CALGARY, ALBERTA — (Marketwire) — 07/25/12 — (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.
Precision Drilling Corporation (“Precision” or the “Corporation”) (TSX: PD) (NYSE: PDS) reported net earnings of $18 million or $0.06 per diluted share for the three months ended June 30, 2012 compared to net earnings of $16 million or $0.06 per diluted share for the second quarter of 2011.
Revenue for the second quarter of 2012 was $382 million and earnings before finance charges, income taxes, depreciation, amortization and foreign exchange (“EBITDA”) totalled $97 million compared to $345 million and $93 million, respectively, during the comparable period in 2011. Second quarter 2012 revenue and EBITDA were lower than the first quarter of 2012 due to the seasonality of oilfield service activity in Canada known as “spring break-up”. This is a time in Canada where heavy equipment movement is restricted due to road bans and normally occurs in March to June of each year. Spring break-up was extended this year due to significant rainfall in western Canada.
In the Contract Drilling Services segment, average drilling rig revenue per day increased by US$1,065 to US$23,145 in Precision–s United States operations and by $2,188 to $20,649 in the Canadian operations in the second quarter of 2012 over the comparable quarter in 2011. Average revenue per day in the second quarter of 2012 decreased over the first quarter by US$80 and $442 in the United States and Canadian operations, respectively. The rate decreases from the first quarter in the United States and Canada are primarily the result of declines in the spot market rate, while in Canada the drop is also due to winter related revenue received in the first quarter.
For the six months ended June 30, 2012, Precision reported net earnings of $129 million or $0.45 per diluted share compared to net earnings of $82 million or $0.28 per diluted share for the same period of 2011. Revenue for the first half of 2012 was $1,022 million compared to $871 million for the corresponding period of 2011. EBITDA totalled $343 million for the first half of 2012 compared to $279 million in the first half of 2011. The year-over-year improvement resulted from higher pricing in the Contract Drilling Services and Completion and Production Services segments partially offset by lower drilling activity levels. Activity for Precision, as measured by drilling utilization days, decreased 2% in Canada and remained flat in the United States for the first six months of the year compared with the same period in 2011.
Precision is updating its 2012 capital expenditure plan and announcing five additional new build Super Series drilling rigs for Precision–s North American operations backed by long-term contracts. Precision has reduced its adjusted 2012 capital expenditure plan from $975 million to $875 million. The reduction in the plan has occurred in accordance with normal budgetary procedures and reflects lower than originally forecasted industry activity levels for 2012.
Kevin Neveu, Precision–s President and Chief Executive Officer, stated: “Despite softening customer demand and a prolonged Canadian spring break-up this was Precision–s strongest second quarter for EBITDA in the history of the company. Precision–s fleet of Super Series drilling rigs, supported by a strong base of long-term contracts operating across most North American unconventional basins partially offset the headwinds in the market. The demand for Super Series rigs remains encouraging as we continue to see customers willing to commit to long-term contracts for new build rigs. Today–s announcement of five additional new build Super Series rigs supports our view that these are the rigs our customers desire and should continue to deliver superior utilization and returns even in periods of lower activity.”
“Precision remains mindful of the volatile and weakened oil prices and depressed natural gas prices, the reduction in our customers– cash flow and the potential impact that has on our business. In response, Precision has reduced total capital spending in 2012 to $875 million, down approximately $270 million from our original 2012 budget of $1.14 billion. While we have eliminated many discretionary projects and reduced maintenance capital commensurate with expected activity levels, we continue to invest in the new build Super Series Rigs which are all supported by long-term customer contracts.”
“Despite commodity price softness in the quarter, Precision was able to maintain pricing gains achieved over the past several quarters in the United States market. Precision–s average dayrates were supported by sustained demand for Tier 1 assets and new build Super Series rigs entering our active fleet. For lower tier assets we expect the pricing pressure experienced in the quarter to continue if commodity price weakness and market uncertainty persists. Precision–s average active rig count in the United States was down seven rigs from the first quarter of 2012 and five rigs over the same period in 2011. Precision–s active rig count in the United States is currently 93 and we expect it to increase over the coming weeks as rigs that have recently moved from the Northeast begin to spud wells for customers and contracted new build rigs enter our active fleet.”
