CALGARY, ALBERTA — (Marketwired) — 10/27/14 — (Canadian dollars except as indicated)
This news release contains “forward-looking information and statements” within the meaning of applicable securities laws. For a full disclosure of the forward-looking information and statements and the risks to which they are subject, see the “Cautionary Statement Regarding Forward-Looking Information and Statements” later in this news release.
The Board of Directors of Precision Drilling Corporation (TSX: PD) (NYSE: PDS) (“Precision” or the “Corporation”) has declared a dividend on its common shares of $0.07 per common share, a 17% increase over the prior quarter. The dividend is payable on November 24, 2014, to shareholders of record on November 14, 2014. For Canadian income tax purposes, all dividends paid by Precision on its common shares are designated as “eligible dividends” unless otherwise indicated by Precision.
We recorded net income this quarter of $53 million, or earnings per diluted share of $0.18, compared to net earnings of $29 million, or $0.10 per diluted share, in the third quarter of 2013. Effective January 1, 2014 we began calculating depreciation on our drilling rigs and service rigs on a straight-line basis which reduced net earnings for the quarter by approximately $10 million or $0.03 per diluted share compared with what net earnings would have been using the previous depreciation method.
Revenue this quarter was $585 million or 20% higher than the third quarter of 2013, mainly due to higher pricing and drilling activity in the U.S., Canada and internationally. Revenue from our Contract Drilling Services and Completion and Production Services segments both increased over the comparative prior year period by 22% and 7%, respectively.
Earnings before income taxes, finance charges, foreign exchange, and depreciation and amortization (adjusted EBITDA) this quarter were $199 million or 45% higher than the third quarter of 2013. Our activity for the quarter, as measured by drilling rig utilization days, increased 6% in Canada, 20% in the U.S. and 4% internationally, compared to the third quarter of 2013. Our adjusted EBITDA as a percent of revenue was 34% this quarter, compared to 28% in the third quarter of 2013. The increase in adjusted EBITDA as a percent of revenue was mainly due to increases in activity and profitability in our Contract Drilling Services segment and decreases in our share based compensation accruals, which were $0.3 million this quarter.
Net earnings for the first nine months of 2014 were $147 million, or $0.50 per diluted share, compared to net earnings of $123 million, or $0.43 per diluted share in 2013, while revenue was $1,732 million, or 18% higher than in 2013. The impact of the change in calculating depreciation on our drilling and service rigs reduced net earnings by approximately $27 million or $0.09 per diluted share compared with what net earnings would have been using the previous depreciation method.
Our current expected capital plan for 2014 is $908 million, a decrease of $26 million compared to the $934 million capital plan announced in July 2014. The capital decrease relates to the deferral of infrastructure and upgrade projects. Our 2014 capital plan includes long-lead items for announced new build rig deliveries in 2015. The number of new-build deliveries scheduled for Precision in 2014 totals 18 rigs (eight in the U.S., seven in Canada and three internationally). For 2015 deliveries, we have announced contracts or firm customer commitments for 16 new-build rigs (15 for the U.S. and one for Kuwait).
Kevin Neveu, Precision–s President and Chief Executive Officer, stated: “Precision–s focus on delivering maximum efficiency to unconventional oil and gas operators drove EBITDA growth of 45% in the third quarter of this year. In all of our markets, customers are recognizing Precision–s High Performance, High Value offering with our fleet approaching nearly 240 Tier 1 Super Series rigs, over 8,000 well trained personnel and robust support systems. While overall customer demand may be impacted by further decreases in commodity prices, the demand for our Super Series fleet is expected to remain strong as a result of the value generated by these rigs.”
“Precision–s growth has been most significant in the U.S. where our drilling days increased 20% year over year, compared to an 8% increase in industry activity. With 20 scheduled new-build deliveries to the U.S. market from the start of the fourth quarter 2014 until mid-2015, we expect to continue to expand our market presence. These rig deliveries, along with four Canadian and two international new-build deliveries over the same time period, will further support our high performance operations and the cash flows delivered by our fleet. We continue to have conversations with customers about new-build rig deliveries in 2015 and expect to deliver new-build rigs in the second half of the year as these discussions advance to contracted agreements.”
“We are encouraged by steps taken last week by the British Columbia government to improve the tax structure for LNG investment and we continue to closely monitor the capital decisions of major operators as we expect to be a key service provider and partner in developing this important Canadian resource base. To date, we have booked approximately half of the Canadian industry–s awarded new-build rigs associated with LNG export projects and are well positioned to deliver additional Super Series rigs if the market demands them.”
