Mr. Kevin Neveu reports
PRECISION DRILLING CORPORATION ANNOUNCES 2013 FIRST QUARTER FINANCIAL RESULTS AND 2013 SECOND QUARTER DIVIDEND
Precision Drilling Corp. has declared a second-quarter dividend on its common shares of five cents per share, payable on May 15, 2013, to shareholders of record on May 6, 2013. For Canadian income tax purposes, all dividends paid by Precision on its common shares are designated as eligible dividends, unless otherwise indicated by Precision.
Net earnings this quarter were $93-million or 33 cents per diluted share compared with $111-million or 39 cents per diluted share in the first quarter of 2012.
Revenue this quarter was $596-million, or 7 per cent lower than the first quarter of 2012, mainly due to lower North American activity partially offset by higher average dayrates and increased international activity.
Earnings before income taxes, finance charges, foreign exchange, and depreciation and amortization (adjusted EBITDA) this quarter were $215-million or 12 per cent lower than the first quarter of 2012. The company's adjusted EBITDA margin was 36 per cent this quarter, compared with 38 per cent in the first quarter of 2012. The decrease in adjusted EBITDA margin was mainly the result of lower activity levels across most North American business lines partially offset by higher dayrates. The company's activity in this quarter, as measured by drilling rig utilization days, decreased 10 per cent in Canada and 23 per cent in the United States compared with the first quarter of 2012.
North American drilling activity was down this quarter versus the prior-year quarter as a result of continuing low natural gas prices, oil transportation bottlenecks resulting in regional oil price discounts and general global economic uncertainty persisting for much of the quarter.
Revenue and adjusted EBITDA for the quarter were higher than the fourth-quarter 2012 revenue and adjusted EBITDA of $534-million and $177-million, respectively, primarily as a result of increased activity levels in Canada along with higher dayrates and margins in Canada.
"I am pleased with Precision's strong financial performance during the first quarter despite subdued North American industry activity levels that continue to disappoint many in the industry. Our success is a direct result of the investment in upwards of 70 Tier 1 rigs over the past few years," said Kevin Neveu, president and chief executive officer of Precision Drilling.
"Precision's Canadian drilling operations earned margins almost $1,000 above the prior year while Canadian industry drilling days were down approximately 10 per cent. Our combination of a large Tier 1 fleet, excellent service and diligent cost management continues to produce value for customers and shareholders.
"The plummet in gas directed drilling activity in the United States which began in late 2011 and continued through the first quarter of this year has put pressure on industry utilization and dayrates. Precision's drilling activity was down 23 per cent during the quarter while dayrates remained stable, reflecting the higher percentage of Super Series rigs active during the quarter. We remain focused on executing our high-performance, high-value strategy and less fixated on short-term changes in utilization. We believe our strategy creates the greatest opportunities for our rigs over the long term and this is especially true in today's performance-driven market.
"Our completion and production services segment faced similar market activity challenges in Canada with industry well service and completion activity ramping up slower than drilling in the quarter. Offsetting the decline in Canadian activity, our U.S. C&P group generated activity levels almost six times the prior year quarter. With a focus on the northern U.S. markets, we have started to generate healthy utilization levels in coil tubing, well servicing, snubbing and rentals. Although early on in this expansion, we believe this geographic segment will continue to provide growth for Precision as our high-performance capabilities combined with our cold weather experience offers a unique value proposition for our customers.
"Of note in the first quarter, our international business produced almost four times the operating days compared to the first quarter last year. Eight rigs operated continuously during the quarter and we are on track to increase the rig count by five rigs over the next 12 months. Our announced international deployments are going well and we are clearly benefiting from the lessons learned during our 2012 Saudi Arabia start-up.
"While customer spending has been restrained during the first quarter, continued strength in commodity prices should lead to improving activity as the year continues. We believe in the long-term positive fundamentals of the North American unconventional oil and gas market. Oil development presents compelling economics that will improve as transportation differentials get resolved. And with natural gas, we are encouraged that the North American market is moving closer to a balanced state, yet an increase in drilling activity may still be some time away. In Canada, we believe political willpower and large capital investments will eventually lead to LNG exports. It is possible that new build rigs will be added to the Canadian fleet later this year as the ramp-up for LNG exports will likely need to begin soon.
