UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO SECTION 13A-16 OR 15D-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
For April 13, 2004
Commission File Number: 001-14534
PRECISION DRILLING CORPORATION
(Exact name of registrant as specified in its charter)
4200, 150 - 6TH AVENUE S.W.
CALGARY, ALBERTA
CANADA T2P 3Y7
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F [_] Form 40-F [X]
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(1). _____
Note: Regulation S-T Rule 101(b)(1) only permits the submission in
paper of a Form 6-K if submitted solely to provide an attached annual report to
security holders.
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(7): _____
Note: Regulation S-T Rule 101(b)(7) only permits the submission in
paper of a Form 6-K if submitted to furnish a report or other document that the
registrant foreign private issuer must furnish and make public under the laws of
the jurisdiction in which the registrant is incorporated, domiciled or legally
organized (the registrant's "home country"), or under the rules of the home
country exchange on which the registrant's securities are traded, as long as the
report or other document is not a press release, is not required to be and has
not been distributed to the registrant's security holders, and, if discussing a
material event, has already been the subject of a Form 6-K submission or other
Commission filing on EDGAR.
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes [_] No [X]
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82- N/A
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PRECISION DRILLING CORPORATION
Per: /s/ Jan M. Campbell
-----------------------------
Jan M. Campbell
Corporate Secretary
Date: April 13, 2004
EXHIBIT INDEX
Exhibit No.
1. Management's Discussion and Analysis extracted from the 2003
Annual Report to Shareholders of Precision Drilling Corporation
2. Consolidated Financial Statements extracted from the 2003 Annual
Report to Shareholders of Precision Drilling Corporation
EXHIBIT 1
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ANNUAL REPORT 2003
page 43
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MANAGEMENT'S DISCUSSION AND ANALYSIS
The Management's Discussion and Analysis has been prepared taking into
consideration information available to February 10, 2004. The discussion focuses
on key statistics from the Consolidated Financial Statements, and pertains to
known risks and uncertainties relating to the oilfield and industrial service
sectors. This discussion should not be considered all-inclusive, as it excludes
changes that may occur in general economic, political and environmental
conditions. Additionally, other elements may or may not occur which could affect
the Corporation in the future. In order to obtain the best overall perspective,
this discussion should be read in conjunction with the material contained in
other parts of this annual report, including the audited Consolidated Financial
Statements. 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 15 to the Consolidated Financial
Statements.
HIGHLIGHTS(1)
(STATED IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS,
WHICH ARE PRESENTED ON A DILUTED BASIS)
Increase Increase Increase
Years ended December 31, 2003 (DECREASE) 2002 (Decrease) 2001 (Decrease)
---------------------------------------------------------------------------------------------------------------------------
Revenue 1,917,933 350,427 1,567,506 (247,702) 1,815,208 504,234
% change 22% (14%) 45%
Operating earnings (2) 297,110 141,551 155,559 (206,226) 361,785 115,840
% change 91% (57%) 47%
Earnings from continuing operations
before goodwill amortization 191,131 101,597 89,534 (116,763) 206,297 59,439
% change 113% (57%) 40%
Earnings from continuing operations 191,131 101,597 89,534 (86,176) 175,710 50,694
% change 113% (49%) 41%
Net earnings 188,676 97,411 91,265 (95,269) 186,534 56,421
% change 107% (51%) 43%
Earnings per share from
continuing operations 3.46 1.83 1.63 (1.60) 3.23 0.75
% change 112% (50%) 30%
Net earnings per share 3.41 1.75 1.66 (1.78) 3.44 0.86
% change 105% (52%) 33%
Cash flow from operations 258,427 59,204 199,223 (233,007) 432,230 195,345
% change 30% (54%) 82%
Net capital spending 290,504 50,961 239,543 (101,418) 340,961 160,207
% change 21% (30%) 89%
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(1) QUARTERLY FINANCIAL INFORMATION FOR THE TWO-YEAR PERIOD ENDED DECEMBER 31,
2003 IS PRESENTED ON PAGE 104 OF THIS ANNUAL REPORT.
(2) OPERATING EARNINGS IS NOT A RECOGNIZED MEASURE UNDER CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (GAAP). MANAGEMENT BELIEVES THAT IN ADDITION
TO NET EARNINGS, OPERATING EARNINGS IS A USEFUL SUPPLEMENTAL MEASURE AS IT
PROVIDES AN INDICATION OF THE RESULTS GENERATED BY THE CORPORATION'S
PRINCIPAL BUSINESS ACTIVITIES PRIOR TO CONSIDERATION OF HOW THOSE
ACTIVITIES ARE FINANCED OR HOW THE RESULTS ARE TAXED IN VARIOUS
JURISDICTIONS. INVESTORS SHOULD BE CAUTIONED, HOWEVER, THAT OPERATING
EARNINGS SHOULD NOT BE CONSTRUED AS AN ALTERNATIVE TO NET EARNINGS
DETERMINED IN ACCORDANCE WITH GAAP AS AN INDICATOR OF PRECISION'S
PERFORMANCE. PRECISION'S METHOD OF CALCULATING OPERATING EARNINGS MAY
DIFFER FROM OTHER COMPANIES AND, ACCORDINGLY, OPERATING EARNINGS MAY NOT BE
COMPARABLE TO MEASURES USED BY OTHER COMPANIES.
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FINANCIAL POSITION AND RATIOS
(STATED IN THOUSANDS OF CANADIAN DOLLARS)
Years ended December 31, 2003 2002 2001
-------------------------------------------------------------------------------
Working capital 248,261 210,256 215,919
Working capital ratio 1.6 1.5 1.6
Long-term debt (1) 399,422 514,878 496,200
Long-term debt to long-term debt
plus equity (1) 0.19 0.25 0.26
Long-term debt to cash flow
from operations (1) 1.5 2.6 1.1
Interest coverage (2) 8.5 4.4 8.4
--------------------------------------------------------------------------------
(1) EXCLUDING CURRENT PORTION OF LONG-TERM DEBT WHICH IS INCLUDED IN WORKING
CAPITAL.
(2) OPERATING EARNINGS DIVIDED BY NET INTEREST EXPENSE.
The 107% increase in net earnings in 2003 over 2002 was driven largely by
the strong Canadian market where drilling activity increased by 30% year over
year. Technology Services (TS) return to profitability was also a contributor to
the improvement. While not as significant quantitatively, this milestone
provides a measure of success for management's efforts to re-focus that business
from top line growth to bottom line profitability.
Interim objectives in the Corporation's five year plan to develop the
Technology Services segment have been achieved, the most significant of which
relate to technological advancements. Our new logging-while-drilling (LWD),
measurement-while-drilling (MWD) and rotary steerable tools have set new
standards for operating in high temperature and high pressure environments and
have demonstrated superior information gathering and steering response
capabilities. The tools are now being put to work by our customers and revenues
should increase as the number of systems deployed to operations increases and as
we fill out our fleet with the full complement of tool sizes.
Our research and engineering programs were successful at mitigating the
technology risk associated with the TS development plan. However, it was
recognized that insufficient attention had been paid to managing factors that
put achievement of profitability objectives at risk. As is often the case,
achievement of one set of objectives requires different skills than achieving
another set of objectives. As a result, changes were made at various levels of
the TS management team to add the experience required to focus on delivering a
consistent product to our customers in a systematic and profitable manner.
Change was not isolated to the Technology Services segment. Early in the
year, the Corporation sold its gas compression business, which was carried on by
Energy Industries Inc. Although Energy Industries had been profitable since its
acquisition by Precision in 1996, the compression packaging business was
determined to be not core to the Corporation's energy services globalization
strategy. In September the Corporation's rental businesses were brought under
one umbrella to form Precision Rentals Ltd. This served to simplify purchasing
decisions for our customers by providing one point of contact for all their
rental needs.
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ANNUAL REPORT 2003 MANAGEMENT'S DISCUSSION AND ANALYSIS
page 45
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SUMMARY INCOME STATEMENT
(STATED IN THOUSANDS OF CANADIAN DOLLARS)
Years ended December 31, 2003 2002 2001
---------------------------------------------------------------------------------------------------------------
Operating earnings (loss)
Contract Drilling $ 285,753 $ 184,553 $ 298,737
Technology Services 4,842 (31,733) 52,257
Rental and Production 39,350 30,090 39,365
Corporate and Other (32,835) (27,351) (28,574)
---------------------------------------------------------------------------------------------------------------
297,110 155,559 361,785
Interest, net 35,050 35,123 43,059
Dividend income -- (39) (1,106)
Gain on disposal of investments (3,355) (900) (1,805)
Earnings from continuing operations before
income taxes, non-controlling interest
and goodwill amortization 265,415 121,375 321,637
Income taxes 72,532 30,690 114,472
---------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before
non-controlling interest and
goodwill amortization 192,883 90,685 207,165
Non-controlling interest 1,752 1,151 868
---------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before
goodwill amortization 191,131 89,534 206,297
Goodwill amortization, net of tax -- -- 30,587
---------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 191,131 89,534 175,710
Gain on disposal of discontinued operations 17,460 -- --
Discontinued operations (19,915) 1,731 10,824
Net earnings $ 188,676 $ 91,265 $ 186,534
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ECONOMIC DRIVERS OF THE OILFIELD SERVICES BUSINESS
Crude oil and natural gas (hydrocarbons) are the primary sources of energy
in the world. The provision of these commodities to the consuming public
involves a number of players, each of whom take on different risks in the
process of exploring for, producing, refining and distributing hydrocarbons and
its associated refined by-products. Exploration and production companies assume
the risk of finding hydrocarbons in pools of sufficient size to economically
develop and produce the reserves. The economics of exploration and production is
dictated by the current and expected future margin between the cost to find and
develop hydrocarbons and the price at which those products can be sold. The
wider the margin, the more incentive there is to undertake the activities
involved in the process of finding, producing, refining and distributing energy
to residential and business users.
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The worldwide oilfield services industry (broadly defined) is a 100 billion
business that provides a wide array of services and equipment to support oil and
gas exploration and production activities.
[GRAPHIC OMITTED - PIE CHART] [GRAPHIC OMITTED - PIE CHART]
[OILFIELD SPENDING WORLDWIDE] [SOURCES OF ENERGY USED WORLDWIDE]
These activities include acquiring access to prospective lands, shooting
seismic to detect the presence of hydrocarbons, drilling wells and measuring the
characteristics of subsurface geological formations. If a well is evaluated to
be commercially viable, additional oilfield services are required to complete
the new well and then subsequently to maintain production. Exploration and
production companies hire oilfield service companies to perform the majority of
these services, hence, they are Precision's customers. The revenue for an
oilfield service company is therefore, our customer's finding and development
cost.
Providing these services incorporates three main elements: people,
technology and equipment. Attracting, training and retaining qualified employees
is the single biggest challenge for a service company. Exploration and
production activities are taking place in ever changing surface and subsurface
conditions. Developing technology and building equipment that can withstand
increasing physical challenges and operate more efficiently is key to
maintaining and improving the economics of crude oil and natural gas production.
The primary economic risks assumed by oilfield service companies are the
volatility of activity levels, that translate into utilization rates for its
investment in people, technology and equipment, and cost control to maximize the
margins it earns.
The economics of a service company is thus largely driven by the current
and expected price of crude oil and natural gas, which is determined by the
supply and demand for the commodity. Since crude oil can be transported
relatively easily, it is priced in a worldwide market which is influenced by a
wide array of economic and political factors. Natural gas is priced in more
local markets due to the requirement to transport this gaseous product in
pressurized pipelines.
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ANNUAL REPORT 2003 MANAGEMENT'S DISCUSSION AND ANALYSIS
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[GRAPHIC OMITTED - LINE CHART]
[WTI OIL AND HENRY HUB GAS PRICES]
Although, as illustrated above, crude oil and natural gas prices have
historically been quite volatile, the consensus of industry observers is that
the relatively high current price environment appears to be sustainable for the
foreseeable future. Oil prices, which during 2003 averaged US$31.10 per barrel
for West Texas Intermediate (WTI), are the result of political instability in
some OPEC member nations (Venezuela, Iraq and Nigeria) and from a generally
improving world economy with energy demand growth particularly strong in China
and Southeast Asia. Another important factor in the crude oil pricing equation,
and one that has seen a fundamental change from past pricing scenarios, is the
value of the U.S. dollar. Since oil prices are denominated in U.S. dollars
around the world, the devaluation of the U.S. dollar that has occurred over the
past year has implications for both the seller and buyer of the commodity. Oil
producing nations, with OPEC members taking the lead in controlling supplies and
prices, are motivated to see an increase in the U.S. dollar price of oil to
maintain their purchasing power in other currencies such as the Euro. From a
buyer's perspective, the devaluation of the U.S. dollar has made oil a cheaper
commodity for those who spend Euros and Japanese Yen thus supporting the
increased demand.
