Precision Drilling Trust Performs Well in Q1 2009, Earnings Rise by 15%
Precision Drilling Trust reported a 31% revenue increase and a 15% rise in earnings before interest, taxes, depreciation and amortization and foreign exchange ("EBITDA") for the first quarter of 2009 over the first quarter of 2008. Revenue for the first quarter of 2009 totaled $448 million compared to $343 million for the same period in 2008. EBITDA was $169 million for the first three months of 2009, an increase of $22 million over the first quarter of 2008. The increase in revenue and EBITDA is due to the acquisition in December 2008 of Grey Wolf, Inc ("Grey Wolf"), an onshore drilling contractor in the United States with 123 rigs. Precision reported net earnings of $57 million or $0.30 per diluted unit for the quarter ended March 31, 2009, a decrease of $49 million or 46% compared to $106 million or $0.84 per diluted unit in the first quarter of 2008. Earnings in the first quarter of 2009 were reduced by $70 million, for a $36 million increase in interest expense and an increase of $34 million in foreign exchange losses. Net earnings per unit were also reduced by a 56% increase in the weighted average diluted units outstanding.
Precision's President and Chief Executive Officer stated: "We have completed the first quarter of 2009 as the new Precision Drilling and our results demonstrate that the consolidation of the 123 rigs of Grey Wolf and the 257 Precision rigs has been successful despite unprecedented declines in activity and customer demand in both the United States and Canada. I am especially pleased with our term contract position for drillings rigs which, combined with our recently announced financing activities, positions Precision very well as the industry goes through a dramatic reduction in service demand due to low commodity prices.
"Our first quarter operating results demonstrated the strategic value in last year's acquisition of Grey Wolf. The new Precision had an average of 107 rigs under term contract during the quarter and 73 rigs on well to well contracts across North America. This acquisition helped Precision mitigate the worst winter drilling season in Canada for the past 17 years with year over year revenue and EBITDA growth. The results speak to Precision's people, who continue to do an excellent job in integrating the two companies.
"As we move through this second quarter, the sector is experiencing record low activity levels in Canada and again, the impact is mitigated by the less seasonal nature of our expanded United States operations. The economic conditions and continuing weak commodity prices continue to drive activity down in Canada and the United States at an unprecedented rate. Despite these very challenging market conditions the benefits of diversification are clear and our customers continue to support us by honoring their contracts and taking delivery of the new rigs contracted in 2008."
Precision remains focused to reduce debt levels and strengthen its underlying capital structure and decisive steps have been taken to conserve cash and improve Precision's financial position. Precision reduced long-term debt by $221 million during the quarter and increased working capital by $22 million to $367 million as at March 31, 2009. Cash has been conserved through the indefinite suspension of cash distributions to unitholders and cost reduction measures that include personnel reductions and operating facility consolidation.
Capitalization was strengthened by net proceeds of $207 million received on February 18, 2009 through the successful issuance of 46 million Trust units. Planned upgrade capital expenditures on existing equipment have been reduced however Precision intends to complete the remaining 10 new Super Series rigs from the 2008 rig build program.
As announced on April 20, 2009, Precision entered into a series of financing transactions to raise up to approximately $380 million which will be used to strengthen the Trust's balance sheet by refinancing and restructuring the debt incurred in the acquisition of Grey Wolf. A summary of the financing transactions is set forth below:
- The Trust has entered into an agreement with Alberta Investment Management Corporation ("AIMCo"), pursuant to which AIMCo has agreed to purchase by way of private placement:
- $175 million aggregate principal amount of senior unsecured notes of Precision bearing interest at 10% per annum and having an eight-year life;
- 35,000,000 Trust units at a subscription price of $3.00 per Trust unit for gross proceeds of $105 million; and
- 15,000,000 purchase warrants of the Trust entitling AIMCo to acquire up to an additional 15,000,000 Trust units at a price of $3.22 per trust unit for a period of five years from the date of issue.
