CALGARY, ALBERTA — (Marketwired) — 07/25/13 — (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 third quarter dividend on its common shares of $0.05 per share, payable on August 15, 2013, to shareholders of record on August 6, 2013. For Canadian income tax purposes, all dividends paid by Precision on its common shares are designated as “eligible dividends”, unless otherwise indicated by the Corporation.
Net earnings this quarter were $0.5 million or $nil per diluted share compared to $18 million or $0.06 per diluted share in the second quarter of 2012.
Revenue this quarter was $379 million, or 1% lower than the second quarter of 2012, mainly due to lower North American activity partially offset by higher average dayrates and increased international and directional drilling activity.
Earnings before income taxes, finance charges, foreign exchange, and depreciation and amortization (“adjusted EBITDA”) this quarter was $88 million or 9% lower than the second quarter of 2012. Our adjusted EBITDA margin was 23% this quarter, compared to 25% in the second quarter of 2012. The decrease in adjusted EBITDA margin was mainly the result of lower activity levels across most North American business lines partially offset by higher dayrates and increased international profitability. Our activity in this quarter, as measured by drilling rig utilization days, decreased 10% in Canada and 17% in the United States compared to the second quarter of 2012.
North American drilling activity was down this quarter versus the prior year quarter as a result of wet weather in Canada, continuing low natural gas prices and lower levels of customer activity.
Revenue and adjusted EBITDA for the quarter were lower than the first quarter 2013 revenue and adjusted EBITDA of $596 million and $215 million, respectively, primarily as a result of decreased seasonal activity levels in Canada.
Precision is adding five contracted new build Super Series rigs to its North American drilling fleet bringing the total number of announced new build rigs in 2013 to six. Also, we have signed an upgrade contract for an existing drilling rig for operations in Mexico. The 2013 capital expenditures are expected to increase from $533 million to $654 million as a result of these additional capital commitments.
Kevin Neveu, President and Chief Executive Officer, stated: “I am pleased that several years of aggressive fleet repositioning, highlighted by Super Series rig investments, continues to generate sustained financial returns which are reflected in our resilient activity levels and firm day rates despite the competitive pressures in the U.S. and weather related delays in the Canadian post break-up seasonal recovery.”
“We have a long history of drilling horizontal wells, pushing efficiency boundaries and ultimately creating more economic drilling opportunities for our customers and for Precision. Many believe that the drilling efficiency achievements necessary for cost effective resource development is a losing proposition for the land drillers. Precision–s reputation for excellence in safety, environmentally responsible operations and, most importantly, the efficiency of our Super Series rigs are well recognized by our customers and invariably make us a winner in this highly competitive game.”
“In the second quarter of 2013, about 90 percent of our active North American rigs were drilling horizontal wells and our scale was demonstrated by our activity in essentially all unconventional basins in North America.”
“I am encouraged by continued customer demand for our High Performance, High Value rigs and services and particularly pleased by our ability to deploy additional capital for five new build Super Series rigs in Canada and the United States. These rigs are all well-supported with firm customer contracts and will generate financial returns in line with our long term expectations.”
“In the United States, Precision contracted three ST-1500 rigs, all intended for oil and gas liquids targets and one of these is working for a new customer for Precision–s Super Series rig design. In Canada, the two ST-1500 rigs are contracted for northwestern Alberta natural gas drilling. Additionally, this summer Precision expects to experience increased activity supporting delineation drilling in northeastern British Columbia, related to potential LNG export projects. Including delivery of these five new build rigs and the previously announced 2013 new build rig, we will have a fleet of 196 Tier 1 drilling rigs in North America.”
“On the international front, we are growing our presence and have successfully deployed the two drilling rigs to Northern Iraq in the Kurdistan region, one of which has been drilling for several weeks and one of which is expected to begin drilling before the end of July. Also, we have entered into an agreement with an integrated service provider for an upgraded 3,000 horsepower drilling rig to work in Mexico under long-term contract. Upon delivery of this rig, which is expected to be late in the third quarter of this year, Precision–s international drilling fleet will consist of 13 rigs with eight rigs in Mexico, three in Saudi Arabia and two in the Kurdistan region of Iraq. The construction of two high capacity Super Series rigs for Kuwait is ongoing and the rigs are expected to be deployed in the middle of 2014.”