"With today's dividend announcement, Precision has announced over $40-million in dividend payments to shareholders in the past five months," concluded Mr. Neveu.
OPERATING HIGHLIGHTS
Three months ended March 31,
2013 2012
Contract drilling rig fleet 322 344
Drilling rig utilization days
Canada 11,101 12,369
United States 7,278 9,451
International 719 185
Service rig fleet 217 210
Service rig operating hours 89,392 94,042
Revenue in the first quarter of this year was $44-million lower than the first quarter in 2012 mainly due to a decrease in activity days in both Canada and the United States, partially offset by higher dayrates in both markets and increased international activity. Compared with the first quarter of 2012, revenue from the company's contract drilling services and completion and production services segments were both down 7 per cent.
Adjusted EBITDA margin (adjusted EBITDA as a percentage of revenue) was 36 per cent this quarter, compared with 38 per cent in the first quarter of 2012. The 36-per-cent adjusted EBIDTA margin was a result of higher dayrates from the new build and upgraded Tier 1 rigs that Precision has deployed over the past few years offset by the impact of lower utilization on fixed costs. The company's portfolio of term customer contracts, a highly variable operating cost structure and economies achieved through vertical integration of the supply chain all help Precision manage its adjusted EBITDA margins.
The company's vision is to be recognized as the high-performance, high-value provider of services for global energy exploration and development. Precision works toward that vision by defining and measuring the company's results against strategic priorities. The company's 2013 priorities are threefold:
- Execute the company's high-performance, high-value strategy:
- Continue to drive execution excellence in the company's people, internal systems
and infrastructure supporting the company's world-class safety, training and
development programs, upgrading and consolidating the company's Nisku operations,
and leveraging the company's investments in its Houston and Red Deer tech centres;
- Execute on existing organic growth opportunities:
- Remain poised to seize growth opportunities, leveraging the company's balance
sheet strength and flexibility;
-
Deliver new build rigs to the North American market and upgrade existing
drilling rigs to higher specification assets on customer contracts;
-
Grow high-performance, high-value service lines for unconventional field
development, such as integrated directional drilling, coil tubing and
rentals;
- Build the company's brand:
-
Uphold the company's reputation and market breadth in North America while
strengthening the company's presence in select oil field markets internationally.
The West Texas Intermediate price of oil has remained consistent with the 2012 average while natural gas prices have improved.
PRICES
Year ended
Three months ended March 31, Dec. 31,
2013 2012 2012
Average oil and natural gas prices
Oil
West Texas Intermediate (per barrel)
(U.S.$) $94.35 $102.84 $94.13
Natural gas
Canada
AECO (per MMBtu) ($) $ 3.20 $ 2.15 $ 2.39
United States
Henry Hub (per MMBtu) (U.S.$) $ 3.49 $ 2.45 $ 2.75
Summary for the three months ended March 31, 2013:
- Operating earnings this quarter were $130-million and 22 per cent of revenue, compared with $171-million and 27 per cent of revenue in 2012. Operating earnings were negatively
impacted by the decrease in activity in most of the company's North American-based
operations compared with the first quarter in 2012.
- General and administrative expenses this quarter were $39-million or $1-million higher than the first quarter of 2012.
- Finance charges were $23-million, an increase of $1-million compared
with the first quarter of 2012.
- Average revenue per utilization day for contract drilling rigs increased
in the first quarter of 2013 to $23,991 (U.S.) from the prior-year first
quarter of $23,225 (U.S.) in the United States, and increased in Canada to
$22,299 in the first quarter of 2013 from $21,091 for the first quarter
of 2012. The increase in revenue rates for the first quarter in Canada
and the United States in part reflects the dayrates achieved from
additional Tier 1 and upgraded rigs entering the fleet compared with the
prior year quarter. In addition, average dayrates in Canada were higher
due to the pass-through of increased labour costs, while in the United States average dayrates were higher because of the effect of turnkey revenue
spread over a lower activity base. In Canada, for the first quarter of
2013, 39 per cent of Precision's utilization days were achieved from drilling
rigs working under term contracts compared with 36 per cent in the 2012
comparative period. In the United States, for the first quarter of 2013,
59 per cent of Precision's utilization days were generated from rigs working
under term contracts compared with 79 per cent in the 2012 comparative period.