- The Trust also intends to initiate a rights offering for up to approximately $103 million that will allow unitholders, including AIMCo, to purchase Trust units at a price of $3.00 per unit in their proportionate ownership share on the same terms as AIMCo.
The financing transactions will enable the repayment of Precision's unsecured bridge facility loans of $296 million (US$235 million) which bear interest at approximately 17% and allow Precision's secured facilities to be fully syndicated and thereby provide certainty to the cost of debt.
The financing transactions, coupled with the Trust's February 2009 unit offering, are expected to reduce Precision's blended interest rate, based upon current market rates, to approximately 8.4% from 10.8%, reduce Precision's cash interest expense by approximately $70 million on an annual basis, reduce the Trust's overall leverage and advance the Trust's objective of returning to an investment grade credit.
Revenue of $448 million in the first quarter was 31% higher than the prior year period. The increase was due to 2008 expansion initiatives through organic and acquisition growth in the United States onshore contract drilling rig market. Precision marketed an average United States fleet of 152 rigs during the first quarter of 2009 as compared to a fleet of 13 rigs in 2008. The mix of drilling rigs working under term contracts and on high performance well-to-well programs supported relatively strong average rig day rate results in the quarter. Revenue in Precision's Canadian Contract Drilling Services segment decreased by 30% while revenue declined 40% in the Canadian based Completion and Production Services segment.
The Trust reported total EBITDA for the first quarter of $169 million compared with $147 million for the first quarter of 2008. EBITDA is not a recognized financial measure under Generally Accepted Accounting Principles ("GAAP") see "Non-GAAP Measures and Reconciliations" in this report. EBITDA margin, calculated as EBITDA as a percentage of revenues, was 38% for the first quarter of 2009 compared to 43% for the same period in 2008. The 5% decline in margin percentage was attributable to the pass through nature of field crew wage increases in the second half of 2008, significantly lower market pricing for new work and lower overall utilization in both operating segments. Precision's term contract position with customers, a highly variable operating cost structure and economies achieved through vertical integration of the supply chain served to limit the declines.
In the Contract Drilling Services segment Precision currently markets 380 contract drilling rigs, including 224 in Canada, 153 in the United States and three rigs in international locations and 100 drilling rig camps. Precision's Completion and Production Services segment includes 229 services rigs, 29 snubbing units, 76 wastewater treatment units and a broad mix of rental equipment.
During the quarter an average of 83 drilling rigs worked in Canada and averaged 84 in the United States and Mexico totaling an average of 167 rigs working. This compares with an average of 134 rigs working in the fourth quarter of 2008 and 145 rigs in the first quarter a year ago which does not include Grey Wolf rigs for the pre-acquisition period.
Customer demand in North America commenced the year with the 2008 carry over impact of a weak and declining global economy and resulting low energy commodity prices. While oil pricing has recovered somewhat during the quarter, there remains considerable demand uncertainty for both oil and natural gas and this has triggered very low underlying customer demand for Precision's oilfield services. Accordingly, these factors have eroded oilfield services for a second consecutive quarter as evidenced by minimal spot market opportunities, pricing declines and low winter equipment utilization.
At the end of the quarter these conditions persist as the fundamentals for natural gas continue to show weakness through high storage and growth in domestic United States natural gas supply. The supply capacity was delivered through elevated drilling activity in many regions within the United States, including unconventional resource plays in Texas and Louisiana. A good portion of the production gains are subject to higher depletion rates and the recent steep decline in drilling is expected to eventually restore supply and demand balance.
Precision is focused on further diversification of its high performance, high value service offering as the market rebounds and debt levels are reduced. Expansion of operations into the United States land drilling market provided first quarter growth in the earnings base and cash flow continuity that offsets the seasonal nature of Precision's oilfield service business in Canada. Besides new rig deployments, no existing rigs were moved for customers between Canada and the United States. Outside Canada and the United States, there was no change in activity as Precision continued to operate two 3,000 horsepower drilling rigs in Mexico and have one idle rig in Chile. Precision will be opportunistic in deploying rigs to international markets with minimal new capital investment requirements and contracts that reward high value high performance services.
