UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO SECTION 13A-16 OR 15D-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
For November 9, 2004
Commission File Number: 001-14534
PRECISION DRILLING CORPORATION
(Exact name of registrant as specified in its charter)
4200, 150 - 6TH AVENUE S.W.
CALGARY, ALBERTA
CANADA T2P 3Y7
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F [_] Form 40-F [X]
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(1).____
Note: Regulation S-T Rule 101(b)(1) only permits the submission in
paper of a Form 6-K if submitted solely to provide an attached annual report to
security holders.
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(7):_____
Note: Regulation S-T Rule 101(b)(7) only permits the submission in
paper of a Form 6-K if submitted to furnish a report or other document that the
registrant foreign private issuer must furnish and make public under the laws of
the jurisdiction in which the registrant is incorporated, domiciled or legally
organized (the registrant's "home country"), or under the rules of the home
country exchange on which the registrant's securities are traded, as long as the
report or other document is not a press release, is not required to be and has
not been distributed to the registrant's security holders, and, if discussing a
material event, has already been the subject of a Form 6-K submission or other
Commission filing on EDGAR.
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes [_] No [X]
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82- N/A
----
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PRECISION DRILLING CORPORATION
Per: /s/ Jan M. Campbell
------------------------------
Jan M. Campbell
Corporate Secretary
Date: November 9, 2004
PRECISION DRILLING CORPORATION INTERIM REPORT Q3 2004
Periods ended September 30
MANAGEMENT'S DISCUSSION AND ANALYSIS
HIGHLIGHTS
Three months ended September 30,
(Stated in thousands of dollars, except per share amounts) 2004 2003 % Change
-----------------------------------------------------------------------------------------------------------------------
FINANCIAL RESULTS
Revenue $ 570,047 $ 450,942 26.4
Operating earnings (1) 77,074 60,958 26.4
Earnings from continuing operations 41,034 36,455 12.6
Net earnings 42,707 35,765 19.4
Diluted earnings per share:
From continuing operations 0.68 0.66 3.0
After discontinued operations 0.71 0.65 9.2
Funds provided by continuing operations 103,095 91,764 12.3
-----------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2004 December 31, 2003
-----------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Working capital 474,011 248,261
Long-term debt (2) 732,154 399,422
Long-term debt to long-term debt plus equity (2) 0.25 0.19
-----------------------------------------------------------------------------------------------------------------------
(1) SEE EXPLANATION ON PAGE 8
(2) EXCLUDES CURRENT PORTION OF LONG-TERM DEBT
OVERVIEW
Diluted earnings per share from continuing operations were $0.68 for the
quarter ended September 30, 2004 compared to $0.66 in 2003. Revenue and
operating earnings both increased by 26% with the acquisition of Reeves Oilfield
Services Ltd. (OReevesO) and the land drilling operations of GlobalSantaFe
Corporation contributing significantly to the increase. This improvement was
achieved despite a 13% reduction in Canadian drilling activity, which was
hampered by the much reported wet weather conditions in western Canada. Although
activity levels were lower than the third quarter of 2003, anticipated strong
demand for services going into the winter drilling season has provided support
for pricing improvements across most of our service lines in Canada.
The increased value of the Canadian dollar relative to the US dollar had a
significant negative impact in the third quarter of 2004, reducing before tax
earnings by $6.8 million. Most of the Corporation's international operations are
carried on in US dollars and as a result the 6% strengthening of the Canadian
dollar versus the US dollar had a two fold impact. First, the Canadian dollar
equivalent of our net US dollar denominated monetary asset position declined,
leading to a foreign exchange loss being recorded, and second, the Canadian
dollar equivalent of US dollar denominated operating cash flow was reduced.
Stock-based compensation expense amounted to $4.9 million ($0.08 per share)
in the quarter compared to $1.9 million ($0.04 per share) in the third quarter
of 2003.
During the quarter the Corporation completed the issuance of 4,400,000
common shares for net proceeds of $276.5 million which funds were used to repay
bank borrowings incurred to finance the acquisition of Reeves. The Corporation
enjoys a strong balance sheet with a debt to debt plus equity ratio of 0.25, an
undrawn revolving credit facility of $335 million and cash on hand of $79.4
million.
In September, the Corporation launched a branding campaign focused on its
Technology Services segment. This important milestone in the Corporation's
technology services development will see all the businesses that currently make
up the Technology Services segment combined under one brand, OPrecision Energy
ServicesO. The segment will have three product lines: Wireline Services,
Drilling & Evaluation Services and Production Services.
The Corporation will be undertaking its annual planning and budget review
in the fourth quarter. In conjunction with this process the annual assessment of
the carrying value of the Corporation's investment in the Energy Services
segment will be completed.
