Precision Drilling Sees 30% Revenue Increase in 1Q
Precision Drilling reported a 30% revenue increase and a 28% rise in earnings before interest, taxes, loss on asset decommissioning, depreciation and amortization and foreign exchange for the first quarter of 2010 over the fourth quarter of 2009. These increases are due to increased activity levels during the first quarter of this year compared with the fourth quarter of 2009.
Revenue for the first quarter of 2010 totaled $373 million compared to $448 million for the first quarter of 2009. EBITDA was $118 million for the first three months of 2010, a decrease of $51 million from the same period of 2009. Precision reported net earnings of $62 million or $0.22 per diluted unit for the quarter ended March 31, 2010, an increase of $5 million or 8% compared to $57 million or $0.28 per diluted unit in the first quarter of 2009. Pre-tax earnings in the first quarter of 2010 were increased by $20 million for foreign exchange gains or $0.05 per diluted unit after tax. Results are lower in the first quarter of 2010 compared with the first quarter of 2009 because of lower average drilling revenue per day in both Canada and the United States partially offset by higher Canadian utilization.
Kevin Neveu, Precision's President and Chief Executive Officer stated, "First quarter 2010 winter drilling season activity levels in Canada exceeded our expectations and we are pleased to note that Precision was the most active land driller in North America during the fourth quarter of 2009 and the first quarter of 2010. Late last year our expectations for activity levels during the winter season in Canada were on par with the first quarter of 2009. However, as the quarter unfolded, activity increased and Precision averaged 38% more rigs working in the first quarter of 2010 than during the same period in 2009. This increase was led by an increase in oil related activity. As pricing for Precision's services are negotiated prior to the winter drilling season, rates for Canadian drilling services for the 2010 quarter were approximately 16% below 2009 levels."
"In the United States, activity levels continue to gradually improve, again with oil related activity leading the way. Precision's active rig count in the first quarter of 2010 was up 19% over the fourth quarter of last year. Dayrates in the United States drilling markets have modestly improved from the bottom of the cycle in mid 2009."
"We are now in the middle of spring break-up in Canada and as such Precision's Canadian active rig count is down to 33. With over half of the wells drilled by Precision in Canada being directed toward oil over the last two quarters, we are encouraged and believe that the remainder of 2010 activity levels will exceed those in 2009. In the United States, Precision's active rig count is currently 87 and we expect our rig count to continue to increase. If the recent decline in and the generally negative outlook for natural gas prices persists, there is the potential for a pullback in gas related activity."
"Precision is poised to seize market opportunities and as such has signed term contracts with two customers to build two new Super Single® rigs for deployment in Canada later this year. We are also in discussion with customers on potential new build opportunities for rigs in both the United States and Canada for heavy oil drilling and resource plays such as the Marcellus, Bakken, Horn River and the Eagle Ford," concluded Mr. Neveu.
Revenue in the first quarter of 2010 was 17% lower than the prior year period. The decrease was due to lower average dayrates in the United States and Canada in 2010. This decrease was partially offset by a year-over-year increase in utilization days in Canada. The mix of drilling rigs working under term contracts and on high performance well-to-well programs helped partially mitigate the downward revenue pressure in the quarter. Revenue in Precision's Contract Drilling Services segment decreased by 20% while revenue increased 1% in the Canadian based Completion and Production Services segment.
The Trust reported total EBITDA of $118 million for the first quarter of 2010 compared with $169 million for the first quarter of 2009. EBITDA is not a recognized financial measure under Generally Accepted Accounting Principles ("GAAP") see "Non-GAAP Measures" in this report. EBITDA margin, calculated as EBITDA as a percentage of revenues, was 32% for the first quarter of 2010 compared to 38% for the same period in 2009. The six percentage point decline in EBITDA margin was primarily attributable to lower market pricing for new work. 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 owns 351 contract drilling rigs, including 202 in Canada, 146 in the United States and three rigs in international locations and 96 drilling rig camps. Precision's Completion and Production Services segment includes 200 service rigs, 20 snubbing units, 78 wastewater treatment units and a broad mix of rental equipment.