Financial summary for the three months ended March 31, 2009:
- Precision lowered its debt to capitalization ratio from 0.37 to 0.31 with debt repayment from proceeds through an equity raise in February 2009. As at March 31, 2009 Precision had a cash balance of $130 million and in combination with access to its revolving credit facility, Precision continued to carry ample liquidity.
- Revenue was $448 million, an increase of $106 million or 31% from the prior year quarter due to growth in Precision's United States operations offset by lower activity levels in Precision's Canadian operations and lower customer pricing for most of Precision's services.
- General and administrative costs were $25 million, an increase of $6 million from the prior year due primarily to the growth in Precision's United States operations partially offset by lower accrued incentive compensation expense, personnel reductions and reduced discretionary expenses.
- Interest expense was $39 million, an increase of $36 million from the prior year due to credit facilities entered into during the fourth quarter 2008 as the result of the acquisition growth in the United States contract drilling business.
- Operating earnings were $93 million, a decrease of $31 million or 31% from the first quarter in 2008. Operating earnings were 21% of revenue, compared to 36% in 2008. Operating earnings margins were negatively impacted by declines in customer pricing for most Canadian divisions and foreign exchange losses arising from the translation of US dollar denominated debt.
- Bad debt expense was $7 million as the allowance for doubtful accounts was increased to $13 million. Customer creditworthiness remains a top priority as low energy commodity prices are creating financial hardship for certain customers.
- Nonrecurring expenses associated with a 14% reduction in Precision's office and shop workforce during the quarter was $3 million. Further measures have been taken to minimize operational and administrative costs to align cost structure with low customer demand levels.
- In connection with the acquisition of Grey Wolf, Precision entered into credit facilities the majority of which are denominated in US dollars. During the quarter the Canadian dollar weakened by 3% as compared to the US dollar resulting in most of the foreign exchange loss on long-term monetary items of $35 million.
Operational summary for the three months ended March 31, 2009:
- Capital expenditures for the purchase of property, plant and equipment were $75 million in the first quarter, an increase of $51 million over the same period in 2008. Capital spending for the first quarter of 2009 included $61 million on expansionary capital initiatives and $14 million on the upgrade of existing assets.During the quarter six newly-built Super Series drilling rigs were added to the fleet under long-term customer contracts, four in Canada and two in the United States.
- Average revenue per utilization day for contract drilling rigs increased in the first quarter of 2009 to US$25,154 per day from the prior year first quarter of US$22,802 per day in the United States and increased from $16,363 in 2008 to $18,537 for Canada in 2009. The increase in revenue rates for the first quarter in the United States reflects the new rig mix with the acquisition, including turnkey operations. These figures also include US$9 million in revenue generated from idle but contracted rigs associated with term customer contracts and US$5 million in revenue from an early contract termination for one rig. Turnkey revenue was US$30 million generated from 419 utilization days. Within Precision's Completion and Production Services segment, average hourly rates for service rigs were $731 in the first quarter of 2009 compared to $736 in the fourth quarter of 2008.
Average operating costs per day for drilling rigs increased in the first quarter of 2009 to US$14,456 per day from the prior year first quarter of US$10,503 per day in the United States and $8,322 to $10,032 in Canada. Within Precision's Completion and Production Services segment, average hourly operating costs for service rigs were $527 in the first quarter of 2009 compared to $492 in the first quarter of 2008. The cost escalations were primarily attributable to deeper capacity drilling rig mix, labour increases in the second half of 2008 and lower equipment activity to allocate fixed costs. In the United States the increase was also impacted by turnkey operations acquired in December 2008 whereby there is a larger scope to drilling costs that the drilling contractor is responsible to provide and revenue increases accordingly.
The Canadian 2009 winter drilling season was characterized by unseasonably low utilization for Precision and the industry. At the end of the quarter there were 863 drilling rigs registered with the Canadian Association of Oilwell Drilling Contractors ("CAODC"). In the United States the industry and Precision have been experiencing declining utilization as customer spending has been dramatically reduced because of lower oil and natural gas commodity prices.