“Our Completion and Production Services business is driven primarily by fundamentals in the Canadian oilfield, which in this quarter, like most second quarters, were slow due to spring break-up. However, we have made meaningful investments in our rental fleet and in coil tubing operations and believe we are well positioned to capture business in the second half of the year with seasonal activity increases. The planned addition of two large diameter coil rigs targeted for the Marcellus, bringing our fleet in the region to eight units, further underlines the strength and value of our emerging presence in this strategic market.”
“With today–s dividend announcement, Precision has announced $55 million in dividend payments to shareholders in the past eight months,” concluded Mr. Neveu.
SELECT FINANCIAL AND OPERATING INFORMATION
Financial Highlights
Financial Position
Revenue in the second quarter of this year was $3 million lower than the second quarter in 2012 mainly due to a decrease in activity days in both Canada and the United States, partially offset by higher dayrates in both markets, increased international activity and growth in our U.S. Completion and Production Services division. Compared to the second quarter of 2012, revenue from our Contract Drilling Services segment was down 1% while revenue in our Completion and Production Services segment was up 6%.
Adjusted EBITDA margin (adjusted EBITDA as a percentage of revenue) was 23% this quarter, compared to 25% in the second quarter of 2012. The 23% adjusted EBIDTA margin was a result of higher dayrates from the new build and upgraded Tier 1 rigs that we have deployed over the past few years offset by the impact of lower utilization on fixed costs. Our portfolio of term customer contracts, a highly variable operating cost structure and economies achieved through vertical integration of the supply chain all help in managing our adjusted EBITDA margins.
Our vision is to be recognized as the High Performance, High Value provider of services for global energy exploration and development. We work toward that vision by defining and measuring our results against strategic priorities. Our 2013 priorities are threefold:
Continue to drive execution excellence in our people, internal systems and infrastructure supporting our world class safety, training and development programs, upgrading and consolidating our Nisku operations and leveraging our investments in our Houston and Red Deer Tech Centers.
To June 30, 2013 our safety performance and mechanical downtime have shown improvement over the same period in 2012 and we are continuing to invest in our systems and infrastructure.
Remain poised to seize growth opportunities, leveraging our balance sheet strength and flexibility. Deliver new build rigs to the North American market and upgrade existing drilling rigs to higher specification assets on customer contracts globally.
To June 30, 2013 we have delivered the two remaining rigs from the 2012 new build program, announced six new build rigs for 2013 and we continue to deliver upgraded rigs to customers under contract.
Grow High Performance, High Value service lines for unconventional field development, such as integrated directional drilling, coil tubing and rentals.
To June 30, 2013 we have increased our coil tubing fleet to ten units from five as at December 31, 2012. In the second half of 2013, we expect our coil tubing fleet to grow by two units and we expect to execute integrated directional drilling projects in Canada and the United States.
Uphold our reputation and market breadth in North America while strengthening our presence in select oilfield markets internationally.
To June 30, 2013 we continue to operate a high percentage of our rigs drilling directional or horizontal wells in unconventional basins across North America and have expanded our activities in Mexico and entered a new market in Northern Iraq.
For the second quarter of 2013, the West Texas Intermediate price of oil was consistent with the 2012 average while natural gas prices were higher.
Summary for the three months ended June 30, 2013:
Summary for the six months ended June 30, 2013:
OUTLOOK
Contracts
Our portfolio of term customer contracts provides a base level of activity and revenue, and as of July 24, 2013 we have term contracts in place for an average of 53 rigs in Canada, 40 in the United States and 11 internationally for the third quarter of 2013 and an average of 54 rig contracts in Canada, 42 in the United States and 10 internationally for the full year. In Canada, term contracted rigs normally generate 250 utilization days per rig year because of the seasonal nature of well access. In most regions in the United States and internationally, term contracts normally generate 365 utilization days per rig year.
