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Natural Gas Drilling Activity in Canada's Deep Basin Higher, But Business Still Slow, Says Precision Drilling

Precision Drilling Corp., Canada's most active land drilling contractor, is seeing strengthening natural gas and liquids drilling in the Deep Basin, which runs through northwestern Alberta and northeastern British Columbia, but the bias in the United States continues toward oil, the CEO said Thursday.

Weakness in the market appears likely for the foreseeable future, however, and the top priority is to protect the bottom line. With that in mind, Precision suspended its dividend.

"The dividend suspension, while a result of a debt covenant restriction, further strengthens the balance sheet as we continue to maneuver through uncharted waters," CEO Kevin Neveu said. "There is limited visibility with few positive market signals. In this protracted challenging environment, financial stability is paramount for both survival and sustaining competitive advantage.”

By focusing on cost reductions and efficiencies over 2015, Precision, which also operates in every major U.S. onshore basin, was able to achieve strong operating margins and cash flow, ending the year with a cash balance and "ample capacity in our revolving credit facility," which "ensures we can perform through an extended downturn."

Even through the downturn, management has accelerated Precision’s transformation to retire legacy rigs and retool with advanced rig systems that can work in multi-pad developments.

"During the fourth quarter of 2015, we evaluated our fleet of equipment and decided to decommission older, lower tiered equipment because of the high cost to maintain, low demand and highly competitive market," Neveu said. "The drop in oil prices and the number of newbuild drilling rigs that entered the market are expected to effectively render legacy assets obsolete."

Precision began to overhaul its rig fleet in 2009, when it had 93 top tier rigs, about 25% of its fleet.

"Today we are operating 57 rigs in Canada, 32 in the U.S. and nine rigs internationally," Neveu said. "With the majority of these rigs under term contract, our margins are holding up well. However, in a market where incremental opportunities are limited, dayrates can be expected to trend lower, which we plan to partially offset by ongoing cost reduction initiatives."

Term customer contracts through March, which provide a base level of activity and revenue, totaled an average of 36 Canadian rigs, 25 U.S. rigs and nine internationally. It also has 31 rig contracts in Canada, 21 in the United States and eight internationally for 2016, and an average of 30 rigs under contract for 2017.

"In Canada, term contracted rigs normally generate 250 utilization days per year because of the seasonal nature of well site access," Neveu said. "In most regions in the U.S. and internationally, term contracts normally generate 365 utilization days per year."

The contract drilling rig fleet in 4Q2015 fell year/year to 251 worldwide, almost 20% lower year/year. U.S. drilling utilization days declined 55%, and in Canada they were down half. The service rig fleet fell by 8%, while rig operating hours slumped by close to 50%. Activity in the final period of 2015, as measured by drilling rig utilization days, declined from 4Q2014 by 51% in Canada, 55% in the United States and 23% internationally.

Precision, which reports its financial results in Canadian dollars, suffered net losses of $271 million (minus 93 cents) in the fourth quarter, versus a loss of $114 million (minus 39 cents) in the year-ago period. Asset decommissioning and impairment charges totaled $369 million, which reduced net profits by $254 million (87 cents). Revenue declined 44% year/year to $345 million, with revenue from contract drilling services off 42% and completion and production services down 53%.

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