Oil and natural gas prices during the first quarter of 2009 were significantly lower than a year ago. For the first quarter of 2009 AECO natural gas spot prices averaged $4.95 per MMBtu, a decrease of 37% over the first quarter 2008 average of $7.90 per MMBtu. In the United States, Henry Hub natural gas spot prices averaged US$4.55 per MMBtu in the first quarter of 2009 a decrease of 47% over the first quarter 2008 average of US$8.61 per MMBtu. West Texas Intermediate crude oil averaged US$43.21 per barrel during the quarter compared to US$97.79 per barrel in the same period in 2008. The one-year forward price for North American natural gas was also lower than the prior year comparable quarter, trading in a range of about $4.50 to $7.00 on Canadian and U.S. exchanges in the first quarter of 2009, compared to a range of about $7.00 to $10.50 in the same quarter of 2008.
The global economic recession, reduced liquidity in the capital markets and low oil and natural gas commodity prices continue to have a negative impact on the oilfield service industry. The drilling sector in both Canada and the United States is experiencing a period of significant decline in utilization. According to industry sources, as at April 3, 2009, the United States active land drilling rig count was down about 43% from the same period in the prior year while the Canadian drilling rig count was down about 40%. With decreasing utilization, the competitive pressure on all of Precision's service offerings intensifies resulting in lower rates for services. Precision expects this trend to continue into the second quarter of 2009 and potentially longer depending on commodity prices.
Precision has a strong portfolio of long-term customer contracts that help mitigate the effects of the current downturn. Precision expects to have an average of approximately 100 rigs committed under day work term contract in North America in the second quarter of 2009, an average of 90 rigs contracted for the third quarter of 2009 and 78 for the fourth quarter of 2009. These term contract totals include 17 rigs in the United States that are currently not working but receiving margin revenue from customers. In Canada, term contracted rigs generate about 200 to 250 utilization days a year due to the seasonal nature of well access whereas in the United States we expect about 350 utilization days in most regions. For all of 2009, Precision expects to have an average of approximately 94 rigs under term contract, with 56 rigs contracted in the United States, 36 in Canada and two in Mexico. For 2010, Precision expects to have an average of 29 rigs in Canada under term contract and 28 in the United States and Mexico, for a total of 57 for the full year. None of Precision's long-term contracts have been terminated without appropriate payment, though certain contracted days have been moved between rigs or deferred to accommodate customer requests. One long-term contract was prepaid through the lump sum payment of US$5 million which was recognized as revenue during the first quarter of 2009.
As part of an ongoing debt reduction plan, Precision expects to keep capital expenditures at low levels during 2009. Capital expenditures totaled $75 million in the first quarter of 2009 and are expected to be approximately $210 million for the full year, with approximately $40 million for upgrade capital and $170 million for previously committed expansion capital. The expansion capital is for 16 new rigs to be placed into service in 2009 with the completion of the 2008 Super Series new build program. Six of those rigs were completed in the first quarter with the remaining ten to be deployed under term contracts, seven in the United States and three in Canada.
With the recession negatively impacting energy demand, the United States natural gas storage levels are currently near the upper range of the five-year average and 35% higher than storage volumes a year ago. Canada exports over half its natural gas production to the United States and Precision's oilfield service businesses are highly dependent on associated customer economics. The view that North America has an oversupply of natural gas has driven gas prices lower. The recent increase in United States natural gas production, concerns over the declines in industrial gas consumption and the prospect of higher liquefied natural gas ("LNG") imports has overshadowed lower Canadian imports and the drop in active North American drilling rig count. Subject to demand clarity and LNG imports, Precision anticipates the supply decline from reduced drilling may begin to outpace demand reductions in late 2009, providing the catalyst for improved fundamentals to support a recovery in drilling activity.
Despite the near term challenges the future of the global oil and gas industry remains promising. For Precision, 2009 represents an opportunity to demonstrate our value to customers through delivery of high performance, high value services that deliver low customer well costs and strong relative margins to Precision.
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