U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 40-F
(Check One)
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o
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Registration statement pursuant to Section 12 of the Securities Exchange Act of 1934
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or
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þ
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Annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
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For the fiscal year ended December 31, 2008
Commission file number 001-14534
PRECISION DRILLING TRUST
(Exact name of registrant as specified in its charter)
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Alberta, Canada
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1381
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Not applicable
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(Province or other jurisdiction of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number (if
applicable))
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(I.R.S. Employer
Identification Number (if
Applicable))
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4200-150 6th Avenue, S.W., Calgary, Alberta, Canada T2P 3Y7
(403) 716-4500
(Address and Telephone Number of Registrants Principal Executive Offices)
CT Corporation System, North St. Paul Street, Dallas, Texas 77022
(214) 979-1172
(Name, Address (Including Zip Code) and Telephone Number
(Including Area Code) of Agent For Service in the United States)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
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Title of each class
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Name of each exchange on which registered
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Trust Units
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New York Stock Exchange
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Securities registered or to be registered pursuant to Section 12(g) of the Act. None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None.
For annual reports, indicate by check mark the information filed with this Form:
þ
Annual Information Form
þ
Audited Annual Financial Statements
Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report: 160,042,065 Trust Units
outstanding as at December 31, 2008.
Indicate by check mark whether the Registrant by filing 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 (the Exchange Act). If Yes is marked, indicate the file number
assigned to the Registrant in connection with such rule.
Yes
o
No
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Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days.
Yes
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No
o
The documents (or portions thereof) forming part of this Form 40-F are incorporated by
reference into the following registration statement under the Securities Act of 1933, as amended:
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Form
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Registration No.
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F-10
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333-156844
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PRINCIPAL DOCUMENTS
The following documents are being filed as part of this Annual Report on Form 40-F:
A. Annual Information Form for the fiscal year ended December 31, 2008 (the Annual
Information Form).
B. Managements Discussion and Analysis of Financial Condition and Results of Operations for
the fiscal year ended December 31, 2008 (Managements Discussion and Analysis).
C. Consolidated Financial Statements for the fiscal year ended December 31, 2008 (the
Consolidated Financial Statements). Note 20 to the Consolidated Financial Statements relates to
United States Generally Accepted Accounting Principles. Managements annual report on internal
control over financial reporting and the attestation report of KPMG LLP regarding managements
assessment of internal controls over financial reporting are included in the Consolidated Financial
Statements.
UNDERTAKING
The Registrant undertakes to make available, in person or by telephone, representatives to
respond to inquiries made by the staff of the Securities and Exchange Commission (the
Commission), and to furnish promptly, when requested to do so by the Commission staff,
information relating to: the securities registered pursuant to Form 40-F; the securities in
relation to which the obligation to file an Annual Report on Form 40-F arises; or transactions in
said securities.
DISCLOSURE CONTROLS AND PROCEDURES
For information on disclosure controls and procedures, see Evaluation of Disclosure Controls
and Procedures in the Annual Information Form and Disclosure Controls and Procedures in Managements
Discussion and Analysis.
AUDIT COMMITTEE FINANCIAL EXPERT
The board of directors of Precision Drilling Corporation, the administrator of the registrant,
has determined that it has at least one audit committee financial expert serving on its audit
committee. Each of Patrick M. Murray, William T. Donovan and Allen R. Hagerman has been designated an audit committee
financial expert and is independent, as that term is defined by the New York Stock Exchanges
listing standards applicable to the Registrant. The Commission has indicated that the designation
of each of Messrs. Murray and Hagerman as an audit committee financial expert does not make either
of them an expert for any purpose, impose any duties, obligations or liability on them that is
greater than that imposed on members of the audit committee and board of directors who do not carry
this designation or affect the duties, obligations or liability of any other member of the audit
committee.
CODE OF ETHICS
The Registrant and Precision Drilling Corporation have adopted a Joint Code of Business
Conduct and Ethics for their principal executive officer, principal financial officer, principal
accounting officer or controller and any person performing similar functions. The Registrants code
is available on its website at www.precisiondrilling.com. No waivers have been granted from, and
there have been no amendments to, any provision of the code during the 2008 fiscal year.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
For information on principal accountant fees and services, see Audit Committee Information
Audit Fees in the Annual Information Form.
OFF-BALANCE SHEET ARRANGEMENTS
The Registrant has no off-balance sheet arrangements, as defined in this Form.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
For information on Tabular Disclosure of Contractual Obligations, see Liquidity and Capital
Resources in Managements Discussion and Analysis.
IDENTIFICATION OF THE AUDIT COMMITTEE
The Registrant has a separately-designated standing Audit Committee. The members of the Audit
Committee are:
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Chair:
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Patrick M. Murray
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Members:
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Allen R. Hagerman
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Robert J.S. Gibson
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William T. Donovan
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Robert L. Phillips
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SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all
of the requirements for filing on Form 40-F and has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereto duly authorized, in the City of Calgary, Province of
Alberta, Canada.
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Precision Drilling Corporation,
as agent for
and on behalf of Precision Drilling Trust
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By:
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/s/ Kevin A. Neveu
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Name:
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Kevin A. Neveu
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Title:
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President and Chief Executive Officer
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Date:
March 30, 2009
EXHIBITS
23.1
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Consent of KPMG LLP, Chartered Accountants.
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31.1
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Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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31.2
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Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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32.1
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Certification of Chief Executive Officer regarding Periodic Report containing
Financial Statements.
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32.2
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Certification of Chief Financial Officer regarding Periodic Report containing
Financial Statements.
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PRECISION
DRILLING TRUST
ANNUAL INFORMATION
FORM
For the
fiscal year ended December 31, 2008
Dated March
27, 2009
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND
STATEMENTS
This Annual Information Form contains certain forward-looking
information and statements, including statements relating to
matters that are not historical facts and statements of our
beliefs, intentions and expectations about developments, results
and events which will or may occur in the future, which
constitute forward-looking information within the
meaning of applicable Canadian securities legislation and
forward-looking statements within the meaning of the
safe harbor provisions of the
United States
Private Securities Litigation Reform Act of 1995
(collectively the forward-looking information and
statements). Forward-looking information and statements
are typically identified by words such as
anticipate, could, should,
expect, seek, may,
intend, likely, will,
plan, estimate, believe and
similar expressions suggesting future outcomes or statements
regarding an outlook.
Forward-looking information and statements are included
throughout this Annual Information Form including under the
headings General Development of the Business,
Description of the Business of Precision and
Risk Factors and include, but are not limited to
statements with respect to:
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2009 expected cash provided by continuing operations;
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2009 capital expenditures, including the amount and nature
thereof;
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2009 distributions on Trust Units (as defined herein) and
payments on Exchangeable Units (as defined herein);
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the global economic crisis and its impact on operations;
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performance of the oil and natural gas industry, including oil
and natural gas commodity prices and supply and demand;
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expansion, consolidation and other development trends of the oil
and natural gas industry;
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demand for and status of drilling rigs and other equipment in
the oil and natural gas industry;
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costs and financial trends for companies operating in the oil
and natural gas industry;
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world population and energy consumption trends;
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that continental natural gas will continue to be part of the
long-term energy solution for North America;
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our business strategy, including the 2009 strategy and outlook
for our business segments;
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expansion and growth of our business and operations, including
diversification of the Trusts (as defined herein) earnings
base, safety and operating performance, the size and
capabilities of the Trusts drilling and service rig fleet,
the Trusts market share and the Trusts position in
the markets in which it operates;
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the potential impact and benefits of the Acquisition (as defined
herein);
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the integration of Precision (as defined herein) and Grey Wolf
(as defined herein);
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the opportunities stemming from a focus on global contract
drilling through United States expansion;
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international diversification opportunities and complementary
product line expansion;
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the impact of shale gas drilling in Canada and the United States;
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that new drilling rigs are expected to be contracted with
customers before completion;
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the number of rigs under daywork term contracts in Canada, the
United States and Mexico;
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the potential rebound in land drilling activity;
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the timing of completion of rigs in Precisions rig build
program;
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that unconventional drilling applications will require high
performance drilling rigs;
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that some wells have a steep rate of production decline in the
first year necessitating additional drilling to replace rapidly
depleting wells;
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the demand for the Trusts products and services;
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the Trusts management strategy, including transitions in
executive roles;
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labour shortages;
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climatic conditions;
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the maintenance of existing customer, supplier and partner
relationships;
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supply channels;
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accounting policies and tax liabilities;
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expected payments pursuant to contractual obligations;
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the prospective impact of recent or anticipated regulatory
changes;
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that planned asset growth will generally be financed through
existing debt facilities or cash retained from continuing
operations;
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financing strategy and compliance with debt covenants;
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potential downgrades to credit ratings;
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credit risks; and
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other such matters.
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All such forward-looking information and statements are based on
certain assumptions and analyses made by the Trust in light of
its experience and perception of historical trends, current
conditions and expected future developments, as well as other
factors the Trust believes are appropriate in the circumstances.
These statements are, however, subject to known and unknown
risks and uncertainties and other factors. As a result, actual
results, performance or achievements could differ materially
from those expressed in, or implied by, these forward-looking
information and statements and, accordingly, no assurance can be
given that any of the events anticipated by the forward-looking
information and statements will transpire or occur, or if any of
them do so, what benefits will be derived therefrom. These
risks, uncertainties and other factors include, among others:
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the impact of general economic conditions in Canada and the
United States;
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world energy prices and government policies;
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industry conditions, including the adoption of new
environmental, taxation and other laws and regulations and
changes in how they are interpreted and enforced;
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the current global financial crisis and the dislocation in the
credit markets;
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fluctuations in the level of oil and natural gas exploration and
development activities;
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fluctuations in the demand for well servicing, contract drilling
and ancillary oilfield services;
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the impact of initiatives by the Organization of Petroleum
Exporting Countries and other major petroleum exporting
countries;
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the ability of oil and natural gas companies to access external
sources of debt and equity capital;
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the effect of weather conditions on operations and facilities;
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the existence of operating risks inherent in well servicing,
contract drilling and ancillary oilfield services;
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the volatility of oil and natural gas prices;
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oil and natural gas product supply and demand;
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risks inherent in the ability to generate sufficient cash flow
from operations to meet current and future obligations;
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increased competition;
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consolidation among the Trusts customers;
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risks associated with technology;
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political uncertainty, including risks of war, hostilities,
civil insurrection, instability or acts of terrorism;
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liabilities under laws and regulations protecting the
environment;
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the impact of purchase accounting;
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expected outcomes of litigation, claims and disputes and their
expected effects on the Trusts financial condition and
results of operations;
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difficulties and delays in achieving synergies and cost savings;
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the lack of availability of qualified personnel or management;
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credit risks;
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increased costs of operations, including costs of equipment;
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future capital expenditures and refurbishment, repair and
upgrade costs;
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expected completion times for new equipment manufacture and
refurbishment and upgrade projects;
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sufficiency of funds for required capital expenditures, working
capital and debt service;
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the failure to realize anticipated synergies in the Acquisition;
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the Trusts ability to enter into and the terms of future
contracts;
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the adequacy of sources of liquidity;
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the inability to carry out plans and strategies as expected;
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loss of mutual fund trust status;
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the effect of the Canadian federal governments SIFT Rules
(as defined herein);
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the conversion of the Trust into a corporate structure and other
unforeseen conditions which could impact the use of services
supplied by Precision;
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fluctuations in interest rates;
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stock market volatility;
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safety performance;
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foreign operations;
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foreign currency exposure;
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dependence on third party suppliers;
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opportunities available to or pursued by the Trust; and
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other factors, many of which are beyond the Trusts control.
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These risk factors are discussed in this Annual Information
Form, the Trusts Annual Report and
Form 40-F
on file with the Canadian securities commissions and the United
States Securities and Exchange Commission (the
SEC
) and available on the Canadian
System for Electronic Document Analysis and Retrieval
(
SEDAR
)
at
www.sedar.com
and the SECs Electronic Document
Gathering and Retrieval System
(
EDGAR
)
at
www.sec.gov
, respectively. Except as required by law,
Precision Drilling Trust, Precision Drilling Limited Partnership
and Precision Drilling Corporation disclaim any intention or
obligation to update or revise any forward-looking information
or statements, whether as a result of new information, future
events or otherwise.
3
The forward-looking information and statements contained in this
Annual Information Form are expressly qualified by this
cautionary statement.
Unless otherwise stated, all references in this Annual
Information Form to sums of money are expressed in Canadian
dollars.
CORPORATE
STRUCTURE
The
Trust
Precision Drilling Trust (the
Trust
) is an
unincorporated open-ended investment trust established under the
laws of the Province of Alberta pursuant to a declaration of
trust dated September 22, 2005 (the
Declaration of
Trust
). The Trust maintains its head office and
principal place of business at 4200, 150
6th Avenue S.W., Calgary, Alberta, T2P 3Y7, telephone
(403) 716-4500,
facsimile
(403) 264-0251,
email
info@precisiondrilling.com
and website
www.precisiondrilling.com.
For a discussion of the
Declaration of Trust, see Description of Capital
Structure.
Pursuant to a reorganization of the former Precision Drilling
Corporation (
Precision
) into a mutual
fund trust for purposes of the Tax Act (as defined
herein), the Trust issued units
(
Trust Units
) to certain former
shareholders of Precision in exchange for such holders
common shares pursuant to a plan of arrangement which was
approved by the former shareholders of Precision at a special
meeting held on October 31, 2005 (the
Plan of
Arrangement
).
Precision
Drilling Limited Partnership
Precision Drilling Limited Partnership
(
PDLP
)
is a limited partnership formed pursuant to the laws of the
Province of Manitoba pursuant to a limited partnership agreement
dated as of September 28, 2005 (the
Limited
Partnership Agreement
). The Trust holds a 99.91%
partnership interest in PDLP through its holding of Class A
Limited Partnership Units (the
PDLP A
Units) and the remaining 0.09% limited partnership
interest in PDLP is held by former shareholders of Precision who
elected to receive Class B Limited Partnership Units
(
Exchangeable Units
) which are exchangeable
into Trust Units on a one-for-one basis and are the
economic equivalent of Trust Units. The general partner of
PDLP is 1194312 Alberta Ltd. (the
General
Partner
) which holds a nominal (0.001%) interest in
PDLP. The head and principal offices of PDLP are located at
4200, 150 6th Avenue S.W., Calgary, Alberta,
T2P 3Y7, telephone
(403) 716-4500,
facsimile
(403) 264-0251
and email
info@precisiondrilling.com.
Precision
Drilling Corporation
Precision was originally incorporated on March 25, 1985 and
carried out amalgamations with wholly-owned subsidiary companies
on January 1, 2000, January 1, 2002 and
January 1, 2004 pursuant to Articles of Amalgamation and
the
Business Corporations Act
(Alberta). On
November 7, 2005, Precision became a wholly-owned
subsidiary of PDLP. As part of the Plan of Arrangement,
Precision amalgamated with a number of its wholly-owned
subsidiaries: 1195309 Alberta ULC on November 23, 2005;
Live Well Service Ltd. (
Live Well Service
) on
January 1, 2006; and Terra Water Group Ltd.
(
Terra
) on January 1, 2007. In each
amalgamation, the name of the amalgamated company remained
Precision Drilling Corporation. The head and
principal offices of Precision are located at 4200,
150 6th Avenue S.W., Calgary, Alberta, T2P 3Y7,
telephone
(403) 716-4500,
facsimile
(403) 264-0251,
email
info@precisiondrilling.com
and website
www.precisiondrilling.com.
Administration
Agreement
The Trust and Precision are parties to an administration
agreement entered into on November 7, 2005 (the
Administration Agreement
). Under the terms of
the Administration Agreement, Precision provides administrative
and support services to the Trust including, without limitation,
those necessary to:
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ensure compliance by the Trust with continuous disclosure
obligations under applicable securities legislation;
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provide investor relations services;
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provide or cause to be provided to holders of Trust Units
(
Trust Unitholders
) all information to which
such Trust Unitholders are entitled under the Declaration
of Trust, including relevant information with respect to
financial reporting and income taxes;
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call and hold meetings of Trust Unitholders and distribute
required materials, including notices of meetings and
information circulars, in respect of all such meetings;
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assist the Board of Trustees (as defined herein) in calculating
distributions to Trust Unitholders;
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ensure compliance with the Trusts limitations on
non-resident ownership, if applicable; and
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generally provide all other services as may be necessary or as
may be requested by the Board of Trustees.
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INTERCORPORATE
RELATIONSHIPS
The following table sets forth the names of the material
subsidiaries (which includes limited partnerships) of the Trust,
the percent of shares (or interest) owned by the Trust and the
jurisdiction of incorporation, continuance or formation of each
such subsidiary as of December 31, 2008:
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Jurisdiction of Incorporation,
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Name of Subsidiary or Partnership
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Percent or Interest Owned
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Continuance or Formation
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Precision Drilling Limited Partnership
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99.9
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%
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Manitoba
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1194312 Alberta Ltd.
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100
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%
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Alberta
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Precision Drilling Corporation
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99.9
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%
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Alberta
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Precision Drilling Oilfield Services, Inc.
(
PDOSI
)
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99.9
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%
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Delaware
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Precision Drilling Oilfield Services Corporation
(
PDOS
)
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99.9
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%
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Texas
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Precision Limited Partnership (
PLP
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99.9
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%
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Alberta
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Precision Drilling Canada Limited Partnership
(
PDCLP
)(1)
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99.9
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%
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Alberta
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Grey Wolf Holdings
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99.9
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%
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Texas
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Grey Wolf Drilling Corporation LP
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99.9
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%
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Texas
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NOTE:
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(1)
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PDCLP was formed pursuant to the
Partnership Act
(Alberta) on January 2,
2009.
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5
Organizational
Structure of the Trust
The following diagram sets forth the organizational structure of
the Trust and its material subsidiaries as of the date hereof:
NOTES:
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(1)
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As of December 31, 2008, there
were 125,606,341 PDLP A Units outstanding.
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(2)
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As of December 31, 2008, there
were 151,583 Exchangeable Units outstanding.
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(3)
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The interest of 1194312 Alberta
Ltd. in PDLP is 0.001%.
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(4)
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Inter-company note owing by PDLP to
the Trust.
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(5)
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The Trust holds PDLP A Units and
PDLP holds an interest bearing promissory note owing by
Precision (the
Promissory Note
). Cash
generated from the operations of Precision flow to PDLP in
settlement of principal and interest owing on such Promissory
Note. The cash payable to PDLP is then available to be paid to
the limited partners of PDLP which includes holders of
Exchangeable Units and, indirectly, the holders of
Trust Units.
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GENERAL
DEVELOPMENT OF THE BUSINESS
Recent
Developments
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As at March 27, 2009, within the Secured Facility (as
defined herein), US$69 million (US$64 million on
February 4, 2009 and US$5 million on March 26,
2009) has been reallocated from the Term Loan A Facility (as
defined herein) to the Term Loan B Facility (as defined herein).
See Description of the Business of Precision
Material Debt.
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As at March 20, 2009, holders of convertible notes of Grey
Wolf representing US$262.3 million notified the Trust that
they would be accepting the purchase offer made pursuant to the
terms thereof and PDOS purchased such notes at the principal
balance plus accrued interest of US$2.3 million on
March 24, 2009. See General Development of the
Business Three Year History Acquisition
of Grey Wolf.
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On February 19, 2009, the Trust announced that Precision
had postponed its previously announced offering of
US$250 million principal amount of senior notes due 2015
(the
Senior Note Offering
) due to
unfavourable market conditions. See Risk
Factors Proposed Financing Arrangements.
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On February 18, 2009, the Trust closed an offering of
46 million Trust Units at a price of US$3.75 per
Trust Unit for aggregate gross proceeds of
US$172.5 million (the
Trust Unit
Offering
). As a result of the Trust Unit
Offering, the funds available under the Unsecured Facility were
reduced to US$235 million.
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On February 9, 2009, the Trust announced the suspension of
cash distributions for an indefinite period for distributions to
be paid after February 17, 2009. The suspension was taken
in response to lower financial operating performance at the
start of 2009 and will allow the Trust to increase debt
repayment capability and balance sheet strength. Accordingly,
Precision will not pay a distribution in March 2009, or for an
indefinite period thereafter, to Trust Unitholders or
holders of Exchangeable Units (
Exchangeable
Unitholders
and, together with Trust Unitholders,
the
Unitholders
). See Risk
Factors Distributions on Trust Units have been
suspended and may not be reinstated.
|
|
|
The Trusts business depends on the level of spending by
oil and natural gas companies for exploration and development
activities. Therefore, a sustained increase or decrease in the
price of oil or natural gas, which could have a material impact
on exploration and development activities, could also materially
affect the Trusts financial position, results of
operations and cash flows. The recent decline in commodity
prices has primarily been driven by the deterioration of the
global economic environment, including, without limitation,
volatility in the capital markets and lack of liquidity in the
credit markets. Recent commodity price declines for oil and
natural gas are expected to reduce funding for drilling and well
servicing activity in North America which will likely result in
reduced demand for oilfield services in the near term. Subject
to the severity of the current winter heating season and demand
levels for natural gas in North America, the current economic
slowdown could moderate energy consumption growth and may result
in lower producer spending for marginal oil and natural gas
programs, which may adversely affect the demand for
Precisions services. See Risk Factors
The operations of Precision are dependent on the price of oil
and natural gas.
|
|
|
Precision has experienced a reduction in the demand for its
services in late 2008 and early 2009 in correlation with the
significant downward trend in oil and natural gas prices over
the same period. The following table summarizes the active
land-based drilling rigs of Precision and the drilling industry
as a whole in Canada and the United States as at the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
As at September 30, 2008
|
|
As at December 31, 2008
|
|
|
Industry
(1)
|
|
Precision
(2)(3)
|
|
Industry
(1)
|
|
Precision
(3)
|
|
Canada
|
|
416
|
|
123
|
|
277
|
|
61
|
|
|
|
|
|
|
|
|
|
United States
|
|
1,995
|
|
138
|
|
1,721
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2,411
|
|
261
|
|
1,998
|
|
176
|
NOTES:
|
|
|
(1)
|
|
Source: Canada Canadian
Association of Oilwell Drilling Contractors
(
caodc
);
United States Baker Hughes, Inc.
|
|
(2)
|
|
On a
pro forma
basis after
giving effect to the Acquisition.
|
|
(3)
|
|
Does not include Precisions
two active drilling rigs in Mexico.
|
Management of the Trust believes that Precision will be able to
meet its debt obligations under the Credit Facilities
notwithstanding the current and anticipated near-term decline in
drilling and well servicing activity. See Description of
the Business of Precision Material Debt and
Risk Factors Deteriorating conditions in the
credit markets may adversely affect business.
|
|
|
On January 2, 2009, Precision transferred substantially all
of the assets of its Precision Drilling, Rostel Industries
(
Rostel Industries
) and Columbia Oilfield
Supply (
Columbia
) divisions to PDCLP in
consideration for a 99% limited partnership interest in PDCLP.
PDCLP carries on Precisions Contract Drilling Services
business. See Description of the Business of
Precision Contract Drilling Services.
|
Three
Year History
The Trust is an unincorporated open-ended investment trust
established under the laws of the Province of Alberta pursuant
to the Declaration of Trust. The beneficiaries of the Trust are
the Unitholders. The Trusts principal
7
undertaking is to issue Trust Units and to indirectly carry
on the business of the provision of land-based contract
drilling, well servicing and ancillary oilfield services to oil
and gas exploration and production companies through its direct
and indirect subsidiaries. This business is carried out in two
segments, Contract Drilling Services and Completion and
Production Services.
As of December 31, 2008, Management believes that the Trust
is the second largest land driller in North America, based
on the number of rigs in its drilling rig fleet. The Trust
presently operates in most conventional and unconventional oil
and natural gas basins in Canada and the United States and has
an emerging presence in Mexico. Management believes that the
Trusts high performance drilling rigs, supply chain
management systems and technology, together with its Canadian
and United States customer base, deep drilling capabilities and
positions in Canadian and United States sedimentary basins,
provides it with a substantial foundation for expansion, both in
North America and internationally. After giving effect to the
Acquisition, the Trust has a high quality fleet consisting of
374 drilling rigs, 229 service rigs and 29 snubbing units. In
addition, Precision presently offers its customers a
complementary suite of wellsite products and services including
camp and catering, wastewater treatment and rental equipment.
Most of these complementary operations and the service rig
business are located in Canada.
2008
On December 23, 2008, the Trust completed the indirect
acquisition of Grey Wolf, Inc. (
Grey Wolf
)
(the
Acquisition
) pursuant to an agreement
and plan of merger dated August 24, 2008, as amended
December 2, 2008 (the
Merger Agreement
)
with Grey Wolf, Precision and Precision Lobos Corporation
(
Lobos
a subsidiary of the Trust). Pursuant
to the Acquisition, Grey Wolf was merged with and into Lobos
pursuant to the Texas Business Corporations Act and the Texas
Corporation Law. Accordingly, the separate legal existence of
Grey Wolf has ceased and Lobos, which was subsequently renamed
Precision Drilling Oilfield Services Corporation,
became the surviving corporation. Upon the closing of the
Acquisition, Messrs. Frank M. Brown, William T. Donovan and
Trevor M. Turbidy, each of whom was a director of Grey Wolf,
were appointed to the Board of Directors of Precision.
Under the terms of the Merger Agreement, shareholders of Grey
Wolf elected to receive either cash or Trust Units in
exchange for their shares of Grey Wolf common stock. Each share
of Grey Wolf common stock was convertible, at the option of the
holder, into US$9.02 in cash or 0.4225 Trust Units, subject
to proration. The total consideration paid by the Trust to
shareholders of Grey Wolf in connection with the Acquisition was
approximately US$897.2 million and 34.4 million
Trust Units. Costs of approximately US$219.2 million
(after accounting for applicable discounts), including a
US$25 million
break-up
fee
payable by Grey Wolf to a third party, debt issuance costs,
professional services fees, severance costs and other costs were
incurred in respect of the Acquisition.
At closing of the Acquisition, Grey Wolf had outstanding
US$262.3 million aggregate principal amount of convertible
notes. Pursuant to the terms of the convertible notes, during
the first quarter of 2009, PDOS, as successor to Grey Wolf, made
to the holders thereof a change of control offer to repurchase
any or all of the outstanding convertible notes at 100% of the
principal amount thereof, plus accrued but unpaid interest to
the date of the repurchase, payable in cash. As at
March 20, 2009 the holders of such notes representing
US$262.3 million have notified the Trust that they will be
accepting the purchase offer made pursuant to the terms thereof.
PDOS purchased such notes at the principal balance plus accrued
interest of approximately US$2.3 million on March 24,
2009.
The Acquisition is described in greater detail in the business
acquisition report of the Trust dated January 21, 2009, in
respect of the Acquisition (the
BAR
) and the
material change report of the Trust dated December 23,
2008, in respect of the Acquisition (the
Grey Wolf
MCR
), both the BAR and the Grey Wolf MCR having been
filed on SEDAR at
www.sedar.com
and EDGAR at
www.sec.gov.
The BAR also contains audited annual
financial statements of Grey Wolf for the year ended
December 31, 2007, unaudited comparative interim financial
statements of Grey Wolf for the nine months ended
September 30, 2008 and unaudited pro forma consolidated
financial statements of the Trust for the year ended
December 31, 2007 and nine months ended September 30,
2008 that give effect to the Acquisition.
On July 31, 2008, Precision also closed the acquisition of
six service rigs from a private well servicing company for
approximately $16 million. The assets are positioned in
south-eastern Saskatchewan and southwestern
8
Manitoba and strengthen Precisions capabilities in these
oil regions. Subsequent to this acquisition, Precision moved an
additional three service rigs into these regions.
Precisions Super
Series
tm
drilling rig build program in 2008 was comprised of 10 Super
Single
tm
rigs and nine Super Triple rigs. Eighteen of these rigs are
under signed term customer contracts. Management expects the
remaining capital cost of the rig build program for 2009 to be
approximately $167 million. Of the 19 rigs, three were
completed in 2008 and management expects the remaining
contracted rigs to be delivered before the fourth quarter of
2009.
On September 1, 2008, Precision transferred substantially
all of the assets of its Precision Well Servicing, Live Well
Service, Precision Rentals and LRG Catering
(
LRG
) divisions to Terra Water Systems
Limited Partnership, which subsequently changed its name to
Precision Limited Partnership. PLP carries on
Precisions Completion and Production Services business.
See Description of the Business of Precision
Completion and Production Services.
On August 31, 2008, certain non-compete obligations from a
2005 business divestiture that restricted the Trusts
growth outside of North America and in certain business lines
expired. Through its international subsidiaries, the Trust can
now pursue global contract drilling opportunities without
restriction.
In addition to the Acquisition, Precisions organic growth
in the United States accelerated during 2008 with 18 rigs moved
from Canada.
Pursuant to amendments to the
Income Tax Act
(Canada)
(the
Tax Act
) made effective on
October 31, 2006 (the
SIFT Rules
, and
which, for greater certainty, include all proposed amendments to
said rules publicly announced by or on behalf of the Minister of
Finance (Canada) prior to the date hereof on the assumption that
such proposed amendments will be executed substantially in the
form proposed), a trust that is resident in Canada for purposes
of the Tax Act, that holds one or more non-portfolio
properties, and the units of which are listed on a stock
exchange or other public market (a
SIFT
trust
) will be subject to tax at the prevailing
federal corporate income tax rate, plus an additional provincial
tax factor, on certain of its income paid, or made payable, to
unitholders, and such distributions will be treated as eligible
dividends paid by a taxable Canadian corporation. In general
terms, a trust that existed on October 31, 2006 and to
which the SIFT trust legislation otherwise would apply should
not be a SIFT trust until the earlier of January 1, 2011 or
the first day after December 15, 2006 that the trust
exceeds normal growth determined by reference to
guidelines first issued on December 15, 2006 by the
Minister of Finance (Canada) and amended effective
December 31, 2008 (the
Guidelines
).
Provided that the Trust does not issue new equity in an amount
greater than the safe-harbour determined by the
market capitalization of the Trust on October 31, 2006, the
Trust should not be considered to exceed normal
growth and should not be a SIFT trust until
January 1, 2011. However, no assurances can be provided
that the Trust will not become a SIFT trust prior to
January 1, 2011. The SIFT Rules (including the Guidelines)
may adversely effect the marketablility of the Trust Units
and the ability of the Trust to undertake financings and
acquisitions, and at such time as the new rules apply to the
Trust, the distributions on Trust Units may be materially
reduced.
On March 12, 2009 specific proposals to amend the Tax Act
that are intended to facilitate the conversion of mutual fund
trusts (as defined in the Tax Act) into corporations (the
SIFT Conversion Rules
) on a, generally,
tax-deferred basis were enacted. These transition rules are only
available to trusts that convert to corporations prior to
January 1, 2013.
The Trust, with input from external legal and financial
advisors, is carefully assessing the impact of the SIFT Rules on
the business and financial outlook of the Trust and its broader
effect on the income trust sector as a whole. The Board of
Trustees continues to examine whether changes in the current
legal structure are appropriate and in the best interests of
Unitholders and, if so, when such changes should be implemented.
See Risk Factors A change in the structure of
the Trust may have an adverse effect on the Unitholders.
2007
In 2007, Precision increased capital spending on additions to
property, plant and equipment to grow and upgrade its high
performance drilling rig fleet in Canada and the United States,
significantly expanded its contract drilling operations in the
United States and mobilized one drilling rig for a project in
Chile.
9
Precision invested $141 million in expansion capital for
the purchase of property, plant and equipment and
$46 million in upgrade capital in 2007. In 2007, Precision
commissioned 16 new drilling rigs and two new service rigs and
decommissioned 11 drilling and 16 service rigs.
In 2007, Precision deployed an additional seven Super
Single
tm
rigs and four triple diesel-electric rigs for work contracted in
Texas, Colorado, Oklahoma and Wyoming. In early 2008, Precision
also mobilized one additional Super
Single
tm
rig to Colorado and one additional triple diesel-electric rig to
New York, bringing its fleet of high performance drilling rigs
operating in the United States to 14, and entered into contracts
for the delivery of three additional new Super
Single
tm
rigs to Colorado in 2009.
On January 1, 2007, Precision amalgamated with Terra.
2006
During 2006, Precision focused capital spending on additions to
property, plant and equipment to grow and upgrade its rig fleet
and initiated contract drilling operations in the United States.
On August 17, 2006, Precision acquired Terra, a privately
owned wastewater treatment business operating at remote worksite
locations, for an aggregate purchase price of $16 million.
Terra had 41 treatment units at the time of the acquisition and
closed the year with 51 treatment units. The service provided by
Terra complements those provided by the LRG Catering and
Precision Rentals divisions and expanded the diversity of
services Precision offers customers. Also on August 17,
2006, Terra transferred substantially all of its net assets to
Terra Water Systems Limited Partnership.
Precision invested $171 million in expansion capital for
the purchase of property, plant and equipment and
$92 million in productive capacity maintenance in 2006.
When combined with the acquisition of Terra, Precision increased
its asset base by $279 million in 2006. A total of 13 new
drilling rigs were commissioned in 2006 and two were
decommissioned.
The expansion of Precisions Contract Drilling Services
segment in the United States began in June 2006 with the
deployment of one Super
Single
tm
drilling rig to Texas. Precision deployed a second drilling rig
to the United States from Canada in early 2007 which commenced
drilling in Colorado.
On January 1, 2006, Precision amalgamated with Live Well
Service.
DESCRIPTION
OF THE BUSINESS OF PRECISION
General
Precisions continuing operations are carried out in two
segments: Contract Drilling Services and Completion and
Production Services. In Canada, the Contract Drilling Services
segment included land drilling services, camp and catering
services, procurement and distribution of oilfield supplies and
the manufacture and refurbishment of drilling and service rig
equipment, and the Completion and Production Services segment
included service rig well completion and workover services,
snubbing services, wastewater treatment services and the rental
of oilfield surface equipment, tubulars and well control
equipment and wellsite accommodations. In the United States, the
Contract Drilling Services segment includes land drilling
services and trucking services for the movement of Precision
rigs. Internationally, the Contract Drilling Services segment
includes land drilling services. As at December 31, 2008,
Precision had over 7,200 employees.
10
Precisions revenue by business segment from continuing
operations is illustrated in the following table:
(in
thousands of Canadian dollars)
|
|
|
|
|
|
|
Years ended December
31,
|
|
2008
(1)
|
|
2007
|
|
2006
|
Contract Drilling Services
|
|
$809,317
|
|
$694,340
|
|
$1,009,821
|
Completion and Production Services
|
|
308,624
|
|
327,471
|
|
441,017
|
Inter-segment Eliminations
|
|
(16,050)
|
|
(12,610)
|
|
(13,254)
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$1,101,891
|
|
$1,009,201
|
|
$1,437,584
|
NOTE:
|
|
|
(1)
|
|
Includes PDOS revenue for the eight
day period from December 23, 2008 through December 31,
2008.
|
In North America, the economics of oilfield services align with
global and regional fundamentals. Important regional drivers
include the underlying hydrocarbon
make-up
of
the sedimentary basins where Precisions customers explore
for and develop natural resources and the existence of an
established, competitive and efficient oilfield service
infrastructure. Increasingly, natural gas production is driving
economics in North America as approximately 60% of new well
completions in Canada and 80% of new well completions in the
United States in 2008 targeted natural gas.
The hydrocarbon structures in North America are diverse with
conventional and unconventional sources of oil and natural gas
reservoirs existing at a variety of depths. In Canada, such
depths are comparatively shallow by global standards.
Conventional sources are complemented by more costly and
challenging unconventional reservoirs associated with oil sands,
heavy oil and natural gas in coal, in shale and in deeper, low
permeability formations. Unconventional reservoirs typically
require more complex drilling and completion technologies,
including high performance rigs and directional and horizontal
drilling techniques, to effectively develop. As between Canada
and the United States, approximately 70% of the proven natural
gas reserves are situated in the United States with the
remaining 30% in Canada. Today, Canada is the worlds
seventh largest producer of oil and third largest producer of
natural gas. Approximately half of Canadas oil and gas
production is exported to the United States. In Canada, there
are three major areas that are considered unconventional
resource plays: the Montney and Horn River shale gas plays in
northeastern British Columbia; the Bakken shale play in southern
Saskatchewan; and the heavy oil and oil sands in northeastern
Alberta. In the United States there are several unconventional
resource plays, two of which are believed to present the
greatest growth potential for Precision: the Haynesville play in
Texas and Louisiana and the Marcellus play in New York and
Pennsylvania. Precision has a growing presence in those and the
other major unconventional plays in Canada and the United States.
The ability to move heavy equipment in oil and natural gas
fields in Canada and the northern United States is dependent on
weather conditions. As warm weather returns in the spring, the
thawing of ground frost typically renders secondary roads
incapable of supporting the weight of heavy equipment until such
time as the roads have thoroughly dried. The duration of spring
breakup has a direct impact on Precisions activity levels.
In addition, many exploration and production areas in northern
Canada are accessible only in winter when the ground is frozen
enough to support the transportation of heavy equipment. The
timing of winter
freeze-up
and spring breakup affects Precisions ability to move
equipment in and out of these areas. Wet weather can further
defer commencement of drilling or servicing operations on any
given day or well location.
Providing oilfield services incorporates three main elements:
people, technology and equipment. Attracting, training and
retaining qualified employees is a challenge for oilfield
services providers. As exploration and production activities are
taking place in an ever increasing variety of surface and
subsurface conditions, developing technology and building
equipment that can withstand increasing physical challenges and
operate more efficiently is required to maintain and improve the
economics of crude oil and natural gas production. The primary
economic risk assumed by oilfield service providers relates to
the volatility in activity levels which affect utilization
rates, investment in people, technology and equipment and cost
controls.
11
The economics of oilfield services providers are largely driven
by current and expected prices of crude oil and natural gas
which are determined by supply and demand fundamentals on a
global and regional level. Crude oil and natural gas prices have
historically been volatile. The upward trend in commodity prices
since 2002 through 2008 peaked for natural gas in December 2005
and for oil in July 2008. The price for gas has fluctuated from
that time and is currently at lower levels when compared to
pricing trends over the past five years.
Contract
Drilling Services
In Canada, as at December 31, 2008, the Contract Drilling
Services segment comprised:
|
|
|
Precision Drilling 220 land drilling rigs in
Canada;
|
|
|
LRG 97 drilling and base camps with food catering in
Canada and three drilling camps in the United States;
|
|
|
Rostel Industries engineering, machining,
fabrication, component manufacturing and repair services for
drilling and service rigs primarily for Precisions
operations; and
|
|
|
Columbia centralized procurement, inventory and
distribution of consumable supplies primarily for
Precisions operations.
|
In the United States, as at December 31, 2008, the Contract
Drilling Services segment comprised:
|
|
|
PDOS 121 land drilling rigs in the United
States; and
|
|
|
PDOSI 30 land drilling rigs in the United
States including one scheduled to be mobilized from Canada.
|
Internationally, as at December 31, 2008, the Contract
Drilling Services segment comprised:
|
|
|
A Precision affiliate two land drilling rigs in
Mexico; and
|
|
|
A Precision affiliate one land drilling rig in Chile.
|
Precision
Drilling
The Precision Drilling division owned and operated the largest
fleet of land drilling rigs in Canada, with 220 actively
marketed drilling rigs located throughout western Canada,
accounting for approximately 25% of the industrys fleet of
884 drilling rigs in Canada at December 31, 2008.
In the United States at December 31, 2008, Precision had a
fleet of 151 land drilling rigs representing approximately
7% of the estimated total marketed land drilling rigs, primarily
operating in the following drilling markets: Ark-La-Tex
(northeast Texas, northern Louisiana and southern Arkansas);
United States Gulf Coast in southern Louisiana and the upper
Texas Gulf Coast; Mississippi/Alabama; South Texas; Rocky
Mountain (Wyoming, Colorado, northwest Utah and northern New
Mexico); Mid-Continent (west Texas, southwest New Mexico, the
Barnett Shale area in north Texas and the mid-continent region);
and Appalachia (New York and Pennsylvania). The 151 land
drilling rig fleet in the Unites States comprises the 30 rigs
operated by PDOSI and the 121 rigs acquired in connection with
the Acquisition.
Internationally, as at December 31, 2008, Precision had two
land drilling rigs acquired in connection with the Acquisition
operating in Mexico and one Precision land drilling rig racked
in Chile.
In 2008, Precision had approximately 450 customers including
approximately 250 in Canada and approximately 200 in the United
States, which included independent producers and major oil and
gas companies. In fiscal 2008, only one customer accounted for
more than 10% of Precisions revenue.
Precision primarily markets its drilling rigs on a regional
basis through employee sales personnel and contracts for
drilling oil and natural gas wells are obtained either through
competitive bidding or as a result of relationships and
negotiations with customers. Contract terms offered by Precision
are generally dependent on the complexity and risk of
operations,
on-site
drilling conditions, type of equipment used and the anticipated
duration of the work to be performed. Drilling contracts can be
for a single or multiple wells and may vary in duration from a
day or two on shallow single well applications to multiple year,
multiple well drilling programs. Term drilling
12
contracts typically contain early termination penalties while
non-term contracts are typically subject to termination by the
customer on short notice or with little or no penalty.
Oil and natural gas well drilling contracts are carried out on a
daywork, metreage or turnkey basis. On a daywork basis,
Precision contracts to provide a drilling rig with required
personnel where the customer supervises the drilling of the well
and Precision charges the customer a fixed rate per day
regardless of the number of days needed to drill the well.
Daywork contracts usually also provide for a reduced day rate
(or a lump sum amount) for mobilization of the rig to the well
location and for both
rig-up
and
rig-down of the rig. On a daywork basis, Precision ordinarily
bears no part of the costs arising from downhole risks (such as
time delays for various reasons, including a stuck or broken
drill string or blowouts). Under a metreage contract, Precision
would be paid a fixed charge for each metre drilled regardless
of the time required or the problems encountered in drilling the
well or, in some cases, may be carried out on a metreage basis
to a specified depth and on a daywork basis thereafter. Under a
turnkey contract, Precision contracts to drill a well to an
agreed depth, under specified conditions, for a fixed price.
Compared to daywork contracts, metreage and turnkey contracts
involve a higher degree of risk to Precision and, accordingly,
normally provide greater profit or loss potential. See
Risk Factors Unexpected cost overruns on
turnkey drilling jobs could adversely affect Precisions
revenues. From time to time, Precision may also enter into
informal, non-binding commitments with its customers to provide
drilling rigs for future periods at agreed upon rates plus fuel
and mobilization charges, if applicable, and escalation
provisions. In Canada, Precisions contracts have been
carried out almost exclusively on a daywork basis. In the United
States, the majority of Precisions contracts have been
carried out on a daywork basis, with only approximately 13%
performed on a turnkey basis, subsequent to the Acquisition.
Precisions newly built drilling rigs tend to have term
contracts in place prior to the rig being completed and in many
cases have a three to five year capital payout contract in place
at the time construction commences.
Precisions rig fleet can drill virtually all types of
on-shore conventional and unconventional oil and gas wells in
North America. These rigs are particularly adept in developing
unconventional resources such as oil sands, natural gas in coal
or in shale or tight gas reservoirs. The increase in
drilling-intensive unconventional resource plays creates
opportunities for technically innovative and operationally
efficient drillers like Precision.
Precisions drilling rigs have varying configurations and
capabilities which enable Precision to provide services in
virtually all areas of drilling activity in North America, with
rig capacities of up to 4,000 horsepower. Conventional rigs are
configured to handle either one, two or three joints of standard
length drill pipe at one time and are categorized as singles,
doubles or triples based on this capability. As well, Precision
has coiled tubing drilling rigs which utilize a single strand of
pipe coiled around a reel. As a coil tubing drilling rig drills,
the tubing is unwound and as the tubing is rewound onto the reel
the bit returns to surface.
To facilitate customer requirements Precision also utilizes top
drives in its drilling operations. A top drive is suspended in
the mast of the drilling rig and is powered by a hydraulic or
electric motor and is used to rotate the drill string in the
place of a traditional rotary table and kelly bushing. Top
drives enable the use of 30-metre or 15-metre lengths of drill
pipe on triple, double and Super
Single
tm
rigs, respectively, rather than traditional 10-metre lengths
thereby reducing the number of required connections in the drill
string and generally increasing drilling efficiency. At the end
of 2008, Precision had 15 mobile and 58 integrated top drives in
its operations in Canada and 37 mobile and 16 integrated top
drives in the United States.
Single, double and coiled tubing rigs are generally used in the
shallow drilling markets in Canada, while triple rigs, which
have greater hoisting capacity, are used in deeper exploration
and development drilling applications such as the foothills and
Rocky Mountain regions of Canada, and the United States, in
Louisiana and in west Texas.
Precisions rig fleet includes Super
Single
tm
rigs which are manufactured by Precision and are equipped with
top drive drilling systems, extended length drill pipe and an
automated pipe handling system and generally have slant drilling
capability. Precision believes the Super
Single
tm
rig category will continue to offer significant revenue growth.
In addition to conventional wells, Precisions Super
Single
tm
rigs have been adapted to meet a variety of operational needs in
Canada, the United States and internationally.
The Super
Single
tm
Light is a scaled-down version of the Super
Single
tm
without slant drilling capabilities. These rigs have been built
for drilling shallow wells. Using extended length drill pipe,
the design incorporates
13
proven technology and reliability in a light weight, easily
moved load configuration. The Super
Single
tm
Light competes with coiled tubing rigs and offers greater
drilling capability over a wider range of well configurations
than coiled tubing rigs.
Rigs built by Precision are designed for greater safety and
operating efficiency to deliver well cost savings to customers.
High performance drilling rigs combine high mobility,
automation, advanced control systems, minimal environmental
impact, and highly trained crews. Over the past 13 years
Precision has been developing the Super
Series
tm
drilling rigs and has built 40 Super
Single
tm
,
seven Super
Single
tm
Light and ten Super Triple rigs. Precision continually seeks to
upgrade and modify its rig fleet to maximize performance.
Precision works hard to remain abreast of and, in many cases,
lead advances in specialized drilling techniques and technology
in order to maximize rig efficiency and minimize environmental
impact. A total of 176 of Precisions drilling rigs are
diesel-electric powered, including 70 in Canada, 103 in the
United States and 3 internationally, with the remaining rigs
being mechanically powered. Diesel-electric powered rigs provide
more precise control of drilling components than mechanical rigs
and are well suited for horizontal and directional drilling.
Many of the diesel electric rigs are AC power driven which
provides more efficient power conversion and smaller component
size and weight. Many of Precisions mechanically powered
rigs are also capable of horizontal and directional drilling.
The following table lists the capacity of Precisions land
drilling rigs as at December 31, 2008:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Region
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|
|
Rig Capacity
|
|
|
Total
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|
|
|
< 500 Hp
|
|
|
500 - 999 Hp
|
|
|
1,000 - 1,499 Hp
|
|
|
1,500 - 1,999 Hp
|
|
|
>2,000 Hp
|
|
|
|
|
|
|
Electrical
|
|
|
Mechanical
|
|
|
Electrical
|
|
|
Mechanical
|
|
|
Electrical
|
|
|
Mechanical
|
|
|
Electrical
|
|
|
Mechanical
|
|
|
Electrical
|
|
|
Mechanical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
2
|
|
|
105
|
|
|
19
|
|
|
78
|
|
|
12
|
|
|
2
|
|
|
1
|
|
|
-
|
|
|
1
|
|
|
-
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
-
|
|
|
-
|
|
|
3
|
|
|
28
|
|
|
42
|
|
|
15
|
|
|
29
|
|
|
4
|
|
|
30
|
|
|
-
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
-
|
|
|
-
|
|
|
1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2
|
|
|
-
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fleet
|
|
|
2
|
|
|
105
|
|
|
23
|
|
|
106
|
|
|
54
|
|
|
17
|
|
|
30
|
|
|
4
|
|
|
33
|
|
|
-
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2008 there was a net reduction of 14 drilling rigs or
approximately 2% in the Canadian industry fleet. Approximately
338 drilling rigs were added to the number of marketed rigs in
the United States during 2008, an increase of approximately 15%
over 2007. In 2006, customer demand for drilling conventional
oil and natural gas wells, in combination with improving
commercialization of natural gas in coal and in shale, oil
sands, heavy oil and deeper natural gas formations had driven
demand for rigs to record levels but the slowdown in drilling
activity commencing in the second half of 2006 led to reduced
2007 and 2008 rig utilization rates. In 2008, Precisions
average land drilling rig utilization in Canada was
approximately 37% compared to 35% in 2007. In the
United States, Precisions average land drilling rig
utilization was approximately 95% in 2008 and 99% in 2007.
During 2008, Precision achieved a utilization rate of 37% for
its Canadian drilling rigs compared to the estimated average
industry utilization rate in Canada of 42% and a utilization
rate of 95% for its United States rigs compared to an estimated
industry utilization rate of 77%. Precision strives to balance
utilization and optimal profitability given competitive pricing
and seasonal reductions in drilling demand during the second and
third quarters.
The drilling industry requires specialized skill and knowledge
which, due to increased utilization levels over the past decade,
has been in short supply. A drilling rig crew is generally
comprised of a rig manager, driller, derrickman, motorman, two
floormen and possibly a leaseman. Rig crew configuration may
vary from three crews working
8-hour
shifts to two crews working
12-hour
shifts, with varying rotations for days off. The floorman and
leaseman positions are entry level, with the motorman,
derrickman and driller positions being more advanced. Each
position has certain prerequisite qualifications and training.
Well control,
H
2
S,
first aid, fall protection, work place hazardous materials and
various aspects of Precisions health, safety and
environment management systems are all key training components.
The provision of an experienced and competent crew is a
competitive strength, highly valued by Precisions
customers.
The shortage of labour in the oilfield service industry in
recent years continues with human resource issues expected to
remain a priority for the industry for the foreseeable future.
For Precision, emphasis is placed on retention of experienced
employees in derrickman, driller and rig manager positions. A
shortage occurs in high
14
activity periods when most of the rig fleet is working. The
service industry loses experienced employees to customers,
competitors, other oilfield businesses and to other industries
due to the cyclical nature of the work and the resulting
uncertainty of continuing employment. Precision focuses on the
retention of existing employees through initiatives that provide
a safe and productive work environment and opportunity for
advancement and, in some cases, added wage security through
programs such as the Designated Driller Program in Canada.
LRG
Catering
LRG provides food and accommodation to personnel working at the
wellsite, typically in remote locations in western Canada. LRG
has 97 drilling camps and base camps representing approximately
10% of the camp and catering business in western Canada and
three drilling camps in the United States. In Canada, LRG also
provides food service for all field workers on a location.
LRGs mobile camps include five or six units and can
accommodate 20 to 25 crew members and individual dormitory units
that can accommodate up to 45 workers. LRG also has the ability
to configure several of its camps and dormitories on a single
site to create a base camp for major projects which can house as
many as 200 workers and provide up to 1,000 meals per day. As
the oil and gas industry in western Canada moves to more remote
locations in search of new reserves there is increasing demand
for crews to stay near the worksite, often in camps, throughout
the duration of a project. LRG serves Precision and other
companies in the upstream oil and gas sector and periodically
secures opportunities to serve other industries that operate in
remote locations.
Rostel
Industries
Rostel Industries manufactures and refurbishes custom drilling
rig and service rig components. This uniquely positions
Precision with in-house rig manufacturing capability.
Approximately 80% of Rostel Industries activities support
Precision business units. The ability to repair or provide new
components for either drilling or service rigs in-house improves
the efficiency and reliability of Precisions fleets. In
addition to quality construction and repair services, Rostel
Industries sustains high plant utilization by providing
specialized services, including inspection and certification of
critical drilling components such as overhead equipment, well
control equipment and handling tools. Rostel Industries
expertise includes an in-house engineering group as well as an
equipment sales group that specializes in the distribution of
mud pumps and other imported products. Rostel Industries designs
and builds a significant portion of the components for
Precisions Super
Single
tm
drilling rigs and is developing products that can be applied to
new rigs and retro-fitted to improve the versatility of many of
Precisions existing rigs. Strategically, Rostel Industries
gives Precision the ability to control cost, quality and
production schedules that meet customer requirements.
Columbia
Oilfield Supply
Columbia is a general supply store that procures, packages and
distributes large volumes of consumable oilfield supplies for
the contract drilling and well servicing industry. Approximately
90% of Columbias activities support Precision operations
and it plays a key role in supply chain management for
Precision. Columbias key strengths, which contribute to
Precisions competitiveness, are in inventory management,
demand anticipation and distribution. Precision and its
customers also benefit from Columbias purchasing power,
standardized product selection, streamlined business processes
and coordinated distribution. Strategically, Columbia gives
Precision the ability to set its own service level priorities
and to standardize products used on its equipment. Through
Columbia, Precision has direct control over supply distribution
to field destinations which enhances its reliability in the
execution of its operations.
Completion
And Production Services
As at December 31, 2008, Precisions Completion and
Production Services segment comprised the following businesses
in Canada:
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Precision Well Servicing 229 well completion
and workover service rigs;
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|
|
Live Well Service 29 snubbing units;
|
15
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|
|
Precision Rentals approximately 12,000 rental
items including well control equipment, surface equipment,
specialty tubulars and wellsite accommodation units; and
|
|
|
Terra Water 76 wastewater treatment units.
|
Precision
Well Servicing
The Precision Well Servicing division is Canadas largest
service rig contractor, providing customers with a complete
range of oil and natural gas well services
completion, workover, abandonment, well maintenance, high
pressure and critical sour gas well work and re-entry
preparation. Precisions service rig fleet completes all
types of new wells and works over existing wells to optimize oil
and natural gas production. The configuration of the Precision
Well Servicing fleet as at December 31, 2008 is illustrated
in the following table:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Service Rig
|
|
|
|
|
|
Horsepower
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2006
|
|
Singles
|
|
|
Mobile single
|
|
|
|
150-400
|
|
|
|
|
2
|
|
|
|
|
5
|
|
|
|
|
12
|
|
|
|
|
|
Freestanding mobile
|
|
|
|
150-400
|
|
|
|
|
97
|
|
|
|
|
94
|
|
|
|
|
92
|
|
|
Doubles
|
|
|
Mobile
|
|
|
|
250-550
|
|
|
|
|
42
|
|
|
|
|
43
|
|
|
|
|
44
|
|
|
|
|
|
Freestanding mobile
|
|
|
|
200-550
|
|
|
|
|
23
|
|
|
|
|
9
|
|
|
|
|
9
|
|
|
|
|
|
Skid
|
|
|
|
300-860
|
|
|
|
|
48
|
|
|
|
|
55
|
|
|
|
|
65
|
|
|
Slants
|
|
|
Freestanding
|
|
|
|
250-400
|
|
|
|
|
17
|
|
|
|
|
17
|
|
|
|
|
15
|
|
|
Total Fleet
|
|
|
|
|
|
|
|
|
|
|
|
229
|
|
|
|
|
223
|
|
|
|
|
237
|
|
At the end of 2008, Precision Well Servicing had an industry
market share of approximately 21% with a rig fleet of 229 rigs
after the acquisition of six rigs, while the average registered
CAODC industry fleet was approximately 1,100 service rigs in
western Canada. Precision Well Servicing continued to upgrade
its fleet through initiatives that included freestanding
conversions and new transporters along with engines and
combination trailers. As at December 31, 2008, Precision
Well Servicing had 137 freestanding service rigs representing
60% of its service rig fleet. A freestanding rig is more
efficient to set up, minimizes surface disturbance and, as there
is no need for anchors, reduces the possibility of striking
underground utilities. However, a majority of the mobile double
rigs are not freestanding as the additional weight to convert
them would limit movement during restricted road use periods.
Skid double rigs are ideal for deeper natural gas wells which
require multi-zone completion or re-completion. This type of
work usually has the service rig working for a greater length of
time so the rig does not need to be moved as often. They also
include additional equipment such as circulating pumps, tanks,
blowout preventers and tools.
Well servicing requires its own unique skill set and
in addition to physical work, harsh weather and other
factors crews must deal with the potential dangers
and safety concerns of working with pressurized wellbores. A
typical service rig crew has four members: driller, derrickman
and two floormen, in addition to the rig manager. Servicing
wells often means the customer must coordinate activities of
several service companies, so work normally takes place in
daylight hours. Jobs are typically shorter in well servicing
than contract drilling so the ability of a service rig to move
quickly from one site to another is critical. Precision Well
Servicing typically charges its customers an hourly rate for its
services based on a number of considerations including market
demand in the region, the type of rig and complement of
equipment required.
The Precision Well Servicing rig fleet is deployed throughout
western Canada to improve efficiency and reduce travel time to
wellsites. Well servicing operations have two distinct
functions completions and workovers. Service rigs
are typically used during the completion phase of a well,
instead of larger, more expensive drilling rigs, in order to
reduce the cost of completing the well. The demand for well
completion services is related to the level of drilling activity
in a region whereas the demand for production or workover
services is based upon the total number of active wells, their
age and their producing characteristics. Consequently, demand
for completion services is generally more volatile than workover
services. Completions accounted for approximately 32% and
workovers accounted for 68% of total activity for Precision Well
Servicing in 2008, no change from 2007.
16
After a well is initially drilled, the customer contracts a
service provider such as Precision Well Servicing to supply the
crew and equipment to complete the well. Completion services
prepare a newly drilled well for initial production and may
involve cleaning out the wellbore and the installation of
production tubing, downhole equipment and wellheads. Service
rigs work jointly with other services to perforate the wellbore
to open the producing zones and stimulate the producing zones to
improve productivity. The well completion process may take one
day to many weeks to complete and Precision Well Servicing
provides a service rig to assist during most or all of this
process.
Workover services are generally provided according to
preventative maintenance schedules or on a call-out basis when a
well needs major repairs or modifications. This can involve
operations similar to those conducted during the initial
completion of a well. Workovers may also involve restoring or
enhancing production in an existing producing zone, changing to
a new producing zone, converting the well for use as an
injection well for enhanced recovery operations or plugging and
abandoning the well. Workover services also include major
subsurface repairs such as casing repair or replacement,
recovery of tubing and removal of foreign objects from the
wellbore, such as lost tools. Workover activities may require a
few days to several weeks to complete. During this time,
Precision Well Servicing may work alongside other oilfield
service providers on the well location while other services are
being directed by the customer.
A typical gas well in western Canada is likely to require one or
more workovers during its operating life compared with four or
five workovers for some conventional oil wells. Wells for some
heavy oil and bitumen production could require many workovers
during their lifecycle. Workovers take place over the producing
life of the well and involve a variety of activities to restore
or enhance production. Well maintenance services are often
required to ensure continuous and efficient operation of
producing wells. These services include routine mechanical
repairs such as repairing failed wellbore pumping equipment or
replacing damaged rods and tubing.
Live
Well Service
Live Well Service markets 22 portable hydraulic rig-assist
snubbing units, six self-contained units and one rack and pinion
unit in western Canada for a market share of approximately 24%.
Snubbing units are equipped with specialized pressure control
devices which allow tubing to be pushed (snubbed) into and
pulled out of a wellbore while a well is under pressure and
production has been suspended.
Traditional well servicing operations require the pressure in a
well to be neutralized prior to performing such operations so
they can be conducted safely. Some reservoirs can be damaged if
a well is neutralized prior to workover operations, as the
fluids used in the process may cause the flow characteristics of
the reservoir to be impaired. Consequently, snubbing units have
been developed to perform certain workover and completion
activities without neutralizing the well.
Live Well Service has three types of snubbing units: rig-assist,
self-contained and rack and pinion. Rig-assist units work with a
service rig to complete the snubbing activity for a well.
Self-contained and rack and pinion units do not require a
service rig on site and are capable of snubbing and many other
services traditionally completed by a service rig. Snubbing is
primarily used to enhance natural gas production on gas wells.
Precision
Rentals
Precision Rentals is a provider of oilfield rental equipment
with four operating centres and 12 stocking points located
throughout western Canada as well as a central technical support
centre in Edmonton, Alberta. Most exploration and production
companies do not own the specialty equipment used in oil and gas
operations and rely on suppliers such as Precision Rentals for
access to large inventories of drilling, completion and
production equipment.
Precision Rentals inventory of equipment is marketed
through three product categories: surface equipment; tubulars
and well control equipment; and wellsite accommodation units.
Surface equipment includes 2,300 drilling and production tanks
and other equipment primarily associated with fluid handling.
Tubular equipment includes approximately 9,000 joints of
specialty-sized drill pipe and collars. Well-control equipment
includes handling tools and equipment such as blowout preventers
and diverter systems. Wellsite accommodations comprise 250 fully
equipped units that provide office and lodging for oil and gas
field personnel.
17
Precision Rentals also supplies the patented Vapour Tight Oil
Battery which allows for single well production of oil with
hydrogen sulphide
(H
2
S)
content through the use of a 500 barrel NACE (National
Association of Corrosion Engineers) certified vessel with gas
metering and flaring capabilities.
Terra
Water Systems
Terras principal role is the provision of portable on-site
wastewater handling, treatment, and disposal expertise within a
remote worksite environment. Terras equipment focuses on
reducing environmental impacts from wastewater generated on-site.
The wastewater treatment units are designed and manufactured
in-house and are built to industry leading standards. Terra
provides regular servicing for all of its equipment and tests
treated effluent samples to ensure the units are producing high
quality treated effluent with no detectible odours. Terra has 76
portable treatment units comprising approximately 9% of the
industry within the remote work site market in western Canada.
Terras fleet of 52 large units can accommodate camp sites
of up to 50 people and several units can be combined to
serve large-scale base camp configurations. To meet specific
requests from customers, Terra has also developed a fleet of 24
smaller models which are better suited to lower volume
requirements of remote locations that accommodate less than
15 people.
