Precision Drilling Corp (PDS) 2013 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Precision Drilling Corporation 2013 fourth quarter and year-end results conference call and webcast.

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

Thank you, Elena. Good afternoon, everyone. I'd also like to welcome to you Precision Drilling Corporation's fourth-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 Gene Stahl, our President of Drilling Operations; and Doug Strong, President of Completion and Production Services.

Through a news release earlier today, Precision Drilling Corporation reported on the fourth-quarter 2013 results and the announcement of a first 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, operation 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 today with a brief discussion of the fourth-quarter operating results and a financial overview. Kevin will then provide business operations update and our outlook. Rob, we'll hand it over to you.

Thanks, Carey. Earlier today we reported a strong fourth quarter with revenues of CAD567 million and net earnings of CAD68 million, or CAD0.24 per diluted share. We also announced a quarterly dividend of CAD0.06 per share. Revenues were up 6% versus the same quarter in 2012 primarily due to higher international and US drilling activity, partially offset by lower turnkey activity in the United States.

Fourth quarter 2013 EBITDA was CAD198 million, which is 12% higher than the fourth quarter of 2012. The higher Q4 of 2013 results primarily reflect increases in US and international drilling activity and increased pricing and margins in the US and Canada versus the fourth quarter of 2012, which is partially offset by weaker demand for our C&P Services. EBITDA margins were 35% this quarter versus 33% in the fourth quarter 2012.

For the year ended December 31, 2013, revenue was just over CAD2 billion, essentially flat versus 2012. EBITDA decreased from CAD671 million in 2012 to CAD639 million in 2013. Overall activity was down in all of our North American service lines in 2013 versus 2012, partially offset by higher activity in international drilling and higher pricing in US and Canadian drilling.

In the US, during the fourth quarter of 2013, drilling revenue, excluding the impact of turnkey, improved by about CAD300 per day versus the fourth quarter of 2012. Year-over-year margins improved by approximately CAD1,200 per day, again, excluding the impact of turnkey operations. We have seen a meaningful improvement in US margins largely due to leveraging our scale and business systems to drive efficiencies. Versus the fourth quarter of 2012, US rig utilization days were up 3% in the US, while the overall industry rig count was down by over 3%. Our market share gains are a sign of our customers' recognizing the value provided by Precision's Tier 1 drilling rigs, particularly in unconventional basins like the Marcellus and horizontal Permian.

In Canada, in the quarter drilling revenues improved by approximately CAD1,000 per day year over year and margins improved by over CAD750 per day. We're very pleased with the continuing growth in margins. Drilling days in Canada were flat in the fourth quarter of 2013 versus the same quarter in 2012.

Our Completion and Production segment revenues were CAD85 million in the quarter, flat with the fourth quarter of 2012, largely driven by a decline in Canadian activity offset by expansion of services into the United States. EBITDA in the fourth quarter of 2013 was CAD16 million, which is 27% below the fourth quarter of 2012 driven by lower demand in Canada and higher costs in the United States.

In December, we announced our 2014 capital spending plan and gave an update on our 2013 capital spending plan. Precision concluded 2013 with CAD522 million in capital expenditures made up of CAD282 million for expansion, CAD141 million for upgrades, CAD113 million for maintenance and infrastructure offset by approximately CAD13 million from sale of assets. Planned capital expenditures for 2014 are expected to be CAD515 million, including CAD268 million for expansion capital which includes the cost to build 11 new build drilling rigs: 6 for Canada, 2 for the United States, 2 for Kuwait and 1 Super Triple 1500 which will only be completed once a firm contract is in place.

The six rigs for Canada include five Super Triple 1500's for Northern Gas and gas liquids drilling, and one Super Single for heavy oil development drilling. The US new builds consist of two Super Triple 1500 rigs and the Kuwait Super Triple 3000-horsepower rigs are expected to be completed and deployed late in the second quarter. A bit of additional expansion capital is allocated for C&P equipment and long lead items.

Our capital plan does include 10 to 14 rig upgrades, 4 of which represent the completion of the 2013 rig upgrade program. Our sustaining infrastructure capital is based on currently anticipated activity levels for 2014 and includes our tech center in Nisku, Alberta along with other regional support centers and corporate systems. The Nisku support center consolidates Precision's existing Canadian operations and technical centers and will contain a training center with a fully functioning training rig.

Turning to the balance sheet. We believe that our balance sheet is strong and stable. As of December 31, 2013 total debt was approximately CAD1.4 billion, net debt was approximately CAD1.3 billion. Our blended interest rate is just a bit over 6.5%, and our earliest debt maturity is in 2019. Our revolving credit facility has availability of approximately CAD800 million and we extended the maturity date to November 2018. Precision's liquidity is more than adequate with cash operating facilities and our undrawn revolver totaling approximately CAD900 million of availability.

