Precision Drilling Trust Reports 2008 Second Quarter Financial Results
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CALGARY, ALBERTA, Jul 23 (MARKET WIRE) --
(Canadian dollars)
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 Trust ("Precision" or the "Trust") reported net
earnings of $22 million or $0.17 per diluted unit for the quarter ended
June 30, 2008, a decrease of $4 million or 15% compared to $26 million or
$0.20 per diluted unit in the second quarter of 2007. The decrease in net
earnings was primarily attributable to higher year over year incentive
compensation expense accruals of $9 million as 2007 was in a $4 million
expense recovery position. The 2008 second quarter results were as
anticipated. Precision's strategy to diversify into the United States
drilling market generated strong revenue and earnings growth and served
to offset Canadian price weakness carried over from 2007. Customer
pricing trends in Canada began to improve in 2008 due to strengthening
industry fundamentals associated with higher natural gas pricing.
Precision's Canadian equipment activity in the second quarter essentially
held at prior year levels with stronger customer demand in 2008 held at
bay due to weather conditions.
For the six months ended June 30, 2008, net earnings were $128 million or
$1.02 per diluted unit, a decrease of $56 million or 30% compared to $184
million or $1.46 in the first half of 2007. The decrease in net earnings
was due to lower first quarter industry demand and pricing for both
operating segments in Canada and was partially mitigated by new market
growth. During the first half, geographical diversification outside
Canada strengthened as drilling rig operating days grew by 374% over the
first half of 2007 with 19 rigs operating in the United States and one
rig in Latin America as at June 30, 2008.
Revenue in the second quarter was 14% higher than the prior year period
at $139 million, increasing 18% in the Contract Drilling Services segment
and 6% in the Completion and Production Services segment. Revenue in
Precision's United States operation grew 17% over the first quarter of
2008 and 198% over the same quarter in the prior year. In Canada,
Precision realized a slight decrease in operating activity in the
Contract Drilling Services segment while activity in the Completion and
Production Services segment was moderately higher.
"Precision's strategy to deliver high-performance, high-value services
was demonstrated through accelerating our United States organic growth
and delivering three new-build rigs on time and under budget, while
continuing to enhance our Target Zero safety program. Sustained strength
in commodity pricing and commodity supply tightness is already driving an
increase in Canadian activity which we see continuing to build through
the second half of 2008 and into 2009," said Kevin Neveu, Precision's
Chief Executive Officer.
SELECT FINANCIAL AND OPERATING INFORMATION
Three months ended Six months ended
June 30, June 30,
(Stated in thousands
of Canadian dollars,
except per diluted unit % %
amounts) 2008 2007 Change 2008 2007 Change
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Revenue $138,514 $122,005 14 $481,203 $532,547 (10)
Operating earnings(1) 22,047 27,074 (19) 146,285 205,253 (29)
Net earnings 21,739 25,722 (15) 128,005 183,789 (30)
Cash provided by
operations 200,458 229,073 (12) 257,765 385,371 (33)
Net capital spending 29,201 50,710 (42) 51,366 105,284 (51)
Distributions declared 49,045 56,591 (13) 98,091 128,273 (24)
Per diluted unit
information:
Net earnings 0.17 0.20 (15) 1.02 1.46 (30)
Distributions declared $ 0.39 $ 0.45 (13) $ 0.78 $ 1.02 (24)
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Contract Drilling Rig
Fleet
Operating days
(spud to release):
Canada 3,066 3,175 (3) 13,570 14,960 (9)
United States 1,227 352 249 2,243 499 349
International 54 - n/m 124 - n/m
Completion and Production
Service Rig Fleet
Operating hours in
Canada 55,631 52,680 6 167,626 185,091 (9)
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(1) Non-GAAP measure; see "NON-GAAP MEASURES AND RECONCILIATIONS".
n/m - calculation not meaningful
FINANCIAL POSITION AND RATIOS
(Stated in thousands of Canadian June 30, December 31, June 30,
dollars, except ratios) 2008 2007 2007
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Working capital $ 88,295 $ 140,374 $ 77,729
Working capital ratio 1.8 2.1 1.8
Long-term debt $ 104,948 $ 119,826 $ 51,937
Total assets $ 1,756,302 $ 1,763,477 $ 1,629,942
Long-term debt to long-term debt plus
equity ratio 0.07 0.08 0.04
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OVERVIEW
Precision's high-performance, high-value customer service
offering advanced since the first quarter of 2008 through developments
that included the following:
- Growth in the United States accelerated with seven rig moves from
Canada representing fleet expansion of 50%.
- The 2007 Super Series drilling rig build program is finished, with
three Super Single TM rigs commissioned for work in Alberta's oil sands
region.
- The 2008 Super Series 19 drilling rig build program is comprised of ten
Super Single TM rigs and nine Super Triple rigs. Seven rigs are under
long-term customer contracts with advanced customer discussion or letters
of intent on the remainder. Of the seven contracted rigs, three are for
the United States and four are for the Canadian market.
- On July 18, 2008 Precision entered into an agreement to acquire six
service rigs from Rick's Well Servicing Ltd., a private company, for
approximately $16 million. The assets are positioned in south-eastern
Saskatchewan and south-western Manitoba and strengthen Precision's
capabilities in those oil regions.
- Precision has previously expressed continuing interest to acquire Grey
Wolf, Inc. ("Grey Wolf"), following the termination of Grey Wolf's Merger
Agreement with another party. Following the termination of its Merger
Agreement, Grey Wolf announced a review of strategic alternatives to
maximize shareholder value. Precision respects the process Grey Wolf is
undertaking and continues to carry significant interest in an
acquisition. Grey Wolf is the fourth largest onshore drilling contractor
in the United States with a fleet of 122 drilling rigs.
Precision remains focused on customer service and earnings margins. In
the quarter the operating earnings margin was 16% compared to 22% for the
same period in 2007. Before the impact of incentive compensation expense,
margins held at prior year levels due to high United States margins,
internal manufacturing and consumable supply distribution cost control
and Precision's spot market revenue discipline. Margins were supported by
Precision's highly variable operating cost structure and pricing
discipline as Precision had a limited amount of low day rate spot market
work.
In the Western Canada Sedimentary Basin ("WCSB"), Precision experienced
higher customer demand over the comparative year quarter due to a
significant improvement in the underlying fundamentals of the oil and gas
industry. Generally, drilling programs by producers were established in
the fourth quarter of 2007 amid modest natural gas fundamentals and
general uncertainty around Alberta's changing royalty structure. With the
significant improvement in natural gas pricing through the first six
months of 2008, producers have begun to accelerate drilling plans but the
impact of spring break-up and wet weather delayed any significant uplift
in activity.
Average customer pricing for Precision's services in Canada stabilized,
down only 4% for drilling rigs and 5% for service rigs from the second
quarter of 2007. Pricing declines were attributable to lower pricing
entering the year as a result of the competitive bidding environment and
equipment availability from 2007. While rates are down from the prior
year, relative to the first quarter of 2008, the average operating day
rate for drilling rigs and well servicing remained consistent when
normalized for first quarter winterization revenue.
Average customer pricing for Precision's operations in the United States
held strong as all drilling rigs are under term contracts. An increasing
active industry rig count and a rising trend toward directional and
horizontal drilling programs continued to provide opportunities for
high-performing, versatile drilling rigs.
Early in 2008 Precision reentered the international onshore drilling
market with a one rig operation in Latin America and realized 54
operating days in the second quarter. Precision continued to evaluate
global opportunities in select regions not restricted by non-compete
obligations and is positioning for global markets in anticipation of the
expiration of these provisions on August 31, 2008.