Turnkey revenue for the first quarter of 2013 was $12-million (U.S.), the
same as in the 2012 comparative period. Within Precision's completion
and production services segment, average hourly rates for service rigs
were $813 in the first quarter of 2013 compared with $819 in the first
quarter of 2012.
- Average operating costs per utilization day for drilling rigs increased
in the first quarter of 2013 to $14,813 (U.S.) from the prior-year first
quarter of $13,860 (U.S.) in the United States while in Canada costs
increased to $9,949 in 2013 from $9,691 in 2012. The cost increase per
day in the United States was primarily due to turnkey and fixed costs
spread over a lower activity base. The cost increase in Canada was
primarily due to a labour rate increase that became effective in the
fourth quarter of 2012 and fixed costs spread over a lower activity
base. Within Precision's completion and production services segment,
average hourly operating costs for service rigs in Canada increased to
$565 in the first quarter of 2013 as compared with $549 in the first
quarter of 2012 primarily due to costs associated with coil tubing.
- Precision realized revenue from directional services of $37-million in
the first quarter of 2013 in line with the prior-year period.
- Funds provided by operations in the first quarter of 2013 were $145-million, a decrease of $103-million from the prior-year comparative
quarter of $248-million. In addition to lower earnings for the quarter
compared with last year the company paid $71-million in tax in the current quarter
compared with $1-million in the prior-year period.
- Capital expenditures for the purchase of property, plant and equipment
were $131-million in the first quarter, a decrease of $91-million over
the same period in 2012. Capital spending for the first quarter of 2013
included $77-million for expansion capital, $37-million for upgrade
capital and $17-million for the maintenance of existing assets and
infrastructure spending.
Outlook
Contracts
The company's portfolio of term customer contracts provides a base level of activity and revenue, and as at April 24, 2013, Precision has term contracts in place for an average of 55 rigs in Canada, 40 in the United States and 10 internationally for the second quarter of 2013, and an average of 52 rig contracts in Canada, 36 in the United States and 10 internationally for the full year. In Canada, term contracted rigs normally generate 250 utilization days per rig year because of the seasonal nature of well access. In most regions in the United States and internationally, term contracts normally generate 365 utilization days per rig year.
Drilling activity
In the United States, the company's average active rig count in the quarter was 81 rigs, down 22 rigs over the first quarter in 2012 and down six rigs over the fourth quarter of 2012. The company currently has 79 rigs active in the United States and expects its rig count in the United States to remain relatively unchanged over the coming months.
In Canada, the company's average active rig count in the quarter was 123 rigs, down 11 rigs over the first quarter in 2012 and up 34 rigs over the fourth quarter of 2012. Precision expects typical seasonal softness through the second quarter in Canada, but in the third quarter expects to benefit from the fleet enhancements made over the past few years when compared with the prior-year period.
Internationally, the company's average active rig count in the quarter was eight rigs, up six over the first quarter in 2012 and in line with the fourth quarter of 2012. The company's active rig count internationally is expected to grow by three rigs over the next two quarters as the company's two rigs in Kurdistan begin drilling operations and Precision has an additional rig going to work in Mexico.
Industry conditions
To date in 2013, drilling activity has been lower in Canada and the United States compared with this time last year. According to industry sources, as at April 19, 2013, the U.S. active land drilling rig count was down about 11 per cent from the same point last year and the Canadian active land drilling rig count was down about 14 per cent. Despite the active industry rig count softness, demand for Tier 1 assets continues to be strong, benefiting the drilling contractors with a high percentage of Tier 1 assets.
The trend toward oil-directed drilling in North America has continued in 2013. During the quarter approximately 74 per cent of the Canadian industry's active rigs and 76 per cent of the U.S. industry's active rigs were drilling for oil targets, compared with 72 per cent and 64 per cent, respectively at the same time last year.
Capital spending
The company expects capital spending in 2013 to be approximately $533-million, of which $131-million was spent during the first quarter:
- $237-million for expansion capital, which includes the cost to complete the two
remaining drilling rigs from the 2012 new build rig program, one new rig
build for the North American market, the cost to complete about 50
per cent of two new build rigs going to Kuwait, long-lead equipment and
new equipment for the company's completion and production services segment;
- $119-million for upgrade capital, which includes the upgrade of
approximately 20 rigs, including the two rigs going to northern Iraq in
the Kurdistan region and to purchase long-lead-time items for the company's
capital inventory;
- $177-million for sustaining and infrastructure expenditures, which is based on
currently anticipated activity levels and some of the cost to
consolidate and upgrade the company's operating facilities.