We believe that our balance sheet is in excellent shape and positions us well to address high-return growth opportunities to return capital to shareholders in the form of our dividend and thrive in a downturn if necessary. Our tax rate for the year was approximately 14%. We expect the tax rate to be in the range of 14% to 16% in 2014.

We currently have 118 rigs committed under term contracts for the first quarter of 2014. For the year, based on current drilling rig contracts we have contracts -- we have 99 contracts in hand: 51 rigs Canada, 41 in the US and 7 internationally. We do expect to see the number of rigs under contract rise as we move through the year. Since our third quarter earnings release, we have increased our rig -- our contracted rig average for 2014 by 10 rigs. Including today's announced new builds, we will have 212 Tier 1 rigs up from 91 just 4 years ago, which puts us in great position to generate strong returns for our shareholders now and in the future.

For clarity, I want to remind investors that during the fourth quarter of 2013 our largest shareholder who is AIMCo, or Alberta Investment Management Company, exited its entire position in Precision Drilling shares and warrants. They sold approximately 56 million shares after exercising their 15 million warrants. So as of December 31, 2013 our basic shares outstanding were approximately 292 million. That concludes my comments, so Kevin I'll turn it over to you.

Thank you, Rob. Good afternoon. Well, as Rob covered, Precision's fourth-quarter financial performance was due primarily to strong geographically diversified customer demand for our Tier 1 rigs combined with Precision's operational leverage and effective cost control in our drilling groups. So I think there's two takeaways we can pull from this.

First of all, I'm very pleased to see the investment we've made in our fleet showing strong financial returns, continued strength in day rates, margins and market share gains. And secondly, I believe the momentum we've created in the third and fourth quarters of last year are propelling us into 2014 with a very nice start. And I'll speak to these business issues in a little more detail.

But before I do, I want to thank the Precision folks for their huge efforts delivering operating excellence and record achievement against all of Precision's key operational performance metrics in 2013. And these are important messages because it speaks to how we create our competitive advantage for our customers. Precision achieved its all-time safest year ever, reducing injuries and loss time incidents to the lowest levels, with over 93% of our facilities running incident free each quarter of 2013.

Coupled with this excellent safety record, Precision's non productive rig down time was also at record low levels, significantly below industry standards. Our vertically integrated repair capabilities and Precision's preventive maintenance programs are delivering exceptional value by ensuring our rigs operate consistently and predictably with virtually no unplanned down time.

Now on the third -- on third metric, I can tell you that our customers tell us their number one concern is crew training and crew retention. And despite a highly competitive employment environment in an industry well-known for serious crewing challenges, once again Precision Drilling exceeded our internal targets for employee retention, training and recruitment. And I know how hard all of our Precision people worked over the last year to deliver these results. And I want to thank all of you for the great results we achieved.

It is these key performance factors: safety, minimizing down time, crewing, retaining crew and developing experienced well trained crews, combined with our Super Series rig technology that differentiates Precision Drilling, creates customer value and ultimately drives our financial performance and shareholder returns.

Turning to our rig technology for a moment, Precision's fleet today includes 204 Tier 1 rigs operating, by the end of 2014 we'll have 211 in operation. And remember, it was just over a few years ago that our fleet of Tier 1 rigs was just over 90 and that we've added 92 new build rigs over the last four or five years all to fill a customer demand that all supported with long-term contracts. Now based on some of the reports I've read, many comments I've heard lately, it seems the definitions of rig tiering that Precision introduced back in 2010 have become somewhat clouded or confused. The Precision tier 1 definition is very simple. Rigs which are designed for horizontal drilling, efficiency and rapid mobility.

Now there's a lot of talk about power type, rig size. What really matters is if the rig has the functionality and control capability to consistently and efficiently drill horizontal wells. And the rig must have rapid deployment capabilities.

And then from an economic perspective, Precision's Tier 1 rigs demonstrate continued high demand, firm day rates, excellent margins and, in industry downturns, we find that our customers resist early termination, keeping our rigs running. The result for Precision is consistent utilization, effective employee loading and the opportunity to optimize cost, improve our margins, provide excellent cash generation on these Tier 1 rigs as well as well evidenced in our fourth-quarter results and ultimately generate shareholder returns.

I think it's very important to remember that Precision is the only land driller with Tier 1 rigs operating and with a substantial, in most cases, growing market position in virtually every unconventional oil and gas basin in North America, including Canadian heavy oil, Canadian light sweet crude, unconventional development, the deep basin gas and gas liquids in Canada, and in the US we are well positioned and growing in the Marcellus, the Permian, the Eagle Ford, the Bakken and Niobrara.

