CALGARY, ALBERTA — (Marketwired) — 10/24/13 — (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 fourth quarter dividend on its common shares of $0.06 per share, a 20% increase over the prior quarter. The dividend is payable on November 15, 2013, to shareholders of record on November 4, 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 $29 million or $0.10 per diluted share compared to $39 million or $0.14 per diluted share in the third quarter of 2012.
Revenue this quarter was $488 million, or 1% higher than the third quarter of 2012. Increased international activity and higher average dayrates in Canadian contract drilling were substantially offset by lower North American activity as a result of lower levels of customer spending.
Earnings before income taxes, finance charges, foreign exchange, and depreciation and amortization (“adjusted EBITDA”) this quarter was $138 million, 9% lower than the third quarter of 2012. Our adjusted EBITDA margin was 28% this quarter, compared to 31% in the third 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 average dayrates and increased international profitability. Our activity in this quarter, as measured by drilling rig utilization days, decreased 1% in Canada and 11% in the United States compared to the third quarter of 2012.
Revenue and adjusted EBITDA for the quarter were higher than the second quarter 2013 revenue and adjusted EBITDA of $379 million and $88 million, respectively, primarily as a result of improved seasonal activity levels in Canada.
Precision has firm customer commitments to add three new build Super Series rigs to its North American drilling fleet bringing the total number of announced new build rigs in 2013 to nine. Capital expenditures in 2013 are expected to decrease from $654 million announced in July to $609 million primarily as a result of decreased activity based maintenance and discretionary expansion capital expenditures offset by the additional new build rigs.
Kevin Neveu, President and Chief Executive Officer, stated: “Precision–s third quarter results reflect overall softness in customer demand and weak demand for Canadian completion and production services. Additionally a non-recurring vendor issue and a difficult turnkey project weighed negatively on the quarter. Precision continues to exercise capital discipline by linking near term capital expenditures with industry activity and as such we are reducing our 2013 planned capital expenditures by $45 million.”
“Tempering these short term issues is Precision–s resurgent activity levels in the U.S. where our current rig count is at 87, up seven, or 9%, since the beginning of the third quarter, while overall industry activity levels have remained flat. In addition, our North American and international contract coverage has improved with an expected average of 115 rigs under contract in the fourth quarter, compared to the second quarter of this year when an average of 107 rigs worked under contract.”
“Precision–s strong market share in horizontal drilling and three new build customer commitments announced today for the U.S. demonstrate our customers– increasing acceptance of our High Performance, High Value strategy and the overall efficiency gains our services deliver to the customer. We are also encouraged by the prospect of several additional new build pad walking rigs for delivery to Canada over the next nine months related to increased Canadian emphasis on natural gas exports and natural gas liquids development. Precision–s fleet of Super Series Tier 1 rigs and horizontal capable Tier 2 rigs ensures that we are well positioned as a driller of choice in unconventional oil and gas resource drilling across North America.”
“Our Canadian drilling operations delivered higher daily operating revenues and margins relative to the third quarter in 2012, a direct result of the investment in our drilling rig fleet over the past several years. Our Canadian drilling operations were able to generate higher overall revenue and profitability despite slightly weaker activity in Canada.”
“Our U.S. rig count increase over the past several weeks has resulted from new build and upgraded rig deliveries to customer contracts and reactivation of Tier 1 rigs for customers. Our increase in activity is due to unconventional development and we have seen our position strengthen in several unconventional U.S. basins. For the third quarter, an average of 87% of our active rigs in the U.S. were drilling horizontal or directional wells.”
“Our international operations posted the highest revenue quarter since we began our international expansion in 2012. We deployed our second rig to the Kurdistan region of Iraq during the quarter and deployed an additional rig to Mexico that will begin drilling in the fourth quarter. The construction of our two ST-3000 rigs for Kuwait is going as planned and we expect the rigs to begin drilling in mid-2014. We currently have 11 rigs active internationally and see opportunities to deploy existing and new build rigs to our operating areas in Mexico and the Middle East.”
“The dividend increase is supported by our confidence in Precision–s business outlook and high percentage of contracted Tier 1 drilling rigs and growing international presence. Today, we have a total of 197 Tier 1 drilling rigs and expect to have 202 by the end of 2013, an increase of 109 Tier 1 rigs from the 93 we had in our fleet at the beginning of 2009, just five years ago. Additionally, the dividend increase is consistent with our commitment to maximize returns for our shareholders through both share price appreciation and return of capital. With today–s dividend announcement, Precision has announced $72 million in dividend payments to shareholders in the past eleven months,” concluded Mr. Neveu.