North American natural gas prices are also being supported by strong
fundamentals. Demand is increasing with improved economic growth while supply
from relatively mature producing basins is starting to decline. The near record
gas drilling activity in 2003 served only to slow the decline in the production
rate and this situation is not expected to change in the near future. High oil
prices also serve to support natural gas prices as the
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economic benefit of switching between the two fuels is minimal. The importation
of liquefied natural gas into the North American market, once thought to be the
competitive product that would cause gas prices to decline, is now viewed by
many industry analysts as a requirement to fill the gap between demand and
conventional production capabilities.
THE CANADIAN MARKET - PRECISION'S PLATFORM
The Western Canada Sedimentary Basin (WCSB) is maturing and our Canadian
business units are adapting to this change. Overall production in the WCSB is
growing, however, conventional oil is on the decline and natural gas reserve
growth is struggling to replace 2003 production volumes. Growth opportunities
exist in oil sands, heavy oil and tight gas drilling, coal bed methane drilling
in particular. Longer-term medium to deep drilling prospects will be long
awaited opportunity for oilfield service providers. With strong commodity
prices, our customers first exploit low risk quick tie-in production. For
western Canada this is shallow natural gas and the statistics prove this out.
The number of wells drilled in 2003 set an all-time high with 19,851 completed
wells. Note that well statistics on a completion basis differ from rig releases
due to delays in reporting. While the statistics vary, well completion
statistics accurately profile work opportunity over longer periods of time.
The following chart profiles the type of wells drilled in Canada over the
past 10 years.
[CHART OMITTED - BAR CHART]
[WESTERM CANADA SEDIMENTARY BASIN]
[NUMBER OF INDUSTRY WELLS DRILLED ON A COMPLETION BASIS]
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ANNUAL REPORT 2003 MANAGEMENT'S DISCUSSION AND ANALYSIS
page 49
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The steady growth in natural gas drilling has fueled activity for the past
decade. The shift from oil to natural gas wells impacts the underlying nature of
the energy services that companies like Precision provide. It has created higher
demand for snubbing and in general, lower demand for service rigs, as natural
gas wells do not need to be worked over as frequently as oil wells.
The following chart profiles 10-year drilling rig activity trends as
measured by spud to rig release operating days by category of drilling rig depth
rating.
[GRAPHIC OMITTED - BAR CHART]
[WESTERN CANADA SEDIMENTARY BASIN]
[INDUSTRY OPERATING DAYS]
[BY DRILLING RIG DEPTH RATING]
While the year 2003 set the WCSB well count record, it is 1997 that
continues to hold the high mark for drilling rig work in terms of utilization
and operating days. At 33% of industry drilling rigs, Precision's activity
tracks very close to industry. While the well count is important, the reduction
in time to drill a well deserves emphasis.
It is the development of shallow well oil and natural gas prospects that
underpins the Canadian market and continues to be the agent for activity
volatility. The trend towards deeper drilling prospects is progressing at a slow
pace. However as our customers drill out the shallow well inventories that they
hold today, they will be forced to pursue deeper prospects. We believe that we
are beginning to see this shift as demand for medium depth light triple type
drilling rigs has never been stronger than it is in the first quarter of 2004.
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The following chart profiles the 10-year trend in terms of average well
depth and average operating days to drill a well.
[GRAPHIC OMITTED - LINE CHART]
[WESTERN CANADA SEDIMENTARY BASIN]
AVERAGE INDUSTRY WELL DEPTH VERSUS TIME TO DRILL
On average, oil and gas well depths are increasingly shallow. This is
entirely consistent with the production shift to natural gas in the WCSB.
Experience shows that our customers, the producers, first develop low risk close
to market prospects such as those in southern Alberta. The average time to drill
a well in the WCSB in 2003 was just over six days. For Precision in Canada, the
average time is 5.1 days. The average drilling time per well has shown
considerable reduction since 1999 as drilling contractors continue to search for
niche equipment solutions to specific well parameters. Precision's coil tubing
drilling rigs, since their emergence in the year 2000, have had a significant
impact on industry drilling statistics and in some ways have diminished the
meaning of a well count in terms of drilling rig activity.
Improvements in drilling equipment and processes in combination with better
downhole tools like MWD, LWD and the drill bit have provided productivity gains
that lower customer costs. Precision's coil tubing drilling rigs is a case in
point. Available rigs averaged 10.5 in 2003 and all together they drilled 2,641
wells during the year. Each well averaged a well depth of 614 metres, took 16.8
hours to drill with an operating utilization of 48%, move time excluded. These
types of drilling solutions are applicable to specific drilling programs only
and have filled a customer need to better exploit shallow natural gas. Another
example is oil sands drilling in northeast Alberta where Precision has taken a
lead industry role in the development of specialized equipment configuration
with our Super Single(R) drilling rig to meet the drilling requirement for
programs that enable recovery techniques such as Steam Assisted Gravity Drainage
(SAGD).
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ANNUAL REPORT 2003 MANAGEMENT'S DISCUSSION AND ANALYSIS
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Innovations such as these may reduce our drilling revenue days in the near
term, however it balances out as we enable our customers to pursue more
prospects in the exploitation of hydrocarbons within the WCSB.
The following chart profiles the 10-year trend in terms of available
drilling rigs and operating day rig utilization.
[GRAPHIC OMITTED - LINE/BAR CHART]
[WESTERN CANADA SEDIMENTARY BASIN]
[INDUSTRY UTILIZATION VERSUS NUMBER OF DRILLING RIGS AVAILABLE]
The supply of drilling rigs in Canada has steadily increased over the past
10 years to almost 700, an all-time high. Customer demand as measured by
operating day utilization peaked in 1997 and has languished between 38% and 56%
since. This has not deterred the industry from adding rigs as drilling
contractors have continued to build capacity. In the short term the capacity is
geared toward peak winter demand in January and February. In the medium to
long-term it provides the capacity to drill more wells through better
utilization in the other ten months of the year. If commodity prices weaken for
a prolonged period the industry may have a large supply demand imbalance.
Clearly the industry believes that the pace of drilling to sustain natural gas
production for domestic Canadian use and export to the United States will keep
equipment utilization in good stead.
Within the Contract Drilling segment, Precision underwent tremendous growth
in Canada up to 1997. Subsequently we diversified our service offering through
service rigs and snubbing units to service and work-over the increasing number
of wells drilled and in production. This included camp and catering capabilities
to meet the logistical reality of remote drilling locations and the need to
reduce travel incidents for field employees at the well site. Precision's
drilling rig fleet represented 40% of the industry in 1997. Our market share has
eroded to 33% in 2003. Precision is comfortable at this level and we acknowledge
that it would take the acquisition of 55 existing rigs to regain lost market
share.
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With a lead industry market share in Canada and reduced acquisition
opportunities within Canada our focus has been to reach out and gain experience
in the international drilling market. We have gained considerable work
experience and projects like the Burgos Basin in Mexico demonstrate our ability
to deploy and operate on a large scale in the global arena.
PRECISION'S DEVELOPMENT IN THE OILFIELD SERVICES BUSINESS
Precision's development is best described in the context of its three
business segments which are distinguished by not only by the types of services
provided but also by their position on the continuum from start-up to maturity.
Contract Drilling includes drilling rigs, service rigs, hydraulic well assist
snubbing units, procurement and distribution of oilfield supplies, camp and
catering services, and manufacture, sale and repair of rig equipment. Technology
Services includes wireline, directional drilling, MWD, LWD services, separation
services, controlled pressure drilling, and the design, manufacture and
marketing of polycrystalline diamond compact drill bits. Rental and Production
includes oilfield equipment rental services and industrial process services.
The following graphs illustrate how each of the Contract Drilling,
Technology Services and Rental and Production segments have historically
contributed to Precision's profitability and investment.
[GRAPHIC OMITTED - BAR CHART]
[REVENUE ($ millions)]
[GRAPHIC OMITTED - BAR CHART]
[OPERATING EARNINGS ($ millions)]
[GRAPHIC OMITTED - BAR CHART]
[CAPITAL SPENDING ($ millions)]
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ANNUAL REPORT 2003 MANAGEMENT'S DISCUSSION AND ANALYSIS
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CONTRACT DRILLING - CANADA IS THE CORE - WORLDWIDE DRILLING IS IN SIGHT
The Contract Drilling segment is the current financial foundation of the
Corporation. Canadian business units within the segment are well established.
Each core business unit has undergone asset growth and has a lead market role
within Canada. Using the financial and operational leverage gained, the segment
continues to evolve within Canada with a view to exporting its capabilities to
niche markets worldwide.
Within Canada the segment has individual business units that are tightly
integrated in terms of operational management, safety, engineering, accounting
and senior management supervision and governance. Communication is a skill that
has been refined and ingrained in the operating culture. The strength to
successfully integrate acquisitions with vertical integration within and between
related ancillary business units has been developed through the handling of
acquisitions over the past 15 years.
Precision's roots began in Western Canada as a land drilling contractor and
the Corporation's development has matched that of the WCSB. Initially founded in
1985 as Cypress Drilling Ltd., the business quickly grew from four drilling rigs
to 19 with the reverse takeover in 1987 of Precision Drilling Ltd., a company
formed in 1952. Over the following decade a series of nine acquisitions expanded
the Canadian drilling rig fleet to 200 as of May 1997 and a 40% market share of
industry rigs. International operations in Venezuela commenced in 1992 with the
Sierra Drilling acquisition. Diversification into service rig and snubbing
operations came with the 1996 acquisition of Enserv Corporation. In the second
half of the year 2000, Precision became fully vested in the Canadian service rig
business as the CenAlta Energy Services Inc. acquisition created a combined
fleet of 257 service rigs and a lead industry market share of 28%. The
additional acquisition in 2000 of coil tubing drilling rigs and other shallow
drilling rigs rounds out key milestones in our asset base growth.
While each business unit is at its own stage in the business life cycle
continuum, drilling has matured over the past three years. Today the business
has developed critical equipment mass and employee depth. It has developed
integrity-based systems that enable the business to evolve in meeting
fundamental industry challenges while delivering better profit and safety
performance. Employee retention and seasonal cycles remain a huge manpower
challenge for the industry. This condition is rather unique in that there is a
reasonable supply of equipment; it is the people element that keeps the market
in tight supply. The supply of experienced people yields profit leverage for
oilfield service companies, not just the "iron".
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CORE BUSINESS ASSETS
Five Year History, end of year status
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2003 2002 2001 2000 1999
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International (beyond Canada and the U.S.)
Drilling Rigs 19 16 15 12 11
United States
Drilling Rigs 1 1 4 2 0
Canada
Drilling Rigs - 33% of industry 225 226 229 230 211
Service Rigs - 28% of industry 239 240 257 257 76
Rig Assist Snubbing Units - 33% of industry 25 23 24 19 20
Oilfield Drilling Camps - 25% of industry 88 74 74 74 75
Enabling Infrastructure (Canada - in square feet)
Equipment Manufacture Facility 48,000 48,000 48,000 38,000 38,000
Consumable Supply Procurement and
Distribution Facility 40,000 40,000 40,000 40,000 40,000
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The following tables provide a worldwide summary of Precision's drilling and
service rig fleets.
2003 2002
Type of Drilling Rig Depth CANADA/U.S. INTERNATIONAL TOTAL Canada/U.S. International Total
---------------------------------------------------------------------------------------------------------------------------
Single to 1,200 m 18 -- 18 17 -- 17
Super Single(R) to 2,500 m 15 4 19 16 4 20
Double to 3,000 m 96 7 103 96 6 102
Light triple to 3,600 m 47 6 53 48 5 53
Heavy triple to 7,600 m 39 2 41 39 1 40
Coiled tubing 11 -- 11 11 -- 11
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Total fleet 226 19 245 227 16 243
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Type of Service Rig - Canada 2003 2002 2001 2000 1999
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Single 1 1 4 4 --
Freestanding mobile single 75 50 23 8 4
Mobile single 29 55 91 105 42
Double 57 58 60 59 24
Freestanding mobile double 6 6 5 4 --
Mobile double 46 45 48 50 --
Heavy double 7 7 9 9 2
Freestanding heavy double 2 2 -- -- --
Freestanding slants 16 16 16 16 4
Swab -- -- 1 2 --
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Total fleet 239 240 257 257 76
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As shallow natural gas drilling runs its course in Canada, our diverse and
versatile fleet of drilling and service rigs are very well positioned for the
eventual shift to deeper drilling prospects.