Now turning for a moment to our 102 rig Tier 2 fleet. These rigs are also designed to drill horizontal wells and they're typically heavily upgraded rigs and offer the same optimized drilling capabilities as a Tier 1 rig. But their mobility is somewhat limited by their legacy design. And they're typically more useful in the early cycle of an unconventional play.

Now, today the day rates utilizations of our Tier 2 rigs are currently below our desired levels. However, we believe the full cycle financial returns driven by pricing discipline outweighs the downturn utilization gains. And as such, we resist price discounting and live with lower utilization in these downturns for the Tier 2 rigs. It's our view that when our customers redirect capital to expand land positions, commence the next round of delineation drilling or when stronger gas prices drive a response in gas-directed drilling, these rigs will see improved demand and will have good earnings capability for Precision.

And finally, Tier 3 rigs are legacy rigs not really suitable for upgrades and not competitive for unconventional drilling. And this is a business we exited back in 2012.

Now turning to current trends, we're well into the Canadian winter drilling season. Overall activity is in line with last year but we believe that the intensity of oil sands coring activity is down, at least for the large cap customers we deal with, which will slightly reduce our peak activity levels compared to last year. However, we also believe that our mix of higher day rate Tier 1 rigs in the deeper, actually I should say longer reach drilling activity we're involved in today, will drive improved financial results in 2014. As Rob mentioned, our Canadian day rates in the fourth quarter showed good growth year over year and we see no reason why this will not hold true throughout 2014.

While leading edge spot day rates make for an interesting discussion, at Precision our customer mix and rig fleet quality -- with our customer mix and rig quality, spot day rates are much less of a concern for us. We expect winter activity will remain firm and that the seasonal spring breakup will be weather driven not customer budget limited. On this basis, we are hoping that the Arctic vortex, or as my parents used to call it, the cold snap, continues into March or for that matter even April.

And a couple of weeks ago, I was up visiting some of our -- up north visiting some of our heavy oil rigs located near Fort McMurray, and I was reminded just how seriously cold minus 37 degrees Celsius is. And my hat's off to the thousands of PD rig hands who are excited to work on our rigs throughout the winter and continue to produce outstanding efficiency for our customers.

Now turning to the Canadian LNG opportunity. I know the investment community would like to see this opportunity unfold immediately. Unfortunately, LNG export development projects are measured in years and often over the course of a decade. And while investor enthusiasm seems to have pulled back, Precision remains highly encouraged by the Canadian LNG prospect.

Every key indicator we watch remains highly positive. We have rigs currently drilling delineation projects. We have new builds ordered mid last year now in deployment and drilling. And we have several new builds ordered late last year and scheduled for delivery over the course of 2014. There remains continued new build interest and we're working with clients to develop specifications for possible contract negotiations later this year.

We know that many important hurdles need to be crossed before the full LNG potential can be realized. However, nothing has changed to dampen our enthusiasm for long-term LNG prospects and how Precision is so well positioned. In any event, every investment we make or will make is fully backed or will be fully backed by long-term customer contracts. And we don't need to speculate with our capital on this opportunity.

Now shifting gears to the US. It's very important to note that Precision's activity in the US is up almost 25% from early third quarter lows, while industry activities remain flat during that same period. We have gained meaningful market share. This increase has been driven entirely from Precision gains in horizontal activity spread across multiple basins: the Marcellus, the Niobrara, the Permian and the Bakken.

Now while I'm a firm believer that new build contracts are an important indicator, it's not the only metric we use to judge our performance. Demand for new build rigs remains firm as it has the last few quarters. And I'll remind you, we did announce five new builds during the course of the fourth quarter. I expect we'll continue to see new build demand for the balance of 2014 and I believe we will have the opportunity to win additional contracts for Super Series rigs. However, fiscal discipline remains a key strategic element, which means occasionally we will pass on less than optimum opportunities.

On the international front, we are most focused on commencing operations in Kuwait with the deployment of the two new build ST-3000s Rob mentioned earlier. Both rigs should be up and running mid year. More recently, the IPM project awards in Mexico include for Precision a range of between four and nine additional rigs for our Mexican operations through our IPM arrangement with Schlumberger. However, until the IPM contracts are finalized and the rigs are fully committed, it's premature for us to give firm estimates. However, these rigs will redeploy -- will be redeployed from our US fleet and may require some minor upgrades.

In the Arabian Gulf, we continue to see many bid opportunities. However, as we've always said, Precision is very selective and only interested in the best opportunities. I think we're progressing closer to success on some of these bids. Kurdistan and Kuwait remain firmly in our cross hairs and look for more news from us later this year.

Turning to our Completion and Production Services segment. Fourth-quarter results showed a sequential improvement over third quarter, but the business continues to be challenged by soft customer demand for many of our service lines. We continue to expand our presence in the US both in the Marcellus and Bakken regions. And our activity decreases in Canada have been offset by this growth in the US through the deployment of new (technical difficulty) and service rigs into North Dakota.