Precision's operations are reported in two segments: the contract drilling services segment, which includes the drilling rig, directional drilling, oil field supply and manufacturing divisions; and the completion and production services segment, which includes the service rig, snubbing, coil tubing, rental, camp and catering, and waste water treatment divisions.
Customer demand for drilling services was down in the first quarter due to economic uncertainty and its impact on drilling budgets. Revenue from contract drilling services was $496-million this quarter or 7 per cent lower than the first quarter of 2012, while adjusted EBITDA of $207-million decreased 9 per cent. The decreases were mainly because drilling rig utilization was down in both Canada and the United States partially offset by growth in the company's international contract drilling business.
Operating results for the company's international business improved as Precision began to realize revenue from increased activity and Middle East start-up costs incurred in the prior-year quarter. On average, Precision had eight rigs working internationally during the first quarter of 2013 compared with two in the corresponding quarter of 2012. Drilling utilization days in the company's international operations were 719 days, 289 per cent higher than the prior-year comparative period.
Drilling rig utilization days in Canada (drilling days plus move days) during the first quarter of 2013 were 11,101, a decrease of 10 per cent compared with 2012 while drilling rig utilization days in the United States were 7,278 or 23 per cent lower than the same quarter of 2012. The declines in activity were primarily due to decreased market demand as customers conserved cash and deferred drilling programs. The majority of the company's North America activity came from oil and liquids-rich natural gas related plays.
Drilling rig revenue per utilization day in Canada was up 6 per cent and 3 per cent in the United States over 2012. The increase in average dayrates for Canada and the U.S. was the result of improved rig mix and continued demand for Tier 1 assets. In the U.S. the increase in the average dayrate was primarily driven by turnkey revenue spread over lower activity and idle but contracted rig revenue.
In Canada, 39 per cent of utilization days in the first quarter were generated from rigs under term contract, compared with 36 per cent in the first quarter of 2012. In the United States, 59 per cent of utilization days were generated from rigs under term contract as compared with 79 per cent in the first quarter of 2012. At the end of the quarter Precision had 58 drilling rigs under contract in Canada, 44 in the United States and eight internationally.
Operating costs were 56 per cent of revenue for the quarter, which was one percentage point higher than the prior-year period. On a per-utilization-day basis, operating costs for the drilling rig division in Canada were above the prior year primarily because of an increase in crew wage expense. In the United States, operating costs for the quarter on a per-day basis were up from the first quarter in 2012 as a result of higher relative turnkey costs and timing of sales and use and property taxes, partially offset by a reduction in repair and maintenance costs.
Depreciation expense in the quarter was 9 per cent higher than in the first quarter of 2012. Depreciation was higher, despite a decrease in overall drilling activity, as a result of a greater proportion of operating days from the company's Tier 1 drilling rigs in 2013 relative to 2012 and depreciation from the growth in directional drilling and international contract drilling. With the exception of certain PSST drilling rigs and directional drilling equipment, contract drilling operations use the unit of production method of calculating depreciation.
Revenue and adjusted EBITDA from completion and production services were both down compared with the first quarter of 2012: revenue was $104-million or 7 per cent lower than the first quarter of 2012; adjusted EBITDA was $30-million or 23 per cent lower than the first quarter of 2012. These declines are mainly because customers reduced spending in response to greater economic uncertainty, which reduced activity across all the company's service lines.
Well servicing activity in the first quarter was 5 per cent lower than the first quarter of 2012 due to lower industry activity. Approximately 85 per cent of the first quarter service rig activity was oil related. The company's rental division activity in the first quarter was lower than the first quarter of 2012 mainly due to the amount of surface storage capacity in the Western Canada sedimentary basin.
Average service rig revenue per operating hour in the first quarter was $813, or $6 lower than the first quarter of 2012. Increased coil tubing operations in the current quarter, which operate at higher rates, was offset by a reduction in the service rig rate due to geographic mix.