Material
Debt
In connection with the Acquisition, Precision entered into a new
US$1.2 billion senior secured credit facility with a
syndicate of lenders consisting of the Royal Bank of Canada, RBC
Capital Markets, Deutsche Bank AG Cayman Islands Branch,
Deutsche Bank Securities Inc., HSBC Bank Canada, HSBC Bank USA,
National Association and the Toronto-Dominion Bank (the
Commitment Banks
), and certain other lenders
(the
Secured Facility
) that is guaranteed by
the Trust and is comprised of US$800 million of term loans
and a US$400 million revolving credit facility and also
entered into a US$400 million unsecured credit facility
(sometimes referred to as a bridge loan) with certain of the
Commitment Banks (the
Unsecured Facility
and,
together with the Secured Facility, the
Credit
Facilities
) that is also guaranteed by the Trust. The
Credit Facilities funded the cash portion of the Acquisition and
refinanced the pre-closing Precision bank debt and certain
pre-closing debt obligations of Grey Wolf. On February 18,
2009, the Trust received gross proceeds of US$172.5 million
from the Trust Unit Offering. As a result of the
Trust Unit Offering, the funds available under the
Unsecured Facility were reduced to US$235 million. The
Unsecured Facility was used in the repurchase of
US$262.3 million principal amount of Grey Wolf convertible
notes tendered for repurchase by holders under a change of
control offer made by PDOS in the first quarter of 2009. Taking
into account upfront issue discount and applicable fees, the
all-in cost of capital borrowing under the Credit Facilities at
December 31, 2008 was approximately 13%. See General
Development of the Business Recent
Developments and Three Year History
2008.
In order to complete a successful syndication of the Secured
Facility, the Commitment Banks are entitled, prior to
March 23, 2009 (extended at Precisions option to
May 22, 2009) in consultation with Precision, to
change certain of the terms of the Credit Facilities including,
without limitation, to implement additional increases in
interest rates, original issue discounts
and/or
upfront fees, reallocate up to US$250 million between the
Term Loan A Facility (as defined herein) and the Term Loan B
Facility (as defined herein) (US$69 million (US$64 million
on February 4, 2009 and US$5 million on March 26, 2009) of which
has been reallocated from the Term Loan A Facility to the Term
Loan B Facility as at March 27, 2009), reallocate up to
US$150 million between the Secured Facility and the
Unsecured Facility and amend certain covenants, financial ratio
tests and other provisions for portions of the Secured Facility.
The following is a summary of the material terms of the Secured
Facility and the Unsecured Facility. Potential investors may
refer to copies of the credit agreements governing such
facilities, which are available on SEDAR at
www.sedar.com
and EDGAR at
www.sec.gov.
Secured
Facility
Precision (as borrower) and the Trust (as a guarantor) have
entered into a credit agreement dated December 23, 2008, as
amended, governing the Secured Facility with the lenders parties
thereto, Royal Bank
18
of Canada, as administrative agent, Deutsche Bank Securities
Inc., as syndication agent, and HSBC Bank Canada and The
Toronto-Dominion Bank, as co-documentation agents.
The Secured Facility provides senior secured financing of up to
approximately US$1.2 billion, consisting of (after giving
effect to the reallocation between the Term Loan A Facility and
the Term Loan B Facility):
|
|
|
a term loan A facility in an aggregate principal amount of
US$331 million (the
Term Loan A
Facility
);
|
|
|
a term loan B facility in an aggregate principal amount of
US$469 million (the
Term Loan B
Facility
); and
|
|
|
a revolving credit facility in the amount of US$400 million
(the
Revolving Credit Facility
).
|
The terms of the Secured Facility include:
|
|
|
a blended effective cash interest rate, as at February 4,
2009, of approximately 8% per annum, before original issue
discounts and upfront fees;
|
|
|
covenants requiring the Trust and Precision to comply with
certain financial ratios;
|
|
|
limits on distributions based on 20% of the Trusts
operating cash flow before changes in working capital, provided
that 50% of operating cash flow generated in excess of certain
base case projections will also be permitted to be paid as
distributions, subject to an overall cap of 30% of aggregate
operating cash flow before changes in working capital; and
|
|
|
covenants that will limit the Trusts capital expenditures
above an agreed base-case, allowing for certain exceptions.
|
Up to US$200 million of the Revolving Credit Facility is
available for letters of credit in United States dollars
and/or
Canadian dollars.
The interest rate on loans under the Secured Facility that are
denominated in United States dollars is, at the option of
Precision, either a margin over an adjusted United States base
rate or a margin over a Eurodollar rate. The interest rate on
loans denominated in Canadian dollars is, at the option of
Precision, a margin over the Canadian prime rate or a margin
over the bankers acceptance rate. Certain of the margins
on the Revolving Credit Facility are subject to reduction based
upon a leverage test.
The Revolving Credit Facility provides for: a commitment fee of
0.60% (subject to reduction based on a leverage test) on the
unused portion; a fee on the outstanding amount of the letters
of credit denominated in United States dollars equal to the
margin applicable to the Eurodollar rate; and a fee on the
outstanding amount of the letters of credit denominated in
Canadian dollars equal to the margin applicable to the
bankers acceptance rate (subject to reduction for
non-financial letters of credit).
The Secured Facility requires the following amounts to be used
as prepayments of the term loans: (i) 100% of the net cash
proceeds of any incurrence of debt by the Trust, Precision or
their subsidiaries (subject to certain exceptions);
(ii) 100% of the net cash proceeds of certain sales or
other dispositions of any assets belonging to the Trust,
Precision or their subsidiaries, except to the extent the Trust,
Precision or their subsidiaries use the proceeds from the sale
or disposition to acquire, improve or repair assets useful in
their business within a specified period; and (iii) 75% of
the Trusts annual excess cash flow, which percentage will
be reduced to 50%, 25% and 0% if the Trust achieves and
maintains a consolidated leverage ratio of less than 2.00 to
1.00, 1.25 to 1.00, and 0.75 to 1.00, respectively. In addition
to mandatory prepayments, the Trust will have the option to
prepay the loans under the Secured Facility generally without
premium or penalty, other than customary breakage
costs for Eurodollar rate loans.
The Term Loan A Facility is repayable in quarterly installments
in aggregate annual amounts equal to 5% of the original
principal amount thereof in the first year following the closing
date, 10% of the original principal amount thereof in the second
year following the closing date, 10% of the original principal
amount thereof in the
19
third year following the closing date and 15% of the original
principal amount thereof in the fourth and fifth years following
the closing date, with the balance payable on the final maturity
date thereof, which is December 23, 2013.
The Term Loan B Facility is repayable in quarterly installments
in an aggregate annual amount equal to 5% of the original
principal amount thereof with the balance payable on the final
maturity date thereof, which is September 30, 2014.
The Trust, Precision and their material subsidiaries organized
in Canada or the United States (other than certain excluded
subsidiaries) and each other subsidiary that becomes a party to
the collateral documents (collectively, the
Subsidiary
Guarantors
) have pledged substantially all of their
tangible and intangible assets (with certain exceptions) that
are located in Canada or the United States as collateral,
secured by a perfected first priority lien, subject to certain
permitted liens. In addition, the Trust and the Subsidiary
Guarantors have guaranteed the obligations of Precision under
the Secured Facility.
The Secured Facility contains a number of covenants that, among
other things, restrict, subject to certain exceptions, the
Trusts, Precisions and their subsidiaries
ability to:
|
|
|
incur additional indebtedness;
|
|
|
sell assets;
|
|
|
pay dividends and distributions (including by the Trust to
Unitholders) or purchase the Trusts, Precisions or
their subsidiaries capital stock or trust units;
|
|
|
make investments or acquisitions;
|
|
|
make optional payments or repurchases of any subordinated
indebtedness and certain other debt;
|
|
|
amend material agreements relating to the Acquisition and the
financing thereof;
|
|
|
change the Trusts, Precisions or their
subsidiaries lines of business;
|
|
|
engage in sale leasebacks;
|
|
|
incur liens on their assets;
|
|
|
enter into mergers, consolidations or amalgamations;
|
|
|
make capital expenditures;
|
|
|
enter into transactions with foreign subsidiaries of the Trust
or Precision other than wholly-owned subsidiaries that provide
guarantees;
|
|
|
enter into swap agreements;
|
|
|
make changes to their respective fiscal periods;
|
|
|
enter into negative pledge clauses; and
|
|
|
agree to restrict subsidiary distributions.
|
The Secured Facility requires the Trust and Precision to comply
with the following financial ratios:
|
|
|
a maximum total leverage ratio of 3.00 to 1.00 as at the last
day of any period of four consecutive fiscal quarters of the
Trust beginning March 31, 2009;
|
|
|
a minimum interest coverage ratio of 3.00 to 1.00 for any period
of four consecutive fiscal quarters of the Trust beginning
March 31, 2009; and
|
|
|
a minimum fixed charge coverage ratio for any period of four
consecutive fiscal quarters of the Trust beginning
March 31, 2009 of: (i) 1.00 to 1.00 for any such
period ending on or prior to December 31, 2010; and
(ii) 1.05 to 1.00 for any such period ending after
December 31, 2010.
|
The Secured Facility also contains customary affirmative
covenants and events of default.
20
Unsecured
Facility
Precision (as the borrower) and the Trust (as a guarantor)
entered into a credit agreement dated December 23, 2008
governing the Unsecured Facility with the lenders parties
thereto, Royal Bank of Canada, as syndication agent, Deutsche
Bank AG Cayman Islands Branch, as administrative agent and HSBC
Bank USA, National Association, as documentation agent. The
Unsecured Facility originally provided senior unsecured
financing of up to US$400 million of which approximately
US$137.5 million was drawn after completion of the
Acquisition and the related financing transactions. Net proceeds
of US$165 million were received by the Trust in connection
with the Trust Unit Offering in February 2009, which reduced the
amount available under the Unsecured Facility by an equivalent
amount. The Unsecured Facility, along with net proceeds from the
Trust Unit Offering was used to fund the repurchase of Grey Wolf
convertible notes tendered for repurchase by holders under a
change of control offer made in the first quarter of 2009. See
General Development of the Business Recent
Developments and Three Year History
2008.
The loans under the Unsecured Facility bear interest at a fixed
rate per annum of 17%, will initially mature on
December 23, 2009, and, to the extent unpaid on that date,
will be converted into term loans that will mature on
December 23, 2016 provided that the loans will not be
converted to term loans if an event of default has occurred
under the Unsecured Facility or the Secured Facility or certain
other conditions are not satisfied.
The loans under the Unsecured Facility are subject to mandatory
prepayments from the net cash proceeds from the issuance or sale
of any equity interests by the Trust (subject to certain
exceptions), and, subject to the prior rights of the lenders
under the Secured Facility, are also subject to mandatory
prepayments from: (i) 100% of the net cash proceeds of any
incurrence of debt by the Trust, Precision or their subsidiaries
(subject to certain exceptions); and (ii) 100% of the net
cash proceeds of certain sales or other dispositions of any
assets belonging to the Trust, Precision or their subsidiaries,
except to the extent the Trust, Precision or their subsidiaries
use the proceeds from a sale or disposition to acquire, improve
or repair assets to be used in their business within a specified
period. In addition to mandatory prepayments, the Trust has the
option to prepay the loans under the Unsecured Facility, without
premium or penalty, prior to the exchange of the loans for
exchange notes.
After the initial maturity date of the Unsecured Facility of
December 23, 2009, each lender under the Unsecured Facility
may request the Trust issue an exchange note bearing interest at
a specified interest rate (to be calculated on the date of
issuance of such exchange note based on the greater of 16.66%
and a market-based interest rate cap) in replacement for the
term loan (or a portion thereof) made under the Unsecured
Facility. In the event that the Trust receives such a request,
the Trust shall, as promptly as practicable after being
requested to do so, among other things: (i) enter into an
exchange note indenture pursuant to which the exchange notes
will be issued and governed; (ii) enter into an exchange
and registration rights agreement providing for, among other
things, registration rights in respect of the exchange notes in
favour of the holders thereof; and (iii) cause to be issued
exchange notes in the same principal aggregate amount as the
term loan being exchanged.
In addition, after June 30, 2009 (or after April 1,
2009 in certain circumstances), the lenders under the Unsecured
Facility may require that debt securities be issued and sold to
repay amounts outstanding under the Unsecured Facility, subject
to certain specified terms and conditions. Precision has agreed
to engage one or more investment banks to publicly sell or
privately place debt securities in such circumstances, the
proceeds of which will be used to repay outstanding loans under
the Unsecured Facility. The Trust may also, at any time, issue
equity or debt securities and Precision may, at any time, issue
debt securities to repay outstanding loans under the Unsecured
Facility.
The Unsecured Facility is unsecured and has been guaranteed by
the Trust and each subsidiary of the Trust that guaranteed the
Secured Facility.
The Unsecured Facility contains a number of covenants that,
among other things, restrict, subject to certain exceptions, the
Trusts, Precisions and their subsidiaries ability to:
|
|
|
make certain restricted payments (which include dividends,
distributions (including by the Trust to Unitholders),
redemptions and certain investments);
|
|
|
make distributions to the Trust;
|
21
|
|
|
incur additional indebtedness;
|
|
|
sell assets;
|
|
|
enter into transactions with affiliates;
|
|
|
incur liens on their assets;
|
|
|
change the primary business of the Trust;
|
|
|
enter into mergers, consolidations or amalgamations; and
|
|
|
amend certain material agreements.
|
The terms of the Unsecured Facility limit (subject to certain
exceptions) the Trusts ability to make distributions in
the following circumstances:
|
|
|
where a default under the terms of the Unsecured Facility shall
have occurred and be continuing or shall occur as a consequence
thereof;
|
|
|
where the incurrence of at least US$1.00 of additional
indebtedness would result in the consolidated interest coverage
ratio being less than 2.50 to 1.00;
|
|
|
for so long as the Trust is a mutual fund trust for
Canadian federal income tax purposes, where the consolidated
leverage ratio exceeds 3.00 to 1.00; or
|
|
|
where the amount of such distribution, when added to the amount
of all distributions (subject to certain exceptions) made after
the closing date of the Acquisition exceeds certain prescribed
amounts specified in Section 8.1(a)(iii) of the credit
agreement governing the Unsecured Facility.
|
The Unsecured Facility also contains customary affirmative
covenants and events of default, including customary cross
payment defaults.
General
The terms of the documents governing the Credit Facilities
contain provisions that in effect ensure that the lenders have
priority as to payment over the Unitholders in respect to the
assets and income of the Trust and its subsidiaries. Amounts due
and owing to the lenders under the Credit Facilities must be
paid before any distributions can be made to Unitholders. This
relative priority of payments could result in a temporary or
permanent interruption of distributions to Unitholders. See
Risk Factors The Trusts debt service
obligation may limit the amount of cash available for
distributions and Distributions on the
Trust Units have been suspended and may not be
reinstated.
As at December 31, 2008, approximately $1,087 million
($130.5 million plus US$781.1 million) was outstanding
under the Secured Facility and approximately
US$137.5 million was outstanding under the Unsecured
Facility. On March 20, 2009, an additional
US$98 million was borrowed under the Unsecured Facility to
fund the repurchase of the Grey Wolf convertible notes, bringing
the balance outstanding under this facility to
US$235 million. The Revolving Credit Facility may be
redrawn by Precision in the future to fund capital expenditures
or for other corporate purposes.
At the time of the closing of the Acquisition, Grey Wolf had
outstanding US$262.3 million aggregate principal amount of
convertible notes, the obligations for which were assumed by
PDOS. Pursuant to the terms of the convertible notes, during the
first quarter of 2009, PDOS, as successor to Grey Wolf, made to
the holders thereof a change of control offer to repurchase any
or all of the outstanding convertible notes at 100% of the
principal amount thereof, plus accrued but unpaid interest to
the date of the repurchase, payable in cash. On March 23,
2009, US$262.3 million of Grey Wolf convertible notes were
tendered for repurchase.
22
RECORD OF
CASH DISTRIBUTIONS/PAYMENTS
On February 9, 2009, the Trust announced that it had
suspended cash distributions payable on both the
Trust Units and Exchangeable Units for an indefinite
period. See General Development of the
Business Recent Developments and Risk
Factors Distributions on the Trust Units have
been suspended and may not be reinstated.
This measure
was taken in response to lower financial operating performance
at the start of 2009 and will allow Precision to increase debt
repayment capabilities and balance sheet strength. The Trust
will continue to monitor its financial situation and evaluate
the possibility of the reinstatement of monthly cash
distributions based on the relevant factors in effect from time
to time.
The following table sets forth the distributions (in Canadian
dollars) paid or declared payable by the Trust on each
Trust Unit for the three most recently completed financial
years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount per Trust
|
|
Distribution Type
|
|
|
Record Date
|
|
|
Payment Date
|
|
|
Unit
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Regular Distribution
|
|
|
January 31, 2006
|
|
|
February 15, 2006
|
|
|
$
|
0.270
|
|
Regular Distribution
|
|
|
February 28, 2006
|
|
|
March 15, 2006
|
|
|
$
|
0.270
|
|
Regular Distribution
|
|
|
March 31, 2006
|
|
|
April 18, 2006
|
|
|
$
|
0.270
|
|
Regular Distribution
|
|
|
April 28, 2006
|
|
|
May 16, 2006
|
|
|
$
|
0.270
|
|
Regular Distribution
|
|
|
May 31, 2006
|
|
|
June 15, 2006
|
|
|
$
|
0.310
|
|
Regular Distribution
|
|
|
June 30, 2006
|
|
|
July 18, 2006
|
|
|
$
|
0.310
|
|
Regular Distribution
|
|
|
July 31, 2006
|
|
|
August 15, 2006
|
|
|
$
|
0.310
|
|
Regular Distribution
|
|
|
August 31, 2006
|
|
|
September 15, 2006
|
|
|
$
|
0.310
|
|
Regular Distribution
|
|
|
September 29, 2006
|
|
|
October 17, 2006
|
|
|
$
|
0.310
|
|
Regular Distribution
|
|
|
October 31, 2006
|
|
|
November 15, 2006
|
|
|
$
|
0.310
|
|
Regular Distribution
|
|
|
November 30, 2006
|
|
|
December 15, 2006
|
|
|
$
|
0.310
|
|
Regular Distribution
|
|
|
December 31, 2006
|
|
|
January 16, 2007
|
|
|
$
|
0.310
|
|
Special Year-end in-kind
Distribution
(1)
|
|
|
December 31, 2006
|
|
|
January 16, 2007
|
|
|
$
|
0.195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Regular Distribution
|
|
|
January 31, 2007
|
|
|
February 15, 2007
|
|
|
$
|
0.190
|
|
Regular Distribution
|
|
|
February 28, 2007
|
|
|
March 15, 2007
|
|
|
$
|
0.190
|
|
Regular Distribution
|
|
|
March 30, 2007
|
|
|
April 17, 2007
|
|
|
$
|
0.190
|
|
Regular Distribution
|
|
|
April 30, 2007
|
|
|
May 15, 2007
|
|
|
$
|
0.190
|
|
Regular Distribution
|
|
|
May 31, 2007
|
|
|
June 15, 2007
|
|
|
$
|
0.130
|
|
Regular Distribution
|
|
|
June 29, 2007
|
|
|
July 17, 2007
|
|
|
$
|
0.130
|
|
Regular Distribution
|
|
|
July 31, 2007
|
|
|
August 15, 2007
|
|
|
$
|
0.130
|
|
Regular Distribution
|
|
|
August 31, 2007
|
|
|
September 18, 2007
|
|
|
$
|
0.130
|
|
Regular Distribution
|
|
|
September 28, 2007
|
|
|
October 16, 2007
|
|
|
$
|
0.130
|
|
Regular Distribution
|
|
|
October 31, 2007
|
|
|
November 15, 2007
|
|
|
$
|
0.130
|
|
Regular Distribution
|
|
|
November 30, 2007
|
|
|
December 18, 2007
|
|
|
$
|
0.130
|
|
Regular Distribution
|
|
|
December 31, 2007
|
|
|
January 15, 2008
|
|
|
$
|
0.130
|
|
Special Year-end in cash Distribution
|
|
|
December 31, 2007
|
|
|
January 15, 2008
|
|
|
$
|
0.160
|
|
Special Year-end in-kind
Distribution
(1)
|
|
|
December 31, 2007
|
|
|
January 15, 2008
|
|
|
$
|
0.240
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount per Trust
|
|
Distribution Type
|
|
|
Record Date
|
|
|
Payment Date
|
|
|
Unit
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Regular Distribution
|
|
|
January 31, 2008
|
|
|
February 15, 2008
|
|
|
$
|
0.130
|
|
Regular Distribution
|
|
|
February 29, 2008
|
|
|
March 18, 2008
|
|
|
$
|
0.130
|
|
Regular Distribution
|
|
|
March 31, 2008
|
|
|
April 15, 2008
|
|
|
$
|
0.130
|
|
Regular Distribution
|
|
|
April 30, 2008
|
|
|
May 15, 2008
|
|
|
$
|
0.130
|
|
Regular Distribution
|
|
|
May 30, 2008
|
|
|
June 17, 2008
|
|
|
$
|
0.130
|
|
Regular Distribution
|
|
|
June 30, 2008
|
|
|
July 15, 2008
|
|
|
$
|
0.130
|
|
Regular Distribution
|
|
|
July 31, 2008
|
|
|
August 15, 2008
|
|
|
$
|
0.130
|
|
Regular Distribution
|
|
|
August 29, 2008
|
|
|
September 16, 2008
|
|
|
$
|
0.130
|
|
Regular Distribution
|
|
|
September 30, 2008
|
|
|
October 15, 2008
|
|
|
$
|
0.130
|
|
Regular Distribution
|
|
|
October 31, 2008
|
|
|
November 18, 2008
|
|
|
$
|
0.130
|
|
Regular Distribution
|
|
|
November 28, 2008
|
|
|
December 16, 2008
|
|
|
$
|
0.130
|
|
Regular Distribution
|
|
|
December 31, 2008
|
|
|
January 15, 2009
|
|
|
$
|
0.130
|
|
Special Year-end in-kind
Distribution
(1)
|
|
|
December 31, 2008
|
|
|
January 15, 2009
|
|
|
$
|
0.150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Regular Distribution
|
|
|
January 30, 2009
|
|
|
February 17, 2009
|
|
|
$
|
0.040
|
|
NOTE:
|
|
(1)
|
The special year-end distribution was settled
in-kind through the issuance of Trust Units
rather than the payment of cash in order for Precision to
minimize debt levels and retain balance sheet strength.
Immediately after the special in-kind distribution the
outstanding Trust Units were consolidated so that the number of
Trust Units outstanding remained unchanged from the number
of Trust Units outstanding immediately before the special
in-kind distribution. See Risk Factors The
issuance of additional Trust Units in lieu of cash
distributions could negatively affect the value of the
Trust Units and result in the payment of taxes.
|
The following table sets forth the amount of payments (in
Canadian dollars) paid or payable on each Exchangeable Unit for
the three most recently completed financial years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Payment Type
|
|
|
Record Date
|
|
|
Payment Date
|
|
|
per Exchangeable Unit
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Regular Payment
|
|
|
January 31, 2006
|
|
|
February 15, 2006
|
|
|
$
|
0.270
|
|
Regular Payment
|
|
|
February 28, 2006
|
|
|
March 15, 2006
|
|
|
$
|
0.270
|
|
Regular Payment
|
|
|
March 31, 2006
|
|
|
April 18, 2006
|
|
|
$
|
0.270
|
|
Regular Payment
|
|
|
April 28, 2006
|
|
|
May 16, 2006
|
|
|
$
|
0.270
|
|
Regular Payment
|
|
|
May 31, 2006
|
|
|
June 15, 2006
|
|
|
$
|
0.310
|
|
Regular Payment
|
|
|
June 30, 2006
|
|
|
July 18, 2006
|
|
|
$
|
0.310
|
|
Regular Payment
|
|
|
July 31, 2006
|
|
|
August 15, 2006
|
|
|
$
|
0.310
|
|
Regular Payment
|
|
|
August 31, 2006
|
|
|
September 15, 2006
|
|
|
$
|
0.310
|
|
Regular Payment
|
|
|
September 29, 2006
|
|
|
October 17, 2006
|
|
|
$
|
0.310
|
|
Regular Payment
|
|
|
October 31, 2006
|
|
|
November 15, 2006
|
|
|
$
|
0.310
|
|
Regular Payment
|
|
|
November 30, 2006
|
|
|
December 15, 2006
|
|
|
$
|
0.310
|
|
Regular Payment
|
|
|
December 31, 2006
|
|
|
January 16, 2007
|
|
|
$
|
0.310
|
|
Special Year-end in-kind
Payment
(1)
|
|
|
December 31, 2006
|
|
|
January 16, 2007
|
|
|
$
|
0.195
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Payment Type
|
|
|
Record Date
|
|
|
Payment Date
|
|
|
per Exchangeable Unit
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Regular Payment
|
|
|
January 31, 2007
|
|
|
February 15, 2007
|
|
|
$
|
0.190
|
|
Regular Payment
|
|
|
February 28, 2007
|
|
|
March 15, 2007
|
|
|
$
|
0.190
|
|
Regular Payment
|
|
|
March 30, 2007
|
|
|
April 17, 2007
|
|
|
$
|
0.190
|
|
Regular Payment
|
|
|
April 30, 2007
|
|
|
May 15, 2007
|
|
|
$
|
0.190
|
|
Regular Payment
|
|
|
May 31, 2007
|
|
|
June 15, 2007
|
|
|
$
|
0.130
|
|
Regular Payment
|
|
|
June 29, 2007
|
|
|
July 17, 2007
|
|
|
$
|
0.130
|
|
Regular Payment
|
|
|
July 31, 2007
|
|
|
August 15, 2007
|
|
|
$
|
0.130
|
|
Regular Payment
|
|
|
August 31, 2007
|
|
|
September 18, 2007
|
|
|
$
|
0.130
|
|
Regular Payment
|
|
|
September 28, 2007
|
|
|
October 16, 2007
|
|
|
$
|
0.130
|
|
Regular Payment
|
|
|
October 31, 2007
|
|
|
November 15, 2007
|
|
|
$
|
0.130
|
|
Regular Payment
|
|
|
November 30, 2007
|
|
|
December 18, 2007
|
|
|
$
|
0.130
|
|
Regular Payment
|
|
|
December 31, 2007
|
|
|
January 15, 2008
|
|
|
$
|
0.130
|
|
Special Year-end in cash Payment
|
|
|
December 31, 2007
|
|
|
January 15, 2008
|
|
|
$
|
0.160
|
|
Special Year-end in-kind
Payment
(1)
|
|
|
December 31, 2007
|
|
|
January 15, 2008
|
|
|
$
|
0.240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Regular Payment
|
|
|
January 31, 2008
|
|
|
February 15, 2008
|
|
|
$
|
0.130
|
|
Regular Payment
|
|
|
February 29, 2008
|
|
|
March 18, 2008
|
|
|
$
|
0.130
|
|
Regular Payment
|
|
|
March 31, 2008
|
|
|
April 15, 2008
|
|
|
$
|
0.130
|
|
Regular Payment
|
|
|
April 30, 2008
|
|
|
May 15, 2008
|
|
|
$
|
0.130
|
|
Regular Payment
|
|
|
May 30, 2008
|
|
|
June 17, 2008
|
|
|
$
|
0.130
|
|
Regular Payment
|
|
|
June 30, 2008
|
|
|
July 15, 2008
|
|
|
$
|
0.130
|
|
Regular Payment
|
|
|
July 31, 2008
|
|
|
August 15, 2008
|
|
|
$
|
0.130
|
|
Regular Payment
|
|
|
August 29, 2008
|
|
|
September 16, 2008
|
|
|
$
|
0.130
|
|
Regular Payment
|
|
|
September 30, 2008
|
|
|
October 15, 2008
|
|
|
$
|
0.130
|
|
Regular Payment
|
|
|
October 31, 2008
|
|
|
November 18, 2008
|
|
|
$
|
0.130
|
|
Regular Payment
|
|
|
November 28, 2008
|
|
|
December 16, 2008
|
|
|
$
|
0.130
|
|
Regular Payment
|
|
|
December 31, 2008
|
|
|
January 15, 2009
|
|
|
$
|
0.130
|
|
Special Year-end in-kind
Payment
(1)
|
|
|
December 31, 2008
|
|
|
January 15, 2009
|
|
|
$
|
0.150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Regular Payment
|
|
|
January 30, 2009
|
|
|
February 17, 2009
|
|
|
$
|
0.040
|
|
NOTE:
|
|
(1)
|
The special year-end distribution was settled
in-kind through the issuance of Trust Units
rather than cash in order for Precision to minimize debt levels
and retain balance sheet strength. Immediately after the payment
of the special in-kind payment, the outstanding Trust Units
were consolidated so that the number of Trust Units
outstanding after the special in-kind payment remained unchanged
from the number of Trust Units outstanding immediately
prior to the special in-kind payment. Holders of Exchangeable
Units received the economic equivalent treatment. See Risk
Factors The issuance of additional Trust Units
in lieu of cash distributions could negatively affect the value
of the Trust Units and result in the payment of taxes.
|
The historical distributions described above may not be
reflective of future distributions, which are subject to review
by the Board of Trustees taking into account the prevailing
circumstances at the relevant time. See Risk
Factors Distributions on the Trust Units are
variable and Distribution on the Trust Units
have been suspended and may not be reinstated.
The terms of the documents governing the Credit Facilities
contain provisions that in effect ensure that the lenders have
priority as to payment over the Unitholders in respect to the
assets and income of the Trust and its subsidiaries. Amounts due
and owing to the lenders under the Credit Facilities must be
paid before any distributions can be made to Unitholders. This
relative priority of payments could result in a temporary or
permanent interruption of distributions to Unitholders. See
Risk Factors The Trusts debt service
obligations may limit the amount of cash available for
distributions and Distribution on the
Trust Units have been suspended and may not be
reinstated.
25
DESCRIPTION
OF CAPITAL STRUCTURE
Description
Of Trust Units
As of March 27, 2009, there were 206,065,086
Trust Units and 128,562 Exchangeable Units issued and
outstanding. Each Exchangeable Unit can be exchanged into
Trust Units at any time at the option of the holder based
on the exchange ratio in effect at the date of exchange. Each
Trust Unit entitles the holder thereof to one vote at any
meeting of Unitholders, or in respect of any written resolution
of Unitholders, and represents an equal undivided beneficial
interest in any distribution from the Trust (whether from
income, net realized capital gains or other amounts) and in any
net assets of the Trust in the event of the termination or
winding up of the Trust. All Trust Units rank among
themselves equally and rateably without discrimination,
preference or priority whatsoever. Each Trust Unit is
transferable, is not subject to any conversion or pre-emptive
rights and entitles the holder thereof to require the Trust to
redeem any or all of the Trust Units held by such holder.
The Trust Units do not represent a traditional investment
and should not be viewed by investors as shares in
either the Trust or Precision. As holders of Trust Units,
Unitholders do not have the statutory rights normally associated
with ownership of shares of a corporation including, for
example, the right to bring oppression or
derivative actions. The market price of the
Trust Units will be sensitive to, among other things, the
anticipated distributable income from the Trust, as well as a
variety of market conditions including, but not limited to,
interest rates, commodity prices and the ability of the Trust to
maintain and grow revenues. Changes in market conditions may
adversely affect the trading price of the Trust Units. See
Risk Factors Trust Units have certain
risks not associated with traditional investments in the oil and
natural gas services business.
The Trust Units are not deposits within the
meaning of the
Canada Deposit Insurance Corporation Act
(Canada) and are not insured under the provisions of that
Act or any other legislation. Furthermore, the Trust is not a
trust company and, accordingly, is not registered under any
trust and loan company legislation, as it does not carry on or
intend to carry on the business of a trust company.
The Trust is not a legally recognized entity within the
relevant definitions of the
Bankruptcy and Insolvency Act
(Canada), the Companies Creditors Arrangement Act
(Canada) and, in some cases, the
Winding Up and
Restructuring Act
(Canada). As a result, in the event a
restructuring of the Trust were necessary, the Trust would not
be able to access the remedies available thereunder. In the
event of a restructuring, the position of Unitholders may be
different than that of the shareholders of a corporation.
Issuance
of Trust Units
The Declaration of Trust provides that Trust Units,
including rights, warrants, options or other securities
convertible into or exchangeable for Trust Units, may be
created, issued, sold and delivered on such terms and conditions
and at such times as the Trustees (as defined herein) may
determine. The Declaration of Trust also provides that the
Trustees may authorize the creation and issuance of any type of
debt securities or convertible debt securities of the Trust from
time to time on such terms and conditions to such persons and
for such consideration as the Trustees may determine.
Purchase
of Trust Units
The Trust may from time to time purchase for cancellation some
or all of the Trust Units (or other securities of the Trust
which may be issued and outstanding from time to time) in the
market, by private agreement or upon any recognized stock
exchange on which such Trust Units are traded or pursuant
to tenders received by the Trust upon request for tenders
addressed to all holders of record of Trust Units, provided
in each case that the Trustees have determined that such
purchases are in the best interests of the Trust. Any such
purchases may constitute an issuer bid under
Canadian provincial securities legislation and must be conducted
in accordance with the applicable requirements thereof.
26
Cash
Distributions on Trust Units and Exchangeable
Units
On February 9, 2009, the Trust announced that it had
suspended cash distributions for an indefinite period. This
measure was taken in response to lower financial operating
performance at the start of 2009. The previously announced
distribution of $0.04 per unit payable on February 17, 2009
to Trust and PDLP Unitholders of record on January 30, 2009
was unaffected by the suspension. The Trust will continue to
monitor its financial situation and evaluate the possibility of
the reinstatement of monthly cash distributions based on the
relevant factors in effect from time to time. See Risk
Factors Distributions on Trust Units have been
suspended and may not be reinstated.
Under the terms of the Declaration of Trust, the Trust is
required to make distributions to holders of Trust Units in
amounts at least equal to its taxable income. Distributions may
be monthly or special and in cash or in Trust Units
(in-kind) at the discretion of the Board of
Trustees. To the extent that additional cash distributions are
paid and capital expenditure or investment programs are not
adjusted, debt levels may increase. In the event that a
distribution in the form of Trust Units is declared, the
terms of the Declaration of Trust require that the outstanding
Trust Units be consolidated immediately subsequent to the
distribution. The number of outstanding Trust Units would
remain at the number outstanding immediately prior to the
Trust Unit distribution and an amount equal to the
distribution would be allocated to the holders of
Trust Units. For greater clarity, holders of
Trust Units do not receive additional Trust Units
during an in-kind issuance and consolidation process.
The Board of Trustees reviews the Trusts distribution
policy from time to time. The actual amount distributed is
dependent on various economic factors and distributions are
declared at the discretion of the Board of Trustees. The actual
cash flow available for distribution to Unitholders is a
function of numerous factors, including the Trusts,
PDLPs and Precisions financial performance; debt
covenants and obligations; working capital requirements;
productive capacity maintenance expenditures and expansion
capital expenditure requirements for the purchase of property,
plant and equipment and number of Trust Units and
Exchangeable Units issued and outstanding.
Distribution
Reinvestment Plan
Effective December 18, 2006, the distribution reinvestment
plan (the
DRIP
), outlined below, was
suspended indefinitely by the Board of Trustees. Details of the
DRIP are described more fully in the DRIP document available on
the Trusts website at
www.precisiondrilling.com.
The DRIP was approved by the Board of Trustees on February 14,
2006. The DRIP was implemented on March 31, 2006 and allows
certain holders of Trust Units, at their option, to
reinvest monthly cash distributions to acquire additional
Trust Units at the average market price as defined in the
DRIP. Unless otherwise announced by the Trust,
Trust Unitholders who are not residents of Canada are not
eligible to participate, directly or indirectly, in the DRIP.
Exchangeable Unitholders also are not eligible to participate in
the DRIP. Generally, no brokerage fees or commissions are
payable by participants for the purchase of Trust Units
under the DRIP, but holders of Trust Units should make
inquiries with their broker, investment dealer or financial
institution through which their Trust Units are held as to
any policies that may result in any fees or commissions being
payable. The Trust reserved the right to amend, terminate or
suspend the DRIP at any time provided that such amendment,
termination or suspension does not prejudice the interests of
holders of Trust Units.
Trust Unit
Redemption Right
Trust Units are redeemable at any time on demand by the
holders thereof upon delivery to the Trust of a duly completed
and properly executed notice requesting the Trust to redeem
Trust Units. Upon receipt of the notice to redeem
Trust Units by the Trust, the holder thereof shall
thereafter cease to have any rights with respect to the
Trust Units tendered for redemption (other than to receive
the redemption payment therefor unless the redemption payment is
not made as required) including the right to receive any
distributions thereon which are declared payable on a date
subsequent to the day of receipt by the Trust of the notice
requesting redemption.
27
Cash
Redemption
Upon receipt by the Trust of the notice to redeem
Trust Units, the tendering Unitholder will thereafter be
entitled to receive a price per Trust Unit (the
Market Redemption Price
) equal to the
lesser of: (a) 90% of the market price per Trust Unit
on the principal stock exchange on which the Trust Units
are listed (or, if the Trust Units are not listed on any
such exchange, on the principal market on which the
Trust Units are quoted for trading) during the period of
the last ten trading days immediately prior to the date on which
the Trust Units were tendered for redemption; and
(b) the closing market price per Trust Unit on the
principal stock exchange on which the Trust Units are
listed (or, if the Trust Units are not listed on any such
exchange, on the principal market on which the Trust Units
are quoted for trading) on the date that the Trust Units
were tendered for redemption.
The aggregate Market Redemption Price payable by the Trust
in respect of the Trust Units tendered for redemption
during any calendar month shall be satisfied by way of a cash
payment on the last day of the calendar month following the
month in which the Trust Units were tendered for redemption.
Unitholders will not receive cash upon the redemption of their
Trust Units if:
|
|
|
|
(a)
|
the total amount payable by the Trust in respect of such
Trust Units and all other Trust Units tendered for
redemption in the same calendar month exceeds $50,000; provided
that the Trustees may, in their sole discretion, waive such
limitation in respect of all Trust Units tendered for
redemption in any calendar month. If this limitation is not so
waived, the Trust Units tendered for redemption in such
calendar month shall be redeemed for cash based on the Market
Redemption Price and, unless any applicable regulatory
approvals are required, by a distribution in specie of the
Trusts assets, which may include Redemption Notes (as
defined below) or other assets held by the Trust, on a pro-rata
basis;
|
|
|
|
|
(b)
|
at the time such Trust Units are tendered for redemption,
the outstanding Trust Units are not listed for trading on
the Toronto Stock Exchange or traded or quoted on any stock
exchange or market which the Trustees consider, in their sole
opinion, provides representative fair market value prices for
the Trust Units;
|
|
|
|
|
(c)
|
the normal trading of the Trust Units is suspended or
halted on any stock exchange on which the Trust Units are
listed for trading or, if not so listed, on any market on which
the Trust Units are quoted for trading, on the date that
such Trust Units tendered for redemption were tendered to
the Trust for redemption or for more than five trading days
during the ten day trading period prior to the date on which
such Trust Units were tendered for redemption; or
|
|
|
|
|
(d)
|
the redemption of Trust Units will result in the delisting
of the Trust Units on the principal stock exchange on which
the Trust Units are listed.
|
In
Specie Redemption
If a Unitholder is not entitled to receive cash upon the
redemption of Trust Units as a result of one or more of the
foregoing limitations, then each Trust Unit tendered for
redemption will, subject to any applicable regulatory approvals,
be redeemed by way of a distribution in specie. In such
circumstances, the support agreement dated November 7,
2005, among the Trust, PDLP, the General Partner and Precision
(the
Support Agreement
) provides that, upon
the direction of the Trustees, PDLP will request partial
repayment of the debt incurred by Precision in connection with
its conversion into a trust structure and use the funds received
therefrom to subscribe for new notes from Precision (the
Redemption Notes
) with a 15 year
maturity and that will bear interest at a market rate to be
determined by the Board of Directors of Precision, payable
monthly in arrears on the 15th day of each calendar month
that such Redemption Note is outstanding.
Pursuant to the terms of the Support Agreement, PDLP will
distribute the Redemption Notes to the Trust as the holder
of Class A limited partnership units of PDLP and the Trust
will distribute these Redemption Notes to the redeeming
Unitholders in satisfaction of the Market Redemption Price.
Pursuant to the terms of the Support Agreement, Precision has
agreed to enter into a note indenture, prior to issuance of the
Redemption Notes, that will set out the definitive terms of
the Redemption Notes and provide for a note trustee. The
Support Agreement provides that the Redemption Notes will
be direct, subordinated obligations of
28
Precision ranking subordinate to all senior unsecured
indebtedness. The Support Agreement further provides that the
note indenture governing the Redemption Notes must contain
events of default that are market standard for notes of this
nature, the occurrence of which will result in the principal and
any accrued and unpaid interest on the Redemption Notes
being immediately due and payable.
Rather than distributing Redemption Notes in satisfaction
of the Market Redemption Price for Trust Units
tendered for redemption in the circumstances described above,
the Trustees may, provided certain conditions have been met,
determine to satisfy the Market Redemption Price by way of
an alternate distribution in specie to redeeming Unitholders. In
order to make an in specie distribution other than
Redemption Notes to redeeming Unitholders or for the Trust
to redeem Trust Units with its own indebtedness, the
Trustees must have received both a written opinion of tax
counsel that such a distribution of Trust assets does not have a
material adverse effect on other Unitholders and a written
opinion from a financial advisor that such Trust assets being
distributed in lieu of Redemption Notes would be reasonably
considered to be financially equivalent in value to
Redemption Notes.
Where the Trust makes a distribution in specie of any assets of
the Trust on the redemption of Trust Units by a Unitholder,
the Trustees retain the discretion to designate to the account
of such Unitholder any capital gains realized by the Trust or
income of the Trust arising as a result of such redemption and
distribution. It is anticipated that the redemption right
described above will not be the primary mechanism for holders of
Trust Units to dispose of their Trust Units.
Redemption Notes or other Trust assets that may be
distributed in specie to Unitholders in connection with a
redemption will not be listed on any stock exchange, no market
is expected to develop in Redemption Notes or other Trust
assets and they may be subject to resale restrictions under
applicable securities laws. Redemption Notes or other Trust
assets so distributed may not be qualified investments for
Exempt Plans (as defined herein) depending on the circumstances
at the time. See Risk Factors Risks Relating
to the Structure of the Trust.
The aggregate Market Redemption Price payable by the Trust
in respect of the Trust Units tendered for redemption
during any calendar month shall be paid by the transfer, to or
to the order of the Unitholder who exercised the right of
redemption, on the last day of the calendar month following the
month in which the Trust Units were tendered for
redemption, of Redemption Notes or Trust assets, as the
case may be.
Meetings
of Unitholders
The Declaration of Trust provides that meetings of Unitholders
must be called and held for, among other matters, the election
of Trustees, the appointment or removal of the auditors of the
Trust, the approval of amendments to the Declaration of Trust
(except as described below under Amendments to the
Declaration of Trust), the sale of all or substantially
all of the Trusts assets and the dissolution or
termination of the Trust. Meetings of Unitholders will be called
and held annually for, among other things, the election of
Trustees and the appointment of the auditors of the Trust.
A meeting of Unitholders may be convened at any time and for any
purpose by the Trustees and must be convened, except in certain
circumstances, if requisitioned by the holders of not less than
5% of all votes entitled to be voted at a meeting of Unitholders
(including the votes attached to Exchangeable Units (as defined
herein) by virtue of the special voting unit (the
Special Voting Unit
) of the Trust issued
pursuant to the Voting and Exchange Trust Agreement dated
November 7, 2005, among the Trust, PDLP and Computershare
Trust Company of Canada (the
Voting and Exchange
Trust Agreement
)) by a written requisition. A
requisition must, among other things, state in reasonable detail
the business purpose for which the meeting is to be called.
Subject to the Voting and Exchange Trust Agreement, only
Unitholders of record may attend and vote at meetings of
Unitholders either in person or by proxy and a proxyholder need
not be a Unitholder. Two persons present in person or
represented by proxy and representing in the aggregate at least
5% of the votes attaching to all outstanding Trust Units
shall constitute a quorum for the transaction of business at all
such meetings. For the purposes of determining such quorum, the
Special Voting Unit shall be regarded as representing
outstanding Trust Units equivalent in number to the number of
Exchangeable Units represented by proxy by Computershare
Trust Company of Canada at such meeting.
29
The Declaration of Trust contains provisions as to the notice
required and other procedures with respect to the calling and
holding of meetings of Unitholders in accordance with the
requirements of applicable laws.
Limitation
on Non-Resident Ownership
It is in the best interest of Unitholders that the Trust always
qualify as a mutual fund trust under the Tax Act and
in order to ensure the maintenance of such status the
Declaration of Trust provides, in part, that:
|
|
|
|
(a)
|
if determined necessary or desirable by the Trustees, in their
sole discretion, the Trust may, from time to time, among other
things, take all necessary steps to monitor the activities of
the Trust and ownership of the Trust Units. If at any time
the Trust or the Trustees become aware that the activities of
the Trust
and/or
ownership of the Trust Units by non-residents of Canada may
threaten the status of the Trust under the Tax Act as a
unit trust or a mutual fund trust, the
Trust, by or through the Trustees on the Trusts behalf, is
authorized to take such action as may be necessary in the
opinion of the Trustees to maintain the status of the Trust as a
unit trust or a mutual fund trust
including, without limitation, the imposition of restrictions on
the issuance by the Trust of Trust Units or the transfer by
any Unitholder of Trust Units to a non-resident of Canada
and/or
require the sale of Trust Units by non-residents of Canada
on a basis determined by the Trustees
and/or
suspend distribution
and/or
other
rights in respect of Trust Units held by non-residents of
Canada transferred contrary to the foregoing provisions or not
sold in accordance with the requirements thereof; and
|
|
|
|
|
(b)
|
in addition to the foregoing, the transfer agent of the
Trust Units, by or through the Trustees may, if determined
appropriate by the Trustees, establish operating procedures for,
and maintain, a reservation system which may limit the number of
Trust Units that non-residents of Canada may hold, limit the
transfer of the legal or beneficial interest in any
Trust Units to non-residents of Canada unless selected
through a process determined appropriate by the Trustees, which
may either be a random selection process or a selection process
based on the first to register, or such other basis as
determined by the Trustees. The operating procedures relating to
such reservation system shall be determined by the Trustees and,
prior to implementation, the Trust shall publicly announce the
implementation of the same. Such operating procedures may, among
other things, provide that any transfer of a legal or beneficial
interest in any Trust Units contrary to the provisions of
such reservation system may not be recognized by the Trust.
|
Amendments
to the Declaration of Trust
The Trustees may, without the consent, approval or ratification
of any of the Unitholders, amend the Declaration of Trust at any
time:
|
|
|
|
(a)
|
for the purpose of ensuring the Trusts continuing
compliance with applicable laws, regulations or policies of any
governmental authority having jurisdiction over the Trustees or
the Trust;
|
|
|
|
|
(b)
|
in a manner which, in the opinion of the Trustees, provides
additional protection for the Unitholders;
|
|
|
|
|
(c)
|
in a manner which, in the opinion of the Trustees, is necessary
or desirable as a result of changes in Canadian tax laws;
|
|
|
|
|
(d)
|
to remove any conflicts or inconsistencies in the Declaration of
Trust or to make minor corrections which are, in the opinion of
the Trustees, necessary or desirable and not prejudicial to the
Unitholders; or
|
|
|
|
|
(e)
|
to change the situs of, or the laws governing, the Trust which,
in the opinion of the Trustees is desirable in order to provide
Unitholders with the benefit of any legislation limiting their
liability.
|
Term
of the Trust
The Unitholders may vote by special resolution to terminate the
Trust at any meeting of the Unitholders duly called for that
purpose, following which the Trustees shall commence to
wind-up
the
affairs of the Trust (and shall thereafter be restricted to only
such activities).
30
Unless the Trust is earlier terminated or extended by vote of
the Unitholders, the Trustees shall commence to
wind-up
the
affairs of the Trust on such date as may be determined by the
Trustees, being not more than two years prior to the earlier of
September 21, 2105 and the date which is one day prior to
the date, if any, the Trust would otherwise be void by virtue of
any applicable rule against perpetuities then in force in
Alberta. In the event that the Trust is
wound-up,
the Trustees will sell and convert into money the assets of the
Trust in one transaction or in a series of transactions at
public or private sales and do all other acts appropriate to
liquidate the property of the Trust, and shall in all respects
act in accordance with the directions, if any, of the
Unitholders (in respect of termination authorized pursuant to a
special resolution). After paying, retiring or discharging or
making provision for the payment, retirement or discharge of all
known liabilities and obligations of the Trust and providing for
indemnity against any other outstanding liabilities and
obligations, the Trustees shall, subject to obtaining all
necessary regulatory approvals, distribute the remaining part of
the proceeds of the sale of the assets together with any cash
forming part of the Trusts assets pro-rata among the
Unitholders.
Take-Over
Bids
The Declaration of Trust contains provisions to the effect that
if a take-over bid, as defined under the
Securities Act
(Alberta), is made for the Trust Units and not less
than 90% of the Trust Units (including Trust Units
issuable upon the conversion, exercise or exchange of any
securities exchangeable into Trust Units but not including
any Trust Units held at the date of the take-over bid by or on
behalf of, or issuable to, the offeror or an affiliate or
associate of the offeror) are taken up and paid for by the
offeror, the offeror will be entitled to acquire the
Trust Units and Exchangeable Units held by Unitholders who
did not accept the take-over bid on the terms offered by the
offeror.
Special
Voting Unit
Pursuant to the provisions of the Declaration of Trust a Special
Voting Unit was issued to Computershare Trust Company of
Canada, as the initial trustee (the
Voting and Exchange
Trustee
) under a Voting and Exchange
Trust Agreement, which allows the Special Voting Unit to be
voted by the Voting and Exchange Trustee for and on behalf of
the holders of Exchangeable Units. The Voting and Exchange
Trustee is only entitled to the number of votes at meetings of
Trust Unit holders which is equal to the number of
Exchangeable Units registered and outstanding on the record date
in respect of each meeting. The Voting and Exchange Trustee will
be obligated to vote the Special Voting Unit at meetings of
Trust Unit holders pursuant to instructions of the holders
of Exchangeable Units. However, if no instructions are provided
by holders of Exchangeable Units, the votes associated therewith
in the Special Voting Unit will be withheld from voting.
Description
Of Exchangeable Units
As a result of the Plan of Arrangement, PDLP issued 122,512,799
Class A Limited Partnership Units to the Trust on November 7,
2005 (the effective date of the reorganization of the business
of Precision into the Trust). An additional 1,840,122 Class A
Limited Partnership Units were issued between November 7 and
November 22, 2005 inclusive (the last date on which holders of
New Options could exercise their options pursuant to the Plan of
Arrangement). As of December 31, 2008, there were 125,606,341
Class A Limited Partnership Units issued to the Trust. As of
March 27, 2009 there were 125,629,362 Class A Limited
Partnership Units issued to the Trust.
Also, as part of the Plan of Arrangement, PDLP issued 1,108,382
Exchangeable Units to certain shareholders of Precision who
elected to receive such Exchangeable Units instead of
Trust Units. As of December 31, 2008, 151,583 Exchangeable
Units remained outstanding. As of March 27, 2009, 128,562
Exchangeable Units remained outstanding. The Exchangeable Units
have the economic equivalence of the Trust Units and the
principal terms of the Exchangeable Units are:
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|
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|
(a)
|
they are exchangeable for Trust Units on a
one-for-one
basis at the option of the holder;
|
|
|
|
|
(b)
|
each Exchangeable Unit entitles the holder thereof to receive
(in the form of a non-interest bearing loan) cash payments equal
to cash payments made by the Trust on a Trust Unit (and at
the beginning of the next calendar year a special distribution
will be made on each Exchangeable Unit in an amount
|
31
|
|
|
|
|
equal to the outstanding non-interest bearing loan accumulated
during the previous year which will be used to repay such
accumulated debt);
|
|
|
|
|
(c)
|
the holder of each Exchangeable Unit is entitled to direct the
Voting and Exchange Trustee to vote the Special Voting Unit at
all meetings of Trust Unit holders;
|
|
|
|
|
(d)
|
the holders of Exchangeable Units are not entitled, as such, to
receive notice of or to attend any meeting of the partners of
PDLP or to vote at any such meeting, however, such holders of
Exchangeable Units are entitled to vote separately as a class in
respect of proposals to add to, change or remove any right,
privilege, restriction or condition attaching to the
Exchangeable Units or in respect of any other amendment to the
applicable partnership agreement which would have an adverse
impact on the holders of such Exchangeable Units; and
|
|
|
|
|
(e)
|
there are certain restrictions on the transfer of Exchangeable
Units.
|
In addition to the foregoing, the Support Agreement requires the
Trust or its affiliates to take all actions and do all things as
are reasonably necessary or desirable to enable and permit PDLP
to meet all of its obligations with respect to the Exchangeable
Units and such agreement also provides that the Trust will not,
without the prior approval of PDLP and holders of Exchangeable
Units:
|
|
|
|
(a)
|
issue or distribute Trust Units to the holders of all, or
substantially all, of the then outstanding Trust Units by
way of distribution; or
|
|
|
|
|
(b)
|
issue or distribute rights, options or warrants to the holders
of all, or substantially all, of the then outstanding
Trust Units entitling them to subscribe for or purchase
Trust Units (or securities exchangeable for or converting
into or carrying rights to acquire Trust Units); or
|
|
|
|
|
(c)
|
issue or distribute to the holders of all, or substantially all,
of the then outstanding Trust Units:
|
|
|
|
|
(i)
|
securities of the Trust or any class other than Trust Units
(other than securities exchangeable for or converting into or
carrying rights to acquire Trust Units);
|
|
|
|
|
(ii)
|
rights, options or warrants other than those described
above; or
|
|
|
|
|
(iii)
|
evidences of indebtedness of the Trust; or
|
|
|
|
|
(iv)
|
other assets of the Trust,
|
unless the economic equivalent on a per Exchangeable Unit basis
of such rights, options, warrants, securities, shares, evidences
of indebtedness or other assets is issued or loaned
simultaneously to the holders of Exchangeable Units.
Payments
on Exchangeable Units
Holders of Exchangeable Units will be entitled to receive, and
PDLP will make, subject to applicable law, on each date on which
the Board of Trustees declares a distribution on the
Trust Units, a loan in respect of each Exchangeable Unit in
an amount in cash for each Exchangeable Unit equal to the
distribution declared on each Trust Unit; or in the case of
a distribution declared on the Trust Units in securities or
property other than cash or Trust Units, a loan in the
amount equal to the value of such type and amount of securities
or property which is the same as, or economically equivalent to,
the type and amount of property declared as a distribution on
each Trust Unit.
On February 9, 2009, the Trust announced that it had
suspended cash distributions for an indefinite period. This
measure was taken in response to lower financial operating
performance at the start of 2009. The previously announced
distribution of $0.04 per unit payable on February 17, 2009
to Trust and PDLP unitholders of record on January 30, 2009 was
unaffected by the suspension. The Trust will continue to monitor
its financial situation and evaluate the possibility of the
reinstatement of monthly cash distributions based on the
relevant factors in effect from time to time. See Risk
Factors Distributions on Trust Units have been
suspended and may not be reinstated.
32
Any amount loaned in respect of Exchangeable Units pursuant to
these distribution entitlements will not constitute a
distribution of profits or other compensation by way of income
in respect of such Exchangeable Units, rather, will constitute a
non-interest bearing loan of the amount thereof, or in the case
of property, a loan in the amount equal to the fair market value
thereof as determined in good faith by the board of directors of
the General Partner, which loan is repayable on the first day of
January of the calendar year next following the date of the loan
or such earlier date as may be applicable.
On the date on which the loan is repayable, PDLP will make a
distribution in respect of each Exchangeable Unit equal to the
amount of the loan outstanding in respect thereof. PDLP will set
off and apply the amount of any such distribution payment
against the obligation of any holder of Exchangeable Units under
any loan outstanding in respect thereof.
In the event that a payment in the form of Trust Units is
declared the outstanding units will be consolidated immediately
subsequent to the payment. The number of outstanding
Exchangeable Units would remain at the number outstanding
immediately prior to the Exchangeable Unit payment and an amount
equal to the payment would be allocated to the holders of
Exchangeable Units. For greater clarity, holders of Exchangeable
Units do not receive additional Exchangeable Units during an
in-kind issuance and consolidation process.
The
General Partner
The General Partner of PDLP is a direct wholly-owned subsidiary
of the Trust. The General Partner is the managing partner of
PDLP and has the exclusive authority to manage the business and
affairs of PDLP, to make all decisions regarding the business of
PDLP and to bind PDLP.
Partnership
Units
PDLP is authorized to issue an unlimited number of PDLP A Units
and Exchangeable Units. The General Partner may, in respect of
PDLP, also issue at any time units of any class or series or
secured and unsecured debt obligations, debt obligations
convertible into any class or series of units, or options,
warrants, rights, appreciation rights or subscription rights
relating to any class or series of units, to the General
Partner, to limited partners or any other person who is not a
non-resident of Canada and is not exempt from tax under
Part I of the Tax Act (as defined herein). Each unit ranks
equally with each other unit of the same class or series and
entitles the holder thereof to the same rights and obligations
as the holder of any other unit of the same class or series and
no limited partner is entitled to any privilege, priority or
preference in relation to any other limited partner holding
units of the same class or series.
In addition, on a distribution of assets in the event of the
liquidation, dissolution or
winding-up
of PDLP, whether voluntary or involuntary, or any other
distribution of the assets of PDLP among its Partners for the
purpose of
winding-up
its affairs: (a) the holders of PDLP A Units will be
distributed an amount equal to the aggregate of all liabilities
of the Trust; and (b) the balance of the assets of PDLP
will be distributed: (i) as to that proportion of such
assets equal to the result obtained by dividing the amount of
such assets by the sum of the number of Exchangeable Units and
the number of Trust Units, in each case as outstanding on
the date of such distribution, in respect of each Exchangeable
Unit outstanding; and (ii) as to the remaining portion of
such assets, to the holders of PDLP A Units rateably in
accordance with the number of PDLP A Units held thereby.
Amendment
and Approval
An amendment to the Limited Partnership Agreement may be
proposed by the General Partner and, subject to the following
limitations, will be deemed to be effective if approved by the
General Partner:
|
|
|
|
(a)
|
the amendment provisions themselves may not be amended without
the unanimous consent of the holders of the PDLP A Units and
Exchangeable Units (together, the
Unitholders
);
|
|
|
|
|
(b)
|
no amendments shall be made to the Limited Partnership Agreement
which would have the effect of, among other things;
(i) preventing the loans or distributions to the
Unitholders or adversely affecting the rights of the Unitholders
under the Support Agreement (as defined herein);
(ii) changing the provisions in the Limited Partnership
Agreement requiring that the business of PDLP be conducted
|
33
|
|
|
|
|
solely through its investment in Precision or any associate or
affiliate thereof, or in any other corporation, partnership,
trust or other person involved, directly or indirectly, in any
business which involves the provision of contract drilling,
service rigs, snubbing, rentals and related services to oil and
gas exploration and production companies, (iii) changing
the liability of a limited partner; (iv) allowing any
limited partner to exercise control over the business of PDLP;
(v) changing the right of a limited partner to vote on
resolutions; (vi) changing PDLP from a limited partnership
to a general partnership, or (vii) causing the Trust to lose its
status as a mutual fund trust under the Tax Act,
without such amendment being passed by way of an extraordinary
resolution;
|
|
|
|
|
(c)
|
no amendment shall be made to the Limited Partnership Agreement
which would have the effect of adding, changing or removing any
right, privilege, restriction or condition attaching to the
Exchangeable Units, or which would have an adverse impact on the
holders of Exchangeable Units unless such amendment is approved
by class vote of
66
2
/
3
%
of the holders of Exchangeable Units; and
|
|
|
|
|
(d)
|
no amendment shall be made which would have the effect of
adversely affecting the rights and obligations of the General
Partner becoming effective before 45 days after the
resolution approving such amendment.
|
Partners must be notified of the full details of any amendment
to the Limited Partnership Agreement within 30 days of the
effective date of such amendment.
