Precision Drilling Trust Records Lower Profits for 3Q
Precision Drilling Trust reported revenue of $253 million for the third quarter of 2009, an 11% decrease from the third quarter of 2008. Earnings before interest, taxes, depreciation and amortization and foreign exchange ("EBITDA") were $86 million for the third quarter of 2009, a 28% decline from the third quarter of 2008. The decrease in revenue and EBITDA is due to significantly lower customer demand on an industry-wide basis, partially mitigated by Precision's acquisition in December 2008 of Grey Wolf, Inc ("Grey Wolf"), an onshore drilling contractor in the United States with 123 rigs including two in Mexico. Precision reported net earnings of $72 million or $0.25 per diluted unit for the quarter ended September 30, 2009, a decrease of 13% compared to $82 million or $0.61 per diluted unit in the third quarter of 2008.
Earnings in the third quarter of 2009 were reduced by a $27 million increase in finance charges. Earnings were increased in the quarter by a $63 million foreign exchange gain, or after-tax $0.19 per diluted unit. Net earnings per unit were impacted by the 119% increase in units outstanding in the one-year period ending September 30, 2009.
For the nine months ended September 30, 2009, net earnings were $187 million or $0.75 per diluted unit, a decrease of $24 million or 11% compared to $210 million or $1.56 per diluted unit for the first nine months of 2008. Net earnings decreased due to increased financing charges and lower utilization rates throughout North America partially offset by growth in Precision's rig fleet in the United States. Earnings were supported by high-margin term customer contracts and a $105 million foreign exchange gain, or after-tax $0.36 per diluted unit, but these favourable factors did not entirely offset lower earnings from the sharp reduction in equipment utilization and customer pricing compared to 2008 results. Rig utilization days for the first nine months of 2009 were 4% higher than the same period of 2008 due to growth in Precision's United States operations. EBITDA for the first nine months of 2009 totaled $314 million, a 4% increase from $302 million for the first nine months of 2008.
On a sequential basis, third quarter 2009 revenue increased by 21% over the second quarter. The increase was attributed to higher rig activity due to seasonality in Canada, demand for services on oil wells and early indications that drilling for natural gas may have bottomed in the second quarter. EBITDA margin as a percentage of revenue increased 6% over the second quarter due to the influence of higher rig activity and high margin term contracts partially offset by lower customer pricing on new work. During the quarter 61% of overall drilling rig utilization days were generated from term contracts with term contract utilization day concentration in Canada at 42%, the United States at 78% and Mexico at 100%.
"Precision, and for that matter the North American land drilling industry, entered the third quarter with the lowest utilization and customer demand levels of the decade." stated Kevin Neveu, President and Chief Executive Officer. "Precision's third quarter financial results demonstrate our ability to generate solid EBITDA margins, complete new rig build programs on schedule and on budget, and reduce spending quickly to conserve cash. Precision is poised to exploit market opportunities as industry fundamentals strengthen. The business trough that we, and the industry, are working our way through has reinforced Precision's focus on our Target Zero safety vision, integration of systems and processes in our expanded United States operation and the execution of our 2009 business plan. These results reinforce our promise of high performance, high value services to our customers.
"There was an increase in working rigs in both Canada and the U.S. during the third quarter. In Canada, coming out of the spring break up, Precision returned rigs to work and currently has 60 drilling rigs working. Precision believes that we have reached a bottom in Canadian activity. One of the reasons for this belief is that Canadian customers are interested in locking in today's depressed day rates for the upcoming winter drilling season. While we have experienced a seasonal pick-up in Canada and are encouraged by customer demand in response to higher oil prices and certain shale play opportunities, it is far too early to make the call for a meaningful recovery.
"In the U.S., we have seen a very gradual increase in the rigs working over the third quarter. Precision is earning revenue on 75 rigs today, which includes 65 working and 10 idle rigs that are being paid at contracted rates. Precision's very strong term contract position anchored our third quarter results. However due to rig oversupply, day rate pressure persists in many areas of the market. One of Precision's success stories is in the Marcellus shale region in Pennsylvania in which Precision has been very successful penetrating this rapidly growing market. A few months ago we had two rigs working in this area, today we have eight rigs working and are planning to be up to 12 rigs working in the next six months. Also, we have completed negotiations with a major exploration and development company to reactivate two rigs and relocate two rigs to Northwest Louisiana and one additional rig has been reactivated for North Texas. All five of these rigs are being used for horizontal shale gas drilling. Precision's high performance, high value capabilities are ideally suited for all North American shale gas opportunities.
"Sustained improvement in North American drilling markets will be driven by customer demand resulting from increases in the underlying commodity price of natural gas. We believe that due to the dramatic reduction in drilling activity, natural gas production declines will accelerate in Canada and the United States. In Canada, natural gas production is down 20% from its highs in 2007 and continues to decline.
In the U.S., production declines are becoming evident and by the end of 2009 natural gas production is expected to be down by 5% to 10% on a year-over-year comparison. These supply factors, coupled with improvements in the global economy, should lead to strengthening natural gas prices and a need to replace declining production through the drill bit. Precision has the experienced personnel, geographically positioned high performance rigs and the financial capacity to excel in the eventual upturn" concluded Mr. Neveu.
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