Precision Posts Financial Results, Suspends Monthly Cash Distributions
Precision Drilling Trust reported net earnings of $92 million or $0.71 per diluted unit for the quarter ended December 31, 2008, compared to $89 million or $0.71 per diluted unit in the fourth quarter of 2007. Revenue for the fourth quarter of 2008 was $335 million, up 35% from $249 million in the fourth quarter of 2007. Earnings before income taxes for the fourth quarter of 2008 were $102 million, up 34% from the fourth quarter of 2007 amount of $76 million.
The increases resulted from the trend established during the third quarter of 2008 as customer demand from high commodity prices carried over to start the fourth quarter. However, by the end of the quarter, commodity prices had declined as the economic recession deepened and customer demand declined. Net earnings were reduced by income tax expense of $10 million in the fourth quarter of 2008 as opposed to an income tax benefit of $13 million in the last quarter of 2007.
The Trust's organic growth in the United States, along with the completion of the acquisition of Grey Wolf, Inc. ("Grey Wolf") on December 23, 2008, led to the growth in quarterly revenue and earnings before income taxes. Drilling rig utilization days in the United States increased to 3,248 days in the fourth quarter of 2008, up by 258% from the fourth quarter of 2007, while Canadian drilling rig utilization days increased during the same period by 419 days, up 5% from the fourth quarter of 2007. Overall, North American drilling rig utilization days for Precision totaled 12,314 in the fourth quarter of 2008, up by 29% from the fourth quarter of 2007.
Revenues totaled $1,102 million for the year ended December 31, 2008, which was a 9% increase from fiscal 2007 revenues of $1,009 million. The increase in revenues in fiscal 2008 was primarily driven by the effects of high commodity prices on customer demand in the third quarter and the beginning of the fourth quarter of 2008, which offset the effects of lower activity and customer pricing in Canada in the first half of 2008. In addition, growth in the United States land drilling market also had a positive impact through 2008. However, the positive trends in customer demand in the second half of 2008 were reversed during the fourth quarter as noted above.
The Trust reported net earnings of $303 million or $2.39 per diluted unit for the year ended December 31, 2008 compared with $346 million or $2.75 per diluted unit for fiscal 2007. The net earnings decrease was driven primarily by lower activity and customer pricing in Canada during the first half of 2008 relative to 2007 and higher 2008 income tax expense.
Gross margin, calculated as earnings from continuing operations before income taxes as a percentage of revenues, decreased from 34.6% in 2007 to 30.9% in 2008. The positive margin impact from growth in the number of rigs operating in the United States was more than offset by reduced customer pricing and activity during the first half of 2008 in both Canadian business segments: Contract Drilling and Completion and Production.
The Trust reported total earnings before interest, income taxes, depreciation and amortization ("EBITDA") for the fourth quarter of 2008 of $133 million compared with $103 million for the fourth quarter of 2007. For the year ended December 31, 2008, EBITDA was $439 million compared with $435 million for 2007. EBITDA is not a recognized financial measure under Generally Accepted Accounting Principles ("GAAP"). See "Non-GAAP Measures and Reconciliations" in this news release.
"Precision's performance in the second half of 2008, both on revenue and, particularly EBITDA generation, demonstrates how our strategy delivers strong financial results when the drilling cycle shows even modest improvement. The fourth quarter of 2007 was characterized by low commodity prices, unfavorable royalty changes and reduced drilling plans by most of our customers. We believe that Precision responded with the appropriate reduction in expenses and growth diversification initiatives. As a result, Precision was well-positioned to take advantage of the mid-2008 rebound in commodity prices and drilling activity." said Kevin Neveu, Precision's President and Chief Executive Officer.
Mr. Neveu continued, "We finished 2008 with a strategic acquisition to gain market share in the United States land drilling market and the people and assets of Grey Wolf are already proving to be an excellent fit with Precision. We believe Precision's broad North American presence positions us to be a significant land driller for oil and clean, economic and strategically significant natural gas throughout the industry cycle."
Mr. Neveu added, "Contraction in the global economy and low commodity prices have led to a decline in customer demand for Precision's services early in 2009. The shift in momentum has been swift and Precision has responded with initiatives designed to generate free cash flow and strengthen its balance sheet. Our priorities remain aligned with our previously announced debt reduction objective, the integration of Grey Wolf and execution of our 2009 business plan. Precision is utilizing its full-cycle experience to reduce costs while retaining high performance capabilities and will remain focused on deleveraging its balance sheet."
"We believe that global under-investment in oil and natural gas wells coupled with high depletion rates on many new unconventional gas wells will eventually lead to a rebound in land drilling activity for Precision" concluded Mr. Neveu.
Precision expects to have an average of approximately 102 rigs working under daywork term contract in North America in the first quarter of 2009 and an average of 93 rigs contracted for the second quarter of 2009. For the full year 2009, the Trust expects to have an average of approximately 85 rigs working under term contract, with 53 rigs contracted in the United States, 30 in Canada and 2 in Mexico.
In the challenging economic environment of 2009, Precision expects demand for its drilling services to decline in the short term. Precision expects EBITDA as a percentage of revenue and its gross margin to decline in 2009 and remain at lower levels for much of 2009. However, Precision's term customer contracts provide solid margin support.
As part of its ongoing debt reduction plan, the Trust expects to keep capital expenditures at efficient levels during 2009. Precision expects to spend approximately $239 million in capital expenditures for 2009, with approximately $75 million being for upgrade capital and $164 million being for previously committed expansion capital. The expansion capital is for 16 new rigs to be placed into service in 2009 as the culmination of the 2008 new build program. All 16 of these rigs are expected to go to work under long-term contracts and are included in the total term contracted rigs described above.
Precision is taking steps to add certainty to its capital and debt structure and announced today that the Board of Trustees has suspended cash distributions for an indefinite period. This measure was taken in response to lower financial operating performance at the start of 2009. The suspension of cash distributions allows Precision to increase debt repayment capability and balance sheet strength.
Accordingly, no distributions will be paid in March 2009 to Trust or Precision Drilling Limited Partnership unitholders of record on February 27, 2009, or for an indefinite period thereafter. The previously announced distribution of $0.04 per unit payable on February 17, 2009 to Trust and Precision Drilling Limited Partnership unitholders of record on January 30, 2009 is unaffected by the suspension.
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