“Our joint technology and marketing alliance with Schlumberger is gaining momentum with strong support from field and marketing employees at Precision and Schlumberger and growing interest from our customers. In the first three months of the alliance, Schlumberger tools have been deployed with Precision drilling rigs and crews on 27 wells across seven land basins in the U.S. and Canada, demonstrating the broad appeal and potential value of this unique combination. In addition, in the first three quarters of 2014, we completed nearly 1,800 operating days of integrated directional drilling jobs where both the drilling and directional drilling crews were from Precision. This is almost three times the number of integrated jobs we completed in all of 2013 and we see the growth continuing as our customers realize the efficiency this integrated model generates. Precision–s integrated directional drilling capability combined with Schlumberger–s technology further differentiates our competitive advantage, offering our customers increased drilling efficiency and reduced well costs.”
“Precision–s international operations generated a strong quarter for revenue and profitability, a direct result of the performance of our people in the field and the support provided by Precision–s quality systems. We expect to further strengthen this growing part of our business with rig deliveries including today–s announcement of a 2,000 horsepower drilling rig mobilizing to the country of Georgia, the previously announced delivery of the ST-2000 rig to the Kingdom of Saudi Arabia in November of this year and the ST-1500 new build delivery to the Kuwait market in mid-2015. Additionally, our strategy of international expansion is delivering the diversification we desire. During the third quarter, 9% of our revenue was generated internationally with 47% coming from our U.S. operations and 44% from our Canadian operations.”
“As expected, our Completion and Production Services segment continued to face sluggish market conditions during the third quarter. However, our team–s focus on cost reductions and efficiency gains in this operation helped support field and segment margin improvement even as utilization waned. We expect challenging market conditions to persist in the near term, but with a growing inventory of wells to be serviced in the Canadian marketplace, we are fully prepared and capable of capitalizing on an industry rebound.”
“In addition to the strength in our Tier 1 fleet, which generated more than 90% of our North American contract drilling EBITDA, our contract coverage is at a two and a half year high and our balance sheet remains strong with approximately $1.3 billion of liquidity and no debt maturities until 2019. Despite the potential for a lower oil price environment, our North American unconventional E&P customers remain focused on generating long-term returns on their investments, just like we are. Although lower oil prices may challenge returns in the short term, continued advances in drilling and completion techniques and efficiency gains will result in lower overall well costs, attracting investment and driving activity. To that end, I am pleased Precision–s strategy is aligned with our customers– desire to increase efficiency and generate solid returns.”
“Today–s dividend increase is supported by our long-term business outlook, high percentage of contracted Tier 1 assets and growing international presence. Our dividend payment remains an important part of our long-term strategy of fiscal discipline and generating returns to shareholders”, concluded Mr. Neveu.
SELECT FINANCIAL AND OPERATING INFORMATION
Adjusted EBITDA and funds provided by operations are additional GAAP measures. See “ADDITIONAL GAAP MEASURES”.
Our portfolio of term customer contracts, a scalable operating cost structure and economies achieved through vertical integration of the supply chain all help us manage our business through the cycles.
Precision–s strategic priorities are as follows:
For the third quarter of 2014, the average natural gas prices were higher than the 2013 average while the West Texas Intermediate price of oil was consistent with the 2013 average.
West Texas Intermediate oil prices displayed volatility throughout the third quarter of this year and have declined by approximately 20% since the third quarter peak on July 20, 2014. As of October 24, West Texas Intermediate oil prices were approximately US$81.
Summary for the three months ended September 30, 2014:
Summary for the nine months ended September 30, 2014:
OUTLOOK
Contracts
Our portfolio of term customer contracts provides a base level of activity and revenue and, as of October 24, 2014, we had term contracts in place for an average of 50 rigs in Canada, 63 in the U.S. and 12 internationally for the fourth quarter of 2014 and an average of 45 rig contracts in Canada, 57 in the U.S. and 13 internationally for the first quarter of 2015. For the full year in 2015, we currently have contracts in place for an average of 40 rigs in Canada, 41 in the U.S. and 11 internationally. In Canada, term contracted rigs normally generate 250 utilization days per year because of the seasonal nature of well site access. In most regions in the U.S. and internationally, term contracts normally generate 365 utilization days per year.
Drilling Activity
In the U.S., our average active rig count in the quarter was 97 rigs, up 16 rigs over the third quarter in 2013 and up 3 rigs over the average for the first half of 2014. We currently have 101 rigs active in the U.S.