MARKET
FOR SECURITIES
Trading
Price and Volume of Trust Units
The Trust Units are listed for trading under the symbol
PD.UN on the Toronto Stock Exchange (the
TSX
) and under the symbol PDS on
the New York Stock Exchange (the
NYSE
). The
following table sets forth the price range and trading volumes
for the Trust Units on each of the TSX and NYSE, as
reported by each of the TSX and NYSE, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSX
|
|
|
NYSE
|
|
|
|
|
Period
|
|
High
|
|
|
Low
|
|
|
Volume
|
|
|
High
|
|
|
Low
|
|
|
Volume
|
|
|
|
|
|
|
($)
|
|
|
($)
|
|
|
|
|
|
(US$)
|
|
|
(US$)
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
18.01
|
|
|
|
15.13
|
|
|
|
11,591,630
|
|
|
|
17.70
|
|
|
|
15.15
|
|
|
|
11,208,759
|
|
|
|
|
|
February
|
|
|
22.53
|
|
|
|
17.15
|
|
|
|
15,377,467
|
|
|
|
22.91
|
|
|
|
17.10
|
|
|
|
12,326,070
|
|
|
|
|
|
March
|
|
|
24.00
|
|
|
|
19.61
|
|
|
|
9,855,413
|
|
|
|
23.53
|
|
|
|
19.46
|
|
|
|
15,556,649
|
|
|
|
|
|
April
|
|
|
27.46
|
|
|
|
22.55
|
|
|
|
15,213,996
|
|
|
|
27.25
|
|
|
|
21.89
|
|
|
|
17,653,251
|
|
|
|
|
|
May
|
|
|
28.39
|
|
|
|
24.50
|
|
|
|
10,295,190
|
|
|
|
28.38
|
|
|
|
24.03
|
|
|
|
12,249,342
|
|
|
|
|
|
June
|
|
|
28.93
|
|
|
|
26.05
|
|
|
|
13,594,223
|
|
|
|
28.59
|
|
|
|
25.76
|
|
|
|
17,063,854
|
|
|
|
|
|
July
|
|
|
28.09
|
|
|
|
21.30
|
|
|
|
15,022,653
|
|
|
|
28.15
|
|
|
|
21.01
|
|
|
|
18,697,742
|
|
|
|
|
|
August
|
|
|
23.45
|
|
|
|
20.53
|
|
|
|
19,241,508
|
|
|
|
22.89
|
|
|
|
19.30
|
|
|
|
25,311,531
|
|
|
|
|
|
September
|
|
|
22.32
|
|
|
|
16.00
|
|
|
|
20,876,778
|
|
|
|
21.05
|
|
|
|
15.42
|
|
|
|
31,944,785
|
|
|
|
|
|
October
|
|
|
17.84
|
|
|
|
9.99
|
|
|
|
22,501,020
|
|
|
|
16.82
|
|
|
|
8.41
|
|
|
|
42,647,176
|
|
|
|
|
|
November
|
|
|
13.90
|
|
|
|
8.10
|
|
|
|
14,143,561
|
|
|
|
12.06
|
|
|
|
6.36
|
|
|
|
34,439,385
|
|
|
|
|
|
December
|
|
|
11.77
|
|
|
|
7.07
|
|
|
|
14,588,829
|
|
|
|
9.65
|
|
|
|
5.57
|
|
|
|
44,416,102
|
|
|
|
|
|
34
Prior
Sales
The following table summarizes the issuances of Trust Units
within the twelve month period ending December 31,
2008
(1)
.
|
|
|
|
|
|
|
|
|
|
|
Number of Trust Units or
|
|
|
Date of Issuance
|
|
Description of
Transaction
|
|
Securities
|
|
Price per
Security
|
|
December 23, 2008
|
|
Acquisition
(2)
|
|
34,435,724
|
|
US$21.22
|
NOTES:
|
|
|
(1)
|
|
On February 18, 2009, the
Trust issued 46 million Trust Units pursuant to the
Trust Unit Offering. See General Development of the
Business Recent Developments.
|
|
(2)
|
|
Pursuant to the Acquisition, each
share of Grey Wolf common stock was convertible, at the option
of the holder, into US$9.02 in cash or 0.4225 Trust Units,
subject to proration. The total consideration paid by the Trust
to shareholders of Grey Wolf in connection with the Acquisition
was approximately US$897.2 million and 34.4 million
Trust Units. Cash consideration elections exceeded the
amount of cash available for cash elections. Accordingly, former
Grey Wolf shareholders who properly chose to receive all-cash
merger consideration received a prorated amount of cash
consideration in the amount of US$5.39 and 0.17 Trust Units
for each share of Grey Wolf common stock. Grey Wolf shareholders
who elected to receive Trust Units or did not make a timely
and valid merger consideration election received 0.4225
Trust Units for each share of Grey Wolf common stock.
|
35
TRUSTEES,
DIRECTORS AND EXECUTIVE OFFICERS
Board
of Trustees
Pursuant to the terms of the Declaration of Trust, the board of
trustees of the Trust (the
Board of Trustees
and, each member thereof, a
Trustee
) consists
of three members who are responsible for supervising the
activities and managing the affairs of the Trust.
The Declaration of Trust provides that, subject to its terms and
conditions, the Board of Trustees has full, absolute and
exclusive power, control, authority and discretion over the
Trust assets and the management of the affairs of the Trust to
the same extent as if the Board of Trustees were the sole and
absolute legal and beneficial owners of the Trust assets.
Trustees are elected at each annual meeting of Unitholders to
hold office for a term expiring at the close of the next annual
meeting. A quorum of the Board of Trustees is a majority of the
Trustees then holding office. A majority of the Trustees may
fill a vacancy in the Board of Trustees, except a vacancy
resulting from an increase in the number of Trustees or from a
failure of the Unitholders to elect the required number of
Trustees. In the absence of a quorum of Trustees, or if the
vacancy has arisen from a failure of the Unitholders to elect
the required number of Trustees, the Board of Trustees will
promptly call a special meeting of the Unitholders to fill the
vacancy. If the Board of Trustees fails to call that meeting or
if there are no Trustees then in office, any Unitholder may call
the meeting. Except as otherwise provided in the Declaration of
Trust, the Board of Trustees may, between annual meetings of
Unitholders, appoint one or more additional Trustees to serve
until the next annual meeting of Unitholders, but the number of
additional Trustees will not at any time exceed one-third of the
number of Trustees who held office at the expiration of the
immediately preceding annual meeting of Unitholders.
Any one or more of the Trustees may resign upon 30 Days written
notice to the Trust and may be removed by an ordinary resolution
of the Unitholders and the vacancy created by such removal may
be filled at the same meeting, failing which it may be filled by
the affirmative vote of a quorum of the Board of Trustees.
The following table sets forth, for each Trustee and Director
and each officer of Precision: his or her name; municipality,
province or state and country of residence; all positions and
offices now held by him or her; the month and year in which he
or she was first elected a Trustee, Director or officer; and his
or her principal occupation during the preceding five years.
|
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|
Position
|
|
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|
|
|
|
Name, Municipality, Province or
|
|
|
Presently
|
|
|
Trustee/Director/Officer
|
|
|
Principal Occupation
|
State & Country of Residence
|
|
|
Held
|
|
|
Since
(1)
|
|
|
During the Preceding 5 Years
|
Frank M. Brown
(3)(5)
Anchorage, Alaska, USA
|
|
|
Director
|
|
|
December 2008
|
|
|
Director of Precision since December 2008; Director of Grey Wolf
since May 2000. Private consultant in the Alaskan oil and gas
industry 2006-Present; Chief Executive Officer of ZRB Resources,
LLC, since 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William T. Donovan
(2)(5)
Milwaukee, Wisconsin, USA
|
|
|
Director
|
|
|
December 2008
|
|
|
Director of Precision since December 2008; Director of Grey
Wolf, 1997-2008; Chairman of the board of Rockland Industrial
Holdings, LLC, since 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
W.C. (Mickey)
Dunn
(3)(4)
Edmonton, Alberta, Canada
|
|
|
Director
|
|
|
September 1992
|
|
|
Chairman, True Energy Trust.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian A. Felesky, CM,
Q.C.
(4)
Calgary, Alberta, Canada
|
|
|
Director
|
|
|
December 2005
|
|
|
Counsel, Felesky Flynn LLP. From April 1978 through July 2006,
Partner at Felesky Flynn LLP.
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Robert J.S.
Gibson
(2)(4)
Calgary, Alberta, Canada
|
|
|
Trustee Director
|
|
|
June 1996
|
|
|
President, Stuart & Company Limited.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allen R. Hagerman,
FCA
(2)
Calgary, Alberta, Canada
|
|
|
Trustee Director
|
|
|
December 2006
|
|
|
Executive Vice President, Canadian Oil Sands Limited, Oil Sands
Mining and Upgrading; Chief Financial Officer, Canadian Oil
Sands Limited 2003 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen J.J.
Letwin
(3)
Houston, Texas, USA
|
|
|
Director
|
|
|
December 2006
|
|
|
Managing Director, Enbridge Energy Partners and Executive Vice
President, Gas Transportation & International, Enbridge
Inc. since May 2006; Group Vice President, Gas Strategy &
Corporate Development, Enbridge Inc., April 2003 to May 2006;
Group Vice President, Distribution & Services, Enbridge
Inc., September 2000 to April 2003.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick M.
Murray
(2)
Dallas, Texas, USA
|
|
|
Trustee Director
|
|
|
July 2002
|
|
|
Corporate Director; Chairman and Chief Executive Officer,
Dresser, Inc. from 2001 until retiring in May 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin A. Neveu
Calgary, Alberta, Canada
|
|
|
President, Chief Executive Officer Director
|
|
|
August 2007
|
|
|
President and Chief Executive Officer since January 13, 2009.
Chief Executive Officer, Precision Drilling Corporation from
August 2007 to January 13, 2009; President, Rig Solutions Group,
National Oilwell Varco 2002 to 2007.
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
Position
|
|
|
|
|
|
|
Name, Municipality, Province or
|
|
|
Presently
|
|
|
Trustee/Director/Officer
|
|
|
Principal Occupation
|
State & Country of Residence
|
|
|
Held
|
|
|
Since
(1)
|
|
|
During the Preceding 5 Years
|
|
|
|
|
|
|
|
|
|
|
Frederick W.
Pheasey
(3)
Edmonton, Alberta, Canada
|
|
|
Director
|
|
|
July 2002
|
|
|
Director of Dreco Energy Services Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert L.
Phillips
(2)(3)(4)
Vancouver, British Columbia, Canada
|
|
|
Director Chairman
|
|
|
May 2004
|
|
|
Corporate Director; President and Chief Executive Officer, BCR
Group of Companies 2001-2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trevor M. Turbidy
(4)(5)
Houston, Texas, USA
|
|
|
Director
|
|
|
December 2008
|
|
|
Director of Precision since December 2008; Director of Grey Wolf
2005-2008; Energy Industry Advisor with Avista Capital Partners
2007-Present; President and Chief Executive Officer of Trico
Marine Services, Inc., 2005-2007.
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joanne L. Alexander
Calgary, Alberta, Canada
|
|
|
Vice President, General Counsel and Corporate Secretary
|
|
|
April 2008
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Vice-President, General Counsel and Corporate Secretary since
January 13, 2009; Vice President and General Counsel, Precision
Drilling Corporation from April 2008 to January 13, 2009;
General Counsel, Marathon Oil Canada Corporation 2007-2008;
General Counsel, Western Oil Sands Inc. 2007; General Manager,
Stakeholder Engagement & Regulatory Affairs, ConocoPhillips
Canada Ltd. 2006; Vice President, Legal and Regulatory Affairs,
Burlington Resources Canada Ltd. 2000-2006.
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David J. Crowley
Houston, Texas, USA
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President, U.S. Operations
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January 2009
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|
President, U.S. Operations since January 13, 2009. Executive
Vice President and Chief Operating Officer, Grey Wolf 2007-2008;
Senior Vice President of Operations, The Offshore Drilling
Company 2003-2007.
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Kenneth J. Haddad
Houston, Texas, USA
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Vice President, Business Development
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March 2008
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Vice President, Business Development, Precision Drilling
Corporation since March 2008; Director, Mergers and
Acquisitions, Halliburton Company 2002-2008.
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Darren J. Ruhr
Calgary, Alberta, Canada
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Vice President, Corporate Services
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November 2005
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|
Vice-President, Corporate Services since January 13, 2009, Vice
President, Corporate Services & Corporate Secretary,
Precision Drilling Corporation from November 2005 to January 13,
2009; Director, Information Technology, Real Estate &
Travel, Precision Drilling Corporation 2003-2005; Director,
Information Technology, Precision Drilling Corporation 2000-2003.
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Gene C. Stahl
Calgary, Alberta, Canada
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President, Canadian Operations
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|
November 2005
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|
President, Canadian Operations since January 13, 2009, President
& Chief Operating Officer, Precision Drilling Corporation
from November 2005 to January 13, 2009; Vice President,
Precision Rentals 2003-2005; General Manager, Ducharme
Rentals/Big D Rentals 2002-2003.
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Douglas J. Strong
Calgary, Alberta, Canada
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Chief Financial Officer
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November 2005
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Chief Financial Officer, Precision Drilling Corporation since
2005; Chief Financial Officer, Precision Diversified Services
Ltd. 2001-2005, Group Controller, Precision Drilling 2001- 2005.
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David W. Wehlmann
Houston, Texas, USA
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Executive Vice President, Investor Relations
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|
January 2009
|
|
|
Executive Vice President, Investor Relations since January 13,
2009. Executive Vice President and CFO, Grey Wolf 2003-2008;
Senior Vice President, Chief Financial Officer and Secretary,
Grey Wolf 1998-2003; Vice President, Controller, Grey Wolf
1996-1998.
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NOTES:
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(1)
|
|
Each Trustees or
Directors term of office expires not later than the close
of business at the next annual meeting, or until successors are
appointed or Trustees or Directors vacate their office.
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(2)
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|
Member of the Audit Committee.
|
(3)
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|
Member of the Compensation
Committee.
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(4)
|
|
Member of the Corporate Governance
and Nominating Committee.
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(5)
|
|
Nominated by Grey Wolf and
appointed by Precision.
|
At March 27, 2009, the Trustees, Directors and officers of
Precision, as a group, beneficially owned, directly or
indirectly, or controlled or directed over 1,062,577
Trust Units and no Exchangeable Units, or approximately
0.516% of the issued and outstanding Trust Units and
Exchangeable Units, which aggregate number includes a total of
73,536 Trust Units credited to the accounts of
non-management Directors pursuant to a deferred trust unit plan
approved by Unitholders on May 7, 2008.
CEASE
TRADE ORDERS, BANKRUPTCIES, PENALTIES OR SANCTIONS
Corporate
Cease Trade Orders
To the knowledge of the Trust, no Trustee, Director or executive
officer of the Trust or Precision, as applicable, is as at the
date hereof or has been, within the 10 years before the
date hereof, a director, chief executive officer or chief
financial officer of any company that: (i) was subject to
an order that was issued while the director or executive officer
was acting in the capacity as director, chief executive officer
or chief financial officer; or (ii) was subject to an order
that was issued after the director or executive officer ceased
to be a director, chief executive officer or chief financial
officer and which resulted from an event that occurred while
that person was acting in the capacity as director, chief
executive officer or chief financial officer.
37
Corporate
Bankruptcies
To the knowledge of the Trust, no Trustee, Director, executive
officer or controlling securityholder of the Trust or Precision,
as applicable, is, as of the date hereof, or has been within the
10 years before the date hereof, a director or executive
officer of any company that, while that person was acting in
that capacity, or within a year of that person ceasing to act in
that capacity, became bankrupt, made a proposal under any
legislation relating to bankruptcy or insolvency or was subject
to or instituted any proceedings, arrangement or compromise with
creditors or had a receiver, receiver manager or trustee
appointed to hold its assets.
Personal
Bankruptcies
To the knowledge of the Trust, no Trustee, Director, executive
officer or controlling securityholder of the Trust or Precision,
as applicable, has, within the 10 years before the date
hereof, become bankrupt, made a proposal under any legislation
relating to bankruptcy or insolvency, or became subject to or
instituted any proceedings, arrangement or compromise with
creditors, or had a receiver, receiver manager or trustee
appointed to hold such persons assets.
Penalties
or Sanctions
To the knowledge of the Trust, no Trustee, Director, executive
officer or controlling securityholder of the Trust or Precision,
as applicable, has been subject to: (i) any penalties or
sanctions imposed by a court relating to securities legislation
or by a securities regulatory authority or has entered into a
settlement agreement with a securities regulatory authority; or
(ii) any other penalties or sanctions imposed by a court or
regulatory body that would likely be considered important to a
reasonable investor in making an investment decision.
AUDIT
COMMITTEE INFORMATION
Audit
Committee Charter
The Audit Committee Charter and Terms of Reference (the
Audit Committee Charter
) of Precision is set
forth in Appendix 1 of this Annual Information Form.
Composition
of the Audit Committee
The Audit Committee of Precision currently consists of Patrick
M. Murray (Chairman), Robert L. Phillips, Allen R. Hagerman,
Robert J.S. Gibson and William T. Donovan. The Audit Committee
is a standing committee appointed by the Board of Directors to
assist the Board of Directors in fulfilling its oversight
responsibilities with respect to financial reporting by
Precision and the Trust, in its own capacity and in its capacity
as the administrator of the Trust. Each member of the Audit
Committee is independent and none received, directly or
indirectly, any compensation from Precision or the Trust other
than for services as a member of the Board of Trustees or the
Board of Directors and its committees. All members of the Audit
Committee are financially literate (as that term is
defined in Multilateral Instrument
52-110
Audit Committees
). In addition, the Board of Directors
has determined that each of Messrs. Murray, Hagerman and
Donovan qualify as audit committee financial experts
(as that term is defined in the United States
Sarbanes-Oxley
Act of 2002
).
Relevant
Education and Experience
In addition to each members general business experience,
the education and experience of each Audit Committee member that
is relevant to the performance of his responsibilities as an
Audit Committee member are as follows: Patrick M. Murray (Chair)
is the retired Chairman, President and Chief Executive Officer
of Dresser, Inc. Mr. Murray received a B.Sc. degree in
Accounting in 1964 from Seton Hall University and an MBA in
1973. Mr. Murray has been a member of Precisions
Audit Committee since April 2003. Robert L. Phillips
experience includes executive level positions at several
corporations and board membership on several public
corporations. Mr. Phillips received a B.Sc. in Chemical
Engineering in 1971 and a LLB in 1976 from the University of
Alberta. Mr. Phillips was appointed to the Audit Committee
in December, 2008. Allen R. Hagerman is the Executive Vice
38
President, Canadian Oil Sands Limited and was Chief Financial
Officer of Canadian Oil Sands Limited from 2003 to 2007.
Mr. Hagerman received a B. Comm. from the University of
Alberta in 1973, his Chartered Accountant designation in 1975
and his FCA designation in 1996 from the Institute of Chartered
Accountants of Alberta. Mr. Hagerman also received an MBA
from the Harvard School of Business in 1977. Mr. Hagerman
was appointed to the Audit Committee in May 2007. Robert J. S.
Gibson is the President of Stuart & Company Limited
and has been a member of the Audit Committee since June 1997.
William T. Donovan is the Chairman of Rockland Industrial
Holdings LLC of Milwaukee, Wisconsin and was a director of Grey
Wolf from 1997 until the date of the Acquisition.
Mr. Donovan has a B.Sc (1974) and an MBA
(1976) from the University of Notre Dame. Mr. Donovan
was appointed to the Audit Committee in December 2008.
Pre-approval
Policies and Procedures
Under the Audit Committee Charter, the Audit Committee is
required to approve the terms of the engagement and the
compensation to be paid to the external auditor of the Trust. In
addition, the Audit Committee is required to review and
pre-approve all permitted non-audit services to be provided to
the Trust or any affiliated entities by the external auditors or
any of their affiliates subject to any de
minimus
exception allowed by applicable law. The Audit Committee may
delegate to one or more designated members of the Audit
Committee the authority to pre-approve non-audit services.
Non-audit services that have been pre-approved by any such
delegate must be presented to the Audit Committee at its first
scheduled meeting following such pre-approval.
The Audit Committee implemented specific procedures regarding
the pre-approval of services to be provided by Precisions
external auditor commencing in 2003. These procedures specify
certain prohibited services that are not to be performed by the
external auditor. In addition, these procedures require that at
least annually, prior to the period in which the services are
proposed to be provided, Precisions management will, in
conjunction with the Trusts external auditor, prepare and
submit to the Audit Committee a complete list of all proposed
services to be provided to Precision and the Trust by the
external auditor. Under the Audit Committee pre-approval
procedures, for those services proposed to be provided by the
external auditor that have not been previously approved by the
Audit Committee, the Chairman of the Audit Committee has the
authority to grant pre-approvals of such services. The decision
to pre-approve a service covered under this procedure is
required to be presented to the full Audit Committee at the next
scheduled meeting. At each of the Audit Committees regular
meetings, the Audit Committee is to be provided with an update
as to the status of services previously pre-approved.
Pursuant to these procedures, since their implementation in
2003, 100% of each of the services provided by the Trusts
external auditor relating to the fees reported as audit,
audit-related, tax and all other fees were pre-approved by the
Audit Committee or its delegate.
Audit
Fees
The following table provides information about fees billed to
the Trust and its affiliates for professional services rendered
by KPMG LLP, the Trusts external auditor, during fiscal
2008 and 2007:
(in
thousands of Canadian dollars)
|
|
|
|
|
|
|
|
|
|
|
Years ended December
31,
|
|
|
2008
|
|
|
|
2007
|
|
Audit fees
|
|
|
$
|
2,248
|
|
|
|
$
|
990
|
|
Audit-related fees
|
|
|
|
-
|
|
|
|
|
-
|
|
Tax fees
|
|
|
|
442
|
|
|
|
|
73
|
|
All other fees
|
|
|
|
40
|
|
|
|
|
-
|
|
|
Total
|
|
|
$
|
2,730
|
|
|
|
$
|
1,063
|
|
Audit fees consist of fees for the audit of the Trusts
annual financial statements or services that are normally
provided in connection with statutory and regulatory filings or
engagements and include fees related to Sarbanes-Oxley
section 404 compliance. The increase in audit fees from
2007 to 2008 was primarily due to the Acquisition.
39
Audit-related fees consist of fees for assurance and related
services that are reasonably related to the performance of the
audit or review of the Trusts financial statements and are
not reported as audit fees. There were no such fees incurred in
2007 or 2008.
Tax fees consist of fees for tax compliance services, tax advice
and tax planning. During fiscal 2008 and 2007 the services
provided in this category included assistance and advice in
relation to the preparation of income tax returns for the Trust
and its subsidiaries, expatriate tax compliance matters, tax
advice and planning, commodity tax and property tax consultation.
All other fees consist of fees for those services provided to
the Trust. In 2008, these fees were for services rendered with
respect to the Trusts International Financial Reporting
Standards conversion project. There were no such fees in 2007.
LEGAL
PROCEEDINGS AND REGULATORY ACTIONS
Except as described herein under the heading Risk
Factors Risks Relating to the
Acquisition PDOS, as the successor to Grey Wolf, is
subject to litigation regarding the Acquisition, the Trust
is not involved in any legal proceedings that it believes might
have a material adverse effect on its business or results of
operations.
During the course of the year ended December 31, 2008, the Trust
was not subject to any penalties or sanctions imposed by a court
in relation to securities legislation or by securities
regulatory authority, was not the subject of any other penalties
or sanctions imposed by a court or regulatory authority and did
not enter into any settlement agreements with a court relating
to securities legislation or with a securities regulatory
authority.
INTEREST
OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
There were no material interests, direct or indirect, of the
Trustees, Directors and executive officers of Precision, any
Unitholder who beneficially owns more than 10% of the
outstanding Trust Units or Exchangeable Units, or any known
associate or affiliate of such persons, in any transaction
within the last fiscal year and in any proposed transaction
which has materially affected or is reasonably expected to
materially affect the Trust.
TRANSFER
AGENT, REGISTRAR AND VOTING AND EXCHANGE TRUSTEE
Computershare Trust Company of Canada, located in Calgary,
Alberta, is the transfer agent and registrar of the
Trust Units and the Special Voting and Exchange Trustee for
the holders of Exchangeable Units. In the United States, the
co-transfer agent for the Trust is Computershare
Trust Company NA located in Golden, Colorado.
MATERIAL
CONTRACTS
The only material contracts entered into by Precision, the Trust
or PDLP during the most recently completed financial year, or
before the most recently completed financial year that are still
in effect, other than contracts during the ordinary course of
business, are as follows:
Declaration
of Trust
See Corporate Structure The Trust and
Description of Capital Structure.
Limited
Partnership Agreement
See Corporate Structure Precision Drilling
Limited Partnership and Description of Capital
Structure.
Voting
and Exchange Trust Agreement
See Description of Capital Structure.
40
Support
Agreement
See Description of Capital Structure.
Administration
Agreement
See Corporate Structure Administration
Agreement.
Merger
Agreement
See General Development of the Business Three
Year History.
Secured
Facility Agreement
See Description of the Business of Precision
Material Debt.
Unsecured
Facility Agreement
See Description of the Business of Precision
Material Debt.
Copies of the material agreements described above have been
filed by the Trust on SEDAR and are available online at
www.sedar.com.
INTERESTS
OF EXPERTS
KPMG LLP, the Trusts external auditor, has prepared an
opinion with respect to the Trusts consolidated financial
statements as at and for the year ended December 31, 2008.
In connection with the audit of the Trusts annual
financial statements for the year ended December 31, 2008,
the auditors confirmed that they are independent within the
meaning of the Rules of Professional Conduct of the Institute of
Chartered Accountants of Alberta.
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
As of the fiscal year ended December 31, 2008, an
evaluation of the effectiveness of the Trusts
disclosure controls and procedures (as such term is
defined in
Rules 13a-15(e)
and
15d-15(e)
of
the United States
Securities Exchange Act of 1934
, as
amended (the
Exchange Act
)) was carried out
by the Trusts management with the participation of the
principal executive officer and principal financial and
accounting officer of Precision on behalf of the Trust. Based
upon that evaluation, the principal executive officer and the
principal financial and accounting officer of Precision have
concluded that as of the end of that fiscal year, the
Trusts disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Trust in
reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission
rules and forms and is accumulated and communicated to the
Trusts management, including the principal executive
officer and principal financial and accounting officer of
Precision, to allow timely decisions regarding required
disclosure.
It should be noted that while Precisions principal
executive officer and principal financial and accounting officer
believe that the Trusts disclosure controls and procedures
provide a reasonable level of assurance that they are effective,
they do not expect that the Trusts disclosure controls and
procedures or internal control over financial reporting will
prevent all errors and fraud. A control system, no matter how
well conceived or operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system
are met.
With the Acquisition occurring close to the fiscal year end,
management of Precision is not required to conclude as to the
effectiveness of disclosure controls and procedures within Grey
Wolf. As such, the principal executive officer and principal
financial accounting officer have not concluded as to the design
and effectiveness of disclosure controls and procedures in Grey
Wolf.
41
INTERNAL
CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and preparation of financial statements for external
purposes in accordance with Canadian generally accepted
accounting principles (
Canadian GAAP
)
including reconciliation to United States generally accepted
accounting principles (
U.S. GAAP
).
Under the supervision and with the participation of management,
including the principal executive officer and principal
financial and accounting officer, Precision conducted an
evaluation of the design and effectiveness of our internal
control over financial reporting as of the end of the fiscal
year based on the framework in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. On December 23,
2008, Precision acquired Grey Wolf and began consolidating the
operations from that date. Based on the proximity of this
acquisition to year end, management has excluded this business
from its evaluation of the effectiveness of Precisions
internal control over financial reporting as of
December 31, 2008. The net earnings attributable to this
business represented approximately 1% of the Trusts
consolidated net earnings for the year ended December 31,
2008, and its aggregate total assets represented approximately
56% of the consolidated total assets as at December 31,
2008.
Based on this evaluation, management concluded that as of
December 31, 2008, the Trust did maintain effective
internal control over financial reporting.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Managements Discussion and Analysis relating to the
consolidated financial statements for the fiscal year ended
December 31, 2008 forms part of the Trusts 2008
Annual Report and is incorporated by reference in this Annual
Information Form. Managements Discussion and Analysis
appears on pages 2 to 53 of the 2008 Annual Report.
ADDITIONAL
INFORMATION
Additional information concerning the Trust is available through
the Internet on SEDAR which may be accessed at
www.sedar.com.
Copies of such information may also be
obtained without charge, on the Trusts website at
www.precisiondrilling.com
or by request to the Vice
President, General Counsel and Corporate Secretary, at the
offices of Precision at 4200, 150 6th Avenue
S.W., Calgary, Alberta, Canada T2P 3Y7; by email at
corporatesecretary@precisiondrilling.com;
by telephone at
(403) 716-4500;
and by facsimile at
(403) 264-0251.
Additional information, including information regarding
Precisions Trustees, Directors and
officers remuneration, will be contained in the Management
Information Circular of the Trust provided for the Annual and
Special Meeting of Unitholders of the Trust to be held on
May 6, 2009, and filed on SEDAR. Additional financial
information is provided in the Trusts annual consolidated
financial statements and managements discussion and
analysis for the year ended December 31, 2008 which are
contained in the Annual Report. Copies of such documents may be
obtained in the manner set forth above.
RISK
FACTORS
An investment in the Trust Units and Exchangeable Units is
subject to certain risks. Investors should carefully review and
consider the risks described below and all other information
contained in this Annual Information Form before making an
investment decision and consult their own experts where
necessary.
42
Risks
Relating To The Structure Of The Trust
Precision
may be unable to obtain access to additional
financing.
Precision may find it necessary in the future to obtain
additional debt or equity financing through the Trust to support
ongoing operations, to undertake capital expenditures, to repay
existing indebtedness or to undertake acquisitions or other
business combination transactions. There can be no assurance
that additional financing will be available to Precision when
needed or on terms acceptable or favourable to Precision.
Precisions inability to raise financing to support ongoing
operations or to fund capital expenditures, acquisitions, debt
repayments or other business combination transactions could
limit Precisions growth and may have a material adverse
effect upon Precision. See Description of the Business of
Precision Material Debt.
The
Trust may not be able to obtain financing or obtain financing on
acceptable terms because of the deterioration of the credit and
capital markets.
On February 19, 2009, the Trust announced that the Senior
Note Offering had been postponed due to currently unfavourable
market conditions. Global financial markets and economic
conditions have been, and continue to be, disrupted and
volatile. The debt and equity capital markets have been
exceedingly distressed. The re-pricing of credit risk and the
current weak economic conditions have made, and will likely
continue to make, it difficult to obtain funding on acceptable
terms, if at all. In particular, the cost of raising money in
the debt and equity capital markets has increased substantially,
while the availability of funds from those markets has
diminished significantly. Also, as a result of concerns about
the stability of financial markets generally and the solvency of
counterparties specifically, the cost of obtaining money from
the credit markets has increased as many lenders and
institutional investors have increased interest rates, enacted
tighter lending standards, refused to refinance existing debt at
maturity at all or on terms similar to the Trusts current
debt and reduced and, in some cases, ceased to provide funding
to borrowers.
If the Trusts business does not generate sufficient cash
flow from operations to enable it to pay its indebtedness or to
fund its other liquidity needs, then, as a consequence of these
changes in the credit markets, the Trust cannot assure that
future borrowings will be available to it under its credit
facilities in sufficient amounts, either because the
Trusts lending counterparties may be unwilling or unable
to meet their funding obligations or because the Trusts
borrowing base may decrease as a result of lower asset
valuations, operating difficulties, lending requirements or
regulations, or for any other reason. Moreover, even if lenders
and institutional investors are willing and able to provide
adequate funding, interest rates may rise in the future and
therefore increase the cost of borrowing the Trust incurs on any
of its floating rate debt. Finally, the Trust may need to
refinance all or a portion of its indebtedness on or before
maturity, sell assets, reduce or delay capital expenditures,
seek additional equity financing or seek third-party financing
to satisfy such obligations. The Trust cannot assure that it
will be able to refinance any of its indebtedness on
commercially reasonable terms or at all. There can be no
assurance that the Trusts business, liquidity, financial
condition, or results of operations will not be materially and
adversely impacted in the future as a result of the existing or
future credit market conditions. See General Development
of the Business Recent Developments.
The
Trusts debt service obligations may limit the amount of
cash available for distributions.
The Trust and its affiliates may, from time to time, finance a
significant portion of their growth (either from acquisitions or
capital expenditure additions) and operations through debt.
Amounts paid in respect of interest and principal on debt
incurred by Precision and its affiliates may impair
Precisions ability to satisfy its obligations under its
debt instruments. Variations in interest rates and scheduled
principal repayments could result in significant changes in the
amount required to be applied to service debt before payment of
inter-entity debt. This may result in lower levels of cash
available for distribution by the Trust. Ultimately,
subordination agreements or other debt obligations (including
the terms of the Credit Facilities, see Description of the
Business of Precision Material Debt) could
preclude distributions altogether. See Risk
Factors Risks Relating to the Acquisition.
The terms of the documents governing the Credit Facilities
contain provisions that in effect ensure that the lenders have
priority as to payment over the Unitholders in respect to the
assets and income of the Trust and its subsidiaries. Amounts due
and owing to the lenders under the Credit Facilities must be
paid before any distributions
43
can be made to Unitholders. This relative priority of payments
could result in a temporary or permanent interruption of
distributions to Unitholders. See Risk Factors
Distributions on the Trust Units have been suspended and
may not be reinstated.
Sales
of additional Trust Units could negatively affect the value
of the Trust Units.
The Trust may issue additional Trust Units in the future to
fund the requirements of Precision and other entities now or
hereafter owned directly or indirectly by the Trust. Such
additional Trust Units may be issued without the approval
of Unitholders. Unitholders have no pre-emptive rights in
connection with such additional issues. The Board of Trustees
has discretion in connection with the price and the other terms
of the issue of such additional Trust Units. See
General Development of the Business Recent
Developments.
The
price of Trust Units may experience
volatility.
The price of Trust Units may be volatile. Some of the
factors that could affect the price of the Trust Units are
increases or decreases in revenue or earnings, changes in cash
distributions made by the Trust, changes in revenue or earnings
estimates by the investment community, the ability of the Trust
to implement its integration strategy and to realize the
expected benefits from the Acquisition and speculation in the
press or investment community about the Trusts financial
condition or results of operations. General market conditions
and Canadian, United States or international economic factors
and political events unrelated to the performance of the Trust
may also affect the price of Trust Units. For these
reasons, investors should not rely on past trends in the price
of Trust Units to predict the future price of
Trust Units or the Trusts financial results.
Precision has experienced a reduction in the demand for its
services in late 2008 and early 2009 in correlation with the
significant downward trend in oil and natural gas prices over
the same period. See General Development of the
Business Recent Developments.
Distributions
on the Trust Units have been suspended and may not be
reinstated.
On February 9, 2009, the Trust announced that it had
suspended cash distributions for an indefinite period. The
Trusts ability to resume making cash distributions, if
any, in the future and the actual cash flow available for
distribution to Unitholders is a function of numerous factors
including, among other things, the Trusts,
Precisions and PDLPs financial performance; debt
covenants and obligations; working capital requirements; future
upgrade capital expenditures and future expansion capital
expenditure requirements for the purchase of property, plant and
equipment; tax obligations; the impact of interest rates
and/or
foreign exchange rates; the growth of the general economy; the
price of crude oil and natural gas; weather; and number of
Trust Units and Exchangeable Units issued and outstanding.
Cash distributions may or may not be reinstated, may be
reinstated at amounts different than historical or recent
amounts (and subsequently increased or reduced) or may be
eliminated entirely depending on the Trusts operations and
the performance of its assets. The market value of the
Trust Units may deteriorate if the Trust is unable to
reinstate its cash distributions or otherwise meet cash
distribution expectations in the future, and that deterioration
may be material. See Risk Factors The Trust is
dependent on Precision and its subsidiaries for the amount of
cash available for distributions and Distributions
on the Trust Units are variable.
Asset
valuation variability could negatively affect the value of the
Trust Units.
The net asset value of the assets of the Trust from time to time
will vary depending upon factors which are beyond the control of
the Trust. The trading price of the Trust Units also
fluctuates due to factors beyond the control of the Trust and
such trading prices may be greater than the net asset value of
the Trusts assets.
The
Trust could face negative tax consequences for previous
transactions.
The business and operations of Precision prior to completion of
the Plan of Arrangement pursuant to which former shareholders of
Precision were issued Trust Units were complex and
Precision has executed a number of significant financings,
business combinations, acquisitions and dispositions over the
course of its history. The computation of income taxes payable
as a result of these transactions involves many complex factors
as well as Precisions interpretation of relevant tax
legislation and regulations. Management believes that the
provision for income tax is adequate and in accordance with
generally accepted accounting principles and applicable
legislation
44
and regulations. However, there are a number of tax filing
positions that can still be the subject of review by taxation
authorities who may successfully challenge Precisions
interpretation of the applicable tax legislation and
regulations, with the result that additional taxes could be
payable by Precision and the amount payable without penalties
could be up to $382 million as of December 31, 2008.
Any increase in tax liability would reduce the net assets of and
funds available to the Trust.
The Trust received Notices of Reassessment from a provincial
taxing authority relating to a prior period tax filing position
in the total amount of $58 million as of December 31,
2008. This $58 million has been paid, recorded as a
long-term receivable and included in the $382 million tax
contingency disclosed in the preceding paragraph. The income
tax-related portion of the applicable reassessments and the
interest portion is $38 million and $20 million,
respectively.
The
Trust is dependent on Precision and its subsidiaries for the
amount of cash available for distributions.
To receive cash available for distribution, the Trust is
dependent on the operations and assets of Precision (as well as
its direct and indirect subsidiaries, including PDOS, the former
Grey Wolf) through its interest in PDLP, which in turn owns 100%
of the shares of Precision and the Promissory Note.
Distributions to Unitholders are dependent on the ability of
Precision to make principal and interest payments on the
Promissory Note, dividends and return of capital payments. The
actual amount of cash available for distribution is dependent
upon numerous factors relating to the business of Precision
including profitability, changes in revenue, fluctuations in
working capital, capital expenditure levels, applicable laws,
compliance with contracts, contractual restrictions contained in
the instruments governing its indebtedness, the impact of
interest rates, the growth of the general economy, industry
activity, the price of crude oil and natural gas, changes to tax
laws, weather, future capital requirements and the number of
Trust Units and Exchangeable Units issued and outstanding
and potential tax liabilities resulting from any successful
reassessments of prior taxation years by taxation authorities.
Any reduction in the amount of cash available for distribution,
or actually distributed, by Precision to the Trust will
adversely impact or limit the amount of cash available for
distributions by the Trust to Unitholders. The market value of
the Trust Units may deteriorate if the Trust is unable to
meet distribution expectations in the future, and such
deterioration may be material. See Risk
Factors Distributions on the Trust Units are
variable and Distributions on the Trust Units
have been suspended and may not be reinstated.
Risks
associated with the taxation of the Trust and Precision could
negatively affect the value of the
Trust Units.
There can be no assurance that Canadian federal income tax laws
and administrative policies respecting the treatment of
mutual fund trusts will not be changed in a manner
that adversely affects Unitholders. For example, if the Trust
ceases to qualify as a mutual fund trust under the
Tax Act, certain Canadian income tax considerations would be
materially and adversely different in certain respects.
To qualify as a mutual fund trust for purposes of
the Tax Act the Trust must continuously satisfy certain
requirements as to the nature of its undertakings (primarily
that it must restrict its activities to the investment of
funds), its ability to distribute Trust Units to the
public, the dispersal of ownership of its Trust Units and
the requirement that, unless it meets certain exceptions, it
must not be reasonable to consider that it was established or is
maintained primarily for the benefit of Non-Canadian Holders (as
defined herein).
As noted above, the Tax Act provides that a trust will not be
considered to be a mutual fund trust for purposes of
the Tax Act if it is established or is maintained primarily for
the benefit of non-residents of Canada. However, this
disqualification rule does not apply if all or substantially all
of the trusts property is property other than
taxable Canadian property as defined in the Tax Act.
Although no assurances can be provided, all or substantially all
of the assets of the Trust should be property other than
taxable Canadian property as defined in the Tax Act.
Relevant specific proposals to amend the Tax Act that have been
publicly announced by the Minister of Finance (Canada) prior to
the date of this Annual Information Form (the
Proposed
Amendments
) provide that the Trust will lose its
status as a mutual fund trust if the aggregate fair
market value of all Trust Units issued by the
45
Trust and held by one or more non-residents of Canada or
partnerships that are not Canadian partnerships (as
defined in the Tax Act) is more than 50% of the aggregate fair
market value of all of the Trust Units issued by the Trust
and if more than 10% (based on fair market value) of the
Trusts property consists of certain types of taxable
Canadian property, Canadian resource property
or timber resource property, all as defined in the
Tax Act. Since no more than 10% of the Trusts property
should be taxable Canadian property, Canadian
resource property or timber resource property
these Proposed Amendments should not adversely affect the
Trusts status as a mutual fund trust. However,
no assurances can be provided that no more than 10% of the
Trusts property will be taxable Canadian
property, Canadian resource property or
timber resource property and, therefore, that, if
enacted, these Proposed Amendments would not adversely affect
the Trusts status as a mutual fund trust under
the Tax Act.
Provided the Trust satisfies the foregoing requirements it
should be a mutual fund trust for purposes of the
Tax Act. If the Trust ceased to qualify as a mutual fund
trust under the Tax Act, certain Canadian federal income
tax considerations would be materially and adversely different
in certain respects.
Moreover, if the Trust were to cease to qualify as a
mutual fund trust, Trust Units held by
Unitholders who are not resident in Canada for the purposes of
the Tax Act (
Non-Canadian Holders
) would
become taxable Canadian property under the Tax Act.
These Non-Canadian Holders would be subject to Canadian income
tax on any gains realized on a disposition of the
Trust Units held by them unless they were exempt under an
income tax convention, and Non-Canadian Holders may be subject
to certain notification and withholding requirements on a
disposition of their Trust Units. In addition, the Trust
would be taxed on certain types of income distributed to
Unitholders (apart from under the specified investment
flow-through legislation discussed below). Payment of this tax
may have adverse consequences for some Unitholders, particularly
Non-Canadian Holders and residents of Canada that are otherwise
exempt from Canadian income tax.
The SIFT Rules apply to trusts that are resident in Canada for
purposes of the Tax Act, that hold one or more
non-portfolio properties, and the trust units of
which are listed on a stock exchange or other public market. A
SIFT trust effectively is subject to tax on its income from
non-portfolio properties and taxable capital gains from
dispositions of non-portfolio properties paid, or made payable,
to unitholders at a rate comparable to the combined federal and
provincial corporate income tax rate.
In general terms, a trust that existed on October 31, 2006
and to which the SIFT Rules otherwise would apply (i.e., the
Trust), should not become a SIFT trust until the earlier of
January 1, 2011 or the first day after December 15,
2006 that the trust exceeds normal growth determined
by reference to the Guidelines. The Guidelines provide that a
trust should not be considered to exceed normal
growth if the trust does not issue new equity (including
convertible debentures or other equity substitutes) that exceeds
the greater of $50 million per year or certain specified
safe harbour amounts based on the market
capitalization of the trust on October 31, 2006.
Provided that the Trust does not issue new equity (including
debt that is convertible into equity) in an amount greater than
the safe-harbour amount of $4 billion
determined by reference to the market capitalization of the
Trust on October 31, 2006, the Trust should not be
considered to exceed normal growth as set forth in
the Guidelines. No assurances can be provided that the Trust
will not otherwise become a SIFT trust prior to January 1,
2011.
As part of its ongoing strategic planning, the Trust will
continue to examine and evaluate its various strategic
alternatives, including its ability to reorganize its legal and
tax structure to mitigate the expected impact of the SIFT Rules.
While no assurances can be provided regarding the strategic
alternatives, if any, that may be available, the strategic
alternatives considered will recognize that on March 12,
2009 the federal government enacted the SIFT Conversion Rules.
There can be no assurance that the Trust will not cease to
qualify as a mutual fund trust under the Tax Act or
that it will not become a SIFT trust prior to January 1,
2011.
46
If the
Trust does not constitute a qualified foreign
corporation for United States federal income tax purposes,
individual U.S. Holders (as defined below) may be taxed at a
higher rate on distributions.
Management expects that distributions it makes to non-corporate
U.S. Holders (including individual U.S. Holders) that
are treated as dividends for United States federal income tax
purposes will be treated as qualified dividend income eligible
for the reduced maximum rate to individuals of 15% (5% for
individuals in lower tax brackets). However, if the Trust does
not constitute a qualified foreign corporation for
United States federal income tax purposes, and as a result such
dividends to non-corporate U.S. Holders do not qualify for
this reduced maximum rate, such holders will be subject to tax
on such dividends at ordinary income rates (currently at a
maximum rate of 35%). In addition, under current law, the
preferential tax rate for qualified dividend income will not be
available for taxable years beginning after December 31,
2010.
For the purposes of this Annual Information Form, the term
U.S. Holder means a beneficial owner of
Trust Units that for United States federal income tax
purposes is:
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(a)
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an individual citizen or resident of the United States;
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(b)
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a corporation or other entity treated as a corporation for
federal income tax purposes, created or organized in or under
the laws of the United States or any State or the District of
Columbia;
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(c)
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an estate that is subject to United States federal income tax on
its income regardless of is source; or
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(d)
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a trust, the substantial decisions of which are controlled by
one or more United States persons and which is subject to the
primary supervision of a United States court, or a trust that
validly has elected under applicable Treasury regulations to be
treated as a United States person for United States federal
income tax purposes.
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Changes
in legislation may have an adverse effect on
Unitholders.
There can be no assurance that income tax laws related to the
status of mutual fund trusts, the taxation of
mutual fund trusts, or other matters will not be
changed in a manner which adversely affects Unitholders.
Environmental and applicable operating legislation may be
changed in a manner which adversely affects Unitholders.
Precision
has retained liabilities as a consequence of prior
reorganizations.
Precision, the successor entity to amalgamations involving its
predecessor companies, has retained all liabilities of its
predecessor companies, including liabilities relating to
corporate and income tax matters.
A
successful challenge by the tax authorities of the amount of
interest expense deducted by Precision on its payments of
Promissory Note interest could negatively affect the value of
the Trust Units.
Income fund structures often involve significant amounts of
inter-entity debt, which may generate substantial interest
expense and which serves to reduce earnings and therefore income
tax payable. This is the case in respect of Precision and its
interest expense on the Promissory Note. There can be no
assurance that the taxation authorities will not seek to
challenge the amount of interest expense deducted. If such a
challenge were to succeed against Precision or the Trust, it
could have a material adverse affect on the amount of
distributions paid by the Trust to Unitholders.
A
successful challenge by the tax authorities of the amount of
expenses deducted by the Trust or its subsidiaries could
negatively affect the value of the
Trust Units.
There can be no assurance that the applicable taxation
authorities will agree with the classification of expenses
claimed by the Trust or its subsidiaries. If the taxation
authorities successfully challenge the deductibility of any such
expenses, the return to Unitholders may be adversely affected.
47
A
change in the structure of the Trust may have an adverse effect
on Unitholders.
As a result of the adoption of the SIFT Rules, management of the
Trust may, from time to time, evaluate the organizational and
capital structure of the Trust and its subsidiaries to ensure
that it remains appropriate and efficient for the business of
the Trust and the benefit of Unitholders. Such evaluation and
review may result in the recommendation that Unitholders approve
a conversion of the Trust to a corporation.
In the event that such a recommendation were to be made,
approved and implemented, the Trusts income trust
structure could be reorganized into a corporation and the
Unitholders may become shareholders of that corporation which
would own all of the Trust Units of the Trust. Under this
form of reorganization, each Unitholder would exchange its
Trust Units for shares of the successor corporation. Such
reorganization would be subject to a review of all possible
reorganization alternatives as well as approval of the
Unitholders and to such other approvals as may be required,
including regulatory, stock exchange and court approvals.
In connection with any such reorganization, the current
distribution policies of the Trust would be replaced by the
dividend policy of the successor corporation which may result in
a decrease in the cash amount distributed compared with the
current or prior distributions of the Trust. Furthermore, the
reorganization would result in the conversion of the Trust into
an entity that would be subject to Canadian federal and
provincial income tax.
Any such reorganization may occur prior to January 1, 2011
and may have an adverse impact on the market price of the
Trust Units.
Trust Units
have certain risks not associated with traditional investments
in the oil and natural gas services business.
The Trust Units do not represent a traditional investment
in the oil and natural gas services business and should not be
viewed as shares of a corporation. The Trust Units
represent a fractional interest in the Trust. Unitholders do not
have the statutory rights normally associated with ownership of
shares of a corporation including, for example, the right to
bring oppression or derivative actions.
The Trusts sole assets are the shares of the General
Partner, the Class A Limited Partnership Units of PDLP and
other investments in securities. The price per Trust Unit
is a function of anticipated net earnings, the amount of cash
distributions paid by the Trust to Unitholders, the underlying
assets of the Trust and managements ability to effect
long-term growth in the value of Precision and other entities
now or hereafter owned directly or indirectly by the Trust. The
market price of the Trust Units are sensitive to a variety
of market conditions including, but not limited to, interest
rates, the growth of the general economy, the price of crude oil
and natural gas and changes in law. Changes in market conditions
may adversely affect the trading price of the Trust Units.
The Trust Units are not deposits within the
meaning of the
Canada Deposit Insurance Corporation Act
(Canada) and are not insured under the provisions of that
act or any other legislation. Furthermore, the Trust is not a
trust company and, accordingly, is not registered under any
trust and loan company legislation as it does not carry on or
intend to carry on the business of a trust company.
The Trust is not a legally recognized entity within the relevant
definitions of the
Bankruptcy and Insolvency Act
(Canada), the
Companies Creditors Arrangement Act
(Canada) and, in some cases, the
Winding Up and
Restructuring Act
(Canada). As a result, in the event a
restructuring of the Trust were necessary, the Trust would not
be able to access the remedies available thereunder. In the
event of a restructuring, the position of Unitholders may be
different than that of the shareholders of a corporation.
The
composition for Canadian federal income tax purposes of
distributions on Trust Units may change over time, and such
changes could negatively affect the return on the
Trust Units.
Unlike interest payments on an interest-bearing security,
distributions by income trusts on trust units (including the
Trust Units) are, for Canadian federal income tax purposes,
composed of different types of payments (portions of which may
be fully or partially taxable or may constitute non-taxable
returns of capital). The composition for Canadian
federal income tax purposes of distributions may change over
time, thus affecting the after-tax return to Unitholders who are
resident in Canada for purposes of the Tax Act
(
Canadian Holders
). Therefore, the rate of
return for Canadian Holders over a defined period may not be
comparable to the rate of return
48
on a fixed-income security that provides a return on capital
over the same period. This is because a Canadian Holder may
receive distributions that constitute a return of capital
(rather than a return on capital) to some extent during the
relevant period. Returns on capital are generally taxed as
ordinary income, dividends or taxable capital gains in the hands
of a holder of Trust Units, while returns of capital are
generally non-taxable to a Canadian Holder (but reduce the
adjusted cost base in a Trust Unit for Canadian federal
income tax purposes).
If the
Trust ceases to qualify as a mutual fund trust under
the Tax Act, the Trust Units will cease to be qualified
investments for a variety of plans, which could have negative
tax consequences.
If the Trust ceases to qualify as a mutual fund
trust, the Trust Units will cease to be qualified
investments for trusts governed by registered retirement
savings plans, registered retirement income
funds, deferred profit sharing plans and
registered education savings plans, each as defined
in the Tax Act (collectively,
Exempt Plans
)
and for trusts governed by tax-free savings
accounts, as defined in the Tax Act. Where, at the end of
any month, an Exempt Plan holds trust units that are not
qualified investments, the Exempt Plan must, in respect of that
month, pay a tax under Part XI.1 of the Tax Act equal to 1%
of the fair market value of the trust units at the times such
trust units were acquired by the Exempt Plan. In addition, where
a trust governed by a registered retirement savings
plan or registered retirement income fund
holds trust units that are not qualified investments, such trust
will become taxable on its income attributable to the trust
units while they are not qualified investments, including the
full amount of any capital gain realized on a disposition of
trust units while they are not qualified investments. Where a
trust governed by a registered education savings
plan holds trust units that are not qualified investments,
the plans registration may be revoked. Where a trust
governed by a tax-free savings account holds trust
units that cease to be qualified investments, the holder of that
tax-free savings account may be required to pay a
tax under Part XI.01 of the Tax Act equal to 50% of the
fair market value of such trust units at the time the trust
units ceased to be a qualified investment.
Canadian
withholding tax may exceed allowable United States foreign tax
credits and reduce effective yield to United States
investors.
Withholding of Canadian tax is imposed at a 25% rate (reduced to
15% for recipients that are residents of the United States
eligible for benefits under the Canada-United States Tax
Convention) both on cash and non-cash distributions by the Trust
to persons that are not Canadian residents. However, as certain
non-cash distributions by the Trust generally will not be
included in income for United States federal income tax
purposes, such Canadian withholding tax may exceed a
U.S. Holders allowable foreign tax credit for the
taxable year of the distribution, potentially resulting in a
reduced after-tax cash yield to United States investors for the
year of such distribution.
The
Trust expects to maintain its status as a foreign private
issuer in the United States and thus will be exempt from a
number of rules under the Exchange Act and will be permitted to
file less information with the SEC than a company incorporated
in the United States.
As a foreign private issuer the Trust is exempt from
certain rules under the United States Securities Exchange Act of
1934, as amended (the
Exchange Act
) that
impose disclosure requirements, as well as procedural
requirements, for proxy solicitations under Section 14 of
the Exchange Act. The officers, Trustees and principal
Unitholders of the Trust are exempt from the reporting and
short-swing profit recovery provisions of
Section 16 of the Exchange Act. Moreover, the Trust is not
required to file periodic reports and financial statements with
the SEC as frequently or as promptly as United States companies
whose securities are registered under the Exchange Act, nor is
it generally required to comply with Regulation FD, which
restricts the selective disclosure of material nonpublic
information. Accordingly, there may be less information
concerning the Trust publicly available than there is for United
States public companies and such information may not be provided
as promptly. In addition, the Trust is permitted, under a
multi-jurisdictional disclosure system adopted by the United
States and Canada, to prepare its disclosure documents in
accordance with Canadian disclosure requirements, including
preparing its financial statements in accordance with Canadian
GAAP, which differs in some respects from U.S. GAAP.
49
Issuance
of additional Trust Units in lieu of cash distributions
could negatively affect the value of the Trust Units and
result in the payment of taxes.
The Declaration of Trust provides that an amount equal to the
taxable income of the Trust will be payable each year to
Unitholders in order to reduce the Trusts taxable income
to zero. Where in a particular year, the Trust does not have
sufficient cash to distribute such an amount, the Declaration of
Trust provides that additional Trust Units may be
distributed in lieu of cash payments. Such in kind
distributions have been declared by the Trust in each of 2006,
2007 and 2008. In such a case, Unitholders will generally be
required to include an amount equal to the fair market value of
those Trust Units in their taxable income in the year
declared, notwithstanding that they do not directly receive a
cash payment.
Distributions
on the Trust Units are variable.
The actual cash flow available for distribution to Unitholders
is a function of numerous factors including the Trusts,
PDLPs and Precisions financial performance; debt
covenants and obligations; working capital requirements; future
upgrade capital expenditures and future expansion capital
expenditure requirements for the purchase of property, plant and
equipment; tax obligations; the impact of interest rates
and/or
foreign exchange rates; the growth of the general economy; the
price of crude oil and natural gas; weather; and number of
Trust Units and Exchangeable Units issued and outstanding.
Cash distributions may be increased, reduced or suspended or
eliminated entirely depending on the Trusts operations and
the performance of its assets. The market value of the
Trust Units may deteriorate if the Trust is unable to meet
cash distribution expectations in the future, and that
deterioration may be material. See Risk Factors
The Trust is dependent on Precision and its
subsidiaries for the amount of cash available for
distributions and Distributions on the
Trust Units have been suspended and may not be
reinvested.
There
are risks associated with the indemnification of the limited
partners of PDLP.
While the General Partner has agreed pursuant to the terms of
the Limited Partnership Agreement of PDLP to indemnify
PDLPs limited partners, including holders of the
Class A Limited Partnership Units of PDLP and the
Exchangeable Units, the General Partner may not have sufficient
assets to honour the indemnity.
The
Trust may become a passive foreign investment company
(PFIC), which could result in adverse United States
tax consequences to United States investors.
Management does not believe that the Trust is, or will be
treated as, a PFIC for United States tax purposes. Since PFIC
status is determined on an annual basis and will depend on the
composition of the Trusts income and assets from time to
time, it is possible that the Trust could be considered a PFIC
in 2008 or a future taxable year. Such characterization could
result in adverse United States tax consequences to a United
States investor. In particular, a United States investor would
be subject to United States federal income tax at ordinary
income rates, plus a possible interest charge, in respect of any
gain derived from a disposition of the Trust Units, as well
as certain distributions by the Trust. In addition, a
step-up
in
the tax basis of the Trust Units would not be available
upon the death of an individual holder.
Unitholders
face a possibility of personal liability in connection with the
obligations and affairs of the Trust.
The Declaration of Trust provides that no Unitholder will be
subject to any liability in connection with the Trust or its
obligations and affairs and, in the event that a court
determines that Unitholders are subject to any such liabilities,
the liabilities will be enforceable only against, and will be
satisfied only out of, the Trusts assets. Pursuant to the
Declaration of Trust, the Trust will indemnify and hold harmless
each Unitholder from any costs, damages, liabilities, expenses,
charges and losses suffered by a Unitholder resulting from or
arising out of such Unitholder not having such limited
liability. The Declaration of Trust provides that all written
instruments signed by or on behalf of the Trust must contain a
provision to the effect that obligations under those instruments
will not be binding upon Unitholders personally. Personal
liability may however arise in respect of claims against the
Trust that do not arise under contracts, including claims in
tort, claims for taxes and possibly certain other statutory
liabilities.
50
The possibility of any personal liability of this nature arising
is considered unlikely. The
Income Trusts Liability Act
(Alberta) came into force on July 1, 2004. The
legislation provides that a unitholder will not be, as a
beneficiary, liable for any act, default, obligation or
liability of the trustee(s) of the trust that arises after the
legislation came into force. However, this legislation has not
yet been ruled upon by the courts. The operations of the Trust
will be conducted, upon the advice of counsel, in such a way and
in such jurisdictions as to avoid as far as possible any
material risk of liability to the Unitholders for claims against
the Trust, including by obtaining appropriate insurance, where
available and to the extent commercially feasible.
If an
investor acquires 10% or more of the Trust Units it may be
subject to taxation under the CFC rules.
Under certain circumstances, a United States person who directly
or indirectly owns 10% or more of the voting power of a foreign
corporation that is a controlled foreign corporation
(
CFC
) (generally, a foreign corporation in
which 10% United States shareholders own more than 50% of the
voting power of the foreign corporation) for an uninterrupted
period of 30 days or more during a taxable year and who
holds any shares of the foreign corporation on the last day of
the corporations tax year must include in gross income for
United States federal income tax purposes its pro rata share of
certain income of the CFC even if such share is not distributed
to such person. The Trust is not presently a CFC, but this could
change in the future.
The terms of the documents governing the Credit Facilities
contain provisions that in effect ensure that the lenders have
priority as to payment over the Unitholders in respect to the
assets and income of the Trust and its subsidiaries. Amounts due
and owing to the lenders under the Credit Facilities must be
paid before any distributions can be made to Unitholders. This
relative priority of payments could result in a temporary or
permanent interruption of distributions to Unitholders.
The
distribution of assets on redemption or termination of the Trust
may have adverse consequences.
It is anticipated that a redemption right will not be the
primary mechanism for Unitholders to liquidate their investment.
Securities which may be received as a result of a redemption of
Trust Units will not be listed on any stock exchange and no
market for such securities is expected to develop. The
securities so distributed may not be qualified investments for
Exempt Plans, depending upon the circumstances existing at that
time. On termination of the Trust, the Board of Trustees may
distribute the securities directly to Unitholders, subject to
obtaining all of the necessary regulatory approvals. In
addition, there may be resale restrictions imposed by applicable
law upon the recipients of securities pursuant to a redemption
right.
Risks
Relating To The Business Currently Conducted By
Precision
The
operations of Precision are dependent on the price of oil and
natural gas.
Precision sells its services to oil and natural gas exploration
and production companies. Macro economic and geopolitical
factors associated with oil and natural gas supply and demand
are prime drivers for pricing and profitability within the
oilfield services industry. Generally, when commodity prices are
relatively high, demand for Precisions services are high,
while the opposite is true when commodity prices are low. The
markets for oil and natural gas are separate and distinct. Oil
is a global commodity with a vast distribution network. As
natural gas is most economically transported in its gaseous
state via pipeline, its market is dependent on pipeline
infrastructure and is subject to regional supply and demand
factors. However, recent developments in the transportation of
liquefied natural gas (
LNG
) in ocean going
tanker ships have introduced an element of globalization to the
natural gas market. Crude oil and natural gas prices are quite
volatile, which accounts for much of the cyclical nature of the
oilfield services business.
Worldwide military, political and economic events, including
initiatives by the Organization of the Petroleum Exporting
Countries and other major petroleum exporting countries, for
instance, may affect both the demand for, and the supply of, oil
and natural gas. Weather conditions, governmental regulation
(both in Canada and elsewhere), levels of consumer demand, the
availability of pipeline capacity, United States and Canadian
natural gas storage levels and other factors beyond
Precisions control may also affect the supply of and
demand for oil and natural gas and thus lead to future price
volatility. A prolonged reduction in oil and natural gas prices
would likely depress the level of exploration and production
activity. This would likely result in a corresponding decline in
51
the demand for Precisions services and could have a
material adverse effect on its revenues, cash flows and
profitability. Lower oil and natural gas prices could also cause
Precisions customers to seek to terminate, renegotiate or
fail to honour Precisions drilling contracts which could
affect the fair market value of its rig fleet which in turn
could trigger a write down for accounting purposes,
Precisions ability to retain skilled rig personnel and
Precisions ability to obtain access to capital to finance
and grow its businesses. There can be no assurance that the
future level of demand for Precisions services or future
conditions in the oil and natural gas and oilfield services
industries will not decline.
Precisions accounts receivable are with customers involved
in the oil and natural gas industry, whose revenues may be
impacted by fluctuations in commodity prices. The collection of
receivables may be adversely affected by any prolonged weakness
in oil and natural gas prices.
The
intense price competition and cyclical nature of the contract
drilling industry could have an adverse effect on revenue and
profitability.
The contract drilling business is highly competitive with
numerous industry participants, and the drilling contracts
Precision competes for are usually awarded on the basis of
competitive bids. Management believes pricing and rig
availability are the primary factors considered by
Precisions potential customers in determining which
drilling contractor to select. Management believes other factors
are also important. Among those factors are:
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the drilling capabilities and condition of drilling rigs;
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the quality of service and experience of rig crews;
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the safety record of the contractor and the particular drilling
rig;
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the offering of ancillary services;
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the ability to provide drilling equipment adaptable to, and
personnel familiar with, new technologies and drilling
techniques; and
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the mobility and efficiency of rigs.
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The contract drilling industry historically has been cyclical
and has experienced periods of low demand, excess rig supply,
and low dayrates, followed by periods of high demand, short rig
supply and increasing dayrates. Periods of excess drilling rig
supply intensify the competition in the industry and often
result in rigs being idle. There are numerous contract drilling
competitors in each of the markets in which Precision competes.
