think they're going to be successful getting pipeline approvals. We'll be watching carefully for off-take contracts. But in the meantime, the resource has to be proved. Again, without the resource being proven, there is drilling going on right now. There are rigs being ordered right now by various projects and spread among the Canadian drillers, ourselves included, they are going to be used to prove up resources and ensure that the gas is there.

Any read on when the pipeline approvals might come through?

We're the wrong people to be handicapping that but I know they're well on their way. I'm hopeful that we'll see something in 2014.

That's fair. Switching to Saudi, we did see a competitor announce a number of Saudi new builds. I know that was an opportunity you were looking at. Just an update on that.

Something I will tell you is that if the bid list is long and the low bid is going to win, it's unlikely that Precision is ever going to be successful. So without referring to any given area or any given country, because there aren't many of these projects floating around, if it's a broad list of bidders and there's no special technical requirements, it's less suited to Precision going forward.

Okay. And then just a quick one. In terms of the three new build contracts, were those at rates higher, lower, in line with what we've seen in the past?

Doug, we kind of went overboard during our prepared comments around fiscal discipline, long-term hurdles, and I would tell that you all of those rules apply to Precision. Up cycle, down cycle, mid cycle, for these rigs we're maintaining our long-term investment expectations on every time we deploy capital on a new build contract.

Good answer. Thank you.

Sean Meakim from Barclays.

Sean, are you there?

Yes, can you hear me? Good afternoon, guys. You noted a strong pickup in utilization start 4Q. And not something that you expect to continue into 1 Q. After this massive switch in the US from gas plays to oil plays are you getting the sense that your E&P customers are getting better visibility on their drilling programs as we look into '14 and '15?

That's a tough question about better visibility into the programs. Certainly I think every drilling program that's focused on the sweet spot of an oil or gas play is well understood and mature. The new builds we announced including the uptick in our activity are all pretty much pad type applications, high efficiency high performance type drilling. So I think they're getting good visibility into the technical efficiency of the drilling, and the resource they have. I don't think this -- and I think probably -- we're hearing a lot of information sort of seeping out now about increased drilling budgets in 2014. The indications all sort of align for an increased activity level in 2014, but it's just too hard to say.

Right. Okay, that's fair. So we spent a lot of time today talking about the market share gains in the Marcellus. Is there anything specific to that play that you think has helped drive those gains for you, and are there any characteristics that we can map over to other plays across the US?

There's a couple of things about the Marcellus that really fits well with Precision. It's really tough to move rigs around because of the size of the roads and weight limitations which really plays into our Canadian background and knowledge. So much of what we do in Canada during breakup or during the summer season looks a lot like the Marcellus. So I think we're pretty good at that type of drilling. We're well-known for being a very clean, safe driller, which in the Marcellus it's under such a spotlight for performance right now that that plays in well. These types of trends play out in other basins. While the environmental focus in West Texas might be a little bit less than in the Marcellus we don't expect it to stay that way. We think those trends will spread across the US. We think that will play into Precision's capability.

I would also add to that Marcellus and Bakken play to our expertise in running equipment and crews in cold weather. That's something that we've grown up with as a company. It doesn't bother us. It's a lot easier to have a Canadian come down and run a rig in the Bakken than to take a guy from South Texas to the Bakken.

Right. Of course, that makes sense. One last question. Looking at the rollout of C&P in the US how should we think about some of the startup costs as they abate in the coming quarters and what the impact can be ultimately on C&P as a whole?

You see the start-up costs start to fade both in terms of one-time expenses that are just setting the business up, and then just absorption of overhead as we get the crews up and running because the overhead that we need to run two units is pretty well the same as what we need to run eight, and so we can absorb those costs. So you will see the financial performance improve. When you look at the C&P business unit itself it will be meaningful. It won't be a big deal for the overall company, but when you look at the C&P business unit as a stand-alone it will be a meaningful improvement.

Great. Thanks, guys.

Okay, thanks, Sean.

John Daniel from Simmons & Company.