SEGMENT REVIEW
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
--------------------------------------------------------------------------------------------------------------------
OPERATING EARNINGS: (1)
Contract Drilling $ 71,469 $ 62,011 $ 261,396 $ 185,834
Energy Services 9,245 275 21,886 173
Rental and Production 9,507 9,175 28,861 31,636
Corporate and Other (13,147) (10,503) (36,401) (27,338)
--------------------------------------------------------------------------------------------------------------------
$ 77,074 $ 60,958 $ 275,742 $ 190,305
====================================================================================================================
(1) SEE EXPLANATION ON PAGE 8
CONTRACT DRILLING
(Stated in thousand of dollars, except per day/hour amounts)
% OF % of
Three months ended September 30, 2004 REVENUE 2003 Revenue
--------------------------------------------------------------------------------------------------------------------
Revenue $ 287,721 $ 227,490
Expenses:
Operating 171,870 59.8 139,137 61.1
General and administrative 16,713 5.8 7,571 3.3
Depreciation and amortization 24,474 8.5 19,961 8.8
Foreign exchange 3,195 1.1 (1,190) (0.5)
--------------------------------------------------------------------------------------------------------------------
Operating earnings (1) $ 71,469 24.8 $ 62,011 27.3
--------------------------------------------------------------------------------------------------------------------
% Change
--------------------------------------------------------------------------------------------------------------------
Number of drilling rigs (end of period) 274 239 14.6
Drilling operating days 12,774 11,820 8.1
Drilling revenue per operating day 17,437 14,365 21.4
Number of service rigs (end of period) 239 239 --
Service rig operating hours 112,637 110,447 2.0
Service revenue per operating hour 479 432 10.9
--------------------------------------------------------------------------------------------------------------------
% OF % of
Nine months ended September 30, 2004 REVENUE 2003 Revenue
--------------------------------------------------------------------------------------------------------------------
Revenue $ 857,711 $ 701,884
Expenses:
Operating 493,141 57.5 436,603 62.2
General and administrative 36,300 4.2 23,248 3.3
Depreciation and amortization 63,565 7.4 58,234 8.3
Foreign exchange 3,309 0.4 (2,035) (0.3)
--------------------------------------------------------------------------------------------------------------------
Operating earnings (1) $ 261,396 30.5 $ 185,834 26.5
--------------------------------------------------------------------------------------------------------------------
% Change
--------------------------------------------------------------------------------------------------------------------
Number of drilling rigs (end of period) 274 239 14.6
Drilling rig operating days 36,229 33,786 7.2
Drilling revenue per operating day 17,915 15,379 16.5
Number of service rigs (end of period) 239 239 -
Service rig operating hours 344,316 326,383 5.5
Service revenue per operating hour 498 454 9.7
--------------------------------------------------------------------------------------------------------------------
(1) SEE EXPLANATION ON PAGE 8
Contract Drilling revenue increased by 26% in the third quarter compared to
the same period in 2003 as a result of the acquisition of 31 internationally
based rigs in May 2004, and pricing increases in the Canadian market. These
positive factors were mitigated somewhat by lower activity levels in Canada as a
result of wet weather conditions hindering the movement and operation of
drilling rigs. Western Canada received 23% more rainfall in the third quarter of
2004 than in the third quarter of 2003 contributing to a 13% reduction in well
completions.
Operating earnings as a percentage of revenue declined to 25% from 27% in
2003. Improved margins in the Canadian market were more than offset by lower
margins realized internationally. Reduced spending by PEMEX, the Mexican
National Oil Company, reduced our activity and profitability in that country. In
addition, expenses were incurred in connection with the integration of the
GlobalSantaFe land drilling business. Foreign exchange fluctuations also
contributed to the reduced profitability of the Contract Drilling segment.
The Canadian drilling rig fleet achieved 9,479 operating days for a
utilization rate of 46% in the quarter compared to 10,848 operating days and a
52% utilization rate in 2003. The service rig operation was less affected by the
wet conditions in western Canada and saw a slight increase in operating hours
from 110,447 in 2003 to 112,637 in 2004.
ENERGY SERVICES
(Stated in thousand of dollars)
% OF % of
Three months ended September 30, 2004 REVENUE 2003 Revenue
--------------------------------------------------------------------------------------------------------------------
Revenue $ 229,246 $ 174,593
Expenses:
Operating 161,661 70.5 126,077 72.2
General and administrative 17,532 7.7 18,524 10.6
Depreciation and amortization 24,334 10.6 17,558 10.1
Research and engineering 13,097 5.7 13,208 7.5
Foreign exchange 3,377 1.5 (1,049) (0.6)
--------------------------------------------------------------------------------------------------------------------
Operating earnings (1) $ 9,245 4.0 $ 275 0.2
--------------------------------------------------------------------------------------------------------------------
% Change
--------------------------------------------------------------------------------------------------------------------
Wireline jobs performed 10,366 11,855 (12.6)
Directional wells drilled 646 762 (15.2)
--------------------------------------------------------------------------------------------------------------------
(1) SEE EXPLANATION ON PAGE 8
% OF % of
Nine months ended September 30, 2004 REVENUE 2003 Revenue
--------------------------------------------------------------------------------------------------------------------
Revenue $ 627,890 $ 512,305
Expenses:
Operating 447,113 71.2 376,524 73.5
General and administrative 50,141 8.0 52,562 10.3
Depreciation and amortization 67,528 10.8 54,307 10.6
Research and engineering 37,279 5.9 30,834 6.0
Foreign exchange 3,943 0.6 (2,095) (0.4)
--------------------------------------------------------------------------------------------------------------------
Operating earnings (1) $ 21,886 3.5 $ 173 --
--------------------------------------------------------------------------------------------------------------------
% Change
--------------------------------------------------------------------------------------------------------------------
Wireline jobs performed 29,886 29,600 1.0
Directional wells drilled 2,512 2,124 18.3
--------------------------------------------------------------------------------------------------------------------
(1) SEE EXPLANATION ON PAGE 8
Compared to the same period in 2003, revenues in the Energy Services sector
increased 31% in the third quarter of 2004. This growth was primarily achieved
in international operations. Revenue from Canadian operations remained
relatively flat year over year where the impact of adverse weather conditions
was offset by the addition of Reeves. The same is true for operating earnings
where overall results increased $9.0 million, despite the inclusion of a foreign
exchange loss of $3.4 million. The addition of Reeves contributed significantly
to the profitability of the Energy Services segment in the quarter. The biggest
geographical improvements came from operations in the United States, Latin
America and Asia Pacific.
