Precision Drilling Trust Posts 2Q Financial Results
Precision Drilling Trust reported a 51% revenue increase and a 67% rise in earnings before interest, taxes, depreciation and amortization and foreign exchange ("EBITDA") for the second quarter of 2009 over the second quarter of 2008. Revenue for the second quarter of 2009 totaled $210 million compared to $139 million for the same period in 2008. EBITDA was $59 million for the second quarter of 2009, an increase of $24 million over the second 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 including two in Mexico. Precision reported net earnings of $57 million or $0.22 per diluted unit for the quarter ended June 30, 2009, an increase of $35 million or 164% compared to $22 million or $0.16 per diluted unit in the second quarter of 2008. Earnings in the second quarter of 2009 were reduced by a $43 million increase in finance charges. Earnings were increased in the quarter by a $74 million foreign exchange gain, or after-tax $0.20 per diluted unit.
Net earnings per unit were impacted by the 119% increase in units outstanding in the one-year period ending June 30, 2009.
For the six months ended June 30, 2009, net earnings were $115 million or $0.50 per diluted unit, a decrease of $13 million or 10% compared to $128 million or $0.95 per diluted unit for the first half 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. Rig utilization days for the first six months of 2009 were 23% higher than the same period of 2008 due to growth in Precision's United States operations. EBITDA for the first half of 2009 totaled $229 million, a 25% increase from $183 million for the first half of 2008.
"Precision's second quarter results were achieved against the back drop of historically low utilization during Canadian spring break-up and the apparent bottoming of customer demand in the United States" stated Kevin Neveu, President and Chief Executive Officer. "Under these challenging market conditions, I appreciate the exceptional efforts of our people delivering cost reductions and successfully integrating the Grey Wolf acquisition while reinforcing our promise of high performance, high value services to our customers.
"We are pleased to have completed our financing activities during the quarter. Through a combination of equity, debt and cash generation activities, we have paid off and eliminated our bridge facility, reduced total debt, significantly reduced annual interest expense and removed financing uncertainties. We believe Precision has sufficient financial capacity and liquidity to operate through a prolonged downturn. Further net debt reduction remains a top priority going forward.
"Low Canadian activity levels experienced during the first quarter continued right through the second quarter and resulted in second quarter utilization levels at a record low. Precision's Canadian results were bolstered by a strong contract presence in the north eastern British Columbia shale plays. While these shale plays represent a significant development opportunity, early indications for the third quarter suggest Canadian activity will remain depressed with a diminishing likelihood of a meaningful recovery this year.
"The activity collapse in the United States drilling market which started last year and persisted through the first quarter of 2009 appears to have troughed in the second quarter. However due to rig oversupply, day rate pressure will persist in many areas of the market for some time to come. Our term contract position provides Precision with a solid base of activity, somewhat insulating us from full spot market exposure. Precision was able to build on its reputation for high performance services with six new term contracts signed during the second quarter for existing rigs. These rigs will be deployed to the Marcellus shale play in late 2009 and 2010. This is a very important development as we believe Precision's high performance, high value capabilities are ideally suited for all North American shale gas opportunities, but especially so for the challenging logistics of Pennsylvania.
"Sustained improvement in North America 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 abrupt reduction in drilling activity, natural gas production declines will accelerate in Canada. United States natural gas production, which is showing initial signs of decline, should be significantly impacted in the near future. These supply factors, coupled with improvement 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.
During the first half of 2009, Precision remained focused on reducing debt levels and strengthening its capital structure and decisive steps were taken to conserve cash and improve Precision's financial position. Precision repaid long-term debt by $251 million during the quarter and working capital declined by $114 million to $254 million at June 30, 2009. Cash continues to be conserved through the indefinite suspension of cash distributions to unitholders and cost reduction measures that include personnel reductions and operating facility consolidation. Planned upgrade capital expenditures on existing equipment were significantly reduced and the remaining two new Super Series rigs from the 18 rig 2008 build program are near completion.