In Canada, the well service market has been hampered by pockets of regional weakness with stiff competition from local or regional players. However, there are bright spots. Notably our strong presence in Northern Alberta SAGD market and the more medium to long-term positioning as we stand to benefit when the Canadian oil well count translates into incremental service rig industry demand.

Our Precision Camp Services division continues to perform very well. And a few weeks ago when traveling around Alberta visiting rigs, I had the good fortune to stop at a Precision Camp and again enjoyed the excellent food and the wonderful hospitality at our facilities. This service line continues to be a very good business for Precision Drilling and well supports our remote drilling operations.

So finally I'll circle back to the macro view. Six weeks into 2014, we see a very constructive commodity price environment, excellent demand for our Super Series rigs in our core US and Canadian markets and imminent opportunities in our international regions. And we have a solid handle on cost control. All of the market signals and key operational metrics we monitor are well aligned. And we look forward to sustaining this momentum through 2014. And I'll now turn the call back to the Operator for questions.

(Operator Instructions)

Scott Treadwell, TD Securities.

Congratulations on pretty nice numbers. Wanted to dive into the big headline for me was day rates.

Obviously Q4 there's a transition a little bit to some seasonal winter equipment but maybe less so in the States. Are you comfortable characterizing the day rate gain as a rig mix and pricing driven event, or is there part of it that you need to think about coming off as we go back into more warm weather activity?

Scott, I'll start and to let Rob fill in any gaps. But first of all thank you for the compliments on the quarter, appreciate it.

But in Q4 I think the thing to look at is Q4 2013 versus Q4 2012 and those gains are solid period over period. So I think on a like-for-like basis, it's reasonable the look at the gains as sustainable. And while there is some winterization built in, there would have been last year also, so I think it's a fair comparison.

But in Canada the gains are in day rate. In the US it's a combination of day rate and very strong cost management that's leading to better margins in both markets for us.

Rob, anything more to add?

No I think that's spot on. Scott, you will see the absolute day rates come down a bit when boilers and things come off in the north, but the quarter over quarter comparisons we should still be solid.

Okay, so nothing outlying outside of the normal seasonal trends.

No, and we tried to give you some clarity on the differences in turnkey year over year.

Right. Okay moving to international, think you mentioned that you've got seven contracts through the balance of the year. I would assume that means that probably one of the rigs in Mexico at some point is up for renegotiation. Given that you've talked about potential to had a rigs I'm assuming you're relatively confident that that rig rolls and then obviously the opportunity for incremental rigs remains pretty strong.

So, Scott, we have seven contracts through the year but we have 11 rigs running today. We'll have two more adding in Kuwait later this year. I'd expect that all 11 rigs will stay running through the year and the contracts will be renewed. And I think we'll be in good position on both margin and day rate on those rigs.

And then I mentioned the recent IPM Awards in Mexico that we have an opportunity ranging from between four and nine rigs. And I don't think we'll be shooting for the high end of that range but we've got pretty good opportunity there to see our business in Mexico grow pretty substantially over the course of 2014.

And then the opportunities we are seeing in, as I mentioned, Kurdistan and Kuwait, could see further growth in those two market later this year.

Okay. And you mentioned Schlumberger by name, I wondering that's -- it's more of a -- there's a joint marketing or a up -- there's nothing official in terms of a partnership there really, it's just a preferred supplier maybe?

Well so we actually have operations in Mexico with two different service companies but that was the award that Schlumberger won the award and we're supporting their bid on a number of the packages.

Okay and that -- all those packages are typically a little bit shallower, so we should think about maybe Super Singles or something of that ilk going down --

I'd say this is a medium to deeper packages, actually the ones that we're successful in and fits with what we're doing.

Okay.

Unlikely it's the Super Singles market for us, unlikely.

Okay, last one from me is given your guys exposure to the large cap E&P space and certainly some announcements from some of the more global guys about CapEx discipline, has there been any sense of a change in CapEx attitude whether some of those guys have rigs in new build or rigs under contract, that they're sharpening their pencils or that there's any [sea] change in that group of customers?

Scott, I think it actually plays into our advantage a little bit. We're -- generally these are Tier 1 rigs, they're delivering really high efficiency. And what usually happens is they go into their drilling programs and they'll high grade optimize.

So typically what happens is, when it's like this, this kind of market, this is not a pull down market, this is a get better at what you're doing effort by our customers. And that's where we will usually shine.

Okay. So there's --

Does that make sense?

Reading between the lines, there's either opportunities for you to grow market share either by protecting the number of rigs or potentially targeting some weaker hands that are in that mix.

Yes, I would tell you that I think it'll play into our strategy better than a broad market pull down ever does.

Okay. No, that's great, guys. As always, appreciate the color. Thanks very much.