In all of those markets, an oversupply of drilling rigs can
cause greater price competition. Contract drilling companies
compete primarily on a regional basis, and the intensity of
competition may vary significantly from region to region at any
particular time. If demand for drilling services is better in a
region where Precision operates, its competitors might respond
by moving in suitable drilling rigs from other regions, by
reactivating previously stacked rigs or purchasing new drilling
rigs. An influx of drilling rigs into a market area from any
source could rapidly intensify competition and make any
improvement in demand for drilling rigs short-lived.
The number of drilling rigs competing for work in the market
areas Precision serves has increased due to the entry into those
markets of newly-built or newly-refurbished rigs. Management
expects that more of these newer rigs may enter Precisions
market areas over the next year. The addition of these drilling
rigs in 2008 has and could continue to intensify price
competition and possibly reduce customer demand for term
drilling contracts, which would have an adverse effect on the
revenues, cash flows and earnings of the Trust.
Deteriorating
conditions in the credit markets may adversely affect
business.
The ability to make scheduled payments on or to refinance debt
obligations depends on the financial condition and operating
performance of the Trust, which is subject to prevailing
economic and competitive conditions and to certain financial,
business and other factors beyond its control. The credit
markets have recently experienced and continue to experience
adverse conditions. Continuing volatility in the credit markets
may increase costs associated with debt instruments due to
increased spreads over relevant interest rate benchmarks, or
affect the Trusts, or third parties it seeks to do
business with, ability to access those markets. The Trust may be
unable to
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maintain a level of cash flow from operating activities
sufficient to permit it to pay the principal, premium, if any,
and interest on its indebtedness.
In addition, there has been substantial uncertainty in the
capital markets and access to financing is uncertain. These
conditions could have an adverse effect on the industry in which
the Trust operates and its business, including future operating
results. Precisions customers may curtail their drilling
programs, which could result in a decrease in demand for
drilling rigs and a reduction in dayrates, reduction in the
number and profitability of turnkey jobs
and/or
utilization. In addition, certain customers could experience an
inability to pay suppliers, including the Trust, in the event
they are unable to access the capital markets to fund their
business operations.
The
results of the Trusts annual assessment of goodwill may
result in a non-cash charge against the consolidated net income
of the Trust.
In general, Canadian GAAP requires that the Trust assess its
goodwill balance at least annually for impairment and that any
permanent impairment writedown be charged to net income. The
calculation of any impairment is subject to management estimates
and assumptions. Factors that may be considered in such a
calculation include, but are not limited to, declines in
Trust Unit price and market capitalization, reduced future
cash flow and earnings estimates, significantly reduced or
depressed markets in the industry in which the Trust and its
subsidiaries operate and general economic conditions. Any
impairment would result in a writedown of the goodwill value and
a non-cash charge against net income. If any impairment
writedown to goodwill is required under Canadian GAAP, such
writedown may be material.
Precision completed its annual assessment of goodwill effective
December 31, 2008 and concluded that there was no
impairment of the carrying value for long-lived assets and
goodwill. Future impairment analysis of goodwill and long-lived
assets may be required and at intervals more frequent than in
the past due to declines in economic conditions. These
impairment analyses may result in impairment charges being
recorded and such charges could be material.
Capital
overbuild in the drilling industry could lead to a decline in
demand for Precisions services.
Because of the long life nature of drilling equipment and the
lag between the moment a decision to build a rig is made and the
moment the rig is placed into service, the number of rigs in the
industry does not always correlate to the level of demand for
those rigs. Periods of high demand often spur increased capital
expenditures on rigs, and those capital expenditures may exceed
actual demand. Management believes that there is currently an
excess of rigs in the North American oil and gas industry in
relation to current levels of demand. This capital overbuild
could cause Precisions competitors to lower their rates
and could lead to a decrease in rates in the oilfield services
industry generally, which would have an adverse effect on the
revenues, cash flows and earnings of the Trust.
Customer
merger and acquisition activity could lead to a decline in the
demand for services.
Merger and acquisition activity in the oil and natural gas
exploration and production sector can impact demand for
Precisions services as customers focus on internal
reorganization activities prior to committing funds to
significant drilling and capital maintenance projects.
Business
acquisitions entail numerous risks and may disrupt
Precisions business or distract management
attention.
The Trust contemplates that as part of its business strategy, it
will continue to consider and evaluate acquisitions of, or
significant investments in, businesses and assets that are
complementary to it. Any acquisition that the Trust completes
could have a material adverse effect on the Trusts
operating results
and/or
the
price of its securities. Acquisitions involve numerous risks,
including:
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unanticipated costs and liabilities;
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difficulty of integrating the operations and assets of the
acquired business;
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the ability to properly access and maintain an effective
internal control environment over an acquired company in order
to comply with public reporting requirements;
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potential loss of key employees and customers of the acquired
companies; and
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an increase in Precisions expenses and working capital
requirements.
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The Trust may incur substantial indebtedness to finance future
acquisitions and also may issue equity securities or convertible
securities in connection with any such acquisitions. Debt
service requirements could represent a significant burden on the
Trusts results of operations and financial condition and
the issuance of additional equity could be dilutive to
Unitholders. The Trust will also be required to meet certain
financial covenants in order to borrow money under its credit
agreements to fund future acquisitions. Acquisitions could also
divert the attention of management and other employees from
Precisions
day-to-day
operations and the development of new business opportunities.
Even if the Trust is successful in integrating its current or
future acquisitions into its existing operations, the Trust may
not derive the benefits, such as operational or administrative
synergies, that the Trust expected from such acquisitions, which
may result in the commitment of the Trusts capital
resources without the expected returns on such capital. In
addition, the Trust may not be able to continue to identify
attractive acquisition opportunities or successfully acquire
identified targets.
Business
in Precisions industry is seasonal and highly
variable.
In Canada and the northern part of the United States, the level
of activity in the oilfield service industry is influenced by
seasonal weather patterns. During the spring months, wet weather
and the spring thaw make the ground unstable. Consequently,
municipalities and counties and provincial and state
transportation departments enforce road bans that restrict the
movement of rigs and other heavy equipment, thereby reducing
activity levels and placing an increased level of importance on
the location of Precisions equipment prior to imposition
of the road bans. The timing and length of road bans is
dependant upon the weather conditions leading to the spring thaw
and the weather conditions during the thawing period.
Additionally, certain oil and natural gas producing areas are
located in areas of western Canada that are inaccessible, other
than during the winter months, because the ground surrounding or
containing the drilling sites in these areas consists of terrain
known as muskeg. Until the muskeg freezes, the rigs and other
necessary equipment cannot cross the terrain to reach the
drilling site. Moreover, once the rigs and other equipment have
been moved to a drilling site, they may become stranded or
otherwise unable to relocate to another site should the muskeg
thaw unexpectedly. Precisions business results depend, at
least in part, upon the severity and duration of the winter
season.
New
technology could place Precision at a disadvantage versus
competitors.
Complex drilling programs for the exploration and development of
remaining conventional and unconventional oil and natural gas
reserves in North America demand high performance drilling rigs.
The ability of drilling rig service providers to meet this
demand will depend on continuous improvement of existing rig
technology such as drive systems, control systems, automation,
mud systems and top drives to improve drilling efficiency.
Precisions ability to deliver equipment and services that
are more efficient is critical to continued success. There is no
assurance that competitors will not achieve technological
improvements that are more advantageous, timely or cost
effective than improvements developed by Precision.
Unexpected
cost overruns on turnkey drilling jobs could adversely affect
Precisions revenues.
Grey Wolf historically derived a portion of its revenues from
turnkey drilling contracts and management of Precision expects
that turnkey drilling will continue to represent a part of
Precisions revenue. The occurrence of operating cost
overruns on turnkey jobs could have a material adverse effect on
the Trusts financial position and results of operations.
Under a typical turnkey drilling contract, Precision would agree
to drill a well for a customer to a specified depth and under
specified conditions for a fixed price. As part of this
arrangement, Precision would typically provide technical
expertise and engineering services, as well as most of the
equipment required for the drilling of turnkey wells. Precision
would use subcontractors for related services. In the typical
turnkey drilling arrangement, Precision would not receive
progress payments and would be entitled to be paid by the
customer only after the terms of the drilling contract have been
performed in full. In addition, from time to time, Grey Wolf had
54
encountered difficulties on wells being drilled under turnkey
contracts and has incurred related costs, not all of which have
been covered by Grey Wolfs insurance. For these reasons,
the risk under turnkey drilling contracts is substantially
greater than for wells drilled on a daywork basis, because under
such contracts Precision must assume most of the risks
associated with drilling operations that are generally assumed
by the customer under a daywork contract.
Any
difficulty Precision experiences retaining, replacing or adding
personnel could adversely affect its business.
Precision may not be able to find enough skilled labor to meet
its needs, which could limit its growth. As a result, Precision
may have problems finding enough skilled and unskilled laborers
in the future if demand for its services increases. If Precision
is not able to increase its service rates sufficiently to
compensate for similar wage rate increases, its operating
results may be adversely affected.
Although Precision, and prior to the Acquisition, Grey Wolf,
have not historically encountered material difficulty in hiring
and retaining qualified rig crews, shortages of qualified
personnel have occurred in the past in its industry during
periods of high demand. The demand for qualified rig personnel
has increased as a result of overall stronger demand for land
drilling services over the last few years. Management believes
the demand for qualified rig personnel could increase further as
new and refurbished rigs are brought into service by the Trust
and its competitors.
Other factors may also inhibit the Trusts ability to find
enough workers to meet its employment needs. The work currently
performed by the employees of the Trust requires skilled workers
who can perform physically demanding work. As a result of that
industrys volatility and the demanding nature of the work,
workers may choose to pursue employment in fields that offer a
more desirable work environment at wage rates that are
competitive with Precisions. Management believes that its
success is dependent upon its ability to continue to employ and
retain skilled technical personnel and qualified rig personnel.
The Trusts inability to employ or retain skilled technical
personnel and qualified rig personnel generally could have a
material adverse effect on its operations.
Precisions ability to provide reliable services is
dependent upon the availability of well-trained, experienced
crews to operate its field equipment. Precision must also
balance the requirement to maintain a skilled workforce with the
need to establish cost structures that fluctuate with activity
levels. Within Precision the most experienced employees are
retained during periods of low utilization by having them fill
lower level positions on field crews. Many of Precisions
businesses are currently experiencing manpower shortages in peak
operating periods. These shortages are likely to be further
challenged by the number of rigs being added to the industry
along with the entrance and expansion of newly formed oilfield
service companies.
The
business of Precision is affected by governmental regulations
and policies.
Certain activities of Precision are affected by factors that are
beyond its control or influence. The drilling rig, camp and
catering, service rig, snubbing, rentals, wastewater treatment
and related service businesses and activities of Precision in
Canada and the drilling rig, camp and rentals business and
activities of Precision in the United States are directly
affected by fluctuations in exploration, development and
production activity carried on by its customers which, in turn,
is dictated by numerous factors including world energy prices
and government policies. The addition, elimination or
curtailment of government regulations and incentives could have
a significant impact on the oil and natural gas business in
Canada and the United States. These factors could lead to a
decline in the demand for Precisions services, resulting
in a material adverse effect on revenues, cash flows, earnings
and cash distributions to Unitholders.
Precisions
operations subject it to currency translation risk, which could
cause results to fluctuate significantly from period to
period.
Precisions operations in the United States have revenue,
expenses, assets and liabilities denominated in United States
dollars. As a result Precisions income statement, balance
sheet and statement of cash flow are impacted by changes in
exchange rates between Canadian and United States currencies.
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Translation of United States
Subsidiaries.
Precisions United States
operations are considered self-sustaining operations and will be
translated into Canadian dollars using the current rate method.
Under this method, the assets and liabilities of
Precisions operations in the United States will be
recorded in the consolidated financial statements at the
exchange rate in effect at the balance sheet dates and the
unrealized gains and losses will be included in other
comprehensive income, a component of Unitholders equity.
As a result, changes in the Canadian to United States dollar
exchange rates will increase or decrease Precisions United
States dollar denominated net assets on consolidation which will
increase or decrease Unitholders equity. The translation
will increase and decrease Precisions United States dollar
assets and liabilities as a result of changes in foreign
exchange rates which could have a material impact on the amounts
recorded in the balance sheet. In addition, under certain
circumstances Canadian GAAP requires foreign exchange gains and
losses that are accumulated in other comprehensive income to be
recorded as a foreign exchange gain or loss in the statement of
earnings. Precisions United States operations generate
revenue and incur expenses in United States dollars and the
United States dollar based earnings are converted into Canadian
dollars for purposes of financial statement consolidation and
reporting. The conversion of the United States dollar based
revenue and expenses to a Canadian dollar basis does not result
in a foreign exchange gain or loss but does result in lower or
higher net earnings from United States operations than would
have occurred had the exchange rate not changed. If the Canadian
dollar strengthens versus the United States dollar, the Canadian
dollar equivalent of net earnings from United States operations
will be negatively impacted. Precision does not currently hedge
any of its exposure related to the translation of United States
dollar based earnings into Canadian dollars.
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Transaction Exposure.
Precision has long-term
debt denominated in United States dollars. This debt is
converted at the exchange rate in effect at the balance sheet
dates with the resulting gains or losses included in the
statement of earnings as foreign exchange. If the
Canadian dollar strengthens versus the United States dollar,
Precision will incur a foreign
exchange gain from the
translation of this debt. Currently, Precision has not
designated any of this debt as a hedge against the net asset
position of its self-sustaining United States operations.
The vast majority of Precisions United States operations
are transacted in United States dollars. Transactions for
Precisions Canadian operations are primarily transacted in
Canadian dollars. However, Precision occasionally purchases
goods and supplies in United States dollars. These transactions
and foreign exchange exposure would not typically have a
material impact on the Canadian operations financial
results.
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Poor
safety performance could lead to a decline in the demand for
services.
Standards for the prevention of incidents in the oil and gas
industry are governed by service company safety policies and
procedures, accepted industry safety practices, customer
specific safety requirements, and health and safety legislation.
Management believes that Precisions drilling and well
servicing businesses are highly competitive with numerous
competitors. A key factor considered by Precisions
customers in selecting oilfield service providers is safety.
Deterioration in Precisions safety performance could
result in a decline in the demand for Precisions services
and could have a material adverse effect on its revenues, cash
flows, profitability and funds available for distributions.
There
are risks associated with increased capital
expenditures.
The timing and amount of capital expenditures incurred by
Precision will directly affect the amount of cash available for
distribution to Unitholders. The cost of equipment has escalated
over the past several years as a result of, among other things,
high input costs. There can be no assurance that Precision will
be able to recover higher capital costs through rate increases
to its customers, and in such event, cash distributions may be
reduced.
56
Compliance
with various environmental laws, rules, legislation and
guidelines could impose greater costs on Precisions
business or lead to a decline in the demand for
services.
There is growing concern about the apparent connection between
the burning of fossil fuels and climate change. The issue of
energy and the environment has created intense public debate in
Canada and around the world in recent years that is likely to
continue for the foreseeable future and could potentially have a
significant impact on all aspects of the economy including the
demand for hydrocarbons and resulting in lower demand for
Precisions services.
Precisions operations are subject to numerous laws,
regulations and guidelines governing the management,
transportation and disposal of hazardous substances and other
waste materials and otherwise relating to the protection of the
environment and health and safety. These laws, regulations and
guidelines include those relating to spills, releases, emissions
and discharges of hazardous substances or other waste materials
into the environment, requiring removal or remediation of
pollutants or contaminants and imposing civil and criminal
penalties for violations. Some of the laws, regulations and
guidelines that apply to Precisions operations also
authorize the recovery of natural resource damages by the
government, injunctive relief, and the imposition of stop,
control, remediation and abandonment orders. The costs arising
from compliance with such laws, regulations and guidelines may
be material to Precision.
The trend in environmental regulation has been to impose more
restrictions and limitations on activities that may impact the
environment, including the generation and disposal of wastes and
the use and handling of chemical substances. These restrictions
and limitations have increased operating costs for both
Precision and its customers. Any regulatory changes that impose
additional environmental restrictions or requirements on
Precision or its customers could adversely affect Precision
through increased operating costs and potential decreased demand
for Precisions services.
While Precision maintains liability insurance, including
insurance for environmental claims, the insurance is subject to
coverage limits and certain of Precisions policies exclude
coverage for damages resulting from environmental contamination.
There can be no assurance that insurance will continue to be
available to Precision on commercially reasonable terms, that
the possible types of liabilities that may be incurred by
Precision will be covered by Precisions insurance, or that
the dollar amount of such liabilities will not exceed
Precisions policy limits. Even a partially uninsured
claim, if successful and of sufficient magnitude, could have a
material adverse effect on Precisions business, results of
operations, prospects and funds available for distributions.
There
are certain risks associated with Precisions dependence on
third-party suppliers.
Precision sources certain key rig components, raw materials,
equipment and component parts from a variety of suppliers
located in Canada, the United States and overseas. Precision
also outsources some or all services for the construction of
drilling and service rigs. While alternate suppliers exist for
most of these components, materials, equipment, parts and
services, cost increases, delays in delivery due to high
activity or other unforeseen circumstances may be experienced.
Precision maintains relationships with a number of key suppliers
and contractors, maintains an inventory of key components,
materials, equipment and parts and orders long lead time
components in advance. However, if the current or alternate
suppliers are unable to provide or deliver the necessary
components, materials, equipment, parts and services, any
resulting delays by Precision in the provision of services to
its customers may have a material adverse effect on
Precisions business, results of operations, prospects and
funds available for distributions.
The
Trust and Precision may face potential unknown
liabilities.
There may be unknown liabilities assumed by the Trust through
its direct and indirect interests in Precision and its other
operating subsidiaries (including the former Grey Wolf),
including those associated with prior acquisitions and
dispositions by Precision as well as environmental issues or tax
issues. Specifically, Precision has provided certain indemnities
to the purchasers under the agreement dated September 13,
2005 between Precision and 1191678 Alberta Inc. The discovery of
any material liabilities could have an adverse affect on the
financial condition and results of discontinued operations of
Precision and, as a result, the amount of cash available for
distribution to Unitholders.
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Precision
is subject to various risks from its foreign
operations.
Precision conducts a material portion of its business in the
United States and is subject to risks inherent in such
operations, such as: terrorist threats; fluctuations in currency
and exchange controls; increases in duties and taxes; and
changes in laws and policies governing operations. In addition,
in the United States jurisdictions in which Precision operates,
it is subject to various laws and regulations that govern the
operation and taxation of its businesses in such jurisdictions
and the imposition, application and interpretation of which laws
and regulations can prove to be uncertain.
Precisions
operations face many risks of interruption and casualty
losses.
Precisions operations are subject to many hazards inherent
in the drilling, workover and well servicing industries,
including blowouts, cratering, explosions, fires, loss of well
control, loss of hole, damaged or lost drilling equipment and
damage or loss from inclement weather or natural disasters and
reservoir damage. Any of these hazards could result in personal
injury or death, damage to or destruction of equipment and
facilities, suspension of operations, environmental damage,
damage to the property of others and damage to producing or
potentially productive oil and natural gas formations through
which Precision drills. Generally, drilling and service rig
contracts provide for the division of responsibilities between a
drilling or service rig company and its customer, and Precision
seeks to obtain indemnification from its customers by contract
for certain of these risks. Precision also seeks protection
through insurance. However, Precision cannot ensure that such
insurance or indemnification agreements will adequately protect
it against liability from all of the consequences of the hazards
described above. The occurrence of an event not fully insured or
indemnified against, or the failure of a customer or insurer to
meet its indemnification or insurance obligations, could result
in substantial losses. In addition, insurance may not be
available to cover any or all of these risks, or, even if
available, may not be adequate. Insurance premiums or other
costs may rise significantly in the future, so as to make such
insurance prohibitively expensive or uneconomic. This is
particularly of concern in the wake of the September 11,
2001 terrorist attacks in the United States and the severe
hurricane damage in the United States Gulf Coast region in 2005,
2007 and 2008, all of which have resulted in significantly
increased insurance costs, deductibles and coverage
restrictions. In future insurance renewals, Precision may choose
to increase its self insurance retentions (and thus assume a
greater degree of risk) in order to reduce costs associated with
increased insurance premiums.
Risks
Relating to the Acquisition
The
Trust and its subsidiaries have incurred substantial debt in
connection with the Acquisition, which could have a material
adverse effect on its financial position and limit its future
operations.
The Trust and its subsidiaries have a significant amount of debt
as a result of the financing of the Acquisition. See
Description of the Business of Precision
Material Debt. As of December 31, 2008, the
Trusts total outstanding long-term debt was
$1,576.6 million.
The Trusts substantial debt could have a material adverse
effect on its financial condition and results of operations as
well as on the distributions that the Trust may pay to
Unitholders. In particular, it could:
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increase the Trusts vulnerability to general adverse
economic and industry conditions and require it to dedicate a
substantial portion of its cash flow from operations to payments
on its indebtedness, thereby reducing the availability of its
cash flow to fund working capital, capital expenditures,
acquisitions, other debt service requirements, distributions to
Unitholders and other general corporate purposes;
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decrease the Trusts ability to satisfy its obligations
under the Credit Facilities or other indebtedness and, if the
Trust fails to comply with these requirements, an event of
default could result;
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increase the Trusts vulnerability to covenants relating to
its indebtedness which may limit the Trusts ability to
obtain additional financing for working capital, capital
expenditures and other general corporate activities;
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increase the Trusts exposure to risks inherent in interest
rate fluctuations and changes in credit ratings or statements
from rating agencies because certain of its borrowings
(including borrowings under the Credit Facilities) are at
variable rates of interest, which would result in higher
interest expense to the extent the Trust has not hedged these
risks against increases in interest rates;
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increase the Trusts exposure to exchange rate fluctuations
because a change in the value of the Canadian dollar against the
United States dollar will result in an increase or decrease in
the Trusts United States dollar denominated debt, as
expressed in Canadian dollars, as well as in the related
interest expense;
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increase the Trusts vulnerability to covenants relating to
its indebtedness that may limit the Trusts flexibility in
planning for, or reacting to, changes in its business or the
industry in which it operates;
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place the Trust at a competitive disadvantage compared to its
competitors that have less debt;
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limit the Trusts ability to borrow additional funds to
meet its operating expenses, to make acquisitions and for other
purposes; and
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limit the Trusts ability to construct, purchase or acquire
new rigs.
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The Trust and its subsidiaries may be able to incur substantial
additional debt in the future, including additional secured debt
pursuant to the Credit Facilities and under operating
facilities. This could further exacerbate the risks associated
with its substantial debt.
Precision
will require significant amounts of cash to service
indebtedness.
Precision will require significant amounts of cash in order to
service and repay indebtedness. The ability to generate cash in
the future will be, to a certain extent, subject to general
economic, financial, competitive and other factors that may be
beyond managements control. In addition, the ability to
borrow funds in the future to service debt will depend on
covenants in the Credit Facilities and other debt agreements
which may be entered into in the future. Future borrowings may
not be available to the Trust or Precision under the Credit
Facilities or from the capital markets in amounts sufficient to
enable the Trust or Precision to pay obligations as they mature
or to fund other liquidity needs (including the required
repayments on the Unsecured Facility and the Secured Facility
described under Description of the Business of
Precision Material Debt). If Precision is not
able to obtain such borrowings or generate cash flow from
operations in an amount sufficient to enable it to service and
repay indebtedness, the Trust and Precision will need to
refinance indebtedness or they will be in default under the
agreements governing indebtedness. Such refinancing may not be
available on favorable terms or at all. The inability to
service, repay
and/or
refinance indebtedness could negatively impact the Trusts
financial condition and results of operations.
The
Credit Facilities contain restrictive covenants.
Each of the Secured Facility and Unsecured Facility contains a
number of covenants that, among other things, restrict, the
Trusts, Precisions and their subsidiaries
ability to conduct certain activities. See Description of
the Business of Precision Material Debt.
In addition, under the Secured Facility, Precision will be
required to satisfy and maintain certain financial ratio tests,
which ratios may be changed by the lenders in certain
circumstances. Precisions ability to meet such tests could
be affected by events beyond its control, and Precision may not
be able to meet such tests. A breach of any of these covenants
could result in a default under the Secured Facility or
Unsecured Facility. Upon the occurrence of an event of default
under the Credit Facilities, the lenders could elect to declare
all amounts outstanding under the Credit Facilities to be
immediately due and payable and terminate all commitments to
extend further credit. If Precision is unable to repay those
amounts, the lenders under the Credit Facilities could proceed
to foreclose or otherwise realize upon the collateral granted to
them to secure that indebtedness. If the lenders under the
Credit Facilities accelerate the repayment of borrowings,
Precision may not have sufficient assets to repay the Credit
Facilities as well as its unsecured indebtedness. The
acceleration of indebtedness under one agreement may permit
acceleration of indebtedness under other agreements that contain
cross-default or cross-acceleration
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provisions. If indebtedness is accelerated, Precision may not be
able to repay its indebtedness or borrow sufficient funds to
refinance it. Even if Precision is able to obtain new financing,
it may not be on commercially reasonable terms or on terms that
are acceptable. The restrictions in the Credit Facilities may
adversely affect the ability to finance future operations and
capital needs and to pursue available business opportunities.
Moreover, any new indebtedness incurred by Precision may impose
financial restrictions and other covenants that may be more
restrictive than the Credit Facilities.
The
terms of Precisions Credit Facilities may be amended by
the lenders.
In order to complete a successful syndication of the Secured
Facility, the Commitment Banks are entitled, prior to
March 23, 2009 (extended at Precisions option to
May 22, 2009) in consultation with Precision, to
change certain of the terms of the Credit Facilities including,
without limitation, to implement additional increases in
interest rates, original issue discounts
and/or
upfront fees, reallocate up to US$250 million between the
Term Loan A Facility and the Term Loan B Facility (US$69 million
(US$64 million on February 4, 2009 and US$5 million on
March 26, 2009) of which has been reallocated from the Term Loan
A Facility to the Term Loan B Facility as at March 27, 2009),
reallocate up to US$150 million between the Secured
Facility and the Unsecured Facility and amend certain covenants,
financial ratio tests and other provisions for portions of the
Secured Facility. Such changes may result in materially
increased or accelerated debt service payments or debt
repayments, reduce cash distributions that may be made by the
Trust to Unitholders or otherwise materially adversely affect
the financial position and operations of the Trust. In addition,
adverse market conditions could result in higher than expected
interest
and/or
original issue discount rates or subject the Trust to
restrictive covenants that impose restrictions and limitations
that are in addition to, or more restrictive than, those
currently existing.
All
the anticipated benefits of the Acquisition may not be
realized.
The success of the Acquisition will depend, in part, on the
ability of the Trust to achieve the anticipated strategic
benefits from integrating the businesses of Grey Wolf into the
Trust. Management expects the Trust to benefit from modest
operational synergies resulting from the integration of the
capabilities of Grey Wolf as well as greater efficiencies from
increased scale. If the Trust is not able to achieve these
objectives, the anticipated cost synergies and other strategic
benefits of the Acquisition may not be realized fully or at all
or may take longer to realize than expected. The Trust may fail
to realize some or all of the anticipated benefits of the
Acquisition in the amounts and times projected for a number of
reasons, including that the integration may take longer than
anticipated, be more costly than anticipated or have
unanticipated adverse results relating to the Trusts
businesses. As a result of these factors, it is possible that
the Trust will not achieve the anticipated operating synergies
from the Acquisition.
Grey
Wolf may not be integrated successfully.
Prior to the Acquisition, the Trust and Grey Wolf operated
independently. As a result, the combined operation of the
resulting entities from the Acquisition will present challenges
to management, including the integration of the operations,
systems, technologies and personnel of Grey Wolf, and special
risks, including possible unanticipated liabilities,
unanticipated costs, diversion of managements attention,
inconsistencies in standards, controls, procedures and policies,
operational interruptions and the loss of key employees,
customers or suppliers. The difficulties to be encountered in
the transition and integration processes could have an adverse
effect on the revenues, levels of expenses and operating results
of the combined company. As a result, the Trust may not be able
to successfully integrate Grey Wolf.
The
Trust has incurred and will incur significant transaction,
integration and restructuring costs in connection with the
Acquisition.
Significant costs of approximately US$219.2 million (after
accounting for applicable discounts), including a
US$25 million
break-up
fee
payable by Grey Wolf to a third party, debt issuance costs,
professional services fees, severance costs and other costs were
incurred in respect of the Acquisition. Additionally, the Trust
will incur integration and restructuring costs as the business
operations of Grey Wolf are integrated with the business of the
Trust. Although it is expected that, over time, the realization
of efficiencies related to such integration will offset
60
incremental transaction, Acquisition-related and restructuring
costs, this net benefit may not be achieved in the near term, or
at all. This may result in unanticipated costs and other changes
in future financial results.
PDOS,
as the successor to Grey Wolf, is subject to litigation
regarding the Acquisition.
The Trusts subsidiary, PDOS, as successor to Grey Wolf, is
subject to litigation arising from the Acquisition. A class
action petition was filed alleging the Grey Wolf board of
directors breached their fiduciary duties and Grey Wolf aided
and abetted this breach. In March 2009, the court granted a
motion to quash depositions requested by the Plaintiff and
requested that a motion for summary judgment be filed and heard
to determine as a matter of law whether there is a viable cause
of action. In addition, two shareholders derivative actions were
filed alleging that Grey Wolf and its board of directors
breached their fiduciary duties and acted with negligence or
gross negligence in failing to maximize shareholder value. The
Plaintiffs of the two derivative actions have agreed in
principal to dismissals of their cases with prejudice and the
parties are finalizing documents to present to the court.
The Trust maintains a level of insurance coverage deemed
appropriate by management for matters for which insurance
coverage can be acquired.
The
Trusts consolidated results of operations may be
negatively impacted by foreign currency
fluctuations.
A substantial portion of the Trusts consolidated revenues
following the Acquisition will be earned in non-Canadian
currencies, primarily United States dollars. For purposes of
financial reporting under Canadian GAAP, revenues and expenses
denominated in non-Canadian currencies are translated into
Canadian dollars at the average exchange rates prevailing during
the year. It is expected that the Trust will continue to report
its financial results in Canadian dollars. The revenues that are
earned in currencies other than Canadian dollars are subject to
unpredictable fluctuations if the values of non-Canadian
currencies change relative to the Canadian dollar. Such
fluctuations could decrease the Trusts revenues earned in
non-Canadian currencies and have a material adverse impact on
its business and results of operations.
61
APPENDIX 1
AUDIT COMMITTEE CHARTER AND TERMS OF REFERENCE
General
The purpose of this document is to establish the terms of
reference of the Audit Committee (the
Committee
) of Precision Drilling Corporation
(the
Corporation
). The Committee is a
standing committee of the Board of Directors of the Corporation
(the
Board of Directors
) appointed to assist
the Board of Directors in fulfilling its oversight
responsibilities with respect to financial reporting by the
Corporation, in its own capacity and as the administrator for
Precision Drilling Trust (the
Trust
).
It is critical that the external audit function, a mechanism
that promotes reliable, accurate and clear financial reporting
to unitholders of the Trust, is working effectively and
efficiently, and that financial information is being relayed to
the Board of Directors, and ultimately by the Board of Directors
to the Board of Trustees (the Board of Trustees) of
the Trust, in a timely fashion. The activities of the Committee
are fundamental to the process.
The requirement to have an audit committee is established in
Section 171 of the
Business Corporations Act
(Alberta) and, in addition, is required pursuant to the
Securities Act
(Alberta) and the United States
Securities Exchange Act of 1934
for issuers listed on the
New York Stock Exchange (the
NYSE
).
Committee
Structure and Authority
The Committee shall consist of no fewer than three members, at
least a majority of whom must be resident Canadians. Each member
of the Committee shall be independent under the
requirements or guidelines for audit committee service under
applicable securities laws and the rules of any stock exchange
on which the units of the Trust are listed for trading.
Each member of the Committee must be financially
literate as such term is interpreted by the Board of
Directors in its business judgment in light of, and in
accordance with, the requirements or guidelines for audit
committee service under applicable securities laws and the rules
of any stock exchange on which the Trusts units are listed
for trading. At least one of the members of the Committee must
also have accounting or related management financial
expertise as such term is defined from time to time under
the requirements or guidelines for audit committee service under
applicable securities laws and the rules of any stock exchange
on which the Trusts units are listed for trading.
No Committee member shall serve on the audit committees of more
than three other issuers without prior determination by the
Board of Directors that such simultaneous service would not
impair the ability of such member to serve effectively on the
Committee.
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(b)
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Appointment and Replacement of Committee Members
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Each member of the Committee shall serve at the pleasure of the
Board of Directors. Any member of the Committee may be removed
or replaced at any time by the Board of Directors, and shall
automatically cease to be a member of the Committee upon ceasing
to be a director of the Corporation. The Board of Directors may
fill vacancies on the Committee by appointment from among its
number. The Board of Directors shall fill any vacancy if the
membership of the Committee is less than three directors. If and
whenever a vacancy shall exist on the Committee, the remaining
members may exercise all their power so long as a quorum remains
in office. Subject to the foregoing, the members of the
Committee shall be appointed by the Board of Directors annually
and each member of the Committee shall hold office until the
next annual meeting of the unitholders of the Trust after his or
her election or until his or her successor shall be duly
qualified and appointed.
(c) Quorum
The Committee shall have a quorum of not less than a majority of
its members.
62
(d) Review of Charter and Terms of
Reference
The Committee shall review and reassess the adequacy of this
Charter and Terms of Reference at least annually and otherwise
as it deems appropriate, and recommend changes to the Board of
Directors. The Committee shall evaluate its performance with
reference to this Charter and Terms of Reference annually. The
Committee will approve the form of disclosure of this Charter
and Terms of Reference on the Trusts website and, where
required by applicable securities laws or regulatory
requirements, in the annual management information circular or
annual report of the Trust.
(e) Delegation
The Committee may delegate from time to time to any person or
committee of persons any of the Committees
responsibilities that lawfully may be delegated.
(f) Reporting to the Board of
Directors
The Committee will report through the Chair of the Committee to
the Board of Directors following meetings of the Committee on
matters considered by the Committee, its activities and
compliance with this Charter and Terms of Reference.
(g) Committee Chair Responsibilities
The Board of Directors shall appoint a Chair of the Committee.
The primary responsibility of the Chair of the Committee is to
provide leadership to the Committee to enhance its
effectiveness. In such capacity, the Chair of the Committee will
perform the duties and responsibilities set forth in the
Position Description for the Audit Committee Chair.
(h) Other Authority
The Committee may request any officer or employee of the
Corporation, or the Corporations or the Trusts legal
counsel, or any external or internal auditors to attend a
meeting of the Committee or to meet with any members of, or
consultants to the Committee. The Committee shall also have the
authority to communicate directly with the internal auditor and
external auditor.
The Committee may retain special legal, accounting, financial or
other consultants to advise the Committee at the
Corporations expense.
Purpose
The Committee shall have responsibility for overseeing the
development and maintenance of the Corporations and the
Trusts systems for financial reporting. Responsibility for
accounting for transactions and internal control over financial
reporting lies with senior management of the Corporation with
oversight responsibilities vested in the Board of Directors. The
Committee is a permanent committee of the Board of Directors
whose purpose is to assist the Board of Directors by overseeing:
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the integrity of financial reporting to the holders of units of
the Trust (Unitholders) and the investment community;
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the integrity of the financial reporting process, including the
audit process;
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the Corporations and the Trusts compliance with
legal and regulatory requirements as they relate to financial
reporting matters;
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the external auditors qualifications and independence;
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the integrity of the system of internal accounting and financial
reporting controls implemented by management;
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the work and performance of the Corporations and the
Trusts financial management, internal audit function and
its external auditor; and
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any other matter specifically delegated to the Committee by the
Board of Directors.
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63
Committee
Responsibilities
The Committee shall:
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review the interim and annual financial statements of the
Corporation and make any comments or recommendations to the
Board of Directors;
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review the annual financial statements of the Trust and related
notes and managements discussion and analysis
(
MD&A
) components and make
recommendations to the Board of Directors, and ultimately, once
approved by the Board of Directors, to the Board of Trustees,
for their approval;
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review the interim financial statements of the Trust and related
notes and MD&A components prepared for distribution to the
Unitholders and the investment community;
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be satisfied that adequate procedures are in place for the
review of the Trusts public disclosure of financial
information extracted or derived from the Trusts financial
statements, other than the public disclosure referred to above,
and must periodically assess the adequacy of those procedures;
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report, through the Chair of the Committee, to the Board of
Directors following each meeting of the Committee, including an
outline of the nature of discussions, major decisions reached by
the Committee, and its activities and compliance with this
Charter and Terms of Reference;
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approve the terms of the external auditors engagement
letter as agreed between the external auditor and financial
management of the Corporation, and the compensation to be paid
by the Corporation to the external auditor;
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review the reasons for any proposed change in the external
auditor which is not initiated by the Committee or the Board of
Directors and any other significant issues related to the
change, including the response of the incumbent external
auditor, and enquire as to the qualifications of the proposed
external auditor before making its recommendations to the Board
of Directors;
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be directly responsible for overseeing the work of the external
auditor engaged for the purpose of preparing or issuing an
auditors report or performing other audit or review
services for the Corporation or the Trust, including the
resolution of disagreements between management and internal or
the external auditor regarding financial reporting or the
application of any accounting principles or practices;
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require the external auditor and internal auditor to report
directly to the Committee;
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provide the external auditor with notice of every meeting of the
Committee and, at the expense of the Corporation, the
opportunity to attend and be heard thereat, and if so requested
by a member of the Committee, shall attend every meeting of the
Committee held during the term of the office of the external
auditor. The external auditor of the Corporation or any member
of the Committee may call a meeting of the Committee;
|
pre-approve all permitted non-audit services to the Corporation
or any affiliated entities by the external auditor or any of
their affiliates subject to any
de minimus
exception
allowed by applicable law. The Committee may delegate to one or
more designated members of the Committee the authority to
pre-approve non-audit services, however any non-audit services
that have been pre-approved by any such delegate of the
Committee must be presented to the Committee at its first
scheduled meeting following such pre-approval;
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review the disclosure with respect to its pre-approval of audit
and non-audit services provided by the external auditors;
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review and discuss with management and the external auditor, as
applicable, (a) all critical accounting policies and
practices to be used in the annual audit, (b) major issues
regarding accounting principles and financial statement
presentations, including any significant changes in the
Trusts or the Corporations selection or application
of accounting principles, and major issues as to the adequacy of
the Trusts or the Corporations respective internal
controls and any special audit steps adopted in light of
material control deficiencies; (c) analyses prepared by
management or the external auditor setting forth significant
financial reporting issues and judgments made in connection with
the preparation of the financial statements, including
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64
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analyses of the effects of alternative Canadian Generally
Accepted Accounting Principles (
GAAP
) methods
on the financial statements of the Trust and any other opinions
sought by management from an independent or other audit firm or
advisor with respect to the accounting treatment of a particular
item; (d) any management letter or schedule of unadjusted
differences provided by the external auditor and the
Trusts response to that letter and other material written
communication between the external auditor and management;
(e) any problems, difficulties or differences encountered
in the course of the audit work including any disagreements with
management or restrictions on the scope of the external
auditors activities or on access to requested information
and managements response thereto; (f) the effect of
regulatory and accounting initiatives, as well as any
off-balance sheet structures on the financial statements of the
Trust and other financial disclosures; (h) any reserves,
accruals, provisions or estimates that may have a significant
effect upon the financial statements of the Trust; (i) the
use of special purpose entities and the business purpose and
economic effect of off balance sheet transactions, arrangements,
obligations, guarantees and other relationships of the Trust or
the Corporation and their impact on the reported financial
results of the Trust; and (j) the use of any pro
forma or adjusted information not in
accordance with generally accepted accounting principles;
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reviewing earnings press releases (paying particular attention
to any use of pro forma or adjusted
non-GAAP information) as well as financial
information and earnings guidance provided to analysts and
rating agencies, it being understood that such review may in the
discretion of the Committee, be done generally (i.e., by
discussing the types of information to be disclosed and the type
of presentation to be made);
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review with the external auditor and management the general
audit approach and scope of proposed audits of the financial
statements of the Trust, the objectives, staffing, locations,
co-ordination and reliance upon management in the audit, the
overall audit plans, the audit procedures to be used and the
timing and estimated budgets of the audits;
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review any legal matter, claim or contingency that could have a
significant impact on the financial statements of the Trust, the
Corporations or the Trusts compliance policies and
any material reports, inquiries or other correspondence received
from regulators or governmental agencies and the manner in which
any such legal matter, claim or contingency has been disclosed
in the Trusts financial statements;
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review the treatment for financial reporting purposes of any
significant transactions which are not a normal part of the
Corporations operations;
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review the interim review engagement report of the external
auditor before the release of interim financial statements of
the Trust;
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review and discuss with management the Corporations major
financial risk exposures and the steps management has taken to
monitor and control such exposures, including the
Corporations risk assessment and risk management policies
such as financial derivatives and hedging activities;
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annually request and review a report from the external auditor
regarding (a) the external auditors quality-control
procedures, (b) any material issues raised by the most
recent quality-control review. Canadian Public Accountability
Board or Public Company Accounting Oversight Board or other
available peer review of the external auditor, or by any inquiry
or investigation by governmental or professional authorities
within the preceding five years respecting one or more
independent audits carried out by the firm, and (c) any
steps taken to deal with any such issues;
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evaluate the qualifications and performance of the external
auditor, including a written review and evaluation of the lead
partner of the external auditor, review and approve hiring
policies for partners, employees or former employees of the
external auditor and make recommendations to the Board of
Directors as to the appointment or reappointment of the external
auditor to be proposed for approval by the Board of Trustees and
Unitholders;
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review the independence of the external auditor, annually
request and review a written report from the external auditor
respecting its independence, including a list of all
relationships between the external auditor and each of the
Corporation and the Trust, and consider applicable auditor
independence standards;
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65
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ensure that the lead audit partner of the external auditor and
the audit partner responsible for reviewing the audit are
rotated at least every five years as required by the
Sarbanes-Oxley Act of 2002, and further consider rotation of the
external auditors firm itself;
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discuss with management and the external auditors any accounting
adjustments that were noted or proposed by the internal or
external auditors but were not adopted (as immaterial or
otherwise);
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review the adequacy and effectiveness of the Corporations
and the Trusts internal accounting and financial controls
based on recommendations from management and the external
auditor for the improvement of accounting practices and internal
controls;
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establish and periodically review procedures for (a) the
receipt, retention and treatment of complaints received by the
Corporation or the Trust regarding accounting, internal controls
or auditing matters, and (b) the confidential, anonymous
submission by employees of the Corporation of concerns regarding
questionable accounting or auditing matters or other matters
that could negatively affect the Corporation or the Trust such
as violations of the Joint Code of Business Conduct and Ethics;
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review periodically with management and the external auditors
any significant complaints received;
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review other financial information included in the Trusts
Annual Report to ensure that it is consistent with the Board of
Directors knowledge of the affairs of the Corporation and
the Trust and is unbiased and non-selective;
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if requested by the Board of Directors, receive from the Chief
Executive Officer and Chief Financial Officer of the Corporation
a certificate certifying in respect of each annual and interim
report of the Trust the matters such officers are required to
certify in connection with the filing of such reports under
applicable securities laws and receive and review disclosures
made by such officers about any significant deficiencies in the
design or operation of internal controls or material weaknesses
therein and any fraud involving management or persons who have a
significant role in the Corporations internal controls;
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prepare any report required by law, regulations or stock
exchange requirement to be included in the Trusts periodic
reports;
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meet at least four times a year on a quarterly basis or more
frequently as circumstances require, with the Chief Financial
Officer of the Corporation, the head of the internal audit
function of the Corporation, if other than the Chief Financial
Officer, and the external auditor in separate executive sessions
to discuss any matters that the Committee or each of these
groups believes should be discussed privately;
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meet in separate, non-management,
in camera
sessions at
each regularly scheduled meeting;
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meet in separate, non-management, closed sessions with any other
internal personnel or outside advisors, as necessary or
appropriate;
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review annually the Corporations insurance programs and
pension plans, not including the Directors and Officers
insurance program;
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review the results of the annual external audit, including the
audit report to the Trusts Unitholders and any other
reports prepared by the external auditors and the informal
reporting from the external auditor on accounting systems and
internal controls, including managements response;
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review and evaluate the scope, risk assessment, and nature of
the internal audit plan and any subsequent changes;
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consider and review the following issues with management and the
head of the internal audit group:
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significant findings of the internal audit group as well as
managements response to them;
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any difficulties encountered in the course of their internal
audits, including any restrictions on the scope of their work or
access to required information;
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the internal auditing budget and staffing;
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66
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the internal Audit Services Charter; and
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compliance with The Institute of Internal Auditors
Standards for the Professional Practice of Internal
Auditing;
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approve the appointment, replacement or dismissal of the head of
the internal audit group; and
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direct the head of the internal audit group to review any
specific areas the Committee deems necessary; and
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ensure that the obligations of the Corporation pursuant to the
Administration Agreement are met and that good corporate
governance procedures are used in connection therewith.
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In addition, the Committee shall hold in-camera meetings with
representatives of the external auditor and internal auditor to
discuss audit related issues, including the quality of
accounting personnel.
The Committee shall have such other powers and duties as may
from time to time by resolution be assigned to it by the Board
of Directors.
Limitation
of Committees Role
While the Committee has the responsibilities and powers set
forth in its Charter and Terms of Reference, it is not the duty
of the Committee to prepare financial statements, plan or
conduct audits or to determine that the Trusts or the
Corporations financial statements and disclosures are
complete and accurate and are in accordance with GAAP and
applicable rules and regulations. These are the responsibilities
of the management of the Corporation and the external auditor.
The Committee, the Chair of the Committee and any Committee
members identified as having accounting or related financial
expertise are members of the Board of Directors, appointed to
the Committee to provide broad oversight of the financial, risk
and control-related activities of the Corporation and the Trust,
and are specifically not accountable or responsible for the
day-to-day
operation or performance of such activities.
Although the designation of a Committee member as having
accounting or related financial expertise for disclosure
purposes is based on that individuals education and
experience, which that individual will bring to bear in carrying
out his or her duties on the Committee, such designation does
not impose on such person any duties, obligations or liabilities
that are greater than the duties, obligations and liabilities
imposed on such person as a member of the Committee and Board of
Directors in the absence of such designation. Rather, the role
of a Committee member who is identified as having accounting or
related financial expertise, like the role of all Committee
members, is to oversee the process, not to certify or guarantee
the internal or external audit of the Trusts financial
information or public disclosure.
Approved on March 18, 2009.
67
This Managements Discussion and Analysis (MD&A), prepared as at March 23, 2009 focuses on the
Consolidated Financial Statements, and pertains to known risks and uncertainties relating to the
energy services sector. This discussion should not be considered all-inclusive, as it does not
include all changes regarding general economic, political, governmental and environmental events.
Additionally, other events may or may not occur which could affect Precision Drilling Trust (the
Trust or Precision) in the future. In order to obtain an overall perspective, this discussion
should be read in conjunction with the Cautionary Statement Regarding Forward-Looking Information
and Statements on page 52 and the audited Consolidated Financial Statements and related notes. The
effects on the Consolidated Financial Statements arising from differences in generally accepted
accounting principles (GAAP) between Canada and the United States are described in Note 20 to the
Consolidated Financial Statements. Additional information relating to the Trust, including the
Annual Information Form, is available under our profile on the SEDAR website at www.sedar.com and
on the EDGAR website at www.sec.gov.
2
MANAGEMENTS DISCUSSION AND ANALYSIS
FINANCIAL AND OPERATING HIGHLIGHTS
(Stated in thousands of Canadian dollars, except per unit amounts)
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% Increase
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% Increase
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% Increase
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Years ended December 31,
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2008
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(Decrease)
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2007
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(Decrease)
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2006
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(Decrease)
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Revenue
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$
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1,101,891
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9.2
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$
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1,009,201
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(29.8
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)
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$
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1,437,584
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13.3
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EBITDA
(1)
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436,536
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(0.1
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)
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437,075
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(34.6
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)
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668,160
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24.4
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Earnings from continuing operations
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302,730
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(11.7
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)
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342,820
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(40.1
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)
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572,512
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159.2
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Discontinued operations, net of tax
(2)
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n/m
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2,956
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n/m
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7,077
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n/m
|
|
Net earnings
|
|
|
302,730
|
|
|
|
(12.4
|
)
|
|
|
|
345,776
|
|
|
|
(40.3
|
)
|
|
|
579,589
|
|
|
|
(64.5
|
)
|
Cash provided by continuing operations
|
|
|
343,910
|
|
|
|
(29.0
|
)
|
|
|
|
484,115
|
|
|
|
(20.6
|
)
|
|
|
609,744
|
|
|
|
196.0
|
|
Net capital spending
(3)
|
|
|
219,139
|
|
|
|
20.9
|
|
|
|
|
181,239
|
|
|
|
(22.4
|
)
|
|
|
233,693
|
|
|
|
66.8
|
|
Distributions declared cash
|
|
|
200,659
|
|
|
|
(18.6
|
)
|
|
|
|
246,485
|
|
|
|
(44.9
|
)
|
|
|
447,001
|
|
|
|
n/m
|
|
Distributions declared in-kind
|
|
|
24,029
|
|
|
|
(20.4
|
)
|
|
|
|
30,182
|
|
|
|
23.1
|
|
|
|
24,523
|
|
|
|
n/m
|
|
Earnings per unit from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2.39
|
|
|
|
(12.5
|
)
|
|
|
|
2.73
|
|
|
|
(40.1
|
)
|
|
|
4.56
|
|
|
|
154.7
|
|
Diluted
|
|
|
2.39
|
|
|
|
(12.5
|
)
|
|
|
|
2.73
|
|
|
|
(40.1
|
)
|
|
|
4.56
|
|
|
|
159.1
|
|
Earnings per unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2.39
|
|
|
|
(13.1
|
)
|
|
|
|
2.75
|
|
|
|
(40.5
|
)
|
|
|
4.62
|
|
|
|
(65.1
|
)
|
Diluted
|
|
|
2.39
|
|
|
|
(13.1
|
)
|
|
|
|
2.75
|
|
|
|
(40.5
|
)
|
|
|
4.62
|
|
|
|
(64.5
|
)
|
Distributions declared per unit cash
|
|
|
1.56
|
|
|
|
(20.4
|
)
|
|
|
|
1.96
|
|
|
|
(44.9
|
)
|
|
|
3.56
|
|
|
|
n/m
|
|
Distributions declared per unit in-kind
|
|
|
0.15
|
|
|
|
(37.5
|
)
|
|
|
|
0.24
|
|
|
|
23.1
|
|
|
|
0.195
|
|
|
|
n/m
|
|
|
|
|
|
|
|
Drilling rig utilization days:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
34,488
|
|
|
|
(0.2
|
)
|
|
|
|
34,572
|
|
|
|
(32.3
|
)
|
|
|
51,050
|
|
|
|
(4.9
|
)
|
United States
|
|
|
8,006
|
|
|
|
281.6
|
|
|
|
|
2,098
|
|
|
|
1,034.1
|
|
|
|
185
|
|
|
|
n/m
|
|
International
|
|
|
159
|
|
|
|
n/m
|
|
|
|
|
|
|
|
|
n/m
|
|
|
|
|
|
|
|
n/m
|
|
Service rig operating hours:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
335,127
|
|
|
|
(5.9
|
)
|
|
|
|
355,997
|
|
|
|
(25.9
|
)
|
|
|
480,137
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
(1)
|
|
Non-GAAP measure. See page 50.
|
|
(2)
|
|
Includes gain on disposition
of discontinued operations.
|
|
(3)
|
|
Excludes acquisitions.
|
|
n/m
calculation not meaningful.
|
FINANCIAL POSITION AND RATIOS
(Stated in thousands of Canadian dollars, except ratios)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2008
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
345,329
|
|
|
|
$
|
140,374
|
|
|
$
|
166,484
|
|
Working capital ratio
|
|
|
2.0
|
|
|
|
|
2.1
|
|
|
|
1.8
|
|
Long-term debt
(1)
|
|
$
|
1,368,349
|
|
|
|
$
|
119,826
|
|
|
$
|
140,880
|
|
Total long-term financial liabilities
|
|
$
|
1,399,300
|
|
|
|
$
|
133,722
|
|
|
$
|
163,579
|
|
Total assets
|
|
$
|
4,833,702
|
|
|
|
$
|
1,763,477
|
|
|
$
|
1,761,186
|
|
Enterprise value
(2)
|
|
$
|
2,636,170
|
|
|
|
$
|
1,877,139
|
|
|
$
|
3,369,860
|
|
Long-term debt to long-term debt plus equity
(1)
|
|
|
0.37
|
|
|
|
|
0.08
|
|
|
|
0.10
|
|
Long-term debt to cash provided by continuing operations
(1)
|
|
|
3.98
|
|
|
|
|
0.25
|
|
|
|
0.23
|
|
Long-term debt to enterprise value
(1)
|
|
|
0.52
|
|
|
|
|
0.06
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
(1)
|
|
Excludes current portion of long-term debt which is included in working capital.
|
|
(2)
|
|
Unit price as at December 31 multiplied by the number of units outstanding plus long-term debt
minus working capital. See page 36.
|
PRECISION DRILLING TRUST
3
PROFILE AND STRATEGY
For Precision, 2008 was a transformation year to become the second largest land driller in North
America with drilling rigs operating in virtually every emerging unconventional gas basin. With the
December 23, 2008 acquisition of Grey Wolf, Inc. (Grey Wolf), Precision operated 374 land rigs,
229 service rigs and 100 camps along with catering, rental, snubbing and wastewater services.
The Canadian drilling and services market opened 2008 overshadowed by royalty changes, strong
Canadian currency and a general reluctance by Canadian exploration and production (E&P) companies
to spend their drilling budgets in Alberta. Many of the Canadian E&P companies with international
operations focused their spending outside Canada. Precision accelerated its growth and
diversification strategy moving 17 rigs to the United States over the course of 2008 where
strengthening natural gas prices in the first half of the year resulted in higher producer
spending. Precisions high performance high value strategy was well received by customers but with
the highly risk-adverse and relationship-based nature of the oilfield services sector this growth
would have finite limits. Grey Wolf, Inc., with 123 rigs in seven key oil and natural gas basins,
approximately 3,000 experienced personnel and a customer list exceeding 200 proved to be an
excellent fit. The acquisition also provided a two rig operation in Mexico and resources from which
to launch global growth.
The acquisition of Grey Wolf provides value, diversification and growth.
1.
|
|
Value lives in high performing assets, people and technology, as evidenced by strong margins
and sector leading rig utilization for a heritage rig fleet. The senior management team has
global experience and is positioned to enhance Precisions existing 29 rig operation in the
United States. Precisions in-house supply, manufacturing and support systems provide levers
to increase profit margins.
|
2.
|
|
Diversification was immediate with contracted drilling rigs strategically positioned in key
oil and natural gas basins, especially unconventional resource plays. The customer mix was
broad and provides immediate relationships to market Precisions rig technology and other
services.
|
3.
|
|
Growth was delivered through people and assets. The combination of new and upgraded rigs with
an experienced workforce provides added capacity to leverage favourable long-term drilling
industry fundamentals, technologically advanced rigs suited for unconventional plays, history
of successful acquisition integrations and a larger platform to apply directional drilling
integration.
|
4
MANAGEMENTS DISCUSSION AND ANALYSIS
Late in the year, the global economic slowdown significantly lowered commodity prices and a
reduction in customer spending caused a sharp reduction in drilling and well servicing activity.
The industry slowdown combined with higher than anticipated total cost of debt for Precision has
created financial challenges.
Precisions commitment to the long-term strategic importance of the Grey Wolf acquisition remains
strong. However, given the rapid and unprecedented disruptions in the capital markets the cost of
financing this transaction is higher than anticipated and challenges remain as the underwriter
banks move to fully syndicate the debt structure. While the transaction is funded, credit
facilities are placed and the unsecured facility (sometimes referred to as a bridge loan)
automatically converts to term notes, there remains cost of financing uncertainty that has carried
forward from closing. The aggregate credit facility cost of financing had an effective blended cash
interest rate of 11%, and a debt to capitalization ratio of 0.37, both higher than management
desires. The cost of the effective interest rate may be subject to further increases depending on
the success of syndication and certain debt market indices.
Precisions key priorities for 2009 are the resolution of this finance pricing uncertainty through
capital structure planning and debt reduction. These balance sheet priorities are complemented by
the successful integration of Grey Wolf and execution of the 2009 business plan.
Precision was able to succeed on many of its 2008 initiatives through its strategy of combining the
best people, with the best systems and best technology, including:
|
|
Reducing dependence on underlying economics and seasonality of the relatively mature western
Canada sedimentary basin;
|
|
|
Capitalizing on customer production growth in North America, especially unconventional
natural gas wells;
|
|
|
Pursuing global oil drilling opportunities; and
|
|
|
Achieving greater high performance high value services through investment in new asset
technology and acquisition opportunities to establish market positioning that consolidates
industry and provides profit margin improvement through people, technology and systems
initiatives.
|
As a large North American oilfield service provider with diverse operations and two business
segments, Contract Drilling Services and Completion and Production Services, Precision holds about
26% of the onshore drilling rig market in Canada, about 7% in the United States and about 20% of
the Canadian service rig market. In addition, Precision has a substantial Canadian market presence
in the camp and catering, snubbing, equipment rental and wastewater treatment business lines.
Precision now operates one of the largest onshore drilling rig fleets in the world which, on
December 31, 2008, was comprised of a global drilling fleet of 374 rigs with 220 in Canada, 151 in
the United States, two in Mexico and one in Chile.
PRECISION DRILLING TRUST
5
KEY RESOURCES AND COMPETENCIES
The acquisition of Grey Wolf was the primary reason for the 2008 increase in long-term debt of
$1.25 billion and a reported balance, net of unamortized debt issue costs of $159 million, as of
December 31, 2008 of $1.37 billion.
Historic Levels of Long-term Debt
In conjunction with the acquisition of Grey Wolf, Precision entered into a new US$1.6 billion
dollar credit facility. The facility has funded the acquisition of Grey Wolf, is available to repay
Grey Wolf convertible notes and provides ample liquidity at December 31, 2008 to fund ongoing
operational and investment activities.
During the fourth quarter of 2008 the severity of the global financial crisis led to a significant
contraction in global debt and equity financing capability. In turn, these conditions led to a
rapid decline in consumer confidence and major economies around the world, including the United
States and Europe. The resulting demand uncertainty and expectations for reduced energy consumption
significantly lowered oil and natural gas commodity prices and cast a negative near term outlook on
the oilfield services sector. While many governments have taken measures to inject capital and
confidence in their banking systems, there remains an acute undersupply of capital for debt
financings. Accordingly, the scarcity of debt financing resulted in higher debt service costs for
Precision, risk rated for industry and credit quality, even though government treasury rates in
many countries are at historic lows.
Given this current set of circumstances, Precision acted decisively to strengthen its capability to
reduce long-term debt and improve its underlying credit quality and capital structure:
|
|
2009 compensation restructuring to freeze employee pay and reduce salaried positions. Also
for 2008, the Chief Executive Officer has agreed to forego certain incentive bonus obligations
due under his employment contract and the Chief Financial Officer agreed to a reduced 2008
incentive bonus remuneration;
|
|
|
2009 capital expenditures on existing equipment have been reduced to a level that will
maintain the safety and overall performance of assets;
|
|
|
During 2008 and 2009, cost reduction measures have been taken to reduce the salaried
workforce, reduce employee travel, consolidate operating and administrative locations, lower
certain field wages and optimize supplier relationships;
|
|
|
Future expansion capital expenditures have been reduced to amounts required to complete the
2008 Super Series rig programs pursuant to term customer contracts;
|
|
|
In February 2009, the Trust announced the indefinite suspension of cash distributions;
|
|
|
A US$800 million base shelf prospectus was filed with regulatory authorities in February 2009
to facilitate the possible issuance of debt or equity securities over the following 25 month
period;
|
6
MANAGEMENTS DISCUSSION AND ANALYSIS
|
|
Gross proceeds of US$172.5 million were raised through an equity offering of 46 million units
of the Trust during February 2009; and
|
|
|
Management continues to seek permanent pricing for certain remaining debt within its credit
facilities. Provisions exist for the commitment banks to facilitate syndication for a period
following the Grey Wolf acquisition which may result in further increases in any or a
combination of interest rates, original issue discounts or fees, all subject to certain market
based indexing.
|
Precision strengthened its capabilities through management and board of director appointments
during the year. During 2008 Precision had full retention of senior management and executive
officers and complemented growth during the year with certain new hires and appointments. The
management appointments add to existing international and oilfield service expertise and bring new
exploration and production business insight.
During 2008 Precision Drilling Corporation appointed four new officers:
|
|
Joanne L. Alexander, Vice President, General Counsel and Corporate Secretary, industry
experience from 1990;
|
|
|
Kenneth J. Haddad, Vice President, Business Development, industry experience from 1981;
|
|
|
David J. Crowley, President U.S. Operations, former Grey Wolf Chief Operating Officer,
industry experience from 1980; and
|
|
|
David W. Wehlmann, Executive Vice President, Investor Relations, former Grey Wolf Chief
Financial Officer, industry experience from 1980.
|
During 2008 Precision Drilling Corporation appointed three additional directors, Frank M. Brown,
William T. Donovan and Trevor M. Turbidy, all formerly directors of Grey Wolf. As a group these
appointments provide particular expertise in the areas of finance and United States oilfield
services.