“Customer demand in Canada during the second quarter was higher than activity levels indicate with operations hampered by weather as an exceptionally wet June delayed the summer ramp up. Additionally, we believe lower commodity prices have caused some customers to reduce their capital spending budgets and this may continue to impact activity levels throughout the second half of the year. Precision–s current active rig count in Canada of 82, compares to 98 at this time last year. In Canada, Precision averaged 44 rigs operating during the second quarter of 2012, down from 46 rigs during the second quarter of 2011. Precision expects to have approximately 110 rigs working once the ground dries sufficiently to facilitate the movement of rigs.”
“In Precision–s international operations I am pleased to report that we now have eight rigs running including three in Saudi Arabia and five in Mexico. Current activity levels are up from three rigs at the end of the first quarter. With continued international customer interest, bid activity remains high for Precision and we expect further progress in the second half of the year.”
“Precision–s Completion and Production Services segment continues to perform well. Due to spring break-up, Precision–s service rig fleet worked 46% fewer hours during the second quarter of 2012 as compared to the first quarter of 2012, and 9% more hours than the second quarter of 2011. Oil related work continued to be where the vast majority of the service rig hours were achieved during the second quarter of 2012. The segment generated EBITDA of $9 million during the second quarter of 2012, up 9% from last year.”
“While there is a high degree of short-term market uncertainty, we are confident in the long-term growth prospects for oil and natural gas development and Precision–s ability to continue to safely deliver our High Performance, High Value services to our customers”, concluded Mr. Neveu.
SELECT FINANCIAL AND OPERATING INFORMATION
FINANCIAL POSITION AND RATIOS
Revenue in the second quarter of 2012 was $37 million higher than the prior year period. The increase was mainly due to a year-over-year increase in rates partially offset by slightly lower drilling utilization days in both Canada and the United States. Revenue in Precision–s Contract Drilling Services segment increased by 11% while revenue increased 10% in the Completion and Production Services segment in the second quarter of 2012 compared to the prior year.
EBITDA margin (EBITDA as a percentage of revenue) was 25% for the second quarter of 2012 compared to 27% for the same period in 2011. The decrease in EBITDA margin for the quarter was primarily attributable to lower utilizations and higher costs offset partially by higher average dayrates in both Canada and the United States. Higher operating costs in the quarter were the result of start-up costs internationally, increased maintenance costs in the United States and costs associated with directional drilling in Canada in a period of seasonally low activity. Precision–s term contract position with customers, a highly variable operating cost structure and economies achieved through vertical integration of the supply chain continue to support EBITDA margins.
In the Contract Drilling Services segment, Precision currently owns 353 contract drilling rigs, including 198 in Canada, 147 in the United States and eight rigs in international locations and the capacity to run concurrently 81 directional drilling jobs. Precision–s Completion and Production Services segment includes 190 service rigs, 19 snubbing units, two coil tubing units, 106 wastewater treatment units, 66 drilling and base camps and a broad mix of rental equipment.
During the quarter, an average of 44 drilling rigs worked in Canada, 97 worked in the United States and four worked internationally totalling an average of 145 rigs. This compares with an average of 150 rigs in the second quarter a year ago.
Oil and natural gas prices were lower during the second quarter of 2012 compared with the year ago period. For the second quarter of 2012, West Texas Intermediate crude oil averaged US$93.43 per barrel, 9% lower when compared to US$102.55 per barrel in the same period in 2011. AECO natural gas spot prices averaged $1.90 per MMBtu, 51% lower than the second quarter 2011 average of $3.88 per MMBtu. In the United States, Henry Hub natural gas spot prices averaged US$2.28 per MMBtu in the second quarter of 2012, a decrease of 48% over the second quarter 2011 average of US$4.35 per MMBtu.