Dana Benner, AltaCorp Capital.

I wanted to start with your US business, and you talked about cost management. You also talk about scale and efficiencies. And I wonder if you would maybe draw out that a little bit and give us a sense for which you think is more important right now in helping to drive your US margins higher.

Without giving out every little penny of savings we've achieved, there's been a real focus on two fronts. As we grow activity in the US, we want to make sure we don't pick up any extra cost anywhere. We want to make sure we maximize and leverage in this organization.

So we're very careful about -- as we've added rigs throughout the course of the end of last year, not pulling along any transitory costs. So that's the first piece, I think it's been very helpful.

But I think -- I know the organization has had an ongoing effort over the course of 2013 to eke out every bit of efficiency we can out of the existing cost base. And I think the results are sustainable and they're showing up nicely in Q4.

Right, that's great.

Didn't really help with you the modeling question that's buried that in question but we like the direction we're going here, and I don't think we're done yet.

Dana, part of it is getting critical mass where things like our tech center where we run a good part of the repair and maintenance work through that tech center. And having 95 or 96 rigs running is a lot more efficient for us than if we're running 78 or 80 rigs. So some of it's getting to the tipping point on volumes.

Right. You've actually answered the question nicely.

Secondly on the new build side, it's very clear, I'm pretty sure everyone is well aware of how well you've done so far. And I wonder if you would characterize your current series of discussions as being perspective in the near term or could these take another six months to see the next wave of new build announcements for you?

It's pretty early in the year yet, Dana, but so far I'm pretty encouraged with the direction I'm seeing between commodity prices and customer demand. If you had asked me this question back in December I might have said mid to later in the year. It's certainly looking like earlier now.

So it's still -- nothings ever-- we're not going to be announcing anything in the next three or four weeks on the way of new builds for West Texas or for Canada, but I think it's first half of the year events. I might have said second half of the year a month ago.

All right. And then third and finally on the upgrade side, I wonder if you can give us more color on the opportunities that you feel is before you as it relates to the capital budget that you've announced?

Dana, there's a number of rigs, both in the US and in Canada where there's opportunities to upgrade from a Tier 2 rig to Tier 1, or in some cases it's as simple as adding a walking system to an existing Tier 1 or Tier 2 rig. But as we work through upgrades over the past three or four years, we've done most of the low hanging fruit, and so in past years we've upgraded more rigs. I still think that the 10 to 14 range is the right range for us, and it's a variety of different kinds of upgrades, ranging like I say, from walking systems to bigger CAD8 million or CAD10 million upgrades.

I guess maybe the different way I should ask the question is will this latest series of upgrades, can you more directly relate it to revenue opportunities, contractual or otherwise? Or is it just your best sense of the market with the expectation that given your knowledge of the client base, the market will come to you?

No, they're typically specific for particular customers and with a contract we treat it similar as we do with new builds. They're generally shorter in duration, they might be one to two years in duration with the same idea that we want to recover the majority of the capital that we're spending in that first contract term. Occasionally we will do one without a contract but that's rare.

All right. Okay, I'll turn it back. Thank you.

Doug Becker, Bank of America Merrill Lynch.

Wanted to touch base on Mexico. Initially you mentioned opportunity for four to nine rigs in the country related to the integrated project management work. When might that actually start, and would those rigs be coming from your working fleet or more likely from the idle fleet?

I think there's going to be some timeline constraints, meaning they'll need the rigs pretty quickly, and could be as early as during the second quarter of the year. And one or two of those rigs might come out of the working fleet and some more might come out of the idle fleet. If they come out of the working fleet we'll backfill those with other rigs that we'll move into the working fleet. So I don't think it will mean a net reduction in US activity.

Got it.

So we might have to pull some rigs out of the active fleet just to meet the time constraints of the IPM projects.

Got it, but by year end we'd be thinking about those as incremental rigs?

Absolutely, no question.

And then your comment about capital discipline as it related to new builds. I guess that would imply that you did turn down some new build opportunities. Was that the case and was that a function of day rates, terms or some other factor?

Day rates are hanging in there at a pretty good range. It's actually customers' willingness to accept the contract duration that we're looking for.

I think if you want a six-month term or one-year term you can probably build -- get as many new build contracts as you can pump up door, whether it's three rigs a month ar two rigs a month. But if you're looking to stretch towards those two and three-year terms that we're more likely to want, I think the customer appetite still a bit light. So I don't think it's a day rate challenges, I think it's more of a contract term challenge.

Got it. And then you also mentioned that the key indicators related to Canadian LNG are still highly positive. Maybe if you could give us an update of what you're seeing in terms of the big indicators, and fully appreciate we're talking about years, not months and quarters like we'd like.