Precision initially estimated 2008 capital spending to be $370 million
but now forecasts to spend $290 million, with $75 million for upgrade
capital and $215 million for expansion capital. The remaining $80 million
relates to expansion capital expected to be carried forward to 2009 for a
total estimated expansion capital carry forward of $130 million. The
deferral of capital to 2009 is primarily the result of contracting out
the partial construction of five rigs and rig deliveries remain as
planned. All 19 new Super Series drillings rigs are expected to be
contracted with customers before completion. Up to five rigs from the
2008 program are expected to be completed in 2008 with most of the
remaining rigs in the first half of 2009. Financial and operational
information for the three months ended June 30, 2008:
- Precision maintained a strong financial position with working capital
of $88 million, long-term debt of $105 million and a long-term debt to
long-term debt plus equity ratio of 0.07.
- Revenue was $139 million, an increase of $17 million or 14% from the
prior year quarter due primarily to growth in the United States.
- General and administrative costs were $17 million, an increase of $7
million from the prior year due primarily to differences associated with
incentive compensation plan expenses and increased professional fees.
During 2007 declining financial performance led Precision to recover
previously recorded long-term performance incentive accruals.
- Operating earnings were $22 million, a decrease of $5 million or 19%
from the second quarter in 2007 or 16% of revenue, compared to 22% in
2007. Operating earnings margins were negatively impacted by declines in
customer pricing for most Canadian divisions, differences associated with
incentive compensation offset by growth in the United States where
margins were strong.
- Capital expenditures for the purchase of property, plant and equipment
were $31 million, a decrease of $21 million over the same period in 2007.
Capital spending for the second quarter of 2008 included $22 million on
expansionary capital initiatives and $9 million on the upgrade of
existing assets.
- During the quarter Precision moved five rigs from Canada to the United
States under term contracts. At the end of the quarter, Precision had 19
drilling rigs in the United States, an increase of seven from December
31, 2007.
Financial and operational information for the six months ended June 30,
2008:
- Revenue was $481 million, a decrease of $51 million or 10% from the
prior year period due to lower activity levels in Precision's Canadian
operations during the first quarter and lower customer pricing for most
of Precision's services offset by growth in the United States.
- General and administrative costs were $36 million, an increase of $11
million from the prior year due primarily to differences associated with
incentive compensation plan expenses and increased professional fees.
- Operating earnings were $146 million, a decrease of $59 million or 29%
from the first half of 2007 or 30% of revenue, compared to 39% in 2007.
Operating earnings margins were negatively impacted by declines in
customer pricing for most Canadian divisions and differences associated
with incentive compensation offset by growth in the United States where
margins were strong.
- Capital expenditures for the purchase of property, plant and equipment
were $55 million, a decrease of $54 million over the same period in 2007.
Capital spending for the first half of 2008 included $43 million on
expansionary capital initiatives and $12 million on the upgrade of
existing assets.
- During March 2008 Precision paid $55 million to a provincial taxing
authority, due to the reassessment of income taxes relating to tax filing
positions taken in prior periods. The reassessments have been recorded as
long-term receivables. The income tax related portion of the
reassessments is $36 million and was included in the $300 million tax
contingent liability note disclosed in the December 31, 2007 financial
statements. Precision is in the process of challenging these
reassessments.
The increase in natural gas and oil prices has raised expectations for
higher drilling activity in Canada and the United States. AECO natural
gas spot prices averaged $10.22 per MMBtu in the second quarter of 2008,
an increase of 44% over the second quarter 2007 average of $7.09 per
MMBtu. In the United States, Henry Hub natural gas spot prices averaged
US$11.37 per MMBtu in the second quarter of 2008, an increase of 51% over
the second quarter 2007 average of US$7.51 per MMBtu. West Texas
Intermediate crude oil averaged US$124.29 per barrel during the quarter
compared to US$64.99 per barrel in the same period in 2007. The one-year
forward price for North American natural gas improved, trading in a range
of about $9.00 to $13.00 on Canadian and U.S. exchanges in the second
quarter of 2008, compared to a range of about $7.00 to $9.00 in the same
quarter of 2007.
OUTLOOK
For Precision in Canada, the second half of 2008 carries opportunity for
seasonally adjusted higher drilling and service levels compared to the
first six months of 2008. On July 11, 2008 U.S. natural gas underground
storage inventories were 14% below the prior year level and 2% lower than
the five year average. Lower storage levels have propelled natural gas
prices in the spot and forward markets to levels not seen since the Gulf
of Mexico hurricanes in 2005. This trend is positive since Canada exports
over half of its natural gas production to the United States and
Precision's oilfield service businesses are highly dependent on
associated customer economics.
The outlook indicators for 2008 have turned positive for the WCSB.
Favourable commodity prices have positively impacted the cash flow of
Precision's customers and should result in a more robust drilling and
servicing environment for the remainder of 2008 and into 2009. While some
already have, we expect many more customers to revisit their capital
programs in the coming months and adjust their 2008 budgets with an
upward bias. Active rig counts in British Columbia and Saskatchewan are
higher than prior year. While Alberta remains at prior year levels, the
most recent Alberta government land sale generated a sharp increase in
proceeds; an early indicator that industry economics support higher well
licensing and drilling levels.
As activity rises, field labour will be a challenge for the oilfield
service industry. Precision activated its recruitment, training and
orientation processes in the second quarter and is well positioned to
attract and retain field personnel.
Precision continues geographic diversification to the United States and
international markets leveraging its Canadian reputation for
high-performance, high-value onshore drilling services for oil and
natural gas exploration and development. Precision's strategy is focused
on value-based high-performance services where customers recognize and
reward superior performance. This presents Precision with significant
opportunity to displace low performing rigs, especially in technically
demanding unconventional drilling applications. A greater proportion of
wells drilled in North America are seeking unconventional oil and natural
gas reserves and due to the complexity of these programs, high
performance drilling rigs and services are required. The delineation
between underperforming rigs and high performing, highly mobile, well
designed rigs with exceptional crews continues to emerge.
Precision remains focused on United States expansion and the August 31,
2008 expiry of non-compete provisions creates international
diversification opportunities. Precision's growth strategy lies within
its organic new rig construction program, acquisition opportunities and
leveraging its competitive strengths in people, systems and equipment. As
a drilling contractor operating one of the world's largest and safest
fleets, Precision has a unique business model. A suite of complimentary
well site businesses, integrated system support and employee depth
provides Precision with a strong foundation for oilfield service sector
consolidation.
SEGMENTED FINANCIAL RESULTS
Precision's operations are reported in two segments. The Contract
Drilling Services segment includes the drilling rig, camp and catering,
oilfield supply, and manufacturing divisions. The Completion and
Production Services segment includes the service rig, snubbing, rental,
and wastewater treatment divisions.
Three months ended June 30,
%
(Stated in thousands of Canadian dollars) 2008 2007 Change
----------------------------------------------------------------------------
Revenue:
Contract Drilling Services $ 93,006 $ 78,829 18.0
Completion and Production
Services 47,559 44,978 5.7
Inter-segment eliminations (2,051) (1,802) (13.8)
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$ 138,514 $ 122,005 13.5
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Operating earnings:(1)
Contract Drilling Services $ 23,695 $ 24,013 (1.3)
Completion and Production
Services 8,808 8,954 (1.6)
Corporate and other (10,456) (5,893) (77.4)
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$ 22,047 $ 27,074 (18.6)
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(1) Non-GAAP measure; see "NON-GAAP MEASURES AND RECONCILIATIONS".
Six months ended June 30,
%
(Stated in thousands of Canadian dollars) 2008 2007 Change
----------------------------------------------------------------------------
Revenue:
Contract Drilling Services $ 335,371 $ 359,724 (6.8)
Completion and Production
Services 152,279 178,184 (14.5)
Inter-segment eliminations (6,447) (5,361)
(20.3)--------------------------------------------------------------------------
-
$ 481,203 $ 532,547 (9.6)
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Operating earnings:(1)
Contract Drilling Services $ 124,576 $ 156,748 (20.5)
Completion and Production
Services 42,673 60,769 (29.8)
Corporate and other (20,964) (12,264) (70.9)
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$ 146,285 $ 205,253 (28.7)
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(1) Non-GAAP measure; see "NON-GAAP MEASURES AND RECONCILIATIONS".