TECHNOLOGY SERVICES
The acquisition of Computalog Ltd. in 1999 marked the initial step in a
five-year strategy to develop the Technology Services business. The market for
downhole services was and still is dominated by three large multi-national
oilfield service companies. However, oil and gas exploration and production
companies are keen to see competition in the ranks of their service providers
and a niche was available to a smaller participant that could deliver quality
products and service. Precision's mature drilling operation provided the
reputation of a respected service provider and the financial backing required to
take on such a venture. In addition, the TS business provided the means to
participate in the offshore oil and gas exploration and production market.
The objectives of TS are the same today as they were in 1999. They are to
expand our product offering, globalize the presence of the whole Precision group
outside of Canada, and introduce a step change in technological capabilities of
what existed in TS and the industry. An advantage that TS had as a new
"greenfield" participant in the market was that it was not burdened by the
challenge of integrating new technology with old, nor need it be concerned with
the impact new technology might have on the economics of a substantial
investment in earlier generation technologies.
Initially, activities aimed at achieving TS objectives were undertaken
across a broad front. Since 1999 Precision has spent $133 million on its
research and engineering efforts. Much of this work was centered around
Advantage R&D, Inc. in Houston, Texas, which was established by Precision in
2000 with the mandate to develop the next generation of LWD and MWD tools.
Another significant element of the research and engineering program focused on
the development of our Rotary Steerable tools, which work was undertaken by
Smart Stabilizer Systems Ltd., a Precision subsidiary based in Cheltenham,
England.
Acquisitions, including Geoservices S.A in October 2000 and BecField
Drilling Services Ltd. in January 2001, were completed to gain access to
innovative technologies and to establish a presence in certain regional
international markets. By early 2001, TS had established regional centers in
seven strategic geographic areas around the world, namely Canada, the U.S.,
Mexico, Latin America, Europe/Africa, the Middle East and Asia/Pacific.
Technology Services revenue grew from $126 million in 1999 to $603 million
in 2002. A significant amount of this expansion came outside of the Canadian and
U.S. markets with the other regional operations accounting for 38% of revenue in
2002 compared to 14% in 1999. However, the scope of TS growth initiatives, in
terms of both geography and product lines, combined with the impact of delays in
the deployment of new technologies, resulted in operations support and
administrative organizations that were uneconomic for the start-up revenue
levels realized.
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Fiscal 2003 can best be characterized as a "year of re-focus" for TS. A
number of management changes occurred during the year which changed the style
and culture of the TS segment. No longer is the segment purely focused on
revenue growth and geographic expansion. The renewed goal is profitable growth
in areas where we believe we can achieve an acceptable long-term return on our
investment.
RENTAL AND PRODUCTION
Precision entered this segment of its business in 1996 when it acquired
EnServ Corporation. Since then the Corporation has reduced the operations
carried on by this segment through strategic divestitures that took advantage of
attractive valuations to dispose of operations determined to be not core to
Precision's future growth plans. The industrial rental division was sold in
February 1999 and the gas compression operation was sold in March 2003. Each of
these transactions produced gains for the Corporation. Both of the businesses
currently carried on by the segment, namely, industrial plant maintenance and
oilfield equipment rental, have grown through acquisitions and the pursuit of
internal growth opportunities.
CEDA's plant maintenance operations have become increasingly focused on the
expanding activity in northern Alberta's oilsands regions. The acquisition of
JJay Exchanger Industries Ltd. in the second quarter of 2000 solidified the
segment's position in this market as a provider of all the required services in
a major refinery or petro-chemical plant turnaround/shutdown.
Innovation has also played an important role in CEDA's steady growth. Their
research and development efforts have grown out of their unique knowledge and
experience, with the focus on developing new tools and applications that are
marketable in the field. Examples of products that CEDA has introduced to the
market include the SuperLance(TM) System, which combined Precision's experience
in coil tubing drilling with water blasting technology to increase the
efficiency of cleaning coker units in refineries, and various adaptations of
robotics technology to increase the safety and timeliness of tank cleaning
operations.
The oilfield equipment rental business expanded its product offerings in
1997 with the acquisition of substantially all of the business assets of
Ducharme Oilfield Rentals Ltd. whose primary product line was the rental of
portable industrial housing, which is used at many remote drilling locations in
western Canada. Since then many initiatives have been undertaken to integrate
the delivery of products to customers and increase the profitability of
operations. Among them is the closure of the wellsite trailer manufacturing
facility in favour of less costly outsourcing arrangements in 2002 and more
recently the consolidation of all rental product lines to form Precision Rentals
Ltd. This latter move was in response to changing and growing customer needs to
simplify their purchasing decisions by providing one point of contact to access
all their rental needs.
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RESULTS OF OPERATIONS
CONTRACT DRILLING
(STATED IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER DAY/HOUR AMOUNTS)
% OF % of % of
Years ended December 31, 2003 REVENUE 2002 Revenue 2001 Revenue
-----------------------------------------------------------------------------------------------------------------------------
Revenue $ 992,824 $ 770,147 $1,004,265
Expenses:
Operating 602,418 60.7 491,433 63.8 599,159 59.7
General and administrative 29,364 3.0 29,769 3.9 32,453 3.2
Depreciation 77,725 7.8 62,524 8.1 75,170 7.5
Foreign exchange (2,436) (0.3) 1,868 0.2 (1,254) (0.1)
-----------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 285,753 28.8 $ 184,553 24.0 $ 298,737 29.7
-----------------------------------------------------------------------------------------------------------------------------
% INCREASE % Increase % Increase
2003 (DECREASE) 2002 (Decrease) 2001 (Decrease)
-----------------------------------------------------------------------------------------------------------------------------
Number of drilling rigs (end of year) 245 0.8 243 (2.0) 248 1.6
Drilling operating days (worldwide) 46,715 33.2 35,081 (25.6) 47,142 8.7
Revenue per operating day $ 15,984 (0.1) $ 16,008 (0.1) $ 16,097 15.3
Number of service rigs (end of year) 239 (0.4) 240 (6.6) 257 --
Service rig operating hours 439,519 12.1 392,210 (20.4) 492,480 121.3
Revenue per operating hour $ 462 3.6 $ 446 4.4 $ 427 12.4
-----------------------------------------------------------------------------------------------------------------------------
2003 COMPARED TO 2002
In financial terms, the Contract Drilling segment had a very good year in
2003 with a sharp rebound in Canadian drilling activity to 2001 levels, higher
international rig activity with fourth quarter growth and a moderate increase in
Canadian service rig activity. Snubbing and camps services were also more active
with equipment utilization improvement similar to drilling. While international
conditions were positive, seasonally adjusted Canadian performance strengthened
throughout 2003. In 2002, the quarterly trend was quite the opposite where in
Canada conditions were deteriorating after the torrid pace of 2001. For 2003,
segment revenues increased by 29% to $993 million, an improvement of $223
million over the prior year. Operating earnings increased by 55% to $286
million, an improvement of $101 million and 4.8 percentage points of revenue for
a margin improvement of 20%. Of the $101 million improvement in operating
earnings, 70% or $70 million of this is attributable to Canadian drilling rig
and service rig operations. This earnings improvement is attributable to more
equipment activity and higher pricing. The equipment activity increase, volume
factor, generated incremental operating earnings of $50 million over prior year
with higher pricing, price factor, generating $20 million virtually all of which
was generated in the second half of the year. Service rig performance is
noteworthy, as the operating earnings margin improvement was almost half the
total at $9 million or $21 per service rig operating hour.
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International drilling operations experienced significant expansion in 2003
as operating earnings and operating days increased by 31% and 32%, respectively,
over 2002. The increased activity is attributable to additional rigs working in
Mexico and the commencement of operations in the Middle East and the
Asia/Pacific region.
In summary, current year performance is significantly ahead of 2002, and
close to the record setting performance of fiscal 2001.
Coming off a relatively weak 2002, fiscal 2003 steadily gained strength as
our customers stepped up field activity to increase production in an environment
where commodity price strength became more entrenched. With firm global oil
pricing and firm North American natural gas pricing, sustained demand for
Canadian Contract Drilling services throughout the year has allowed for strong
revenue rates as we exit the fourth quarter of 2003. In the Canadian market,
this is in sharp contrast to 2002, where rates were being undermined to start
the year and continued to erode during the year.
During 2003 Contract Drilling kept tight control on capital expenditures
with a focus to strengthen the existing asset base, grow international drilling
and be opportunistic to acquisitions within Canada. Capital expenditures,
including business acquisitions, totaled $106 million, representing an increase
of $55 million or 108% compared with 2002. The increase is primarily
attributable to asset base growth as the level of expenditure to upgrade our
existing asset base is a continual priority.
International drilling operations continued along a path of patient growth.
The rig count increased by three to exit the year at 19, with 10 in Mexico, two
in the Middle East, two in Asia/Pacific, and five in South America. There were
four additions and net one rig disposal. Three new rigs were built in Canada
with one deployed to Mexico, one to the Middle East and one platform rig to the
Asia/Pacific region. The fourth rig is a retrofitted mechanical light triple
deployed to Mexico from the Canadian fleet. A net one rig ownership interest in
Argentina was disposed of during the year. The platform-mounted rig 703 is of
particular interest as it is Precision's first offshore drilling rig. The rig
was mobilized for Asia/Pacific late in the year and is not expected to start
operations until the second quarter of 2004.
[GRAPHIC OMITTED - PIE CHART]
[GEOGRAPHIC DISTRIBUTION OF
CONTRACT DRILLING REVENUE (2003)]
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In Canada, our asset base expanded with the acquisition of two snubbing
units, 19 oilfield camps and the construction of one new generation single
drilling rig, a Super Single(R) Light with a 1,200 metre depth rating. A second
such rig commenced drilling in February 2004. Asset reductions include the
decommissioning of one drilling and one service rig, the sale of one surface
hole drilling rig and one camp and the transformation of certain four unit camps
into six unit configurations.
Canada spurred the improved financial performance on the strength of record
shallow natural gas well drilling activity.
o Canadian drilling rig activity increased 36% over prior year to 42,725
operating days and 52% utilization, an improvement of 11,362 days and 14
utilization percentage points.
o Service rig activity increased 12% over prior year to 439,519 operating
hours and 50% utilization, an improvement of 47,309 hours and five
utilization percentage points.
o Snubbing unit activity increased 39% over prior year to 4,322 utilization
days and 54% utilization, an improvement of 1,210 days and 12 utilization
percentage points.
o Camp activity increased 38% over prior year to 12,451 camp days and 39%
utilization, an improvement of 3,406 days and 6 utilization percentage
points.
International drilling rig activity increased 32% over prior year to 3,990
operating days, an improvement of 975 days. Two thirds of the additional days
occurred in the Mexico operations where additional rigs were put to work with
the extension of the Burgos integrated services project. Drilling operations ran
for a full year in the Asia/Pacific region adding 280 days to the increase in
2003 while Middle East operations commenced in the fourth quarter of 2003.
Looking ahead to 2004 we carry strong momentum in all business lines within
the segment.
o Precision Drilling International's drilling operation is expected to
benefit from a full year of 2003 growth in the Middle East and Asia/Pacific
regions. We expect operations in Venezuela to carry forward at current
levels.
o Precision Drilling in Canada is off to an excellent first quarter start
with drilling rig activity 4% ahead of 2003 and superior operating earning
margins.
o Precision Well Servicing in Canada is off to an even better first quarter
start with service rig activity 8% ahead of 2003 and superior operating
earnings margins.
o Live Well Service and LRG Catering are also ahead of last year's pace as
natural gas drilling and production activity is generating strong demand
for snubbing and camp/catering services.
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2002 COMPARED TO 2001
The asset base for Contract Drilling was virtually unchanged during 2002,
as there were no additions and certain rigs, 4 drilling and 17 service, were
taken out of service. The reasons for the decline in activity in 2002 compared
to 2001 were two-fold. First, competition and industry capacity continued to
increase, albeit at a slower pace, as competitors continued to build new
equipment. Available rigs in Canada reached an all-time record high. Second,
although the fourth best year ever in western Canada in terms of well
completions, 2002 was characterized by low risk drilling whereby short duration
shallow gas wells were dominant. A lack of confidence in energy commodity
pricing triggered conservative spending by our customers. This was noteworthy as
drilling parameters serve as a lead indicator for most future energy services
within a region. There were 14,459 wells drilled in Canada in 2002, a mark that
resulted in a drilling rig activity decline of 27% to 31,363 operating days for
Precision in Canada representing a 38% utilization rate, a post-1992 low.