Wireline Services generated the largest increase in results from 2003
levels, with improvements coming from both the core business as well as from the
addition of Reeves. Continued capital spending in 2004, to round out LWD and RST
service offerings, resulted in increased depreciation charges and a slight
decline in operating earnings for Drilling & Evaluation Services. Business
levels for this product line have not yet reached a sustainable threshold where
the global fleet is enjoying continuous utilization of assets. The outlook for
the balance of the year appears promising as we are experiencing an increase in
jobs being awarded for our drilling and evaluation services. The Production
Services business experienced mixed performances with some regions achieving
excellent results, while others, such as Canada, struggled in adverse business
environments. With renewal of a key North Sea contract and the start-up of other
international projects before year end we are anticipating a strong finish to
2004.
In spite of utilization growing pains within our drilling and evaluation
business we have been encouraged by the performance of our new RST and LWD
tools. Several key customer trials were successfully completed around the world
in the third quarter, with both reliability and performance demonstrating top
tier industry standards. With respect to Wireline, we have been very encouraged
by the addition of Reeves to our existing business. We believe Reeves' unique
technology, as well as its cost effective service solutions, will provide
exciting opportunities for our formation evaluation business in mature basins.
RENTAL AND PRODUCTION
(Stated in thousand of dollars)
% OF % of
Three months ended September 30, 2004 REVENUE 2003 Revenue
--------------------------------------------------------------------------------------------------------------------
Revenue $ 53,080 $ 48,859
Expenses:
Operating 37,326 70.3 34,067 69.7
General and administrative 2,587 4.9 2,589 5.3
Depreciation and amortization 3,626 6.8 3,072 6.3
Foreign exchange 34 0.1 (44) (0.1)
--------------------------------------------------------------------------------------------------------------------
Operating earnings (1) $ 9,507 17.9 $ 9,175 18.8
--------------------------------------------------------------------------------------------------------------------
% Change
--------------------------------------------------------------------------------------------------------------------
Equipment rental days (000's) 198 200 --
% OF % of
Nine months ended September 30, 2004 REVENUE 2003 Revenue
--------------------------------------------------------------------------------------------------------------------
Revenue $ 160,128 $ 162,312
Expenses:
Operating 113,305 70.8 113,698 70.0
General and administrative 7,773 4.8 7,183 4.4
Depreciation and amortization 10,199 6.4 9,364 5.8
Foreign exchange (10) -- 431 0.3
--------------------------------------------------------------------------------------------------------------------
Operating earnings (1) $ 28,861 18.0 $ 31,636 19.5
--------------------------------------------------------------------------------------------------------------------
% Change
--------------------------------------------------------------------------------------------------------------------
Equipment rental days (000's) 617 595 3.7
--------------------------------------------------------------------------------------------------------------------
(1) SEE EXPLANATION ON PAGE 8
The Rental and Production segment saw a 9% increase in revenue in the third
quarter of 2004 over the same period in 2003, with the majority of the increase
coming from the industrial plant maintenance business. The Canadian rental
business experienced a slight decrease in rental days; however the impact on
revenue was more than offset by pricing increases. Operating margins remained
relatively consistent year over year in both businesses.
CORPORATE AND OTHER
CORPORATE AND OTHER EXPENSES
Expenses in the third quarter associated with Corporate activities have
increased by $2.6 million year over year. Much of the increase occurred in
conjunction with the Corporation's expanded worldwide operations with
approximately $0.7 million resulting from the expense associated with stock
options issued in the third quarter.
OTHER ITEMS
The effective tax rate on earnings in the third quarter from continuing
operations before income taxes and non-controlling interest was 37% compared to
33% in the prior year. The increased tax rate is a result of unforeseen expenses
during the quarter that are not tax affected. The most significant is the
foreign exchange loss that occurred on translation of our foreign subsidiaries
with another one being share-based compensation expense.
Interest expense increased in the third quarter of 2004 compared to the
same period of the prior year as a result of additional debt incurred to finance
business acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by continuing operations amounted to $309.4 million in the
nine months ended September 30, 2004 with capital expenditures, net of proceeds
of disposal, totaling $168.0 million. The acquisition of Reeves and the land
drilling business of GlobalSanteFe for a combined purchase price of $671.5
million was financed by a US $300 million public note issue and the issuance of
4,400,000 common shares for net proceeds of $276.5 million. Additional cash was
realized from the disposal of investments and discontinued operations ($55.2
million) and from the exercise of stock options ($50.4 million).