SEGMENT REVIEW OF CONTRACT DRILLING SERVICES
Three months ended June 30,
(Stated in thousands of Canadian dollars, %
except where indicated) 2008 2007 Change
----------------------------------------------------------------------------
Revenue $ 93,006 $ 78,829 18.0
Expenses:
Operating 55,133 44,623 23.6
General and administrative 5,615 3,669 53.0
Depreciation 8,442 6,112 38.1
Foreign exchange 121 412 (70.6)
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Operating earnings(1) $ 23,695 $ 24,013 (1.3)
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Operating earnings as a percentage
of revenue 25.5% 30.5%
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Drilling rig revenue per operating
day in Canada $ 17,877 $ 18,656 (4.2)
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(1) Non-GAAP measure; see "NON-GAAP MEASURES AND RECONCILIATIONS".
Six months ended June 30,
(Stated in thousands of Canadian dollars, %
except where indicated) 2008 2007 Change
----------------------------------------------------------------------------
Revenue $ 335,371 $ 359,724 (6.8)
Expenses:
Operating 176,438 174,111 1.3
General and administrative 11,460 9,826 16.6
Depreciation 23,610 18,722 26.1
Foreign exchange (713) 317 (324.9)
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Operating earnings(1) $ 124,576 $ 156,748 (20.5)
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Operating earnings as a percentage
of revenue 37.1% 43.6%
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Drilling rig revenue per operating
day in Canada $ 18,428 $ 20,419 (9.8)
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(1) Non-GAAP measure; see "NON-GAAP MEASURES AND RECONCILIATIONS".
Canadian drilling statistics for the three month period ended June 30:
2008 2007
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Precision Industry(1) Precision Industry(1)
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Number of drilling rigs
(end of period) 228 886 242 878
Drilling rig operating days
(spud to release) 3,066 15,744 3,175 13,343
Drilling rig operating day
utilization 15% 19% 14% 17%
Number of wells drilled 413 1,568 411 1,677
Average days per well 7.4 10.0 7.7 8.0
Number of metres drilled
(000s) 602 2,444 572 2,295
Average metres per well 1,457 1,559 1,392 1,369
Average metres per day 196 155 180 172
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Canadian drilling statistics for the six month period ended June 30:
2008 2007
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Precision Industry(1) Precision Industry(1)
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Number of drilling rigs
(end of period) 228 886 242 878
Drilling rig operating days
(spud to release) 13,570 61,082 14,960 58,749
Drilling rig operating day
utilization 32% 38% 34% 38%
Number of wells drilled 1,863 6,694 2,139 7,638
Average days per well 7.3 9.1 7.0 7.7
Number of metres drilled
(000s) 2,548 9,234 2,714 9,680
Average metres per well 1,368 1,379 1,269 1,267
Average metres per day 188 151 181 165
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(1) Canadian Association of Oilwell Drilling Contractors ("CAODC") and
Precision - excludes non-CAODC rigs and non-reporting CAODC members.
In the Contract Drilling Services segment, revenue for the second
quarter increased by 18% to $93 million while operating earnings
decreased by 1% to $24 million compared to the same period in 2007.
Revenue growth in Precision's United States operation was partially
offset by lower pricing in Canadian operations. Activity in the WCSB was
at low levels as wet weather restricted access to drilling locations.
For the second quarter, average drilling operating day rates for
Precision in Canada stabilized, declining 4% to $17,877 compared to the
second quarter of 2007 as low demand and high industry rig capacity
carried over from 2007 fostered a competitive pricing market. The
operating day rates in the comparative quarter of 2007 were stronger as
rates carried forward from robust demand in 2006.
Drilling rig operating days, spud to rig release, in Canada during the
second quarter of 2008 were 3,066 a decrease of 3% compared to 3,175 in
2007. Drilling rig activity for Precision in the United States was 249%
higher than the same quarter of 2007 as the average number of rigs
operating during the second quarter of 2008 was 17 compared to five in
the prior year quarter. During the quarter Precision's Latin America
based drilling rig realized a total of 54 operating days with completion
of a second well.
During the second quarter, Precision's geographical diversification
outside Canada continued as five drilling rigs were moved to the United
States from Canada, all under term contracts. The total number of
Precision drilling rigs operating in the United States at the end of the
quarter was 19. During the quarter Precision recorded 1,227 operating
days in the United States which represented a three-fold increase over
the second quarter of 2007 and 211 more operating days than the first
quarter of 2008. Precision's United States based drilling rigs are all
working under term contracts and had a combined utilization rate
including move days near 100%. Drilling activity in the United States is
not subject to seasonal fluctuations to the same extent experienced in
Canada.
Precision's camp and catering division experienced activity increases of
21% over the prior year second quarter with a greater number of days
realized from larger base camp activity.
Operating expenses were 59% of revenue for the quarter compared to 57%
for the prior year quarter. The increase was due to lower revenue per
operating day in all of Precision's Canadian divisions without a
corresponding drop in operating costs. On a per day basis, operating
costs for the drilling rig division in Canada were 5% higher than the
prior year quarter primarily due to employee benefit recoveries and
repairs for preparing equipment in anticipation of increased activity in
the second half of the year.
Depreciation in the Contract Drilling Services segment increased from the
prior year due to a higher cost base for working rigs and activity growth
in the United States.
SEGMENT REVIEW OF COMPLETION AND PRODUCTION SERVICES
Three months ended June 30,
(Stated in thousands of Canadian dollars, %
except where indicated) 2008 2007 Change
----------------------------------------------------------------------------
Revenue $ 47,559 $ 44,978
5.7Expenses:
Operating 32,713 29,085 12.5
General and administrative 1,992 2,068 (3.7)
Depreciation 4,044 4,861 (16.8)
Foreign exchange 2 10 (80.0)
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Operating earnings (1) $ 8,808 $ 8,954 (1.6)
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Operating earnings as a percentage
of revenue 18.5% 19.9%
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Six months ended June 30,
(Stated in thousands of Canadian dollars, %
except where indicated) 2008 2007 Change
----------------------------------------------------------------------------
Revenue $ 152,279 $ 178,184 (14.5)
Expenses:
Operating 91,994 97,312 (5.5)
General and administrative 5,292 5,253 0.7
Depreciation 12,320 14,844 (17.0)
Foreign exchange - 6 (100.0)
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Operating earnings (1) $ 42,673 $ 60,769 (29.8)
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Operating earnings as a percentage
of revenue 28.0% 34.1%
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Three months ended June 30,
%
Well servicing statistics: 2008 2007 Change
----------------------------------------------------------------------------
Number of service rigs (end of period) 223 238 (6.3)
Service rig operating hours 55,631 52,680 5.6
Service rig operating hour utilization 27% 24%
Service rig revenue per operating hour $ 649 $ 681 (4.7)
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Six months ended June 30,
%
Well servicing statistics: 2008 2007 Change
----------------------------------------------------------------------------
Number of service rigs (end of period) 223 238 (6.3)
Service rig operating hours 167,626 185,091 (9.4)
Service rig operating hour utilization 41% 43%
Service rig revenue per operating hour $712 $ 771 (7.7)
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(1) Non-GAAP measure; see "NON-GAAP MEASURES AND RECONCILIATIONS".
In the Completion and Production Services segment, revenue for the
second quarter increased 6% from 2007 to $48 million while operating
earnings remained consistent at $9 million. The increase in revenue is
attributed to an increase in industry activity, particularly in oil
producing regions, offset by a moderate decrease in average service rates
which occurred in the fourth quarter of 2007 as a result of a competitive
pricing environment.