Service rig activity declined 20% to 392,210 hours in Canada (44% utilization).
Our service rig work was split one-third new well completion with the remaining
two-thirds directed towards the workover of existing wells in production.
Snubbing unit activity declined 15% and camp and catering days declined 37% to
9,041 days (33% utilization).
Capital expenditures were managed to closely match changes in demand for
our existing asset base. Measures of demand include utilization, revenue and
operating earnings. Compared to the prior year service and drilling rig
utilization declined a combined 24%, capital expenditures declined 59%, revenue
decline of 23% and operating earnings declined 38%.
In terms of operating earnings, the $114 million dollar decline over prior
year was due to a volume reduction of $71 million due to lower equipment
utilization, with the remaining $43 million due to price competitiveness
resulting in lower rig dayrates and less coverage of fixed infrastructure costs.
Drilling and service rig dayrates were strong in the first quarter of 2002 as
record 2001 performance momentum carried forward through winter drilling.
However, as the remaining three quarters progressed, steadily softening demand
continued to erode operating margins and Contract Drilling exited the year with
margins at 52 week lows.
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TECHNOLOGY SERVICES
(STATED IN THOUSANDS OF CANADIAN DOLLARS)
% OF % of % of
Years ended December 31, 2003 REVENUE 2002 Revenue 2001 Revenue
------------------------------------------------------------------------------------------------------------------------------
Revenue $ 714,385 $ 603,088 $ 614,152
Expenses:
Operating 523,105 73.2 463,632 76.9 404,577 65.9
General and administrative 70,619 9.9 80,751 13.4 75,468 12.3
Depreciation and amortization 75,578 10.6 53,347 8.8 47,694 7.8
Research & engineering 42,419 5.9 34,862 5.8 31,677 5.1
Foreign exchange (2,178) (0.3) 2,229 0.4 2,479 0.4
Operating earnings (loss) $ 4,842 0.7 $ (31,733) (5.3) $ 52,257 8.5
------------------------------------------------------------------------------------------------------------------------------
% INCREASE % Increase % Increase
2003 (DECREASE) 2002 (Decrease) 2001 (Decrease)
------------------------------------------------------------------------------------------------------------------------------
Wireline jobs performed 38,403 24.6 30,813 (18.6) 37,845 28.6
Directional wells drilled 2,954 78.6 1,654 44.1 1,148 15.1
Well testing/CPD man days (Canada only) (1) 53,377 8.4 49,227 (18.1) 60,135 43.9
------------------------------------------------------------------------------------------------------------------------------
(1) CONTROLLED PRESSURE DRILLING (CPD).
2003 COMPARED TO 2002
As noted earlier, 2003 was a year of transition for Technology Services
with new management changing the focus of the business from top line growth and
geographic expansion to enhanced bottom line profitability. Return on capital
employed is now the yardstick by which success is measured and investment
decisions are guided. The transition is not complete, however, significant
improvements were achieved in all regions and we will strive to make further
progress in 2004.
Notable accomplishments in 2003 include the following:
o Non-profitable product lines were shut down in many regions. This is
consistent with another key element of the Technology Services strategy
going forward. That being, not trying to be everything to everybody
everywhere. The segment will focus on what it is good at in regions where
economies of scale will contribute to profitable operations.
o Other businesses were rationalized and re-focused. In some instances this
involved consolidating management functions where geographically possible.
In others it meant trimming cost structures to better match anticipated
revenue levels and renegotiating customer contracts to recognize additional
services being provided.
o Non-core businesses were identified. The sale of one such business, Fleet
Cementers, Inc., was completed in February 2004, and a similar transaction
is being pursued with respect to Polar Completions.
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o TS was successful in signing a number of large contracts throughout the
world on which the Corporation will use its new technologies.
o A technology review was completed in the third quarter which provided the
direction for our research and engineering work for the next few years.
This review centered on a road map for a development plan that considers
key customer needs and requirements, identifies the related project
parameters, and set priorities.
o The first phase of the segment's Enterprise Resource Planning information
system implementation project was completed in the fourth quarter when the
Canadian operations went live on the software. The new system and processes
are already beginning to pay dividends in terms of expense analysis and
additional information available to manage the business.
One critical factor that hampered the roll out of our new suite of tools in
the first part of 2003 was the ability for the hostile environment logging
(HEL(TM))/LWD tool to demonstrate that it could reliably perform in many
different geological environments. The fourth quarter saw a step change in the
reliability of these tools. The mean time between failure almost quadrupled in
December and that success has continued in early 2004. This operating
reliability allows our customers to also see the technological advantages of our
tools which are demonstrating logging speeds well in excess of existing industry
standards. The HEL(TM)/LWD tools now appear to be nearing the end of the process
of evolving from a science project to a viable business. We began the project by
designing and building tools to collect high quality geological and geophysical
information. The next phase focused on collecting that information in a reliable
and efficient manner, which is what we accomplished in the latter half of 2003.
We are now starting to generate advanced interpretation products from that
information and should be able to grow the business using our existing wireline
infrastructure such as our computing and interpretation centers in Calgary and
Houston.
With respect to our Rotary Steerable tool, although several runs have been
completed with over 125 hours in the hole, we are having some reliability
challenges of the same nature as we experienced with the HEL(TM)/LWD tools in
early 2003. The tools have demonstrated superior capability to generate high
build angles and to kick off directionally from a vertical wellbore, both of
which add efficiencies to our customers' drilling operations.
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[GRAPHICS OMITTED - BAR CHARTS]
[GEOGRAPHICAL DISTRIBUTION OF REVENUE]
[2003, 2002, 2001]
Revenue increased by $111 million or 18% in 2003 over 2002. All of the
increase came from the Canada, U.S. and Mexico operations. Operations in Canada
increased in conjunction with increased drilling activity. This increased demand
for services also resulted in generally improved pricing. Similarly, revenue and
pricing in the U.S. operation responded to the increase in the average rig count
from 830 in 2002 to 1,030 in 2003. The Mexico business benefited from the
extension of the Burgos integrated services project and from the award of
additional contracts outside of that project.
Combined revenue from the segment's other regional operations was flat year
over year. Increased revenue associated with a large wireline contract with a
Canadian-based company in the Middle East was offset by reduced controlled
pressure drilling work in the North Sea. Although it improved late in the year,
activity in Venezuela was also lower than 2002 as a result of the political
unrest in that country. Other countries in the region have improved over the
last half of the year.
Profitability of the segment improved year over year moving from an
operating loss in 2002 of $32 million to earnings of $5 million in 2003. The
effort to review and rationalize businesses in TS brought with it incremental
expenses in the form of severance and closure costs and write-downs of unusable
assets. These expenses totaled $15 million in 2003. Operating and general and
administrative expenses declined as a percentage of revenue due to cost
reduction initiatives and economies of scale associated with certain fixed
infrastructure costs. However, continued improvements are anticipated as we
further develop our execution plan. This involves refining our personnel
development, recruiting and training programs to make sure we have the
appropriate people in place to facilitate the utilization of assets. It also
involves standardizing our maintenance systems and operating procedures, all
standard things that must be put in place to provide the foundation upon which
to grow.
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An important element in continuing the profitability improvements in TS is
increased utilization of the new tools being put into service. Currently the
jobs being performed are usually isolated from one another requiring backup
equipment for every location. As customer acceptance increases, more jobs will
be occurring simultaneously in one geographic region requiring less backup
equipment on a per job basis. Plans are also in place to refine our
manufacturing processes to reduce the overall cost of tools being built. These
developments should serve to reduce depreciation expense as a percentage of
revenue.
Research and engineering expenditures increased in 2003 as tool development
programs moved from the laboratory to field operations. During the initial
stages of the roll out, product support initiatives were being performed by the
research and engineering teams. With the commercialization of operations, this
work has been transferred to the operations groups. The target for sustained
research and engineering expenditures is 5% of revenue.
2002 COMPARED TO 2001
TS continued its geographic diversification efforts in 2002. Revenue
declined by $11 million or 1.8% in 2002 compared to 2001. The Canadian and U.S.
operations saw revenue decline as a result of reduced activity levels. The year
over year decline in the number of wells drilled amounted to approximately 20%
in both markets. The U.S. operations were also hampered by delays in the roll
out of the new suite of tools.
Revenue increased in all regions outside of Canada and the U.S. as the
segment's expanded international presence facilitated the participation in a
broader spectrum of projects. The political situation in Venezuela did have a
negative effect on revenue as oil and gas production activity in that country
was virtually shut down in the last six weeks of the year.
Having set up regional operations centers in 2001, the strategy was to
establish brand recognition for Precision through successful completion of
competitively bid projects. With these expanded operations, Precision increased
its recognition as a viable alternative to the historical group of oilfield
service providers in many international markets. However, the scope of the TS
growth initiatives, in terms of both geography and product lines, combined with
the impact of delays in the deployment of new technologies, resulted in
operations support and administrative organizations that were uneconomic for the
start-up revenue levels realized. This is also reflected in operating and
general and administrative expense which grew 13.4% while revenue declined by
1.8%.
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RENTAL AND PRODUCTION
(STATED IN THOUSANDS OF CANADIAN DOLLARS)
% OF % of % of
Years ended December 31, 2003 REVENUE 2002 Revenue 2001 Revenue
-----------------------------------------------------------------------------------------------------------------------
Revenue $ 210,724 $ 192,840 $ 194,567
Expenses:
Operating 147,911 70.2 139,781 72.5 132,832 68.3
General and administrative 10,479 5.0 9,518 4.9 9,484 4.9
Depreciation 12,533 5.9 13,159 6.8 13,388 6.9
Foreign exchange 451 0.2 292 0.2 (502) (0.3)
-----------------------------------------------------------------------------------------------------------------------
Operating earnings $ 39,350 18.7 $ 30,090 15.6 $ 39,365 20.2
-----------------------------------------------------------------------------------------------------------------------
% INCREASE % Increase % Increase
2003 (DECREASE) 2002 (Decrease) 2001 (Decrease)
-----------------------------------------------------------------------------------------------------------------------
Equipment rental days (000's) 820 35.1 607 (34.4) 925 37.9
Plant maintenance man-days (000's) 272 5.0 259 12.6 230 15.0
----------------------------------------------------------------------------------------------------------------------
2003 COMPARED TO 2002
Revenue in the Rental and Production segment increased by 9% in 2003
compared to 2002. Both the oilfield equipment rental and industrial plant
maintenance operations contributed to the increase. Equipment rental days
increased in conjunction with increased drilling activity and operating earnings
in this business improved significantly as most expenses are fixed in nature.
The cornerstone to the plant maintenance operations continues to be the
work performed at the oilsands projects in northern Alberta. The division's
ability to offer the complete suite of cleaning, mechanical, catalyst and
dredging services required to maintain these large projects, and the continued
training and development of its employees, differentiates it from its
competitors. Recognition of the value this business brings to its customers has
resulted in continued steady revenue growth and consistent operating margins.
2002 COMPARED TO 2001
Revenue declined modestly as reductions in the oilfield equipment rental
business was only partially offset by increases in the industrial plant
maintenance operation. The rental business saw revenue decline in conjunction
with reduced Canadian drilling activity. This also impacted overall segment
profitability as the rental business has higher margins than the plant
maintenance business.
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The plant maintenance business benefited from commissioning work performed
at a new heavy oil upgrading plant and continued high levels of maintenance work
at oil sands projects in northern Alberta. Operating margins were consistent
with 2001. During the year, this business was expanded through the acquisition
of a vacuum truck operation in northern Alberta.
OTHER ITEMS
2003 COMPARED TO 2002
CORPORATE AND OTHER EXPENSES
Expenses in the Corporate and Other segment increased by $4.1 million in
2003 compared to 2002. In contrast to last year, variable compensation payments
tied to corporate performance increased in 2003. In addition, directors and
officers insurance premiums have increased as a result of increased scrutiny of
corporate governance practices of public equity market participants in North
America and around the world. General and administrative expenses are also
affected by the ongoing requirements surrounding Sarbanes-Oxley legislation.