Drilling Activity
In the United States, our average active rig count in the quarter was 80 rigs, down 17 rigs over the second quarter in 2012 and down one rig over the first quarter of 2013. We currently have 80 rigs active in the United States.
In Canada, our average active rig count in the quarter was 40 rigs, down four rigs over the second quarter in 2012 and down 84 rigs over the first quarter of 2013. We currently have 74 rigs active in Canada and expect typical seasonal volatility through the third quarter, but in general, during the second half of the year we expect to benefit from the fleet enhancements made over the past few years when compared to the prior year period.
Internationally, our average active rig count in the quarter was nine rigs, up five over the second quarter in 2012 and in line with the first quarter of 2013. Our active rig count internationally is expected to grow by two rigs over the next two quarters as our second of two rigs goes to work in Northern Iraq and we have an additional rig going to work in Mexico. We expect to have 12 rigs working internationally under contract by the end of the year.
Industry Conditions
To date in 2013, drilling activity has been lower in Canada and the United States compared to this time last year. According to industry sources, as of July 19, 2013, the U.S. active land drilling rig count was down about 9% from the same point last year and the Canadian active land drilling rig count was in line with the prior year. Despite the active industry rig count softness, demand for Tier 1 assets continues to be strong, benefiting the drilling contractors with a high percentage of Tier 1 assets.
The trend toward oil-directed drilling in North America has continued in 2013. To date approximately 71% of the Canadian industry–s active rigs and 78% of the U.S. industry–s active rigs were drilling for oil targets, compared to 71% for Canada and 68% for the U.S. at the same time last year.
Capital Spending
We expect capital spending in 2013 to be approximately $654 million, of which $267 million was spent during the first six months of the year:
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, rental, camp and catering and wastewater treatment divisions.
SEGMENT REVIEW OF CONTRACT DRILLING SERVICES
Revenue from Contract Drilling Services was $327 million this quarter or 1% lower than the second quarter of 2012, while adjusted EBITDA of $102 million decreased 2%. The decreases were mainly due to lower drilling rig utilization in both Canada and the U.S. partially offset by growth in our international contract drilling business and increases in average dayrates in North America.
Operating results for our international business improved as we began to realize revenue from increased activity. On average, we had nine rigs working internationally during the second quarter of 2013 compared with four in the corresponding quarter of 2012. Drilling utilization days in our international operations were 815 days, 105% higher than the prior year comparative period.
Drilling rig utilization days in Canada (drilling days plus move days) during the second quarter of 2013 were 3,606, a decrease of 10% compared to 2012 while drilling rig utilization days in the United States were 7,320 or 17% lower than the same quarter of 2012. The declines in activity were primarily due to decreased market demand as customers conserved cash and deferred drilling programs and in the Western Canada Sedimentary Basin (“WCSB”) we had an unusually high number of rigs waiting on weather in June 2013. The majority of our North America activity came from oil and liquids-rich natural gas related plays.
Drilling rig revenue per utilization day in Canada was up 8% and 3% in the U.S. over 2012. The increase in average dayrates for Canada and the U.S. was the result of improved rig mix and continued demand for Tier 1 assets. In the U.S. the increase in the average dayrate was primarily driven by turnkey revenue spread over lower activity and idle but contracted rig revenue.
In Canada, 50% of utilization days in the second quarter were generated from rigs under term contract, compared to 44% in the second quarter of 2012. In the U.S., 58% of utilization days were generated from rigs under term contract as compared to 78% in the second quarter of 2012. At the end of the quarter we had 55 drilling rigs under contract in Canada, 47 in the U.S. and ten internationally.
Operating costs were 65% of revenue for the quarter, which was two percentage points lower than the prior year period. On a per utilization day basis, operating costs for the drilling rig division in Canada were above the prior year primarily because of an increase in crew wage expense. In the U.S., operating costs for the quarter on a per day basis were up from the second quarter in 2012 as a result of higher relative turnkey costs and the impact of fixed costs on lower activity partially offset by a reduction in repair and maintenance costs.