During the quarter an average of 113 drilling rigs worked in Canada and 80 in the United States and Mexico totaling an average of 193 rigs working. This compares with an average of 138 rigs working in the fourth quarter of 2009 and 167 rigs in the first quarter a year ago.
Precision's priorities for 2010 are threefold. The first is to continue to deliver the high performance, high value level of services that customers require to drill the technically challenging wells of today's resource play exploitation. Second, Precision continues to improve its balance sheet, which provides financial flexibility and liquidity to be able to seize market opportunities, our third priority. To that end, Precision has signed two term contracts with an average length of three years to build two new Super Single® rigs for two customers for deployment in Canada. Precision is planning to spend $48 million in 2010 to upgrade rigs which will increase the marketability of these assets. All in, Precision's capital expenditure plan for 2010 has been increased by $47 million and now stands at $122 million.
The Canadian 2010 winter drilling season was characterized by higher than expected utilization for Precision and the industry. In the United States, the industry and Precision have experienced improving utilization as customer spending has increased because of higher oil commodity prices.
Oil and natural gas prices during the first quarter of 2010 were higher than a year ago. For the first quarter of 2010 AECO natural gas spot prices averaged $4.96 per MMBtu, nominally higher than the first quarter 2009 average of $4.95 per MMBtu. In the United States, Henry Hub natural gas spot prices averaged US $5.12 per MMBtu in the first quarter of 2010 an increase of 13% over the first quarter 2009 average of US $4.55 per MMBtu. West Texas Intermediate crude oil averaged US $78.58 per barrel during the quarter compared to US $43.21 per barrel in the same period in 2009.
Summary for the three months ended March 31, 2010:
- Precision continued to improve its balance sheet and reduced its debt by making a voluntary principal repayment of $12 million on March 31, 2010. As at March 31, 2010 Precision's debt to capitalization ratio was 0.22 and Precision had a cash balance of $132 million and in combination with its revolving credit facility, continued to carry ample liquidity.
- Operating earnings were $73 million, a decrease of $53 million or 42% from the first quarter in 2009. Operating earnings were 20% of revenue, compared to 28% in 2009. Operating earnings margins were negatively impacted by declines in customer pricing for most of Precision's service offerings over the same period in 2009.
- Financial charges were $29 million, a decrease of $10 million from the prior year primarily due to the reduction in long-term debt during 2009.
- The majority of Precision's credit facilities are denominated in U.S. dollars. During the quarter the Canadian dollar strengthened in relation to the U.S. dollar giving rise to most of the $20 million foreign exchange gain recognized in the quarter.
- Capital expenditures for the purchase of property, plant and equipment were $7 million in the first quarter, a decrease of $67 million over the same period in 2009. Capital spending for the first quarter of 2010 included $1 million on expansionary capital initiatives and $6 million on the upgrade of existing assets.
- Average revenue per utilization day for contract drilling rigs decreased in the first quarter of 2010 to US $18,710 from the prior year first quarter of US $25,154 in the United States and decreased in Canada from $18,537 in the first three months of 2009 to $15,511 for the first quarter of 2010. The decrease in revenue rates for the first quarter in the United States reflects the reduction of rigs working under term contracts, more rigs working under well-to-well contracts and the mix of turnkey operations. These figures also include US $4 million in revenue generated from idle but contracted rigs associated with term customer contracts. Turnkey revenue for the first quarter of 2010 was US $13 million generated from 243 utilization days. Within Precision's Completion and Production Services segment, average hourly rates for service rigs were $633 in the first quarter of 2010 compared to $731 in the first quarter of 2009.