INTEREST EXPENSE
Net interest expense remained constant at $35 million in 2003 and 2002. The
impact of a $24 million increase in average debt outstanding was offset by
reduced interest rates. As anticipated at the end of last year, interest
coverage, defined as operating earnings divided by net interest expense,
returned to 2001 levels. Interest coverage in 2003, 2002 and 2001 was
approximately 9, 4 and 8 times respectively, and is expected to improve in 2004
with the free cash flow being generated.
INCOME TAXES
The Corporation's effective tax rate on earnings from continuing operations
before income taxes, non-controlling interest and goodwill amortization in 2003
was 27.3% compared to 25.3% in 2002. The Alberta government reduced tax rates by
0.5% in each of 2003 and 2002. Canadian GAAP requires that the effect of these
rate reductions be reflected as a decrease of future tax expense. The impact of
these rate reductions on tax expense was similar in 2003 and 2002 at $3 million
and $2.6 million respectively. However, given the higher before tax earnings in
2003 compared to 2002, the impact of the reductions on the Corporation's
effective tax rate amounted to 1.1 percentage points in 2003 versus 2.1 in 2002.
Similarly, the Corporation's organization structure generates tax savings
which, in absolute dollar terms, are relatively consistent from year to year. In
2003 these tax savings reduced the effective tax rate by 4.1 percentage points
compared to 9.4 in 2002.
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In the absence of the above factors the Corporation's effective tax rate
would have been 32.6% in 2003 compared to 36.8% in 2002. This decrease is a
reflection of the tax rate reduction initiatives of the Canadian Federal and
Alberta Provincial governments and of the mix of income from different tax rate
jurisdictions. The Corporation's effective tax rate is expected to be in the
range of 32 - 34% in 2004.
2002 COMPARED TO 2001
CORPORATE AND OTHER EXPENSES
Net expenses for Corporate and Other declined by $1.2 million in 2002
compared to 2001. The primary reason was the reduction in variable compensation
payments, which are tied to corporate performance.
INTEREST EXPENSE
Net interest expense declined by $7.9 million in 2002 as a result of
reduced cost of borrowing due to declining interest rates and reduced borrowing
levels. The average debt outstanding in 2002 was $568.4 million compared to
$630.8 million in 2001. Interest coverage, defined as operating earnings divided
by net interest expense, declined to 4 times in 2002 compared to 8 times in
2001.
INCOME TAXES
The effective tax rate on earnings before income taxes and goodwill
amortization was 25.3% in 2002 compared to 35.6% in 2001. This reduction is due
to the combined impact of tax rate reductions instituted by both the Alberta and
Canadian governments and income taxed in jurisdictions with lower tax rates.
The effective tax rate in 2002 and 2001 was reduced by 0.5% and 2%,
respectively, as a result of tax rate decreases enacted by the Alberta
government in those years. Canadian GAAP required that the effect of these rate
reductions be reflected as a decrease of future tax expense. The impact of these
rate reductions was $2.6 million in 2002 and $6.0 million in 2001.
GOODWILL AMORTIZATION
In 2001, standards under both Canadian and U.S. GAAP were issued that
eliminated the amortization of goodwill. These rules were adopted January 1,
2002 by the Corporation.
LIQUIDITY AND CAPITAL RESOURCES
Historically the oilfield services business has been very cyclical. In
managing the risk of this volatility, Precision has adhered to its philosophy of
maintaining a strong balance sheet. In addition, a strong balance sheet has
allowed the Corporation to grow through acquisition by providing the financial
flexibility to respond to attractive investment opportunities in the form of
both acquisitions and internal growth. The following graph gives a historical
perspective on how Precision has managed its cash flows and its debt levels.
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[GRAPHIC OMMITTED - BAR/LINE CHART]
[INVESTMENT, CASH FLOW and CAPITALIZATION]
In 2004 the Corporation expects cash flow from operations to approach $400
million and net capital expenditures to amount to approximately $320 million.
Another significant source of cash has been proceeds from the exercise of
employee stock options, which has contributed an average of $23 million over
each of the past three years ended December 31, 2003. In January 2004 the
Corporation received $25 million from the exercise of options and the total
amount for the year is anticipated to exceed $50 million.
As a Corporation with multiple lines of business, Precision also regularly
assesses each unit from the perspective of strategic fit with future growth
plans and profitability improvement initiatives. In 2003 the Corporation
received $67 million from the sale of business units identified as non-core,
primarily the gas compression business carried on by Energy Industries Inc. In
February 2004, the Corporation completed the sale of substantially all of the
assets of Fleet Cementers, Inc. realizing proceeds of approximately $26 million
(US$20 million). A similar transaction is being pursued with respect to the
Polar Completions division.
The Corporation exited 2003 with a long-term debt to long-term debt plus
equity ratio of 19% and a ratio of long-term debt to trailing cash flow from
operations of 155%. Both measures showed improvement over 2002 when these ratios
amounted to 25% and 258% respectively. Continued improvement is expected in
2004, barring the impact of any significant acquisitions.
Precision has a number of lines of credit available to finance its
activities, the most significant of which is a $350 million extendable revolving
unsecured facility with a syndicate led by a Canadian chartered bank. At
December 31, 2003, $140 million had been borrowed under this facility, the
majority of which was used to finance working capital requirements. Canadian
oilfield activity peaks in the first quarter of every year with a
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ANNUAL REPORT 2003 MANAGEMENT'S DISCUSSION AND ANALYSIS
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swift reduction in the second quarter due to spring breakup which precludes the
movement of heavy equipment. As a result, accounts receivable are expected to
increase by approximately $175 million during the first quarter with a similar
reduction in the second quarter.
The Corporation's contractual obligations are outlined in the following
table:
(STATED IN THOUSANDS OF CANADIAN DOLLARS) Payments Due by Period
Less Than After
Total 1 Year 1 - 3 Years 4 - 5 Years 5 Years
---------------------------------------------------------------------------------------------------------------------------
Long-term debt $ 415,951 $ 16,566 $ 239,570 $ -- $ 159,815
Capital lease obligations 629 592 37 -- --
Operating leases 110,500 28,104 49,566 11,168 21,662
---------------------------------------------------------------------------------------------------------------------------
Total contractual obligations $ 527,080 $ 45,262 $ 289,173 $ 11,168 $181,477
---------------------------------------------------------------------------------------------------------------------------
CRITICAL ACCOUNTING ESTIMATES
This Management's Discussion and Analysis of Precision's financial
condition and results of operations is based on its consolidated financial
statements which are prepared in accordance with Canadian generally accepted
accounting principles. The Corporation's significant accounting policies are
described in Note 1 to its consolidated financial statements. The preparation of
these 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
Corporation's operating environment changes.
The accounting estimates believed to require the most difficult, subjective
or complex judgments and which are the most critical to our reporting of results
of operations and financial position are as follows:
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
The Corporation performs ongoing credit evaluations of our 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. The Corporation's 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 gas industry
and the inherent risk of successfully finding hydrocarbon reserves, a customer's
ability to fulfill its payment obligations can change suddenly and without
notice. In addition, many of our customers are located in international areas
that are inherently subject to risks of economic, political and civil
instabilities, which may impact our ability to collect those accounts
receivable.
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PRECISION DRILLING CORPORATION
page 70
--------------------------------------------
EXCESS AND OBSOLETE INVENTORY PROVISIONS
Quantities of inventory on hand are regularly reviewed and provisions for
excess or obsolete inventory are established based on historical usage patterns
and known changes to equipment or processes that would render specific items no
longer usable in operations. Significant or unanticipated changes in business
conditions could impact the amount and timing of any additional provision for
excess or obsolete inventory that may be required. The TS segment of our
operations involves the application of new technologies in its efforts to
deliver superior products to our customers and therefore has a greater risk of
obsolescence due to finding or developing better products. The TS inventories
comprise 87% of our total inventory of $99 million. These inventories are
reviewed on a quarterly basis to assess the appropriateness of quantities and
valuation.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, which includes property, plant and equipment,
intangibles and goodwill, comprise the majority of the Corporation's 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 the Corporation 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 2003 the Corporation
completed its goodwill assessment incorporating the work of independent
valuation experts resulting in the conclusion that there was no impairment of
the carrying value.
DEPRECIATION AND AMORTIZATION
The Corporation's 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. The high
depreciation expense associated with the TS segment is anticipated to improve
with the optimization of equipment fleet sizes in each geographic region.
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ANNUAL REPORT 2003 MANAGEMENT'S DISCUSSION AND ANALYSIS
page 71
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INCOME TAXES
The Corporation uses 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 clarification of uncertain tax regimes may require changes
to the valuation allowances associated with the Corporation's future tax assets.
NEW ACCOUNTING STANDARDS
In 2003 the Canadian Institute of Chartered Accountants issued revised
recommendations with respect to accounting for stock based compensation.
Effective January 1, 2004 the Corporation will retroactively apply these new
standards to all common share purchase options granted in 2002 and subsequent
years. Under the new standard, the fair value of common share purchase options
will be calculated at the date of grant and that value will be recorded as
compensation expense over the vesting period of those grants. Under the previous
Canadian accounting standard, the Corporation had the choice of using the
intrinsic value method of accounting for grants of common share purchase
options, which resulted in no associated compensation expense being recognized,
and disclosing in a note to the financial statements the impact of expensing the
fair value of option grants. This alternative still exists under U.S. generally
accepted accounting principles.
BUSINESS RISKS
CRUDE OIL AND NATURAL GAS PRICES
The price received by our customers for the crude oil and natural gas they
produce has a direct impact on cash flow available for them to finance the
acquisition of services provided by the Corporation.
Prices for crude oil are established in a worldwide market in which supply
and demand are subject to a vast array of economic and political influences.
This results in very volatile pricing; a prime example of which is West Texas
Intermediate crude oil trading at US$12 per barrel in late 1998 and in excess of
US$40 per barrel at one point in 2000. Natural gas prices are established in a
more "local" North American market due to the requirement to transport this
gaseous product in pressurized pipelines. Demand for natural gas is seasonal and
is correlated to heating and electricity generation requirements. Demand for
natural gas and fuel oils is also affected by consumers ability to switch from
one to the other to take advantage of relative price variations.
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PRECISION DRILLING CORPORATION
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--------------------------------------------
The Corporation partially manages the risk of volatile commodity prices,
and thus volatile demand for its services, by striving to maintain cost
structures that are scalable to activity levels. However, cost structures in
Contract Drilling are more variable in nature than those within TS. In addition,
our strong balance sheet and adherence to conservative financing practices
provide the resilience to withstand and benefit from downturns and upturns in
the business cycle.
North American oilfield service activity is focused on natural gas. One
objective of the Corporation's international growth initiatives is to increase
our exposure to crude oil activity in less cyclical markets.
WORKFORCE AVAILABILITY
The Corporation's ability to provide reliable services is dependent upon
the availability of well trained, experienced crews to operate our field
equipment. We must also balance the requirement to maintain a skilled workforce
with the need to establish cost structures that vary as much as possible with
activity levels.
Within Contract Drilling, our most experienced people are retained during
periods of low utilization by having them fill lower level positions on our
field crews. The Corporation has established training programs for employees new
to the oilfield service sector and we work closely with industry associations to
ensure competitive compensation levels and to attract new workers to the
industry as required.
Many of our Canadian businesses are currently experiencing manpower
shortages. Over 50 drilling rigs have been running without relief crews,
requiring them to shut down when crews need time off. Technology Services
Canadian operations have been supported by additional people and equipment
brought in from other regional operations to meet peak winter demand.
WEATHER
The ability to move heavy equipment in the Canadian oil and natural gas
fields is dependent on weather conditions. As warm weather returns in the
spring, the winter's frost comes out of the ground rendering many secondary
roads incapable of supporting the weight of heavy equipment until they have
thoroughly dried out. The duration of this "spring breakup" has a direct impact
on the Corporation's activity levels. In addition, many exploration and
production areas in northern Canada are accessible only in winter months when
the ground is frozen hard enough to support equipment. The timing of freeze up
and spring breakup affects the ability to move equipment in and out of these
areas.
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ANNUAL REPORT 2003 MANAGEMENT'S DISCUSSION AND ANALYSIS
page 73
--------------------------------------------------------------------------------
Working with customers, we strive to position equipment where possible such
that it can be working on location during spring breakup, limiting the need to
move equipment during this time period as much as possible. However, many
uncontrollable factors affect our ability to plan in this fashion and the spring
breakup, which can occur any time from late March through May, is traditionally
our slowest time.