The Corporation's outstanding debt is now solely comprised of its three
debenture issues. Of these unsecured debentures, $200 million matures in 2007,
$150 million matures in 2010 and $382 million matures in 2014. Cash on hand at
September 30, 2004 amounted to $79.4 million and it is anticipated that cash
reserves will continue to grow as cash flow from operations should exceed
capital spending. The Corporation's liquidity position is also bolstered by its
undrawn $335 million revolving bank credit facility.
The Corporation's long-term debt to long-term debt plus equity ratio is
0.25 at September 30, 2004, well within our long-term target of 0.30. During
October the Corporation issued 73,650 shares on the exercise of stock options.
QUARTERLY FINANCIAL SUMMARY
(Stated in thousands of dollars except per share amounts, which are presented on
a diluted basis)
2003 2004
----------- -----------------------------------------
Quarters ended December 31 March 31 June 30 September 30
---------------------------------------------------------------------------------------------------------
Revenue 523,646 659,365 416,317 570,047
Operating earnings (1) 91,173 169,631 29,037 77,074
Earnings from continuing operations 61,434 106,082 15,982 41,034
Per share 1.11 1.88 0.28 0.68
Net earnings 52,958 100,519 15,995 42,707
Per share 0.95 1.79 0.28 0.71
Funds provided by continuing operations 108,252 178,186 38,947 103,095
---------------------------------------------------------------------------------------------------------
2002 2003
----------- -----------------------------------------
Quarters ended December 31 March 31 June 30 September 30
---------------------------------------------------------------------------------------------------------
Revenue 367,775 583,313 342,246 450,942
Operating earnings (1) 11,330 117,033 12,314 60,958
Earnings from continuing operations 4,497 73,525 8,489 36,455
Per share 0.08 1.33 0.15 0.66
Net earnings 6,616 83,129 8,622 35,765
Per share 0.12 1.51 0.16 0.65
Funds provided by continuing operations 34,758 131,406 21,215 91,764
---------------------------------------------------------------------------------------------------------
(1) NON-GAAP MEASURE
OPERATING EARNINGS IS NOT A RECOGNIZED MEASURE UNDER CANADIAN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP). MANAGEMENT BELIEVES THAT IN ADDITION TO NET
EARNINGS, OPERATING EARNINGS IS A USEFUL SUPPLEMENTAL MEASURE AS IT PROVIDES AN
INDICATION OF THE RESULTS GENERATED BY THE CORPORATION'S PRINCIPAL BUSINESS
ACTIVITIES PRIOR TO CONSIDERATION OF HOW THOSE ACTIVITIES ARE FINANCED OR HOW
THE RESULTS ARE TAXED IN VARIOUS JURISDICTIONS. INVESTORS SHOULD BE CAUTIONED,
HOWEVER, THAT OPERATING EARNINGS SHOULD NOT BE CONSTRUED AS AN ALTERNATIVE TO
NET EARNINGS DETERMINED IN ACCORDANCE WITH GAAP AS AN INDICATOR OF PRECISION'S
PERFORMANCE. PRECISION'S METHOD OF CALCULATING OPERATING EARNINGS MAY DIFFER
FROM OTHER COMPANIES AND, ACCORDINGLY, OPERATING EARNINGS MAY NOT BE COMPARABLE
TO MEASURES USED BY OTHER COMPANIES.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED IN THIS INTERIM REPORT, INCLUDING STATEMENTS WHICH
ARE RELATED TO DRIVERS FOR IMPROVED EARNINGS, CUSTOMER REQUESTS FOR SERVICES AND
DRILLING ACTIVITY AND THE OUTLOOK FOR THE BALANCE OF THE YEAR FOR OUR ENERGY
SERVICES SEGMENT, STATEMENTS WHICH MAY CONTAIN WORDS SUCH AS OANTICIPATEO,
OCOULDO, OSHOULDO, OEXPECTO, OBELIEVEO, OWILLO AND SIMILAR EXPRESSIONS AND
STATEMENTS RELATING TO MATTERS THAT ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE UNITED STATES PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN
RISKS AND UNCERTAINTIES WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS OF PRECISION TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS,
PERFORMANCES OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. SUCH FACTORS INCLUDE FLUCTUATIONS IN THE MARKET FOR OIL AND GAS AND
RELATED PRODUCTS AND SERVICES; COMPETITION; POLITICAL AND ECONOMIC CONDITIONS IN
COUNTRIES IN WHICH PRECISION DOES BUSINESS; THE DEMAND FOR SERVICES PROVIDED BY
PRECISION; CHANGES IN LAWS AND REGULATIONS, INCLUDING ENVIRONMENTAL, TO WHICH
PRECISION IS SUBJECT AND OTHER FACTORS, WHICH ARE DESCRIBED IN FURTHER DETAIL IN
PRECISION'S FILINGS WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, December 31,
Stated in thousands of dollars 2004 2003
----------------------------------------------------------------------------------------------------------------------------
(unaudited) (restated - Note 5)
ASSETS
Current assets:
Cash $ 79,422 $ 21,370
Accounts receivable 636,155 539,370
Inventory 111,425 95,210
Assets of discontinued operations -- 30,508
----------------------------------------------------------------------------------------------------------------------------
827,002 686,458
Property, plant and equipment, net of accumulated depreciation 1,932,174 1,584,954
Intangibles, net of accumulated amortization 160,058 65,262
Goodwill 767,415 527,443
Other assets 10,096 8,932
Assets of discontinued operations -- 35,336
----------------------------------------------------------------------------------------------------------------------------
$ 3,696,745 $ 2,908,385
----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness $ -- $ 147,909
Accounts payable and accrued liabilities 327,101 258,803
Income taxes payable 25,890 7,136
Current portion of long-term debt -- 17,158
Liabilities of discontinued operations -- 7,191
----------------------------------------------------------------------------------------------------------------------------
352,991 438,197
Long-term debt (NOTE 8) 732,154 399,422
Future income taxes 359,903 320,599
Future income taxes of discontinued operations - 1,107
Non-controlling interest 9,545 3,771
Shareholders' equity:
Share capital (NOTE 9) 1,265,258 936,744
Contributed surplus 21,445 14,266
Cumulative translation adjustment 1,949 --
SEPTEMBER 30, December 31,
Stated in thousands of dollars 2004 2003