Summary for the three months ended June 30, 2012:
Summary for the six months ended June 30, 2012:
OUTLOOK
Precision has a strong portfolio of long-term customer contracts that provides a base level of activity and revenue. Precision has an average of 122 rigs committed under term contracts for the third quarter of 2012, an average of 113 rigs contracted for the fourth quarter of 2012 and 92 for the first quarter of 2013. In Canada, term contracted rigs normally generate 250 utilization days per rig year due to the seasonal nature of well access, whereas in the United States and international they usually generate 365 utilization days per rig year in most regions.
Capital expenditures are expected to be approximately $875 million for 2012, of which $443 million was expended during the first half of 2012. The expected 2012 total includes $132 million for sustaining and infrastructure expenditures and is based upon currently anticipated activity levels for 2012. Additionally, $613 million is slated for expansion capital and includes the cost to complete the drilling rigs from the 2011 new build rig program and the new build rigs for 2012. The total capital expenditures also include an estimated $130 million to upgrade approximately 14 rigs in 2012 and to purchase long lead time items for the Corporation–s capital inventory. These long lead time items include top drives, masts and engines, that can be used for North American or international new build rig opportunities and rig tier upgrades. Precision expects that the $875 million will be split $751 million for the Contract Drilling segment and $124 million for the Completion and Production Services segment. An additional $44 million of committed expansion capital is expected to carry forward to 2013.
Demand remains solid for existing Tier 1 Super Series rigs for both Canada and the United States and customers continue to show interest in contracting new build Super Series rigs. Precision believes it will have opportunities to contract additional new build and upgraded rigs in the second half of 2012, although the number of contracts is likely to be significantly lower than the 42 rigs contracted during 2011. According to industry sources, as at July 20, 2012, the United States active land drilling rig count was flat with the prior year period while the Canadian drilling rig count had decreased about 13%.
Natural gas production in the United States has remained strong despite reduced drilling activity. United States natural gas storage levels as at July 13, 2012 are 17% above the five-year average and 19% above storage levels of a year ago. This also strongly influences Canadian activity since Canada has historically exported a significant portion of its natural gas production to the United States. The increase in oil and liquids rich natural gas drilling in areas like the Permian Basin, Bakken and Eagle Ford has been strong and the U.S. oil rig count as at July 20, 2012 is 39% higher than it was a year ago. On average, Precision has more equipment working in oil related plays than at any time in its history with approximately 80% of Precision–s active rig count drilling for oil targets.
With high storage levels, consistent production and the view that North America has an oversupply of natural gas, gas prices have remained at very low levels. To date, customer changes in natural gas drilling plans are reflected in a decline in the rig count targeting dry gas plays. If low natural gas prices continue, Precision and the North American drilling industry could see continued weak demand for natural gas drilling.
SEGMENTED FINANCIAL RESULTS
Precision–s operations are reported in two segments; the Contract Drilling Services segment includes the drilling rig, directional drilling, oilfield supply and manufacturing divisions; and the Completion and Production Services segment includes the service rig, snubbing, coiled tubing, rental, camp and catering and wastewater treatment divisions.
SEGMENT REVIEW OF CONTRACT DRILLING SERVICES
Contract Drilling Services segment revenue for the second quarter of 2012 increased by 11% to $332 million and EBITDA decreased by 1% to $103 million compared to the same period in 2011. The increase in revenue was due to higher average rates per day for both Canada and the United States partially offset by lower activity. The decrease in EBITDA in a period of increased revenue was the result of start-up costs internationally, lower margin in the United States as a result of increased maintenance costs and costs associated with directional drilling in Canada in a period of seasonally low activity.
Activity in North America was centered on oil and liquids rich natural gas related drilling activity. In the second quarter, drilling rig revenue per utilization day over the prior year was up 12% in Canada and 5% in the United States as a result of increased rates for rigs working on well-to-well contracts and new rig builds. During the quarter, 44% of Precision–s utilization days in Canada were generated from rigs under term contract compared with 33% in 2011 while in the United States 72% of utilization days were generated from rigs under term contract as compared to 80% in the prior year period. At the end of the quarter, Precision had 69 drilling rigs working under term contracts in the United States and 54 in Canada.