Depreciation expense in the quarter was 8% higher than in the second quarter of 2012. Depreciation was higher, despite a decrease in overall drilling activity, as a result of a greater proportion of operating days from our Tier 1 drilling rigs in 2013 relative to 2012 and depreciation from the growth in directional drilling and international contract drilling. With the exception of certain PSST drilling rigs and directional drilling equipment, contract drilling operations use the unit of production method of calculating depreciation.
SEGMENT REVIEW OF COMPLETION AND PRODUCTION SERVICES
Revenue from Completion and Production Services was up $3 million or 6% compared to the second quarter of 2012 due to expansion of services in the United States partially offset by lower activity in Canada. Adjusted EBITDA was $7 million lower than the second quarter of 2012 due to start-up costs associated with expanding activity in the United States and lower activity in Canada. The decline in industry activity was mainly because customers reduced spending to work within cash flow, which reduced activity in the majority of our service lines.
Well servicing activity in the second quarter was 2% higher than the second quarter of 2012 primarily due to our expansion in the United States. Approximately 85% of the second quarter service rig activity was oil related. Our rental division activity in the second quarter was lower than the second quarter of 2012 mainly due to the excess amount of surface storage capacity in the WCSB.
Average service rig revenue per operating hour in the second quarter was $817, or $83 higher than the second quarter of 2012. Increased coil tubing operations in the current quarter, which operate at higher rates, was only partially offset by a reduction in the average service rig rate due to geographic mix.
Operating costs as a percentage of revenue increased to 89% in the second quarter of 2013, from 76% in the second quarter of 2012. Operating costs per service rig operating hour were higher than in the second quarter of 2012 mainly because of the higher cost associated with the new coil tubing operations.
Depreciation in the second quarter of 2013 was 16% higher than the second quarter of 2012 because of the depreciation expense associated with new equipment. We use the straight-line method of calculating depreciation for our completion and production business lines, except for the well servicing division, where we use the unit of production method.
SEGMENT REVIEW OF CORPORATE AND OTHER
Our corporate segment is viewed as support functions that provide assistance to more than one segment. The Corporate and other segment had an adjusted EBITDA loss of $16 million for the second quarter of 2013, in line with the prior year comparative period.
OTHER ITEMS
Net financial charges for the quarter were $24 million, an increase of $3 million from the second quarter of 2012. The increase was primarily because of a non-recurring gain recognized in 2012 and interest related to prior year commodity tax audits.
We had a foreign exchange gain of $5 million during the second quarter of 2013 due to the weakening of the Canadian dollar versus the U.S. dollar and the impact thereof on the net U.S. dollar denominated monetary position in the Canadian dollar-based companies.
Income taxes for the quarter were a recovery of $4 million in line with the prior year comparative period. Our effective tax rate on earnings before income taxes for the first half of 2013 was 13%.
In June 2013, a wholly owned subsidiary of Precision lost a tax appeal in the Ontario Superior Court of Justice related to a reassessment of Ontario income tax for the subsidiary–s 2001 thru 2004 taxation years. Precision has appealed the decision to the Ontario Court of Appeal and we expect this appeal to be heard by mid-2014. Despite the decision in the Superior Court, management believes it is more likely than not that Precision will prevail on appeal. Should Precision lose on appeal, approximately $55 million of the long-term income tax recoverable related to this issue would be expensed.
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, no matter 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
As at June 30, 2013 our liquidity is supported by a cash balance of $127 million, a senior secured credit facility of US$850 million, operating facilities totaling approximately $55 million and a US$25 million secured facility for letters of credit.
At June 30, 2013, including letters of credit, we had approximately $1,349 million outstanding under our secured and unsecured credit facilities and $25 million in unamortized debt issue costs.
Our secured facility includes financial ratio covenants that are tested quarterly and we are compliant with these covenants and expect to remain compliant.
The current blended cash interest cost of our debt is about 6.6%.
