Precision Drilling annual profits fall to $580M, expects weak market in 2007

Precision Drilling Trust’s (TSX:PD.UN) profits dropped by $1 billion last year and Canada’s largest oil and gas drilling company warned that a continuing slowdown in the natural gas sector will lead to more challenges going forward.

Calgary-based Precision posted $580 million in net earnings last year, down from $1.6 billion in 2005 due to a “persistent downward trend in commodity prices” as well as a huge one-time gain for 2005 after the sale of international assets by the company.

“None of us really know the summer of 2007 – what’s going to play – obviously it does look weak as we go forward,” said executive chairman Hank Swartout.

Swartout predicted that the lower drilling activity would result is some competitors lowering prices and “concentrating on utilization rather than profitability” which will add further strain to the sector.

He predicted a shakeout in the industry over the next couple years, providing consolidation opportunities.

Swartout said that the number of rigs working in Canada has doubled in the past decade to nearly 1,000.

“We possibly have more rigs than we need in this country, not to say that the drilling contractors . . . have gone a little bit amiss, but there’s not a lot of forward thought and some people are still building on spec.”

Still, Precision was amoung those who continued to build new rigs last year. In 2006 the company commissioned 13 new rigs and it expects to deliver 16 more this year.

By 2008, Precision expects to have 260 rigs, with 253 in western Canada and seven in the U.S. – a 13 per cent increase within three years..

And despite the increasing challenges, Precision said Thursday that it will increase its capital spending program this year by $15 million to about $300 million with the addition of two new rigs specifically designed for the oilsands market in northern Alberta.

In the fourth quarter of 2004, Precision’s earnings of $127.4 million or $1.01 per trust unit compared favourably to the $83.5 million or 66 cents a unit for the same 2005 period, due to one-time charges of $75 million last year.

Revenue in the final three months of 2006 fell 23 per cent to $328 million from $427.9 million, with the contract drilling services division decreasing 28 per cent to $223 million and the completion and production services segment decreasing 13 per cent to $108 million.

Equipment utilization declined significantly while pricing held firm. Drilling rig operating days fell by 18 per cent over the third quarter 2006 and were 33 per cent lower than in the fourth quarter of 2005.

Last month, Precision’s drilling rig operating day utilization was 66 per cent compared to 83 per cent in January 2006.

President and chief operating officer Gene Stahl said the company is “staring at a different world” than in the past several years.

“As we look forward . . . it appears it’s going to be a more challenging year,” Stahl told analysts.

“As well, we’re starting to get signs that some of our operators are close to getting through their (first quarter) spending programs, which will likely mean that within the next month more equipment will be hitting the spot market,” he said.

“And that will then clearly soften the demand for our services and we’ll get to the point where we see what kind of pricing discipline is out there in the service sector.”

In Thursday trading on the Toronto stock market Thursday, Precision units rose 48 cents to close at $25.98, a gain of nearly two per cent, in trading of 281,000 units.

Source: www.canadianbusiness.com