Drilling rig utilization days in Canada (drilling days plus move days) during the second quarter of 2012 were 4,005, a decrease of 5% compared to 4,200 in 2011 due to the unseasonably wet spring. Drilling rig utilization days for Precision in the United States were 5% lower than the same quarter of 2011 due to a reduction in natural gas targeted drilling. On average, Precision had four rigs working internationally as the Saudi Arabia based business ramped up and Precision mobilized three additional rigs into Mexico.
Contract Drilling Services segment operating costs were 67% of revenue for the quarter which is four percentage points higher than the prior year period. Higher operating costs in the quarter were the result of start-up costs internationally, increased maintenance costs in the United States and costs associated with directional drilling in Canada in a period of seasonally low activity. In addition, crew wage increases in Canada and the United States in October contributed to the year-over-year increase.
Quarterly depreciation in the Contract Drilling Services segment increased 28% from the prior year. As discussed in Management–s Discussion and Analysis for the year ended December 31, 2011, Precision changed its depreciation policy on certain Tier 3 rigs from the unit of production method to straight-line over four years resulting in approximately $8 million in additional depreciation in the quarter. Additional increases in depreciation are the result of an increased asset base and new business lines. With the exception of certain Tier 3 equipment and directional drilling equipment, contract drilling operations use the unit of production method of calculating depreciation.
SEGMENT REVIEW OF COMPLETION AND PRODUCTION SERVICES
Completion and Production Services segment revenue for the second quarter increased by 10% from the second quarter of 2011 to $52 million and EBITDA increased by 9% to $9 million. The increase in revenue and EBITDA is attributed to an increase in service rig rates, oil well production activity and service line growth, partially offset by lower results from rental and camp and catering operations.
Well servicing and snubbing activity increased 9% from the prior year period, with the fleet generating 50,560 operating hours in the second quarter of 2012 compared with 46,533 hours in the prior year quarter for utilization of 26% and 23%, respectively. The increase was a result of higher service rig activity performing workover and production work on oil wells, the start-up of new coil tubing service rigs and expansion of services into the northern United States. Approximately 98% of the second quarter service rig activity was oil related. New well completions were 30% lower than the prior year quarter and accounted for 4% of service rig operating hours in the second quarter compared to 6% in the same quarter in 2011. Precision–s rental division benefitted from new equipment additions in the quarter, but utilization for some equipment decreased in conjunction with lower drilling and completion activity in the industry.
Average service rig revenue increased $85 per operating hour to $728 from the prior year period due to rig mix and increased labour and operating costs passed through to customers.
Operating costs as a percentage of revenue in the second quarter of 2012 was 76%, unchanged compared to the same period of 2011. Operating costs per service rig hour increased over the comparable period in 2011 primarily due to higher wages and fuel prices.
Depreciation in the Completion and Production Services segment in the second quarter of 2012 was 20% higher than the prior year due to the addition of new assets and higher well servicing activity. The well servicing division uses the unit of production method of calculating depreciation while the other operating divisions within the Completion and Production Services segment use the straight-line method.
SEGMENT REVIEW OF CORPORATE AND OTHER
Precision views its corporate segment as support functions that provide assistance to more than one segment. The Corporate and other segment had an EBITDA loss of $15 million for the second quarter of 2012, $5 million lower than the prior year comparative period due to decreased costs associated with share based performance incentive plans partially offset by incremental costs associated with increasing activity.
OTHER ITEMS
Net financial charges for the quarter were $22 million, an increase of $6 million from the second quarter of 2011 primarily due to higher long-term debt interest expense.
Finance charges for the three and six month periods ended June 30, 2012 and 2011 are as follows:
The Corporation had a foreign exchange gain of $5 million during the second quarter of 2012 due to the strengthening of the U.S. dollar versus the Canadian dollar and the impact thereof on the net U.S. dollar denominated monetary position in the Canadian dollar based companies.
Precision–s effective tax rate on earnings before income taxes for the first half of 2012 was 18%.