Service rig activity increased 6% from the prior year period, with the
fleet generating 55,631 operating hours in the second quarter of 2008
compared with 52,680 hours in 2007 for utilization of 27% and 24%,
respectively. The increase was a result of higher production work in oil
producing regions in the WCSB and the performance of completion work from
wells drilled in the first quarter of 2008. New well completions
accounted for 20% of service rig operating hours in the second quarter
compared to 17% in the same quarter in 2007.
Service rig revenue per operating hour decreased slightly over the prior
year as rates declined in 2007 due to reduced demand resulting in a more
competitive pricing environment.
Higher variable operating expenses and lower revenue rates led to an
increase in operating expenses as a percent of revenue from 65% in the
second quarter of 2007 to 69% for the same period in 2008. On a per
operating hour basis, costs for the service rig division increased 3%
over the same quarter in 2007 primarily due to the rising cost of fuel.
Depreciation in the Completion and Production Services segment in the
second quarter of 2008 was 17% lower than the prior year period due to
losses on disposal of equipment in 2007.
SEGMENT REVIEW OF CORPORATE AND OTHER
Corporate and other expenses increased by 77% to $10 million in the
second quarter of 2008 compared to $6 million in the same period of 2007.
The increase was primarily due to the difference in employee incentive
compensation expense and increased professional fees. In 2007, as a
result of financial performance, Precision recorded a recovery of
long-term incentive accruals expensed in prior periods.
OTHER ITEMS
Net interest expense of $2 million for the first quarter of 2008 was in
line with the prior year.
The Trust's effective tax rate on earnings before income taxes for the
second quarter of 2008 was negative 9% compared to positive 8%, before
rate reductions, for the same period in 2007. The income tax recovery is
primarily a result of estimated higher income to be distributed to
unitholders, not subject to tax in the Trust. The effective tax rate for
the six month periods ended June 30, 2008 and June 30, 2007 was 10%.
Compared to a corporate tax rate, the low effective tax rate is primarily
the result of the income trust structure shifting all or a portion of the
income tax burden of the Trust to its unitholders.
LIQUIDITY AND CAPITAL RESOURCES
Precision's liquidity and solvency position remained strong as long-term
debt exceeded working capital by only $17 million as at June 30, 2008
compared to working capital exceeding long-term debt by $21 million as at
December 31, 2007. The change in financial position primarily resulted
from cash payments associated with prior period income tax reassessments
of $55 million and lower operating earnings partially offset by reduced
distributions and lower capital spending.
During the first half of 2008 Precision generated cash from continuing
operations of $258 million. The cash was used to purchase property, plant
and equipment net of disposal proceeds and related non-cash working
capital of $48 million, make cash distributions to unitholders of $118
million, net repayment of long-term debt of $15 million, repay bank
indebtedness of $14 million and pay assessed income taxes and interest of
$55 million leaving a cash balance of $7 million.
The first six months of 2008 were further highlighted by the following
financial developments:
- The Trust declared monthly distributions to unitholders of $0.13 per
diluted unit for aggregate distributions declared of $98 million or $0.78
per diluted unit.
- Long-term debt decreased by $15 million from December 31, 2007 to $105
million for a long-term debt to long-term debt plus equity ratio of 0.07.
- Working capital decreased $52 million during the six months to $88
million as Precision realized lower activity and corresponding operating
results in the first half of 2008 compared to 2007 year end and certain
income tax liabilities.
DISTRIBUTIONS
Upon conversion to an income trust effective November 7, 2005 the Trust
adopted a policy of making monthly distributions to holders of Trust
units and holders of exchangeable LP units ("unitholders"). Precision has
a legal entity structure whereby the trust entity, Precision Drilling
Trust, effectively must flow its taxable income to unitholders pursuant
to its Declaration of Trust. Distributions, including special
distributions, may be declared in cash or "in-kind" or a combination of
both and reduced, increased or suspended entirely depending on the
operations of Precision, the performance of its assets, or legislative
changes in tax laws. The actual cash flow available for distribution to
unitholders is a function of numerous factors, including the Trust's:
financial performance; debt covenants and obligations; working capital
requirements; upgrade and expansion capital expenditure requirements for
the purchase of property, plant and equipment; and number of units
outstanding.
In June 2007 the Government of Canada's Bill C-52 Budget Implementation
Act 2007 was enacted and included legislative provisions that impose a
tax on certain distributions from publicly traded specified investment
flow-through ("SIFT") trusts at a rate equal to the applicable federal
corporate tax rate plus a provincial SIFT tax factor. After the enactment
of federal tax rate reductions in December 2007, the combined SIFT tax
will be 29.5% in 2011, reducing to 25% in 2012. Precision will be a SIFT
trust on the earlier of January 1, 2011 or the first day after it exceeds
the normal growth guidelines announced by the federal Department of
Finance on December 15, 2006. Key factors for consideration in
determining actual cash flow available for distribution, in an historical
context, are disclosed within the consolidated statements of cash flow.
In calculating distributable cash Precision makes the following
adjustments to cash provided by continuing operations:
- Deducts the purchase of property, plant and equipment for upgrade
capital as the minimum reinvestment required to maintain current
operating capacity;
- Deducts the purchase of property, plant and equipment for expansion
initiatives to grow capacity;
- Adds the proceeds on the sale of property, plant and equipment capital
which are incidental transactions occurring within the normal course of
operations; and
- Deducts long-term incentive plan changes as an unfunded liability
resulting from the operating activities in the current period with
payments beginning March 2009.
A quarterly two-year reconciliation of distributable cash from continuing
operations follows:
(Stated in thousands of
Canadian dollars, except per
diluted unit amounts) 2007 2008
----------------------------------------------------------------------------
Quarters ended September 30 December 31 March 31 June 30
----------------------------------------------------------------------------
Cash provided by continuing
operations $ 20,270 $ 78,474 $ 57,307 $200,458
Deduct:
Purchase of property, plant
and equipment for upgrade
capital (10,544) (9,241) (2,814) (8,864)
Purchase of property plant and
equipment for expansion
initiatives (30,382) (28,264) (20,654) (22,480)
Add:
Proceeds on the sale of
property, plant and
equipment 1,273 1,236 1,303 2,143
----------------------------------------------------------------------------
Standardized distributable
cash(1) (19,383) 42,205 35,142 171,257
Unfunded long-term incentive
plan compensation 3,685 (1,817) 469 (2,166)
----------------------------------------------------------------------------
Distributable cash from
continuing operations(1) $ (15,698) $ 40,388 $ 35,611 $169,091
----------------------------------------------------------------------------
Cash distributions declared $ 49,046 $ 69,166 $ 49,046 $ 49,045
----------------------------------------------------------------------------
Per diluted unit information:
Cash distributions declared $ 0.39 $ 0.55 $ 0.39 $ 0.39
Standardized distributable
cash(1) $ (0.15) $ 0.33 $ 0.28 $ 1.36
Distributable cash from
continuing operations(1) $ (0.12) $ 0.32 $ 0.28 $ 1.34
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2006 2007
----------------------------------------------------------------------------
Quarters ended September 30 December 31 March 31 June 30
----------------------------------------------------------------------------
Cash provided by continuing
operations $ 74,952 $ 154,233 $156,298 $229,073
Deduct:
Purchase of property, plant
and equipment for upgrade
capital (24,503) (26,122) (17,583) (8,602)
Purchase of property plant and
equipment for expansion
initiatives (55,876) (46,211) (38,119) (44,238)
Add:
Proceeds on the sale of
property, plant and equipment 4,251 3,742 1,128 2,130
----------------------------------------------------------------------------
Standardized distributable
cash(1) (1,176) 85,642 101,724 178,363
Unfunded long-term incentive
plan compensation (5,262) (10,192) 2,461 4,167
----------------------------------------------------------------------------
Distributable cash from
continuing operations (1) $ (6,438) $ 75,450 $104,185 $182,530
----------------------------------------------------------------------------
Cash distributions declared $ 116,785 $ 116,912 $ 71,682 $ 56,591
----------------------------------------------------------------------------
Per diluted unit information:
Cash distributions declared $ 0.93 $ 0.93 $ 0.57 $ 0.45
Standardized distributable
cash(1) $ (0.01) $ 0.68 $ 0.81 $ 1.42
Distributable cash from
continuing operations(1) $ (0.05) $ 0.60 $ 0.83 $ 1.45
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Non-GAAP measure; see "NON-GAAP MEASURES AND RECONCILIATIONS".