SUMMARY OF CONSOLIDATED STATEMENTS OF EARNINGS
(Stated in thousands of Canadian dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2008
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Drilling Services
|
|
$
|
809,317
|
|
|
|
$
|
694,340
|
|
|
$
|
1,009,821
|
|
Completion and Production Services
|
|
|
308,624
|
|
|
|
|
327,471
|
|
|
|
441,017
|
|
Inter-segment elimination
|
|
|
(16,050
|
)
|
|
|
|
(12,610
|
)
|
|
|
(13,254
|
)
|
|
|
|
|
|
|
|
|
|
1,101,891
|
|
|
|
|
1,009,201
|
|
|
|
1,437,584
|
|
|
|
|
|
|
|
EBITDA:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Drilling Services
|
|
|
359,137
|
|
|
|
|
329,351
|
|
|
|
511,883
|
|
Completion and Production Services
|
|
|
109,054
|
|
|
|
|
132,030
|
|
|
|
195,173
|
|
Corporate and Other
|
|
|
(31,655
|
)
|
|
|
|
(24,306
|
)
|
|
|
(38,896
|
)
|
|
|
|
|
|
|
|
|
|
436,536
|
|
|
|
|
437,075
|
|
|
|
668,160
|
|
|
|
|
|
|
|
Depreciation
|
|
|
83,829
|
|
|
|
|
78,326
|
|
|
|
73,234
|
|
Foreign exchange
|
|
|
(2,041
|
)
|
|
|
|
2,398
|
|
|
|
(353
|
)
|
Interest, net
|
|
|
14,174
|
|
|
|
|
7,318
|
|
|
|
8,029
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
(408
|
)
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes
|
|
340,574
|
|
|
|
|
349,033
|
|
|
|
587,658
|
|
Income taxes
|
|
|
37,844
|
|
|
|
|
6,213
|
|
|
|
15,146
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
|
302,730
|
|
|
|
|
342,820
|
|
|
|
572,512
|
|
Discontinued operations, net of tax
|
|
|
|
|
|
|
|
2,956
|
|
|
|
7,077
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
302,730
|
|
|
|
$
|
345,776
|
|
|
$
|
579,589
|
|
|
|
|
|
|
|
|
(1)
|
|
Non-GAAP measure. See page 50.
|
PRECISION DRILLING TRUST
7
Revenue and EBITDA
(1)
|
|
|
(1)
|
|
Non-GAAP measure. See page 50.
|
Capital Spending Total
For the year ended December 31, 2008 Precisions earnings from continuing operations was $303
million or $2.39 per diluted unit compared to $343 million or $2.73 per diluted unit in 2007. The
decrease of $0.34 per diluted unit was due to lower activity and pricing for Precisions Canadian
services in the first half of 2008 relative to 2007 and higher 2008 income tax expense partially
mitigated by higher earnings from contract drilling growth in the United States. The decline in the
first half of 2008 in Canada was driven by capital planning by customers late in 2007, when natural
gas prices were unfavourable and industry economics were hindered by royalty changes announced by
the government of Alberta. As commodity prices strengthened in 2008, customers responded by
increasing budgets with particular emphasis in British Columbia and Saskatchewan. In 2007,
Precision benefitted from a future income tax recovery of $22 million due to enacted Canadian
federal tax rate reductions.
West Texas Intermediate (WTI) crude oil averaged US$99.67 per barrel in 2008 versus US$72.45 in
2007 and Henry Hub natural gas averaged US$8.84 per MMBtu in 2008 versus US$6.94 in 2007. On
Canadian markets the average price for AECO natural gas one-year forward was $8.74 per MMBtu in
2008 compared to $7.50 in 2007. However, commodity prices deteriorated quickly in late 2008 and
early 2009 to an average Henry Hub natural gas price of US$4.88 and an average WTI price of
US$40.64 for the period of January 1, 2009 to February 28, 2009.
Currency exchange rates can impact commodity prices and have always had an impact on industry
fundamentals in the Canadian market. For Precision, this continues and with a significant portion
of long-term debt as of December 23, 2008 denominated in United States currency, exchange rate
fluctuations to Precisions Canadian dollar reporting currency and the impact on financial results
and credit facility financial covenants will take on additional importance going forward. During
the second half of 2008, a stronger United States dollar led to a weakening of 17% for the Canadian
dollar.
8
MANAGEMENTS DISCUSSION AND ANALYSIS
During 2008 there were 16,812 wells drilled in western Canada on a rig release basis, an 8% decline
from the 18,342 drilled in 2007. Although the industry experienced a decrease in wells drilled
total industry drilling operating days increased by 12% to 134,835 as a result of the mix of wells
drilled. The average industry drilling operating days per well in 2008 was 8.0 days compared to 6.6
days in 2007.
In 2008, higher oil and natural gas prices mid-way through the year prompted many customers to
increase their drilling programs. In the western Canada sedimentary basin (WCSB) the total number
of well licenses issued for oil targets was 8,275 which represented an 11% increase over 2007 and
41% of the total licenses issued compared to 37% in 2007. Well licenses for natural gas prospects
declined 5% in 2008 to 12,082. In the United States the active drilling rig count peaked during the
third quarter of 2008 at over 2,000 rigs.
OUTLOOK
While energy fundamentals always carry a degree of uncertainty, the global economic recession and
impact from the financial crisis has reduced both our customers access to capital and their desire
for drilling and well service programs. Hence, the level of uncertainty for 2009 is higher than
previous years. In the challenging economic environment of 2009, Precision expects demand for its
drilling services to decline in the short term. Precision expects EBITDA as a percentage of revenue
and its gross margin to decline and remain at lower levels for much of 2009. However, Precisions
term customer contracts provide a noteworthy degree of profit margin support.
Onshore drilling rigs go to work for customers under contracts that vary in duration, from one-well
programs to multi-well programs under near term or spot market pricing or under long-term contracts
whereby pricing is established from the outset and the customer has the right to work the rig for a
set time period. For 2009, Precision has a solid long-term contracted position and expects to have
an average of approximately 102 rigs working under long-term contracts in North America in the
first quarter of 2009 and an average of approximately 93 rigs contracted for the second quarter of
2009. For the entire year, Precision expects to have an average of approximately 85 rigs working
under long-term contracts, including 53 rigs on average in the United States, 30 on average in
Canada and two in Mexico.
As part of an ongoing debt reduction plan, Precision expects to keep capital expenditures at low
levels. Precision expects to spend approximately $207 million in capital expenditures for 2009,
with approximately $40 million being for upgrade capital and $167 million being for previously
committed expansion capital. The expansion capital is for 16 new rigs to be placed into service in
2009 to complete the 2008 new build program. All 16 of these rigs are included in the total term
contracted rigs described above.
The combination of weak equity and debt markets, lower commodity prices as well as higher long-term
royalty programs in Alberta have caused many customers to reduce their drilling budgets.
Precisions operations in Canada during the first quarter of 2009, as well as industry, have had
the lowest first quarter activity levels in over 10 years. Beyond the first quarter, activity is
less clear and will be largely dependent on North American natural gas pricing and the availability
of capital for customers.
The active rig count is a direct indication of activity levels for exploration and production of
oil and natural gas. Rig counts in North America are at reduced levels not seen since 2004 in the
United States and 1999 in Canada and continue to deteriorate. This deterioration has put pricing
pressure on the spot market and has greatly reduced new term contract opportunities.
During the first two months of 2009, natural gas prices have declined approximately 30%. Natural
gas storage levels were approximately 14% above the five-year average as withdrawals are below
average levels despite a relatively cold winter in North America. 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 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, we anticipate
the supply decline from reduced drilling may begin to outpace demand reductions later in 2009,
providing the catalyst for improved fundamentals to support a recovery in drilling activity.
PRECISION DRILLING TRUST
9
U.S. Working Gas in Underground Storage Compared with Five-year Range
Despite current near-term industry activity uncertainty, Precision has long-term growth
opportunities in North America. Over the past couple of years, through advancements in hydraulic
fracturing and directional drilling, the industry has undergone a noteworthy shift from
conventional resource plays to unconventional resource plays. This is evidenced by United States
natural gas production growth from unconventional resource plays and the rising trend in
directional and horizontal well programs.
Unconventional resource plays represent the greatest short-term solution to sustain North America
production. The resource plays are characterized by high initial production rates that can payout
the customers initial investment in a relatively short time. These wells have steep first year
decline rates in the range of 50% 80%. Given their steep early declines, a greater number or
higher density of wells are required to efficiently exploit the resource potential. The nature of
this production profile presents tremendous upside to drilling contractors. These wells are
expensive and technically challenging to drill. Customers who drill these well programs require
high-performing drilling rigs and thus recognize Precisions high performance high value advantage.
U.S. Natural Gas Production and Decline Rate
10
MANAGEMENTS DISCUSSION AND ANALYSIS
Precision believes it is well positioned with the rig fleet, experience and customer relationships
for active participation in North Americas resource play development. In Canada, there are three
major areas that are considered unconventional resource plays; the shale gas plays in Northeastern
British Columbia (Montney and Horn River), the Bakken shale in southern Saskatchewan, and the heavy
oil/oilsands in northeastern Alberta. In the United States there are several unconventional
resource plays. The three resource plays that present excellent growth potential for Precision are
the Haynesville play in Texas/Louisiana, the Marcellus play in New York/Pennsylvania and the Bakken
oil shale in North Dakota. Precisions geographic footprint coupled with application of know-how
and experience applicable in these areas provide a significant competitive advantage.
For Precision, international expansion slowed due to lower customer demand from commodity declines.
Precision will manage through these conditions and focus on prospects requiring minimal capital
investment that provide term contracts in regions that match our strategic goals.
With the expiry of non-competition restrictions during 2008, Precision is now in position to offer
customer savings on directional drilling services. Precisions directional drilling operation
commenced in the first quarter of 2009, supporting Precisions high performance high value strategy
to lower customer well costs. A high percentage of Precisions drilling rigs are used on complex
wells that require these services and this provides immediate customer access. The rising industry
trend toward directional and horizontal well programs coupled with the high cost of directional
field personnel provides an opportunity for Precision to successfully compete in this market.
Precision expects to offer this service in both Canada and the United States.
Despite near-term challenges, the future of the global oil and gas industry remains promising.
Compared to prior low-cycle troughs, there is marginal excess supply of oil and natural gas on a
global basis and short-term oversupply conditions are balanced through lower industry investment in
combination with higher well depletion rates. While current economic conditions have led to a
recession in many countries, Precision believes that these mechanisms eventually reduce supply
sufficiently to provide the impetus for a sustained recovery in drilling and well servicing
activity. In the near term, fiscal 2009 has begun in sharp contrast to the high commodity prices of
mid-2008 and will be a financial challenge for Precision and its customers. These difficult
economic conditions represent continuing opportunity to demonstrate customer value through delivery
of high performance high value services that lower well costs.
Precision converted to an income trust in 2005 as the tax rules of the day allowed the market to
place a higher value for unitholders on the flow-through structure than the traditional corporate
structure. In light of legislated and proposed changes, the sector outlook and resulting financial
operating performance and loan covenants the Trust continues to examine whether the current
structure is optimal for Precisions business strategy and in the best interests of unitholders.
PRECISION DRILLING TRUST
11
Through this report, management is presenting its views of Precisions business and the dynamic
industry in which it operates. Understanding the oil and gas industry and the factors that impact
demand for oilfield services is important to assess risk factors that affect Precisions long-term
strategy and financial performance.
GLOBAL MARKETS
Global economic growth and prosperity drives energy consumption. Crude oil and to a lesser extent
natural gas are the most dominant and versatile sources of energy in developed countries while
crude oil and coal are the dominant sources of energy in developing countries. Oil and its
by-products are currently the most important fuel for the transportation industry as there are few
alternatives that can compete economically. Oil and natural gas are major fuel sources for
generating heat and electricity and are critical building blocks for countless consumer products.
The impact of global economic recessionary forces resulting from the current global credit crisis
has led to a curtailment of near-term global energy demand. As a result, there has been a
significant decline in energy prices and capital investment directed towards energy resources while
the global energy supply/demand balance realigns in response to near-term global economic
conditions. Despite the near-term reductions in supply and demand the worldwide population
continues to grow and is expected to rise 1.1% per year fueling a rising global energy demand into
the future. From a reference year of 2005, energy consumption is projected by the United States
government Energy Information Administration (EIA) to increase 50% by 2030 with oil, natural gas
and coal meeting approximately 86% of global demand. World oil consumption is predicted to rise
about 1.2% per year during this period due largely to growing demand in China, India and other
developing countries. Delivering reliable and affordable energy for these fast-growing and upwardly
mobile populations is a major challenge in this century with security of supply becoming a dominant
theme globally. The EIA is forecasting natural gas consumption increases of 1.7% on average per
annum to 2030 as rising oil prices increase the demand for natural gas as an alternative fuel in
industrial and electrical sectors in developed and developing economies.
12
MANAGEMENTS DISCUSSION AND ANALYSIS
NORTH AMERICAN MARKETS
The economics of the oilfield service industry are aligned with global and regional fundamentals.
Important regional drivers for the industry in North America include the underlying hydrocarbon
make-up of the various basins and the existence of established, competitive and efficient service
infrastructure. With high service costs per barrel of oil equivalent production in Canada and
increased pipeline takeaway capacity within the United States, capital allocation by customers has
increasingly favoured unconventional natural gas basins in the United States.
The hydrocarbon basins of North America are diverse and conventional oil and natural gas reservoirs
exist at a variety of depths. These conventional sources are complemented by more costly and
challenging unconventional reservoirs associated with oil sands, heavy oil, natural gas in coal and
in shale and in deeper, low permeability formations. About 70% of the proven natural gas reserves
in North America are situated in the United States with the remaining 30% in Canada. In 2008, about
80% of drilling activity in the United States and 60% in Canada targeted natural gas.
The emergence of LNG as a fungible commodity is an important future source of supply to North
America that could offset production declines from mature reservoirs and help meet future natural
gas demand. There are still technical, political and environmental challenges for significant LNG
developments to occur in North America, but it is believed to be a necessary source of supply as
demand for natural gas increases. Less than 5% of the worlds proven reserves of natural gas exist
in North America yet more than 25% of worldwide natural gas consumption occurs in North America.
Global LNG capacity continues to rise and as the price differential of LNG to North American
produced gas narrows, the likelihood for higher LNG imports to the United States increases.
Currently the differential to North American natural gas prices is narrow and the opportunity for
higher LNG imports during 2009 has increased. The LNG market is developing and has shown that
supply moves to high priced markets, such as Europe and Asia, subject to demand fluctuations.
With next-door proximity to the worlds biggest energy consumer Canada has become the worlds
seventh largest oil producer and third largest producer of natural gas. With oil sands development,
Canada is one of the few countries with growing oil production. A highly integrated continental
energy transportation system, security of supply and access to United States markets has made
Canada one of the largest energy providers to the United States. Currently, just over half of
Canadian oil and natural gas production is exported to the United States.
WCSB Natural Gas Production
PRECISION DRILLING TRUST
13
ECONOMIC DRIVERS OF THE OILFIELD SERVICES INDUSTRY
Providing oil and natural gas products to consumers involves a number of players, each taking on
different risks in the exploration, production, refining and distribution processes. Exploration
and production companies, Precisions customers, assume the risk of finding hydrocarbons in
reservoirs of sufficient size to economically develop and produce. The economics are dictated by
the current and expected future margin between the cost to find and develop hydrocarbons and the
eventual price of these products. The wider the margin, the greater the incentive to undertake
these risks.
Exploration and development activities include acquiring access to prospective lands, seismic
surveying to detect hydrocarbon bearing structures, drilling wells and completing successful wells
for production. Exploration and production companies hire oilfield service companies to perform the
majority of these tasks. The revenue of an oilfield service company is part of the finding and
development costs for an exploration and production company.
Number of Producing Wells in Western Canada
The economics of an oilfield service company are largely driven by the price of crude oil and
natural gas realized by its customers. Since oil can be transported relatively easily, it is priced
in a global market influenced by an array of economic and political factors. Natural gas is priced
in continental markets with supply from LNG a growing factor subject to availability.
From a long-term perspective, there is a narrowing supply-demand balance for natural gas in North
America. Many industry observers believe a new pricing floor may be set through industry cycles due
to the combination of production declines and demand growth. Recent cycles support this thesis with
commodity prices generally trending at higher levels than previously encountered. New hydrocarbon
reserves are clearly more costly and difficult to discover and develop and it is becoming
increasingly necessary to use high-performance drilling rigs and support services to complete well
programs. It has taken record drilling activity over most of the last three years in North America
to marginally increase overall natural gas production levels. To a large extent this production
growth has been derived from unconventional production with significant first-year decline rates.
With the ongoing depletion of conventional resource basins there has been a continued shift in the
oil and natural gas industry in North America to develop unconventional resources such as oil
sands, natural gas in shale and in coal and in deeper, low permeability formations. The economics
of unconventional resource plays are enhanced by technology such as multi-well pad locations,
high-performance drilling rigs and advanced reservoir stimulation techniques.
Reserves to production ratios, which indicate how quickly reserves are depleting, have flattened
after a period of decline starting in the 1990s. The decline implies that drilling activity must
stay level or increase just to maintain current production and producers may need to drill deeper,
more remote resource plays to secure large gas fields and extend reserve life.
14
MANAGEMENTS DISCUSSION AND ANALYSIS
WCSB Well Completions vs AECO Spot Natural Gas Price
The graph above compares WCSB well completions and natural gas pricing over the past 10 years. The
long-term trend towards higher natural gas prices and increased natural gas well drilling has been
suppressed over the past 18 months due primarily to less shallow gas well activity as a result of
Alberta government royalty changes. The average natural gas price in 2008 increased as gas storage
declined. However, prices closed the year much lower as storage increased and demand uncertainty
rose with deteriorating economic conditions in North America.
With growing energy demand, the supply of drilling rigs in Canada increased steadily over the past
14 years from about 450 rigs to an all-time high of about 900 in 2007 and about 850 currently.
Customer demand, measured by annual drilling rig operating day utilization, peaked at 71% in 1997
and has since ranged between 38% and 60%. Industry utilization for 2008 was 41%. The current excess
drilling rig capacity in Canada has prompted some oilfield service providers to relocate certain
assets in their drilling fleets to the United States land drilling market. As illustrated below,
Canadian rig activity fluctuates with the seasons, an event which generally does not occur in the
United States except in northern states.
Active and Existing Canadian Drilling Rigs
PRECISION DRILLING TRUST
15
The United States active drilling rig count steadily increased from about 800 rigs in 2002 to a
peak of just over 2,000 rigs in 2008 before falling to about 1,700 rigs by the end of 2008.
Precision estimates that during peak activity in the fourth quarter of 2008 about 1,200 active
drilling rigs in the United States fleet were constructed prior to 1990 and underperform when
tasked with drilling unconventional complex resource plays. With increased exploitation of
unconventional resource basins and the increases in directional and horizontal drilling the demand
for high performing rigs and crews capturing premium pricing continues to grow, displacing the
underperforming rigs.
Diversification: Unconventional Resource Coverage
The trend toward horizontal and directional well programs has increased with technological and
process improvements that have led to higher production, especially in unconventional resource
plays. As depicted in the above map of North America, Precisions drilling rig fleet is positioned
in virtually every resource play from northern Canada to the southern United States.
16
MANAGEMENTS DISCUSSION AND ANALYSIS
HISTORY OF CONTINUING OPERATIONS
Precision began operating in western Canada as a land drilling contractor in the 1950s. A
combination of new equipment purchases and acquisitions over the last 20 years has expanded fleet
capacity and added complementary businesses. For the past decade, Precision has been Canadas
largest oilfield services provider with an increasing presence in the United States since 2006 and
is now a large North American oilfield service provider.
Precision has a vertical business model that provides customers with a diverse range of services
for the well location. Business lines are organized in two segments to align with the dynamics of
customer markets and processes. This encompasses the initial drilling of oil and natural gas wells,
Contract Drilling Services, and the subsequent completion and workover of wells to optimize
production volumes, Completion and Production Services. These segments have been integrated with
internal support infrastructure to optimize customer service delivery and lower costs.
Precision has a supply procurement and distribution division that supports rig operations and all
other Precision businesses. This division serves to efficiently handle a high volume of
transactions and channel supplier relationships to enhance product quality selection and
standardization. Information system automation has streamlined the procurement, supply distribution
and decision making process. The support is an integral element in Precisions Canadian operations
and is in the process of being replicated in support of contract drilling operations in the United
States.
Precision also has an equipment manufacturing, repair and certification division that supports rig
operations. This division provides rig manufacturing capabilities and engineering to facilitate new
rig construction and the upkeep of operating assets. Specialized machining, skilled tradesmen and
management has allowed Precision to optimize its capital allocation through quality workmanship,
project planning, retention of intellectual property and cost savings.
Precisions supply and manufacturing businesses preserve a small amount of capacity to generate
sales with third party customers and maintain industry connectivity for trends, pricing and
high-performance benchmarks. These capabilities provide Precision with a capital cost advantage in
the manufacture of new Super Series rigs.
Precisions vertical integration is further complemented by rig manufacturing engineering in the
drilling division. Rigs built by Precision are designed for greater safety and operating efficiency
to deliver well cost savings to customers. High-performance drilling rigs combine high mobility,
automated pipe handling, advanced control systems, minimal environmental impact, and highly trained
crews. Over the past 13 years Precision has been developing the Super Series drilling rigs and has
built 40 Super Single, seven Super Single Light and ten Super Triple rigs. Precision also
manufactured ten freestanding mobile single and six slant service rigs.
PRECISION DRILLING TRUST
17
Contract Drilling Services Segment
Precisions Contract Drilling Services are known within the industry as a part of the upstream
sector with operations at the well location to facilitate the drilling of natural gas, oil and, in
rare circumstances, geothermal wells. It is the underlying well program requirements that determine
which rig is best suited to drill a particular prospect for customers.
Precisions development was founded on the successful integration of acquisitions. In the decade
following a 1987 reverse takeover, a series of acquisitions expanded Precisions Canadian drilling
fleet from four to 106 rigs. With the acquisition of Kenting Energy Services Inc. in 1997,
Precision essentially doubled its fleet to 200 rigs representing approximately 40% of the drilling
fleet in Canada. The acquisitions of coil tubing drilling rigs and other shallow drilling rigs in
2000 rounded out the acquisition history for Precisions rig fleet in Canada.
The acquisition of Grey Wolf has accelerated Precisions presence in the United States market and
2008 ended with Precision having 220 drilling rigs in Canada (comprising 25% of the Canadian
market), 151 rigs in the United States (comprising about 7% of the U.S. market), one rig in Chile
and two rigs in Mexico. Precision will seek new global opportunities which exploit Precisions high
performance high value services.
To better operate ancillary assets and to provide a comprehensive suite of services to customers,
Precision acquired and reorganized assets into complementary businesses. In 1993, Precision entered
the camp and catering business with the acquisition of LRG Oilfield Services Ltd. Along with camps
from drilling rig business acquisitions and the purchase in 2003 of McKenzie Caterers (1984) Ltd.,
this division now has 100 camps. In 1996 Precision added in-house capabilities for the design,
fabrication and maintenance of rig components with the acquisition of Rostel Industries Ltd. The
1997 acquisition of Columbia Oilfield Supply Ltd. led to the integration of purchasing systems and
qualitative improvements in product selection and standardization in all of Precisions businesses.
Completion and Production Services Segment
Precisions Completion and Production Services are also known within the oil and gas industry to be
a part of the upstream sector with operations at the well location to complete wells that have been
drilled and to maintain wells that have been placed into production. The underlying well program
parameters determine the type of service rig and ancillary services best suited to workover a
particular well. Service rigs are versatile and capable of working on both oil and natural gas
wells. Design and technological improvements have made equipment offerings more competitive through
efficiency gains and wide market appeal to a broad range of well requirements.
In 1996 Precision diversified into businesses that became the foundation for the Completion and
Production Services segment, specifically Precision Well Servicing, Live Well Service and Precision
Rentals, through the acquisition of EnServ Corporation. The acquisition enabled Precision to offer
services that tracked the life of a particular oil or natural gas well, build customer
relationships and moderate demand volatility associated with the drilling of new wells. In 2000
Precision became fully vested in the Canadian service rig business with the acquisition of CenAlta
Energy Services Inc. to create at the time a combined fleet of 257 service rigs and an
industry-leading 28% market share. Through additional acquisitions in the late 1990s the rental
businesses grew and in 2002 were combined and branded as Precision Rentals. In 2006, Precision
expanded into the business of remote work site wastewater treatment with the acquisition of Terra
Water Group Ltd.
To close fiscal 2008, after acquiring six service rigs strategically positioned near the Bakken
shale play from Ricks Well Servicing, Precisions 229 service rigs and 29 snubbing units comprise
21% and 24% of the Canadian market, respectively. In addition to completing and servicing wells,
the segment offers snubbing to service natural gas wells while pressurized, rental equipment and
wastewater treatment for remote accommodations.
18
MANAGEMENTS DISCUSSION AND ANALYSIS
VISION
Precision will be recognized as the high performance high value provider of services for global
energy exploration and development:
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Precision delivers high performance through passionate people supported by superior systems
and equipment designed to maximize and reduce risks; and
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Precision creates high value by lowering customer costs, operating safely, developing people,
generating financial growth and attracting investment.
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STRATEGIC DIRECTION
Precisions first step to globalize its contract drilling business and broaden its geographic reach
hit stride in late 2007 with drilling rig deployments from Canada and new rig construction to the
United States. This market initiative continued through 2008 with an additional 17 rigs and proven
high performance high value operational execution leading to a fleet of 29 rigs on December 22,
2008.
On August 25, 2008 with the announcement of the Grey Wolf acquisition, Precision took a second step
in the United States by acquiring size and the opportunity to leverage customer relationships,
internal systems support, a medium to deep depth rated rig fleet positioned in key basins and human
capital in the worlds largest onshore drilling market. With closing of the transaction on December
23, 2008, Precision acquired 123 drilling rigs and operated the fourth largest fleet of rigs in the
United States with an emerging international presence through two rigs in Mexico.
Precision will continue to leverage its strategy for high performance high value land drilling
services for oil and natural gas exploration and development. As Precision pursues opportunities
beyond North America the same organic first deployment and expansion is envisioned to prove out
market opportunities and Precisions high performance high value capabilities. As opportunities and
capital markets develop, the second step may involve an acquisition to leverage rig fleet size, to
further customer relationships and to improve underlying profit margins.
Precisions core capabilities reside with its best employees, best systems and best technology.
These areas of excellence provide the operating leverage for organic new asset construction growth
and for consolidation based growth. The high-performance competitive advantage serves to reduce
customer cost and minimize the operational risks associated with drilling and servicing oil and gas
wells. Precisions reputation for high value is evident in financial and operational performance,
employee retention, safety and environmental performance and specifically its market share in
directional drilling and horizontal applications.
Precision continually reviews assets, retiring those which are less competitive and upgrading
others. Precision intends to continue to build high-performance Super Series drilling rigs under
term contracts targeted to customers who recognize and reward the cost saving benefits of these
services.
Precisions high performance high value strategy is focused on best people, best equipment and best
technology to deliver value, diversification and growth:
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Value capitalize on vertically integrated business model; especially supply distribution,
manufacturing and internal system support capabilities to reduce costs and improve margins;
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Value attract investment capital through strong margins and quality management;
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Diversification expand to markets beyond Canada to reduce seasonality of equipment
utilization and dependence on underlying economics of the WCSB;
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Diversification capitalize on customer production growth and resulting drilling
opportunities, especially North American unconventional natural gas wells;
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Diversification develop a broad customer base;
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PRECISION DRILLING TRUST
19
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Growth pursue global oil drilling and service opportunities;
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Growth integrate directional drilling; and
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Growth invest in asset growth that creates customer value through enhanced service
performance.
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Our North American presence enables market share gains as onshore oil and gas basins continue to
mature. Precisions superior equipment technology delivers significantly better operating
performance, especially in complex and demanding customer well programs.
Precision seeks consolidation opportunities to implement its core capabilities of employee
recruitment, safety, training, environmental footprint, equipment maintenance, equipment
manufacturing, supply chain management and cost control to upgrade performance of existing
equipment fleets.
KEY PERFORMANCE DRIVERS
Customer economics are dictated by the current and expected margin between the price at which
hydrocarbons are sold and the cost to find and develop those products. Some of the key business,
customer and industry indicators that Precision focuses on to monitor its performance are:
Safety
Management
Precisions culture is based on the foundation of an all-encompassing Target Zero vision.
Precisions philosophy states that the workplace and organization can be free from injuries,
equipment damage and negative environmental impact. Rigs and services that achieve Target Zero
deliver operational excellence, best profit margins, operating efficiency and customer
satisfaction. Safety is tracked through an industry standard recordable frequency statistic which
is measured to benchmark successes and illustrate areas for improvement.
Environmental
Management
Precision invests resources to reduce the environmental impact at the work site. This is
accomplished through lower emission power systems, small footprint rig designs, efficient field
operations, real property assessments and environmental management systems.
Operating
Efficiency
Precision maximizes the efficiency of operations through proximity to work sites, operating
practices and versatility. Precisions reliable and well maintained equipment minimizes downtime
and non-productive time during operations. Information is gathered from daily drilling log records
stored in a database and analyzed to measure productivity, efficiency and effectiveness.
Key factors which contribute to lower customer well costs are:
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Mechanical downtime which is managed through preventative maintenance programs, detailed
inspection processes, an extensive fleet of strategically placed spare equipment, an in-house
supply chain, and continuous equipment upgrades; and
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Non-productive time, or move, rig-up and rig-out time, which is minimized by decreasing the
number of move loads per rig, using lighter move loads, and using mechanized equipment for
safer and quicker rig component connections.
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20
MANAGEMENTS DISCUSSION AND ANALYSIS
Customer
Demand
Precisions fleet is geographically dispersed to meet customer demands. Relationships with
customers, industry knowledge and new well licenses provide Precision with the information
necessary to evaluate its marketing strategies. The ability to provide customers with some of the
most innovative and advanced rigs in the industry to reduce total well cost increases the value of
the rig to the customer. Industry rig utilization statistics are also tracked to evaluate
Precisions performance against competitors.
Workforce
Precision invests in processes and systems that lead to employee development, leadership and
retention. Precisions variable operating cost structure has led to programs and strategies
designed to retain senior experienced field personnel. These programs include skill development
around leadership and communication, company values, remuneration systems and recruitment
initiatives like Toughnecks, a program that was rolled out during 2008. Precision measures
performance excellence through its safety record and reputation to attract and retain employees as
industry manpower shortages are often experienced in peak operating periods.
Financial
Performance
Precision maximizes revenue without sacrificing operating margins. Key financial information is
unitized on a per day or per hour basis and compared to established benchmarks and past
performance. Precision evaluates the relative strength of its financial position by monitoring its
working capital and debt ratios. The Companys current focus is to reduce long-term debt.
OPERATING SEGMENTS
As at December 31, 2008 in the Contract Drilling Services segment:
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Precision Drilling operates 220 land drilling rigs in Canada;
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Precision Drilling Oilfield Services operates 151 land drilling rigs in the United States;
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Precision affiliates operate two rigs in Mexico and one in Chile;
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LRG Catering operates 97 camps in Canada, with food catering, and a Precision affiliate
operates three camps in the United States;
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Rostel Industries provides engineering, machining, fabrication, component manufacturing and
repair services for drilling and service rigs primarily for Precisions operations; and
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Columbia Oilfield Supply provides centralized procurement, standardized product selection,
and coordinated distribution of goods for Precisions operations.
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As at December 31, 2008 in the Completion and Production Services segment:
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Precision Well Servicing operates 229 well completion and workover service rigs in Canada;
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Live Well Service operates 29 snubbing units in Canada;
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Precision Rentals provides approximately 12,000 rental items in Canada including well control
equipment, surface equipment, specialty tubulars and wellsite accommodation units; and
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Terra Water Systems provides 76 wastewater treatment units.
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PRECISION DRILLING TRUST
21
The table below categorizes the horsepower of Precisions drilling rig fleet as at December 31,
2008:
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Horsepower
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Type of Drilling Rig
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<500
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500-999
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1000-1499
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1500-1999
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2000+
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Total
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Electric
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2
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19
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7
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1
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1
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30
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Mechanical
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82
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66
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2
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150
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Super Single
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23
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12
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35
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Super Triple
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5
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5
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Canada
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107
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97
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14
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1
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1
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|
|
|
220
|
|
|
|
|
Electric
|
|
|
|
|
|
|
3
|
|
|
|
32
|
|
|
|
19
|
|
|
|
30
|
|
|
|
84
|
|
Mechanical
|
|
|
|
|
|
|
23
|
|
|
|
15
|
|
|
|
4
|
|
|
|
|
|
|
|
42
|
|
Super Single
|
|
|
|
|
|
|
5
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Super Triple
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
10
|
|
|
|
|
|
|
|
14
|
|
|
|
|
United States
|
|
|
|
|
|
|
31
|
|
|
|
57
|
|
|
|
33
|
|
|
|
30
|
|
|
|
151
|
|
|
|
|
Electric
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
3
|
|
|
|
|
International
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
3
|
|
|
|
|
Total
|
|
|
107
|
|
|
|
129
|
|
|
|
71
|
|
|
|
34
|
|
|
|
33
|
|
|
|
374
|
|
|
The configuration of Precision Well Servicings Canadian fleet for the past four years is
illustrated in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Service Rig
|
|
Horsepower
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Singles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
|
|
|
150-400
|
|
|
|
2
|
|
|
|
5
|
|
|
|
12
|
|
|
|
17
|
|
Freestanding mobile
|
|
|
150-400
|
|
|
|
97
|
|
|
|
94
|
|
|
|
92
|
|
|
|
88
|
|
Doubles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
|
|
|
250-550
|
|
|
|
42
|
|
|
|
43
|
|
|
|
44
|
|
|
|
44
|
|
Freestanding mobile
|
|
|
200-550
|
|
|
|
23
|
|
|
|
9
|
|
|
|
9
|
|
|
|
8
|
|
Skid
|
|
|
300-860
|
|
|
|
48
|
|
|
|
55
|
|
|
|
65
|
|
|
|
65
|
|
Slants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freestanding
|
|
|
250-400
|
|
|
|
17
|
|
|
|
17
|
|
|
|
15
|
|
|
|
15
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
229
|
|
|
|
223
|
|
|
|
237
|
|
|
|
237
|
|
|
CAPACITY TO DELIVER
Precision is a major supplier of services to oil and gas companies and its success is dependent on
providing a complement of oilfield services that are cost effective to its customers. Precision
provides quality equipment operated by highly experienced and well trained crews. Maintaining
customer relationships is fundamental to Precisions success and is based in large part upon the
ability to deliver. Safety is a measure of performance excellence embodied by Precisions Target
Zero program.
High-Performance Drilling Rigs
Precision Drilling is focused on providing efficient, cost-reducing drilling technology. Design
innovations and technology improvements capture incremental time savings during all phases of the
well drilling process, including moving between wells.
The versatile Super Single design comprises technical innovations in safety and drilling
efficiency in slant, vertical or directional drilling on single or multiple well pad locations in
shallow to medium depth wells. It is extremely proficient on conventional vertical wells and has
drilled in many regions of the world. Super Single rigs utilize extended length tubulars,
integrated top drive, innovative unitization to facilitate quick moves between well locations, a
small footprint to minimize environmental impact and enhanced safety features such as automated
pipe handling and remotely operated torque wrenches.
22
MANAGEMENTS DISCUSSION AND ANALYSIS
A scaled-down version without slant capability, the Super Single Light, also features an
integrated top drive and automated pipe handling and is unitized and trailer mounted to reduce the
load count for efficient moving, rig up and tear down for the shallow well depth market.
Triple rigs have greater hoisting capacity and are used in deeper exploration and development
drilling. The Super Triple electric rigs are fabricated to keep the load count as low as possible
using widely available conventional rig moving equipment. Power capabilities are a major design
criterion for the new Super Triple rigs. Drilling productivity and reliability with AC power drive
systems provides added precision and measurability along with a computerized electronic auto
driller feature that precisely controls weight, rotation and torque on the drill bit. These rigs
use extended length drill pipe, an integrated top drive, automated pipe handling with iron
roughnecks and control automation off the rig floor.
Large Diversified Rig Fleets
Precisions large diverse fleet of onshore drilling rigs is strategically deployed across the most
active regions of the WCSB, and in many basins in the United States. When an exploration and
production company needs a specific type or size of rig in a given area, there is a high likelihood
that a Precision rig will be readily available. Geographic proximity and fleet versatility make
Precision a premium service provider. Precisions fleet can drill virtually all types of onshore
conventional and unconventional oil and natural gas wells in North America. In the United States,
Precision also maintains its own fleet of specialized vehicles for mobilizing its drilling rigs.
Precisions service rigs provide completion, workover, abandonment, well maintenance, high pressure
and critical sour gas well work and well re-entry preparation across the WCSB. The rigs are
supported by three field locations in Alberta, two in Saskatchewan and one in British Columbia.
Snubbing complements traditional natural gas well servicing by allowing customers to work on wells
while they are pressurized and production has been suspended. Precision has two types of snubbing
units rig assist and self-contained. Self-contained units do not require a service rig on site
and are capable of snubbing and performing many other well servicing procedures.
A substantive market share provides size and scale for Precision to leverage vertical integration
of supply procurement and distribution, equipment manufacture repair and certification and internal
support information systems and processes.
Inventory of Ancillary Equipment
Precision has a large inventory of equipment, including portable top drives, loaders, boilers,
tubulars and well control equipment, to support its fleet of drilling and service rigs to meet
customer requirements. Precision also maintains an inventory of key rig components to minimize
downtime in the event of equipment failures.
In support of drilling rig operations, LRG Catering supplies meals and provides accommodation for
rig crews at remote worksites. Terra Water Systems plays an essential role in providing wastewater
treatment services for LRG Catering and other camp facilities. Precision Rentals supplies customers
with an inventory of specialized equipment and wellsite accommodations.
Industry Leading Safety Program
Safety is critical for Precision and its customers. The focus on working safely is one of
Precisions most enduring values. The goal of Target Zero Precisions safety vision for
eliminating workplace incidents is a fundamental belief that all injuries can be prevented. In
2008, 338 of Precisions drilling and service rigs and 80 of Grey Wolfs drilling rigs achieved
Target Zero. Precision is a leader in adopting technological advancements which have made drilling
rigs, service rigs and snubbing units safer.
PRECISION DRILLING TRUST
23
Well-maintained Equipment
Precision consistently reinvests capital to sustain and upgrade existing property, plant and
equipment.
Upgrade Capital Expenditures
In addition to capital expenditures for equipment and infrastructure as illustrated above,
equipment repair and maintenance expenses are benchmarked to activity levels in accordance with
Precisions maintenance and certification programs. Precision employs computer systems to track key
preventative maintenance indicators for major rig components to record equipment performance
history, schedule equipment certifications, reduce downtime and allow for better asset management.
Employees
As a service company, Precision is as good as its people. An experienced, competent crew is a
competitive strength and highly valued by customers. To recruit rig employees, Precision has
centralized personnel departments and orientation and training programs. In 2008 Precision launched
its new Toughnecks recruiting campaign to ensure its future field personnel requirements are
properly managed and maintained.
Information Systems
Precisions commitment to invest in a fully integrated enterprise-wide reporting system has
improved business performance through real-time access to information across all functional areas.
The Canadian divisions operate on a common integrated system using standardized business processes
across finance, payroll, equipment maintenance, procurement and inventory control. Precision is
currently implementing these systems in its expanded United States operations.
Precision continues to invest in information systems that provide competitive advantages.
Electronic links between field and financial systems provide accuracy and timely processing. This
repository of rig data improves response time to customer enquiries. Rig manufacturing projects
benefit from scheduling and budgeting tools as economies of scale can be identified and leveraged
as construction demands increase.
24
MANAGEMENTS DISCUSSION AND ANALYSIS
CONTRACT DRILLING SERVICES SEGMENT
(Stated in thousands of Canadian dollars, except where indicated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
Years ended December 31,
|
|
2008
|
|
|
Revenue
|
|
|
|
2007
|
|
|
Revenue
|
|
|
2006
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
809,317
|
|
|
|
|
|
|
|
$
|
694,340
|
|
|
|
|
|
|
$
|
1,009,821
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
425,051
|
|
|
|
52.5
|
|
|
|
|
345,043
|
|
|
|
49.7
|
|
|
|
470,713
|
|
|
|
46.6
|
|
General and administrative
|
|
|
25,129
|
|
|
|
3.1
|
|
|
|
|
19,946
|
|
|
|
2.9
|
|
|
|
27,225
|
|
|
|
2.7
|
|
|
|
|
|
|
|
EBITDA
(1)
|
|
|
359,137
|
|
|
|
44.4
|
|
|
|
|
329,351
|
|
|
|
47.4
|
|
|
|
511,883
|
|
|
|
50.7
|
|
Depreciation
|
|
|
57,076
|
|
|
|
7.1
|
|
|
|
|
43,120
|
|
|
|
6.2
|
|
|
|
38,573
|
|
|
|
3.8
|
|
Foreign exchange
|
|
|
(8,179
|
)
|
|
|
(1.0
|
)
|
|
|
|
1,477
|
|
|
|
0.2
|
|
|
|
(314
|
)
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
(1)
|
|
$
|
310,240
|
|
|
|
38.3
|
|
|
|
$
|
284,754
|
|
|
|
41.0
|
|
|
$
|
473,624
|
|
|
|
46.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
% Increase
|
|
|
|
2008
|
|
|
(Decrease)
|
|
|
|
2007
|
|
|
(Decrease)
|
|
|
2006
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of drilling rigs (end of
year)
|
|
|
374
|
|
|
|
52.7
|
|
|
|
|
245
|
|
|
|
1.7
|
|
|
|
241
|
|
|
|
4.8
|
|
Drilling utilization days
(operating and moving):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
34,488
|
|
|
|
(0.2
|
)
|
|
|
|
34,572
|
|
|
|
(32.3
|
)
|
|
|
51,050
|
|
|
|
(4.9
|
)
|
United States
|
|
|
8,006
|
|
|
|
281.6
|
|
|
|
|
2,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
159
|
|
|
|
n/m
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling revenue per utilization
day:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
$
|
16,420
|
|
|
|
(2.5
|
)
|
|
|
$
|
16,833
|
|
|
|
(6.5
|
)
|
|
$
|
18,002
|
|
|
|
14.2
|
|
United States
(in US$)
|
|
$
|
21,549
|
|
|
|
(8.2
|
)
|
|
|
$
|
23,473
|
|
|
|
(8.5
|
)
|
|
$
|
25,646
|
|
|
|
n/m
|
|
Drilling statistics:
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of wells drilled
|
|
|
4,432
|
|
|
|
(6.1
|
)
|
|
|
|
4,718
|
|
|
|
(23.7
|
)
|
|
|
6,180
|
|
|
|
(20.4
|
)
|
Average days per well
|
|
|
6.9
|
|
|
|
6.2
|
|
|
|
|
6.5
|
|
|
|
(9.7
|
)
|
|
|
7.2
|
|
|
|
20.0
|
|
Number of metres drilled
(000s)
|
|
|
5,877
|
|
|
|
1.1
|
|
|
|
|
5,813
|
|
|
|
(25.6
|
)
|
|
|
7,810
|
|
|
|
(12.3
|
)
|
Average metres per well
|
|
|
1,326
|
|
|
|
7.6
|
|
|
|
|
1,232
|
|
|
|
(2.5
|
)
|
|
|
1,264
|
|
|
|
10.3
|
|
|
|
|
|
|
|
|
(1)
|
|
Non-GAAP measure. See page 50.
|
|
(2)
|
|
Canadian operations only.
|
PRECISION DRILLING TRUST
25
2008 Compared to 2007
The
Contract Drilling Services segment
generated revenue of $809 million in 2008, 17% more than the
$694 million in 2007. The increase was due to a nearly four-fold increase in the United States
activity that was partially offset by lower average day rates in both Canada and the United States.
In addition, the Grey Wolf acquisition that was completed on December 23, 2008 added 123 rigs and
generated activity for the last eight days of the year.
Operating earnings of $310 million increased $25 million or 9% from $285 million in 2007 and were
38% of revenue in 2008 compared to 41% in 2007. The increase is primarily due to greater United
States activity. This was offset by increases in operating expenses which were 53% of revenue in
2008 compared to 50% in 2007. The October 1, 2008 labour rate adjustment in Canada accounted for
the majority of the operating expense increase. Increases in the cost of operating supplies as well
as higher costs associated with increased deep rig activity also played a role.
Capital expenditures for the Contract Drilling Services segment in 2008 were $203 million and
included $163 million to expand the underlying asset base and $40 million to upgrade existing
equipment. The majority of the expansion capital was associated with our 2008 rig build program
where 18 rigs were being constructed for operations in the United States and Canada.
Canadian Drilling division revenues decreased $16 million or 3% over 2007 to $566 million due to a
decrease in customer demand mainly in the fourth quarter as the global economic slowdown took hold.
Precisions Canadian drilling rig activity in 2008 was down 84 utilization days, or less than 1%
overall compared to 2007. The rapid increase in commodity prices in the first half of 2008
generated substantially higher cash flows and earnings for producers. This situation reversed in
the fourth quarter as dramatic reductions in oil and natural gas prices reduced industry cash flows
and drilling activity.
Precisions 2008 year end Canadian rig count declined to 220 from 232 in 2007 and rig operating day
utilization increased marginally. The industry drilling rig fleet was reduced to about 850 drilling
rigs at the end of 2008 and operating day utilization increased by 10%. Industry operating days in
Canada increased to 134,835 reflecting increased drilling days mainly associated with the Montney,
Horn River and Bakken unconventional plays, which typically require more days to complete. For the
year there was a 25% increase in industry horizontal wells drilled despite an overall decrease in
total wells drilled of 8%.
Average drilling rig utilization day rates for Precision rigs in Canada decreased 2% in 2008 from
2007. Average rates strengthened in the second half of 2008 due to pricing for rigs under term
contracts for Precisions versatile, high performing rigs and strong pricing associated with a
deeper rig mix.
Canadian Drilling EBITDA decreased by 10% over 2007 due to lower activity and pricing in the first
half of 2008. Depreciation expense for the year was $5 million higher than 2007 due to a change in
rig mix and higher cost base associated with high-performance deeper rigs.
The United States drilling division revenues increased $139 million or 273% over 2007 to $190
million. The increase is due to strong utilization and the addition of 17 rigs through organic
growth and the inclusion of Grey Wolf for eight days. Drilling rig activity in 2008 was up 5,908
utilization days or 282% overall compared to 2007.
Average drilling rig utilization day rates in the United States decreased 8% in 2008 from 2007. The
decrease in rates was primarily due to the mix of drilling rigs deployed from Canada during 2008
along with some downward pressure on day rates from operators.
26
MANAGEMENTS DISCUSSION AND ANALYSIS
United States EBITDA of $92 million increased $64 million or 226% from $28 million in 2007
primarily due to an increase in activity from the rig fleet growth during 2008. Operating expenses
increased from 42% of revenue in 2007 to 49% in 2008. The increase was mainly due to higher
maintenance and repair costs for the rig fleet compared to the relatively new rig fleet during
2007.
LRG Catering
achieved activity and revenue growth of 10% in 2008. In response to industry pressure
for quality camps 12 of LRGs oldest camps were replaced with ten new camps. Dorms built in late
2007 and early 2008 were deployed to meet customer demand for base camps.
Rostel Industries and Columbia Oilfield Supply divisions
provided valuable support, best measured
by the efficiencies and contributions made to Precision through cost savings. Rostels expertise
provided Precision control over rig construction and enhanced cost control. Columbia leveraged its
volume purchasing advantage and supplier relationships to provide timely and reliable supplies to
keep Precisions rigs operating and allowed Precision to standardize product use and quality.
2007 Compared to 2006
The Contract Drilling Services segment
generated revenue of $694 million in 2007, 31% less than the
record revenue of $1.0 billion in 2006. The decrease was due to lower equipment utilization and
reduced pricing resulting from lower customer demand for natural gas drilling in Canada, partially
offset by additional rigs and strong utilization in the United States.
Operating earnings decreased by $189 million or 40% to $285 million and were 41% of revenue in 2007
compared to 47% in 2006 primarily due to lower pricing in the final nine months of 2007. Operating
expenses increased from 47% of revenue in 2006 to 50% in 2007, due to crew wage increases in
October 2006 and an overall increase in the cost of materials.
Capital expenditures for the segment in 2007 were $159 million and included $126 million to expand
the underlying asset base and $33 million to upgrade existing equipment. The majority of the
expansion capital expenditure was associated with new drilling rig construction.
Canadian Drilling division revenue decreased by $337 million or 37% over 2006 to $582 million. This
decline was due to a decrease in industry customer demand resulting in lower utilization and
pricing for Precision.
Operating earnings in the division decreased by 45% over 2006 due mainly to a 32% decrease in
activity, a 7% decrease in the average operating rate and a 4% crew wage rate increase in October
2006. Depreciation expense for the year was $1 million lower than 2006 as the impact of lower
activity was offset by a $3 million write down charge for decommissioned rigs and a change in rig
mix.
Precision Drilling Oilfield Services, Inc.
generated revenues of $51 million in 2007, a ten-fold
increase over 2006 due to fleet growth from one rig at the end of 2006 to 12 rigs at the end of
2007.
LRG Catering
experienced activity declines of 51% in 2007 from a record 2006 as a result of the
lower industry activity, which placed downward pressure on pricing.
PRECISION
DRILLING TRUST
27
COMPLETION AND PRODUCTION SERVICES SEGMENT
(Stated in thousands of Canadian dollars, except where indicated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
Years ended December 31,
|
|
2008
|
|
|
Revenue
|
|
|
|
2007
|
|
|
Revenue
|
|
|
2006
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
308,624
|
|
|
|
|
|
|
|
$
|
327,471
|
|
|
|
|
|
|
$
|
441,017
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
188,705
|
|
|
|
61.2
|
|
|
|
|
183,661
|
|
|
|
56.1
|
|
|
|
231,602
|
|
|
|
52.5
|
|
General and administrative
|
|
|
10,865
|
|
|
|
3.5
|
|
|
|
|
11,780
|
|
|
|
3.6
|
|
|
|
14,242
|
|
|
|
3.2
|
|
|
|
|
|
|
|
EBITDA
|
|
|
109,054
|
|
|
|
35.3
|
|
|
|
|
132,030
|
|
|
|
40.3
|
|
|
|
195,173
|
|
|
|
44.3
|
|
Depreciation
|
|
|
22,966
|
|
|
|
7.4
|
|
|
|
|
31,421
|
|
|
|
9.6
|
|
|
|
32,013
|
|
|
|
7.3
|
|
Foreign exchange
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
(1)
|
|
$
|
86,104
|
|
|
|
27.9
|
|
|
|
$
|
100,596
|
|
|
|
30.7
|
|
|
$
|
163,119
|
|
|
|
37.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
|
|
|
% Increase
|
|
|
|
2008
|
|
|
(Decrease)
|
|
|
|
2007
|
|
|
(Decrease)
|
|
|
2006
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of service rigs (end of year)
|
|
|
229
|
|
|
|
2.7
|
|
|
|
|
223
|
|
|
|
(5.9
|
)
|
|
|
237
|
|
|
|
|
|
Service rig operating hours
|
|
|
335,127
|
|
|
|
(5.9
|
)
|
|
|
|
355,997
|
|
|
|
(25.9
|
)
|
|
|
480,137
|
|
|
|
0.6
|
|
Revenue per operating hour
|
|
$
|
708
|
|
|
|
(3.0
|
)
|
|
|
$
|
730
|
|
|
|
2.5
|
|
|
$
|
712
|
|
|
|
18.7
|
|
|
|
|
|
|
|
|
(1)
|
|
Non-GAAP measure. See page 50.
|
2008 Compared to 2007
The Completion and Production Services segment
revenue decreased by $19 million to $309 million
mainly due to a decline in industry completion and production activity.
Operating earnings decreased by $14 million or 14% and was 28% of revenue in 2008 compared to 31%
in 2007 due mainly to lower service activity during the year. Operating expenses increased from 56%
of revenue in 2007 to 61% in 2008. On a daily or hourly operating basis, costs increased due to
crew wage rate increases in October 2008 and an overall increase in the cost of materials. Lower
equipment utilization resulted in increased daily or hourly operating costs associated with fixed
operating cost components.
Capital spending in 2008 of $24 million, down 11% from $27 million in 2007, included $7 million for
the construction of a service rig, a self-contained snubbing unit, storage tanks and wastewater
treatment units, and $17 million for replacement transporter trucks, doghouses, snubbing unit
trucks, drill pipe for rental, tanks and a new operating facility. Additionally, in the third
quarter of 2008 six service rigs and support equipment were acquired from a third party for $16
million.
The Precision Well Servicing division
revenue decreased by $23 million or 9% over 2007 to $237
million as operating rates moved downward in conjunction with reduced activity levels. Price
decreases established in the fourth quarter of 2007 impacted most of 2008 with an upward adjustment
in the fourth quarter.
A total of 16,812 wells were rig released in 2008, a decrease of 9% from the 18,342 wells in the
prior year. With a lag between the drilling and completion of a well, the industry reported 19,340
well completions in 2008, consistent with the 19,272 well completions in 2007. There are currently
about 200,000 producing wells within the WCSB which has added to the ongoing maintenance demand to
ensure continuous and efficient operation of these producing wells.
Industry fleet capacity was consistent with 2007 with about 1,100 rigs at the end of 2008. High
industry capacity coupled with a nominal increase in well completions and commodity price
volatility kept market pricing competitive. There was also a rising number of wells where rig-less
or coiled tubing methods were employed.
28
MANAGEMENTS DISCUSSION AND ANALYSIS
EBITDA decreased by 22% over 2007 due mainly to the 6% decrease in activity and a 3% decrease in
average operating rate. Depreciation expense for the year decreased $2 million due to gains on
disposal offset by increased depreciation from the addition of six service rigs during the year and
the completion of a new operating facility early in the fourth quarter.
Capital expenditures in 2008 were $18 million and included $2 million to construct a new service
rig and $16 million to upgrade pump trucks, certain service rig components and build a new
operating facility that was completed in the fourth quarter.
Live Well Service
division revenue for 2008 was $24 million as activity increased by 10% over 2007
due to higher activity from self-contained units which generate higher operating rates than
rig-assist snubbing units. In 2008, Live Well added a self-contained unit and a rack and pinion
unit to the fleet.
Precision Rentals
division revenue decreased to $42 million, which was $3 million or 6% lower than
2007 as moderately higher utilization could not offset declining rates. Each of Precision Rentals
three major product lines; surface equipment, tubulars equipment, and wellsite accommodations,
experienced year-over-year declines in rates which was brought on by excess industry equipment and
pricing pressures.
The Terra Water Systems
division generated revenue of $6 million in 2008 compared to $5 million in
2007, an increase of 28%. Terra Water had 76 wastewater treatment units at the end of 2008, an
increase of 13 units over 2007.
2007 Compared to 2006
The Completion and Production Services segment
revenue decreased by $114 million to $327 million
mainly due to a decline in industry activity.
Operating earnings decreased by $63 million or 38% and was 31% of revenue in 2007 compared to 37%
in 2006 due mainly to lower service activity during the year. Operating expenses increased from 53%
of revenue in 2006 to 56% in 2007. The margin decrease was primarily attributable to cost increases
from crew wage rate increases in October 2006 and an overall increase in the cost of materials.
Capital spending in 2007 of $27 million, down 32% from $39 million in 2006, included $15 million
for the construction of slant service rigs, self-contained snubbing units, storage tanks and
wastewater treatment units, and $12 million for replacement transporter trucks, doghouses, snubbing
unit trucks, drill pipe for rental, tanks and a new operating facility.
The Precision Well Servicing division
revenue decreased by $82 million or 24% over 2006 to $260
million as moderately higher hourly operating rates could not offset reduced activity levels. Price
increases established in the fourth quarter of 2006 were maintained through most of 2007, with
downward adjustments in the second half. Operating earnings decreased by 33% over 2006. Costs were
higher due to increased crew and rig manager labour expenses. Capital expenditures in 2007 included
the construction of two new service rigs and the continuation of long-term plans to upgrade and
standardize equipment.
Live Well Service
activity decreased by 36% over 2006 with revenues for the year of $19 million due
to weakening natural gas prices in 2007 which led to a shift in customer demand away from
rig-assist units to self-contained snubbing units.
Precision Rentals
generated revenues of $44 million, which was $18 million or 29% lower than 2006.
Each of Precision Rentals three major product lines experienced year-over-year revenue declines
due to low utilization from excess industry capacity and lower pricing.
Terra Water Systems
generated revenue of $5 million in 2007 compared to $2 million in the period
following the date of acquisition in 2006. Terra Water had 63 wastewater treatment units at the end
of 2007, an increase of 12 units over 2006.
PRECISION
DRILLING
TRUST
29
OTHER ITEMS
2008 Compared to 2007
Corporate and Other Expenses
Corporate and other expenses increased by $13 million or 43% from 2007 to $42 million. This
increase was primarily due to a $4 million long-term incentive plan accrual in 2008 compared to a
$4 million recovery in 2007 and an increase in professional fees in the current year. A portion of
the award payable under the long-term incentive plan is dependent on the growth in certain defined
financial targets over a three year period. The actual results in 2007 were below the threshold
amount, resulting in a partial recovery of amounts previously accrued. Increased foreign exchange
losses on the translation of United States dollar denominated debt resulting from a strengthening
United States dollar were incurred in the year. Of the balance of long-term debt as at December 31,
2008, 92% is denominated in United States dollars.
Interest Expense
Net interest expense of $14 million increased by $7 million compared to 2007. This increase was
primarily attributable to the higher average debt outstanding during 2008 compared to the prior
year and the interest associated with the new credit facilities as part of the Grey Wolf
acquisition.
Income Taxes
The Trusts effective income tax rate, before enacted tax rate reductions, on earnings from
continuing operations before income taxes was 11% in 2008 compared to 8% in 2007. The comparatively
low effective income tax rate was primarily a result of the shifting of the income tax burden of
the Trust to its unitholders. The year-over-year increase in the effective income tax rate was
largely a result of taxes associated with Precisions United States operations.
The Trust incurs taxes to the extent there are certain provincial capital taxes, franchise taxes,
as well as taxes on the taxable income of its underlying subsidiaries. In addition, future income
taxes arise from differences between the accounting and tax basis of the Trust and its operating
entities assets and liabilities.
During 2007 the Government of Canada passed legislation to reduce the federal income tax rates to
15% by 2012. These enacted tax rate reductions resulted in a $22 million future tax recovery in
2007, with no comparable recovery recorded in 2008.
Discontinued Operations
A $3 million gain, net of tax, on discontinued operations was recorded in 2007. The gain arose on
the receipt of additional consideration associated with a 2005 business divestiture.
2007 Compared to 2006
Corporate and Other Expenses
Corporate and other expenses decreased by $12 million or 30% from 2006 to $29 million. This
reduction was primarily due to a $4 million recovery of long-term incentive plan accruals in 2007
compared to a $10 million expense in 2006. Additional reductions achieved from lower accruals for
recurring near-term incentive plans were offset by one-time costs associated with hiring a new
Chief Executive Officer and costs associated with workforce restructuring in November 2007. Gains
associated with 2006 disposals and increased foreign exchange losses from a weakening United States
dollar offset by lower support costs in 2007 made up the remaining decrease.
Interest Expense
Net interest expense of $7 million declined by $1 million or 9% in 2007 compared to 2006. This
reduction was primarily attributable to the lower average debt outstanding during 2007 compared to
the prior year.
30
MANAGEMENTS DISCUSSION AND ANALYSIS
Income Taxes
The Trusts effective income tax rate, before enacted tax rate reductions, on earnings from
continuing operations before income taxes was 8% in 2007 compared to 6% in 2006. The comparatively
low effective income tax rate was primarily a result of the shifting of the income tax burden of
the Trust to its unitholders. The year-over-year increase in the effective income tax rate was
largely a result of taxes associated with Precisions United States operations.
During 2007 the Government of Canada passed legislation to reduce the federal income tax rates to
15% by 2012. These enacted tax rate reductions resulted in a $22 million future tax recovery in
2007, compared to the $21 million recorded in 2006.
Discontinued Operations
A $3 million gain, net of tax, on discontinued operations was recorded in 2007. The gain arose on
the receipt of additional consideration associated with a 2005 business divestiture. Additional
consideration on 2004 and 2005 business divestitures resulted in a $7 million gain in 2006.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the acquisition of Grey Wolf, Precision entered into a new US$1.2 billion senior
secured credit facility with a syndicate of lenders consisting of the Royal Bank of Canada, RBC
Capital Markets, Deutsche Bank AG Cayman Islands Branch, Deutsche Bank Securities Inc., HSBC Bank
Canada, HSBC Bank USA, National Association and the Toronto-Dominion Bank (the Commitment Banks),
and certain other lenders (the Secured Facility) that is guaranteed by the Trust and is comprised
of US$800 million of term loans and a US$400 million revolving credit facility. Precision has also
entered into a US$400 million unsecured credit facility with certain of the Commitment Banks (the
Unsecured Facility and, together with the Secured Facility, the Credit Facilities) that is also
guaranteed by the Trust. The Credit Facilities funded the cash portion of the Acquisition and
refinanced the pre-closing Precision bank debt and certain pre-closing debt obligations of Grey
Wolf. The Unsecured Facility is available to fund the repurchase of Grey Wolf convertible notes
expected to be tendered for repurchase by holders under a change of control offer and on March 18,
2009 US$262.3 million was tendered for repurchase by the holders. When upfront issue discount and
fees are factored in, the all-in cost of capital borrowings under the Credit Facilities at December
31, 2008 was about 13%.
In order to complete a successful syndication of the Secured Facility, the Commitment Banks are
entitled, prior to March 23, 2009 (extended by Precision to May 22, 2009 ) in consultation with
Precision, to change certain of the terms of the Revolver and Term Loan A including, without
limitation, to implement, within certain limits, additional increases in interest rates, original
issue discounts and/or upfront fees, reallocate up to US$250 million between the Term Loan A
Facility (as defined herein) and the Term Loan B Facility (as defined herein) (US$64 million of
which was reallocated effective February 4, 2009 from the Term Loan A Facility to the Term Loan B
Facility), reallocate up to US$150 million between the Secured Facility and the Unsecured Facility
and amend certain covenants, financial ratio tests and other provisions for portions of the Secured
Facility.