In Canada, our average active rig count in the quarter was 88 rigs, an increase of five over the third quarter in 2013. We currently have 101 rigs active in Canada. In general we expect volatility on uncontracted rigs as commodity prices fluctuate but we expect to benefit from the fleet enhancements over the past several years and the scheduled delivery of new-build and upgraded rigs to the North American market in 2014 and 2015.
Internationally, our average active rig count in the quarter was 11 rigs, consistent with the third quarter in 2013 and up one rig over the average for the first half of 2014. We currently have 11 rigs under contract internationally and expect delivery of two new-build rigs for the Middle East, one to begin operations in the Kingdom of Saudi Arabia in November of this year and the other to begin operations in Kuwait in mid-2015. Also, we have an existing 2,000 horsepower rig preparing to move to the country of Georgia to work on a term contract starting in the first quarter of 2015. In Mexico, we currently have four rigs on integrated project management contracts.
Industry Conditions
To date in 2014, drilling activity has increased relative to this time last year for both Canada and the U.S. According to industry sources, as of October 24, 2014, the U.S. active land drilling rig count was up approximately 12% from the same point last year and the Canadian active land drilling rig count was up approximately 5%. The increase in the North American rig count has been driven by demand for Tier 1 assets, which continues to be strong, benefiting drilling contractors, like Precision, with a high percentage of Tier 1 assets.
Canada has been experiencing an increase in natural gas and gas liquids drilling activity related to deep basin drilling in northwestern Alberta and northeastern British Columbia while the trend towards oil-directed drilling in the U.S. continues. To date in 2014, approximately 59% of the Canadian industry–s active rigs and 82% of the U.S. industry–s active rigs were drilling for oil targets, compared to 68% for Canada and 78% for the U.S. at the same time last year.
The recent decline in oil prices has yet to impact our activity levels in any meaningful way, but we are monitoring our customers– spending plans and will react accordingly.
Capital Spending
Capital spending in 2014 is expected to be $908 million:
SEGMENTED FINANCIAL RESULTS
Precision–s operations are reported in two segments: the Contract Drilling Services segment which includes the drilling rig, directional drilling, oilfield supply and manufacturing divisions; and the Completion and Production Services segment which includes the service rig, snubbing, coil tubing, rental, camp and catering and wastewater treatment divisions.
Revenue from Contract Drilling Services was $503 million this quarter, or 22% higher than the third quarter of 2013, while adjusted EBITDA increased by 39% to $201 million. The increases were mainly due to higher drilling rig utilization days and dayrates in our U.S., Canadian and international drilling businesses.
Operating results for our international business improved as drilling rig utilization days for the quarter were 1,012, 4% higher than the prior year comparative period and we received an early termination payment of $8 million related to our Mexico operations.
Drilling rig utilization days in Canada (drilling days plus move days) during the third quarter of 2014 were 8,071, an increase of 6% compared to 2013 primarily resulting from the delivery of new-build and upgraded rigs over the last 12 months. Drilling rig utilization days in the U.S. were 8,898, or 20% higher than the same quarter of 2013. The increase in U.S. activity was primarily due to strong demand for Tier 1 assets and has resulted in market share gains over the past year due to our high percentage of Tier 1 assets. The majority of our North American activity came from oil and liquids-rich natural gas related plays.
Compared to the same quarter in 2013, drilling rig revenue per utilization day was up 10% in the U.S. while Canada was up 1%. The increase in average dayrates for the U.S. was driven by improved rig mix, increased turnkey revenue and higher rates for well-to-well and re-contracted rigs. In Canada the dayrate increase was the result of new-build rigs, along with upgraded rigs entering the fleet compared to the prior year quarter offset by competitive pricing in some rig segments.
In Canada, 45% of utilization days in the quarter were generated from rigs under term contract, compared to 46% in the third quarter of 2013. In the U.S., 65% of utilization days were generated from rigs under term contract as compared to 60% in the third quarter of 2013. At the end of the quarter, we had 52 drilling rigs under contract in Canada, 62 in the U.S. and 11 internationally.
Operating costs were 57% of revenue for the quarter, which was five percentage points lower than the prior year period. On a per utilization day basis, operating costs for the drilling rig division in Canada were higher than the prior year primarily because of higher crew wages and labour burden. In the U.S., operating costs for the quarter on a per day basis were up from the third quarter in 2013 primarily as a result of increased turnkey activity partially offset by labour efficiencies and reduction in labour related costs.
Depreciation expense in the quarter was 25% higher than in the third quarter of 2013 due to changes in the estimated remaining useful life of our capital equipment, a change to straight-line depreciation and depreciation expense associated with new equipment.