----------------------------------------------------------------------------------------------------------------------------
(unaudited) (restated - Note 5)
Retained earnings 953,500 794,279
----------------------------------------------------------------------------------------------------------------------------
2,242,152 1,745,289
Subsequent event (NOTE 10)
----------------------------------------------------------------------------------------------------------------------------
$ 3,696,745 $ 2,908,385
----------------------------------------------------------------------------------------------------------------------------
Common shares outstanding (000's) 60,673 54,846
Common share purchase options outstanding (000's) 3,433 3,393
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------------------------------------------------------------------------------
Stated in thousands of dollars, except per share amounts 2004 2003 2004
2003
----------------------------------------------------------------------------------------------------------------------------
(restated - Note 5) (restated - Note 5)
Revenue $ 570,047 $ 450,942 $ 1,645,729 $ 1,376,501
Expenses:
Operating 370,784 299,156 1,053,559 927,075
General and administrative 48,408 38,166 132,006 104,384
Depreciation and amortization 53,888 41,789 145,342 125,472
Research and engineering 13,097 13,208 37,279 30,834
Foreign exchange 6,796 (2,335) 1,801 (1,569)
----------------------------------------------------------------------------------------------------------------------------
492,973 389,984 1,369,987 1,186,196
----------------------------------------------------------------------------------------------------------------------------
Operating earnings 77,074 60,958 275,742 190,305
Interest 13,087 8,540 31,981 26,752
Gain on disposal of investments (2,532) (1,862) (2,574) (3,026)
----------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before
income taxes and non-controlling interest 66,519 54,280 246,335 166,579
Income taxes:
Current 20,659 4,316 76,154 37,352
Future 3,770 13,509 5,785 10,758
----------------------------------------------------------------------------------------------------------------------------
24,429 17,825 81,939 48,110
----------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations
before non-controlling interest 42,090 36,455 164,396 118,469
Non-controlling interest 1,056 -- 1,298 --
----------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 41,034 36,455 163,098 118,469
Discontinued operations, net of tax (NOTE 4) 1,673 (690) (3,877) 9,047
----------------------------------------------------------------------------------------------------------------------------
Net earnings 42,707 35,765 159,221 127,516
Retained earnings, beginning of period 910,793 705,556 794,279 613,805
----------------------------------------------------------------------------------------------------------------------------
Retained earnings, end of period $ 953,500 $ 741,321 $ 953,500 $ 741,321
----------------------------------------------------------------------------------------------------------------------------
Earnings per share from continuing operations:
Basic $ 0.69 $ 0.67 $ 2.87 $ 2.18
Diluted $ 0.68 $ 0.66 $ 2.83 $ 2.15
----------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.72 $ 0.66 $ 2.80 $ 2.35
Diluted $ 0.71 $ 0.65 $ 2.77 $ 2.31
----------------------------------------------------------------------------------------------------------------------------
Common shares outstanding (000's) 60,673 54,639 60,673 54,639
Weighted average shares outstanding (000's) 59,154 54,514 56,844 54,334
Diluted shares outstanding (000's) 59,908 55,334 57,578 55,226
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------------------------------------------------------------------------------
Stated in thousands of dollars 2004 2003 2004 2003
----------------------------------------------------------------------------------------------------------------------------
(restated - Note 5) (restated - Note 5)
Cash provided by (used in):
Continuing operations:
Earnings from continuing operations $ 41,034 $ 36,455 $ 163,098 $ 118,469
Items not affecting cash:
Stock-based compensation 4,934 1,946 8,883 5,872
Depreciation and amortization 53,888 41,789 145,342 125,472
Gain on disposal of investments (2,532) (1,862) (2,574) (3,026)
Future income taxes 3,770 13,509 5,785 10,758
Non-controlling interest 1,056 -- 1,298 --
Amortization of deferred financing costs 465 321 1,145 965
Unrealized foreign exchange loss (gain)
on long-term monetary items 480 (394) (2,749) (14,125)
----------------------------------------------------------------------------------------------------------------------------
Funds provided by continuing operations 103,095 91,764 320,228 244,385
Changes in non-cash working capital balances (60,639) (83,491) (10,874) (85,143)
----------------------------------------------------------------------------------------------------------------------------
42,456 8,273 309,354 159,242
Funds provided by (used in)
discontinued Operations (NOTE 4) 1,898 1,450 110 (709)
Changes in non-cash working capital balances
of discontinued operations (5,260) (849) (447) 886
----------------------------------------------------------------------------------------------------------------------------
(3,362) 601 (337) 177
Investments:
Business acquisitions (NOTE 7) (1,160) -- (660,002) (6,800)
Purchase of property, plant and equipment (83,629) (69,049) (192,610) (237,438)
Purchase of intangibles (314) -- (314) --
Proceeds on sale of property, plant and equipment 13,371 5,500 24,617 16,646
Proceeds on disposal of investments 5,829 2,960 5,877 10,580
Proceeds on disposal of discontinued operations 8,553 -- 49,299 67,274
Investments 1,340 144 -- (730)
----------------------------------------------------------------------------------------------------------------------------