Every active company in Canada right now is do something, they have engineers assigned to projects, they're working on specs, some have drilling programs running, so we're getting rigs fired up right now. There's been no slow down on the E&P side around developing the resource.

Whether that's geological, whether it's delineation drilling or even moving to the next space and looking at the early phases of horizontal and pad-type drilling. So I think there's still good momentum on the E&P side pushing forward on their programs.

And I think they understand the time schedule and always have. None of us were projecting that we'd see 15 new rigs ordered during 2013 for 2014 deliveries. And in fact, I think we commented back in June of last year we saw bids out there for around I think we said, I can't remember if it's 10 or 20 rigs.

But as it turns out, 10 of those rigs got ordered and that surprised me that so many got ordered that were being checked on early in the process. So I think we're not disappointed in the process or the momentum we're seeing.

Makes sense. Kevin, thank you very much.

Jon Morrison, CIBC World Markets.

In the C&P business, can you talk about service rig pricing and what it would have looked like if you backed out the US coil business in the quarter, was it fairly flat on a sequential basis per hour?

Jon, we don't obviously get into that kind of detail on it. But service rig pricing is very regional, and if you look at the margin compression, we had a slight labor increase of 3% back in October. Generally that was passed through to most. And then regionally, the pricing has been fairly flat with a bias to down in the spot market.

Has your view on profitability of Canadian well servicing changed over the last few quarters? On a go forward basis do you believe it becomes a 20% margin business or it gets back to historical levels over the next year or two?

Jon, I think that's a tough question. We're still trying to form a view on whether this is a trough right now or whether this is a bit of a shift in profit like you're suggesting. It's really hard to say.

I spent a lot of time talking to our clients about whether or not they're investing in remediation work on wells. Clearly our clients are focused on the drill bit right now and directing most of their capital towards new wells. And the returns are so good on new wells that I don't think remediation work is getting a lot of attention right now.

I don't think that means that remediation work and well service work is gone and permanently disabled. But the jury is out. And we'll have to wait and see if this business does materialize later this year or into next year.

I think -- I look back at the North Sea. The North Sea has been declared dead about five times over the last 40 years. And what often happens is once the initial wells lose their return for large type players, small companies come and buy them up and go in and do remediation work.

So I think you -- there's a plausible view that in Canada you might see some of these wells that are horizontal wells, high-cost wells pay off quickly. Once they deliver their initial production and initial returns to the guys who drill them, you might find another small cap business comes in and is created buying these assets up, and going back and remediating. So we're far from believing the business has taken a permanent hit, but we have to wait and see.

Appreciate the color. To follow on Dana's question about the US business and improving profitability, can you comment on your vertical integration in the US? And is the US business similar to Canada at this point in terms of supply chain management, supplying your own consumables for the rig, R&M opportunities, or is there incremental margin expansion opportunity by continuing to integrate the business similar to what you've had in Canada for the past 15 years?

So there is incremental margin opportunity to further integrate the business. What we're managing our way through and learning how to handle better is logistics around the US. Obviously with 35 years of experience in Canada, we manage those logistics brilliantly.

And as we've expanded in the US to the Marcellus and to North Dakota and West Texas, we're optimizing our logistics, we're getting things back to Houston quicker for maintenance repair and shipping them back out more economically. So I still think we're learning how to best manage that logistics question.

But from a supply chain perspective, we supply virtually all of our consumables through our own supply chain. We're now maintaining, repairing virtually all of our Caterpillar engines, all of our top drives, all of our BOPs, so I'm pleased with the progress. I think there's more value to be eked out of it, but it's going to be squeezing the wet rag now rather than big steps.

In your preamble you talked about staying in the Camps business. And I was wondering, what's your appetite for increasing that business? If LNG is real and we have a three to five-year growth cycle, and the opportunity to add incremental beds in Northeastern BC is incredibly strong, is that a business where we could see you going into the larger Camp business similar to a couple that you've had in the past?

Yes, so we've got three large Camps running right now today. We're marketing a fourth one. That business is pretty good. It's not our number one investment that we make at the start of each morning, but I will tell that you we do a great job running those larger scale camps.

But I think the bigger focus for us is making sure we maintain and support our drilling operations with the high quality of rig camps like the one I visited a few weeks ago. There's no question that our guys are happy on our rigs. So we've got well motivated crews. And if you're going to be working up in Northeastern BC, four hours from Fort St. John, having a high quality camp nearby will be a real attractive for Precision.

Last one for me. I realize you probably talked more about Mexico than you wanted to on the call, but you mentioned possibly using working rigs to satisfy demand in that market should the IMP contracts come through. What sort of term would you be expecting to get in terms of duration if you're going to move a working rig from your US fleet to Mexico?