Revenue from Completion and Production Services was up $6 million or 7% compared to the third quarter of 2013, as higher average rates resulted from improved product mix as a greater proportion of higher end services were provided in the current year compared with the prior year. Well servicing activity in the third quarter was consistent with the third quarter of 2013 in both Canada and the U.S. Approximately 85% of the third quarter Canadian service rig activity was oil related.
Average service rig revenue per operating hour in the third quarter was $919, or $56 higher than the third quarter of 2013. The increase was primarily the result of rig mix as we completed a greater proportion of higher end services in the current year.
Adjusted EBITDA was $5 million higher than the third quarter of 2013 due to higher average rates in both Canada and in the U.S. and a vendor related charge incurred during the prior year period.
Operating costs as a percentage of revenue decreased to 74% in the third quarter of 2014, from 75% in the third quarter of 2013. Operating costs per service rig operating hour were higher than in the third quarter of 2013 mainly because of the increase in costs associated with the coil tubing operations.
Depreciation in the third quarter of 2014 was 37% higher than the third quarter of 2013 because of changes in the estimated remaining useful life of our capital equipment, a change to straight-line depreciation and depreciation expense associated with new equipment.
SEGMENT REVIEW OF CORPORATE AND OTHER
Our Corporate and Other segment provides support functions to our operating segments. The Corporate and Other segment had an adjusted EBITDA loss of $19 million for the third quarter of 2014, $1 million lower than 2013 comparative period due primarily to lower share based incentive compensation.
OTHER ITEMS
Net financial charges for the quarter were $29 million, an increase of $6 million from the third quarter of 2013, driven by the impact of the issuance of US$400 million 5.25% Senior Notes on June 3, 2014 and the weaker Canadian dollar on our U.S. dollar denominated interest. We had a foreign exchange loss of $2 million during the third quarter of 2014 due to the weakening of the Canadian dollar versus the U.S. dollar, which affected the net U.S. dollar denominated monetary position in the Canadian dollar-based companies.
Income tax expense for the quarter was $8 million compared with a recovery of $4 million in the same quarter in 2013. The increase is due to improved pretax earnings in the current quarter compared to the prior year period. Our effective tax rate on earnings before income taxes for the nine months ended September 30, 2014 was 13.4%.
On August 7, 2014 the Ontario Court of Appeal ruled in favour of Precision–s wholly owned subsidiary, reversing a decision by the Ontario Superior Court of Justice dated June 26, 2013 regarding the reassessment of Ontario income tax for the subsidiary–s 2001 through 2004 taxation years. The Ontario Minister of Revenue has made an application to the Supreme Court of Canada seeking leave to appeal this decision. We expect the Supreme Court of Canada to render its decision on the application for leave to appeal by the end of the first half of 2015.
The approximate $55 million paid to the Ontario tax authorities in 2008, related to the reassessed taxation years, will continue to be reflected as a long-term receivable by Precision until this matter is fully resolved.
LIQUIDITY AND CAPITAL RESOURCES
The oilfield services business is inherently cyclical in nature. To manage this, we focus on maintaining a strong balance sheet so we have the financial flexibility we need to continue to manage our growth and cash flow, regardless of where we are in the business cycle.
We apply a disciplined approach to managing and tracking results of our operations to keep costs down. We maintain a variable cost structure so we can be responsive to changes in demand.
Our maintenance capital expenditures are tightly governed by and highly responsive to activity levels with additional cost savings leverage provided through our internal manufacturing and supply divisions. Term contracts on expansion capital for new-build rig programs provide more certainty of future revenues and return on our capital investments.
Liquidity
In June 2014 we issued US$400 million of 5.25% Senior Notes due in 2024 in a private offering. The Notes are guaranteed on a senior unsecured basis by current and future U.S. and Canadian subsidiaries that also guarantee our revolving credit facility and certain other indebtedness. We expect to use the net proceeds from this placement for general corporate purposes, including building new drilling rigs.
In addition, we amended our credit agreement governing our revolving credit facility to, among other things, voluntarily reduce the size of the revolving credit facility from US$850 million to US$650 million and extend the maturity to September 3, 2019.
In addition to a cash balance of $558 million as at September 30, 2014, we had available capacity of $759 million under our secured facilities.
As at September 30, 2014 we had $1,825 million outstanding under our senior unsecured notes.
Our secured facility includes financial ratio covenants that are tested quarterly; we are compliant with these covenants and expect to remain compliant.
