Profits drop with drilling activity

The chief executive of Precision Drilling Trust (TSX:PD.UN) says the conditions that dragged his firm’s third-quarter profits down 13 per cent are likely to persist into next year.

CALGARY — The chief executive of Precision Drilling Trust (TSX:PD.UN) says the conditions that dragged his firm’s third-quarter profits down 13 per cent are likely to persist into next year.

But crude oil developments in Saskatchewan and emerging shale natural gas plays provide a glimmer of hope for the Calgary-based driller, Kevin Neveu told an analyst conference call Thursday.

“In Canada, we have just completed the slowest summer after the weakest spring following the poorest winter in the last two decades,” he said, wryly adding he’ll run out of synonyms for the word “poor” if the slump lasts much longer.

Oil and gas producers who contract out Precision’s rigs in their operations have indicated that their 2010 budgets will look a lot like their bare-bones 2009 spending.

“It’s hard to find much optimism in this outlook,” Neveu said

“However, as I consider the outlook, I believe there are some bright spots we’ll watch out for.”

One beacon of hope is the Bakken oil play in southeastern Saskatchewan, which has been garnering an increasing amount of investment as oil prices have doubled since the beginning of the year.

“The positive oil price sentiment bodes well for Precision’s heavy oil market presence. Both our drilling and well service business segments stand to benefit from increased spending on oil,” Neveu said.

Activity in emerging shale natural gas plays in Pennsylvania, Louisiana and other parts of North America is also heartening. Precision’s high-tech drilling rigs are well-suited for those reservoirs.

A few months ago Precision only had two rigs working in the Marcellus shale in Pennsylvania, and is now up to eight with the expectation of hitting 12 within the next six months.

And Precision has seven rigs working in the Haynesville shale play, which straddles Louisana and Texas.

During the quarter, Precision averaged 93 rigs on term contract, 36 of which were new builds.

All of those rigs were operating during the period, which is an encouraging sign, Neveu said.

Even more encouraging was the fact that the customers paid a healthy day-rate to use the rigs, which were contracted out in 2007 and 2008, when the economic picture was brighter.

“This is a very important indicator, as it reinforces our contention that the high performance rigs have a remained in strong demand right through the market decline and market bottom,” Neveu said.

“This encouraging customer demand combined with the higher industry utilization levels for high performance rigs continues to support significantly higher pricing and margins for these rigs.”

Earlier Thursday, Precision said its third quarter profits were $72 million, or 25 cents per unit, compared to $82 million, or 61 cents a year earlier.

The per-unit decline was also affected by a 119 per cent increase in the number of trust units outstanding, due to Precision’s purchase of Grey Wolf Inc. in late 2008.

Analysts polled by Thomson-Reuters were on average expecting earnings per unit of 12 cents.

Precision said the decline in net income included a $27-million increase in finance charges, offset by a $63-million foreign exchange gain.

Excluding the impact of interest, taxes, depreciation and amortization, Precision Drilling’s EBITDA was $86 million, down 28 per cent from the third quarter of 2008.

Revenue fell to $253.34 million from $285.64 million, a decline of 11.3 per cent.

However, compared with the second quarter of 2009, revenue was up 21 per cent.

UBS Investment Research analyst Chad Friess said Precision’s results were roughly in line with his expectations.

“Precision’s outlook for 2010 remains very opaque as explorers and producers are providing little guidance on their drilling plans for next year, indicating a high dependency on commodity prices,” he wrote in a note to clients Thursday.

“Though visibility remains low, we expect the company to maintain a very conservative capital program through the first half of 2010 although management is optimistic that growth opportunities will arise as the market absorbs the supply of high-spec rigs.”

Precision’s units rose 2.6 per cent, or 20 cents, to $7.79 in afternoon trading on the Toronto Stock Exchange.

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