The quarterly distributable cash calculation over the past two years
demonstrates the wide variances from quarter to quarter and highlights
the need to consider seasonal and economic conditions for cumulative
quarters to assess performance and the reasonableness of distributions.
For the quarter ended June 30, 2008 cash provided by operations was $200
million, a decrease of $29 million from the 2007 second quarter. The
decrease was due primarily to the reduction in operating earnings in the
current quarter compared to the prior year and a lower cash realization
of non-cash working capital balances of $25 million.
The Canadian drilling industry is subject to seasonality with activity
and earnings peaking during the winter months in the fourth and first
quarters. As temperatures rise in the spring, the ground thaws and
becomes unstable. Government road bans can restrict activity at any time
but are most typical for spring break-up during the second quarter before
equipment is able to move for summer drilling programs. As a result, in
combination with economic cycles, Precision's operating and financial
results can vary significantly by quarter. Working capital is typically
at its highest level at the end of the first quarter when accounts
receivable increases from winter activity and tends to be at its lowest
during the second quarter. The change in the non-cash working capital
balance has a direct impact on cash provided by operations.
Six months Six months Year
ended ended ended
(Stated in thousands of June 30, 2008 June 30, 2007 December 31,
Canadian dollars) 2007
----------------------------------------------------------------------------
Cash provided by continuing
operations (A) $ 257,765 $ 385,371 $ 484,115
----------------------------------------------------------------------------
Net earnings (B) $ 128,005 $ 183,789 $ 345,776
----------------------------------------------------------------------------
Distributions declared Copyright $ 98,091 $ 128,273 $
276,667
----------------------------------------------------------------------------
Excess of cash provided by
continuing operations over
distributions declared (A-C) $ 159,674 $ 257,098 $ 207,448
----------------------------------------------------------------------------
Excess of net earnings from
operating activities over
distributions declared (B-C) $ 29,914 $ 55,516 $ 69,109
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Trust maintained a strong financial position and had sufficient
debt facilities to manage short-term funding needs as well as planned
equipment additions. Part of the debt management strategy involves
retaining sufficient funds from available distributable cash to finance
upgrade capital expenditures as well as working capital needs. Planned
asset growth will generally be financed through existing debt facilities
or cash retained from continuing operations. Precision renewed its $700
million three-year revolving syndicated loan facility during the second
quarter. Tenure has been renewed for most of the facility and certain
pricing terms were amended. A $150 million accordion clause was added,
enabling Precision to increase the size of the facility under certain
conditions.
Periodically, Precision enters into cash generating transactions that are
outside the normal course of operations and, while such transactions
increase the cash available for distribution, Precision does not rely on
these sources of cash for distributions.
QUARTERLY FINANCIAL SUMMARY
(Stated in thousands of
Canadian dollars, except
per diluted unit amounts)
2007 2008
----------------------------------------------------------------------------
Quarters ended September 30 December 31 March 31 June 30
----------------------------------------------------------------------------
Revenue $ 227,928 $ 248,726 $ 342,689 $138,514
Operating earnings(1) 73,402 77,696 124,238 22,047
Earnings from continuing
operations 69,702 89,329 106,266 21,739
Per diluted unit 0.55 0.71 0.84 0.17
Net earnings 72,658 89,329 106,266 21,739
Per diluted unit 0.58 0.71 0.84 0.17
Cash provided by continuing
operations 20,270 78,474 57,307 200,458
Distributions declared $ 49,046 $ 99,348 $ 49,046 $
49,045--------------------------------------------------------------------------
-
2006 2007
----------------------------------------------------------------------------
Quarters ended September 30 December 31 March 31 June 30
----------------------------------------------------------------------------
Revenue $ 349,558 $ 328,049 $ 410,542 $ 122,005
Operating earnings(1) 142,431 132,396 178,179 27,074
Earnings from continuing
operations 133,552 126,474 158,067 25,722
Per diluted unit 1.06 1.01 1.26 0.20
Net earnings 139,667 127,436 158,067 25,722
Per diluted unit 1.11 1.01 1.26 0.20
Cash provided by
continuing operations 74,952 154,233 156,298 229,073
Distributions declared $ 116,785 $ 141,435 $ 71,682 $ 56,591
----------------------------------------------------------------------------
(1) Non-GAAP measure;see "NON-GAAP MEASURES AND RECONCILIATIONS".
NON-GAAP MEASURES AND RECONCILIATIONS
Precision uses both Generally Accepted Accounting Principles ("GAAP") and
non-GAAP measures to assess performance and believes the non-GAAP
measures provide useful supplemental information to investors. Following
are the non-GAAP measures Precision uses in assessing performance:
- Operating Earnings: Management believes that in addition to net
earnings, operating earnings as reported in the Consolidated Statements
of Earnings and Deficit 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 or
how the results are taxed.
- Standardized Distributable Cash, Distributable Cash from Continuing
Operations, Standardized Distributable Cash per Diluted Unit and
Distributable Cash from Continuing Operations per Diluted Unit:
Management believes that in addition to cash provided by continuing
operations, standardized distributable cash and distributable cash from
continuing operations are useful supplemental measures. They provide an
indication of the funds available for distribution to unitholders after
consideration of the impacts of capital expenditures and long-term
unfunded contractual operational obligations.
Precision's method of calculating these non-GAAP measures may differ from
other entities and, accordingly, may not be comparable to measures used
by other entities. Investors should be cautioned, however, that these
measures should not be construed as an alternative to measures determined
in accordance with GAAP as an indicator of Precision's performance.
CHANGES IN ACCOUNTING POLICIES
Effective January 1, 2008 the Trust adopted new Canadian accounting
standards relating to inventories (Section 3031) and capital disclosures
(Section 1535). Section 3031 requires inventories to be measured at the
lower of cost or net realizable value and the reversal of previously
recorded write downs to realizable value when the circumstances that
caused the write down no longer exist. This new standard did not have a
material impact on the Trust's financial statements for the period ended
June 30, 2008. Section 1535 requires the Trust to provide additional
quantitative and qualitative information regarding its objectives,
policies and processes for managing its capital.
Effective for fiscal years starting on or after January 1, 2011, Canadian
Publicly Accountable Enterprises must report financial information using
International Financial Reporting Standards ("IFRS"). During the six
month period ended June 30, 2008 Precision has initiated the transition
process with an identification and assessment of the primary differences
that would have an impact on Precision and has commenced the planning for
the conversion.
Although many elements of Canadian GAAP and IFRS are similar, Precision
expects its transition to IFRS to take considerable effort.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed to provide reasonable
assurance that information required to be disclosed in reports filed
with, or submitted to, securities regulatory authorities is recorded,
processed, summarized and reported within the time periods specified
under Canadian and United States securities laws. The information is
accumulated and communicated to management, including the principal
executive officer and principal financial and accounting officer, to
allow timely decisions regarding required disclosure.