(56,010) (60,445) (773,133) (150,468)
Financing:
Increase in long-term debt -- 35,980 522,136 80,940
Repayment of long-term debt (161,994) (4,486) (173,257) (145,657)
Deferred financing costs on long-term debt (627) -- (5,612) --
Issuance of common shares on exercise of options 13,584 6,115 50,355 16,264
Issuance of common shares (NOTE 9) 276,455 -- 276,455 --
Change in bank indebtedness (71,795) 21,275 (147,909) 40,457
----------------------------------------------------------------------------------------------------------------------------
55,623 58,884 522,168 (7,996)
----------------------------------------------------------------------------------------------------------------------------
Increase in cash 38,707 7,313 58,052 955
Cash, beginning of period 40,715 10,957 21,370 17,315
----------------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 79,422 $ 18,270 $ 79,422 $ 18,270
----------------------------------------------------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (TABULAR AMOUNTS STATED
IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
These interim financial statements were prepared using accounting policies
and methods of their application consistent with those used in the preparation
of the Corporation's audited financial statements for the year ended December
31, 2003, except as noted below. These interim financial statements conform in
all respects to the requirements of generally accepted accounting principles in
Canada for annual financial statements with the exception of certain note
disclosures regarding balance sheet items and transactions occurring prior to
the current reporting period. As a result, these interim financial statements
should be read in conjunction with the Corporation's audited financial
statements for the year ended December 31, 2003 contained in the Corporation's
2003 annual report.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) FOREIGN CURRENCY TRANSLATION
Accounts of foreign operations which are considered financially and
operationally integrated are translated to Canadian dollars using average
exchange rates for the reporting period for revenue and expenses. Monetary
assets and liabilities are translated at period end current exchange rate and
non-monetary assets and liabilities are translated using historical rates of
exchange. Gains or losses resulting from these translation adjustments are
included in net earnings.
With the acquisitions completed in the second quarter of 2004 the
Corporation has international operations which are considered financially and
operationally independent. These self sustaining operations are translated to
Canadian dollars using average rates for the reporting period for revenue and
expenses and period end rates for all assets and liabilities. Gains and losses
resulting from these translation adjustments are included as a component of
shareholders' equity in the cumulative translation adjustment account.
Transactions in foreign currencies are translated at rates in effect at the
time of the transaction. Monetary assets and liabilities are translated at
current rates. Gains or losses are included in net earnings.
(b) HEDGING
The Corporation has designated its US $300.0 million 5.625% long-term notes
as a hedge of its investment in certain self sustaining foreign operations.
Gains or losses resulting from the translation of these notes at period end
exchange rates are included in the cumulative translation adjustment account.
3. SEASONALITY OF OPERATIONS
The majority of the Corporation's operations are carried on in Canada. The
ability to move heavy equipment in the Canadian oil and natural gas fields is
dependent on weather conditions. As warm weather returns in the spring, the
winter's frost comes out of the ground rendering many secondary roads incapable
of supporting the weight of heavy equipment until they have thoroughly dried
out. The duration of this "spring breakup" has a direct impact on the
Corporation's activity levels. In addition, many exploration and production
areas in northern Canada are accessible only in winter months when the ground is
frozen hard enough to support equipment. The timing of freeze up and spring
breakup affects the ability to move equipment in and out of these areas. As a
result, late March through May is traditionally our slowest time.
4. DISPOSAL OF DISCONTINUED OPERATIONS
On February 12, 2004, the Corporation sold substantially all of the assets
of Fleet Cementers Inc. for proceeds of $25.7 million. On May 7, 2004 the
Corporation sold the assets of the Polar Completions division for proceeds of
$15.0 million, subject to working capital adjustments. On August 31, 2004 the
Corporation sold its 65% interest in United Diamond Ltd. for proceeds of $8.5
million. Additional proceeds in the amount of up to $9.5 million is receivable
with respect to the sale of United Diamond Ltd., contingent upon the extent of
future business undertaken between the Corporation and United Diamond Ltd. No
portion of the $9.5 million of contingent proceeds has been recognized. These
assets were included in what is now called the Energy Services segment
(previously Technology Services) and were disposed of as they were not a core
component to the Corporation's energy services globalization strategy.
Effective January 1, 2003, the Corporation sold Energy Industries Inc., a
wholly-owned subsidiary included in the Rental and Production segment.
Effective May 2003, the Corporation sold its 50% interest in Energy
Equipment Rentals General Partnership (OEERO) and Oil Drilling Exploration
(Argentina) SA (OOD&EO). Both entities were included in the Contract Drilling
segment.
Results of the operations of these businesses have been classified as
results of discontinued operations. The following table provides additional
information with respect to amounts included in the results of discontinued
operations.