- Average operating costs per day for drilling rigs decreased in the first quarter of 2010 to US $12,149 from the prior year first quarter of US $14,456 in the United States and from $10,023 to $8,453 in Canada. The cost decrease in Canada was primarily due to rig mix as a higher percentage of spot market work for the double and single rigs which are lower cost rigs and a crew wage reduction implemented on May 1, 2009. In the United States the decrease was impacted by 2009 crew wage reductions and less turnkey operations compared to the prior year whereby there is a larger scope to drilling costs that the drilling contractor is responsible to provide and revenue increases accordingly. Within Precision's Completion and Production Services segment, average hourly operating costs for service rigs were $461 in the first quarter of 2010 as compared to $527 in the first quarter of 2009.
2010 has started with higher drilling activity in Canada than was forecast and United States drilling activity continues to make improvements. The global demand for energy is rising as the global economies are starting to improve and move out of the bottom of the recession. There is also increased liquidity in the capital markets as well as higher oil commodity prices which is providing some of Precision's customers' liquidity to increase drilling programs. The drilling sector in both Canada and the United States is experiencing a period of year-over-year improvements in utilization. According to industry sources, as at April 16, 2010, the United States active land drilling rig count was up about 54% from the same period in the prior year while the Canadian drilling rig count had increased about 65%. Even with the year-over-year improvements in rig utilization, there has been virtually no change in spot market dayrates charged to customers in Canada, and only modest improvements in dayrates in the United States. As drilling rigs complete term contracts and move to lower dayrate spot market contracts, Precision's average revenue per working day declines. This trend is expected to continue until there are meaningful increases in spot market dayrates.
Precision has a strong portfolio of long-term customer contracts that help mitigate the effects of lower dayrate spot market contracts. Precision expects to have an average of approximately 83 rigs committed under term contract in North America in the second quarter of 2010, an average of 74 rigs contracted for the third quarter of 2010 and 63 for the fourth quarter of 2010. These term contract totals include two 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 per rig a year due to the seasonal nature of well access whereas in the United States they generate about 350 utilization days per rig in most regions.
For all of 2010, Precision expects to have an average of approximately 75 rigs under term contract, with 37 rigs contracted in the United States, 37 in Canada and one in Mexico. For 2011, Precision expects to have an average of 24 rigs in Canada under term contract and 17 in the United States and Mexico, for a total of 41 for the full year. As noted earlier in this report, Precision has added two term contracts for new build Super Single® rigs expected to go to work in late 2010.
As part of its strategic plan, Precision expects to keep capital expenditures at levels commensurate with market activity during 2010. Capital expenditures totaled $7 million in the first quarter of 2010 and are expected to be approximately $122 million for the full year, with approximately $103 million for upgrade capital and $19 million for expansion capital. Capital expenditures for rig tier improvements are included in upgrade capital. Expansion capital includes two new build Super Single® rigs under contract for deployment in Canada later this year and additional rental and wastewater equipment.
Natural gas production in the United States has remained strong despite the reduction in drilling activity over the last eighteen months. United States natural gas storage levels are currently near the upper range of the five-year average but in line with storage levels of a year ago. This also strongly influences Canadian activity since Canada exports roughly half of its natural gas production to the United States. Increase in oil and natural gas liquids drilling in areas like the Cardium, Bakken and Eagle Ford have been strong and the United States oil rig count is 148% higher than it was a year ago. Precision has more equipment working in oil related plays than at any time in the last 20 years; however, approximately 60% of Precision's current active rig count is drilling for natural gas targets. With high storage levels, consistent production and the view that North America has an oversupply of natural gas, gas prices have moved down. To date, there has been little change in customers' natural gas drilling plans. If low natural gas prices continue, Precision and the North American drilling industry could see a further reduction in demand for natural gas drilling. Precision continues to manage its operations to maximize cash flow, while providing our customers with high performance, high value services.
Despite near term challenges the future of the global oil and gas industry remains promising. For Precision, 2010 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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