The following is a summary of the material terms of the Secured Facility and the Unsecured
Facility.
Secured Facility
The Secured Facility provides senior secured financing of up to approximately US$1.2 billion,
consisting of (after giving effect to the US$64 million reallocation between the Term Loan A
Facility and the Term Loan B Facility):
|
|
Term loan A facility in an aggregate principal amount of US$336 million (the Term Loan A Facility);
|
|
|
|
Term loan B facility in an aggregate principal amount of US$464 million (the Term Loan B Facility); and
|
|
|
|
Revolving credit facility in the amount of US$400 million (the Revolving Credit Facility).
|
PRECISION
DRILLING TRUST
31
The terms of the Secured Facility include:
|
|
Blended cash interest rate, as at February 4, 2009, of approximately 8% per annum, before original issue discounts and upfront fees;
|
|
|
|
Covenants requiring the Trust and Precision to comply with certain financial ratios; and
|
|
|
|
Covenants that will limit the Trusts capital expenditures above an agreed base-case, allowing for certain exceptions.
|
The interest rate on loans under the Secured Facility that are denominated in United States dollars
is, at the option of Precision, either a margin over an adjusted United States base rate (the ABR
rate) or a margin over a Eurodollar rate. The interest rate on loans denominated in Canadian
dollars is, at the option of Precision, a margin over the Canadian prime rate or a margin over the
bankers acceptance rate. Certain of the margins on the Revolving Credit Facility are subject to
reduction based upon a leverage test.
The Revolving Credit Facility provides for a commitment fee of 0.60% (subject to reduction based on
a leverage test) on the unused portion; a fee on the outstanding amount of the letters of credit
denominated in United States dollars equal to the margin applicable to the Eurodollar rate; and a
fee on the outstanding amount of the letters of credit denominated in Canadian dollars equal to the
margin applicable to the bankers acceptance rate (subject to reduction for non-financial letters
of credit).
The Term Loan A Facility is repayable in quarterly installments in aggregate annual amounts equal
to 5% of the original principal amount thereof in the first year following the closing date, 10% of
the original principal amount thereof in the second year following the closing date, 10% of the
original principal amount thereof in the third year following the closing date and 15% of the
original principal amount thereof in the fourth and fifth years following the closing date, with
the balance payable on the final maturity date thereof, which is December 23, 2013.
The Term Loan B Facility is repayable in quarterly installments in an aggregate annual amount equal
to 5% of the original principal amount thereof with the balance payable on the final maturity date
thereof, which is September 30, 2014.
Unsecured Facility
Precision (as the borrower) and the Trust (as a guarantor) entered into a credit agreement dated
December 23, 2008 governing the Unsecured Facility with the lenders parties thereto, Royal Bank of
Canada, as syndication agent, Deutsche Bank AG Cayman Islands Branch, as administrative agent and
HSBC Bank USA, National Association, as documentation agent. The Unsecured Facility originally
provided senior unsecured financing of up to US$400 million of which approximately US$138 million
was drawn after completion of the Grey Wolf acquisition and the related financing transactions. Net
proceeds received of approximately US$165 million from the equity raise in February 2009 reduced
the amount available under the Unsecured Facility by an equivalent amount. The Unsecured Facility,
along with net proceeds from the equity offering will be used to fund the repurchase of Grey Wolf
convertible notes tendered for repurchase by holders under a change of control offer made in the
first quarter of 2009.
The loans under the Unsecured Facility bear interest at a fixed rate per annum of 17%, which
initially mature on December 23, 2009, and, to the extent unpaid on that date, will be converted
into exchange notes that will mature on December 23, 2016 provided that the loans will not be
converted to exchange notes if an event of default has occurred under the Unsecured Facility or the
Secured Facility or certain other conditions are not satisfied.
After the initial maturity date of the Unsecured Facility of December 23, 2009, each lender under
the Unsecured Facility may request the Trust issue an exchange note bearing interest at a specified
interest rate (to be calculated on the date of issuance of such exchange note based on the greater
of 16.66% and a market-based interest rate cap) in replacement for the term loan (or a portion
thereof) made under the Unsecured Facility. In the event that the Trust receives such a request,
the Trust shall, as promptly as practicable after being requested to do so, among
32
MANAGEMENTS DISCUSSION AND ANALYSIS
other things: (i) enter into an exchange note indenture pursuant to which the exchange notes will
be issued and governed; (ii) enter into an exchange and registration rights agreement providing
for, among other things, registration rights in respect of the exchange notes in favour of the
holders thereof; and (iii) cause to be issued exchange notes in the same principal aggregate amount
as the term loan being exchanged.
In addition, between June 30, 2009 and December 23, 2009, the lenders under the Unsecured Facility
may require that debt securities be issued and sold to repay amounts outstanding under the
Unsecured Facility, subject to certain specified terms and conditions. Precision has agreed to
engage one or more investment banks to publicly sell or privately place debt securities in such
circumstances, the proceeds of which will be used to repay outstanding loans under the Unsecured
Facility. The Trust may also, at its own option, choose to issue equity or debt securities and
Precision may also choose to issue debt securities to repay outstanding loans under the Unsecured
Facility.
The Unsecured Facility is unsecured and has been guaranteed by the Trust and each subsidiary of the
Trust that guaranteed the Secured Facility.
General
The terms of the documents governing the Credit Facilities contain provisions that in effect ensure
that the lenders have priority as to payment over the unitholders in respect to the assets and
income of the Trust and its subsidiaries. Amounts due and owing to the lenders under the Credit
Facilities must be paid before any distributions can be made to unitholders. This relative priority
of payments could result in a temporary or permanent interruption of distributions to unitholders.
As at December 31, 2008, approximately $1,087 million was outstanding under the Secured Facility
and approximately $168 million was outstanding under the Unsecured Facility. The Revolving Credit
Facility may be redrawn by Precision in the future to fund capital expenditures or for other
corporate purposes.
At the time of the closing of the acquisition, Grey Wolf had outstanding $321 million aggregate
principal amount of convertible notes, the obligations for which were assumed by Precision.
Pursuant to the terms of the convertible notes, during the first quarter of 2009, the Trust, as
successor to Grey Wolf, was required to make to the holders thereof a change of control offer to
repurchase any or all of the outstanding convertible notes at 100% of the principal amount thereof,
plus accrued but unpaid interest to the date of the repurchase, payable in cash.
In 2008 the Trust generated cash from continuing operations of $344 million and borrowed an
additional $1,148 million in long-term debt net of financing fees. The cash generated was used to
complete the business acquisitions of $768 million, purchase property plant and equipment net of
disposal proceeds and related non-cash working capital of $197 million, repay long-term debt of
$180 million and bank indebtedness of $14 million, pay an income tax reassessment of $55 million,
and make cash distributions to unitholders of $216 million leaving a cash balance as at December
31, 2008 of $62 million.
The Trust exited 2008 with a long-term debt to long-term debt plus equity ratio of 0.37 compared to
0.08 in 2007 and a ratio of long-term debt to cash provided by continuing operations of 3.98
compared to 0.25 in 2007. The significant increases are due to the additional debt arising from the
acquisition of Grey Wolf. The long-term debt to cash provided by continuing operations ratio is
high in part due to only eight days of Grey Wolf operations in 2008 included in cash provided by
operations.
In addition to the Secured Facility and Unsecured Facility, Precision also has uncommitted
operating facilities which total approximately $51 million equivalent and are utilized for working
capital management and the issuance of letters of credit.
As at March 20, 2009, holders of convertible notes representing US$262 million had notified
Precision that they will be accepting the purchase offer and Precision will be required to purchase
these notes at the principal balance plus accrued interest of US$2 million by March 24, 2009.
PRECISION
DRILLING TRUST
33
Precisions contractual obligations are outlined in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
(Stated in thousands of Canadian dollars)
|
|
Total
|
|
Less Than 1 Year
|
|
|
1 - 3 Years
|
|
|
4 - 5 Years
|
|
|
After 5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
(1)
|
|
$
|
1,255,388
|
|
|
$
|
48,953
|
|
|
$
|
138,990
|
|
|
$
|
472,933
|
|
|
$
|
594,512
|
|
Interest on long-term debt
(2)
|
|
|
581,459
|
|
|
|
114,953
|
|
|
|
215,530
|
|
|
|
191,961
|
|
|
|
59,015
|
|
Rig construction
|
|
|
125,289
|
|
|
|
66,062
|
|
|
|
59,227
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
35,013
|
|
|
|
10,977
|
|
|
|
16,093
|
|
|
|
2,811
|
|
|
|
5,132
|
|
Long-term incentive plans
(3)
|
|
|
20,751
|
|
|
|
9,217
|
|
|
|
11,534
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
2,017,900
|
|
|
$
|
250,162
|
|
|
$
|
441,374
|
|
|
$
|
667,705
|
|
|
$
|
658,659
|
|
|
|
|
|
(1)
|
|
Excludes unsecured convertible notes as these debt instruments contain a provision whereby
Precision is required to provide holders of the notes with an offer to purchase all or a portion of
their notes, including accrued but unpaid interest to the date of purchase, which Precision expects
to repay in 2009 with proceeds received from an equity offering and existing credit facilities.
Upon completion of this transaction the Unsecured Facility would increase to approximately $287.8
million (US$235 million) with repayment in 2016. Interest on the unsecured convertible notes to the
date of purchase is approximately $2.8 million (US$2.3 million). Amounts are after giving effect to
the February 4, 2009 re-allocation between the Term Loan A and Term Loan B facilities.
|
|
(2)
|
|
Interest has been calculated based upon debt balances, interest rates and foreign exchange
rates in effect as at December 31, 2008.
|
|
(3)
|
|
Includes amounts not yet accrued at December 31, 2008 but payable at the end of the contract
term. Unit based compensation amounts disclosed at year-end unit price.
|
Precision has multiple long-term incentive plans (LTIP) which compensate officers and key
employees through cash payments at the end of a three-year term. The compensation is comprised of
two components, a retention award and a performance award. The retention awards are lump sum
amounts determined at the date of commencement in the LTIP. The retention components are accrued
evenly over their respective three-year terms. The performance components are accrued based on
actual results compared to predetermined targets. There is no assurance that the performance
component will be paid. In addition, the Chief Executive Officer has a separate unit-based plan
which paid $1.4 million in September 2008 and anticipated payments of $0.7 million annually, in
September 2009 and September 2010 based on the December 31, 2008 unit price of Precision.
Outstanding Unit Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 20,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust units
|
|
|
206,065,086
|
|
|
|
160,042,065
|
|
|
|
125,587,919
|
|
|
|
125,536,329
|
|
Exchangeable LP units
|
|
|
128,562
|
|
|
|
151,583
|
|
|
|
170,005
|
|
|
|
221,595
|
|
|
|
|
Total units outstanding
|
|
|
206,193,648
|
|
|
|
160,193,648
|
|
|
|
125,757,924
|
|
|
|
125,757,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Trust units outstanding
|
|
|
78,776
|
|
|
|
54,543
|
|
|
|
18,280
|
|
|
|
|
|
|
DISTRIBUTIONS
Upon Precisions conversion to an income trust effective November 7, 2005 the Trust adopted a
policy of making monthly distributions to holders of Trust units and holders of exchangeable LP
units (together unitholders). Precision has a legal entity structure whereby the trust entity,
Precision Drilling Trust, effectively must flow its taxable income to unitholders pursuant to its
Declaration of Trust. Distributions, including special distributions, may be declared in cash or
in-kind or a combination of both and reduced, increased or suspended entirely depending on the
operations of Precision, the performance of its assets, or legislative changes in tax laws. The
actual cash flow available for distribution to unitholders is a function of numerous factors,
including the Trusts: financial performance; debt covenants and obligations; working capital
requirements; upgrade and expansion capital expenditure requirements for the purchase of property,
plant and equipment; and number of units outstanding. The Trust considers these factors on a
monthly basis in determining future distributions. In 2008 cash distributions declared were $201
million or $1.56 per unit, a decrease of $46 million or $0.40 per unit from the previous year. A
special year-end in-kind distribution, as explained below, payable in Trust units, of $24 million
or $0.15 per unit (2007 $30 million or $0.24 per unit) was also declared.
34
MANAGEMENTS DISCUSSION AND ANALYSIS
In the event that a distribution is declared in the form of in-kind units, the terms of the
Declaration of Trust requires that the outstanding units be consolidated immediately subsequent to
the distribution. Accordingly, the number of outstanding units would remain at the number
outstanding immediately prior to the distribution. As a result, unitholders would not receive
additional units and the declared amount of the in-kind distribution would be retained in
Precision. Holders of exchangeable LP units receive economic equivalent treatment.
On February 9, 2009 Precision announced the suspension of cash distributions for an indefinite
period for distributions to be paid after February 17, 2009. The suspension of the distribution was
taken in response to lower financial operating performance at the start of 2009 and will allow
Precision to increase debt repayment capability and balance sheet strength.
Key factors for consideration in determining actual cash flow available for distribution, in an
historical context, are disclosed within the consolidated statements of cash flow. In calculating
distributable cash Precision makes the following adjustments to cash provided by continuing
operations:
|
|
Deducts the purchase of property, plant and equipment for upgrade capital as the minimum capital reinvestment required to maintain current operating capacity;
|
|
|
|
Deducts the purchase of property, plant and equipment for expansion initiatives to grow capacity;
|
|
|
|
Adds the proceeds on the sale of property, plant and equipment which are incidental transactions occurring within the normal course of operations; and
|
|
|
|
Deducts long-term incentive plan changes as an unfunded liability resulting from the operating activities in the current period with payments beginning March 2009.
|
A three-year reconciliation of distributable cash from continuing operations follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
(Stated in thousands of Canadian dollars, except per diluted unit amounts)
|
|
2008
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by continuing operations
|
|
$
|
343,910
|
|
|
|
$
|
484,115
|
|
|
$
|
609,744
|
|
Deduct:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment for upgrade capital
|
|
|
(59,454
|
)
|
|
|
|
(45,970
|
)
|
|
|
(92,123
|
)
|
Purchase of property plant and equipment for expansion initiatives
|
|
|
(170,125
|
)
|
|
|
|
(141,003
|
)
|
|
|
(170,907
|
)
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds on the sale of property, plant and equipment
|
|
|
10,440
|
|
|
|
|
5,767
|
|
|
|
29,337
|
|
|
|
|
|
|
|
Standardized distributable cash
(1)
|
|
|
124,771
|
|
|
|
|
302,909
|
|
|
|
376,051
|
|
Unfunded long-term incentive plan compensation
|
|
|
(2,163
|
)
|
|
|
|
8,496
|
|
|
|
(22,699
|
)
|
|
|
|
|
|
|
Distributable cash from continuing operations
(1)
|
|
$
|
122,608
|
|
|
|
$
|
311,405
|
|
|
$
|
353,352
|
|
|
|
|
|
Cash distributions declared
|
|
$
|
200,659
|
|
|
|
$
|
246,485
|
|
|
$
|
447,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per diluted unit information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions declared
|
|
$
|
1.56
|
|
|
|
$
|
1.96
|
|
|
$
|
3.56
|
|
Standardized distributable cash
(1)
|
|
$
|
0.98
|
|
|
|
$
|
2.41
|
|
|
$
|
3.00
|
|
Distributable cash from continuing operations
(1)
|
|
$
|
0.97
|
|
|
|
$
|
2.48
|
|
|
$
|
2.81
|
|
|
|
|
|
|
|
|
(1)
|
|
Non-GAAP measure. See page 50.
|
Upgrade capital expenditures allow Precision to maintain its existing service levels. These
expenditures consist of betterments and replacements to existing assets and capitalized costs
relating to the underlying support infrastructure. The upgrade capital expenditure strategy of
Precision also involves costs that are charged directly to the income statement. These costs are
related to the scheduled maintenance and certification processes within the various operating
divisions. The level of these expenditures is driven by activity levels and can be scaled back in
times of low activity without jeopardizing the long-term productive capacity of Precision and its
underlying assets.
PRECISION
DRILLING TRUST
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
|
|
|
|
(Stated in thousands of Canadian dollars)
|
|
2008
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by continuing operations (A)
|
|
$
|
343,910
|
|
|
|
$
|
484,115
|
|
|
$
|
609,744
|
|
Net earnings (B)
|
|
$
|
302,730
|
|
|
|
$
|
345,776
|
|
|
$
|
579,589
|
|
Distributions declared (C)
|
|
$
|
224,688
|
|
|
|
$
|
276,667
|
|
|
$
|
471,524
|
|
|
|
|
|
Excess of cash provided by operations over distributions declared (A-C)
|
|
$
|
119,222
|
|
|
|
$
|
207,448
|
|
|
$
|
138,220
|
|
|
|
|
|
Excess of net earnings over distributions declared (B-C)
|
|
$
|
78,042
|
|
|
|
$
|
69,109
|
|
|
$
|
108,065
|
|
|
|
|
|
Precision has acted decisively to strengthen its capability to reduce long-term debt and improve
its underlying credit quality and capital structure. The near-term management strategy involves
retaining sufficient funds from available distributable cash to repay debt finance, spend on
required upgrade capital expenditures as well as financing working capital needs. Planned asset
growth will generally be financed through existing debt facilities or cash retained from continuing
operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
(Stated in thousands of Canadian dollars except per unit amounts)
|
|
2008
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units outstanding
|
|
|
160,193,648
|
|
|
|
|
125,757,924
|
|
|
|
125,757,924
|
|
Year-end unit price
|
|
$
|
10.07
|
|
|
|
$
|
15.09
|
|
|
$
|
27.00
|
|
|
|
|
|
|
|
Units at market
|
|
$
|
1,613,150
|
|
|
|
$
|
1,897,687
|
|
|
$
|
3,395,464
|
|
Long-term debt
|
|
|
1,368,349
|
|
|
|
|
119,826
|
|
|
|
140,880
|
|
Less working capital
|
|
|
(345,329
|
)
|
|
|
|
(140,374
|
)
|
|
|
(166,484
|
)
|
|
|
|
|
|
|
Enterprise value
|
|
$
|
2,636,170
|
|
|
|
$
|
1,877,139
|
|
|
$
|
3,369,860
|
|
|
|
|
|
Precision carried a long-term debt to enterprise value ratio of 0.52 at December 31, 2008. This
represents a significant increase over the 2007 ratio of 0.06 due to the refinancing undertaken to
facilitate the Grey Wolf acquisition in December 2008.
QUARTERLY FINANCIAL SUMMARY
(Stated in thousands of Canadian dollars, except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
342,689
|
|
|
$
|
138,514
|
|
|
$
|
285,639
|
|
|
$
|
335,049
|
|
|
$
|
1,101,891
|
|
EBITDA
(1)
|
|
|
147,347
|
|
|
|
35,574
|
|
|
|
118,820
|
|
|
|
134,795
|
|
|
|
436,536
|
|
Earnings from continuing operations:
|
|
|
106,266
|
|
|
|
21,739
|
|
|
|
82,349
|
|
|
|
92,376
|
|
|
|
302,730
|
|
Per basic unit
|
|
|
0.85
|
|
|
|
0.17
|
|
|
|
0.65
|
|
|
|
0.72
|
|
|
|
2.39
|
|
Per diluted unit
|
|
|
0.84
|
|
|
|
0.17
|
|
|
|
0.65
|
|
|
|
0.71
|
|
|
|
2.39
|
|
Net earnings:
|
|
|
106,266
|
|
|
|
21,739
|
|
|
|
82,349
|
|
|
|
92,376
|
|
|
|
302,730
|
|
Per basic unit
|
|
|
0.85
|
|
|
|
0.17
|
|
|
|
0.65
|
|
|
|
0.72
|
|
|
|
2.39
|
|
Per diluted unit
|
|
|
0.84
|
|
|
|
0.17
|
|
|
|
0.65
|
|
|
|
0.71
|
|
|
|
2.39
|
|
Cash provided by continuing operations
|
|
|
57,307
|
|
|
|
200,458
|
|
|
|
3,241
|
|
|
|
82,904
|
|
|
|
343,910
|
|
Distributions to unitholders declared
|
|
$
|
49,046
|
|
|
$
|
49,045
|
|
|
$
|
49,046
|
|
|
$
|
77,551
|
|
|
$
|
224,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
410,542
|
|
|
$
|
122,005
|
|
|
$
|
227,928
|
|
|
$
|
248,726
|
|
|
$
|
1,009,201
|
|
EBITDA
(1)
|
|
|
201,831
|
|
|
|
39,825
|
|
|
|
92,068
|
|
|
|
103,351
|
|
|
|
437,075
|
|
Earnings from continuing operations:
|
|
|
158,067
|
|
|
|
25,722
|
|
|
|
69,702
|
|
|
|
89,329
|
|
|
|
342,820
|
|
Per basic unit
|
|
|
1.26
|
|
|
|
0.20
|
|
|
|
0.55
|
|
|
|
0.71
|
|
|
|
2.73
|
|
Per diluted unit
|
|
|
1.26
|
|
|
|
0.20
|
|
|
|
0.55
|
|
|
|
0.71
|
|
|
|
2.73
|
|
Net earnings:
|
|
|
158,067
|
|
|
|
25,722
|
|
|
|
72,658
|
|
|
|
89,329
|
|
|
|
345,776
|
|
Per basic unit
|
|
|
1.26
|
|
|
|
0.20
|
|
|
|
0.58
|
|
|
|
0.71
|
|
|
|
2.75
|
|
Per diluted unit
|
|
|
1.26
|
|
|
|
0.20
|
|
|
|
0.58
|
|
|
|
0.71
|
|
|
|
2.75
|
|
Cash provided by continuing operations
|
|
|
156,298
|
|
|
|
229,073
|
|
|
|
20,270
|
|
|
|
78,474
|
|
|
|
484,115
|
|
Distributions to unitholders declared
|
|
$
|
71,682
|
|
|
$
|
56,591
|
|
|
$
|
49,046
|
|
|
$
|
99,348
|
|
|
$
|
276,667
|
|
|
|
|
|
(1)
|
|
Non-GAAP measure. See page 50.
|
36
MANAGEMENTS DISCUSSION AND ANALYSIS
The Canadian drilling industry is subject to seasonality with activity peaking during the winter
months in the fourth and first quarters. As temperatures rise in the spring, the ground thaws and
becomes unstable. Government road bans severely restrict activity in the second quarter in Canada
before equipment is moved for summer drilling programs in the third quarter. These seasonal trends
typically lead to quarterly fluctuations in operating results and working capital requirements. In
contrast the activity in the United States is not subject to the same level of seasonal
interruptions and therefore impacts on operating results and working capital fluctuations are less
volatile.
FOURTH QUARTER DISCUSSION
The global economic recession that began in the United States with the credit crisis significantly
impacted the oil and natural gas commodity prices during the fourth quarter of 2008. However, the
impact of lower commodity prices did not have an immediate impact on Precisions activity as
utilization rates held relatively strong for the first two months of the fourth quarter. Starting
in December 2008 activity began to experience a significant downturn as a result of the decreased
commodity prices. Generally, Precisions expanding market presence in the United States land
drilling market helped to mitigate the lower activity and earnings in Canada.
Net earnings in the fourth quarter ended December 31, 2008 were $92 million or $0.71 per diluted
compared to $89 million or $0.71 per diluted unit in the fourth quarter of 2007.
Revenue for the fourth quarter of 2008 was $335 million, up 35% from $249 million in the fourth
quarter of 2007. Earnings before income taxes for the fourth quarter of 2008 were $102 million, up
35% from $76 million in the fourth quarter of 2007. The increases resulted from the trend
established during the third quarter of 2008 as customer demand from high commodity prices carried
over to start the fourth quarter. However, by the end of the quarter, commodity prices had declined
as the economic recession deepened and customer demand declined. Net earnings were reduced by
income tax expense in the fourth quarter of 2008 of $10 million compared to an income tax benefit
of $13 million in the last quarter of 2007.
The Trusts organic growth in the United States, along with the completion of the acquisition of
Grey Wolf on December 23, 2008, led to the growth in quarterly revenue and earnings before income
taxes. Drilling rig utilization days in the United States increased to 3,248 days in the fourth
quarter of 2008, up by 258% from the fourth quarter of 2007, while Canadian drilling rig
utilization days increased during the same period by 419 days, up 5% from the fourth quarter of
2007. Overall, North American drilling rig utilization days for Precision totaled 12,314 in the
fourth quarter of 2008, up by 29% from the fourth quarter of 2007.
The Trust reported total earnings before foreign exchange, interest, income taxes, depreciation and
amortization (EBITDA) for the fourth quarter of 2008 of $135 million compared with $103 million
for the fourth quarter of 2007.
Contract Drilling Services segment revenue of $261 million and EBITDA of $117 million increased by
50% and 41% respectively in the fourth quarter of 2008 compared to the same period in 2007. Average
customer pricing in Canada was 8% higher in 2008 compared to the fourth quarter of 2007. Drilling
rig utilization days, spud to rig release plus moving, for Precision in Canada in the fourth
quarter of 2008 were 9,066, an increase of 5% compared with 8,647 in the same quarter in 2007.
Utilization increased to 40% in the fourth quarter of 2008 compared with 34% a year ago. United
States land drilling operations contributed 33% of the segments current quarter revenue compared
to 12% in the same quarter of 2007. The increase in revenue in the United States was the result of
Precisions organic growth initiatives and the inclusion of Grey Wolf for eight days added $22
million in revenue during the quarter. LRG Catering followed Canadian industry trends and
experienced an increase in revenue of 64% over the same prior year period.
PRECISION
DRILLING
TRUST
37
Completion and Production Services segment revenue of $80 million increased by 2% over the prior
year while EBITDA of $26 million was 7% lower than the fourth quarter of 2007. Precisions service
rig operating hours during the fourth quarter of 2008 were 79,507 compared to 86,416 in 2007, a
decrease of 8%. The reduction was a result of lower demand as customers scaled back production
activity due to lower commodity prices, particularly natural gas wells. New well completions
accounted for 36% of service rig operating hours in the fourth quarter compared to 33% in 2007
while production activity accounted for 58% of total hours compared to the prior year of 59%. The
average rate per hour for the current year quarter was 6% higher than the prior year due to a flow
through of a wage rate increase in October. Demand for rental equipment followed industry trends as
revenue in the quarter was 6% higher than the fourth quarter of 2007 while revenue for the snubbing
division was higher by 38% and the wastewater treatment division was higher by 44%.
Total operating costs increased from 51% of revenue in the fourth quarter of 2007 to 54% in 2008
due to wage increase for field personnel in October and higher fixed costs. During the quarter,
excluding the effect of field wage increases, service rig costs per hour were up 8% while drilling
rig costs per day were up by 6% over the prior year.
General and administrative expense for the fourth quarter of 2008 was $18 million, in-line with the
same period in 2007. Lower costs associated with employee incentive compensation costs in 2008 and
charges associated with workforce reductions in early November 2007 were offset by increased
professional fees.
Depreciation and amortization expense in the fourth quarter of 2008 was $23 million compared with
$25 million in the same period on 2007. Increased utilization in the current year and depreciation
recorded on a higher asset base was offset by a 2007 charge of $7 million for decommissioned
assets.
The Trusts effective income tax rate on earnings before income taxes for fiscal 2008 was 11%,
compared to 8% for 2007, before enacted tax rate reductions. Compared to a corporate income tax
rate, the low effective income tax rate is primarily the result of the income trust structure
shifting all or a portion of the income tax burden of the Trust to its unitholders.
During the fourth quarter of 2007 the Government of Canada enacted legislation reducing federal
income tax rates to 15% by 2012. The enacted tax rate reductions resulted in a $20 million future
income tax recovery in the fourth quarter of 2007.
In the fourth quarter of 2008 capital expenditures were $99 million, an increase of $62 million
over the same period in 2007. Capital spending for the quarter included $31 million in upgrade and
$68 million in expansion initiatives.
Fourth quarter monthly cash distributions declared were $0.13 per unit for aggregate quarterly cash
distributions declared of $54 million or $0.39 per unit. In addition the Trust declared a special
year-end distribution of $24 million or $0.15 per unit to be settled in-kind. The special
in-kind distribution was made to minimize debt levels and increase balance sheet strength.
38
MANAGEMENTS DISCUSSION AND ANALYSIS
CRITICAL ACCOUNTING ESTIMATES
This Managements Discussion and Analysis of Precisions financial condition and results of
operations is based on Precisions consolidated financial statements which are prepared in
accordance with Canadian GAAP. These principles differ in certain respects from United States GAAP
and these differences are described and quantified in Note 20 to the consolidated financial
statements.
The Trusts significant accounting policies are described in Note 2 to the consolidated financial
statements. The preparation of the financial statements requires that certain estimates and
judgments be made that affect the reported assets, liabilities, revenues and expenses. These
estimates and judgments are based on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances. Anticipating future events cannot be done
with certainty, therefore, these estimates may change as new events occur, more experience is
acquired and as the Trusts operating environment changes.
Following are the accounting estimates believed to require the most difficult, subjective or
complex judgments and which are the most critical to Precisions reporting of results of operations
and financial positions.
Allowance for Doubtful Accounts Receivable
Precision performs ongoing credit evaluations of its customers and grants credit based upon past
payment history, financial condition and anticipated industry conditions. Customer payments are
regularly monitored and a provision for doubtful accounts is established based upon specific
situations and overall industry conditions. Precisions history of bad debt losses has been within
expectations and generally limited to specific customer circumstances. However, given the cyclical
nature of the oil and natural gas industry in Canada, the current state of debt and equity markets
and the inherent risk of successfully finding hydrocarbon reserves, a customers ability to fulfill
its payment obligations can change suddenly and without notice. In cases where creditworthiness is
uncertain, services are provided on receipt of cash in advance, on receipt of a letter of credit,
on deposit of monies in trust or services are declined.
PRECISION
DRILLING
TRUST
39
Impairment of Long-lived Assets
Long-lived assets, which include property, plant and equipment, intangibles and goodwill, comprise
the majority of Precisions assets. The carrying value of these assets is periodically reviewed for
impairment or whenever events or changes in circumstances indicate that their carrying amounts may
not be recoverable. This requires Precision to forecast future cash flows to be derived from the
utilization of these assets based upon assumptions about future business conditions and
technological developments. Significant, unanticipated changes to these assumptions could require a
provision for impairment in the future. During the fourth quarter of 2008, Precision completed its
assessment and concluded that there was no impairment of the carrying value.
Depreciation and Amortization
Precisions property, plant and equipment and its intangible assets are depreciated and amortized
based upon estimates of useful lives and salvage values. These estimates may change as more
experience is gained, market conditions shift or new technological advancements are made.
Income Taxes
The Trust and its subsidiaries follow the liability method which takes into account the differences
between financial statement treatment and tax treatment of certain transactions, assets and
liabilities. Future tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Valuation allowances are established to reduce future
tax assets when it is more likely than not that some portion or all of the asset will not be
realized. Estimates of future taxable income and the continuation of ongoing prudent tax planning
arrangements have been considered in assessing the utilization of available tax losses. Changes in
circumstances and assumptions and clarifications of uncertain tax regimes may require changes to
the valuation allowances associated with Precisions future tax assets.
The business and operations of Precision are complex and Precision has executed a number of
significant financings, business combinations, acquisitions and dispositions over the course of its
history. The computation of income taxes payable as a result of these transactions involves many
complex factors as well as Precisions interpretation of relevant tax legislation and regulations.
Precisions management believes that the provision for income tax is adequate.
Long-term Incentive Plan Compensation
The Trust instituted annual long-term incentive plans which compensates officers and key employees
through cash payments at the end of a three-year term. The compensation includes two components, a
retention award and a performance award. The performance component is based on growth over the
three-year term measured against targets as determined by the Compensation Committee of Precision.
As a result of actual results in the subsequent years, the accrued amount for the performance
component may be reduced or increased.
40
MANAGEMENTS DISCUSSION AND ANALYSIS
NEW ACCOUNTING STANDARDS
The Canadian Institute of Chartered Accountants (CICA) issued certain new accounting standards
which will be in effect for fiscal years beginning on or after January 1, 2009 for recognition and
measurement of goodwill and intangibles and accounting for business combinations:
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Section 3064, Goodwill and Intangible Assets establishes standards for the recognition,
measurement, presentation and disclosure of goodwill and intangible assets. The new Section is
not anticipated to have a significant impact on the consolidated financial statements;
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Section 1582 Business Combinations will require most assets acquired and liabilities assumed, including contingent liabilities to be measured at fair value and that all acquisition costs to be expensed.
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In addition two new Sections were added with an effective date of January 1, 2011 with early adoption permitted, consolidated financial statements and non-controlling interests:
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Section 1602 Non-controlling Interests will require that non-controlling interests be recognized as a separate component of equity and that net earnings be calculated without a deduction for non-controlling interest;
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Section 1601 Consolidated Financial Statements establishes standards for the preparation of consolidated financial statements.
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The Trust is currently evaluating the impact of the new Sections, 1582, 1602, and 1601 on its
consolidated financial statements.
TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS:
In February 2008, the CICA Accounting Standards Board (AcSB) confirmed the transition from
Canadian Generally Accepted Accounting Principles (GAAP) to International Financial Reporting
Standards (IFRS) for all Publicly Accountable Enterprises (PAE). PAE include listed companies
and any other organizations that are responsible to large or diverse groups of stakeholders,
including non-listed financial institutions, securities dealers and many cooperative enterprises.
The goal of IFRS is to improve financial reporting internationally by establishing a single set of
high-quality, consistent, and comparable reporting standards.
The Trust will be required to report its financial results in accordance with IFRS from January 1,
2011, the changeover date set by AcSB. IFRS compliant comparative financial information for one
year will be required on the effective date, therefore the transition date for adoption of IFRS is
January 1, 2010, determined in accordance with IFRS 1, First Time Adoption of International
Financial Reporting Standards.
Although many elements of Canadian GAAP and IFRS are similar, the Trust expects its transition to
IFRS to take considerable effort. Precision has established a project team and steering committee
to oversee the transition to IFRS. A preliminary assessment of the impact of IFRS on the financial
reporting processes has been completed. Planning is currently underway to address the identified
differences.
The key areas identified that affect financial reporting under IFRS for the Trust are:
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Capital asset componentization
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Financial statement disclosure
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Provisions
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Asset Impairments
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IFRS 1 first time adoption
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PRECISION
DRILLING
TRUST
41
A summary of significant activities and deadlines within
the plan along with their current status
is as follows:
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Key Activity
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Deadlines/Milestones
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Status at December 31, 2008
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Financial Statement Preparation:
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Identify differences in Canadian
GAAP/IFRS accounting policies
Select
entitys continuing IFRS policies
Select
entitys IFRS 1 choices
Develop financial
statement format
Quantify IFRS 1
disclosures for 2010
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Identify Canadian GAAP/IFRS differences Q4, 2008
Identify and
evaluate IFRS 1 options Q2, 2009
Identify disclosure
requirements under IFRS Q4, 2009
Ready for complete
IFRS reporting in 2011 financial year including
comparative financial statements for 2010 financial year
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Diagnostic assessment completed to identify differences between
Canadian GAAP
and IFRS as applicable to Precision
Possible
significant accounting policy choices and IFRS 1 elections identified
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Infrastructure:
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Determine and develop IFRS expertise
needed at all levels within the entity
Determine and
implement information technology changes needed to be fully IFRS
compliant
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Identify and train IFRS project team Q1, 2009
Ready for parallel
processing of 2010 general ledger using IFRS accounting
procedures, Q1 2010
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IFRS training delivered to project team and key stakeholders
within Precision
in February 2009
Information
technology impact assessment completed and system configuration changes to commence Q3, 2009
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Business Policy Assessment:
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Identify impact on financial covenants
and renegotiate/ redefine as needed
Identify impact on
compensation plans and change as required
Evaluate impact on
customer and supplier contracts
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Impact of IFRS on debt covenants to be determined
Review compensation
plans by Q4, 2010
Renegotiate and
amend customer and supplier contracts by Q3, 2010 if needed
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Assessment of impact of IFRS conversion on compensation plans,
debt covenants
and customer and supplier contracts has not yet commenced
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Control Environment:
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Assess impact on design and effectiveness
of internal control over financial
reporting
Assess impact on
design and effectiveness of disclosure controls and procedures
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Update business process and information technology controls
documentation
timing to be determined
Update CEO/CFO
certifications process by end of Q4, 2010 for SOX 302
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Identification of material process changes underway
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A number of projects are currently underway between the
International Accounting Standards Board,
the United States Financial Standards Board and the AcSB in order to converge GAAP (both U.S. and
Canadian) with IFRS. These projects may result in new pronouncements or change existing standards
and as a result IFRS as at the transition date may differ from its current form.
The above disclosure is made keeping in mind the
Trusts circumstances as of today in order to help
stakeholders understand the impact of the transition on various aspects of financial reporting. The
Trusts circumstances may change during the course of the project resulting in the need to change
some or all of the key activities and deadlines/milestones disclosed above.
42
MANAGEMENTS DISCUSSION AND ANALYSIS
BUSINESS RISKS
The discussion of risk that follows is not a complete representation. Additional information
related to risks is disclosed in the 2008 Annual Information Form filed with SEDAR and available at
www.sedar.com. Also refer to the Cautionary Statement Regarding Forward-Looking Information and
Statements on page 52.
Certain activities of Precision are affected by factors that are beyond its control or influence.
The drilling rig, camp and catering, service rig, snubbing, rentals, wastewater treatment and
related service businesses and activities of Precision in Canada and the drilling rig, camp and
catering and rentals business and activities of Precision in the United States are directly
affected by fluctuations in exploration, development and production activity carried on by its
customers which, in turn, is dictated by numerous factors including world energy prices and
government policies. The addition, elimination or curtailment of government regulations and
incentives could have a significant impact on the oil and natural gas business in Canada and the
United States. These factors could lead to a decline in the demand for Precisions services,
resulting in a material adverse effect on revenues, cash flows, earnings and cash distributions to
unitholders.
Crude Oil and Natural Gas Prices
Precision sells its services to oil and natural gas exploration and production companies. Macro
economic and geopolitical factors associated with oil and natural gas supply and demand are prime
drivers for pricing and profitability within the oilfield services industry. Generally, when
commodity prices are relatively high, demand for Precisions services are high, while the opposite
is true when commodity prices are low. The markets for oil and natural gas are separate and
distinct. Oil is a global commodity with a vast distribution network. As natural gas is most
economically transported in its gaseous state via pipeline, its market is dependent on pipeline
infrastructure and is subject to regional supply and demand factors. However, recent developments
in the transportation of liquefied natural gas (LNG) in ocean going tanker ships have introduced
an element of globalization to the natural gas market. Crude oil and natural gas prices are quite
volatile, which accounts for much of the cyclical nature of the oilfield services business.
Worldwide military, political and economic events, including initiatives by the Organization of the
Petroleum Exporting Countries and other major petroleum exporting countries, for instance, may
affect both the demand for, and the supply of, oil and natural gas. Weather conditions,
governmental regulation (both in Canada and elsewhere), levels of consumer demand, the availability
of pipeline capacity, United States and Canadian natural gas storage levels and other factors
beyond Precisions control may also affect the supply of and demand for oil and natural gas and
thus lead to future price volatility. A prolonged reduction in oil and natural gas prices would
likely depress the level of exploration and production activity. This would likely result in a
corresponding decline in the demand for Precisions services and could have a material adverse
effect on its revenues, cash flows and profitability. Lower oil and natural gas prices could also
cause Precisions customers to seek to terminate, renegotiate or fail to honour Precisions
drilling contracts which could affect the fair market value of its rig fleet which in turn could
trigger a write down for accounting purposes, Precisions ability to retain skilled rig personnel
and Precisions ability to obtain access to capital to finance and grow its businesses. There can
be no assurance that the future level of demand for Precisions services or future conditions in
the oil and natural gas and oilfield services industries will not decline.
Precisions accounts receivable are with customers involved in the oil and natural gas industry,
whose revenues may be impacted by fluctuations in commodity prices. The collection of receivables
may be adversely affected by any prolonged weakness in oil and natural gas prices.
Workforce Availability
Precision may not be able to find enough skilled labor to meet its needs, which could limit its
growth. As a result, Precision may have problems finding enough skilled and unskilled laborers in
the future if demand for its services increases. If Precision is not able to increase its service
rates sufficiently to compensate for similar wage rate increases, its operating results may be
adversely affected.
PRECISION
DRILLING TRUST
43
Business is Seasonal and Highly Variable
In Canada and the northern part of the United States, the level of activity in the oilfield service
industry is influenced by seasonal weather patterns. During the spring months, wet weather and the
spring thaw make the ground unstable. Consequently, municipalities and counties and provincial and
state transportation departments enforce road bans that restrict the movement of rigs and other
heavy equipment, thereby reducing activity levels and placing an increased level of importance on
the location of Precisions equipment prior to imposition of the road bans. The timing and length
of road bans is dependant upon the weather conditions leading to the spring thaw and the weather
conditions during the thawing period. Additionally, certain oil and natural gas producing areas are
located in sections of western Canada that are inaccessible, other than during the winter months,
because the ground surrounding or containing the drilling sites in these areas consists of terrain
known as muskeg. Until the muskeg freezes, the rigs and other necessary equipment cannot cross the
terrain to reach the drilling site. Moreover, once the rigs and other equipment have been moved to
a drilling site, they may become stranded or otherwise unable to relocate to another site should
the muskeg thaw unexpectedly. Precisions business results depend, at least in part, upon the
severity and duration of the winter season.
Deteriorating Conditions in the Credit Markets May Adversely Affect Business
The ability to make scheduled payments on or to refinance debt obligations depends on the financial
condition and operating performance of the Trust, which is subject to prevailing economic and
competitive conditions and to certain financial, business and other factors beyond its control. The
credit markets have recently experienced and continue to experience adverse conditions. Continuing
volatility in the credit markets may increase costs associated with debt instruments due to
increased spreads over relevant interest rate benchmarks, or affect the Trusts, or third parties
it seeks to do business with, ability to access those markets. The Trust may be unable to maintain
a level of cash flow from operating activities sufficient to permit it to pay the principal,
premium, if any, and interest on its indebtedness.
In addition, there has been substantial uncertainty in the capital markets and access to financing
is uncertain. These conditions could have an adverse effect on the industry in which the Trust
operates and its business, including future operating results. Precisions customers may curtail
their drilling programs, which could result in a decrease in demand for drilling rigs and a
reduction in dayrates, reduction in the number and profitability of turnkey jobs and/or
utilization. In addition, certain customers could experience an inability to pay suppliers,
including the Trust, in the event they are unable to access the capital markets to fund their
business operations.
Technology
Complex drilling programs for the exploration and development of remaining conventional and
unconventional oil and natural gas reserves in North America demand high-performance drilling rigs.
The ability of drilling rig service providers to meet this demand will depend on continuous
improvement of existing rig technology such as drive systems, control systems, automation, mud
systems and top drives to improve drilling efficiency. Precisions ability to deliver equipment and
services that are more efficient is critical to continued success. There is no assurance that
competitors will not achieve technological improvements that are more advantageous, timely or cost
effective than improvements developed by Precision.
Precision is Subject to Various Risks from its Foreign Operations
Precision conducts a material portion of its business in the United States and is subject to risks
inherent in such operations, such as: fluctuations in currency and exchange controls; increases in
duties and taxes; and changes in laws and policies governing operations. In addition, in the United
States jurisdictions in which Precision operates, it is subject to various laws and regulations
that govern the operation and taxation of its businesses in such jurisdictions and the imposition,
application and interpretation of which laws and regulations can prove to be uncertain.
44
MANAGEMENTS DISCUSSION AND ANALYSIS
Customer Merger and Acquisition Activity
Merger and acquisition activity in the oil and natural gas exploration and production sector can
impact demand for Precisions services as customers focus on internal reorganization activities
prior to committing funds to significant drilling and capital maintenance projects.
Competitive Industry
The contract drilling business is highly competitive with numerous industry participants, and the
drilling contracts Precision competes for are usually awarded on the basis of competitive bids.
Management believes pricing and rig availability are the primary factors considered by Precisions
potential customers in determining which drilling contractor to select.
Capital Overbuild in the Drilling Industry
Because of the long life nature of drilling equipment and the lag between the moment a decision to
build a rig is made and the moment the rig is placed into service, the number of rigs in the
industry does not always correlate to the level of demand for those rigs. Periods of high demand
often spur increased capital expenditures on rigs, and those capital expenditures may exceed actual
demand. Management believes that there is currently an excess of rigs in the North American oil and
gas industry in relation to current levels of demand. This capital overbuild could cause
Precisions competitors to lower their rates and could lead to a decrease in rates in the oilfield
services industry generally, which would have an adverse effect on the revenues, cash flows and
earnings of the Trust.
Distributions on the Trust Units are Variable
The actual cash flow available for distribution to unitholders is a function of numerous factors
including the Trusts, PDLPs and Precisions financial performance; debt covenants and
obligations; working capital requirements; future upgrade capital expenditures and future expansion
capital expenditure requirements for the purchase of property, plant and equipment; tax
obligations; the impact of interest rates and/or foreign exchange rates; the growth of the general
economy; the price of crude oil and natural gas; weather; and number of Trust units and
exchangeable LP units issued and outstanding. Cash distributions may be increased, reduced or
suspended or eliminated entirely depending on the Trusts operations and the performance of its
assets. The market value of the Trust units may deteriorate if the Trust is unable to meet cash
distribution expectations in the future, and that deterioration may be material.
Distributions on the Trust Units Have Been Suspended and May Not Be Reinstated
On February 9, 2009, the Trust announced that it had suspended cash distributions for an indefinite
period. The Trusts ability to resume making cash distributions in the future and the actual cash
flow available for distribution to unitholders, if any, is a function of numerous factors
including, among other things, the Trusts, Precisions and Precision Drilling Limited
Partnerships financial performance; debt covenants and obligations; working capital requirements;
future upgrade capital expenditures and future expansion capital expenditure requirements for the
purchase of property, plant and equipment; tax obligations; the impact of interest rates and/or
foreign exchange rates; the growth of the general economy; the price of crude oil and natural gas;
weather; and number of Trust units and exchangeable LP units issued and outstanding. Cash
distributions may or may not be reinstated, may be reinstated at amounts different than historical
or recent amounts (and subsequently increased or reduced) or may be eliminated entirely depending
on the Trusts operations and the performance of its assets. The market value of the Trust units
may deteriorate if the Trust is unable to reinstate its cash distributions or otherwise meet cash
distribution expectations in the future, and that deterioration may be material.
PRECISION
DRILLING TRUST
45
Precision May Not Be Able to Obtain Financing or Obtain Financing on Acceptable Terms
Because of the Deterioration of the Credit and Capital Markets
On February 19th, Precision announced that the Senior Note Offering had been postponed due to
currently unfavourable market conditions. Global financial markets and economic conditions have
been, and continue to be, disrupted and volatile. The debt and equity capital markets have been
exceedingly distressed. The re-pricing of credit risk and the current weak economic conditions have
made, and will likely continue to make, it difficult to obtain funding on acceptable terms, if at
all. In particular, the cost of raising money in the debt and equity capital markets has increased
substantially while the availability of funds from those markets has diminished significantly.
Also, as a result of concerns about the stability of financial markets generally and the solvency
of counterparties specifically, the cost of obtaining money from the credit markets has increased
as many lenders and institutional investors have increased interest rates, enacted tighter lending
standards, refused to refinance existing debt at maturity at all or on terms similar to Precisions
current debt and reduced and, in some cases, ceased to provide funding to borrowers.
If Precisions business does not generate sufficient cash flow from operations to enable it to pay
its indebtedness or to fund its other liquidity needs, then, as a consequence of these changes in
the credit markets, Precision cannot assure that future borrowings will be available to it under
its credit facilities in sufficient amounts, either because Precisions lending counterparties may
be unwilling or unable to meet their funding obligations or because Precisions borrowing base may
decrease as a result of lower asset valuations, operating difficulties, lending requirements or
regulations, or for any other reason. Moreover, even if lenders and institutional investors are
willing and able to provide adequate funding, interest rates may rise in the future and therefore
increase the cost of borrowing Precision incurs on any of its floating rate debt. Finally,
Precision may need to refinance all or a portion of its indebtedness on or before maturity, sell
assets, reduce or delay capital expenditures, seek additional equity financing or seek third-party
financing to satisfy such obligations. Precision cannot assure that it will be able to refinance
any of its indebtedness on commercially reasonable terms or at all. There can be no assurance that
Precisions business, liquidity, financial condition, or results of operations will not be
materially and adversely impacted in the future as a result of the existing or future credit market
conditions.
Tax Consequences of Previous Transactions Completed by Precision
The business and operations of Precision prior to completion of the Plan of Arrangement pursuant to
which former shareholders of Precision were issued Trust Units were complex and Precision has
executed a number of significant financings, business combinations, acquisitions and dispositions
over the course of its history. The computation of income taxes payable as a result of these
transactions involves many complex factors as well as Precisions interpretation of relevant tax
legislation and regulations. Management believes that the provision for income tax is adequate and
in accordance with generally accepted accounting principles and applicable legislation and
regulations. However, there are a number of tax filing positions that can still be the subject of
review by taxation authorities who may successfully challenge Precisions interpretation of the
applicable tax legislation and regulations, with the result that additional taxes could be payable
by Precision and the amount payable without penalties could be up to $382 million as of December
31, 2008. Any increase in tax liability would reduce the net assets of and funds available to the
Trust.
The Trust received Notices of Reassessment from a provincial taxing authority relating to a prior
period tax filing position in the total amount of $58 million as of December 31, 2008. This $58
million has been paid, recorded as a long-term receivable and included in the $382 million tax
contingency disclosed in the preceding paragraph. The income tax-related portion of the applicable
reassessments and the interest portion are $38 million and $20 million, respectively.
46
MANAGEMENTS DISCUSSION AND ANALYSIS
Access to Additional Financing
Precision may find it necessary in the future to obtain additional debt or equity financing through
the Trust to support ongoing operations, to undertake capital expenditures, to repay existing
indebtedness or to undertake acquisitions or other business combination transactions. There can be
no assurance that additional financing will be available to Precision when needed or on terms
acceptable or favourable to Precision. Precisions inability to raise financing to support ongoing
operations or to fund capital expenditures, acquisitions, debt repayments or other business
combination transactions could limit Precisions growth and may have a material adverse effect upon
Precision.
Taxation of Distributions
In June 2007 the Government of Canadas Bill C-52 Budget Implementation Act 2007 was enacted and
included legislative provisions that impose a tax on certain distributions from publicly traded
specified investment flow-through (SIFT) trusts at a rate equal to the applicable federal
corporate tax rate plus a provincial SIFT tax factor. After the enactment of federal tax rate
reductions in December 2007 the combined SIFT tax would be 29.5% in 2011, reducing to 28% in 2012.
Precision will be a SIFT trust on the earlier of January 1, 2011 or the first day after it exceeds
the normal growth guidelines announced by the federal Department of Finance on December 15, 2006.
Environmental
There is growing concern about the apparent connection between the burning of fossil fuels and
climate change. The issue of energy and the environment has created intense public debate in Canada
and around the world in recent years that is likely to continue for the foreseeable future and
could potentially have a significant impact on all aspects of the economy including the demand for
hydrocarbons and resulting in lower demand for Precisions services.
United States Dollar Exchange Exposure
Precisions operations in the United States have revenue, expenses, assets and liabilities
denominated in United States dollars. As a result Precisions income statement, balance sheet and
statement of cash flow are impacted by changes in exchange rates between Canadian and United States
currencies.
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Translation of United States Subsidiaries
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Precisions United States operations are considered self-sustaining operations and will be
translated into Canadian dollars using the current rate method. Under this method, the assets and
liabilities of Precisions operations in the United States will be recorded in the consolidated
financial statements at the exchange rate in effect at the balance sheet dates and the unrealized
gains and losses will be included in other comprehensive income, a component of unitholders
equity. As a result, changes in the Canadian to United States dollar exchange rates will increase
or decrease Precisions United States dollar denominated net assets on consolidation which will
increase or decrease unitholders equity. The translation will increase and decrease Precisions
United States dollar assets and liabilities as a result of changes in foreign exchange rates
which could have a material impact on the amounts recorded in the balance sheet. In addition,
under certain circumstances Canadian GAAP requires foreign exchange gains and losses that are
accumulated in other comprehensive income to be recorded as a foreign exchange gain or loss in
the statement of earnings.
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Precisions United States operations generate revenue and incur expenses in United States dollars
and the United States dollar based earnings are converted into Canadian dollars for purposes of
financial statement consolidation and reporting. The conversion of the United States dollar based
revenue and expenses to a Canadian dollar basis does not result in a foreign exchange gain or
loss but does result in lower or higher net earnings from United States operations than would
have occurred had the exchange rate not changed. If the Canadian dollar strengthens versus the
United States dollar, the Canadian dollar equivalent of net earnings from United States
operations will be negatively impacted. Precision does not currently hedge any of its exposure
related to the translation of United States dollar based earnings into Canadian dollars.
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PRECISION
DRILLING TRUST
47
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Transaction Exposure
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Precision has long-term debt denominated in United States dollars. This debt is converted at the
exchange rate in effect at the balance sheet dates with the resulting gains or losses included in
the statement of earnings as foreign exchange. If the Canadian dollar weakens versus the United
States dollar, Precision will incur a foreign exchange loss from the translation of this debt.
Currently, Precision has not designated any of this debt as a hedge against the net asset
position of its self-sustaining United States operations.
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|
The vast majority of Precisions United States operations are transacted in United States
dollars. Transactions for Precisions Canadian operations are primarily transacted in Canadian
dollars. However, Precision occasionally purchases goods and supplies in United States dollars.
These transactions and foreign exchange exposure would not typically have a material impact on
the Canadian operations financial results.
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Safety Risk
Standards for the prevention of incidents in the oil and gas industry are governed by service
company safety policies and procedures, accepted industry safety practices, customer specific
safety requirements, and health and safety legislation. Management believes that Precisions
drilling and well servicing businesses are highly competitive with numerous competitors. A key
factor considered by Precisions customers in selecting oilfield service providers is safety.
Deterioration in Precisions safety performance could result in a decline in the demand for
Precisions services and could have a material adverse effect on its revenues, cash flows,
profitability and funds available for distributions.
Dependence on Third Party Suppliers
Precision sources certain key rig components, raw materials, equipment and component parts from a
variety of suppliers located in Canada, the United States and overseas. Precision also outsources
some or all services for the construction of drilling and service rigs. While alternate suppliers
exist for most of these components, materials, equipment, parts and services, cost increases,
delays in delivery due to high activity or other unforeseen circumstances may be experienced.
Precision maintains relationships with a number of key suppliers and contractors, maintains an
inventory of key components, materials, equipment and parts and orders long lead time components in
advance. However, if the current or alternate suppliers are unable to provide or deliver the
necessary components, materials, equipment, parts and services, any resulting delays by Precision
in the provision of services to its customers may have a material adverse effect on Precisions
business, results of operations, prospects and funds available for distributions.
Significant Debt and Potential Material Adverse Effect on Financial Position and Limit on Future
Operations
The Trust and its subsidiaries have a significant amount of debt as a result of the financing of
the Acquisition. As of December 31, 2008, the Trusts total outstanding long-term debt was $1,577
million.
The Trusts substantial debt could have a material adverse effect on its financial condition and
results of operations as well as on the distributions that the Trust may pay to unitholders. In
particular, it could:
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|
increase the Trusts vulnerability to general adverse economic and industry conditions and
require it to dedicate a substantial portion of its cash flow from operations to payments on its
indebtedness, thereby reducing the availability of its cash flow to fund working capital, capital
expenditures, acquisitions, other debt service requirements, distributions to unitholders and other
general corporate purposes;
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48
MANAGEMENTS DISCUSSION AND ANALYSIS
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decrease the Trusts ability to satisfy our obligations under our credit facilities or other
indebtedness and, if we fail to comply with these requirements, an event of default could result;
|
|
|
|
increase our vulnerability to covenants relating to our indebtedness which may limit our ability
to obtain additional financing for working capital, capital expenditures and other general
corporate activities;
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|
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|
increase the Trusts exposure to risks inherent in interest rate fluctuations and changes in
credit ratings or statements from rating agencies because certain of its borrowings (including
borrowings under the Credit Facilities) are at variable rates of interest, which would result in
higher interest expense to the extent the Trust has not hedged these risks against increases in
interest rates;
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increase the Trusts exposure to exchange rate fluctuations because a change in the value of the
Canadian dollar against the United States dollar will result in an increase or decrease in the
Trusts United States dollar denominated debt, as expressed in Canadian dollars, as well as in the
related interest expense;
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increase our vulnerability to covenants relating to our indebtedness that may limit the Trusts
flexibility in planning for, or reacting to, changes in its business or the industry in which it
operates;
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place the Trust at a competitive disadvantage compared to its competitors that have less debt;
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limit the Trusts ability to borrow additional funds to meet its operating expenses, to make
acquisitions and for other purposes; and
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limit the Trusts ability to construct, purchase or acquire new rigs.
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The Trust and its subsidiaries may be able to incur substantial additional debt in the future,
including additional secured debt pursuant to the Credit Facilities and under operating facilities.
This could further exacerbate the risks associated with its substantial debt.
Precision Will Require Significant Amounts of Cash to Service Indebtedness
Precision will require significant amounts of cash in order to service and repay indebtedness. The
ability to generate cash in the future will be, to a certain extent, subject to general economic,
financial, competitive and other factors that may be beyond managements control. In addition, the
ability to borrow funds in the future to service debt will depend on covenants in the Credit
Facilities and other debt agreements which may be entered into in the future. Future borrowings may
not be available to the Trust or Precision under the Credit Facilities or from the capital markets
in amounts sufficient to enable the Trust or Precision to pay obligations as they mature or to fund
other liquidity needs (including the required repayments on the Unsecured Facility and the Secured
Facility). If Precision is not able to obtain such borrowings or generate cash flow from operations
in an amount sufficient to enable it to service and repay indebtedness, the Trust and Precision
will need to refinance indebtedness or they will be in default under the agreements governing
indebtedness. Such refinancing may not be available on favourable terms or at all. The inability to
service, repay and/or refinance indebtedness could negatively impact the Trusts financial
condition and results of operations.
PRECISION
DRILLING TRUST
49
DISCLOSURE CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed to provide reasonable assurance that information
required to be disclosed in reports filed with, or submitted to, securities regulatory authorities
is recorded, processed, summarized and reported within the time periods specified under Canadian
and United States securities laws. The information is accumulated and communicated to management,
including the principal executive officer and principal financial and accounting officer, to allow
timely decisions regarding required disclosure.
As of December 31, 2008, an evaluation was carried out, under the supervision of and with the
participation of management, including the principal executive officer and principal financial and
accounting officer, of the effectiveness of Precisions disclosure controls and procedures as
defined under the rules adopted by the Canadian securities regulatory authorities and by the United
States Securities and Exchange Commission. Based on that evaluation, the principal executive
officer and principal financial and accounting officer concluded that the design and operation of
Precisions disclosure controls and procedures were effective as at December 31, 2008.
It should be noted that while Precisions principal executive officer and principal financial and
accounting officer believe that the Trusts disclosure controls and procedures provide a reasonable
level of assurance that they are effective, they do not expect that the Trusts disclosure controls
and procedures or internal control over financial reporting will prevent all errors and fraud. A
control system, no matter how well conceived or operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met.
With the acquisition of Grey Wolf occurring close to the fiscal year end management of Precision is
not required to conclude on the effectiveness of disclosure controls and procedures within Grey
Wolf. As such, the principal executive officer and principal financial accounting officer have not
concluded on the design and effectiveness of disclosure controls and procedures in Grey Wolf.
Management is responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and preparation of financial statements for
external purposes in accordance with Canadian GAAP, including a reconciliation to U.S. GAAP.
Under the supervision and with the participation of management, including the CEO and CFO,
Precision conducted an evaluation of the design and effectiveness of our internal control over
financial reporting as of the end of the fiscal year based on the framework in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. On December 23, 2008 Precision acquired Grey Wolf and began consolidating the
operations from that date. Based on the proximity of this acquisition to year end management has
excluded this business from its evaluation of the effectiveness of Precisions internal control
over financial reporting as of December 31, 2008. The net earnings attributable to this business
represented approximately one per cent of Precisions consolidated net earnings for the year ended
December 31, 2008, and its aggregate total assets represented approximately 56% of the consolidated
total assets as at December 31, 2008.
Based on this evaluation, management concluded that as of December 31, 2008, Precision maintained
effective internal control over financial reporting.
NON-GAAP MEASURES
Precision uses certain measures that are not recognized under Canadian generally accepted
accounting principles to assess performance and believe these non-GAAP measures provide useful
supplemental information to investors. Following are the non-GAAP measures Precision uses in
assessing performance.
50
MANAGEMENTS DISCUSSION AND ANALYSIS
EBITDA
Management believes that in addition to earnings from continuing operations, EBITDA as derived from
information reported in the Consolidated Statements of Earnings and Deficit is a useful
supplemental measure as it provides an indication of the results and cash generated by Precisions
principal business activities prior to consideration of how those activities are financed, how the
results are taxed, how funds are invested or how foreign exchange and non-cash depreciation and
amortization charges affect results.
The following table provides a reconciliation of earnings from continuing operations under GAAP as
disclosed in the Consolidated Statement of Earnings and Deficit to EBITDA.