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------------------------------------------------------------------------------
Revenue
Fleet Cementers, Polar Completions and
United Diamond $ 5,756 $ 17,155 $ 23,879 $ 47,830
Other -- -- -- 560
----------------------------------------------------------------------------------------------------------------------------
5,756 17,155 23,879 48,390
----------------------------------------------------------------------------------------------------------------------------
Gain on disposal of Energy Industries -- -- -- 13,071
Gain on disposal of EER and OD&E -- -- -- 4,389
Loss on disposal of Fleet Cementers' assets (14) -- (362) --
Loss on disposal of United Diamond (254) -- (254) --
----------------------------------------------------------------------------------------------------------------------------
(268) -- (616) 17,460
----------------------------------------------------------------------------------------------------------------------------
Results of operations before income taxes
and non-controlling interest
Fleet Cementers, Polar Completions
and United Diamond 1,952 204 5,623 (7,182)
Other -- -- -- 49
Writedown of assets held for sale -- -- (6,117) --
----------------------------------------------------------------------------------------------------------------------------
1,952 204 (494) (7,133)
Income tax expense (recovery) (327) 620 1,385 440
----------------------------------------------------------------------------------------------------------------------------
Results of operations, before non-controlling interest 2,279 (416) (1,879) (7,573)
Non-controlling interest 338 274 1,382 840
----------------------------------------------------------------------------------------------------------------------------
1,941 (690) (3,261) (8,413)
----------------------------------------------------------------------------------------------------------------------------
Discontinued operations $ 1,673 $ (690) $ (3,877) $ 9,047
----------------------------------------------------------------------------------------------------------------------------
The following table provides additional information with respect to amounts
included in funds provided by (used in) discontinued operations:
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) of discontinued operations $ 1,673 $ (690) $ (3,877) $ 9,047
Items not affecting cash:
Loss (gain) on disposal of discontinued operations 268 -- 616 (17,460)
Depreciation and amortization 84 1,897 1,152 6,874
Stock-based compensation -- 61 -- 143
Writedown of assets of discontinued operations -- -- 3,293 --
Future income taxes (465) (92) (2,456) (153)
Non-controlling interest 338 274 1,382 840
----------------------------------------------------------------------------------------------------------------------------
Funds provided by (used in) discontinued operations $ 1,898 $ 1,450 $ 110 $ (709)
----------------------------------------------------------------------------------------------------------------------------
5. STOCK-BASED COMPENSATION
Effective January 1, 2004, the Corporation has adopted the revised Canadian
accounting standards with respect to accounting for stock-based compensation.
Under the new standard, the fair value of common share purchase options is
calculated at the date of grant and that value is recorded as compensation
expense over the vesting period of those grants. The Corporation has
retroactively applied this standard, with restatement of prior years, to all
common share purchase options granted since January 1, 2002. This has resulted
in a charge to net earnings for the three and nine months ended September 30,
2004 of $4.9 million and $8.9 million (2003 - $2.0 million and $6.0 million)
respectively, and a reduction to opening retained earnings of $14.5 million at
January 1, 2004 ($6.3 million at January 1, 2003).
Included in shareholders' equity at September 30, 2004 is $1.9 million
(December 31, 2003 - $215,000) relating to stock-based compensation on options
that were exercised.
6. SEGMENT INFORMATION
Contract Energy Rental and Corporate
Three months ended September 30, 2004 Drilling Services Production and Other Total
---------------------------------------------------------------------------------------------------------------------------
Revenue $ 287,721 $ 229,246 $ 53,080 $ -- $ 570,047
Operating earnings (loss) 71,469 9,245 9,507 (13,147) 77,074
Research and engineering -- 13,097 -- -- 13,097
Depreciation and amortization 24,474 24,334 3,626 1,454 53,888
Total assets 1,863,678 1,557,996 177,993 97,078 3,696,745
Goodwill 383,041 355,672 28,702 -- 767,415
Capital expenditures 34,551 43,464 2,126 3,802 83,943
---------------------------------------------------------------------------------------------------------------------------
Contract Energy Rental and Corporate
Three months ended September 30, 2003 Drilling Services Production and Other Total
---------------------------------------------------------------------------------------------------------------------------
Revenue $ 227,490 $ 174,593 $ 48,859 $ - $ 450,942
Operating earnings (loss) 62,011 275 9,175 (10,503) 60,958
Research and engineering -- 13,208 -- -- 13,208
Depreciation and amortization 19,961 17,558 3,072 1,198 41,789
Total assets 1,342,054 1,260,539 174,117 82,980 2,859,690
Goodwill 257,531 241,340 28,572 -- 527,443
Capital expenditures 32,798 27,609 2,269 6,373 69,049
---------------------------------------------------------------------------------------------------------------------------
Contract Energy Rental and Corporate
Nine months ended September 30, 2004 Drilling Services Production and Other Total
---------------------------------------------------------------------------------------------------------------------------
Revenue $ 857,711 $ 627,890 $ 160,128 $ -- $ 1,645,729
Operating earnings (loss) 261,396 21,886 28,861 (36,401) 275,742
Research and engineering -- 37,279 -- -- 37,279
Depreciation and amortization 63,565 67,528 10,199 4,050 145,342
Total assets 1,863,678 1,557,996 177,993 97,078 3,696,745
Goodwill 383,041 355,672 28,702 -- 767,415
Capital expenditures* 74,086 92,901 11,611 14,326 192,924
---------------------------------------------------------------------------------------------------------------------------
Contract Energy Rental and Corporate
Nine months ended September 30, 2003 Drilling Services Production and Other Total
---------------------------------------------------------------------------------------------------------------------------
Revenue $ 701,884 $ 512,305 $ 162,312 $ -- $ 1,376,501
Operating earnings (loss) 185,834 173 31,636 (27,338) 190,305
Research and engineering -- 30,834 -- -- 30,834
Depreciation and amortization 58,234 54,307 9,364 3,567 125,472
Total assets 1,342,054 1,260,539 174,117 82,980 2,859,690
Goodwill 257,531 241,340 28,572 -- 527,443
Capital expenditures* 62,794 148,817 9,463 16,364 237,438
---------------------------------------------------------------------------------------------------------------------------
* EXCLUDES BUSINESS ACQUISITIONS
7. ACQUISITIONS
During the year the Corporation made several acquisitions, the most
significant of which were:
On May 14, 2004 the Corporation purchased all of the issued and outstanding
shares of Reeves Oilfield Services Ltd. ("Reeves"). Reeves provides open hole
and cased hole logging services to the oil and gas industry. It has established
operations in Canada, the United States, Australia, Africa, Europe and the
Middle East.