As announced on April 20, 2009, Precision entered into a series of financing transactions that raised approximately $380 million used to strengthen the Trust's balance sheet by refinancing and restructuring debt incurred in the acquisition of Grey Wolf. A summary of the financing transactions is set forth below:
- The Trust completed a transaction with Alberta Investment Management Corporation ("AIMCo"), pursuant to which AIMCo purchased 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 completed a rights offering for proceeds of $103 million that allowed unitholders to purchase Trust units at a price of $3.00 per unit.
The financing transactions enabled the repayment of Precision's unsecured bridge facility loan of $296 million (US$235 million) which bore interest of 17% and allowed 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, substantially reduced Precision's blended interest rate to approximately 8.3%, reduced Precision's cash interest expense by approximately $70 million on an annual basis and reduced the Trust's overall leverage.
Revenue of $210 million in the second quarter was 51% 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 157 rigs during the second quarter of 2009 as compared to a fleet of 17 rigs in 2008 and quarterly revenue increased four-fold. Revenue in Precision's Canadian Contract Drilling Services segment decreased by 20% while revenue declined 46% in the Canadian based Completion and Production Services segment compared to the second quarter of 2008. The mix of drilling rigs under term contracts and on complex well-to-well programs supported relatively strong average rig day rate results in the quarter.
The Trust reported total EBITDA for the second quarter of $59 million compared with $36 million for the second quarter of 2008. EBITDA is not a recognized financial measure under Generally Accepted Accounting Principles ("GAAP") as discussed under "Non-GAAP Measures and Reconciliations" in this report. EBITDA margin, calculated as EBITDA as a percentage of revenues, was 28% for the second quarter of 2009 compared to 26% for the same period in 2008. The 2% EBITDA margin increase was attributable to higher revenue per operating day due to rig mix and margin from idle but contracted rigs in the United States offset by lower overall utilization in both operating segments. Consistent with the previous quarter, Precision's term contract position with customers, a highly variable operating cost structure and economies achieved through vertical integration of the supply chain and maintenance facilities served to limit the declines.
In the Contract Drilling Services segment Precision currently markets 388 contract drilling rigs, including 226 in Canada, 159 in the United States, three rigs in international locations and 99 drilling rig camps. Precision's Completion and Production Services segment markets 229 service rigs, 29 snubbing units, 76 wastewater treatment units and a broad mix of rental equipment.
During the quarter an average of 25 drilling rigs worked in Canada, 50 in the United States and two in Mexico totaling 77 rigs working. This compares with an average of 167 rigs working in the first quarter of 2009 and 48 rigs in the second quarter a year ago. Canadian drilling activity was subject to seasonal slowdowns and very weak customer demand in the second quarter during the spring break-up period.
The first half of 2009 continued to reflect 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 the industry and Precision's oilfield services. Accordingly, these factors have eroded oilfield services activity levels for a third consecutive quarter as evidenced by minimal spot market opportunities, pricing declines and low equipment utilization.
At the end of the quarter these conditions persist as the fundamentals for natural gas continue to show weakness through record high storage levels in the United States. The supply capacity was delivered through drilling activity peaking in 2008 in many regions within the United States, including unconventional resource plays in Texas and Louisiana. A significant portion of these wells, and the associated gas production gains, are subject to high depletion rates and the recent steep decline in drilling is expected to eventually result in supply reductions.
Precision is focused on further diversification of its high performance, high value service offering when the market rebounds and as debt levels are reduced. Expansion of operations in the United States land drilling market provided second quarter growth in EBITDA and cash flow continuity that offsets the seasonal nature of Precision's oilfield service business in Canada.
Besides new rig deployments in the quarter, 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 drilling rigs in Mexico and has one idle rig in Chile. Precision will be opportunistic in deploying rigs to international markets with moderate new capital investment requirements and contracts that reward high value high performance services.
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