TECHNOLOGY
Technological innovation by oilfield service companies has improved the
effectiveness of the entire exploration and production sector over the
industry's 140-year history. Recently, development of directional and horizontal
drilling, controlled pressure drilling, coil tubing drilling, and methods of
providing real time data during drilling and production operations have
increased production volumes and the recoverable amount of discovered reserves.
Innovations such as 3-D and 4-D seismic have improved the success rate of
exploration wells partially offsetting the decline in the quantity of drillable
prospects.
Our ability to deliver more efficient services is critical to our continued
success. The Corporation has continuously built upon its experience and teamed
with customers to provide solutions to their unique problems. Our ability to
design and build specialized equipment has kept us on the leading edge of
technology. The success of our in-house designed and built Super Single(R) rig,
both in Canada and abroad, is testimony of our dedication to these efforts.
The continued development of our Technology Services segment, and in
particular the research and development work of Advantage R&D, Inc., puts the
Corporation at another level where high-end technological innovation is
paramount to success. We have a team of highly qualified experienced
professionals, that has been assembled and working together for over two years
in state-of-the-art testing facilities. The technologies they have developed
over this time are at or near the commercial deployment stage, however, the
success of future technological endeavours is never certain.
ACQUISITION INTEGRATION
The Corporation has worked towards its strategic objective of becoming an
integrated service provider of sufficient size to benefit from economies of
scale and to provide the foundation from which to pursue international
opportunities. Business acquisitions have been an important tool in this pursuit
and will continue to be so in the future. Continued successful integration of
new businesses, people and systems is key to our future success.
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PRECISION DRILLING CORPORATION
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--------------------------------------------
FOREIGN OPERATIONS
The Corporation is working hard to export its expertise and technologies to
oil and gas producing regions around the world. With this comes the risk of
dealing with business and political systems that are much different than we are
accustomed to in North America. The Corporation has hired employees who have
experience working in the international arena and it is committed to recruiting
qualified resident nationals on the staffs of all of its international
operations.
FOREIGN CURRENCY EXCHANGE RATES
The Corporation has a number of sources of foreign currency exchange risk.
On international contracts, attempts are made to structure revenue streams such
that a portion sufficient to match local expenditures is denominated in the
local currency, with the remainder being denominated in U.S. dollars. In
addition, many of our business units buy a portion of their parts and supplies
from suppliers in the United States. Also, the manufacturing effort associated
with the deployment of the new suite of tools is taking place in the U.S. As a
result, the Corporation is presently a net payer of U.S. dollars.
MERGER AND ACQUISITION ACTIVITY
Merger and acquisition activity in the oil and gas exploration and
production sector can impact demand for our services as customers focus on
reorganization activities prior to committing funds to significant drilling and
maintenance projects. Future merger and acquisition activity could have a
short-term impact on our business, but in the long-term should result in a
stronger, more active market.
OUTLOOK
The fortunes of the oilfield services business are dictated by current and
anticipated future crude oil and natural gas prices. The supply and demand
fundamentals that have brought prices to today's relatively high levels are not
expected to change rapidly. Energy price prognosticators have historically
focused on the supply side of the equation where geopolitical events can have a
large impact on short-term supply and where consensus was generally that there
was abundant supply to fill long-term requirements. This view is now starting to
be questioned in some corners. The surplus crude oil production capacity of the
Middle East is being examined with suggestions that it is not as high as once
thought. Similarly, the ability to rapidly increase production of the vast crude
oil reserves in the former Soviet Union is being slowed by the recognition of
the large amount of infrastructure investment required. Recent world events have
also brought security of supply issues to the top of the energy agenda for many
countries.
--------------------------------------------------------------------------------
ANNUAL REPORT 2003 MANAGEMENT'S DISCUSSION AND ANALYSIS
page 75
--------------------------------------------------------------------------------
The North American natural gas market is also facing supply challenges.
Natural gas directed drilling activity has increased significantly in recent
years, however this has only served to maintain production. Liquefied natural
gas, once viewed as the element that would increase gas supplies and thus reduce
prices, is now being thought of as a requirement to fill the void between future
demand requirements and conventional production capabilities. It is not
anticipated that the price of natural gas will experience sustained downward
pressure from the supply side of the pricing equation any time soon.
Many analysts are now looking at the demand elements of energy pricing
economics. Commodity prices have risen over the last number of years in an
environment where the major economies of the world were generally in a period of
slow growth. This is changing as growth rates in the major industrialized
countries are beginning to recover. Of particular importance to the outlook for
the demand for energy is the emergence of countries such as China where economic
expansion is bringing new found purchasing power to a very large population. On
a per capita basis, these populations use energy at a fraction of the rate of
other industrialized nations. This should change as new products, such as
automobiles and electric appliances, are introduced to these markets which in
turn should drive exponential growth in energy demand.
On the basis of these fundamentals, Precision is optimistic about the
prospects to operate and grow our businesses profitably. Canada will play a
major role in supplying the energy needs of North America and our dominant
position in that market will continue to be the cornerstone of the Corporation.
From this strong foundation we will continue to step out into international
markets where the opportunities are such that operations can reach an efficient
size in a reasonable time frame. The strength of our balance sheet will allow us
to examine acquisition opportunities that may allow this process to be
accelerated.
EXHIBIT 2
---------
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PRECISION DRILLING CORPORATION
page 76
--------------------------------------------
MANAGEMENT'S REPORT TO THE SHAREHOLDERS
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 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 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 Management's Discussion and Analysis (MD&A). The
MD&A is based upon the Corporation's financial results prepared in accordance
with Canadian GAAP. The MD&A compares the audited financial results for the
twelve months ended December 31, 2003 to December 31, 2002 and the twelve months
ended December 31, 2002 to December 31, 2001. Note 15 to the consolidated
financial statements describes the impact on the consolidated financial
statements of significant differences between Canadian and United States GAAP.
Management maintains appropriate systems of internal control. Policies and
procedures are designed to give reasonable assurance that transactions are
properly authorized, assets are safeguarded and financial records properly
maintained to provide reliable information for the preparation of financial
statements.
KPMG LLP, an independent firm of Chartered Accountants, was engaged, as
approved by a vote of shareholders at the Corporation's most recent Annual and
Special Meeting, to audit the consolidated financial statements in accordance
with generally accepted auditing standards in Canada and provide an independent
professional opinion.
The Audit Committee of the Board of Directors, which is comprised of three
independent and unrelated directors who are not employees of the Corporation,
has discussed the consolidated financial statements, including the notes
thereto, with management and external Auditors. The consolidated financial
statements have been approved by the Board of Directors on the recommendation of
the Audit Committee.
/s/ Hank B. Swartout /s/ Dale E. Tremblay
-------------------------------- ----------------------------------
HANK B. SWARTOUT (signed) DALE E. TREMBLAY (signed)
Chairman of the Board, President Senior Vice President Finance
and Chief Executive Officer and Chief Financial Officer
February 10, 2004
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ANNUAL REPORT 2003 FINANCIAL REPORTING
page 77
--------------------------------------------------------------------------------
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Precision Drilling
Corporation as at December 31, 2003 and 2002 and the consolidated statements of
earnings and retained earnings and cash flow for each of the years in the
three-year period ended December 31, 2003. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. 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 Corporation as at December
31, 2003 and 2002 and the results of its operations and its cash flow for each
of the years in the three-year period ended December 31, 2003 in accordance with
Canadian generally accepted accounting principles.
/s/ KPMG LLP
---------------------
KPMG LLP (signed)
Chartered Accountants
Calgary, Canada
February 10, 2004
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PRECISION DRILLING CORPORATION
page 78
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CONSOLIDATED BALANCE SHEETS
------------------------------
As at December 31, (stated in thousands of dollars) 2003 2002
--------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 21,370 $ 17,315
Accounts receivable 544,850 431,331
Income taxes recoverable -- 8,712
Inventory (NOTE 3) 99,088 92,744
Assets of discontinued operations (NOTE 20) 21,150 51,725
--------------------------------------------------------------------------------------------------------------
686,458 601,827
Property, plant and equipment, net of accumulated depreciation (NOTE 4) 1,588,250 1,457,273
Intangibles, net of accumulated amortization of $19,844 (2002 - $13,792) 65,262 71,355
Goodwill 527,443 527,443
Other assets (NOTE 5) 8,932 17,443
Assets of discontinued operations (NOTE 20) 32,040 84,674
$2,908,385 $2,760,015
--------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (NOTE 6) $ 147,909 $ 95,321
Accounts payable and accrued liabilities (NOTE 18) 260,545 257,913
Incomes taxes payable 7,373 --
Current portion of long-term debt (NOTE 7) 17,158 27,098
Liabilities of discontinued operations (NOTE 20) 5,212 11,239
--------------------------------------------------------------------------------------------------------------
438,197 391,571
Long-term debt (NOTE 7) 399,422 514,878
Future income taxes (NOTE 11) 320,599 311,164
Future income taxes of discontinued operations (NOTE 20) 1,107 7,383
Non-controlling interest 3,771 2,019
Shareholders' equity:
Share capital (NOTE 8) 936,529 912,916
Retained earnings 808,760 620,084
--------------------------------------------------------------------------------------------------------------
Commitments and contingencies (NOTES 10 AND 19) 1,745,289 1,533,000
--------------------------------------------------------------------------------------------------------------
$2,908,385 $2,760,015
--------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Approved by the Board:
/s/ Hank B. Swartout /s/ H. Garth Wiggins
-------------------------------- ----------------------------------
HANK B. SWARTOUT (signed) H. GARTH WIGGINS (signed)
Director Director
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ANNUAL REPORT 2003 FINANCIAL REPORTING
page 79
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CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
Years ended December 31,
(stated in thousands of dollars, except per share amounts) 2003 2002 2001
----------------------------------------------------------------------------------------------------------------------
(RESTATED - NOTE 2)
Revenue $ 1,917,933 $ 1,567,506 $ 1,815,208
Expenses:
Operating 1,273,434 1,094,846 1,138,231
General and administrative 136,747 144,466 143,521
Depreciation and amortization 170,788 133,384 139,271
Research and engineering 42,419 34,862 31,677
Foreign exchange (2,565) 4,389 723
----------------------------------------------------------------------------------------------------------------------
1,620,823 1,411,947 1,453,423
Operating earnings 297,110 155,559 361,785
Interest:
Long-term debt 34,492 34,378 43,577
Other 1,425 1,334 556
Income (867) (589) (1,074)
Dividend income -- (39) (1,106)
Gain on disposal of investments (3,355) (900) (1,805)
----------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before income taxes,
non-controlling interest and goodwill amortization 265,415 121,375 321,637
Income taxes: (NOTE 11)
Current 59,681 64,762 17,841
Future 12,851 (34,072) 96,631
----------------------------------------------------------------------------------------------------------------------
72,532 30,690 114,472
Earnings from continuing operations before
non-controlling interest and goodwill amortization 192,883 90,685 207,165
Non-controlling interest 1,752 1,151 868
----------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations
before goodwill amortization 191,131 89,534 206,297
Goodwill amortization, net of tax (NOTE 2) -- -- 30,587
----------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 191,131 89,534 175,710
Gain on disposal of discontinued operations (NOTE 20) 17,460 -- --
Discontinued operations, net of tax (NOTE 20) (19,915) 1,731 10,824
Net earnings 188,676 91,265 186,534
Retained earnings, beginning of year (NOTE 2) 620,084 528,819 342,285
----------------------------------------------------------------------------------------------------------------------
Retained earnings, end of year $ 808,760 $ 620,084 $ 528,819
----------------------------------------------------------------------------------------------------------------------
Earnings per share from continuing operations
before goodwill amortization (NOTE 12)
Basic $ 3.51 $ 1.67 $ 3.90
Diluted $ 3.46 $ 1.63 $ 3.81
----------------------------------------------------------------------------------------------------------------------
Earnings per share from continuing operations (NOTE 12)
Basic $ 3.51 $ 1.67 $ 3.31
Diluted $ 3.46 $ 1.63 $ 3.23
----------------------------------------------------------------------------------------------------------------------
Earnings per share: (NOTE 12)
Basic $ 3.47 $ 1.70 $ 3.52
Diluted $ 3.41 $ 1.66 $ 3.44
----------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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PRECISION DRILLING CORPORATION
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CONSOLIDATED STATEMENTS OF CASH FLOW
Years ended December 31,
(stated in thousands of dollars) 2003 2002 2001
--------------------------------------------------------------------------------------------------------------
(RESTATED - NOTE 2)
Cash provided by (used in):
Continuing operations:
Earnings from continuing operations $ 191,131 $ 89,534 $ 175,710
Items not affecting cash:
Depreciation and amortization 170,788 133,384 139,271
Goodwill amortization -- -- 30,587
Future income taxes 12,851 (34,072) 96,631
Gain on disposal of investments (3,355) (900) (1,805)
Amortization of deferred financing costs 1,286 1,294 1,302
Unrealized foreign exchange loss (gain)
on long-term monetary items (16,433) (2,039) 6,576
Non-controlling interest 1,752 1,151 868
--------------------------------------------------------------------------------------------------------------
Funds provided by continuing operations 358,020 188,352 449,140
Changes in non-cash working capital balances (NOTE 18) (101,146) (601) (22,600)
--------------------------------------------------------------------------------------------------------------
256,874 187,751 426,540
Discontinued operations: (NOTE 20)
Funds provided by (used in) discontinued operations (5,692) 6,868 17,261
Changes in non-cash working capital balances of
discontinued operations 7,245 4,604 (11,571)
--------------------------------------------------------------------------------------------------------------
1,553 11,472 5,690
Investments:
Business acquisitions, net of cash acquired (NOTE 14) (6,800) (4,594) (35,557)
Purchase of property, plant and equipment (314,921) (267,794) (366,019)
Purchase of intangibles (6) (4,198) (5,673)
Proceeds on sale of property, plant and equipment 24,423 32,449 31,001
Proceeds on disposal of investments 10,966 1,872 2,283
Investments (1,080) (5,672) 227
Proceeds on disposal of discontinued operations 67,274 -- --
--------------------------------------------------------------------------------------------------------------
(220,144) (247,937) (373,738)
Financing:
Increase in long-term debt 85,228 119,380 22,083
Repayment of long-term debt (145,657) (102,275) (83,437)
Deferred financing costs on long-term debt -- -- (38)
Issuance of common shares on exercise of options 23,613 25,756 20,294
Issuance of common shares on exercise of warrants -- -- 2,371
Change in bank indebtedness 2,588 9,937 (27,236)
--------------------------------------------------------------------------------------------------------------
(34,228) 52,798 (65,963)
--------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 4,055 4,084 (7,471)
Cash, beginning of year 17,315 13,231 20,702
Cash, end of year $ 21,370 $ 17,315 $ 13,231
--------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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ANNUAL REPORT 2003 FINANCIAL REPORTING
page 81
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS STATED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
Precision Drilling Corporation (the "Corporation") is a global oilfield
services company providing a broad range of drilling, production and evaluation
services with focus on fulfilling customer needs through fit-for-purpose
technologies.