On May 21, 2004, the Corporation purchased all of the worldwide land
drilling assets, located in Venezuela and the Middle East, from GlobalSantaFe
Corporation ("Global SantaFe").
These acquisitions have been accounted for by the purchase method with the
results of the acquired operations included in the financial statements from the
effective date of acquisition. Details of the transactions are as follows:
Reeves GlobalSantaFe Other Total
--------------------------------------------------------------------------------------------------------------
Net assets acquired at assigned values:
Working capital $ 23,000(a) $ 11,639 $ -- $ 34,639
Intangibles 95,203 6,139 -- 101,342
Property, plant and equipment 42,026 296,407 500 338,933
Goodwill 113,358 125,510 130 238,998
Future income taxes (33,522) -- -- (33,522)
Minority interest (8,246) -- -- (8,246)
--------------------------------------------------------------------------------------------------------------
231,819 439,695 630 672,144
--------------------------------------------------------------------------------------------------------------
Consideration:
Cash $ 231,819 $ 439,695 $ 630 $ 672,144
--------------------------------------------------------------------------------------------------------------
(a) includes cash of $12,142
8. LONG-TERM DEBT
On May 28, 2004 the Corporation issued US $300.0 million of long-term
notes, bearing interest at 5.625% and maturing on June 1, 2014. These notes are
redeemable at any time by the Corporation upon paying a redemption price equal
to the greater of an amount calculated with reference to the yield on a United
States treasury security with the same maturity and par. Proceeds of the
offering was used to repay indebtedness incurred in connection with the
acquisition of the worldwide land based drilling assets of GlobalSantaFe
Corporation.
9. SHARE CAPITAL
In the third quarter of 2004 the Corporation issued 4,400,000 common shares
at US $49.80 for net proceeds of approximately $276.5 million. Proceeds of the
offering were used primarily to repay indebtedness incurred in connection with
the acquisition of all the issued and outstanding shares of Reeves Oilfield
Services Ltd.
10. SUBSEQUENT EVENT
On October 15, 2004 the Corporation purchased 43.5% of the issued and
outstanding shares of Allegheny Wireline Services Inc. ("Allegheny") for cash
consideration of US $17.5 million. The remaining 56.5% of the issued and
outstanding shares of Allegheny had been acquired by the Corporation as part of
the acquisition of Reeves Oilfield Services Ltd. on May 14, 2004. This
acquisition will be accounted for by the purchase method with the increased
proportion of Allegheny's results of operations included in the financial
statements from the effective date of acquisition.
SHAREHOLDER INFORMATION
DIRECTORS
W.C. (MICKEY) DUNN (2) (3)
Edmonton, Alberta
ROBERT J.S. GIBSON (1) (3)
Calgary, Alberta
PATRICK M. MURRAY (1)
Dallas, Texas
FREDERICK W. PHEASEY (2) (3)
Edmonton, Alberta
ROBERT L. PHILLIPS (2) (3)
Vancouver, British Columbia
HANK B. SWARTOUT
Calgary, Alberta
H. GARTH WIGGINS (1)
Calgary, Alberta
(1) Audit Committee member
(2) Compensation Committee member
(3) Corporate Governance and Nominating Committee member
OFFICERS
HANK B. SWARTOUT
Chairman of the Board, President
and Chief Executive Officer
DALE E. TREMBLAY
Senior Vice President Finance
and Chief Financial Officer
IAN E. KELLY
Senior Vice President
International Drilling
JOHN R. KING
Senior Vice President
Energy Services
M.J. (MICK) MCNULTY
Senior Vice President
Operations Finance
R.T. (BOB) GERMAN
Vice President and
Chief Accounting Officer
JAN M. CAMPBELL
Corporate Secretary
HEAD OFFICE
Precision Drilling Corporation
4200, 150-6th Avenue S. W.
Calgary, Alberta, Canada T2P 3Y7
Telephone: 403-716-4500
Facsimile: 403-264-0251
Website: www.precisiondrilling.com