Jon, I'll clarify it. We would use a working rig out of the US right now to backfill the very short-term needs we need to get those rigs fired up. So for us this is not a build a rig and deploy in 2015. This is going to be a move the rig in Q1 and maybe get fired up in Q2.

So we're going to be on this process pretty quick once the final contract is awarded. So if we borrow a rig from the US fleet, we'll backfill it.

Appreciate the color. Thanks, guys, good quarter.

Sean Meakim, Barclays.

So we've been hearing from the service companies recently about a pick up in inquiries related to equipment heading into 2Q, looking to lock up equipment. And implying that we could be setting up for a better breakup ex weather, maybe some additional momentum going into 3Q. Are you seeing the same thing on the drilling side?

I think that's -- sorry, are we seeing the same thing on the drilling side? Well we're already seeing the increase in activity for our horizontal rigs on drilling. And most of our customers have larger budgets for 2014 than 2013, yet overall activity hasn't picked up yet.

So it's reasonable to think that overall activity picks up and we think there's going to be a continued transition from vertical to horizontal which plays into Precision's strategy well. So as I was hinting at earlier, the things -- the metrics we're watching and tracking right now line up very well with our strategy.

Okay, great. And then switching to the US, obviously Precision has some very strong momentum in the US business today. On the Permian side, the Permian horizontal rig count is up something like 10% year to date. Are you surprised at how quickly that markets ramped up in 2014 and what's your outlook for that market for the rest of the year?

Yes, Sean, I'm not sure that the overall Permian count is up 10%. I think the horizontal counts up 10%.

Sorry, the horizontal count, yes.

Yes, and I think we're tracking that nicely with our activity.

Sean, it is one of the basins that we think has the most potential for increased growth in horizontal drilling because it's still roughly only 50% of the rigs in Permian are drilling horizontally. But that's up from about zero rigs drilling horizontally if you go back three years. So we like the trends in the Permian and are paying a lot of attention to what's going on there and in fact opening a shop in the Permian here at the end of first quarter.

Okay, great. And then -- do you have any concerns around the infrastructure strains being placed in Midland and Odessa in terms of the ability to staff up rigs or have any kind of challenges in the labor front in that market?

Sean, we did very well in the infrastructure strains of the Marcellus, the Bakken, the Haynesville and the Barnett. So I think we understand those challenges. I think we've done a really good job staffing up and keeping our rigs running in the tightest markets.

I'm really pleased with the way Precision systems and our recruiting and our training supports that. So it's a heavy lift for us but I don't lose sleep over it at all.

Okay, good. One last quick one. In the Marcellus, any concern with the weather we've seen so far in 1Q? And have you guys experienced any disruption activity in terms of bridge closings and things like that having trouble getting equipment moved around?

Most of our drilling rigs are on pads, and while there might have been minor interruptions on some of the resupply to the pads, it really hasn't impacted our drilling side. I think on the C&P business, certainly when you're on a daily callout business, there's a chance that if the roads close there's some winter conditions, you might lose a day here and there, but nothing that's material to Precision.

Okay, yes, makes sense. All right, thanks a lot, guys.

Dan MacDonald, RBC Capital Markets.

On the international side, I assume Kevin when you're talking about imminent international opportunities it's really just all Mexico and further opportunities in the Middle East are likely a second half of 2014 event at this point.

Well, certainly will be if this IPM work gets finalized next few days, the deployments will be fairly imminent in Mexico. And we could be successful on some of these bids I was mentioning in Kuwait and Kurdistan even in the first quarter. But deployments will likely be a quarter or two later.

But you could you see contract awards in the first half?

I think there's a good likelihood of contract awards in the first half. Sometimes it's hard to handicap the time frame. What you and I think is quick and long in the Middle East can often be stretched out by months.

Okay.

But we're hopeful that we're fairly close to some next step opportunities for us.

Okay, that's great. And then I'm sure we probably know the answer, but to confirm, the large international rig package that's held by one of the larger service companies, is the quality of that really just too far below what you'd like to have that in market?

You mean for sale?

Yes, the weather --

I'm not sure which one you're referring to.

The Weatherford one.

Oh, the Weatherford one. I'm not sure it's out in the market.

Or (inaudible). But I assume that international

in general you don't see the quality on the acquisition side still.

Yes, Dan, I think right now we're really focused heavily on organic growth.

Great. Lastly with your commentary on some further upward potential for US margins, I take it then you haven't seen an increase in your turnkey work for the US business from where you were in Q4?

Well the turnkey work, we were talking ex turnkey when we were talking about margins. The turnkey work will be up and down quarter to quarter like it always is. We might range from one to as many as four or five rigs working on turnkey, and the variability and the results, as always is highly volatile. But we expect that business to keep clicking along and generating good profits with legacy rigs for us.

And that business is primarily surprisingly deep vertical gas around the Gulf Coast area. And with gas prices today up 7.6%, is that right, CAD5.19 that is usually a pretty good stimulus for that business. But you need to see it for a quarter or two before that business responds.