The financial statements are prepared in accordance with generally
accepted accounting principles (GAAP) in Canada. Management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from these estimates.
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the
Corporation and its subsidiaries, all of which, except one, are
wholly-owned.
(b) INVENTORY:
Inventory is carried at the lower of average cost and replacement
cost.
(c) PROPERTY, PLANT AND EQUIPMENT:
Drilling rig equipment is depreciated by the unit-of-production
method based on 3,650 drilling days with a 20% salvage value.
Drill pipe and drill collars are depreciated over 1,100 drilling
days and have no salvage value. Service rig equipment is
depreciated by the unit-of-production method based on 24,000
hours for single and double rigs and 48,000 hours for heavy
double rigs. Service rigs have a 20% salvage value.
Field technical equipment is depreciated by the straight-line
method over periods ranging from 2 to 10 years.
Rental equipment is depreciated by the straight-line method over
periods ranging from 10 to 15 years. Other equipment is
depreciated by the straight-line method over periods ranging from
3 to 10 years.
Light duty vehicles are depreciated by the straight-line method
over 4 years. Heavy-duty vehicles are depreciated by the
straight-line method over periods ranging from 7 to 10 years.
Buildings are depreciated by the straight-line method over
periods ranging from 10 to 30 years.
(d) INTANGIBLES:
Intangibles, which are comprised of acquired patents, are
recorded at cost and amortized by the straight-line method over
their useful lives ranging from 5 to 15 years.
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PRECISION DRILLING CORPORATION
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(e) GOODWILL:
Goodwill is the residual 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 Corporation's 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
segment's 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
described in the preceding paragraph, using the fair value of the
reporting segment as if it was the purchase price. When the
carrying amount of the reporting segment's goodwill exceeds the
implied fair value of the goodwill, an impairment loss is
recognized in an amount equal to the excess.
(f) INVESTMENTS:
Investments in shares of associated companies, over which the
Corporation has significant influence, are accounted for by the
equity method. Other investments are carried at cost. If there
are other than temporary declines in value, these investments are
written down to their net realizable value.
(g) DEFERRED FINANCING COSTS:
Costs associated with the issuance of long-term debt are deferred
and amortized by the straight-line method over the term of the
debt. The amortization is included in interest expense.
(h) INCOME TAXES:
The Corporation follows 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
the currently enacted, or substantively enacted, tax rates and
laws expected to apply when these differences reverse. Income tax
expense is the sum of the Corporation's provision for current
income taxes and the difference between opening and ending
balances of the future income tax assets and liabilities.
--------------------------------------------------------------------------------
ANNUAL REPORT 2003 FINANCIAL REPORTING
page 83
--------------------------------------------------------------------------------
(i) REVENUE RECOGNITION:
The Corporation's services are generally sold based upon purchase
orders or contracts with the 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.
(j) RETIREMENT ALLOWANCE:
The Corporation has entered into an employment agreement with a
senior officer, which provides for a one-time payment upon
retirement. The amount of this retirement allowance increases by
a fixed amount for each year of service over a ten year period
commencing April 30, 1996. The estimated cost of this benefit is
accrued and charged to earnings on a straight-line basis over the
10-year period.
(k) FOREIGN CURRENCY TRANSLATION:
Accounts of foreign operations, all of which are considered
financially and operationally integrated, are translated to
Canadian dollars using average exchange rates for the year for
revenue and expenses. Monetary assets and liabilities are
translated at the year-end current exchange rate and non-monetary
assets and liabilities are translated using historical rates of
exchange. Gains or losses resulting from these translation
adjustments are included in net earnings.
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.
(l) STOCK-BASED COMPENSATION PLANS:
The Corporation has equity incentive plans, which are described
in Note 8. No compensation expense is recognized for these plans
when stock options are issued. Any consideration received on
exercise of the stock options is credited to share capital. The
Corporation discloses the pro forma effect of stock options
grants, had those grants been accounted for following the fair
value method.
Effective January 1, 2004, the Corporation will retroactively
adopt new required Canadian accounting standards that will apply
the fair value method to all stock options granted in 2002 and
subsequent years.
Under the fair value method, the Corporation will calculate the
fair value of stock option grants and record that fair value as
compensation expense over the vesting period of those grants.
(m) RESEARCH AND ENGINEERING:
Research and engineering costs are charged to income as incurred.
Costs associated with the development of new operating tools and
systems are expensed during the period unless the recovery of
these costs can be reasonably assured given the existing and
anticipated future industry conditions. Upon successful
completion and field testing of the tools any deferred costs are
transferred to the related capital asset accounts.
--------------------------------------------
PRECISION DRILLING CORPORATION
page 84
--------------------------------------------
(n) PER SHARE AMOUNTS:
Basic per share amounts are calculated using the weighted average
number of shares outstanding during the year. Diluted per share
amounts are calculated based on the treasury stock method, which
assumes that any proceeds obtained on exercise of options would
be used to purchase common shares at the average market price
during the period. The weighted average number of shares
outstanding is then adjusted by the net change.
(o) COMPARATIVE FIGURES:
Certain comparative figures have been reclassified to conform
with the current financial statement presentation.
NOTE 2: ACCOUNTING CHANGES
(a) ACCOUNTING FOR BUSINESS COMBINATIONS, GOODWILL AND OTHER
INTANGIBLE ASSETS:
Effective January 1, 2002, the Corporation prospectively adopted
the new Canadian accounting standards relating to business
combinations and goodwill and other intangible assets, as
outlined in Note 1(e).
(b) FOREIGN CURRENCY TRANSLATION:
Effective January 1, 2002, the Corporation adopted, on a
retroactive basis, a new Canadian accounting standard whereby
unrealized gains or losses are not deferred and amortized as
previously required but rather expensed as incurred.
As a result of this change, unrealized gains and losses related
to translation of foreign currency denominated long-term debt are
no longer deferred and amortized over the term of the debt but
are expensed as incurred. Prior period results have been restated
to reflect this change. The retroactive application of this
standard has reduced the opening balance of retained earnings by
$1.6 million and $115,000 at January 1, 2002 and January 1, 2001
respectively.
NOTE 3: INVENTORY
2003 2002
Operating supplies and spare parts $ 95,254 $ 86,002
Manufacturing parts and materials 3,834 6,742
----------------------------------------------------------------------
$ 99,088 $ 92,744
----------------------------------------------------------------------
--------------------------------------------------------------------------------
ANNUAL REPORT 2003 FINANCIAL REPORTING
page 85
--------------------------------------------------------------------------------
NOTE 4: PROPERTY, PLANT AND EQUIPMENT
ACCUMULATED NET BOOK
2003 COST DEPRECIATION VALUE
-------------------------------------------------------------------------------------------------
Rig equipment $1,128,300 $ 324,097 $ 804,203
Field technical equipment 601,752 113,617 488,135
Rental equipment 77,640 30,128 47,512
Other equipment 201,533 95,980 105,553
Vehicles 88,329 23,444 64,885
Buildings 77,839 15,799 62,040
Land 15,922 -- 15,922
-------------------------------------------------------------------------------------------------
$ 2,191,315 $ 603,065 $ 1,588,250
-------------------------------------------------------------------------------------------------
Accumulated Net Book
2002 Cost Depreciation Value
Rig equipment $ 1,059,772 $ 267,174 $ 792,598
Field technical equipment 472,957 65,528 407,429
Rental equipment 76,328 27,900 48,428
Other equipment 163,361 78,890 84,471
Vehicles 77,360 19,240 58,120
Buildings 64,211 12,967 51,244
Land 14,983 -- 14,983
-------------------------------------------------------------------------------------------------
$ 1,928,972 $ 471,699 $ 1,457,273
-------------------------------------------------------------------------------------------------
NOTE 5: OTHER ASSETS
2003 2002
----------------------------------------------------------------------------------------
Investments, at cost less provision for impairment $ 3,539 $ 8,960
Investments, at equity 310 2,114
Deferred financing costs, net of accumulated amortization 5,083 6,369
----------------------------------------------------------------------------------------
$ 8,932 $ 17,443
----------------------------------------------------------------------------------------
NOTE 6: BANK INDEBTEDNESS
The Corporation has available a revolving credit loan facility
of US$25.0 million. Advances under this facility bear interest at the
bank's prime lending rate less 0.75%. The facility is renewable and
extendable annually at the option of the lenders. As at December 31,
2003 $17.9 million (US$13.7 million) was drawn on this facility as
compared to $14.3 million (US$9.2 million) at December 31, 2002.
Availability of this facility is further reduced by outstanding
letters of credit in the amount of $1.1 million (US$850,000).
As at December 31, 2003 the Corporation has included $130.0
million (December 31, 2002 - $80.0 million) of its extendable
revolving unsecured facility in bank indebtedness, as the funds were
used to finance working capital.
--------------------------------------------
PRECISION DRILLING CORPORATION
page 86
--------------------------------------------
NOTE 7: LONG-TERM DEBT
2003 2002
-------------------------------------------------------------------------------------------
Unsecured debentures - Series 1 $ 200,000 $ 200,000
Unsecured debentures - Series 2 150,000 150,000
EDC facility (2003 - US$2,639; 2002 - US$7,917) 3,459 12,255
EDC facility (2003 - US$20,000; 2002 - US$30,000) 26,214 46,440
EDC facility (US$20,190) 26,463 --
Extendable revolving unsecured facility 9,815 128,318
Other 629 4,963
-------------------------------------------------------------------------------------------
416,580 541,976
Less amounts due within one year 17,158 27,098
-------------------------------------------------------------------------------------------
$ 399,422 $ 514,878
-------------------------------------------------------------------------------------------
The $200.0 million 6.85% Series 1 unsecured debentures mature
June 26, 2007 and have an effective interest rate of 7.44% after
taking into account deferred financing costs. The debentures are
redeemable at any time at the option of the Corporation upon payment
of a redemption price equal to the greater of an amount calculated
with reference to the yield on a Government of Canada bond with the
same maturity, and par.