The current blended cash interest cost of our debt is approximately 6.2%.
Hedge of investments in U.S. operations
We have designated a portion of our U.S. dollar denominated long-term debt as a hedge of our investment in our operations in the U.S. To be accounted for as a hedge, the foreign currency denominated long-term debt must be designated and documented as such and must be effective at inception and on an ongoing basis. We recognize the effective amount of this hedge (net of tax) in other comprehensive income. We recognize ineffective amounts (if any) in earnings.
Average shares outstanding
The following table reconciles the weighted average shares outstanding used in computing basic and diluted earnings per share:
ADDITIONAL GAAP MEASURES
We reference Generally Accepted Accounting Principles (GAAP) measures that are not defined terms under International Financial Reporting Standards to assess performance because we believe they provide useful supplemental information to investors.
Adjusted EBITDA
We believe that adjusted EBITDA (earnings before income taxes, financing charges, foreign exchange, and depreciation and amortization) as reported in the Consolidated Statement of Earnings is a useful measure, because it gives an indication of the results from our principal business activities prior to consideration of how our activities are financed and the impact of foreign exchange, taxation and non-cash depreciation and amortization charges.
Operating Earnings
We believe that operating earnings, as reported in the Consolidated Statements of Earnings, is a useful measure because it provides an indication of the results of our principal business activities before consideration of how those activities are financed and the impact of foreign exchange and taxation.
Funds Provided by Operations
We believe that funds provided by operations, as reported in the Consolidated Statements of Cash Flow is a useful measure because it provides an indication of the funds our principal business activities generate prior to consideration of working capital, which is primarily made up of highly liquid balances.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS
Certain statements contained in this report, including statements that contain words such as “could”, “should”, “can”, “anticipate”, “estimate”, “intend”, “plan”, “expect”, “believe”, “will”, “may”, “continue”, “project”, “potential” and similar expressions and statements relating to matters that are not historical facts constitute “forward-looking information” within the meaning of applicable Canadian securities legislation and “forward-looking statements” within the meaning of the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995 (collectively, “forward-looking information and statements”).
In particular, forward looking information and statements include, but are not limited to, the following:
These forward-looking information and statements are based on certain assumptions and analysis made by Precision in light of our experience and our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate in the circumstances. These include, among other things:
Undue reliance should not be placed on forward-looking information and statements. Whether actual results, performance or achievements will conform to our expectations and predictions is subject to a number of known and unknown risks and uncertainties which could cause actual results to differ materially from our expectations. Such risks and uncertainties include, but are not limited to:
Readers are cautioned that the forgoing list of risk factors is not exhaustive. Additional information on these and other factors that could affect our business, operations or financial results are included in reports on file with applicable securities regulatory authorities, including but not limited to Precision–s Annual Information Form for the year ended December 31, 2013, which may be accessed on Precision–s SEDAR profile at or under Precision–s EDGAR profile at . The forward-looking statements contained in this news release are made as of the date hereof and Precision undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a results of new information, future events or otherwise, unless so required by applicable securities laws.
THIRD QUARTER 2014 EARNINGS CONFERENCE CALL AND WEBCAST
Precision Drilling Corporation has scheduled a conference call and webcast to begin promptly at 12:00 noon MT (2:00 p.m. ET) on Monday, October 27, 2014.
The conference call dial in numbers are 1-866-226-1793 or 416-340-2216.
A live webcast of the conference call will be accessible on Precision–s website at by selecting “Investor Centre”, then “Webcasts”. Shortly after the live webcast, an archived version will be available for approximately 30 days.
An archived recording of the conference call will be available approximately one hour after the completion of the call until November 27, 2014 by dialing 1-800-408-3053 or 905-694-9451, pass code 9441451.
About Precision
Precision is a leading provider of safe and High Performance, High Value services to the oil and gas industry. Precision provides customers with access to an extensive fleet of contract drilling rigs, directional drilling services, well service and snubbing rigs, coil tubing services, camps, rental equipment, and wastewater treatment units backed by a comprehensive mix of technical support services and skilled, experienced personnel.
Precision is headquartered in Calgary, Alberta, Canada. Precision is listed on the Toronto Stock Exchange under the trading symbol “PD” and on the New York Stock Exchange under the trading symbol “PDS”.
Contacts:
Precision Drilling Corporation
Carey Ford
Vice President, Finance and Investor Relations
403.716.4575
403.716.4755 (FAX)
Precision Drilling Corporation
Suite 800, 525 – 8th Avenue S.W.
Calgary, Alberta, Canada T2P 1G1