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Years ended December 31,
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(Stated in thousands of Canadian dollars)
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2008
|
|
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2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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EBITDA
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$
|
436,536
|
|
|
|
$
|
437,075
|
|
|
$
|
668,160
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Add (deduct):
|
|
|
|
|
|
|
|
|
|
|
|
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Depreciation and amortization
|
|
|
(83,829
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)
|
|
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|
(78,326
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)
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|
(73,234
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)
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Foreign exchange
|
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2,041
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|
|
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(2,398
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)
|
|
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353
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Interest:
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|
|
|
|
|
|
|
|
|
|
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Long-term debt
|
|
|
(14,478
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)
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|
|
|
(7,767
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)
|
|
|
(8,800
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)
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Other
|
|
|
(151
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)
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|
|
|
(106
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)
|
|
|
(171
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)
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Income
|
|
|
455
|
|
|
|
|
555
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|
|
|
942
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|
Other
|
|
|
|
|
|
|
|
|
|
|
|
408
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|
Income taxes
|
|
|
(37,844
|
)
|
|
|
|
(6,213
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)
|
|
|
(15,146
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)
|
|
|
|
|
|
|
Earnings from continuing operations
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$
|
302,730
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|
|
|
$
|
342,820
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|
|
$
|
572,512
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|
|
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Operating Earnings
Management believes that in addition to earnings from continuing operations, operating earnings as
reported in the Consolidated Statements of Earnings and Deficit is a useful supplemental measure as
it provides an indication of the results generated by Precisions principal business activities
prior to consideration of how those activities are financed or how the results are taxed.
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|
|
|
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|
|
|
|
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|
Years ended December 31,
|
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|
|
|
|
|
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(Stated in thousands of Canadian dollars)
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2008
|
|
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2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Operating earnings
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|
$
|
354,748
|
|
|
|
$
|
356,351
|
|
|
$
|
595,279
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|
Add (deduct):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
(14,478
|
)
|
|
|
|
(7,767
|
)
|
|
|
(8,800
|
)
|
Other
|
|
|
(151
|
)
|
|
|
|
(106
|
)
|
|
|
(171
|
)
|
Income
|
|
|
455
|
|
|
|
|
555
|
|
|
|
942
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
408
|
|
Income taxes
|
|
|
(37,844
|
)
|
|
|
|
(6,213
|
)
|
|
|
(15,146
|
)
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
302,730
|
|
|
|
$
|
342,820
|
|
|
$
|
572,512
|
|
|
|
|
|
Standardized Distributable Cash, Distributable Cash from Continuing Operations, Standardized
Distributable Cash per Diluted Unit and Distributable Cash from Continuing Operations per Diluted
Unit
Management believes that in addition to cash provided by continuing operations, standardized
distributable cash and distributable cash from continuing operations are useful supplemental
measures. They provide an indication of the funds available for distribution to unitholders after
consideration of the impacts of capital expenditures and long-term unfunded contractual
obligations. In prior years, instead of deducting total capital expenditures in the calculation of
distributable cash, Precision only excluded upgrade capital but as a result of new guidance
expansion capital is now also deducted.
Precisions method of calculating these measures may differ from other entities and, accordingly,
may not be comparable to measures used by other entities. Investors should be cautioned that these
measures should not be construed as an alternative to measures determined in accordance with GAAP
as an indicator of Precisions performance.
PRECISION
DRILLING TRUST
51
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS
This Annual Report contains certain forward-looking information and statements, including
statements relating to matters that are not historical facts and statements of our beliefs,
intentions and expectations about developments, results and events which will or may occur in the
future, which constitute forward-looking information within the meaning of applicable Canadian
securities legislation and forward-looking statements within the meaning of the safe harbor
provisions of the
United States Private Securities Litigation Reform Act of 1995
(collectively the
forward-looking information and statements). Forward-looking information and statements are
typically identified by words such as anticipate, could, should, expect, seek, may,
intend, likely, will, plan, estimate, believe and similar expressions suggesting future
outcomes or statements regarding an outlook.
Forward-looking information and statements are included throughout this Annual Report including
under the headings Overview and Outlook, Dynamics of the Oilfield Services Industry,
Precisions Development, Financial Results, Critical Accounting Estimates, New Accounting
Standards and Business Risks and Disclosure Controls and Procedures and include, but are not
limited to statements with respect to: 2009 expected cash provided by continuing operations; 2009
capital expenditures, including the amount and nature thereof; suspension of distributions on Trust
units and payments on exchangeable LP units; performance of the oil and natural gas industry,
including oil and natural gas commodity prices and supply and demand; expansion, consolidation and
other development trends of the oil and natural gas industry; impact of rising demand in
directional and horizontal well programs; demand for and status of drilling rigs and other
equipment in the oil and natural gas industry; costs and financial trends for companies operating
in the oil and natural gas industry; energy consumption trends; our business strategy, including
the 2009 strategy and outlook for our business segments; impact of diversification of our earnings
base, and focus on safety and operating performance, the size and capabilities of our drilling and
service rig fleet, our market share and our position in the markets in which we operate; demand for
our products and services; labour shortages; climatic conditions; the maintenance of existing
customer, supplier and partner relationships; supply channels; accounting policies and tax
liabilities; expected payments pursuant to contractual obligations; the prospective impact of
recent or anticipated regulatory changes; financing strategy and compliance with debt covenants;
expected results of cash conservation measures; credit risks; and other such matters.
All such forward-looking information and statements are based on certain assumptions and analyses
made by us in light of our experience and perception of historical trends, current conditions and
expected future developments, as well as other factors we believe are appropriate in the
circumstances. These statements are, however, subject to known and unknown risks and uncertainties
and other factors. As a result, actual results, performance or achievements could differ materially
from those expressed in, or implied by, these forward-looking information and statements and,
accordingly, no assurance can be given that any of the events anticipated by the forward-looking
information and statements will transpire or occur, or if any of them do so, what benefits will be
derived therefrom. These risks, uncertainties and other factors include, among others: the impact
of general economic conditions in Canada and the United States; world energy prices and government
policies; the availability of credit and equity globally to both Precision and the oil and gas
companies that are its customers; consumer confidence and the duration of any recessionary period;
industry conditions, including capital spending decisions, priority placed on high-performance rigs
in shale-type plays; the adoption of new environmental, taxation and other laws and
52
MANAGEMENTS DISCUSSION AND ANALYSIS
regulations and changes in how they are interpreted and enforced; the impact of initiatives by the
Organization of Petroleum Exporting Countries and other major petroleum exporting countries; the
effect of weather conditions on operations and facilities; the existence of operating risks
inherent in well servicing, contract drilling and ancillary oilfield services; volatility of oil
and natural gas prices; oil and natural gas product supply and demand; risks inherent in the
ability to generate sufficient cash flow from operations to meet current and future obligations;
increased competition; consolidation among our customers; risks associated with technology;
political uncertainty, including risks of war, hostilities, civil insurrection, instability or acts
of terrorism; the lack of availability of qualified personnel or management; credit risks;
increased costs of operations, including costs of equipment; fluctuations in interest rates; stock
market volatility; safety performance; foreign operations; foreign currency exposure; dependence on
third party suppliers; opportunities available to or pursued by us; and other factors, many of
which are beyond our control.
These risk factors are discussed in the Annual Information Form and Form 40-F on file with the
Canadian securities commissions and the United States Securities and Exchange Commission and are
available on SEDAR at www.sedar.com and the website of the United States Securities and Exchange
Commission at www.sec.gov, respectively. Except as required by law, Precision Drilling Trust,
Precision Drilling Limited Partnership and Precision Drilling Corporation disclaim any intention or
obligation to update or revise any forward-looking information or statements, whether as a result
of new information, future events or otherwise.
The forward-looking information and statements contained in this Annual Report are expressly
qualified by this cautionary statement.
PRECISION
DRILLING TRUST
53
Precision Drilling Trust
MANAGEMENTS REPORT TO THE UNITHOLDERS
The accompanying consolidated financial statements and all information in the Annual Report are the
responsibility of management. The consolidated financial statements have been prepared by
management in accordance with the accounting policies in the notes to the consolidated financial
statements. When necessary, management has made informed judgments and estimates in accounting for
transactions which were not complete at the balance sheet date. In the opinion of management, the
consolidated financial statements have been prepared within acceptable limits of materiality, and
are in accordance with Canadian generally accepted accounting principles (GAAP) appropriate in
the circumstances. The financial information elsewhere in the Annual Report has been reviewed to
ensure consistency with that in the consolidated financial statements.
Management has prepared Managements Discussion and Analysis (MD&A). The MD&A is based upon
Precision Drilling Trusts (the Trust) financial results prepared in accordance with Canadian
GAAP. The MD&A compares the audited financial results for the years ended December 31, 2008 to
December 31, 2007 and the years ended December 31, 2007 to December 31, 2006. Note 20 to the
consolidated financial statements describes the impact on the consolidated financial statements of
significant differences between Canadian and United States GAAP.
Management is responsible for establishing and maintaining adequate internal control over the
Trusts financial reporting and is supported by an internal audit function who conducts periodic
testing of these controls. Internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation
of consolidated financial statements for external reporting purposes in accordance with generally
accepted accounting principles. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with direction from our principal executive officer and principal
financial and accounting officer, management conducted an evaluation of the effectiveness of the
Trusts internal control over financial reporting. Managements evaluation of internal control over
financial reporting was based on the Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Trust acquired Grey
Wolf, Inc. on December 23, 2008 and began consolidating the financial results from date of
acquisition. Management has excluded this business from its evaluation of the effectiveness of the
Trusts internal control over financial reporting as at December 31,2008. Based on this evaluation,
management concluded that the Trusts internal control over financial reporting was effective as of
December 31, 2008. Also management determined that there were no material weaknesses in the Trusts
internal control over financial reporting as of December 31, 2008.
KPMG LLP, an independent firm of Chartered Accountants, was engaged, as approved by a vote of
unitholders at the Trusts most recent annual meeting, to audit the consolidated financial
statements and provide an independent professional opinion.
KPMG LLP completed an audit of the design and effectiveness of the Trusts internal control over
financial reporting as of December 31, 2008, as stated in their report included herein and
expressed an unqualified opinion on design and effectiveness of internal control over financial
reporting as of December 31, 2008.
The Audit Committee of the Board of Directors, which is comprised of five independent directors who
are not employees of the Trust, provides oversight to the financial reporting process. Integral to
this process is the Audit Committees review and discussion with management and the external
auditors of the quarterly and annual financial statements and reports prior to their respective
release. The Audit Committee is also responsible for reviewing and discussing with management and
the external auditors major issues as to the adequacy of the Trusts internal controls. The
external auditors have unrestricted access to the Audit Committee to discuss their audit and
related matters. The consolidated financial statements have been approved by the Board of Trustees
on the recommendation of the Board of Directors of Precision Drilling Corporation and its Audit
Committee.
|
|
|
|
|
|
Kevin A. Neveu
|
|
Doug J. Strong
|
Chief Executive Officer
|
|
Chief Financial Officer
|
Precision Drilling Corporation,
|
|
Precision Drilling Corporation,
|
Administrator to Precision Drilling Trust
|
|
Administrator to Precision Drilling Trust
|
|
|
|
March 23, 2009
|
|
March 23, 2009
|
54
CONSOLIDATED FINANCIAL STATEMENTS
Precision Drilling Trust
AUDITORS REPORT TO THE UNITHOLDERS
To the Unitholders of Precision Drilling Trust
We have audited the consolidated balance sheets of Precision Drilling Trust (the Trust) as at
December 31, 2008 and 2007 and the consolidated statements of earnings and deficit, comprehensive
income and cash flow for each of the years in the three-year period ended December 31, 2008. These
financial statements are the responsibility of the Trusts management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards and the
standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects,
the financial position of the Trust as at December 31, 2008 and 2007 and the results of its
operations and its cash flows for each of the years in the three-year period ended December 31,
2008 in accordance with Canadian generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Trusts internal control over financial reporting as of December 31,
2008, based on the criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March
23, 2009 expressed an unqualified opinion on the effectiveness of the Trusts internal control over
financial reporting.
Chartered Accountants
Calgary, Canada
March 23, 2009
PRECISION DRILLING TRUST
55
Precision Drilling Trust
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Precision Drilling Corporation, as Administrator of Precision Drilling
Trust and the Unitholders of Precision Drilling Trust
We have audited Precision Drilling Trusts (the Trust) internal control over financial reporting
as of December 31, 2008, based on the criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Trusts management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Managements Report to the Unitholders. Our responsibility is to
express an opinion on the Trusts internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about
whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
An entitys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. An
entitys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the entity are
being made only in accordance with authorizations of management and directors of the entity; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the entitys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Trust maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2008, based on the criteria established in Internal Control
- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
The Trust acquired Grey Wolf, Inc. during 2008, and management excluded from its assessment of the
effectiveness of the Trusts internal control over financial reporting as of December 31, 2008,
Grey Wolf, Inc.s internal control over financial reporting associated with total assets of $2,724
million and total revenue of $22 million included in the consolidated financial statements of the
Trust as of and for the year ended December 31, 2008. Our audit of internal control over financial
reporting of the Trust also excluded an evaluation of the internal control over financial reporting
of Grey Wolf, Inc.
We also have conducted our audits on the consolidated financial statements in accordance with
Canadian generally accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States). Our report dated March 23, 2009 on the consolidated balance sheets
of the Trust as of December 31, 2008 and 2007, and the related consolidated statements of earnings
and deficit, comprehensive income and cash flow for each of the years in the three-year period
ended December 31, 2008 expressed an unqualified opinion on those consolidated financial
statements.
Chartered Accountants
Calgary, Canada
March 23, 2009
56
CONSOLIDATED FINANCIAL STATEMENTS
Precision Drilling Trust
CONSOLIDATED BALANCE SHEETS
As at December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Stated in thousands of Canadian dollars)
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
$
|
61,511
|
|
|
|
$
|
|
|
Accounts receivable
|
|
(Note 24)
|
|
|
601,753
|
|
|
|
|
256,616
|
|
Income tax recoverable
|
|
|
|
|
|
|
13,313
|
|
|
|
|
5,952
|
|
Inventory
|
|
|
|
|
|
|
8,652
|
|
|
|
|
9,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
685,229
|
|
|
|
|
271,823
|
|
Income tax recoverable
|
|
|
|
|
|
|
58,055
|
|
|
|
|
|
|
Property, plant and equipment, net of accumulated depreciation
|
|
(Note 4)
|
|
|
3,243,213
|
|
|
|
|
1,210,587
|
|
Intangibles
|
|
(Note 5)
|
|
|
5,676
|
|
|
|
|
318
|
|
Goodwill
|
|
(Note 6)
|
|
|
841,529
|
|
|
|
|
280,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,833,702
|
|
|
|
$
|
1,763,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND UNITHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank indebtedness
|
|
(Note 7)
|
|
$
|
|
|
|
|
$
|
14,115
|
|
Accounts payable and accrued liabilities
|
|
(Note 24)
|
|
|
270,122
|
|
|
|
|
80,864
|
|
Distributions payable
|
|
(Note 8)
|
|
|
20,825
|
|
|
|
|
36,470
|
|
Current portion of long-term debt
|
|
(Note 10)
|
|
|
48,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339,900
|
|
|
|
|
131,449
|
|
Long-term liabilities
|
|
(Note 9)
|
|
|
30,951
|
|
|
|
|
13,896
|
|
Long-term debt
|
|
(Note 10)
|
|
|
1,368,349
|
|
|
|
|
119,826
|
|
Future income taxes
|
|
(Note 11)
|
|
|
770,623
|
|
|
|
|
181,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,509,823
|
|
|
|
|
446,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
(Notes 16 and 25)
|
|
|
|
|
|
|
|
|
|
Subsequent events
|
|
(Notes 8, 10 and 28)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unitholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unitholders capital
|
|
(Note 12(b))
|
|
|
2,355,590
|
|
|
|
|
1,442,476
|
|
Contributed surplus
|
|
(Note 12(c))
|
|
|
998
|
|
|
|
|
307
|
|
Deficit
|
|
|
|
|
|
|
(48,068
|
)
|
|
|
|
(126,110
|
)
|
Accumulated other comprehensive income
|
|
(Note 13)
|
|
|
15,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,323,879
|
|
|
|
|
1,316,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,833,702
|
|
|
|
$
|
1,763,477
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
Approved by the Board of Trustees:
|
|
|
|
|
|
Robert J.S. Gibson
|
|
Patrick M. Murray
|
Trustee
|
|
Trustee
|
PRECISION DRILLING TRUST
57
Precision Drilling Trust
CONSOLIDATED STATEMENTS OF EARNINGS AND DEFICIT
Years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Stated in thousands of Canadian dollars, except per unit amounts)
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
$
|
1,101,891
|
|
|
|
$
|
1,009,201
|
|
|
$
|
1,437,584
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
|
|
598,181
|
|
|
|
|
516,094
|
|
|
|
688,207
|
|
General and administrative
|
|
|
|
|
|
|
67,174
|
|
|
|
|
56,032
|
|
|
|
81,217
|
|
Depreciation and amortization
|
|
(Note 4)
|
|
|
83,829
|
|
|
|
|
78,326
|
|
|
|
73,234
|
|
Foreign exchange
|
|
|
|
|
|
|
(2,041
|
)
|
|
|
|
2,398
|
|
|
|
(353
|
)
|
Interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
14,478
|
|
|
|
|
7,767
|
|
|
|
8,800
|
|
Other
|
|
|
|
|
|
|
151
|
|
|
|
|
106
|
|
|
|
171
|
|
Income
|
|
|
|
|
|
|
(455
|
)
|
|
|
|
(555
|
)
|
|
|
(942
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(408
|
)
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes
|
|
|
|
|
|
|
340,574
|
|
|
|
|
349,033
|
|
|
|
587,658
|
|
Income taxes:
|
|
(Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
6,102
|
|
|
|
|
(737
|
)
|
|
|
34,526
|
|
Future
|
|
|
|
|
|
|
31,742
|
|
|
|
|
6,950
|
|
|
|
(19,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,844
|
|
|
|
|
6,213
|
|
|
|
15,146
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
|
|
|
|
|
302,730
|
|
|
|
|
342,820
|
|
|
|
572,512
|
|
Gain on disposal of discontinued operations, net of tax
|
|
(Note 27)
|
|
|
|
|
|
|
|
2,956
|
|
|
|
7,077
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
302,730
|
|
|
|
|
345,776
|
|
|
|
579,589
|
|
Deficit, beginning of year
|
|
|
|
|
|
|
(126,110
|
)
|
|
|
|
(195,219
|
)
|
|
|
(303,284
|
)
|
Distributions declared
|
|
(Note 8)
|
|
|
(224,688
|
)
|
|
|
|
(276,667
|
)
|
|
|
(471,524
|
)
|
|
|
|
|
|
|
|
|
|
|
Deficit, end of year
|
|
|
|
|
|
$
|
(48,068
|
)
|
|
|
$
|
(126,110
|
)
|
|
$
|
(195,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per unit from continuing operations:
|
|
(Note 17)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
$
|
2.39
|
|
|
|
$
|
2.73
|
|
|
$
|
4.56
|
|
Diluted
|
|
|
|
|
|
$
|
2.39
|
|
|
|
$
|
2.73
|
|
|
$
|
4.56
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per unit:
|
|
(Note 17)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
$
|
2.39
|
|
|
|
$
|
2.75
|
|
|
$
|
4.62
|
|
Diluted
|
|
|
|
|
|
$
|
2.39
|
|
|
|
$
|
2.75
|
|
|
$
|
4.62
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Stated in thousands of Canadian dollars)
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
$
|
302,730
|
|
|
|
$
|
345,776
|
|
|
$
|
579,589
|
|
Unrealized gain recorded on translation of assets
and liabilities of self-sustaining operations
denominated in foreign currency
|
|
|
|
|
|
|
11,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
$
|
313,952
|
|
|
|
$
|
345,776
|
|
|
$
|
579,589
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
58
CONSOLIDATED FINANCIAL STATEMENT
Precision Drilling Trust
CONSOLIDATED STATEMENTS OF CASH FLOW
Years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Stated in thousands of Canadian dollars)
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
|
|
|
|
$
|
302,730
|
|
|
|
$
|
342,820
|
|
|
$
|
572,512
|
|
Adjustments and other items not involving cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term incentive plan compensation
|
|
|
|
|
|
|
2,163
|
|
|
|
|
(8,496
|
)
|
|
|
22,699
|
|
Depreciation and amortization
|
|
|
|
|
|
|
83,829
|
|
|
|
|
78,326
|
|
|
|
73,234
|
|
Future income taxes
|
|
|
|
|
|
|
31,742
|
|
|
|
|
6,950
|
|
|
|
(19,380
|
)
|
Other
|
|
|
|
|
|
|
7,219
|
|
|
|
|
112
|
|
|
|
(408
|
)
|
Amortization of debt issue costs
|
|
|
|
|
|
|
798
|
|
|
|
|
|
|
|
|
|
|
Changes in non-cash working capital balances
|
|
(Note 24)
|
|
|
(84,571
|
)
|
|
|
|
64,403
|
|
|
|
(38,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
343,910
|
|
|
|
|
484,115
|
|
|
|
609,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business acquisitions, net of cash acquired
|
|
(Note 19)
|
|
|
(768,392
|
)
|
|
|
|
|
|
|
|
(16,428
|
)
|
Purchase of property, plant and equipment
|
|
|
|
|
|
|
(229,579
|
)
|
|
|
|
(186,973
|
)
|
|
|
(263,030
|
)
|
Proceeds on sale of property, plant and equipment
|
|
|
|
|
|
|
10,440
|
|
|
|
|
5,767
|
|
|
|
29,337
|
|
Changes in income tax recoverable
|
|
|
|
|
|
|
(55,148
|
)
|
|
|
|
|
|
|
|
|
|
Proceeds on disposal of discontinued operations
|
|
(Note 27)
|
|
|
|
|
|
|
|
2,956
|
|
|
|
7,337
|
|
Proceeds on disposal of investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
510
|
|
Purchase of intangibles
|
|
|
|
|
|
|
|
|
|
|
|
(33
|
)
|
|
|
|
|
Changes in non-cash working capital balances
|
|
(Note 24)
|
|
|
22,583
|
|
|
|
|
(13,119
|
)
|
|
|
7,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,020,096
|
)
|
|
|
|
(191,402
|
)
|
|
|
(234,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions paid
|
|
(Note 8)
|
|
|
(216,304
|
)
|
|
|
|
(249,000
|
)
|
|
|
(444,651
|
)
|
Repayment of long-term debt
|
|
|
|
|
|
|
(179,826
|
)
|
|
|
|
(99,700
|
)
|
|
|
(204,910
|
)
|
Debt issue costs
|
|
|
|
|
|
|
(160,098
|
)
|
|
|
|
|
|
|
|
|
|
Increase in long-term debt
|
|
|
|
|
|
|
1,308,040
|
|
|
|
|
78,646
|
|
|
|
248,338
|
|
Issuance of Trust units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,896
|
|
Change in bank indebtedness
|
|
|
|
|
|
|
(14,115
|
)
|
|
|
|
(22,659
|
)
|
|
|
16,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
737,697
|
|
|
|
|
(292,713
|
)
|
|
|
(375,021
|
)
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
|
|
|
|
61,511
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
|
|
|
|
$
|
61,511
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
PRECISION DRILLING TRUST
59
Precision Drilling Trust
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts are stated in thousands of Canadian dollars except unit numbers and per unit
amounts)
NOTE 1. DESCRIPTION OF BUSINESS
Precision Drilling Trust (the Trust) is a provider of contract drilling and completion and
production services primarily to oil and natural gas exploration and production companies in Canada
and the United States. The Trust is an unincorporated open-ended investment trust governed by the
laws of Alberta and created pursuant to the Declaration of Trust dated September 22, 2005.
Prior to the conversion to a trust on November 7, 2005, the consolidated financial statements
included the accounts of Precision Drilling Corporation (Precision), its subsidiaries and its
partnerships, substantially all of which were wholly-owned. The consolidated financial statements
reflect the financial position, results of operations and cash flows as if the Trust had always
carried on the business formerly carried on by Precision.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
The Trusts accounting policies are in accordance with Canadian generally accepted accounting
principles (GAAP). These policies are consistent with accounting principles generally accepted in
the United States in all material respects except as outlined in Note 20.
The preparation of the consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the
disclosure of contingencies. Significant estimates used in the preparation of the financial
statements include, but are not limited to, depreciation of property, plant and equipment,
valuation of long-lived assets and goodwill, allowance for doubtful accounts, accrual for long-term
incentive plan, accruals for uninsured workers compensation and general liability claims and
income taxes. Actual results could differ from these and other estimates, the impact of which would
be recorded in future periods.
(b) Principles of consolidation
The consolidated financial statements include the accounts of the Trust and all of its subsidiaries
and partnerships substantially all of which are wholly-owned. All significant intercompany balances
and transactions have been eliminated.
The Trust does not hold investments in any companies where it exerts significant influence and does
not hold interests in any variable interest entities.
(c) Cash and cash equivalents
Cash and cash equivalents consist of cash and short-term investments with original maturities of
three months or less.
(d) Inventory
Inventory is primarily comprised of operating supplies and is carried at the lower of average cost,
being the cost to acquire the inventory, and net realizable value. Inventory is charged to
operating expenses as items are sold or consumed at the amount of the average cost of the item.
(e) Property, plant and equipment
Property, plant and equipment are carried at cost, including costs of direct material and labour.
Where costs are incurred to extend the useful life of property, plant and equipment or to upgrade
its capabilities, the amounts are capitalized to the related asset. Costs incurred to repair or
maintain property, plant and equipment are expensed as incurred.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, plant, and equipment are depreciated as follows:
|
|
|
|
|
|
|
|
|
Expected life
|
|
Salvage value
|
|
Basis of depreciation
|
|
|
|
|
|
|
|
|
Drilling rig equipment
|
|
5,000 utilization days
|
|
20%
|
|
unit-of-production
|
Drill pipe and drill collars
|
|
1,500 operating days
|
|
|
|
unit-of-production
|
Service rig equipment
|
|
24,000 service hours
|
|
20%
|
|
unit-of-production
|
Drilling rig spare equipment
|
|
15 years
|
|
|
|
straight-line
|
Service rig spare equipment
|
|
10 years
|
|
|
|
straight-line
|
Rental equipment
|
|
10 to 15 years
|
|
|
|
straight-line
|
Other equipment
|
|
3 to 10 years
|
|
|
|
straight-line
|
Light duty vehicles
|
|
4 years
|
|
|
|
straight-line
|
Heavy duty vehicles
|
|
7 to 10 years
|
|
|
|
straight-line
|
Buildings
|
|
10 to 20 years
|
|
|
|
straight-line
|
|
(f) Intangibles
Intangibles with determinable lives are amortized using the straight-line method based on the
estimated useful lives of the respective assets as follows:
|
|
|
Customer relationships
|
|
1 to 5 years
|
|
Patents
|
|
10 years
|
(g) Goodwill
Goodwill is the amount that results when the purchase price of an acquired business exceeds the sum
of the amounts allocated to the assets acquired, less liabilities assumed, based on their fair
values. Goodwill is allocated as of the date of the business combination to the Trusts reporting
segments that are expected to benefit from the business combination.
Goodwill is not amortized and is tested for impairment annually in the fourth quarter, or more
frequently if events or changes in circumstances indicate that the asset might be impaired. The
impairment test is carried out in two steps.
In the first step, the carrying amount of the reporting segment is compared with its fair value.
When the fair value of a reporting segment exceeds its carrying amount, goodwill of the reporting
segment is considered not to be impaired and the second step of the impairment test is unnecessary.
The second step is carried out when the carrying amount of a reporting segment exceeds its fair
value, in which case the implied fair value of the reporting segments goodwill is compared with
its carrying amount to measure the amount of the impairment loss, if any. The implied fair value of
goodwill is determined in the same manner as the value of goodwill is determined in a business
combination using the fair value of the reporting segment as if it was the purchase price. When the
carrying amount of a reporting segments goodwill exceeds the implied fair value of the goodwill,
an impairment loss is recognized in an amount equal to the excess.
(h) Long-lived assets
On a periodic basis, management assesses the carrying value of long-lived assets for indications of
impairment. Indications of impairment include an ongoing lack of profitability and significant
changes in technology. When an indication of impairment is present, the Trust tests for impairment
by comparing the carrying value of the asset to its net recoverable amount. If the carrying amount
is greater than the net recoverable amount, the asset is written down to its estimated fair value.
(i) Income taxes
The Trust and its subsidiaries follow the liability method of accounting for future income taxes.
Under the liability method, future income tax assets and liabilities are determined based on
temporary differences (differences between the accounting basis and the tax basis of the assets
and liabilities), and are measured using current or substantively enacted tax rates and laws
expected to apply when these differences reverse. The effect of a change in income tax rates on
future tax liabilities and assets is recognized in income in the period in which the change occurs.
Future tax assets are recognized if it is considered more likely than not that the tax asset will
be realized.
PRECISION DRILLING TRUST
61
Currently, income earned directly by Precision Drilling Limited Partnership (PDLP) is not subject
to income taxes as its income is taxed directly to the PDLP partners. The Trust is a taxable entity
under the Income Tax Act (Canada) and income earned is taxable only to the extent it is not
distributed or distributable to its holders of Trust units and exchangeable LP units (together
unitholders). In June 2007, the government of Canadas
Bill C-52 Budget Implementation Act, 2007
was enacted and included legislative provisions that impose a tax on certain distributions from
publicly traded specified income flow-through (SIFT) trusts at a rate equal to the applicable
federal corporate tax rate plus a provincial SIFT factor. The Trust will be a SIFT trust on the
earlier of January 1, 2011 or the first day after it exceeds the normal growth guidelines announced
by the federal Department of Finance on December 15, 2006. The enacted SIFT tax had no significant
impact on the Trusts future tax liability.
(j) Revenue recognition
The Trusts services are generally sold based upon service orders or contracts with a customer that
include fixed or determinable prices based upon daily, hourly or job rates. Customer contract terms
do not include provisions for significant post-service delivery obligations. Revenue is recognized
when services and equipment rentals are rendered and only when collectability is reasonably
assured. The Trust also provides services under turnkey contracts whereby it drills a well to an
agreed upon depth under specified conditions for a fixed price, regardless of the time required or
the problems encountered in drilling the well. Revenue from turnkey drilling contracts is
recognized using the percentage-of-completion method based upon costs incurred to date and
estimated total contract costs. Anticipated losses, if any, on uncompleted contracts are recorded
at the time the estimated costs exceed the contract revenue.
(k) Employee benefit plans
At December 31, 2008, approximately 43% (2007 42%) of the employees of the Trusts subsidiaries
were enrolled in defined contribution retirement plans.
Employer contributions to defined contribution plans are expensed as employees earn the entitlement
and contributions are made.
(l) Long-term incentive plan
The Trust has an annual long-term incentive plan (the LTIP) which compensates officers and other
key employees through cash payments at the end of a three-year term. The compensation is comprised
of two components, a retention award and a performance award. The retention award is a lump sum
amount determined in cash or equivalent notional Trust units at the date of commencement in the
LTIP and is accrued and charged to earnings on a straight-line basis over the three-year term. The
values of the notional Trust units are adjusted monthly based on the period-end trading price of
Trust units and the resulting gains or losses are included in earnings. The performance components
are based on the growth targets as determined by the Compensation Committee of Precision and is
accrued over the three-year term of the plans.
(m) Foreign currency translation
Accounts of the Trusts integrated foreign operations are translated to Canadian dollars using
average exchange rates for the month of the respective transaction for revenue and expenses.
Monetary assets and liabilities are translated at exchange rates in effect at the balance sheet
date 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.
Accounts of the Trusts self-sustaining foreign operations are translated to Canadian dollars using
average exchange rates for the month of the respective transaction for revenue and expenses. Assets
and liabilities are translated at exchange rates in effect at the balance sheet date. Gains or
losses resulting from these translation adjustments are included in accumulated other comprehensive
income in unitholders equity.
Coinciding with the acquisition of Grey Wolf, Inc. (Grey Wolf see note 19) the Trust determined
its existing United States based contract drilling operations had changed from integrated to
self-sustaining and accordingly prospectively changed its method of foreign currency translation
for these operations.
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 and losses are
included in net earnings.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(n) Unit-based compensation plans
An equity settled deferred trust unit plan has been established whereby non-management directors of
Precision can elect to receive all or a portion of their compensation in fully-vested deferred
trust units. Under this plan, the number of deferred trust units are adjusted for cash
distributions to unitholders declared prior to redemption by issuing additional Trust units based
on the weighted average trading price of the Trusts units on the Toronto Stock Exchange for the
five days immediately following the ex-distribution date. Compensation expense is recognized based
on the current trading price of the Trust units at the date of grant with a corresponding increase
to contributed surplus. Upon redemption of the deferred trust units into Trust units, the amount
previously recognized in contributed surplus is recorded as an increase to Unitholders capital.
A cash settled deferred trust unit plan has been established whereby eligible participants of
Precisions Performance Savings Plan may elect to receive a portion of their annual performance
bonus in the form of deferred trust units (DTU). These notional units are adjusted for each cash
distribution to unitholders by issuing additional DTUs based on the weighted average trading price
of the Trusts units on the Toronto Stock Exchange for the five days immediately following the
ex-distribution date. The values of these DTUs are adjusted monthly based on the period-end trading
price of Trust units and the resulting amount is included in accounts payable and accrued
liabilities. Gains or losses resulting from these adjustments are charged to earnings.
A cash settled Deferred Signing Bonus Unit Plan has been established for the Chief Executive
Officer. Under this plan deferred trust units are vested on the date of grant and are redeemable
over a three-year period. These notional units are adjusted for each cash distribution to
unitholders by issuing additional DTUs based on the weighted average trading price of the Trusts
units on the Toronto Stock Exchange for the five days immediately following the ex-distribution
date. The values of these DTUs are adjusted monthly based on the period-end trading price of Trust
units and the resulting amount that is redeemable in the current year is included in accounts
payable and accrued liabilities and the remainder is included in long-term incentive plan payable.
Gains or losses resulting from these adjustments are charged to earnings.
A cash settled unit appreciation rights plan (UAR) has been established for certain eligible
participants. This plan uses notional units that are valued based on the Trusts unit price on the
New York Stock Exchange. Compensation costs are accrued over the vesting periods when the market
price of the trust units exceeds the strike price under the plan adjusted by unit distributions.
The recorded liability is revalued at the end of each reporting period to reflect changes in the
market price of the trust units with the net change recognized in earnings. When the UARs are
exercised, the accrued liability is reduced. The accrued compensation cost for a UAR that is
forfeited or cancelled is adjusted by decreasing the compensation cost in the period of forfeiture
or cancellation.
(o) Exchangeable LP units
Exchangeable LP units are presented as equity of the Trust as their features make them economically
equivalent to Trust units.
(p) Per unit amounts
Basic per unit amounts are calculated using the weighted average number of Trust units outstanding
during the year. Diluted per unit amounts are calculated by using the treasury stock method for
equity based compensation arrangements and the if-converted method for the convertible notes. The
treasury stock method assumes that any proceeds obtained on exercise of equity based compensation
arrangements would be used to purchase Trust units at the average market price during the period.
The weighted average number of units outstanding is then adjusted by the difference between the
number of units issued from the exercise of equity based compensation arrangements and units
repurchased from the related proceeds. Under the if-converted method, the after-tax effect of
interest expense related to the convertible notes are added back to net earnings, and the
convertible notes are assumed to have been converted to trust units at the beginning of the period
and are added to the weighted average number of units outstanding.
(q) Financial instruments
Cash and cash equivalents are classified as held for trading and any change in fair value is
recorded through net income.
Accounts receivable are classified as loans and receivables. After their initial fair value
measurement, they are measured at amortized cost using the effective interest rate method. For the
Trust, the measured amount generally corresponds to historical cost.
PRECISION DRILLING TRUST
63
Accounts payable and accrued liabilities, bank indebtedness, distributions payable, long-term debt
and other long-term liabilities, except for the long-term incentive plans, are classified as other
financial liabilities. After their initial fair value measurement, they are measured at amortized
cost using the effective interest rate method. For the Trust, the measured amount generally
corresponds to historical cost.
Transaction costs incurred on the issuance of debt are classified with the related debt instrument.
These costs are amortized using the effective interest rate method over the life of the related
debt instrument.
NOTE 3. CHANGES IN ACCOUNTING POLICIES
(a) 2008 changes
Effective January 1, 2008 the Trust adopted new accounting standards issued by The Canadian
Institute of Chartered Accountants (CICA) relating to inventories (Section 3031) and capital
disclosures (Section 1535). Section 3031 requires inventories to be measured at the lower of cost
or net realizable value and provides guidance on the determination of cost and its subsequent
recognition as an expense, including any write-downs to net realizable value and circumstances for
their subsequent reversal. This new standard did not have a material impact on the Trusts
financial statements. Section 1535 requires the Trust to provide additional quantitative and
qualitative information regarding its objectives, policies and processes for managing its capital.
(b) 2007 changes
Effective January 1, 2007 the Trust adopted new accounting standards issued by the CICA. The
standards regarding the disclosure of comprehensive income (Sections 1530 and 3251) require a
statement of comprehensive income, which is comprised of net earnings and other comprehensive
income.
The adoption of the standards relating to the recognition, measurement, disclosure and presentation
of financial instruments (Sections 3855 and 3861), and hedge accounting (Section 3865) did not have
a material impact on the consolidated financial statements.
In addition, the Trust early adopted new accounting standards related to the disclosure and
presentation of financial instruments (Sections 3862 and 3863). These standards, which replace
Section 3861, provide enhanced disclosure around the nature and extent of risks arising from
financial instruments to which the entity is exposed and how the entity manages those risks.
Adoption of these standards did not have a material impact on the consolidated financial
statements.
(c) Future accounting pronouncements
Effective January 1, 2009 the Trust is required to adopt new Canadian accounting standards relating
to goodwill and intangible assets (Section 3064), replacing Section 3062, goodwill and other
intangible assets and Section 3450, research and development costs. This new section establishes
standards for the recognition, measurement, presentation and disclosure of goodwill and intangible
assets. The new Section will be applicable to the Trust on January 1, 2009 and is not anticipated
to have a significant impact on the consolidated financial statements.
In February 2008, the CICA confirmed that Canadian GAAP for publicly accountable enterprises will
be converged with International Financial Reporting Standards (IFRS) for fiscal years beginning on
or after January 1, 2011. IFRS uses a conceptual framework similar to Canadian GAAP, but there are
significant differences on recognition, measurement and disclosures. The conversion from Canadian
GAAP to IFRS will be applicable to the Trusts reporting for the first quarter of 2011 for which
the current and comparative information will be prepared under IFRS. The Trust has developed a plan
to convert its consolidated financial statements to IFRS. As part of this plan, the Trust will
provide training to key employees and monitor the impact of the transition on its business
practices, systems and internal controls over financial reporting.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In
January 2009 the CICA issued new standards relating to business combinations (Section 1582),
consolidated financial statements (Section 1601) and non-controlling interests (Section 1602).
Section 1582 will be harmonized with IFRS 3, Business Combinations and will require most assets
acquired and liabilities assumed, including contingent liabilities to be measured at fair value and
that all acquisition costs to be expensed. Section 1602 will harmonize with the requirements of
International Accounting Standard 27, Consolidated and Separate Financial Statements and requires
that non-controlling interests be recognized as a separate component of equity and that net
earnings be calculated without a deduction for non-controlling interest. Section 1601 in
combination with Section 1602 replaces the former consolidated financial statements standard
(Section 1600) and establishes standards for the preparation of consolidated financial statements.
These standards are effective January 1, 2011 with early adoption permitted. The Trust is currently
evaluating the impact of these new sections on the consolidated financial statements.
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
2008
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
Rig equipment
|
|
$
|
3,444,120
|
|
|
$
|
548,380
|
|
|
$
|
2,895,740
|
|
Rental equipment
|
|
|
89,433
|
|
|
|
44,240
|
|
|
|
45,193
|
|
Other equipment
|
|
|
122,795
|
|
|
|
76,841
|
|
|
|
45,954
|
|
Vehicles
|
|
|
86,260
|
|
|
|
30,817
|
|
|
|
55,443
|
|
Buildings
|
|
|
43,048
|
|
|
|
12,775
|
|
|
|
30,273
|
|
Assets under construction
|
|
|
151,003
|
|
|
|
|
|
|
|
151,003
|
|
Land
|
|
|
19,607
|
|
|
|
|
|
|
|
19,607
|
|
|
|
|
|
|
$
|
3,956,266
|
|
|
$
|
713,053
|
|
|
$
|
3,243,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
2007
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
Rig equipment
|
|
$
|
1,464,145
|
|
|
$
|
485,822
|
|
|
$
|
978,323
|
|
Rental equipment
|
|
|
95,435
|
|
|
|
45,917
|
|
|
|
49,518
|
|
Other equipment
|
|
|
97,397
|
|
|
|
69,483
|
|
|
|
27,914
|
|
Vehicles
|
|
|
76,387
|
|
|
|
27,892
|
|
|
|
48,495
|
|
Buildings
|
|
|
30,614
|
|
|
|
11,494
|
|
|
|
19,120
|
|
Assets under construction
|
|
|
77,096
|
|
|
|
|
|
|
|
77,096
|
|
Land
|
|
|
10,121
|
|
|
|
|
|
|
|
10,121
|
|
|
|
|
|
|
$
|
1,851,195
|
|
|
$
|
640,608
|
|
|
$
|
1,210,587
|
|
|
In 2007 the Trust incurred $6.7 million of additional depreciation expense associated with the
reduction in the carrying amounts of assets decommissioned during the year. The assets were
decommissioned due to the inefficient nature of the asset and the high cost to maintain. The charge
was allocated $2.4 million to the Contract Drilling Services segment and $4.3 million to the
Completion and Production Services segment.
NOTE 5. INTANGIBLES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
2008
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
Customer relationships
|
|
$
|
5,585
|
|
|
$
|
134
|
|
|
$
|
5,451
|
|
Patents
|
|
|
931
|
|
|
|
706
|
|
|
|
225
|
|
|
|
|
|
|
$
|
6,516
|
|
|
$
|
840
|
|
|
$
|
5,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
2007
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
Patents
|
|
$
|
931
|
|
|
$
|
613
|
|
|
$
|
318
|
|
|
Amortization expense for the year ended December 31, 2008 was $0.2 million (2007 $0.1 million).
PRECISION DRILLING TRUST
65
NOTE 6. GOODWILL
|
|
|
|
|
|
Balance, December 31, 2006 and 2007
|
|
$
|
280,749
|
|
Acquisitions
(Note 19)
|
|
|
557,165
|
|
Exchange adjustment
|
|
|
3,615
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
841,529
|
|
|
NOTE 7. BANK INDEBTEDNESS
At December 31, 2008, the Trust had available $50.0 million (2007 $60.0 million) and US$0.9
million (2007 US$5.0 million) under secured and unsecured credit facilities, of which no
significant amounts had been drawn (2007 $14.1 million). Availability of these facilities were
reduced by outstanding letters of credit in the amount of $35.4 million (2007 $2.0 million). The
current facilities are primarily secured by charges on substantially all present and future
property of the Trust and its material subsidiaries. Advances under the facilities are available at
the banks prime lending rate, U.S. base rate, U.S. LIBOR plus applicable margin or Bankers
Acceptance plus applicable margin, or in combination. As at December 31, 2008, the amounts drawn
under these facilities were at the banks prime lending rate of approximately 3.6% (2007 6%).
NOTE 8. DISTRIBUTIONS
The beneficiaries of the Trust are the holders of Trust units and the partners of PDLP are the
holders of exchangeable LP units of the Trust. The monthly distributions made by the Trust to
unitholders are determined by the Trustees. PDLP earns interest income from a promissory note
issued by its subsidiary Precision at a rate which is determined by the terms of the promissory
note. PDLP in substance pays distributions to holders of exchangeable LP units in amounts equal to
the distributions paid to the holders of Trust units. All distributions are made to unitholders of
record on the last business day of each calendar month.
The Declaration of Trust provides that an amount equal to the taxable income of the Trust not
already paid to unitholders in the year will become payable on December 31 of each year such that
the Trust will not be liable for ordinary income taxes for such year.
A distribution reinvestment plan (the DRIP) was approved by the Board of Trustees in February
2006, and implemented in March 2006. The DRIP allows certain holders of Trust units, at their
option, to reinvest monthly cash distributions to acquire additional Trust units at the average
market price as defined in the DRIP. Unitholders who were not resident in Canada or held
exchangeable LP units were not eligible to participate in the DRIP. The Trust reserved the right to
amend, suspend, or terminate the DRIP at any time. The DRIP was suspended in December 2006.
A summary of the distributions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
Declared
|
|
$
|
224,688
|
|
|
|
$
|
276,667
|
|
Paid
|
|
$
|
216,304
|
|
|
|
$
|
249,000
|
|
Payable in cash at December 31
|
|
$
|
20,825
|
|
|
|
$
|
36,470
|
|
Payable in units at December 31
|
|
$
|
24,029
|
|
|
|
$
|
30,182
|
|
|
|
|
|
Included in the 2008 distributions declared is a special non-cash in-kind distribution of $24.0
million ($0.15 per unit) (2007 $ 30.2 million or $0.24 per unit). This special distribution was
settled on January 15, 2009 through the issuance of units. Immediately following the issuance of
these units, the Trust consolidated the units such that the number of Trust units and exchangeable
LP units remained unchanged from the number outstanding prior to the special non-cash in-kind
distribution.
On February 9, 2009 the Trust announced the suspension of cash distributions for an indefinite
period for distributions to be paid after February 17, 2009.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. LONG-TERM LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
Long-term incentive plans
(Note 14)
|
|
$
|
7,489
|
|
|
|
$
|
13,896
|
|
Long-term workers compensation and other liabilities
|
|
|
23,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,951
|
|
|
|
$
|
13,896
|
|
|
|
|
|
NOTE 10. LONG-TERM DEBT
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
Secured facility:
|
|
|
|
|
|
|
|
|
|
Term Loan A
|
|
$
|
489,215
|
|
|
|
$
|
|
|
Term Loan B
|
|
|
489,840
|
|
|
|
|
|
|
Revolving credit facility
|
|
|
107,981
|
|
|
|
|
|
|
Unsecured facility
|
|
|
168,352
|
|
|
|
|
|
|
Unsecured convertible notes:
|
|
|
|
|
|
|
|
|
|
3.75% notes
|
|
|
168,413
|
|
|
|
|
|
|
Floating rate notes
|
|
|
152,801
|
|
|
|
|
|
|
Unsecured revolving credit facility
|
|
|
|
|
|
|
|
119,826
|
|
|
|
|
|
|
|
|
|
|
1,576,602
|
|
|
|
|
119,826
|
|
Less net unamortized debt issue costs
|
|
|
(159,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,417,302
|
|
|
|
|
119,826
|
|
Less current portion
|
|
|
(48,953
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,368,349
|
|
|
|
$
|
119,826
|
|
|
|
|
|
(a) Secured facility:
During 2008 Precision established a Secured Facility which provides senior secured financing of up
to approximately US$1.2 billion, consisting of a Term Loan A Facility in an aggregate principal
amount of US$400 million, a Term Loan B Facility in an aggregate principal amount of US$400 million
and a Revolving Credit Facility in the amount of US$400 million. The Secured Facility is primarily
secured by charges on substantially all present and future property of the Trust and its material
subsidiaries. The Trust and its material subsidiaries have also guaranteed the obligations of
Precision under the Secured Facility. The Secured Facility requires the Trust comply with certain
financial covenants including a leverage ratio of total debt to earnings before interest, taxes,
depreciation and amortization as defined in the agreement (EBITDA) of less than 3:1; an interest
coverage ratio of EBITDA to cash interest expense of greater than 3:1; and a fixed charge coverage
ratio of EBITDA less cash distributions to scheduled principal repayments plus cash interest
expense plus current tax expense plus upgrade capital expenditures of greater than 1:1 in 2009 and
2010 and 1.05:1 thereafter. As well, the Secured Facility contains certain covenants that places
limits on Trust distributions and limits the Trusts capital expenditures above an agreed
base-case. The first test of these covenants is not until March 31, 2009.
The Secured Facility was not fully syndicated by the underwriting banks that funded borrowings by
Precision at December 31, 2008. As a result these banks retain certain provisions that are
available to March 23, 2009 (extended at Precisions option to May 22, 2009) to facilitate
syndication which may result in further increases in any or a combination of interest rates,
original issue discounts or fees, all subject to certain market based indexing including the
re-allocation of debt between the Term Loan A and Term Loan B and between the Term Loan A and B
loans and the unsecured facility. On February 4, 2009 these provisions remain and resulted in
US$64.0 million ($78.5 million) being reallocated from the Term Loan A to the Term Loan B. The
re-tranche of debt between Term Loan A and Term Loan B facilities led to additional debt issue
costs through original issue discount of US$10.0 million ($12.2 million).
The Secured Facility requires mandatory prepayments upon the occurrence of certain events,
including, the incurrence of debt, certain sales or other dispositions of assets and when cash
flows exceed certain base-case projections. In addition to mandatory prepayments, Precision has the
option to prepay the loans under the Secured Facility generally without premium or penalty, other
than customary breakage costs for Eurodollar rate loans.
PRECISION DRILLING TRUST
67
The interest rate on loans under the Secured Facility that are denominated in U.S. dollars is, at
the option of Precision, either a margin over an adjusted United States base rate (the ABR rate)
or a margin over a Eurodollar rate. The interest rate on loans denominated in Canadian dollars is,
at the option of Precision, a margin over the Canadian prime rate or a margin over the bankers
acceptance rate. Certain of the margins on the Revolving Credit Facility are subject to reduction
based upon a leverage test and these margins range from 3% to 4% for Eurodollar and bankers
acceptance loans and 2% to 3% for ABR and Canadian prime rate loans based on leverage ratios
ranging from greater than 1.5:1 to 1:1. Under the terms of the Secured Facility Precision is
required to enter into interest rate contracts if necessary, on or before June 23, 2009, to ensure
that at least 50% of the aggregate amounts borrowed under the Secured and Unsecured Facilities are
subject to fixed interest rates.
At December 31, 2008 the Term Loan A Facility was fully drawn by Precision and consists of a term
loan A-1 facility denominated in U.S. dollars in the amount of US$381.1 million ($466.7 million)
and a term loan A-2 facility denominated in Canadian dollars in the amount of $22.5 million. The
Term Loan A Facility is repayable in quarterly installments in aggregate annual amounts equal to 5%
of the original principal amount thereof in 2009, 10% of the original principal amount thereof in
each of 2010 and 2011 and 15% of the original principal amount in 2012 and 2013, with the balance
payable on the final maturity date of December 23, 2013. As of December 31, 2008, the Term Loan A
Facility had an interest rate of approximately 6.3% per annum, before original issue discounts and
upfront fees.
At December 31, 2008 the Term Loan B Facility was fully drawn by Precision and consists of a term
loan B-1 facility denominated in U.S. dollars in the amount of US$325 million ($398 million) and a
term loan B-2 facility denominated in U.S. dollars in the amount of US$75 million ($91.8 million).
The Term Loan B Facility is repayable in quarterly installments in aggregate annual amounts equal
to 5% of the original principal amount with the balance payable on the final maturity date of
September 30, 2014. As of December 31, 2008, the Term Loan B Facility had an interest rate of
approximately 9.6% per annum, before original issue discounts and upfront fees.
The Revolving Credit Facility is available to Precision to finance working capital needs and for
general corporate purposes. Under the Revolving Credit Facility amounts can be drawn in U.S.
dollars and/or Canadian dollars and $108 million was drawn as at December 31, 2008. Up to US$200
million of the Revolving Credit Facility is available for letters of credit denominated in United
States and/or Canadian dollars. As of December 31, 2008, the Revolving Credit Facility had an
interest rate of approximately 6.5% per annum, before original issue discounts, upfront fees and
commitment fees.
(b) Unsecured facility:
In connection with the acquisition of Grey Wolf, Inc. (Grey Wolf) Precision established the
Unsecured Facility which provides senior unsecured financing of up to US$400 million. The facility
has been guaranteed by the Trust and each subsidiary of the Trust that has guaranteed the Secured
Facility. After the completion of the acquisition and the related acquisition financing
transactions, approximately US$137.5 million ($168.4 million) was outstanding. Up to an additional
approximately US$262.5 million is available under the Unsecured Facility to fund the repurchase, in
whole or in part, of outstanding (formerly Grey Wolf) unsecured convertible notes that may be
tendered pursuant to the change of control offer for repurchase in the first quarter of 2009 and
related fees and expenses. Loans under the Unsecured Facility currently bear interest at a fixed
rate per annum of 17% and will initially mature on December 23, 2009, and, to the extent unpaid on
that date, will be converted into term loans that will mature on December 23, 2016. Loans under the
Unsecured Facility are subject to mandatory prepayments from the net cash proceeds from the
issuance or sale of any equity securities by the Trust (subject to certain exceptions).
The Unsecured Facility contains a number of occurrence-based covenants that, among other things,
restrict, subject to certain exceptions, the Trusts, Precisions and their subsidiaries ability
to: make certain restricted payments (which include dividends, distributions (including by the
Trust to unitholders), redemptions and certain investments); incur additional indebtedness; sell
assets; enter into mergers, consolidations or amalgamations; and amend certain material agreements.
The terms of this facility limit, subject to certain exceptions, the Trusts ability to make
distributions in the following circumstances: where a default under the terms of this facility has
occurred; where the incurrence of at least US$1.00 of additional indebtedness would result in the
consolidated interest coverage ratio of consolidated cash flow to consolidated interest expense, as
defined in the agreement, being less than 2.5:1; for so long as the Trust is a mutual fund trust
for Canadian federal income tax purposes, where the consolidated leverage ratio of total
indebtedness to consolidated cash flow, as defined in the agreement, exceeds 3:1 or where the
amount of such distribution, when added to the amount of all distributions (subject to certain
exceptions) made after the closing date of the Grey Wolf acquisition exceeds certain prescribed
amounts specified in the agreement.
68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
After the initial maturity date of the Unsecured Facility each lender under the Unsecured Facility
may request Precision issue an exchange note bearing interest at a specified interest rate (to be
calculated on the date of issuance of such exchange note based on the greater of 16.66% and a
market-based interest rate cap) in replacement for the term loan (or a portion thereof) made under
the Unsecured Facility. In the event that Precision receives such a request, Precision shall, as
promptly as practicable after being requested to do so, among other things: (i) enter into an
exchange note indenture pursuant to which the exchange notes will be issued and governed; (ii)
enter into an exchange and registration rights agreement providing for, among other things,
registration rights in respect of the exchange notes in favour of the holders thereof; and (iii)
cause to be issued exchange notes in the same principal aggregate amount as the term loan being
exchanged.
In addition, after June 30, 2009 (or after April 1, 2009 in certain circumstances), the lenders
under the Unsecured Facility may require that debt securities be issued and sold to repay amounts
outstanding under the Unsecured Facility, subject to certain specified terms and conditions.
Precision has agreed to engage one or more investment banks to publicly sell or privately place
debt securities in such circumstances, the proceeds of which will be used to repay outstanding
loans under the Unsecured Facility. The Trust may also, at any time, issue equity or debt
securities and Precision may, at any time, issue debt securities to repay outstanding loans under
the Unsecured Facility.
On February 18, 2009 the Trust received gross proceeds of $217.3 million (US$172.5 million) from an
equity issue (Note 28). As a result of this issuance, the funds available under the Unsecured
Facility were reduced to US$235 million.
(c) Unsecured convertible notes:
The US$137.5 million ($168.4 million) principal amount of 3.75% Contingent Convertible Notes
(3.75% Notes) due May 2023 bear interest at 3.75% per annum. These notes are convertible into
Trust units, upon the occurrence of certain events, including a change of control, at a conversion
price of US$15.27 per Trust unit, which is equal to a conversion rate of 65.4879 Trust units per
US$1,000 principal amount of 3.75% Notes, subject to adjustment. The 3.75% Notes are general
unsecured senior obligations and are fully and unconditionally guaranteed, on a joint and several
basis, by all wholly-owned United States subsidiaries. The 3.75% Notes rank equally with the
Floating Rate Notes described below. During the first quarter of 2009, as a result of the Grey Wolf
acquisition (which constitutes a change of control under the terms of the indenture governing the
3.75% Notes), Precision is required to provide holders of the 3.75% Notes with an offer to purchase
all or a portion of their 3.75% Notes at 100% of the principal amount of the 3.75% Notes, plus
accrued but unpaid interest to the date of purchase, payable in cash.
The US$124.8 million ($152.8 million) principal amount of Contingent Convertible Floating Rate
Notes (Floating Rate Notes) due April 2024 bear interest at a per annum rate equal to 3-month
LIBOR, adjusted quarterly, minus a spread of 0.05% to a maximum limit rate of interest of 6%. The
Floating Rate Notes are convertible into Trust units, upon the occurrence of certain events,
including a change of control, at a conversion price of US$15.41 per Trust unit, which is equal to
a conversion rate of 64.8929 Trust units per US$1,000 principal amount of the Floating Rate Notes,
subject to adjustment. The Floating Rate Notes are general unsecured senior obligations and are
fully and unconditionally guaranteed, on a joint and several basis, by all wholly-owned United
States subsidiaries. The Floating Rate Notes rank equally with the 3.75% Notes. During the first
quarter of 2009, as a result of the Grey Wolf acquisition (which constitutes a change of control
under the terms of the indenture governing the Floating Rate Notes), Precision is required to
provide holders of the Floating Rate Notes with an offer to purchase all or a portion of their
Floating Rate Notes at 100% of the principal amount of the Floating Rate Notes, plus accrued but
unpaid interest to the date of purchase, payable in cash.
As at March 20, 2009 holders of 3.75% Notes and Floating Rate Notes representing US$137.5 million
and US$124.8 million, respectively, had notified Precision that they will be accepting the purchase
offer described above and Precision will be required to purchase these Notes at the principal
balance plus accrued interest of US$2.3 million by March 24, 2009.
PRECISION DRILLING TRUST
69
(d) Unsecured revolving credit facility:
At December 31, 2007 Precision, a subsidiary of the Trust, had available a three-year revolving
unsecured facility of $700.0 million (or U.S. equivalent) with a syndicate led by a Canadian
chartered bank, which was guaranteed by the Trust. Advances were available to Precision under this
facility either at the banks prime lending rate, U.S. base rate, U.S. LIBOR plus applicable margin
or Bankers Acceptance plus applicable margin or in combination. The applicable margin was
dependent on the Trusts consolidated debt to cash flow ratio and the percentage of the total
facility outstanding, which at December 31, 2007 was 75 basis points. The facility required that
the Trust maintain a ratio of total liabilities to total equity of less than 1:1, a trailing 12
month ratio of consolidated debt to cash flow of less than 2.75:1 and total distributions to
unitholders of less than 100% of consolidated cash flow as defined in the facility agreement. This
facility was repaid and extinguished in the fourth quarter of 2008 as a requirement of the Senior
Secured and Senior Unsecured financing for the acquisition of Grey Wolf.
Mandatory principal repayments after 2008 giving effect to the February 4, 2009 re-allocation of
Term Loan A and Term Loan B facilities as described above are as follows:
|
|
|
|
|
|
2009
|
|
$
|
48,953
|
|
2010
|
|
|
69,495
|
|
2011
|
|
|
69,495
|
|
2012
|
|
|
90,037
|
|
2013
|
|
|
382,896
|
|
Thereafter
|
|
|
915,726
|
|
|
NOTE 11. INCOME TAXES
The provision for income taxes differs from that which would be expected by applying Canadian
statutory income tax rates as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes
|
|
$
|
340,574
|
|
|
|
$
|
349,033
|
|
|
$
|
587,658
|
|
Federal and provincial statutory rates
|
|
|
30%
|
|
|
|
|
33%
|
|
|
|
33%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax at statutory rates
|
|
$
|
102,172
|
|
|
|
$
|
115,181
|
|
|
$
|
193,927
|
|
Adjusted for the effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible expenses
|
|
|
372
|
|
|
|
|
1,080
|
|
|
|
297
|
|
Income to be distributed to Unitholders,
not subject to tax in the Trust
|
|
|
(67,463
|
)
|
|
|
|
(91,013
|
)
|
|
|
(155,354
|
)
|
Other
|
|
|
2,763
|
|
|
|
|
3,426
|
|
|
|
(2,896
|
)
|
|
|
|
|
|
|
Income tax expense before tax rate reductions
|
|
|
37,844
|
|
|
|
|
28,674
|
|
|
|
35,974
|
|
Reduction of future income tax balances due to
enacted tax rate reductions
|
|
|
|
|
|
|
|
(22,461
|
)
|
|
|
(20,828
|
)
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
37,844
|
|
|
|
$
|
6,213
|
|
|
$
|
15,146
|
|
|
|
|
|
Effective income tax rate before enacted tax rate reductions
|
|
|
11%
|
|
|
|
|
8%
|
|
|
|
6%
|
|
|
|
|
|
In 2007 the Canadian federal government enacted various reductions to corporate income tax rates,
that when fully implemented over the next five years will decrease the federal corporate income tax
rate to 15% in 2012. These reductions were in addition to those introduced in 2006 that were to
reduce the federal corporate income tax rates from 21% to 18.5% by 2011. The federal corporate
capital tax was eliminated effective January 1, 2006 and the federal corporate surtax was
eliminated in 2008. In 2006 the Province of Alberta reduced the corporate income tax rate by 1.5%
effective April 1, 2006. These and other provincial corporate income tax rate reductions have been
reflected as a reduction of future tax expense.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
The net future tax liability is comprised of the tax effect of the following temporary differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
Future income tax liability:
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment and intangibles
|
|
$
|
783,945
|
|
|
|
$
|
209,772
|
|
Partnership deferrals
|
|
|
4,716
|
|
|
|
|
|
|
Debt issue costs
|
|
|
3,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
792,013
|
|
|
|
|
209,772
|
|
|
|
|
|
|
|
|
|
|
|
Future income tax assets:
|
|
|
|
|
|
|
|
|
|
Losses (the non capital losses expire from time to time up to 2028)
|
|
|
7,416
|
|
|
|
|
9,128
|
|
Long-term incentive plan
|
|
|
5,664
|
|
|
|
|
5,743
|
|
Other
|
|
|
8,310
|
|
|
|
|
13,268
|
|
|
|
|
|
|
|
Net future income tax liability
|
|
$
|
770,623
|
|
|
|
$
|
181,633
|
|
|
|
|
|
Included in the net future tax liability is $560.9 million of tax effected temporary differences
related to the Trusts United States operations.
