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Precision Drilling Ups 2014 Spending in Response to Rig Demand

Share Print Bookmark    |    Monday,April 28,2014

The Board of Directors of Precision Drilling Corporation has declared a second quarter dividend on its common shares of $0.06 per common share, payable on May 26, 2014, to shareholders of record on May 14, 2014.

Net earnings this quarter were $102 million, or $0.35 per diluted share, compared to net earnings of $93 million, or $0.33 per diluted share, in the first quarter of 2013.

Revenue this quarter was $672 million, or 13% higher than the first quarter of 2013, mainly due to higher pricing and drilling activity in Canada, the U.S. and internationally.

Earnings before income taxes, finance charges, foreign exchange, and depreciation and amortization this quarter were $237 million or 10% higher than the first quarter of 2013. Our adjusted EBITDA margin was 35% this quarter, compared to 36% in the first quarter of 2013. The decrease in adjusted EBITDA margin was mainly due to a decrease in the margins in our Completion and Production Services segment and increases in share based compensation accruals, which were $10 million this quarter. Our activity for the quarter, as measured by drilling rig utilization days, increased 3% in Canada, 16% in the U.S. and 38% internationally, compared to the first quarter of 2013.

We are increasing our 2014 capital plan from $634 million to $833 million. The capital increase is in response to strong customer demand for Precision new-build Super Series rigs. The additional capital expenditures consist of four additional new-build Super Triple rigs for the U.S. to be delivered in the second half of 2014 and five new-build Super Triple rigs to be delivered in early 2015. Additionally, we are expanding our long-lead program to shorten construction times for new-build rigs and will provide capacity of two rig deliveries per month to start 2015 if U.S., Canadian and international customer demand continues at the current pace. With today's announcement, the number of new-build deliveries scheduled for Precision in 2014 totals 16 rigs (seven in the U.S., six in Canada and three internationally).

Kevin Neveu, Precision's President and Chief Executive Officer, stated: "I am pleased that the success of Precision's High Performance strategy is demonstrated in our strong first quarter financial results. Customer demand for our Super Series rigs is increasing and the momentum we communicated last quarter has continued. This is evident in our strong day rates, margins, and contract coverage and the increased demand for additional Precision new-build rigs.

In 2009 we began communicating our High Performance, High Value strategy which aligned our people, systems and technology with emerging unconventional resource development. We introduced the Tier system to categorize our rig fleet, where Tier 1 Super Series rigs represent highly efficient, highly mobile rigs designed to drill horizontal wells and being the rigs ideally suited for developing unconventional resources. At the beginning of 2009, we marketed 93 Super Series rigs, primarily in Canada. Over the past five years, we have transformed our fleet and today we have Super Series rigs operating in virtually every unconventional basin in North America. With today's announcement of an additional nine new-build rigs, eight of which have firm customer commitments, we expect to have 222 Super Series rigs operating by early 2015 and an increased capacity to deliver two new-build rigs per month to start 2015. The cornerstone to Precision's build program remains our strict fiscal discipline insuring we achieve contracts from customers that meet our targets before a rig is completed for delivery."

In Canada, our drilling activity during the first quarter was slightly higher than last year, and was supported by growing customer demand throughout the winter drilling season. We are excited about our leading position in the deep basin and LNG related drilling market with five contracted ST-1500 new-builds planned for delivery in 2014. While challenges must still be overcome to fully realize the Canadian LNG development potential, we remain very encouraged by the continued support demonstrated by the key stakeholders in this very important Canadian resource. We believe additional new-build and upgrade opportunities will continue to emerge as these projects gather momentum.

Our U.S. drilling business continues its strong performance with an average of 94 rigs running in the first quarter, an increase from an average of 81 rigs in the third quarter of 2013. Our success responding to the market's demand for high performance services is particularly evident in the Permian basin, where we now have 20 active Super Series rigs and in the Marcellus where we enjoy a leadership position with 17 Super Series rigs running today representing approximately 20% of the activity in the play.

Internationally, with established operations in the Middle East and Mexico, we are continuing to selectively strengthen our position in these regions. In March, we announced a contract for a new-build ST-2000 rig that will begin drilling for a customer in the Middle East in the fourth quarter. In Mexico, we announced the signing of long-term contracts for six rigs under an integrated project management service agreement, five of which are already in Mexico and one of which is currently being deployed from our U.S. fleet. Bidding activity in our target regions remains strong and we believe further international opportunities for Precision will develop over the coming months.