Hey, Kevin. Good afternoon. I know you guys don't like to provide financial guidance but a number of your public peers say that spot price has stabilized, and a few of the private drillers are suggesting that pricing could migrate higher just given sort of the flood of new rig inquiries. With that as a backdrop, and given the new builds for the US market that will be deployed, and my presumption that you are probably going to continue with some rig upgrades, adding of walking systems, et cetera, is it safe to assume that cash margins from here are going to be migrating higher over the next few quarters? And if not --

First of all, day rates, first of all, I think Tier 1 day rates remain firm, and while there may have been some competitive forays in certain areas by certain drillers, I really don't think Tier 1 day rates really suffered much over the past period of time. Tier 2 and Tier 3 day rates have certainly had a tougher time over the last 12 months to 18 months. So going forward, it certainly feels like those rates have bottomed out. And there might be some room for those rates to creep back up a little bit, but really looking at the front end of the market, the Tier 1 end, I think you will see most of the larger drillers reporting very strong day rates for the Tier 1 rigs. And as a result, we'll guide forward on the lease margins staying flat.

John, my bias, if you put a gun to my head, is I'd say flat with an upward bias. I don't expect to see any step change in margins in the next few quarters, but I also don't expect to see any degradation, either.

Okay. Fair enough. A follow-on to the earlier coil tubing questions. Right now all of your units are in the Marcellus. Just curious if you have any initiatives today to move into other regions, and if so is that via kind of finding a good guy and who is knowledgeable in the basin, or through acquisitions? Just your thoughts on how you grow that.

So we clearly have designs on continuing to grow the business. We're going to be measured about it. We're going to make sure that what we're doing in the Marcellus is running well. We're getting closer to that every day. Then we're going to look hard, and it will be unconventional plays, but in the unconventional plays where we have the right customers, the right people on the ground, where we have the right operating guys, and where we think we can apply the high end equipment with very good people and the systems to support it. So we're not ready to say where that's going to be yet, but I think in 2014 we'll make another step out.

Okay. And then just the last one from me. We've heard a lot from lots of companies this quarter, last quarter, just about various self-help initiatives. Given the competitive challenges within the C&P segment are there initiatives that would be ongoing or unfolding next year?

John, we're constantly trying to refine the business, constantly trying to do it better. When you see shifts in the marketplace like we have on the Canadian C&P side where there's real oversupply of some of the surface rental equipment, we've seen a lack of work over activity, absolutely, the management team, which Doug leads, is looking hard at how to run the business in the right way given the environment that we're in. So we're not resting on our laurels at all. It's an ongoing process to make sure we're the right size overhead, that we're running the business the right way given the market conditions.

Okay. Fair enough. Thanks.

Thanks, John.

Jon Morrison from CIBC World Markets.

Good afternoon, guys. In the C&P business can we just run through the margins and what necessarily drove the lower margins in the quarter? Because if you add back the one-time hit from the vendor issue you get about 20% EBITDA margin which would be about 10% below where you would expect it to be for Q3. So can you give a sense of what drove that additional CAD8 million in costs in the quarter? Was it just additional headcount that you would have expected to have for higher activity levels? Was there a high amount of R&M costs in the quarter? From a geographic perspective, is the US a drag to Canada or vice versa?

So that's probably more detail than what we'll give you, Jon, but I'll give you a few pieces. You are right about the vendor issue. It was in C&P, and that made a significant difference. As we were just talking about, we're still not mature in the US. We've got more overhead there than what we do business today. We've got the management team, the technical team, the infrastructure to really be running eight units full-time in the Marcellus. And we're just now getting to that eight units on the ground. So we've had a bit of a drag because we just didn't have critical mass. And then in Canada, we've seen the well servicing work, particularly for work overs decline more than what we would have expected given overall industry activity, and so there's probably a bit more overhead in that business than what it takes to run it today. So we're -- it's a number of things that we're focused on, on rectifying, and part of the struggle is how much are short-term industry conditions and what are fundamental changes in the industry, so we're busy trying to work through that.

