Precision Drilling has reported 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. EBITDA was CAD169 million for the first three months of 2009, an increase of CAD22 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 US with 123 rigs.
Precision Drilling’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 Drilling rigs has been successful despite unprecedented declines in activity and customer demand in both the US and Canada. I am especially pleased with our term contract position for drillings rigs which, combined with our recently announced financing activities, positions Precision Drilling 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 Drilling 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 Drilling 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 Drilling’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 US operations. The economic conditions and continuing weak commodity prices continue to drive activity down in Canada and the US 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.
Overview:
Precision Drilling remains focused to reduce debt levels and strengthen its underlying capital structure and decisive steps have been taken to conserve cash and improve Precision Drilling’s financial position. Precision Drilling reduced long-term debt by CAD221 million during the quarter and increased working capital by CAD22 million to CAD367 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 CAD207 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 Drilling intends to complete the remaining 10 new Super Series rigs from the 2008 rig build program.
As announced on April 20, 2009, Precision Drilling entered into a series of financing transactions to rise up to about CAD380 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:
— CAD175 million aggregate principal amount of senior unsecured notes of Precision Drilling bearing interest at 10% per annum and having an eight-year life;
— 35,000,000 Trust units at a subscription price of CAD3 per Trust unit for gross proceeds of CAD105 million; and
— 15,000,000 purchase warrants of the Trust entitling the AIMCo to acquire up to an additional 15,000,000 Trust units at a price of CAD3.22 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 about CAD103 million that will allow unitholders, including AIMCo, to purchase Trust units at a price of CAD3 per unit in their proportionate ownership share on the same terms as AIMCo.
The financing transactions will enable the repayment of Precision Drilling’s unsecured bridge facility loans of CAD296 million (CAD235 million) which bear interest at about 17% and allow Precision Drilling’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 Drilling’s blended interest rate, based upon current market rates, to about 8.4% from 10.8%, reduce Precision Drilling’s cash interest expense by about CAD70 million on an annual basis, reduce the trust’s overall leverage and advance the trust’s objective of returning to an investment grade credit.
The increase in revenue was due to 2008 expansion initiatives through organic and acquisition growth in the US onshore contract drilling rig market. Precision Drilling marketed an average US 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 Drilling’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 CAD169 million compared with CAD147 million for the first quarter of 2008. 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 Drilling’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 Drilling currently markets 380 contract drilling rigs, including 224 in Canada, 153 in the US and three rigs in international locations and 100 drilling rig camps. Precision Drilling’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 US 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.