As of June 30, 2008 an evaluation was carried out, under the supervision
of and with the participation of management, including the principal
executive officer and principal financial and accounting officer, of the
effectiveness of Precision's disclosure controls and procedures as
defined under the rules adopted by the Canadian securities regulatory
authorities and by the United States Securities and Exchange Commission.
Based on that evaluation, the principal executive officer and principal
financial and accounting officer concluded that the design and operation
of Precision's disclosure controls and procedures were effective as at
June 30, 2008.
During the quarter ended June 30, 2008 there have been no changes in
internal control over financial reporting that have materially affected,
or are reasonably likely to materially affect, Precision's internal
control over financial reporting.
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", "expect",
"believe", "will", "may" 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: new
drilling rigs are expected to be contracted with customers before
completion; stronger than expected natural gas prices in 2008 should
positively impact customer cash flows and provide incentive to drill and
service oil and natural gas wells; expected consummation of the agreement
to acquire six service rigs; estimates that $290 million of the total
capital will be incurred in 2008 with $130 million carried forward to
2009; as many as five rigs from the 2008 program are expected to be
completed in 2008 with the remaining rigs to be completed in 2009;
opportunity in the second half of 2008 for higher drilling and service
levels; as activity rises field labour will be a challenge for the
oilfield service industry; improvement in commodity prices is expected to
alleviate downward pricing pressure; sustained period of higher prices
required to instill enough producer confidence to increase drilling
activity; that unconventional drilling applications will require high
performance drilling rigs; expecting customers to revisit their drilling
programs in the second half and adjust their 2008 budgets with an upward
bias; that industry economics support higher well licensing and drilling
levels; expiry of non-compete provisions creates international
diversification opportunities; planned asset growth will generally be
financed through existing debt facilities or cash retained from
continuing operations, all of which are stated under the headings
"Overview" and "Outlook" of this report.
These statements include, but are not limited to, statements as to
seasonal and weather conditions affecting the Canadian oil and natural
gas industry and the demand for Precision's services. These statements
are based on certain assumptions and analysis made by the Trust 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 Trust'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 Trust'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
well servicing, contract drilling and ancillary oilfield services; the
effects of weather conditions on operations and facilities; the existence
of competitive operating risks inherent in well servicing, contract
drilling and ancillary oilfield services; general economic, market or
business conditions; changes in laws or regulations, including taxation,
environmental and currency regulations; the lack of availability of
qualified personnel or management; 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 Trust will be realized or, even if substantially realized, that they
will have the expected consequences to or effects on the Trust or its
business or operations. Except as may be required by law, the Trust
assumes no obligation to update publicly any such forward-looking
information and statements, whether as a result of new information,
future events or otherwise.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31,
(Stated in thousands of Canadian dollars) 2008 2007
----------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,117 $ -
Accounts receivable 173,658 256,616
Income tax recoverable 3,912 5,952
Inventory 8,301 9,255
----------------------------------------------------------------------------
192,988 271,823
Income tax recoverable (note 5) 58,055 -
Property, plant and equipment, net of
accumulated depreciation 1,224,238 1,210,587
Intangibles, net of accumulated
amortization 272 318
Goodwill 280,749 280,749
----------------------------------------------------------------------------
$ 1,756,302 $ 1,763,477
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities:
Bank indebtedness $ - $ 14,115
Accounts payable and accrued liabilities 88,344 80,864
Distributions payable 16,349 36,470
----------------------------------------------------------------------------
104,693 131,449
Long-term compensation plans 8,723 13,896
Long-term debt (note 4) 104,948 119,826
Future income taxes 190,916 181,633
----------------------------------------------------------------------------
409,280 446,804
----------------------------------------------------------------------------
Contingent Liability and Commitments (notes 8 and 9)
Unitholders' equity:
Unitholders' capital 1,442,476 1,442,476
Contributed surplus 742 307
Deficit (96,196) (126,110)
----------------------------------------------------------------------------
1,347,022 1,316,673
Subsequent event (note 11)
----------------------------------------------------------------------------
$ 1,756,302 $ 1,763,477
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Units outstanding (000s) 125,758 125,758
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF EARNINGS AND DEFICIT (UNAUDITED)
(Stated in thousands of Three months ended Six months ended
Canadian dollars, except per June 30, June 30,
unit amounts) 2008 2007 2008 2007
----------------------------------------------------------------------------
Revenue $ 138,514 $ 122,005 $ 481,203 $ 532,547
Expenses:
Operating 85,795 71,906 261,985 266,062
General and administrative 17,145 10,274 36,297 24,829
Depreciation and amortization 13,394 12,026 37,761 35,510
Foreign exchange 133 725 (1,125) 893
----------------------------------------------------------------------------
116,467 94,931 334,918 327,294
----------------------------------------------------------------------------
Operating earnings 22,047 27,074 146,285 205,253
Interest:
Long-term debt 2,109 1,649 4,344 4,179
Other 53 31 99 58
Income (75) (77) (160) (195)
----------------------------------------------------------------------------
Earnings from before income
taxes 19,960 25,471 142,002 201,211
Income taxes: (note 5)
Current 2,045 (3,967) 4,697 (3,647)
Future (3,824) 3,716 9,300 21,069
----------------------------------------------------------------------------
(1,779) (251) 13,997 17,422
----------------------------------------------------------------------------
Net earnings 21,739 25,722 128,005 183,789
Deficit, beginning of period (68,890) (108,834) (126,110) (195,219)
Distributions declared (49,045) (56,591) (98,091) (128,273)
----------------------------------------------------------------------------
Deficit, end of period $ (96,196) $ (139,703) $ (96,196) $ (139,703)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings per unit:
Basic $ 0.17 $ 0.20 $ 1.02 $ 1.46
Diluted $ 0.17 $ 0.20 $ 1.02 $ 1.46
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Units outstanding (000s) 125,758 125,758 125,758 125,758
Weighted average units
outstanding (000s) 125,758 125,758 125,758 125,758
Diluted units outstanding
(000s) 125,785 125,758 125,781 125,758
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
Three months ended Six months ended
(Stated in thousands of June 30, June 30,
Canadian dollars) 2008 2007 2008 2007
----------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Net earnings $ 21,739 $ 25,722 $ 128,005 $ 183,789
Adjustments and other items
not involving cash:
Long-term compensation plans 2,166 (4,167) 1,697 (6,628)
Depreciation and amortization 13,394 12,026 37,761 35,510
Future income taxes (3,824) 3,716 9,300 21,069
Other 5 5 (17) 5
Changes in non-cash working
capital balances 166,978 191,771 81,019 151,626
----------------------------------------------------------------------------
200,458 229,073 257,765 385,371
Investments:
Purchase of property, plant
and equipment (31,344) (52,840) (54,812) (108,542)
Proceeds on sale of property,
plant and equipment 2,143 2,130 3,446 3,258
Changes in income tax
recoverable 37 - (55,148) -
Changes in non-cash working
capital balances 3,975 (471) 3,071 (10,114)
----------------------------------------------------------------------------
(25,189) (51,181) (103,443) (115,398)
Financing:
Distributions paid (49,045) (64,136) (118,212) (150,909)
Repayment of long-term debt (108,559) (95,753) (108,559) (95,753)
Increase in long-term debt - - 93,681 6,810
Change in bank indebtedness (10,548) (18,003) (14,115) (30,121)
----------------------------------------------------------------------------
(168,152) (177,892) (147,205) (269,973)
Increase in cash and cash
equivalents 7,117 - 7,117 -
Cash and cash equivalents,
beginning of period - - - -
----------------------------------------------------------------------------
Cash and cash equivalents, end
of period $ 7,117 $ - $ 7,117 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Notes to Consolidated Financial Statements (UNAUDITED)
(Tabular amounts are stated in thousands of Canadian dollars except unit
numbers)
1. Basis of Presentation
These interim financial statements for Precision Drilling Trust
("Precision" or the "Trust") were prepared using accounting policies and
methods of their application consistent with those used in the
preparation of the Trust's consolidated audited financial statements for
the year ended December 31, 2007 except as noted below. These interim
financial statements conform in all material respects to the requirements
of generally accepted accounting principles in Canada for annual
financial statements with the exception of certain note disclosures. As a
result, these interim financial statements should be read in conjunction
with the Trust's consolidated audited financial statements for the year
ended December 31, 2007. Effective January 1, 2008 the Trust adopted new
Canadian accounting standards relating to inventories (Section 3031) and
capital disclosures (Section 1535). Section 3031 requires inventories to
be measured at the lower of cost or net realizable value and the reversal
of previously recorded write downs to realizable value when the
circumstances that caused the write down no longer exist. This new
standard did not have a material impact on the Trust's financial
statements for the period ended June 30, 2008. Section 1535 requires the
Trust to provide additional quantitative and qualitative information
regarding its objectives, policies and processes for managing its capital.