How much on a good forward basis would you be accounting for the US will be a drag to historical margins in that business in the next kind of four quarters? Like is it a meaningful 4% or 5% drag as that business grows into itself or more one time in nature?

I think actually, Jon, I think here in pretty short order we are going to see that the US contribution will actually help overall margins as opposed to being a drag.

Okay. The three rigs that are going to West Texas, you used the term firm customer commitments. Is that the exact same thing as contracts, and if so, can you give a sense of durations on those contracts? Is it three years?

So we don't ever give out line by line detail on contracts on duration and information because of competitive reasons. And the contracts on those rigs are not signed as of the moment, but we expect them to be signed, and we believe there's no risk on those rigs being contracted.

Okay. The rigs that are possibly going to be delivered in the next nine months in the Montney and the Duvernay, how many -- can you give a sense of how many are out there in the market and how many you would actually be able to deliver on based on your current inventory that you have right now to actually deliver a nine-month delivery cycle?

Jon, it's really hard to kind of isolate Duvernay right now. There's probably less than a handful of rigs actually drilling. Our lead time for new rigs would be in the range of about six to eight months. We can deliver three or four a month after that. So I think we can meet any demand that might come our way. The Montney is a lot more active right now. I don't have that count on my fingertips right now but 25 to 30 rigs drilling in Montney right now, and there's a few more rigs available for that. We're in there, we're quite well positioned.

The CAD45 million that got pulled out of this program, or this year --

The 25 rigs was Precision rigs.

25 Precision in the Montney specifically?

Yes.

Okay. Can you just walk through and give a little more detail what was pulled out of the '13 capital program?

Sure. So, Jon, it was a number of things, but the biggest portion of it is, as we've seen activity lower than what our expectations were in terms of drilling days and in the C&P business as well, much of our maintenance capital expenditures is just based on utilization. So there's a natural decline in maintenance CapEx because of a few utilization days. There's also some infrastructure projects, some of which were discretionary that we've pulled back on, some discretionary spend in upgrades that weren't contracted, and so there's a number of items that made that up, but it was just a general sense of if we don't need to spend the money and there's not a clear reason that we need to do it in this year, then let's either delay or cancel the expenditure in light of the environment that we're in.

Okay, so it shouldn't be implied as a slow down in potential orders in front half of 2013 at this stage?

No, I wouldn't take it as that at all. It's us just looking hard at how we're spending our capital dollars. And it's, much of the maintenance expenditure, as I said, is utilization driven. So as utilization has been less than we expected in the second half, then it naturally slows down the maintenance capital spending.

Okay. One last one from me. How many of the 20 upgrades that you guys were going to do this year are actually completed and in the field at this point?

You know, Jon, I don't have the answer at my fingertips. If I had to say, I would say it's been pretty well pro rata, and it's three-quarters of them. But I'm sure that's wrong one way or the other by a couple rigs, but I'll have Carey get back to you on that after. I just don't know the answer exactly.

Okay. I appreciate the color. I'll turn it back, guys.

Thanks, Jon.

Kevin Lo from FirstEnergy.

Hi, I just have one quick question. Could you guys help us out on trying to figure out what the relative change in rates were in the service rig side on the C&P side outside of the coil tubing?

With our core customers rates are flats, and the spot market's been -- if you had to put a bias on it, the spot market would be slightly down.

Would that be down from year-over-year or from Q2?

That would be a gradual decline over the past 12 months.

And are the -- is the cost structure kind of -- to John's point, in terms of relative down draft in margins there, is the cost structure coming down as well, or are you maintaining a current cost structure in anticipation of a busier winter?

I think you will find the labor side of the cost structure will -- you will find general increases, low percentages in that 2% to 4% range. Aside from that, I think you will find the cost structure very flat on a per-hour basis.

Okay. Great. That's it for me. Thank you.

Thanks, Kevin.

Jeff Fetterly from Peters and Company.