Our completion and production business continues to face a challenging market characterized by throttled back customer demand. Customer spending on well servicing, well remediation and well repair continues to lag drilling activity as our customers appear to be more focused on deploying capital to drilling programs. Despite the recent weakness, we remain well positioned in Canada and in select basins in the U.S., and believe we can demonstrate meaningfully improved financial results when customer demand improves. We are, as always, intensely focused on execution for our customers and continue to deliver the high performance services they have come to expect from Precision."

We believe we have a competitive advantage in our ability to recruit, develop and retain the best people in the industry and in 2014 we continue to raise the bar in this aspect of our business: Precision safety, training and talent development systems have become integral to our international operations; we are increasing the skill-based and safety training courses at our Houston Tech Center and in the field; and building on the success of our Houston Tech Center, we are preparing for the opening of our Nisku Centre this fall where our workers will have access to a state of the art training facility and a fully functioning training rig. We believe our people are the most important part of the business and we will continue to invest in training and developing our people as we invest in the equipment and systems to support them."

Precision's strategic priorities are as follows:

• Execute our High Performance, High Value strategy - Invest in Precision's physical and human capital infrastructure to advance field level professional development, provide industry leading service to customers and promote safe operations. Continue to measure and benchmark performance with a view to exceeding the high standards we set.
• The construction of our Nisku Centre is underway and we expect to complete construction in the fall of this year. Our Nisku Centre will support safety and training for our Canadian workforce.
• Leverage our scale in operations - Utilize established systems to promote consistent and reliable service and to improve operating efficiencies across all geographies and service lines.
• We have demonstrated our ability to increase activity levels while driving down daily operating cost per rig in our operations. Additionally, we have increased the utilization of our centralized U.S. repair and maintenance facilities at our Houston Tech Center.
• Execute on existing organic growth opportunities - Deliver new-build and upgraded rigs to customer contracts, expand international activity in existing operating regions and grow our Canadian LNG drilling leadership position. Be a recognized leader in the integrated directional drilling transformation.
• We have announced delivery or planned delivery for 13 new-build rigs to the North American market in 2014, including five ST-1500 rigs for deep basin and LNG related drilling in Canada. In addition, we have contracted one new-build for the Middle East and six existing rigs to long-term contracts for integrated project management projects in Mexico and expect to begin operations with the two Kuwait new-build rigs near the end of the second quarter.
• Increase returns for our investors.
• We remain well positioned to increase returns for investors with our continued strong activity levels and margins, favorable contracted terms on new-build and upgraded rigs and our low cost and flexible capital structure.

Drilling Activity

In the U.S., our average active rig count in the quarter was 94 rigs, up 13 rigs over the first quarter in 2013 and up four rigs over the fourth quarter of 2014. We currently have 95 rigs active in the U.S.

In Canada, our average active rig count in the quarter was 126 rigs, an increase of three over the first quarter in 2013 and up 37 rigs over the fourth quarter of 2013. We currently have 44 rigs active in Canada and expect traditional spring weather conditions to negatively affect industry activity in the second quarter. Post spring break-up, we expect to benefit from the fleet enhancements over the past several years and the delivery of four contracted new-build rigs and several contracted upgrade rigs in the second half of this year.

Internationally, our average active rig count in the quarter was 11 rigs, up three rigs over the first quarter in 2013 and in line with the fourth quarter of 2013. We currently have 11 rigs active internationally and expect the two new-build rigs for the Kuwait market to begin operations near the end of the second quarter. In addition, the recently signed rigs for integrated project management contracts are expected to go to work in Mexico over the next two quarters and the new rig for the Middle East is expected to be delivered in late 2014.

Industry Conditions

To date in 2014, drilling activity has increased relative to this time last year for both Canada and the U.S. According to industry sources, as of April 25, 2014, the U.S. active land drilling rig count was up about 6% from the same point last year and the Canadian active land drilling rig count was up about 38%. The large percent increase in Canada is not expected to continue, as cold weather in late March delayed spring break-up in certain locations. The increase in the North American rig count has been driven by demand for Tier 1 assets, which continues to be strong, benefiting drilling contractors, like Precision, with a high percentage of Tier 1 assets.