Great. That's all I got, guys, thanks.

Byron Pope, Tudor Pickering Holt.

Kevin, of the reasons that you mentioned the Marcellus and Niobrara, the Permian and the Bakken where you guys have gained nice market share in the US, I'm assuming that you guys are region agnostic in terms of where you deploy incremental rigs, which is to say I'm assuming your daily cash margins are such that there's no differential advantage to putting an additional rig or two in the Marcellus versus some of these other regions where you've gained share. Wanted to test that assumption.

Yes, you're correct, that's exactly right. And Byron, you got to see one of our rigs operating up in the Marcellus last fall on the rig tour. It really doesn't matter to us whether that rig is in the Marcellus or in the Niobrara or in the Barnett or anywhere for that matter.

We're very good at operating rigs that are several hours away from our nearest fixed base. We do it in Canada all the time. We do it across the US. It's a core competency of the Company.

Okay and then second question, wanted to get your general outlook for the directional drilling business on both the Canadian and US side.

Yes, it's -- I was waiting for that question and thank you for it. I didn't mention it in my prepared comments.

But interesting, Byron, so during the winter drilling season in Canada we had our first round where we had six different customers actually requesting proposals from us for integrated directional services this year. Last year we were out trying to sell them on the concept.

So we had no customers last year. This year we had six customers coming in with formal inquiries. We're successful, we're on those rigs right now. In fact, half of our directional drilling work in Canada right now is integrated directional services. I'm quite pleased with that.

Still broadly speaking, the traction on customer acceptance is still coming at a pace which I'm not happy with. So we're continuing to add more resources and more sales effort and getting in front of the customer more often and trying to create more energy.

We know the solutions, the right economic solution and the right risk solution. But getting that strategy through our customers will take longer than I thought.

Great, guys. Appreciate it.

(Operator Instructions)

Kevin Lo, FirstEnergy.

One quick dumb question. Could you guys comment on the incremental demand or inquiries that you have heard between now I guess maybe a month ago in terms of the gas prone basins and whether that's actually picked up?

Sorry relative to --

Like a month ago, when we didn't have the gas prices as strong as they are today.

Kevin, there's really been no impact yet from gas prices. And I think there's a couple of good reasons for that. I think it's too soon. I think our customers are fixated on starting their 2014 programs and they're a little distracted.

While there has been more work done on LNG because we're into a new budget year and there's engineering teams dedicated to that work, the money that's being created by the increased gas prices it's certainly coming to our customers receipts, we know that, the ones that aren't hedged. And it will be positive. But there's really no reaction yet and wouldn't expect it probably until Q3. If these prices stay firm, in this CAD4.50 to CAD5 range, or like today I see think it's CAD5.20 now, if it stays in that range through the end of Q2, that could be a pretty good back half of the year for us.

Right. And to parlay that to your opening comments about your Tier 2 rigs, if we have a more bullish gas environment, would those -- would you expect that those Tier 2 rigs actually get back to work on some of these gas targets?

I would think that you'd see a real good resurgence in demand for rigs that we could meet with our Tier 2 rigs, yes.

Okay. And last --

But I'll tell you, over the last three or four years I've been disappointed more often than not by gas. So I'll keep my eye on this carefully. But I do know that the cash flows are going to be improved for our customers, and that's a good thing.

Kevin, this is the year, we all know that. This is the year. (Laughter)

Well -- but Kevin just speaking to that for a moment. We're sitting here right now with gas over CAD5, oil over -- West Texas oil over CAD100, we got good activity growth this year versus last year. The momentum we're carrying now starting this year is all positive.

This time last year we were watching gas rig counts slow down, we were watching activity slow down, our rig counts were dropping. It was a -- it's a whole different world starting 2014. And lots of good reasons to think this doesn't go away.

Right. And the last thing in terms of clarification on the day rates. You were talking about Tier 1 rigs being up CAD1,000 incrementally and yet your aggregate day rates in Canada were up CAD1,000. Could we assume that all your rates, all your rigs are up CAD1,000?

Sorry, Kevin, I maybe wasn't entirely clear. In the United States, day rates excluding the effect of turnkey were up a little over CAD300 a day. But costs were also down about CAD900 a day, so the increase in margin in the US is about CAD1,200 a day.

In Canada, the day rate was up about CAD1,000 a day year over year. Costs were up about CAD250, netting an increase in margin in Canada of about CAD750 a day.

Okay. Great.

That's across the full fleet, not just across Tier 1 rigs.

No that's -- yes that's the full fleet of rigs in the US and Canada separately.

Okay, great. Thanks, guys.

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

That concludes our fourth-quarter 2013 earnings call. Appreciate you joining us today.

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