SELECT FINANCIAL AND OPERATING INFORMATION
Financial Highlights
Revenue in the third quarter of this year was $4 million higher than the third quarter in 2012 mainly due to growth in our international drilling activity and U.S. Completion and Production Services division and higher average dayrates in Canadian contract drilling substantially offset by a decrease in activity days in both Canada and the United States. Compared to the third quarter of 2012, revenue from our Contract Drilling Services segment was up 1% and revenue in our Completion and Production Services segment was up 2%.
Adjusted EBITDA margin (adjusted EBITDA as a percentage of revenue) was 28% this quarter, compared to 31% in the third quarter of 2012. The decrease in adjusted EBITDA margin was a result of the impact of lower utilization on fixed costs, a non-recurring vendor issue and a difficult turnkey project, partially offset by higher dayrates from the new build and upgraded Tier 1 rigs that we have deployed over the past few years. 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:
1. Execute our High Performance, High Value strategy
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 September 30, 2013 our safety performance and mechanical downtime have shown improvement over the same period in 2012 and we continue to invest in our systems and infrastructure.
2. Execute on existing organic growth opportunities
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 September 30, 2013 we have delivered the two remaining rigs from the 2012 new build program, announced nine 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 September 30, 2013 we have increased our coil tubing fleet to 12 units from five as at December 31, 2012.
We continue to promote our integrated directional drilling services to oil and gas customers and have invested in people and equipment to execute the strategy. Although overall industry adoption has been slower than expected, we are currently experiencing an increase in the percentage of integrated service jobs on Precision drilling rigs, particularly in Canada.
3. Build our brand
Uphold our reputation and market breadth in North America while strengthening our presence in select oilfield markets internationally.
To September 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 third quarter of 2013, natural gas prices and the West Texas Intermediate price of oil were higher than the 2012 averages.
Summary for the three months ended September 30, 2013:
Summary for the nine months ended September 30, 2013:
OUTLOOK
Contracts
Our portfolio of term customer contracts provides a base level of activity and revenue, and as of October 23, 2013 we have term contracts in place for an average of 54 rigs in Canada, 50 in the United States and 11 internationally for the fourth quarter of 2013 and an average of 56 rig contracts in Canada, 46 in the United States and 10 internationally for the full 2013 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 81 rigs, down nine rigs over the third quarter in 2012 and up one rig over the second quarter of 2013. We currently have 87 rigs active in the United States.
In Canada, our average active rig count in the quarter was 83 rigs, down one rig over the third quarter in 2012 and up 43 rigs over the second quarter of 2013. We currently have 96 rigs active in Canada and expect activity to increase moderately through the fourth quarter.
Internationally, our average active rig count in the quarter was 11 rigs, up three over the third quarter in 2012 and up two rigs over the second quarter of 2013. Our active rig count internationally is expected to grow by one rig before the end of the year as a rig is going to work in Mexico during the fourth quarter.
Industry Conditions
According to industry sources, as of October 18, 2013, the U.S. active land drilling rig count was down about 6% from the same point last year and the Canadian active land drilling rig count was up 9% over the prior year. Despite the active industry rig count softness, demand for Tier 1 assets continues to be strong, benefiting those 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 69% of the Canadian industry–s active rigs and 78% of the U.S. industry–s active rigs were drilling for oil targets, compared to 72% for Canada and 70% for the U.S. at the same time last year.
Capital Spending
We expect capital spending in 2013 to be approximately $609 million, of which $413 million was spent during the first nine 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.
Revenue from Contract Drilling Services was $412 million this quarter or 1% higher than the third quarter of 2012, while adjusted EBITDA of $145 million decreased 1%. The decreases were mainly due to lower drilling rig utilization in both Canada and the United States and lower average dayrates in the United States offset by growth in our international contract drilling business and increases in average dayrates in Canada.
Operating results for our international business improved as a result of increased activity. On average, we had 11 rigs working internationally during the third quarter of 2013 compared with eight in the corresponding quarter of 2012. Drilling utilization days in our international operations were 969 days, 32% higher than the prior year comparative period.
Drilling rig utilization days in Canada (drilling days plus move days) during the third quarter of 2013 were 7,622, a decrease of 1% compared to 2012 while drilling rig utilization days in the United States were 7,412 or 11% 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. The majority of our North America activity came from oil and liquids-rich natural gas related plays.
Drilling rig revenue per utilization day during the third quarter was up 4% in Canada while in the U.S. drilling rig revenue per utilization day was down 2% over 2012. The increase in average dayrates for Canada was the result of improved rig mix and continued demand for Tier 1 assets. In the United States, the decrease in revenue per utilization day for the third quarter was due to rig mix as we experienced lower turnkey activity and a higher proportion of rigs working in the spot market.