In February 2008, the Canadian Institute of Chartered Accountants issued
Section 3064, goodwill and intangible assets, replacing Section 3062,
goodwill and other intangible assets and Section 3450, research and
development costs. The new Section establishes standards for the
recognition, measurement, presentation and disclosure of goodwill and
intangible assets. The new Section will be applicable to the Trust on
January 1, 2009. The Trust is currently evaluating the impact of this new
Section on its consolidated financial statements.
2. Seasonality of Operations
The majority of the Trust's operations are carried on in Canada. The
ability to move heavy equipment in the Canadian oil and natural gas
fields is dependent on weather conditions. As warm weather returns in the
spring, the winter's frost comes out of the ground rendering many
secondary roads incapable of supporting the weight of heavy equipment
until they have thoroughly dried out. The duration of this "spring
break-up" has a direct impact on the Trust's activity levels. In
addition, many exploration and production areas in northern Canada are
accessible only in winter months when the ground is frozen hard enough to
support equipment. The timing of freeze up and spring break-up affects
the ability to move equipment in and out of these areas. As a result,
late March through May is traditionally the Trust's slowest time.
3. Unitholders' Capital
(a) Authorized - unlimited number of voting Trust units
- unlimited number of voting exchangeable LP units
(b) Units issued:
Trust units Number Amount
----------------------------------------------------------------------------
Balance, December 31, 2007 125,587,919 $ 1,440,543
Issued on retraction of exchangeable LP units 9,498 108
----------------------------------------------------------------------------
Balance June 30, 2008 125,597,417 $ 1,440,651
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Exchangeable LP units Number Amount
----------------------------------------------------------------------------
Balance, December 31, 2007 170,005 $ 1,933
Redeemed on retraction of exchangeable LP units (9,498) (108)
----------------------------------------------------------------------------
Balance June 30, 2008 160,507 $1,825
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Summary Number Amount
----------------------------------------------------------------------------
Trust units 125,597,417 $ 1,440,651
Exchangeable LP units 160,507 1,825
----------------------------------------------------------------------------
Unitholders'capital 125,757,924 $ 1,442,476
----------------------------------------------------------------------------
----------------------------------------------------------------------------
4. Long-term Debt
During the quarter, Precision Drilling Corporation, a subsidiary of the
Trust, received approval from its lenders to extend the maturity of the
extendible revolving unsecured credit facility until June 2011. In
addition, a clause was added whereby the facility may increase by $150
million and certain amendments were made to pricing.
5. Income Taxes
Currently, the Trust incurs taxes to the extent that there are certain
provincial capital taxes, as well as taxes on any taxable income, of its
underlying subsidiaries. Future income taxes arise from the differences
between the accounting and tax basis of the Trust's and its subsidiaries'
assets and liabilities.
The provision for income taxes differs from that which would be expected
by applying statutory Canadian income tax rates. A reconciliation of the
difference at June 30 is as follows:
Three months Six months
ended June 30, ended June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Earnings before income taxes $ 19,960 $ 25,471 $ 142,002 $ 201,211
Federal and provincial
statutory rates 30% 33% 30% 33%
----------------------------------------------------------------------------
Tax at statutory rates $ 5,988 $ 8,406 $ 42,601 $ 66,400
Adjusted for the effect of:
Non-deductible expenses 29 (149) (197) 405
Income to be distributed to
unitholders, not subject to
tax in the Trust (8,685) (5,910) (31,569) (47,076)
Other 889 (408) 3,162 (117)
----------------------------------------------------------------------------
Income tax expense before tax
rate reductions $ (1,779) $ 1,939 $ 13,997 $ 19,612
Reduction of future tax balances
due to enacted tax rate reductions - (2,190) - (2,190)
----------------------------------------------------------------------------
Income tax expense $ (1,779) $ (251)$ 13,997 $ 17,422
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Effective income tax rate before
enacted tax rate reductions (9)% 8% 10% 10%
----------------------------------------------------------------------------
The Trust received notices of reassessment from a provincial taxing
authority related to certain subsidiaries' taxation years ending in 2001
through 2004. As a result of the notices, the Trust was required to pay
$36.1 million in taxes and $19.1 million in assessed interest during the
first quarter of 2008 and $1.6 million in taxes and $1.3 million in
assessed interest in 2007. The reassessments relate to the treatment of
interest in certain provincial tax filings. The Trust is in the process
of challenging these reassessments. It is anticipated that the dispute
will not be resolved within one year and the amount paid has been
recorded as a long-term receivable. No amounts related to the $58.1
million in reassessments have been expensed.
6. Unit Based Compensation Plans
(a) Officers and Employees
Eligible participants of Precision's Performance Savings Plan may elect
to receive a portion of their annual performance bonus in the form of
deferred trust units ("DTUs"). These notional units are redeemable in
cash and are adjusted for each distribution to unitholders by issuing
additional DTUs based on the weighted average trading price on the
Toronto Stock Exchange for the five days immediately following the
ex-distribution date. All DTUs must be redeemed within 60 days of ceasing
to be an employee of Precision or by the end of the second full calendar
year after the receipt of the DTUs.
During 2008 Precision issued 27,123 DTUs, including additional DTUs
issued in lieu of cash distributions and redeemed 17,239 DTUs on employee
resignations and employee withdrawals. As at June 30, 2008 $2.4 million
is included in accounts payable and accrued liabilities for outstanding
DTUs. Included in net earnings for the three months and six months ended
June 30, 2008 is an expense of $0.5 million (2007- $0.1 million expense
recovery) and $1.1 million (2007- $0.1 million expense recovery)
respectively.
(b) Executive
In 2007 the Trust instituted a Deferred Signing Bonus Unit Plan for its
Chief Executive Officer. Under the plan 178,336 notional DTUs were
granted on September 1, 2007. The units are redeemable one-third annually
beginning September 1, 2008 and are settled for cash based on the trust
unit trading price on redemption. The number of notional DTUs is adjusted
for each distribution to unitholders by issuing additional notional DTUs
based on the weighted average trading price on the Toronto Stock Exchange
for the five days immediately following the ex-distribution date. As at
June 30, 2008 $1.8 million is included in accounts payable and accrued
liabilities and $3.5 million in long-term incentive plan payable for the
191,269 currently outstanding DTUs. Included in net earnings for the
three and six months ended June 30, 2008 is an expense of $0.8 million
(2007 - $ nil) and $ 2.5 million (2007- $ nil) respectively.