Operating costs as a percentage of revenue increased to 67 per cent in the first quarter of 2013, from 61 per cent in the first quarter of 2012. Operating costs per service rig operating hour were higher than in the first quarter of 2012 mainly because of the higher cost associated with the new coil tubing operations.
Depreciation in the first quarter of 2013 was 15 per cent higher than the first quarter of 2012 because of the depreciation expense associated with new equipment. Precision uses the straight-line method of calculating depreciation for the company's completion and production business lines, except for the well servicing division, where it uses the unit of production method.
Corporate and other
The company's corporate segment is viewed as support functions that provide assistance to more than one segment. The corporate and other segment had an adjusted EBITDA loss of $22-million for the first quarter of 2013, in line with the prior-year comparative period.
Other items
Net financial charges for the quarter were $23-million, an increase of $1-million from the first quarter of 2012.
Precision had a foreign exchange gain of $3-million during the first quarter of 2013 due to the weakening of the Canadian dollar versus the U.S. dollar and the impact thereof on the net U.S.-dollar-denominated monetary position in the Canadian-dollar-based companies.
Income taxes for the quarter were $18-million, a decrease of $15-million compared with the prior year primarily as a result of reduced operating results and income taxed at lower rates.
Liquidity and capital resources
The oil field services business is inherently cyclical in nature. To manage this, Precision focuses on maintaining a strong balance sheet so it has the financial flexibility it needs to continue to manage the company's growth and cash flow, no matter where it is in the business cycle.
Precision applies a disciplined approach to managing and tracking results of the company's operations to keep costs down. The company maintains a variable cost structure so it can be responsive to changing competition and demand.
The company's maintenance capital expenditures are tightly governed by and highly responsive to activity levels with additional cost savings leverage provided through the company's internal manufacturing and supply divisions. Term contracts on expansion capital for new build rig programs provide more certainty of future revenues and return on the company's capital investments.
Liquidity
As at March 31, 2013, the company's liquidity is supported by a cash balance of $95-million, a senior secured credit facility of $850-million (U.S.), operating facilities totalling approximately $55-million and a $25-million (U.S.) secured facility for letters of credit.
At March 31, 2013, including letters of credit, Precision had approximately $1,314-million outstanding under the company's secured and unsecured credit facilities and $25-million in unamortized debt issue costs.
The company's secured facility includes financial ratio covenants that are tested quarterly and Precision is compliant with these covenants and expects to remain compliant.
The current blended cash interest cost of the company's debt is about 6.6 per cent.
Hedge of investments in U.S. operations
Precision has designated the company's U.S.-dollar-denominated long-term debt as a hedge of the company's investment in its operations in the United States. To be accounted for as a hedge, the foreign-currency-denominated long-term debt must be designated and documented as such and must be effective at inception and on a continuing basis. Precision recognizes the effective amount of this hedge (net of tax) in other comprehensive income. The company recognizes ineffective amounts (if any) in earnings.
INTERIM CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of dollars, except per share amounts)
Three months ended March 31,
2013 2012
Revenue $ 595,720 $ 640,066
------------ ------------
Expenses
Operating 341,838 356,586
General and administrative 38,701 37,906
------------ ------------
Earnings before income taxes, finance charges,
foreign exchange, and depreciation and
amortization 215,181 245,574
Depreciation and amortization 84,893 74,824
------------ ------------
Operating earnings 130,288 170,750
Foreign exchange (3,294) 5,367
Finance charges 22,559 21,920
------------ ------------
Earnings before tax 111,023 143,463
Income taxes
Current 18,095 22,839
Deferred (385) 9,543
------------ ------------
17,710 32,382
------------ ------------
Net earnings $ 93,313 $ 111,081
============ ============
Net earnings per share
Basic $ 0.34 $ 0.40
Diluted 0.33 0.39
First-quarter 2013 earnings conference call and webcast
Precision Drilling has scheduled a conference call and webcast to begin promptly at noon MT (2 p.m. ET) on Thursday, April 25, 2013.
The conference call dial-in numbers are 1-877-240-9772 and 416-340-8527.
A live webcast of the conference call will be accessible on Precision's website 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 May 2, 2013, by dialling 1-800-408-3053 or 905-694-9451, pass code 7578848.
We seek Safe Harbor.
© 2024 Canjex Publishing Ltd. All rights reserved.