Hedge of investments in U.S. operations
We have designated 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 tables reconcile the weighted average shares outstanding used in computing basic and diluted earnings per share:
QUARTERLY FINANCIAL SUMMARY
(Stated in thousands of Canadian dollars, except per share amounts)
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 Interim 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 Interim 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 Interim Consolidated Statements of Cash Flow is a useful measure because it provides an indication of the funds our principal business activities generated 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: payment of a third quarter dividend; Precision expects the 2013 capital expenditures to increase from $533 million to $654 million as a result of certain additional capital commitments; the five new build Super Series rigs in Canada and the United States will generate financial returns in line with our long term expectations; this summer Precision expects to experience increased activity supporting delineation drilling in northeastern British Columbia, related to potential LNG export projects; including delivery of all five of the new build rigs and the previously announced 2013 new build rig, Precision will have a fleet of 196 Tier 1 drilling rigs in North America; a drilling rig deployed to Northern Iraq in the Kurdistan region is expected to begin drilling before the end of July; upon delivery of the upgraded 3,000 horsepower drilling rig to work in Mexico, which is expected to be late in the third quarter of this year, Precision–s international drilling fleet will consist of 13 rigs with eight rigs in Mexico, three in Saudi Arabia and two in the Kurdistan region of Iraq; the construction of two high capacity Super Series rigs for Kuwait is ongoing and the rigs are expected to be developed in the middle of 2014; Precision believes it is well positioned to capture business in the second half of the year with seasonal activity increases; Precision–s 2013 priorities; in the second half of 2013, Precision expects its coil tubing fleet to grow by two units and Precision expects to execute projects in Canada and the United States; Precision expects it–s expected rig count in the Unites States to remain relatively unchanged over the coming months; Precision expects to benefit from the fleet enhancements made over the past few years when compared to the prior year period; Precision–s active rig count internationally is expected to grow by two rigs over the next two quarters as its second of two rigs goes to work in Northern Iraq and Precision has an additional rig going to work in Mexico; Precision expects to have 12 rigs working internationally under contract by the end of the year; the amount and use of planned capital expenditures; Precision expects the appeal to the Ontario Court of Appeal related to an assessment of Ontario income tax to be heard by mid-2014 and management of Precision believes it is more likely than not that Precision will prevail on the appeal; should Precision lose on appeal, approximately $55 million of the long-term income tax recoverable related to this issue would be expensed; and Precision expects to remain compliant with the financial ratio covenants of its secured facility.
These forward-looking information and statements are based on certain assumptions and analysis made by the Corporation in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances. However, whether actual results, performance or achievements will conform to the Corporation–s expectations and predictions is subject to a number of known and unknown risks and uncertainties which could cause actual results to differ materially from the Corporation–s expectations. Such risks and uncertainties include, but are not limited to: fluctuations in the price and demand for oil and natural gas; fluctuations in the level of oil and natural gas exploration and development activities; fluctuations in the demand for contract drilling, well servicing and ancillary oilfield services; capital market liquidity available to fund customer drilling programs; availability of cash flow, debt and/or equity sources to fund the Corporation–s capital and operating requirements, as needed; sustainability of our dividend; the effects of seasonal and weather conditions on operations and facilities; the existence of competitive operating risks inherent in its businesses; general economic, market or business conditions; changes in laws or regulations; the availability of qualified personnel, management or other key inputs; currency exchange fluctuations; and other unforeseen conditions which could impact the use of services supplied by Precision and Precision–s ability to respond to such conditions.
Consequently, all of the forward-looking information and statements made in this report are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Corporation will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Corporation or its business or operations. Readers are therefore cautioned not to place undue reliance on such forward-looking information and statements. Except as may be required by law, the Corporation assumes no obligation to update publicly any such forward-looking information and statements, whether as a result of new information, future events or otherwise.
INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
INTERIM CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
SECOND QUARTER 2013 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 Thursday, July 25, 2013.
The conference call dial in numbers are 1-800-766-6630 or 416-695-6622.
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 August 1, 2013 by dialing 1-800-408-3053 or 905-694-9451, passcode 7578848.
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 & 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