LIQUIDITY AND CAPITAL RESOURCES
The oilfield services business is inherently cyclical in nature. Precision employs a disciplined approach to minimize costs through operational management practices and a variable cost structure, and to maximize revenues through term contract positions with a focus of maintaining a strong balance sheet. This operational discipline provides Precision with the financial flexibility to capitalize on strategic acquisitions and internal growth opportunities at all points in the business cycle.
Operating within a highly variable cost structure, Precision–s maintenance capital expenditures are tightly governed by and highly responsive to activity levels with additional cost savings leverage provided through Precision–s internal manufacturing and supply divisions. Expansion capital for new build rig programs require two to five year term contracts in order to mitigate capital recovery risk.
Liquidity remains sufficient as Precision had a cash balance of $398 million and the US$550 million senior secured revolver (“Secured Facility”) remains undrawn except for US$27 million in outstanding letters of credit as at June 30, 2012. In addition to the Secured Facility, Precision has available $40 million in operating facilities which remains undrawn except for $10 million in outstanding letters of credit as at June 30, 2012.
As at June 30, 2012 and December 31, 2011 Precision had the following long-term debt balances:
As at June 30, 2012, the Corporation was in compliance with the covenants under the Secured Facility and expects to remain in compliance with such covenants and have complete access to credit lines during the remainder of 2012.
The current blended cash interest cost of Precision–s debt is approximately 6.6%.
Precision has designated its U.S. dollar denominated long-term debt as a hedge of its investment in its United States operations. 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.
QUARTERLY FINANCIAL SUMMARY
(Stated in thousands of Canadian dollars, except per share amounts)
ADDITIONAL GAAP MEASURES
Precision uses certain additional GAAP measures that are not defined terms under IFRS to assess performance and believes these measures provide useful supplemental information to investors. The following are the measures Precision uses in assessing performance.
EBITDA
Management believes that in addition to net earnings, EBITDA, as derived from information reported in the Interim Consolidated Statements of Earnings, is a useful supplemental measure as it provides an indication of the results generated by Precision–s principal business activities prior to consideration of how those activities are financed, the impact of foreign exchange, how the results are taxed or how depreciation and amortization charges affect results.
Operating Earnings
Management believes that in addition to net earnings, operating earnings as reported in the Interim Consolidated Statements of Earnings is a useful supplemental measure as it provides an indication of the results generated by Precision–s principal business activities prior to consideration of how those activities are financed, the impact of foreign exchange or how the results are taxed.
Funds Provided by Operations
Management believes that in addition to cash provided by operations, funds provided by operations, as reported in the Interim Consolidated Statements of Cash Flow is a useful supplemental measure as it provides an indication of the funds generated by Precision–s principal business activities 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”, “propose”, “plan”, “expect”, “believe”, “will”, “may”, “continue”, “project”, “appears”, “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: Super Series rigs should continue to deliver superior utilization and returns even in periods of lower activity; average dayrates are supported by sustained demand for Tier 1 assets and new build Super Series rigs entering our active fleet; for lower tier assets, the pricing pressure experienced in the quarter to continue if commodity price weakness and market uncertainty persists; we expect further progress on international activity in the second half of the year; demand remains solid for existing Tier 1 Super Series rigs for both Canada and the United States and customers continue to show interest in contracting new build Super Series rigs; Precision believes it will have opportunities to contract additional new build and upgraded rigs in the second half of 2012; Precision–s expected capital expenditures for 2012 and the anticipated uses of capital and the timing of such expenditures; and the timing for delivery of new build rigs.
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; the effects of seasonal and weather conditions on operations and facilities; the existence of competitive operating risks inherent in contract drilling, well servicing and ancillary oilfield services; general economic, market or business conditions; changes in laws or regulations; interpretation of tax filing position for prior period transactions; 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.
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 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 2012 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 Wednesday, July 25, 2012.
The conference call dial in numbers are 1-866-226-1793 or 416-340-2218
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, 2012 by dialing 1-800-408-3053 or 905-694-9451, pass code 6963179.
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, coiled 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
403.716.4575
403.716.4755 (FAX)