Hey, guys. On the Permian side, the three rigs going in there, are those going to displace existing rigs working for customers, or are they incremental, or are they a switch in the type of rig a customer is using?

Those rigs are not displacing Precision rigs. It's really hard for us to sense what our customers are doing generally, but there's been a pretty good transformation in the Permian generally from sort of Tier 3, Tier 2 rigs into Tier 1 rigs. The overall rig count has been going down, but the horizontal Tier 1 rig count has been going up.

Do you have a feel if this is a customer that's moving from a vertical program to a horizontal program?

Well, we're getting -- we've got new customers here taking inventory on the horizontal programs. That's all I can say for sure.

Okay. What does --

The logical answer is that they're likely moving from vertical to horizontal.

What does the new build opportunity set in the US look like going forward?

There's a pretty good level of interest right now. Even in our discussion here about the Permian. It's not so much that a rig transforms from a vertical to horizontal well, but when they finish delineating a certain area and they find the sweet spot, they go in and want to drill horizontal. Once we shift back into a reserve growth mode there will be more work for vertical rigs, and some of the lower quality rigs in the fleets out there, but as customers are just focused on maximizing production I think there will be continued demand for Tier 1 rigs. On that basis looking at 2014 nobody out there wants to see production decrease. The most companies are looking to increase production next year. So I think that speaks well for demand for Tier 1 rigs into 2014. We certainly don't expect to see demand go down for new builds next year, not from what we know right now.

In your mind does that suggest that the US overall rig count will be higher next year?

Well, if customer spending is higher then it would be likely the rig count increases.

Jeff, I would say even if rig count does not increase, if overall rig count is flat, I think that it's still likely that we will see demand from more Tier 1 new build rigs as we displace some of the existing Tier 2 and Tier 3 rigs from the marketplace. I think that trend is going to continue whether the overall rig count is declining, flat, or growing.

What are your expectations or view of new build opportunities in the Middle East market going forward?

We believe that there will be some, particularly when it comes to some of the larger rigs, the 2,000 and 3,000-horsepower rigs. For instance, the new builds that we have going into Kuwait, they're 3,000-horsepower rigs, and are new builds. For some of the smaller size rigs, I think there's still some capacity in the marketplace. And until that gets absorbed it's less likely that you will see new builds. The one caveat to that will be, if we start seeing more kind of North American style drilling programs needing fast moving rigs, pad capable rigs, but that's really not -- that doesn't make up very much of what's going on internationally today. So I think that there will be some opportunities, but there's still some capacity at the 1500-horsepower level on down that has to be absorbed first.

Is that a very Saudi-specific comment, or is that a broader region comment?

That's a broader comment, but it would include Saudi as well.

Okay. Last question on the directional drilling side. Job capability coming out of the quarter, what do you expect that to grow to over the course of this year and next?

Our capability Jeff, hasn't increased this quarter. We still have -- excuse me.

Jeff, I think it's about 90 job capability today, and we haven't needed to increase that as we're, again, working hard on getting the integrated model accepted less on just growing the overall business. So I think that until we see real uptake on the integrated model side, which is getting better, but I don't think you are going to see us grow job capacity significantly until that time.

And the three incremental integrated customers that you mentioned in the dialogue earlier, are those incremental customers to Precision, or are those displacing stand-alone directional jobs that you were doing?

Jeff, we're not giving a lot of guidance right now on how many jobs we are running exactly and where it's coming from. The key for us for integrated directional is winning over customers on the model. So I would tell you that we did -- had 10 very good customers during the third quarter, and we're looking to increase up another 3 customers in the fourth quarter. That's just a good sense for us being happy with the progress we're making. However, I will say it again, it's not going as fast as I would like.

Can you give us a feel for what percentage of your jobs are integrated right now?

I know exactly how many are integrated.

I asked if you could give us a sense, though.

No.

Thanks for the color.

All right. Thanks, Jeff.

Thank you. We have to further questions at this time. Mr. Ford, please go ahead, sir.

Thank you for joining us on our third quarter call.

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