Canada has been experiencing an increase in natural gas and gas liquids drilling activity related to deep basin drilling in northwestern Alberta and northeastern British Columbia while the trend towards oil-directed drilling in the United States has continued in 2014. To date in 2014, approximately 62% of the Canadian industry's active rigs and 81% of the U.S. industry's active rigs were drilling for oil targets, compared to 73% for Canada and 77% for the U.S. at the same time last year.

Capital Spending

Capital spending in 2014 is expected to be $833 million:

The 2014 capital expenditure plan includes $499 million for expansion capital, $199 million for sustaining and infrastructure expenditures, and $135 million to upgrade existing rigs. We expect that the $833 million will be split $796 million in the Contract Drilling segment and $37 million in the Completion and Production Services segment.
Precision's expansion capital plan includes 16 new-build drilling rigs including six for Canada, seven for the U.S., two for Kuwait and one for the Middle East.

The six rigs for Canada include five ST-1500 rigs for northern gas and gas liquids drilling and one Precision Super Single for heavy oil development drilling. The U.S. new-builds consist of six ST-1500 rigs and one ST-1200 rig while in Kuwait two ST-3000 rigs are expected begin operations near the end of the second quarter and a ST-2000 is expected to be deployed to the Middle East in the fourth quarter of 2014.

The majority of the remainder of the expansion capital is allocated to long-lead items which we anticipate using for new-build drilling rigs for delivery later this year and early into 2015.

The 2014 capital plan includes 15 to 19 rig upgrades.

Precision's sustaining and infrastructure capital plan is based upon currently anticipated activity levels for 2014 and includes a technical and operational support centre in Nisku, Alberta along with regional support facilities and corporate systems. The Nisku centre consolidates Precision's existing Canadian operations and technical support centres and will contain a new employee training centre complete with a fully functioning training rig equipped with the latest drilling technology. The Nisku facility is expected to support Canadian operations for several decades, provide increased capacity and efficiency, and ensure that we continue to deliver services with highly skilled and well trained field personnel. This facility accounts for approximately $30 million of the 2014 capital expenditure plan.

Operating results for our international business improved as we averaged 11 rigs active compared to 8 in the prior year comparative quarter. Drilling utilization days in our international operations for the quarter were 990 days, 38% higher than the prior year comparative period.

Drilling rig utilization days in Canada (drilling days plus move days) during the first quarter of 2014 were 11,384, an increase of 3% compared to 2013 while drilling rig utilization days in the U.S. were 8,473, or 16% higher than the same quarter of 2013. The increase in U.S. activity was primarily due to strong demand for Tier 1 assets and resulted in market share gains during the second half of 2013 and first part of 2014. The majority of our North American activity came from oil and liquids-rich natural gas related plays.

Drilling rig revenue per utilization day was up 2% in Canada and 1% in the U.S. compared to the same quarter in 2013. The increase in average dayrates for Canada was the result of improved rig mix, continued demand for Tier 1 assets and a pass through of a labour cost increase that went into effect in the fourth quarter of 2013. In the U.S., the increase in the average dayrate was driven by improved rig mix and higher rates for spot and re-contracted rigs.

In Canada, 40% of utilization days in the first quarter were generated from rigs under term contract, compared to 39% in the first quarter of 2013. In the U.S., 61% of utilization days were generated from rigs under term contract as compared to 59% in the first quarter of 2013. At the end of the quarter, we had 57 drilling rigs under contract in Canada, 56 in the U.S. and 11 internationally.

Well servicing activity in the first quarter was 8% lower than the first quarter of 2013, as lower customer demand in Canada partially offset our growing U.S. presence. Approximately 90% of the first quarter service rig activity was oil related. Our rental division activity in the first quarter was lower than the first quarter of 2013 mainly due to unfavourable supply and demand dynamics in Western Canada.

Average service rig revenue per operating hour in the first quarter was $895, or $71 higher than the first quarter of 2013. The increase was primarily the result of increased coil tubing operations in the current quarter, which operate at higher rates.

Operating costs as a percentage of revenue increased to 77% in the first quarter of 2014, from 67% in the first quarter of 2013. Operating costs per service rig operating hour were higher than in the first quarter of 2013 mainly because of the increase in costs associated with the new coil tubing operations and fixed costs spread over a lower activity base.