(c) Non-management directors
In 2007 a deferred trust unit plan was established for non-management
directors. Under the plan fully vested deferred trust units are granted
quarterly based upon an election by the non-management director to
receive all or a portion of his or her compensation in deferred trust
units. Distributions to unitholders declared by the Trust prior to
redemption are reinvested into additional deferred trust units on the
date of distribution. These deferred trust units are redeemable into an
equal number of trust units any time after the director's retirement. A
summary of this unit based incentive plan is presented below:
Number
Outstanding
----------------------------------------------------------------------------
Balance, December 31, 2007 18,280
Granted 17,104
Issued as a result of distributions 630
----------------------------------------------------------------------------
Balance, June 30, 2008 36,014
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three months and six months ended June 30, 2008 the Trust
expensed $240,000 (2007 - $ nil) and $435,000 (2007 - $ nil) respectively
as unit based compensation, with a corresponding increase in contributed
surplus.
7. Capital Management
The Trust's strategy is to carry a capital base to maintain investor,
creditor and market confidence and to sustain future development of the
business. The Trust seeks to maintain a balance between the level of
long-term debt and unitholders' equity to ensure access to capital
markets to fund growth and working capital given the cyclical nature of
the oilfield services sector. On an historical basis, the Trust has
maintained a conservative ratio of long-term debt to long-term debt plus
equity. The Trust may occasionally need to increase these levels to
facilitate acquisition or expansionary activities. As at June 30, 2008
and December 31, 2007 these ratios were as follows:
June 30, 2008 December 31, 2007
----------------------------------------------------------------------------
Long-term debt 104,948 119,826
Unitholders' equity 1,347,022 1,316,673
----------------------------------------------------------------------------
Total capitalization 1,451,970 1,436,499
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Long-term debt to long-term
debt plus equity ratio 0.07 0.08
----------------------------------------------------------------------------
----------------------------------------------------------------------------
On December 15, 2006 the Minister of Finance (Canada) issued
guidelines establishing "normal growth" limitations designed to limit the
ability of a trust to issue equity (including convertible debentures or
other equity substitutes) that exceeds certain specified percentages of
the market capitalization of a trust on October 31, 2006. The normal
growth limitation is cumulative in nature to the extent not taken and for
the year ended December 31, 2008 the Trust's normal growth limitation is
approximately $2.4 billion. Precision will be a specified investment
flow-through ("SIFT") trust, subject to the SIFT tax rules, on the
earlier of January 1, 2011 or the first day after it exceeds the normal
growth guidelines.
The Trust is bound by a debt covenant requiring the Trust to maintain a
ratio of total liabilities to total equity of 1:1. The Trust monitors
this ratio to ensure compliance.
There were no changes in the Trust's approach to capital management
during the quarter.
8. Contingent Liability
The business and operations of the Trust are complex and the Trust has
executed a number of significant financings, business combinations,
acquisitions and dispositions over the course of its history. The
computation of income taxes payable as a result of these transactions
involves many complex factors as well as the Trust's interpretation of
relevant tax legislation and regulations. The Trust's management believes
that the provision for income tax is adequate and in accordance with
generally accepted accounting principles and applicable legislation and
regulations. However, there are a number of tax filing positions that can
still be the subject of review by taxation authorities who may
successfully challenge the Trust's interpretation of the applicable tax
legislation and regulations, with the result that additional tax
liabilities could be owed by the Trust and the amount owed, with
estimated interest, could be up to $380 million, before penalties,
including the $58 million recorded as a long-term receivable (see note 5).
9. Commitments
Precision entered into a contract with a drilling rig manufacturer to
partially construct five Super Triple drilling rigs for an estimated cost
of US $75 million. The first drilling rig is scheduled to be delivered in
January 2009 with the remaining four at various times later in the first
half of 2009.
10. Segmented Information
The Trust operates primarily in Canada, in two segments; Contract
Drilling Services and Completion and Production Services. Contract
Drilling Services includes drilling rigs, procurement and distribution of
oilfield supplies, camp and catering services and manufacture, sale, and
repair of drilling equipment. Completion and Production Services includes
service rigs, snubbing units, wastewater treatment units, and oilfield
equipment rental.
Three months Contract Completion
ended June 30, Drilling & Production Corporate Inter-segment
2008 Services Services and Other Eliminations Total
----------------------------------------------------------------------------
Revenue $ 93,006 $ 47,559 $ - $ (2,051) $ 138,514
Operating
earnings 23,695 8,808 (10,456) - 22,047
Depreciation
and
amortization 8,442 4,044 908 - 13,394
Total assets 1,252,737 432,896 70,669 - 1,756,302
Goodwill 172,440 108,309 - - 280,749
Capital
expenditures 25,209 5,409 726 - 31,344
----------------------------------------------------------------------------
Three months Contract Completion
ended June 30, Drilling & Production Corporate Inter-segment
2007 Services Services and Other Eliminations Total
----------------------------------------------------------------------------
Revenue $ 78,829 $ 44,978 $ - $ (1,802) $ 122,005
Operating
earnings 24,013 8,954 (5,893) - 27,074
Depreciation
and
amortization 6,112 4,861 1,053 - 12,026
Total assets 1,150,676 447,310 31,956 - 1,629,942
Goodwill 172,440 108,309 - - 280,749
Capital
expenditures 45,670 7,001 169 - 52,840
----------------------------------------------------------------------------
Six months Contract Completion
ended June 30, Drilling & Production Corporate Inter-segment
2008 Services Services and Other Eliminations Total
----------------------------------------------------------------------------
Revenue $ 335,371 $ 152,279 $ - $ (6,447) $ 481,203
Operating
earnings 124,576 42,673 (20,964) - 146,285
Depreciation
and
amortization 23,610 12,320 1,831 - 37,761
Total assets 1,252,737 432,896 70,669 - 1,756,302
Goodwill 172,440 108,309 - - 280,749
Capital
expenditures 44,812 9,181 819 - 54,812
----------------------------------------------------------------------------
Six months Contract Completion
ended June 30, Drilling & Production Corporate Inter-segment
2007 Services Services and Other Eliminations Total
----------------------------------------------------------------------------
Revenue $ 359,724 $ 178,184 $ - $ (5,361) $ 532,547
Operating
earnings 156,748 60,769 (12,264) - 205,253
Depreciation
and
amortization 18,722 14,844 1,944 - 35,510
Total assets 1,150,676 447,310 31,956 - 1,629,942
Goodwill 172,440 108,309 - - 280,749
Capital
expenditures 95,566 12,445 531 - 108,542
----------------------------------------------------------------------------
11. Subsequent Event
On July 18, 2008 Precision Drilling Corporation, a subsidiary of the
Trust, entered into an agreement to acquire six service rigs from Rick's
Well Servicing Ltd., a private company, for approximately $16 million.
SECOND QUARTER 2008 EARNINGS CONFERENCE CALL AND WEBCAST
Precision Drilling Trust ("Precision") has scheduled a conference call
and webcast to begin promptly at 12:00 Noon MT (2:00 p.m. ET) on
Wednesday, July 23, 2008.
The conference call dial in numbers are 1-866-223-7781 or 416-641-6140
A live webcast of the conference call will be accessible on Precision's
website at www.precisiondrilling.com 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 July 30,
2008 by dialing 1-800-408-3053 or 416-695-5800, passcode 3265076#.
Precision is a leading provider of safe, high performance energy services
to the North American oil and gas industry. Precision provides customers
with access to an extensive fleet of contract drilling rigs, service
rigs, camps, snubbing units, wastewater treatment units and rental
equipment backed by a comprehensive mix of technical support services and
skilled, experienced personnel. Precision Drilling Trust is listed on the
Toronto Stock Exchange under the trading symbol "PD.UN" and on the New
York Stock Exchange under the trading symbol "PDS".
Contacts:
Doug Strong, Chief Financial Officer of
Precision Drilling Corporation, Administrator of the Trust
(403) 716-4500
(403) 264-0251 (FAX)
Precision Drilling Trust
4200, 150 - 6th Avenue S.W.
Calgary, Alberta T2P 3Y7
Website: www.precisiondrilling.com
Copyright 2008, Market Wire, All rights reserved.
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