In Canada, 46% of utilization days in the third quarter were generated from rigs under term contract, compared to 42% in the third quarter of 2012. In the U.S., 60% of utilization days were generated from rigs under term contract as compared to 73% in the third quarter of 2012. At the end of the quarter we had 56 drilling rigs under contract in Canada, 53 in the U.S. and 11 internationally.
Operating costs were 62% of revenue for the quarter, which was in line with 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 in line with the third quarter in 2012 as the impact of fixed costs on lower activity was offset by turnkey costs.
Depreciation expense in the quarter was 11% higher than in the third 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 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 $1 million or 2% compared to the third quarter of 2012 due to expansion of services in the United States partially offset by lower activity in Canada. Adjusted EBITDA was $11 million lower than the third quarter of 2012 due to start-up costs associated with expanding activity in the United States and lower activity in Canada and a loss recognized due to a vendor–s insolvency. The decline in industry activity was mainly because customers reduced spending to work within their cash flow, which reduced activity in the majority of our service lines.
Well servicing activity in the third quarter was 3% lower than the third quarter of 2012 primarily due to reduced activity in Canada partially offset by our expansion in the United States. Approximately 84% of our third quarter Canadian service rig activity was oil related. Our rental division activity in the third quarter was lower than the third quarter of 2012 mainly due to the excess amount of surface storage capacity in the Western Canadian Sedimentary Basin.
Average service rig revenue per operating hour in the third quarter was $863, or $94 higher than the third quarter of 2012. Increased coil tubing operations in the current quarter, which operate at higher rates, were partially offset by a reduction in the average service rig rate due to industry competition with less activity.
Operating costs as a percentage of revenue increased to 75% in the third quarter of 2013, from 65% in the third quarter of 2012. Operating costs per service rig operating hour were higher than in the third quarter of 2012 because of higher repairs and maintenance, fixed costs spread over a lower activity base and cost associated with start-up of the new coil tubing operations.
Depreciation in the third quarter of 2013 was 5% higher than the third 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 $19 million for the third quarter of 2013, $1 million higher than the prior period.
OTHER ITEMS
Net financial charges for the quarter were $23 million, an increase of $2 million from the third quarter of 2012. The increase was primarily because of foreign exchange on U.S. dollar denominated interest payments and lower interest income.
We had a foreign exchange loss of $3 million during the third quarter of 2013 due to the strengthening of the Canadian dollar versus the U.S. dollar from June 30, 2013 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 compared to an $8 million expense in the prior year period. Our effective tax rate on earnings before income taxes for the first nine months of 2013 was 8%.
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 in the latter half of 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 September 30, 2013 our liquidity is supported by a cash balance of $82 million, an undrawn balance on our senior secured credit facility of approximately US$805 million, availability on our operating facilities totaling approximately $40 million and a US$25 million secured facility for letters of credit.
At September 30, 2013, including letters of credit, we had approximately $1,341 million outstanding under our senior notes and secured and unsecured credit facilities and $24 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 6.5%.
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 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 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: announced payment of a fourth quarter dividend; that firm customer commitments to build three new build Super Series rigs will result in term contracts; 2013 capital expenditures are expected to decrease from $654 million to $609 million; Precision continues to exercise capital discipline by linking near term capital expenditures with industry activity and as such we are reducing our 2013 planned capital expenditures by $45 million; we are also encouraged by the prospect of several additional new-build pad walking rigs for delivery to Canada over the next nine months related to increased Canadian emphasis on natural gas exports and natural gas liquids development; we deployed a rig to Mexico that will begin drilling in the fourth quarter; the construction of our two ST-3000 rigs for Kuwait is going as planned and we expect the rigs to begin drilling in mid-2014; we currently have 11 rigs active internationally and see opportunities to deploy existing and new build rigs to our operating areas in Mexico and the Middle East; today, we have a total of 197 Tier 1 drilling rigs and expect to have 202 by the end of 2013; we currently have 96 rigs active in Canada and expect activity to increase moderately through the fourth quarter; our active rig count internationally is expected to grow by one rig before the end of the year as a rig is going to work in Mexico during the fourth quarter; despite the active industry rig count softness, demand for Tier 1 assets continues to be strong, benefiting those drilling contractors with a high percentage of Tier 1 assets; we expect capital spending in 2013 to be approximately $609 million, of which $413 million was spent during the first nine months of the year; the anticipated uses and timing of this capital spending; Precision expects the appeal to the Ontario Court of Appeal related to an assessment of Ontario income tax to be heard in the latter half of 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 our 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; viability of its vendors; 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.
THIRD 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, October 24, 2013.
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 October 31, 2013 by dialing 1-800-408-3053 or 905-694-9451, passcode 5078039.
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