NOTE 12. UNITHOLDERS CAPITAL
(a) Authorized
unlimited number of voting Trust units
unlimited number of voting exchangeable LP units
(b) Unitholders capital
|
|
|
|
|
|
|
|
|
Trust units
|
|
Number
|
|
|
Amount
|
|
|
|
Balance, December 31, 2005
|
|
|
124,352,921
|
|
|
$
|
1,365,755
|
|
Issued pursuant to distribution reinvestment plan
(Note 8)
|
|
|
296,621
|
|
|
|
9,896
|
|
Issued on retraction of exchangeable LP units
|
|
|
886,787
|
|
|
|
9,697
|
|
Issued and consolidated pursuant to special distribution
(Note 8)
|
|
|
|
|
|
|
24,480
|
|
|
|
|
Balance, December 31, 2006
|
|
|
125,536,329
|
|
|
|
1,409,828
|
|
Issued on retraction of exchangeable LP units
|
|
|
51,590
|
|
|
|
574
|
|
Issued and consolidated pursuant to special distribution
(Note 8)
|
|
|
|
|
|
|
30,141
|
|
|
|
|
Balance, December 31, 2007
|
|
|
125,587,919
|
|
|
|
1,440,543
|
|
Issued on the acquisition of Grey Wolf
|
|
|
34,435,724
|
|
|
|
889,085
|
|
Issued on retraction of exchangeable LP units
|
|
|
18,422
|
|
|
|
209
|
|
Issued and consolidated pursuant to special distribution
(Note 8)
|
|
|
|
|
|
|
24,006
|
|
|
|
|
Balance, December 31, 2008
|
|
|
160,042,065
|
|
|
$
|
2,353,843
|
|
|
Trust units are redeemable at the option of the holder, at which time all rights with respect to
such units are cancelled. Upon redemption, the unitholder is entitled to receive a price per unit
equal to the lesser of 90% of the average market price of the Trusts units for the 10 trading days
just prior to the date of redemption, and the closing market price of the Trusts units on the date
of redemption. The maximum value of units that can be redeemed for cash is $50,000 per month.
Redemptions, if any, in excess of this amount are satisfied by issuing a note from Precision to the
unitholder, payable over 15 years and bearing interest at a market rate set by the Board of
Directors.
|
|
|
|
|
|
|
|
|
Exchangeable LP units
|
|
Number
|
|
|
Amount
|
|
|
|
Balance, December 31, 2005
|
|
|
1,108,382
|
|
|
$
|
12,120
|
|
Redeemed on retraction of exchangeable LP units
|
|
|
(886,787
|
)
|
|
|
(9,697
|
)
|
Issued and consolidated pursuant to special distribution
(Note 8)
|
|
|
|
|
|
|
43
|
|
|
|
|
Balance, December 31, 2006
|
|
|
221,595
|
|
|
|
2,466
|
|
Redeemed on retraction of exchangeable LP units
|
|
|
(51,590
|
)
|
|
|
(574
|
)
|
Issued and consolidated pursuant to special distribution
(Note 8)
|
|
|
|
|
|
|
41
|
|
|
|
|
Balance, December 31, 2007
|
|
|
170,005
|
|
|
|
1,933
|
|
Redeemed on retraction of exchangeable LP units
|
|
|
(18,422
|
)
|
|
|
(209
|
)
|
Issued and consolidated pursuant to special distribution
(Note 8)
|
|
|
|
|
|
|
23
|
|
|
|
|
Balance, December 31, 2008
|
|
|
151,583
|
|
|
$
|
1,747
|
|
|
PRECISION DRILLING TRUST
71
Exchangeable LP units have voting rights and have been exchangeable since May 7, 2006, for Trust
units on a one-for-one basis at the option of the holder. Holders are entitled to monthly cash
distributions equal to those paid to holders of Trust units.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
Summary as at December 31,
|
|
Number
|
|
|
Amount
|
|
|
|
Number
|
|
|
Amount
|
|
|
|
|
|
Trust units
|
|
|
160,042,065
|
|
|
$
|
2,353,843
|
|
|
|
|
125,587,919
|
|
|
$
|
1,440,543
|
|
Exchangeable LP units
|
|
|
151,583
|
|
|
|
1,747
|
|
|
|
|
170,005
|
|
|
|
1,933
|
|
|
|
|
|
|
|
Unitholders capital
|
|
|
160,193,648
|
|
|
$
|
2,355,590
|
|
|
|
|
125,757,924
|
|
|
$
|
1,442,476
|
|
|
|
|
|
(c) Contributed surplus
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
|
|
Unit based compensation expense
(Note 4(c))
|
|
|
307
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
307
|
|
Unit based compensation expense
(Note 4(c))
|
|
|
691
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
998
|
|
|
NOTE 13. ACCUMULATED OTHER COMPREHENSIVE INCOME
|
|
|
|
|
|
Balance, December 31, 2006 and 2007
|
|
$
|
|
|
Foreign currency translation adjustment upon change in translation methods
|
|
|
4,137
|
|
Unrealized foreign currency translation gains
|
|
|
11,222
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
15,359
|
|
|
NOTE 14. UNIT BASED COMPENSATION PLANS
(a) Officers and employees
Eligible participants of Precisions Performance Savings Plan may elect to receive a portion of
their annual performance bonus in the form of deferred trust units (DTUs). These notional units
are redeemable in cash and are adjusted for each cash distribution to unitholders by issuing
additional DTUs based on the weighted average trading price on the Toronto Stock Exchange for the
five days immediately following the ex-distribution date. All DTUs must be redeemed within 60 days
of ceasing to be an employee of Precision or by the end of the second full calendar year after the
receipt of the DTUs. A summary of this unit based incentive plan is presented below:
|
|
|
|
|
Deferred Trust Units
|
|
Outstanding
|
|
|
Balance, December 31, 2006
|
|
|
|
|
Issued, including as a result of cash distributions
|
|
|
87,340
|
|
Redeemed on employee resignations and withdrawals
|
|
|
(10,611
|
)
|
|
|
|
|
Balance, December 31, 2007
|
|
|
76,729
|
|
Issued, including as a result of cash distributions
|
|
|
31,006
|
|
Redeemed on employee resignations and withdrawals
|
|
|
(24,300
|
)
|
|
|
|
|
Balance, December 31, 2008
|
|
|
83,435
|
|
|
As at December 31, 2008 $0.8 million (2007 $1.2 million) is included in accounts payable and
accrued liabilities for outstanding DTUs. Included in net earnings for the year ended December 31,
2008 is a recovery of $0.4 million (2007 -$0.8 million).
In conjunction with the acquisition of Grey Wolf (Note 19) the Trust instituted a Unit Appreciation
Rights (UAR) plan. Under the plan eligible participants were granted UARs that entitle the
rights holder to receive cash payments calculated as the excess of the market price over the
exercise price per unit on the exercise date. The exercise price of the UAR is adjusted by the
aggregate unit distributions paid or payable on Trust units from the grant date to the exercise
date. The UARs vest over a period of 5 years and expire 10 years from the date of grant.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of
|
|
|
Average
|
|
|
|
|
Unit Appreciation Rights
|
|
|
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
Exercise Price
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
925,746
|
|
|
|
11.34 21.94
|
|
|
|
18.20
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
|
|
|
|
925,746
|
|
|
$
|
11.34 21.94
|
|
|
$
|
18.20
|
|
|
|
469,267
|
|
|
|
|
|
Total UARs Outstanding
|
|
|
|
Exercisable UARs
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
|
Average
|
|
Range of Exercise Prices:
|
|
Number
|
|
|
Exercise Price
|
|
|
Life (Years)
|
|
|
Number
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$11.34 14.99
|
|
|
81,641
|
|
|
$
|
11.34
|
|
|
|
5.23
|
|
|
|
53,668
|
|
|
$
|
11.34
|
|
15.00 18.99
|
|
|
492,443
|
|
|
|
18.03
|
|
|
|
8.33
|
|
|
|
199,279
|
|
|
|
17.46
|
|
19.00 21.94
|
|
|
351,662
|
|
|
|
20.04
|
|
|
|
7.75
|
|
|
|
216,320
|
|
|
|
20.26
|
|
|
|
|
$11.34 21.94
|
|
|
925,746
|
|
|
$
|
18.20
|
|
|
|
7.84
|
|
|
|
469,267
|
|
|
$
|
18.05
|
|
|
No amounts relating to the UAR plan have been recorded as compensation expense or accrued liability
as at December 31, 2008, as the intrinsic value of the awards was nil.
(b) Executive
In 2007 Precision instituted a Deferred Signing Bonus Unit Plan for its Chief Executive Officer.
Under the plan 178,336 notional DTUs were granted on September 1, 2007. The units are redeemable
one-third annually beginning September 1, 2008 and are settled for cash based on the Trust unit
trading price on redemption. The number of notional DTUs is adjusted for each cash distribution to
unitholders by issuing additional notional DTUs based on the weighted average trading price on the
Toronto Stock Exchange for the five days immediately following the ex-distribution date. As at
December 31, 2008 $0.7 million (2007 $0.9 million) is included in accounts payable and accrued
liabilities and $0.7 million (2007 $1.9 million) in long-term incentive plan payable for the
133,780 (2007 182,372) outstanding DTUs. Included in net earnings for the year ended December 31,
2008 is an expense of $21,000 (2007 $2.8 million).
(c) Non-management directors
The Trust has a deferred trust unit plan for non-management directors. Under the plan fully vested
deferred trust units are granted quarterly based upon an election by the non-management director to
receive all or a portion of their compensation in deferred trust units. Cash distributions to
unitholders declared by the Trust prior to redemption are reinvested into additional deferred trust
units on the date of the cash distribution. These deferred trust units are redeemable into an equal
number of Trust units any time after the directors retirement. A summary of this unit based
incentive plan is presented below:
|
|
|
|
Deferred Trust Units
|
|
Outstanding
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
|
Granted
|
|
|
17,855
|
Issued as a result of cash distributions
|
|
|
425
|
Balance, December 31, 2007
|
|
|
18,280
|
Granted
|
|
|
33,058
|
Issued as a result of cash distributions
|
|
|
3,205
|
Balance, December 31, 2008
|
|
|
54,543
|
|
For the year ended December 31, 2008 the Trust expensed $691,000 (2007 $307,000) as unit based
compensation, with a corresponding increase in contributed surplus.
PRECISION
DRILLING TRUST
73
NOTE 15. EMPLOYEE BENEFIT PLANS
The Trust has a defined contribution pension plan covering a significant number of its employees.
Under this plan, the Trust matches individual contributions up to 5% of the employees
compensation. Total expense under the defined contribution plan in 2008 was $5.7 million (2007
$5.3 million; 2006 $5.5 million).
NOTE 16. COMMITMENTS
The Trust has commitments for operating lease agreements, primarily for vehicles and office space,
in the aggregate amount of $35.0 million. Additionally, the Trust has commitments with a drilling
rig manufacturer for the construction, or partial construction, of 11 drilling rigs in the amount
of $125.3 million (US$102.3 million). Expected payments over the next five years are as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
77,039
|
|
2010
|
|
|
68,557
|
|
2011
|
|
|
6,763
|
|
2012
|
|
|
1,608
|
|
2013
|
|
|
1,203
|
|
|
Rent expense included in the statements of earnings is as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
3,636
|
|
2007
|
|
|
3,838
|
|
2006
|
|
|
4,189
|
|
|
NOTE 17. PER UNIT AMOUNTS
The following tables reconcile the net earnings and weighted average units outstanding used in computing basic and
diluted earnings per unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Stated in thousands)
|
|
2008
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings basic
|
|
$
|
302,730
|
|
|
|
$
|
345,776
|
|
|
$
|
579,589
|
|
Impact of assumed conversion of convertible notes, net of tax
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings diluted
|
|
$
|
302,894
|
|
|
|
$
|
345,776
|
|
|
$
|
579,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Stated in thousands)
|
|
2008
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units outstanding basic
|
|
|
126,507
|
|
|
|
|
125,758
|
|
|
|
125,545
|
|
Effect of stock options and other equity compensation plans
|
|
|
33
|
|
|
|
|
2
|
|
|
|
|
|
Effect of convertible notes
|
|
|
372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units outstanding diluted
|
|
|
126,912
|
|
|
|
|
125,760
|
|
|
|
125,545
|
|
|
|
|
|
NOTE 18. SIGNIFICANT CUSTOMERS
During the years ended December 31, 2008 and 2007 one customer (2006 no customers) accounted for
approximately 13% (2007 10%) of the Trusts revenue and year end trade accounts receivable
balance.
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. BUSINESS ACQUISITIONS
Acquisitions have been accounted for by the purchase method with results of operations acquired
included in the consolidated financial statements from the closing date of acquisition.
On December 23, 2008 Precision acquired all the issued and outstanding shares of Grey Wolf, Inc.
Grey Wolf provides land-based daywork and turnkey contract drilling services to the oil and gas
industry in the United States and Mexico. The acquisition facilitates and accelerates Precisions
organic expansion into the United States market and provides a foundation for future international
expansion. Intangible assets acquired relate to customer relationships. The Grey Wolf operations
have been included in the Contract Drilling Services segment.
On July 31, 2008, Precision acquired six service rigs and related equipment from Ricks Well
Servicing Ltd. (RWS) a privately owned well servicing company based in Virden, Manitoba. The
acquisition represented all of the operating assets of RWS and Precision will maintain and operate
out of the RWS facility. Intangible assets acquired relate to customer lists. The acquisition
strengthens Precisions product offering in southeastern Saskatchewan and southwestern Manitoba.
The operations of RWS have been included in the Completion and Production Services segment.
The details of these acquisitions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grey Wolf
|
|
|
RWS
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets at assigned values:
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
470,586
|
(1)
|
|
$
|
19
|
|
|
$
|
470,605
|
|
Property, plant and equipment
|
|
|
1,869,875
|
|
|
|
10,542
|
|
|
|
1,880,417
|
|
Intangible assets
|
|
|
4,428
|
|
|
|
1,128
|
|
|
|
5,556
|
|
Goodwill (no tax basis)
|
|
|
553,335
|
|
|
|
3,830
|
|
|
|
557,165
|
|
Long-term liabilities
|
|
|
(23,308
|
)
|
|
|
|
|
|
|
(23,308
|
)
|
Long-term debt
|
|
|
(319,115
|
)
|
|
|
|
|
|
|
(319,115
|
)
|
Future income taxes
|
|
|
(553,682
|
)
|
|
|
|
|
|
|
(553,682
|
)
|
|
|
|
|
|
$
|
2,002,119
|
|
|
$
|
15,519
|
|
|
$
|
2,017,638
|
|
|
Consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,113,034
|
|
|
$
|
15,519
|
|
|
$
|
1,128,553
|
|
Trust units
|
|
|
889,085
|
|
|
|
|
|
|
|
889,085
|
|
|
|
|
|
|
$
|
2,002,119
|
|
|
$
|
15,519
|
|
|
$
|
2,017,638
|
|
|
|
|
|
(1)
|
|
Working capital includes cash of $360,161
|
Due to the proximity of the Grey Wolf acquisition to the year end, the purchase price allocation is
preliminary and adjustments to the allocation may occur as a result of obtaining additional
information regarding asset valuations or transaction costs.
On August 17, 2006, the Trust acquired all of the shares of Terra Water Group Ltd. (Terra), a
privately owned provider of wastewater treatment units for the traditional drilling rig camp market
in western Canada. The acquisition provides complementary services to Precisions existing camp and
wellsite unit rental businesses. The Terra operations are included in the Completion and Production
Services segment. The details of the acquisition are as follows:
|
|
|
|
|
Net assets acquired at assigned values:
|
|
|
|
|
Working capital
(1)
|
|
$
|
207
|
|
Property, plant and equipment
|
|
|
3,168
|
|
Goodwill (no tax basis)
|
|
|
13,922
|
|
Long-term debt
|
|
|
(614
|
)
|
Future income taxes
|
|
|
(212
|
)
|
|
|
|
|
|
|
$
|
16,471
|
|
|
Consideration:
|
|
|
|
|
Cash
|
|
$
|
16,471
|
|
|
|
|
|
(1) Working capital includes cash of $43
|
PRECISION
DRILLING TRUST
75
NOTE 20. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These financial statements have been prepared in accordance with Canadian GAAP which conform with
United States generally accepted accounting principles (U.S. GAAP) in all material respects, except
as follows:
(a) Income taxes
On December 31, 2008 Precision had $56.6 million (2007 $44.4 million) of unrecognized tax
benefits that, if recognized, would have a favourable impact on Precisions effective income tax
rate in future periods. Precision classifies interest accrued on unrecognized tax benefits and
income tax penalties as income tax expense. Included in the unrecognized tax benefit as at December
31, 2008 is interest and penalties of $9.6 million (2007 $7.0 million). Under FIN 48,
unrecognized tax benefits are classified as current or long-term liabilities as opposed to future
income tax liabilities.
Reconciliation of unrecognized tax benefits
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits, beginning of year
|
|
$
|
44,407
|
|
|
|
$
|
40,047
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
Prior years tax positions
|
|
|
2,822
|
|
|
|
|
5,770
|
|
Assumed on acquisition of Grey Wolf, Inc.
|
|
|
9,696
|
|
|
|
|
|
|
Reductions:
|
|
|
|
|
|
|
|
|
|
Prior years tax positions
|
|
|
(362
|
)
|
|
|
|
(1,410
|
)
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits, end of year
|
|
$
|
56,563
|
|
|
|
$
|
44,407
|
|
|
It is anticipated that approximately $9.0 million (2007 $8.4 million) of an unrecognized tax
position that relates to past reorganization activities will be realized during the next 12 months
and has been classified as a current liability. Subject to the results of audit examinations by
taxing authorities and/or legislative changes by taxing jurisdictions, Precision does not
anticipate further adjustments of unrecognized tax positions during the next 12 months that would
have a material impact on the financial statements of Precision.
There is no difference between the amounts recorded for tax exposures under Canadian and U.S. GAAP.
(b) Equity settled unit based compensation
As described in Note 14(c), the Trust has an equity settled unit based compensation plan for
non-management directors. Trust units issued upon settlement of this plan are redeemable (see Note
20(d)) therefore under U.S. GAAP are accounted for as a liability based award. The liability is
re-measured, until settlement, at the end of each reporting period with the resultant change being
charged or credited to the statement of earnings as compensation expense.
(c) Cash settled unit based compensation
As described in Note 14(a), the Trust has a cash settled unit appreciation rights plan. Under
Canadian GAAP this plan is treated as a liability based compensation plan and recorded at its
intrinsic value. Under U.S. GAAP rights issued under this plan would be measured at their fair
value, and re-measured at fair value at each reporting date with the change in the obligation
charged as unit based compensation. At December 31, 2008 the fair value and intrinsic value of the
rights were insignificant.
(d) Redemption of Trust units
Under the Declaration of Trust, Trust units are redeemable at any time on demand by the unitholder
for cash and notes (see Note 12). Under U.S. GAAP, the amount included on the consolidated balance
sheet for Unitholders equity would be moved to temporary equity and recorded at an amount equal to
the redemption value of the Trust units as at the balance sheet date. The same accounting treatment
would be applicable to the exchangeable LP units. The redemption value of the Trust units and the
exchangeable LP units is determined with respect to the trading value of the Trust units as at each
balance sheet date, and the amount of the redemption value is classified as temporary equity.
Changes (increases and decreases) in the redemption value during a period results in a change to
temporary equity and is charged to retained earnings.
76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(e) Debt issuance costs
Under U.S. GAAP debt issuance costs are recorded as a deferred charge and amortized over the term
of the debt instrument. Canadian GAAP requires that such costs be presented as a reduction of the
related debt, resulting in a $159.3 million reclassification from long-term debt to other
noncurrent assets at December 31, 2008.
(f) Goodwill
In 2000 the Trust adopted the liability method of accounting for future income taxes without
restatement of prior years. As a result, the Trust recorded an adjustment to retained earnings and
future tax liability in the amount of $70.0 million at January 1, 2000. U.S. GAAP requires the use
of the liability method prescribed in the Statement of Financial Accounting Standards (SFAS) No.
109, which substantially conforms to the Canadian GAAP accounting standard adopted in 2000.
Application of U.S. GAAP in years prior to 2000 would have resulted in $70.0 million of additional
goodwill being recognized at January 1, 2000 as opposed to an implementation adjustment to retained
earnings allowed under Canadian GAAP. Prior to 2002 goodwill was amortized under Canadian and U.S.
GAAP. As a result, $7.0 million of amortization was recorded on the additional goodwill in 2000 and
2001 under U.S. GAAP. In 2007 and 2008 the U.S. GAAP financial statements reflect an increase in
goodwill of $63.0 million and a corresponding increase in retained earnings.
(g) Business acquisitions
Under SFAS 141, Business Combinations, supplemental pro forma disclosure is required for
significant business combinations occurring during the year. On December 23, 2008 Precision
completed the business acquisition of Grey Wolf, Inc. with results of operations acquired included
in the consolidated financial statements from this date.
The following unaudited pro forma information provides an indication of what the Trusts results of
operations might have been under U.S. GAAP, had the Grey Wolf acquisition taken place on January 1,
2008:
|
|
|
|
|
|
|
|
|
|
Pro Forma (unaudited)
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,038,828
|
|
|
|
$
|
1,983,046
|
|
Net earnings
|
|
$
|
289,892
|
|
|
|
$
|
437,239
|
|
Earnings per unit:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.81
|
|
|
|
$
|
2.73
|
|
Diluted
|
|
$
|
1.81
|
|
|
|
$
|
2.73
|
|
|
|
|
|
(h) New accounting policies adopted
On January 1, 2008, Precision adopted SFAS 157,
Fair Value Measurements
with the deferral for
certain non-financial assets and liabilities. SFAS 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and expands disclosures about
fair value measurements. On February 12, 2008, SFAS 157-2 was issued which allows for a one year
deferral for the implementation of SFAS 157 for non-financial assets and liabilities that are
recognized or disclosed at fair value on a nonrecurring basis (less frequent than annually).
Beginning January 1, 2009, Precision will adopt the provisions for non-financial assets and
liabilities that are not required or permitted to be measured at fair value on a recurring basis.
SFAS 157 (as amended), defines fair value, establishes a framework for measuring fair value,
outlines a fair value hierarchy based on inputs used to measure fair value and enhances disclosure
requirements for fair value measurements. Fair value is defined as the price at which an asset
could be exchanged in a current transaction between knowledgeable, willing parties. A liabilitys
fair value is defined as the amount that would be paid to transfer the liability to a new obligor,
not the amount that would be paid to settle the liability with the creditor. Where available, fair
value is based on observable market prices or parameters or derived from such prices or parameters.
Where observable prices or inputs are not available, use of unobservable prices or inputs are used
to estimate the current fair value, often using an internal valuation model. These valuation
techniques involve some level of management estimation and judgment, the degree of which is
dependent on the item being valued.
PRECISION DRILLING TRUST 77
Beginning January 1, 2008, assets and liabilities recorded or disclosed at fair value in the
consolidated balance sheet are categorized based upon the level of judgment associated with the
inputs used to measure their fair value. Hierarchical levels defined by SFAS 157 and directly
related to the amount of subjectivity associated with the inputs to fair valuation of these assets
and liabilities are as follows:
Level
I Inputs are unadjusted, quoted prices in active markets for identical assets or
liabilities at the measurement date;
Level
II Inputs (other than quoted prices included in Level I) are either directly or
indirectly observable for the asset or liability through correlation with market data at the
measurement date and for the duration of the instruments anticipated life; and
Level
III Inputs reflect managements best estimate of what market participants would use in
pricing the asset or liability at the measurement date. Consideration is given to the risk
inherent in the valuation technique and the risk inherent in the inputs to the model.
The estimated fair value of the fixed rate unsecured credit facility and the unsecured convertible
notes as disclosed in Note 22 is based on level II inputs. The fair value is estimated considering
the risk free interest rates on government debt instruments of similar maturities, adjusted for
estimated credit risk, industry risk and market risk premiums and considering the debt holders
ability to demand redemption of the debt.
On January 1, 2008, Precision adopted SFAS 159,
The Fair Value Option for Financial Assets and
Liabilities Including an amendment of FASB Statement No. 115.
The statement provides entities
with an irrevocable option to report selected financial assets and liabilities at fair value. The
objective is to improve financial reporting by reducing both the complexity in accounting and the
volatility in earnings caused by differences in existing accounting rules. The adoption of this
standard had no effect on the consolidated financial statements.
(i) Recently issued accounting pronouncements
In December 2007, FASB issued SFAS 160,
Non-controlling Interest in Consolidated Financial
Statements.
The statement clarifies the classification of non-controlling interests in the
financial statements and the accounting for and reporting of transactions between the reporting
entity and the holders of the non-controlling interests. The statement is effective for fiscal
years beginning after December 15, 2008, and will be effective for the Trusts December 31, 2009
year end. At this time management does not expect this statement to have a material impact on the
consolidated financial statements.
In December 2007, FASB issued SFAS 141(R),
Business Combinations.
The statement requires most
identifiable assets, liabilities, non-controlling interests and goodwill acquired in a business
combination be recorded at fair value. In addition the new standard requires all business
combinations be accounted for by applying the acquisition method and that all transaction costs be
expensed as incurred. The statement is applicable for all business combinations occurring in fiscal
years beginning after December 15, 2008, and will be effective for the Trusts December 31, 2009
year end.
In March 2008, FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities.
This standard requires enhanced disclosures about an entitys derivative and hedging
activities. Entities are required to provide enhanced disclosures about (i) how and why an entity
uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted
for, and (iii) how derivative instruments and related hedged items affect an entitys financial
position, financial performance, and cash flows. The standard increases convergence with IFRS, as
it relates to disclosures of derivative instruments. The Trust is currently reviewing the guidance,
which is effective for fiscal years beginning after November 15, 2008, to determine the potential
impact, if any, on its consolidated financial statements.
78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The application of U.S. GAAP accounting principles would have the following impact on the
consolidated financial statements:
Consolidated Statements of Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2008
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations under Canadian GAAP
|
|
$
|
302,730
|
|
|
|
$
|
342,820
|
|
|
$
|
572,512
|
|
Adjustments under U.S. GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity-based compensation expense
|
|
|
183
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations under U.S. GAAP
|
|
|
302,913
|
|
|
|
|
342,855
|
|
|
|
572,512
|
|
Earnings from discontinued operations under Canadian and
U.S. GAAP
|
|
|
|
|
|
|
|
2,956
|
|
|
|
7,077
|
|
|
|
|
|
|
|
Net earnings and comprehensive income under U.S. GAAP
|
|
$
|
302,913
|
|
|
|
$
|
345,811
|
|
|
$
|
579,589
|
|
|
|
|
|
Earnings from continuing operations per unit under U.S. GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.39
|
|
|
|
$
|
2.73
|
|
|
$
|
4.56
|
|
Diluted
|
|
$
|
2.39
|
|
|
|
$
|
2.73
|
|
|
$
|
4.56
|
|
Earnings per unit under U.S. GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.39
|
|
|
|
$
|
2.75
|
|
|
$
|
4.62
|
|
Diluted
|
|
$
|
2.39
|
|
|
|
$
|
2.75
|
|
|
$
|
4.62
|
|
|
|
|
|
|
Consolidated Statements of Retained Earnings (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2008
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings (deficit) under U.S. GAAP, beginning
of year
|
|
$
|
(350,898
|
)
|
|
|
$
|
(1,873,490
|
)
|
|
$
|
(3,167,045
|
)
|
Net earnings under U.S. GAAP
|
|
|
302,913
|
|
|
|
|
345,811
|
|
|
|
579,589
|
|
Distributions declared
|
|
|
(224,688
|
)
|
|
|
|
(276,667
|
)
|
|
|
(471,524
|
)
|
Change in redemption value of temporary equity
|
|
|
1,333,475
|
|
|
|
|
1,453,448
|
|
|
|
1,185,490
|
|
|
|
|
|
|
|
Retained earnings (deficit) under U.S. GAAP, end of year
|
|
$
|
1,060,802
|
|
|
|
$
|
(350,898
|
)
|
|
$
|
(1,873,490
|
)
|
|
|
|
|
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
As at December 31,
|
|
As reported
|
|
|
U.S. GAAP
|
|
|
|
As reported
|
|
|
U.S. GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
685,229
|
|
|
$
|
685,229
|
|
|
|
$
|
271,823
|
|
|
$
|
271,823
|
|
Income taxes recoverable
|
|
|
58,055
|
|
|
|
58,055
|
|
|
|
|
|
|
|
|
|
|
Other long-term assets
|
|
|
|
|
|
|
159,300
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
3,243,213
|
|
|
|
3,243,213
|
|
|
|
|
1,210,587
|
|
|
|
1,210,587
|
|
Intangibles
|
|
|
5,676
|
|
|
|
5,676
|
|
|
|
|
318
|
|
|
|
318
|
|
Goodwill
|
|
|
841,529
|
|
|
|
904,558
|
|
|
|
|
280,749
|
|
|
|
343,778
|
|
|
|
|
|
|
|
|
|
$
|
4,833,702
|
|
|
$
|
5,056,031
|
|
|
|
$
|
1,763,477
|
|
|
$
|
1,826,506
|
|
|
|
|
|
Current liabilities
|
|
$
|
339,900
|
|
|
$
|
349,780
|
|
|
|
$
|
131,449
|
|
|
$
|
140,117
|
|
Long-term liabilities
|
|
|
30,951
|
|
|
|
30,951
|
|
|
|
|
13,896
|
|
|
|
13,896
|
|
Long-term debt
|
|
|
1,368,349
|
|
|
|
1,527,649
|
|
|
|
|
119,826
|
|
|
|
119,826
|
|
Future income taxes
|
|
|
770,623
|
|
|
|
713,918
|
|
|
|
|
181,633
|
|
|
|
137,226
|
|
Other long-term liabilities
|
|
|
|
|
|
|
47,605
|
|
|
|
|
|
|
|
|
36,011
|
|
Temporary equity
|
|
|
|
|
|
|
1,309,967
|
|
|
|
|
|
|
|
|
1,730,328
|
|
Unitholders capital
|
|
|
2,355,590
|
|
|
|
|
|
|
|
|
1,442,476
|
|
|
|
|
|
Contributed surplus
|
|
|
998
|
|
|
|
|
|
|
|
|
307
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
15,359
|
|
|
|
15,359
|
|
|
|
|
|
|
|
|
|
|
Retained earnings (deficit)
|
|
|
(48,068
|
)
|
|
|
1,060,802
|
|
|
|
|
(126,110
|
)
|
|
|
(350,898
|
)
|
|
|
|
|
|
|
|
|
$
|
4,833,702
|
|
|
$
|
5,056,031
|
|
|
|
$
|
1,763,477
|
|
|
$
|
1,826,506
|
|
|
|
|
|
PRECISION DRILLING TRUST 79
NOTE 21. SEGMENTED INFORMATION
The Trust operates primarily in Canada and the United States, in two industry segments; Contract
Drilling Services and Completion and Production Services. Contract Drilling Services includes
drilling rigs, procurement and distribution of oilfield supplies, camp and catering services, and
manufacture, sale and repair of drilling equipment. Completion and Production Services includes
service rigs, snubbing units, wastewater treatment units, and oilfield equipment rental.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
Completion and
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling
|
|
|
Production
|
|
|
Corporate
|
|
|
Inter-segment
|
|
|
|
|
2008
|
|
Services
|
|
|
Services
|
|
|
and Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
809,317
|
|
|
$
|
308,624
|
|
|
$
|
|
|
|
$
|
(16,050
|
)
|
|
$
|
1,101,891
|
|
Segment profit (loss)
(1)
|
|
|
310,240
|
|
|
|
86,104
|
|
|
|
(41,596
|
)
|
|
|
|
|
|
|
354,748
|
|
Depreciation and amortization
|
|
|
57,076
|
|
|
|
22,966
|
|
|
|
3,787
|
|
|
|
|
|
|
|
83,829
|
|
Total assets
|
|
|
4,289,517
|
|
|
|
448,697
|
|
|
|
95,488
|
|
|
|
|
|
|
|
4,833,702
|
|
Goodwill
|
|
|
729,390
|
|
|
|
112,139
|
|
|
|
|
|
|
|
|
|
|
|
841,529
|
|
Capital expenditures*
|
|
|
202,863
|
|
|
|
23,713
|
|
|
|
3,003
|
|
|
|
|
|
|
|
229,579
|
|
|
|
|
|
*
|
|
Excludes business acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
Completion and
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling
|
|
|
Production
|
|
|
Corporate
|
|
|
Inter-segment
|
|
|
|
|
2007
|
|
Services
|
|
|
Services
|
|
|
and Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
694,340
|
|
|
$
|
327,471
|
|
|
$
|
|
|
|
$
|
(12,610
|
)
|
|
$
|
1,009,201
|
|
Segment profit (loss)
(1)
|
|
|
284,754
|
|
|
|
100,596
|
|
|
|
(28,999
|
)
|
|
|
|
|
|
|
356,351
|
|
Depreciation and amortization
|
|
|
43,120
|
|
|
|
31,421
|
|
|
|
3,785
|
|
|
|
|
|
|
|
78,326
|
|
Total assets
|
|
|
1,282,865
|
|
|
|
457,587
|
|
|
|
23,025
|
|
|
|
|
|
|
|
1,763,477
|
|
Goodwill
|
|
|
172,440
|
|
|
|
108,309
|
|
|
|
|
|
|
|
|
|
|
|
280,749
|
|
Capital expenditures
|
|
|
159,004
|
|
|
|
26,772
|
|
|
|
1,230
|
|
|
|
|
|
|
|
187,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
Completion and
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling
|
|
|
Production
|
|
|
Corporate
|
|
|
Inter-segment
|
|
|
|
|
2006
|
|
Services
|
|
|
Services
|
|
|
and Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,009,821
|
|
|
$
|
441,017
|
|
|
$
|
|
|
|
$
|
(13,254
|
)
|
|
$
|
1,437,584
|
|
Segment profit (loss)
(1)
|
|
|
473,624
|
|
|
|
163,119
|
|
|
|
(41,464
|
)
|
|
|
|
|
|
|
595,279
|
|
Depreciation and amortization
|
|
|
38,573
|
|
|
|
32,013
|
|
|
|
2,648
|
|
|
|
|
|
|
|
73,234
|
|
Total assets
|
|
|
1,198,284
|
|
|
|
507,510
|
|
|
|
55,392
|
|
|
|
|
|
|
|
1,761,186
|
|
Goodwill
|
|
|
172,440
|
|
|
|
108,309
|
|
|
|
|
|
|
|
|
|
|
|
280,749
|
|
Capital expenditures*
|
|
|
220,397
|
|
|
|
39,273
|
|
|
|
3,360
|
|
|
|
|
|
|
|
263,030
|
|
|
|
|
|
*
|
|
Excludes business acquisitions
|
|
(1)
|
|
Segment profit (loss) is defined as revenue less operating, general and administrative,
depreciation and amortization and foreign exchange expenses. A reconciliation of segment profit
(loss) to earnings from continuing operations before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment profit (loss)
|
|
$
|
354,748
|
|
|
|
$
|
356,351
|
|
|
$
|
595,279
|
|
Add (deduct):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
(14,478
|
)
|
|
|
|
(7,767
|
)
|
|
|
(8,800
|
)
|
Other
|
|
|
(151
|
)
|
|
|
|
(106
|
)
|
|
|
(171
|
)
|
Income
|
|
|
455
|
|
|
|
|
555
|
|
|
|
942
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
408
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes
|
|
$
|
340,574
|
|
|
|
$
|
349,033
|
|
|
$
|
587,658
|
|
|
|
|
|
80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Corporations operations are carried on in the following geographic locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter-segment
|
|
|
|
|
2008
|
|
Canada
|
|
|
United States
|
|
|
International
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
909,001
|
|
|
$
|
189,796
|
|
|
$
|
4,686
|
|
|
$
|
(1,592
|
)
|
|
$
|
1,101,891
|
|
Total assets
|
|
|
1,741,462
|
|
|
|
3,033,378
|
|
|
|
58,862
|
|
|
|
|
|
|
|
4,833,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter-segment
|
|
|
|
|
2007
|
|
Canada
|
|
|
United States
|
|
|
International
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
958,937
|
|
|
$
|
51,082
|
|
|
$
|
|
|
|
$
|
(818
|
)
|
|
$
|
1,009,201
|
|
Total assets
|
|
|
1,651,920
|
|
|
|
108,683
|
|
|
|
2,874
|
|
|
|
|
|
|
|
1,763,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter-segment
|
|
|
|
|
2006
|
|
Canada
|
|
|
United States
|
|
|
International
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,432,062
|
|
|
$
|
5,645
|
|
|
$
|
|
|
|
$
|
(123
|
)
|
|
$
|
1,437,584
|
|
Total assets
|
|
|
1,752,403
|
|
|
|
8,783
|
|
|
|
|
|
|
|
|
|
|
|
1,761,186
|
|
|
NOTE 22. FINANCIAL INSTRUMENTS
(a) Fair value
The carrying value of cash, accounts receivable, bank indebtedness, accounts payable and accrued
liabilities and distributions payable approximate their fair value due to the relatively short
period to maturity of the instruments. The fair value of the Secured Facilities approximates its
carrying value as it bears interest at floating rates. The fair value of the Unsecured Facility
approximates carrying value due to the short period from issuance to year end. The unsecured
convertible notes were recorded at their estimated fair value as part of allocating the Grey Wolf
purchase consideration on December 23, 2008. The carrying value of the unsecured convertible notes
approximates their fair value due to the short period that has elapsed since the unsecured
convertible notes were recorded.
(b) Credit risk
Accounts receivable includes balances from a large number of customers primarily operating in the
oil and gas industry. The Trust manages credit risk by assessing the creditworthiness of its
customers before providing services and on an ongoing basis as well as monitoring the amount and
age of balances outstanding. In some instances the Trust will take additional measures to reduce
credit risk including obtaining letters of credit and prepayments from customers. When indicators
of credit problems appear the Trust takes appropriate steps to reduce its exposure including
negotiating with the customer, filing liens and entering into litigation. The Trust views the
credit risks on these amounts as normal for the industry. The Trust does not have any significant
accounts receivable at December 31, 2008 that are past due and uncollectible.
As at December 31, 2008 the Trusts allowance for doubtful accounts was $6.2 million (2007 $6.4
million). Included in net earnings for the year ended December 31, 2008 is an expense of $0.6
million (2007 $1.2 million) related to a provision for doubtful accounts.
(c) Interest rate risk
The Trust is exposed to interest rate risk with respect to interest expense on its credit
facilities. The Trust manages its interest rate exposure by incurring a combination of fixed and
floating rate debt obligations of varying maturities in appropriate levels relative to its expected
cash flows from operations. If interest rates applying to long-term debt during the year had been
100 basis points lower or higher, with all other variables held constant, earnings from continuing
operations would have changed by approximately $2.1 million (2007 $1.1 million), net of income
tax. Applying a 100 basis points change in interest rates to the Trusts long-term debt balance at
December 31, 2008, with all other variables held constant, would impact earnings from continuing
operations, on a go forward basis, by approximately $15.8 million.
PRECISION DRILLING TRUST 81
(d) Foreign currency risk
The Trust is exposed to foreign currency fluctuations in relation to the working capital and
long-term debt of its United States operations and certain long-term debt facilities of its
Canadian operations. The Trust has no significant exposures to foreign currencies other than the
U.S. dollar. The Trust monitors its foreign currency exposure and attempts to minimize the impact
by aligning appropriate levels of U.S. dollar denominated debt with cash flows from United States
based operations.
The following financial instruments were denominated in U.S. dollars at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
Canadian
|
|
|
U.S.
|
|
|
|
Operations
|
|
|
Operations
|
|
|
|
Cash
|
|
$
|
100
|
|
|
$
|
65,619
|
|
Accounts receivable
|
|
|
49
|
|
|
|
262,461
|
|
Accounts payable and accrued liabilities
|
|
|
(15,861
|
)
|
|
|
(112,983
|
)
|
Long-term liabilities, excluding long-term incentive plans
|
|
|
|
|
|
|
(19,158
|
)
|
Long-term debt, including current portion
|
|
|
(918,591
|
)
|
|
|
(262,301
|
)
|
|
|
|
Net foreign currency exposure
|
|
$
|
(934,303
|
)
|
|
$
|
(66,362
|
)
|
|
Impact of $ 0.01 change in the U.S. dollar to Canadian dollar
exchange rate on net earnings
|
|
$
|
9,343
|
|
|
$
|
|
|
|
Impact of $ 0.01 change in the U.S. dollar to Canadian dollar
exchange rate on comprehensive income
|
|
$
|
|
|
|
$
|
664
|
|
|
(e) Liquidity risk
Liquidity risk is the exposure of the Trust to the risk of not being able to meet its financial
obligations as they become due. The Trust manages liquidity risk by monitoring and reviewing actual
and forecasted cash flows to ensure there are available cash resources to meet these needs. The
following are the contractual maturities of the Trusts financial liabilities as at December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Stated in thousands)
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
Long-term debt
(1)
|
|
$
|
48,953
|
|
|
$
|
69,495
|
|
|
$
|
69,495
|
|
|
$
|
90,037
|
|
|
$
|
382,896
|
|
|
$
|
594,512
|
|
|
$
|
1,255,388
|
|
Interest on long-term debt
(2)
|
|
|
114,953
|
|
|
|
110,455
|
|
|
|
105,075
|
|
|
|
99,288
|
|
|
|
92,673
|
|
|
|
59,015
|
|
|
|
581,459
|
|
Commitments
|
|
|
77,039
|
|
|
|
68,557
|
|
|
|
6,763
|
|
|
|
1,608
|
|
|
|
1,203
|
|
|
|
5,132
|
|
|
|
160,302
|
|
|
|
|
Total
|
|
$
|
240,945
|
|
|
$
|
248,507
|
|
|
$
|
181,333
|
|
|
$
|
190,933
|
|
|
$
|
476,772
|
|
|
$
|
658,659
|
|
|
$
|
1,997,149
|
|
|
|
|
|
(1)
|
|
Excludes unsecured convertible notes as these debt instruments contain a provision (see Note
10) whereby Precision is required to provide holders of the notes with an offer to purchase all or
a portion of their notes, including accrued but unpaid interest to the date of purchase, which
Precision expects to repay in 2009 with proceeds received from an equity offering (see Note 28) and
existing credit facilities. Upon completion of this transaction, the Unsecured Facility would
increase to approximately $ 287.8 million (US$ 235 million) with repayments in 2016. Interest on the
unsecured convertible notes to the date of purchase is approximately $ 2.8 million (US$ 2.3 million).
Amounts are after giving effect to the February 4, 2009 re-allocation between the Term Loan A and
Term Loan B facilities (see Note 10).
|
|
(2)
|
|
Interest has been calculated based upon debt balances, interest rates and foreign exchange
rates in effect as at December 31, 2008.
|
NOTE 23. CAPITAL MANAGEMENT
The Trusts strategy is to carry a capital base to maintain investor, creditor and market
confidence and to sustain future development of the business. The Trust seeks to maintain a balance
between the level of long-term debt and unitholders equity to ensure access to capital markets to
fund growth and working capital given the cyclical nature of the oilfield services sector. On a
historical basis, the Trust has maintained a conservative ratio of long-term debt to long-term debt
plus equity. The Grey Wolf acquisition caused the Trust to increase these levels. As at December
31, 2008 and 2007 these ratios were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
1,368,349
|
|
|
|
$
|
119,826
|
|
Unitholders equity
|
|
|
2,323,879
|
|
|
|
|
1,316,673
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
3,692,228
|
|
|
|
$
|
1,436,499
|
|
|
|
|
|
Long-term debt to long-term debt plus equity ratio
|
|
|
0.37
|
|
|
|
|
0.08
|
|
|
|
|
|
82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The increase in long-term debt for Precision has coincided with the severe contraction in global
debt and equity markets. The limited availability of capital has created a challenging economic
environment at December 31, 2008 and Precision expects demand for its drilling and other oilfield
services to decline in the short-term.
Accordingly, Precision has undertaken a debt reduction plan to reduce long-term debt levels and
strengthen its capital structure. Included in this management plan are initiatives to keep capital
expenditures for the purchase of property, plant and equipment at efficient levels, limit and
suspend cash distributions to unitholders and raise additional unitholder capital through the
issuance of Trust units, as described in greater detail in Note 28.
In addition, Precision continues to pursue market opportunities to set in place permanent cost of
debt terms associated with long-term debt facilities as outlined in Note 10.
On December 15, 2006 the Minister of Finance (Canada) issued guidelines establishing normal
growth limitations designed to limit the ability of a trust to issue equity (including convertible
debentures or other equity substitutes) that exceeds certain specified percentages of the market
capitalization of a trust on October 31, 2006 and amended such guidelines effective December 4,
2008. The normal growth limitation is cumulative in nature to the extent not taken and for the year
ended December 31, 2008 the Trusts normal growth limitation was approximately $ 4 billion. The
Trust will be a specified investment flow-through (SIFT) trust, subject to the SIFT tax rules, on
the earlier of January 1, 2011 or the first day after it exceeds the normal growth guidelines.
The Trust is bound by a debt covenant limiting the Trusts ability to make distributions to
unitholders and incur additional indebtedness as described in Note 10.
NOTE 24. SUPPLEMENTAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
Interest paid
|
|
$
|
13,394
|
|
|
|
$
|
7,870
|
|
|
$
|
8,929
|
|
Income taxes paid
|
|
$
|
764
|
|
|
|
$
|
4,307
|
|
|
$
|
207,160
|
|
|
|
|
|
Components of change in non-cash working capital balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
(114,444
|
)
|
|
|
$
|
98,055
|
|
|
$
|
148,046
|
|
Inventory
|
|
|
603
|
|
|
|
|
(182
|
)
|
|
|
(2,038
|
)
|
Accounts payable and accrued liabilities
|
|
|
56,299
|
|
|
|
|
(49,338
|
)
|
|
|
(4,736
|
)
|
Income taxes
|
|
|
(4,446
|
)
|
|
|
|
2,749
|
|
|
|
(172,634
|
)
|
|
|
|
|
|
|
|
|
$
|
(61,988
|
)
|
|
|
$
|
51,284
|
|
|
$
|
(31,362
|
)
|
|
|
|
|
The components of accounts receivable are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
Trade
|
|
$
|
387,004
|
|
|
|
$
|
144,468
|
|
Accrued trade
|
|
|
178,946
|
|
|
|
|
96,869
|
|
Prepaids and other
|
|
|
35,803
|
|
|
|
|
15,279
|
|
|
|
|
|
|
|
|
|
$
|
601,753
|
|
|
|
$
|
256,616
|
|
|
|
|
|
The components of accounts payable and accrued liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
Accounts payable
|
|
$
|
136,054
|
|
|
|
$
|
36,742
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
|
Payroll
|
|
|
78,143
|
|
|
|
|
28,527
|
|
Other
|
|
|
55,925
|
|
|
|
|
15,595
|
|
|
|
|
|
|
|
|
|
$
|
270,122
|
|
|
|
$
|
80,864
|
|
|
|
|
|
PRECISION DRILLING TRUST 83
NOTE 25. CONTINGENCIES AND COMMITMENTS
The business and operations of the Trust are complex and the Trust has executed a number of
significant financings, business combinations, acquisitions and dispositions over the course of its
history. The computation of income taxes payable as a result of these transactions involves many
complex factors as well as the Trusts interpretation of relevant tax legislation and regulations.
The Trusts management believes that the provision for income tax is adequate and in accordance
with generally accepted accounting principles and applicable legislation and regulations. However,
there are a number of tax filing positions that can still be the subject of review by taxation
authorities who may successfully challenge the Trusts interpretation of the applicable tax
legislation and regulations, with the result that additional taxes could be payable by the Trust
and the amount owed, with estimated interest but without penalties, could be up to $ 382 million,
including $ 58 million recorded as a long-term receivable.
The Trust, through the performance of its services, product sales and business arrangements, is
sometimes named as a defendant in litigation. The outcome of such claims against the Trust is not
determinable at this time, however, their ultimate resolution is not expected to have a material
adverse effect on the Trust.
The Trusts subsidiary, Precision Drilling Oilfield Services Corporation, as the successor to Grey
Wolf, is subject to litigation regarding the Grey Wolf acquisition. A class action petition was
filed alleging the Grey Wolf board of directors breached their fiduciary duties and Grey Wolf aided
and abetted this breach. In March 2009, the court requested that a motion for summary judgment be
filed and heard to determine as a matter of law whether there is a viable cause of action. In
addition, two shareholder derivative actions were filed alleging that Grey Wolf and its board of
directors breached their fiduciary duties and acted with negligence or gross negligence in failing
to maximize shareholder value. The Plaintiffs of the two derivative actions have agreed in
principal to dismissals of their cases with prejudice and the parties are finalizing documents to
present to the court.
The Trust maintains a level of insurance coverage deemed appropriate by management for matters for
which insurance coverage can be acquired.
NOTE 26. GUARANTEES
The Trust has entered into agreements indemnifying certain parties primarily with respect to tax
and specific third party claims associated with businesses sold by the Trust. Due to the nature of
the indemnifications, the maximum exposure under these agreements cannot be estimated. No amounts
have been recorded for the indemnities as the Trusts obligations under them are not probable or
estimable.
84 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 27. DISCONTINUED OPERATIONS
The details of disposals of discontinued operations are as follows:
2007
In September 2007 the Trust received $ 3.0 million as partial settlement of an outstanding matter
associated with a previous business divestiture.
2006
In January 2007, the Trust received $ 21.3 million as payment of the working capital adjustment
related to the 2005 disposition of its Energy Services and International Contract Drilling
divisions to Weatherford International Ltd. This amount had been recorded in accounts receivable at
December 31, 2006.
In August 2006, the Trust received $ 4.8 million as settlement of the working capital adjustment
arising from the 2005 disposal of CEDA and $ 2.5 million as final payment of the contingent
consideration associated with the 2004 disposal of United Diamond Ltd.
In total these amounts resulted in a gain of $ 8.3 million ($ 7.1 million net of tax).
The following table provides additional information with respect to amounts included in the
statements of earnings related to discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of United Diamond
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
2,070
|
|
Gain on disposal of Energy services and International contract drilling
|
|
|
|
|
|
|
|
2,956
|
|
|
|
962
|
|
Gain on disposal of CEDA
|
|
|
|
|
|
|
|
|
|
|
|
4,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,956
|
|
|
|
7,077
|
|
|
|
|
|
|
|
Net earnings of discontinued operations
|
|
$
|
|
|
|
|
$
|
2,956
|
|
|
$
|
7,077
|
|
|
|
|
|
The following table provides additional information with respect to amounts included in the
statements of cash flow related to discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings of discontinued operations
|
|
$
|
|
|
|
|
$
|
2,956
|
|
|
$
|
7,077
|
|
Items not affecting cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of discontinued operations
|
|
|
|
|
|
|
|
(2,956
|
)
|
|
|
(7,077
|
)
|
|
|
|
|
|
|
Funds provided by discontinued operations
|
|
$
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
NOTE 28. SUBSEQUENT EVENTS
On February 4, 2009 the Trust filed a short form base shelf prospectus that allows the Trust to
raise up to US$ 800 million through the sale and issue of trust units, debt securities, warrants,
and subscription receipts.
On February 18, 2009 the Trust issued 46,000,000 trust units at a price of US$ 3.75 per unit for
aggregate gross proceeds of $ 217.3 million, net of proceeds of $ 208.6 million (US$ 172.5 million,
net proceeds of US$ 165.6 million). The proceeds will be used in the repurchase of outstanding
convertible notes which were assumed in conjunction with the Grey Wolf acquisition.
PRECISION DRILLING TRUST 85
UNIT TRADING SUMMARY 2008
The Toronto Stock Exchange (TSX)
The New York Stock Exchange (NYSE)
86 SUPPLEMENTAL INFORMATION
Precision Drilling Trust
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Stated in millions of Canadian dollars,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
except per unit/share amounts)
|
|
2008
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,101.9
|
|
|
|
$
|
1,009.2
|
|
|
$
|
1,437.6
|
|
|
$
|
1,269.2
|
|
|
$
|
1,028.5
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
598.2
|
|
|
|
|
516.1
|
|
|
|
688.2
|
|
|
|
641.8
|
|
|
|
566.3
|
|
General and administrative
|
|
|
67.2
|
|
|
|
|
56.0
|
|
|
|
81.2
|
|
|
|
76.4
|
|
|
|
64.2
|
|
Reorganization costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.5
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
436.5
|
|
|
|
|
437.1
|
|
|
|
668.2
|
|
|
|
533.5
|
|
|
|
398.0
|
|
Depreciation and amortization
|
|
|
83.8
|
|
|
|
|
78.3
|
|
|
|
73.2
|
|
|
|
71.6
|
|
|
|
74.8
|
|
Foreign exchange
|
|
|
(2.0
|
)
|
|
|
|
2.4
|
|
|
|
(0.3
|
)
|
|
|
(3.5
|
)
|
|
|
(8.1
|
)
|
|
|
|
|
|
|
Operating earnings
|
|
|
354.7
|
|
|
|
|
356.4
|
|
|
|
595.3
|
|
|
|
465.4
|
|
|
|
331.3
|
|
Interest, net
|
|
|
14.1
|
|
|
|
|
7.4
|
|
|
|
8.0
|
|
|
|
29.3
|
|
|
|
46.3
|
|
Premium on redemption of bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71.9
|
|
|
|
|
|
Loss on disposal of short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71.0
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
(4.9
|
)
|
|
|
|
|
|
|
Earnings from continuing operations
before income taxes
|
|
|
340.6
|
|
|
|
|
349.0
|
|
|
|
587.7
|
|
|
|
293.2
|
|
|
|
289.9
|
|
Income taxes
|
|
|
37.9
|
|
|
|
|
6.2
|
|
|
|
15.2
|
|
|
|
72.4
|
|
|
|
101.8
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
|
302.7
|
|
|
|
|
342.8
|
|
|
|
572.5
|
|
|
|
220.8
|
|
|
|
188.1
|
|
Discontinued operations, net of tax
|
|
|
|
|
|
|
|
3.0
|
|
|
|
7.1
|
|
|
|
1,409.8
|
|
|
|
59.3
|
|
|
|
|
|
|
|
Net earnings
|
|
|
302.7
|
|
|
|
|
345.8
|
|
|
|
579.6
|
|
|
|
1,630.6
|
|
|
|
247.4
|
|
Retained earnings (deficit),
beginning of year
|
|
|
(126.1
|
)
|
|
|
|
(195.2
|
)
|
|
|
(303.3
|
)
|
|
|
1,041.7
|
|
|
|
794.3
|
|
Adjustment on cash purchase of
employee stock options, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42.1
|
)
|
|
|
|
|
Reclassification from contributed
surplus on cash buy-out of
employee stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.2
|
|
|
|
|
|
Distribution of disposal proceeds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,851.8
|
)
|
|
|
|
|
Repurchase of common shares of
dissenting shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34.4
|
)
|
|
|
|
|
Distributions declared
|
|
|
(224.7
|
)
|
|
|
|
(276.7
|
)
|
|
|
(471.5
|
)
|
|
|
(70.5
|
)
|
|
|
|
|
|
|
|
|
|
|
Retained earnings (deficit), end of year
|
|
$
|
(48.1
|
)
|
|
|
$
|
(126.1
|
)
|
|
$
|
(195.2
|
)
|
|
$
|
(303.3
|
)
|
|
$
|
1,041.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per unit/share from
continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.39
|
|
|
|
$
|
2.73
|
|
|
$
|
4.56
|
|
|
$
|
1.79
|
|
|
$
|
1.63
|
|
Diluted
|
|
$
|
2.39
|
|
|
|
$
|
2.73
|
|
|
$
|
4.56
|
|
|
$
|
1.76
|
|
|
$
|
1.61
|
|
Earnings per unit/share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.39
|
|
|
|
$
|
2.75
|
|
|
$
|
4.62
|
|
|
$
|
13.22
|
|
|
$
|
2.14
|
|
Diluted
|
|
$
|
2.39
|
|
|
|
$
|
2.75
|
|
|
$
|
4.62
|
|
|
$
|
13.00
|
|
|
$
|
2.11
|
|
|
|
|
|
PRECISION DRILLING TRUST 87
Precision Drilling Trust
ADDITIONAL SELECTED FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Stated in millions of Canadian dollars,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
except per unit/share amounts)
|
|
2008
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on sales %
(1)
|
|
|
27.5
|
|
|
|
|
34.0
|
|
|
|
39.8
|
|
|
|
17.4
|
|
|
|
18.3
|
|
Return on assets %
(2)
|
|
|
12.4
|
|
|
|
|
19.9
|
|
|
|
33.6
|
|
|
|
43.3
|
|
|
|
7.3
|
|
Return on equity %
(3)
|
|
|
19.6
|
|
|
|
|
27.0
|
|
|
|
49.4
|
|
|
|
66.1
|
|
|
|
12.3
|
|
Working capital
|
|
$
|
345.3
|
|
|
|
$
|
140.4
|
|
|
$
|
166.5
|
|
|
$
|
152.8
|
|
|
$
|
557.3
|
|
Current ratio
|
|
|
2.0
|
|
|
|
|
2.1
|
|
|
|
1.81
|
|
|
|
1.43
|
|
|
|
2.47
|
|
PP&E and intangibles
|
|
$
|
3,248.9
|
|
|
|
$
|
1,210.9
|
|
|
$
|
1,108.0
|
|
|
$
|
944.4
|
|
|
$
|
898.1
|
|
Total assets
|
|
$
|
4,833.7
|
|
|
|
$
|
1,763.5
|
|
|
$
|
1,761.2
|
|
|
$
|
1,718.9
|
|
|
$
|
3,852.0
|
|
Long-term debt
|
|
$
|
1,368.3
|
|
|
|
$
|
119.8
|
|
|
$
|
140.9
|
|
|
$
|
96.8
|
|
|
$
|
718.9
|
|
Unitholders equity
|
|
$
|
2,323.9
|
|
|
|
$
|
1,316.7
|
|
|
$
|
1,217.1
|
|
|
$
|
1,074.6
|
|
|
$
|
2,321.7
|
|
Long-term debt to long-term debt
plus equity
|
|
|
0.37
|
|
|
|
|
0.08
|
|
|
|
0.10
|
|
|
|
0.08
|
|
|
|
0.24
|
|
Net capital expenditures from
continuing operations excluding
business acquisitions
|
|
$
|
219.1
|
|
|
|
$
|
181.2
|
|
|
$
|
233.7
|
|
|
$
|
140.1
|
|
|
$
|
113.9
|
|
EBITDA
|
|
$
|
436.5
|
|
|
|
$
|
437.1
|
|
|
$
|
668.2
|
|
|
$
|
533.5
|
|
|
$
|
398.0
|
|
EBITDA % of revenue
|
|
|
39.6
|
|
|
|
|
43.3
|
|
|
|
46.5
|
|
|
|
42.0
|
|
|
|
38.7
|
|
Operating earnings
|
|
$
|
354.7
|
|
|
|
$
|
356.4
|
|
|
$
|
595.3
|
|
|
$
|
465.4
|
|
|
$
|
331.3
|
|
Operating earnings % of revenue
|
|
|
32.2
|
|
|
|
|
35.3
|
|
|
|
41.4
|
|
|
|
36.7
|
|
|
|
32.2
|
|
Cash flow from continuing operations
|
|
$
|
343.9
|
|
|
|
$
|
484.1
|
|
|
$
|
609.7
|
|
|
$
|
206.0
|
|
|
$
|
286.4
|
|
Cash flow from continuing operations
per unit/share
Basic
|
|
$
|
2.72
|
|
|
|
$
|
3.85
|
|
|
$
|
4.86
|
|
|
$
|
1.67
|
|
|
$
|
2.48
|
|
Diluted
|
|
$
|
2.71
|
|
|
|
$
|
3.85
|
|
|
$
|
4.86
|
|
|
$
|
1.64
|
|
|
$
|
2.44
|
|
Book value per unit/share
(4)
|
|
$
|
14.51
|
|
|
|
$
|
10.47
|
|
|
$
|
9.68
|
|
|
$
|
8.57
|
|
|
$
|
19.10
|
|
Price earnings ratio
(5)
|
|
|
4.21
|
|
|
|
|
5.53
|
|
|
|
5.84
|
|
|
|
2.90
|
|
|
|
17.6
|
|
Basic weighted average units/shares
outstanding
(000s)
|
|
|
126,507
|
|
|
|
|
125,758
|
|
|
|
125,545
|
|
|
|
123,304
|
|
|
|
115,654
|
|
|
|
|
|
|
|
|
(1)
|
|
Return on sales was calculated by dividing earnings from
continuing operations by total revenues.
|
|
(2)
|
|
Return on assets
was calculated by dividing net earnings by quarter average
total assets.
|
|
(3)
|
|
Return on equity was calculated by dividing
net earnings by quarter average total unitholders equity.
|
|
(4)
|
|
Book value per unit/share was calculated by dividing
unitholders equity by units/shares outstanding.
|
|
(5)
|
|
Year end
closing price divided by basic earnings per unit/share.
|
88 SUPPLEMENTAL INFORMATION
Precision Drilling (NYSE:PDS)
Gráfica de Acción Histórica
De Jul 2024 a Ago 2024
Precision Drilling (NYSE:PDS)
Gráfica de Acción Histórica
De Ago 2023 a Ago 2024