The $150.0 million 7.65% Series 2 unsecured debentures mature
October 27, 2010 and have an effective interest rate of 7.71% after
taking into account deferred financing costs. The debentures are
redeemable at any time at the option of the Corporation upon payment
of a redemption price equal to the greater of an amount calculated
with reference to the yield on a Government of Canada bond with the
same maturity, and par.
The $3.5 million unsecured term financing facility with Export
Development Canada (EDC) is repayable in semi-annual installments,
matures on January 20, 2004 and bears interest at six-month U.S.
Libor plus applicable margin. The margin is dependent upon the
Corporation's credit rating, which at December 31, 2003 resulted in a
margin of 0.8%.
The $26.2 million unsecured term financing facility with EDC is
repayable over five years in semi-annual installments, matures
September 15, 2005 and bears interest at six-month U.S. Libor plus
applicable margin. The margin is dependent upon the Corporation's
credit rating, which at December 31, 2003 results in a margin of
0.9%.
The $26.5 million unsecured financing facility with EDC matures
on October 24, 2004 and bears interest at six-month U.S. Libor plus
applicable margin. The margin is dependent upon the Corporation's
margin on its $350.0 million extendable revolving unsecured credit
facility, which at December 31, 2003 resulted in a margin of 0.8%.
The facility is extendable upon mutual agreement between the
Corporation and the Lender, or can be converted, at the Corporation's
option, to a term loan repayable in two equal semi-annual
installments, with the first payment due April 25, 2005.
--------------------------------------------------------------------------------
ANNUAL REPORT 2003 FINANCIAL REPORTING
page 87
--------------------------------------------------------------------------------
The Corporation has an extendable revolving unsecured facility
of $350.0 million (or U.S. equivalent) with a syndicate led by a
Canadian chartered bank. Advances are available at either the bank's
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 is dependent on the Corporation's credit rating and
the percentage of the total facility outstanding, which at December
31, 2003 resulted in a margin of 0.8%. The facility is extendable
annually at the option of the lenders. Should this facility not be
extended, outstanding amounts will be transferred to a two-year term
facility repayable in equal quarterly installments. As at December
31, 2003 the Corporation had drawn $139.8 million under this
facility, of which $130.0 million has been included in bank
indebtedness as the funds were used to finance working capital.
Principal repayments over the next five years are as follows:
2004 $ 17,158
2005 39,588
2006 19
2007 200,000
2008 --
Thereafter 159,815
------------------------------------------------------------------
$ 416,580
------------------------------------------------------------------
NOTE 8: SHARE CAPITAL
(a) AUTHORIZED:
o unlimited number of non-voting cumulative convertible
redeemable preferred shares without nominal or par value;
o unlimited number of common shares without nominal or par
value.
(b) ISSUED:
Common Shares: Number Amount
---------------------------------------------------------------------------
Balance, December 31, 2000 52,283,053 $ 864,495
Options exercised 855,935 20,294
Warrants exercised 37,050 2,371
---------------------------------------------------------------------------
Balance, December 31, 2001 53,176,038 $ 887,160
Options exercised 890,715 25,756
---------------------------------------------------------------------------
Balance, December 31, 2002 54,066,753 $ 912,916
Options exercised 778,925 23,613
---------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 54,845,678 $ 936,529
---------------------------------------------------------------------------
--------------------------------------------
PRECISION DRILLING CORPORATION
page 88
--------------------------------------------
(c) EQUITY INCENTIVE PLANS:
The Corporation has equity incentive plans under which a
combined total of 3,966,711 options to purchase common shares
are reserved to be granted to employees and directors. Of the
amount reserved, 3,393,194 options have been granted. Under
these plans, the exercise price of each option equals the
market value of the Corporation's stock on the date of the
grant and an option's maximum term is 10 years. Options vest
over a period from 1 to 4 years from the date of grant as
employees or directors render continuous service to the
Corporation.
A summary of the equity incentive plans as at December 31,
2001, 2002 and 2003, and changes during the periods then ended
is presented below:
Weighted
Range of Average
Options Exercise Exercise Options
Outstanding Price Price Exercisable
--------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2000 4,474,103 $ 13.50 - 54.20 $ 31.18 946,087
Granted 1,055,350 31.05 - 65.90 44.03
Exercised (855,935) 13.50 - 44.38 23.71
Cancelled or expired (267,237) 25.50 - 52.39 38.63
--------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2001 4,406,281 $ 13.50 - 65.90 $ 35.21 1,217,428
Granted 786,050 41.06 - 52.61 48.77
Exercised (890,715) 13.50 - 44.38 28.92
Cancelled or expired (182,288) 25.50 - 65.90 40.19
--------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2002 4,119,328 $ 13.50 - 65.90 $ 38.93 1,627,777
Granted 416,000 49.28 - 51.04 50.61
Exercised (778,925) 13.50 - 51.00 30.34
Cancelled or expired (363,209) 31.05 - 65.90 44.89
--------------------------------------------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 2003 3,393,194 $ 13.50 - 65.90 $ 41.69 2,038,198
--------------------------------------------------------------------------------------------------------------
The range of exercise prices for options outstanding at
December 31, 2003 are as follows:
Total Options Outstanding Exercisable Options
----------------------------------------------------------------------------------------------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Exercise Contractual Exercise
Range of Exercise Prices: Number Price Life (Years) Number Price
----------------------------------------------------------------------------------------------------------------
$ 13.50 - 19.99 161,486 $ 14.12 0.39 161,486 $ 14.12
20.00 - 29.99 51,300 28.98 0.79 51,300 28.98
30.00 - 39.99 1,089,665 34.96 1.21 907,940 35.29
40.00 - 49.99 1,029,943 42.86 3.34 557,172 42.29
50.00 - 59.99 1,038,300 51.98 4.69 359,050 53.24
60.00 - 65.90 22,500 65.81 2.55 1,250 65.10
----------------------------------------------------------------------------------------------------------------
$ 13.50 - 65.90 3,393,194 $ 41.69 2.89 2,038,198 $ 38.55
----------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ANNUAL REPORT 2003 FINANCIAL REPORTING
page 89
--------------------------------------------------------------------------------
In accordance with the Corporation's stock option plans, these
options have an exercise price equal to the market price at
date of grant. The per share weighted average fair value of
stock options granted during the year ended December 31, 2003
was $19.48 (2002 - $20.85) based on the date of grant using the
Black-Scholes option pricing model with the following
assumptions: average risk-free interest rate of 3.47% (2002 -
4.53%), average expected life of 3.42 years (2002 - 3.88 years)
and expected volatility of 47% (2002 - 49%).
Had the Corporation determined compensation costs based on the
fair value at the date of grant for stock options granted since
January 1, 2002; net earnings and earnings per share (EPS)
would have decreased to the pro forma amounts indicated below.
These pro forma amounts reflect compensation cost amortized
over the option's vesting period.
2003 2002
------------------------------------------------------------------------------------------------------
Years Ended December 31 AS REPORTED PRO FORMA As Reported Pro forma
------------------------------------------------------------------------------------------------------
Net earnings $ 188,676 $ 178,993 $ 91,265 $ 85,071
Basic EPS $ 3.47 $ 3.29 $ 1.70 $ 1.59
Diluted EPS $ 3.41 $ 3.24 $ 1.66 $ 1.55
------------------------------------------------------------------------------------------------------
NOTE 9: EMPLOYEE BENEFIT PLANS
The Corporation has a defined contribution employee benefit
plan covering a significant number of its employees. The Corporation
matches individual employee contributions up to 5% of the employee's
compensation. Employer matching contributions under the plan totalled
$7.5 million for the year ended December 31, 2003 (year ended
December 31, 2002 - $6.9 million; year ended December 31, 2001 - $6.3
million).
With respect to the retirement allowance described in Note
1(j), the Corporation charged $351,000 to earnings in 2003 (2002 -
$371,000; 2001 - $360,000) and at December 31, 2003 had accrued a
total of $2.5 million, which amount is included in accounts payable
and accrued liabilities.
NOTE 10: COMMITMENTS
The Corporation has commitments for operating lease agreements,
primarily for vehicles and office space, in the aggregate amount of
$110.5 million. Payments over the next five years are as follows:
---------------------------------------------------------------------
2004 $ 28,104
2005 21,439
2006 15,948
2007 12,179
2008 11,168
---------------------------------------------------------------------
--------------------------------------------
PRECISION DRILLING CORPORATION
page 90
--------------------------------------------
Rent expense included in the statements of earnings is as follows:
2003 $ 23,924
2002 18,085
2001 16,923
---------------------------------------------------------------------
NOTE 11: INCOME TAXES
The provision for income taxes differs from that which would be
expected by applying statutory rates. A reconciliation of the
difference is as follows:
2003 2002 2001
-------------------------------------------------------------------------------------------------------------------
Earnings before income taxes, non-controlling interest,
discontinued operations and goodwill amortization $ 265,415 $ 121,375 $ 321,637
Income tax rate 36% 39% 42%
-------------------------------------------------------------------------------------------------------------------
Expected income tax provision $ 95,549 $ 47,336 $ 135,088
Add (deduct):
Non-deductible expenses 2,380 2,084 3,861
Income taxed in jurisdictions with lower tax rates (14,062) (13,450) (14,302)
Non-taxable disposition of investment (2,327) -- --
Other (6,020) (2,729) (4,211)
-------------------------------------------------------------------------------------------------------------------
75,520 33,241 120,436
Reduction of future tax balances due to
substantively enacted tax rate reductions (2,988) (2,551) (5,964)
-------------------------------------------------------------------------------------------------------------------
$ 72,532 $ 30,690 $ 114,472
-------------------------------------------------------------------------------------------------------------------
In both 2003 and 2002, the Province of Alberta enacted a 0.5%
reduction in tax rates and in 2001 it enacted a 2% reduction in tax
rates. These rate changes have been reflected as a reduction in
future tax expense in 2003, 2002 and 2001.
The Corporation's operations are complex and computation of the
provision for income taxes involves tax interpretations, regulations
and legislation that are continually changing. There are tax matters
that have not yet been confirmed by taxation authorities, however,
management believes the provision for income taxes is adequate.
--------------------------------------------------------------------------------
ANNUAL REPORT 2003 FINANCIAL REPORTING
page 91
--------------------------------------------------------------------------------
The net future tax liability is comprised of the tax effect of
the following temporary differences:
2003 2002
-------------------------------------------------------------------------------------------------
Liabilities:
Property, plant and equipment and intangibles $ 290,371 $288,720
Assets held in partnership with different tax year 92,163 50,640
Deferred financing costs 1,774 2,385
-------------------------------------------------------------------------------------------------
$ 384,308 $341,745
-------------------------------------------------------------------------------------------------
Assets:
Losses carried forward $ 63,431 $ 29,070
Accrued liabilities 278 1,511
-------------------------------------------------------------------------------------------------
63,709 30,581
-------------------------------------------------------------------------------------------------
$ 320,599 $311,164
-------------------------------------------------------------------------------------------------
The Corporation has available losses of $251.4 million of which
the benefit of $181.9 million has been recognized. These losses
expire depending upon the year incurred and various limitations under
tax codes in the jurisdictions in which the losses were incurred.
NOTE 12: PER SHARE AMOUNTS
Per share amounts have been calculated on the weighted average
number of common shares outstanding. The weighted average shares
outstanding for the year ended December 31, 2003 was 54,430,468 (year
ended
December 31, 2002 - 53,701,873; year ended December 31, 2001 -
52,952,879).
Diluted per share amounts reflect the dilutive effect of the
exercise of the options outstanding. The diluted shares for the year
ended December 31, 2003 was 55,299,920 (year ended December 31, 2002
- 54,815,167; year ended December 31, 2001 - 54,198,348).
NOTE 13: SIGNIFICANT CUSTOMERS
During the years ended December 31, 2003, 2002 and 2001, no one
customer accounted for more than 10% of the Corporation's revenue.
NOTE 14: ACQUISITIONS
Acquisitions have been accounted for by the purchase method
with results of operations acquired included in the financial
statements from the effective date of acquisition. The details of
acquisitions for the past three years are as follows.
--------------------------------------------
PRECISION DRILLING CORPORATION
page 92
--------------------------------------------
In February 2003, the Corporation completed the acquisition of
the operating assets of MacKenzie Caterers (1984) Ltd., a provider of
oilfield camp and catering services in western Canada, for $6.8
million. No value was assigned to intangibles or goodwill.
During the year ended December 31, 2002, the Corporation
completed the following business acquisitions:
(a) Acquisition of the business assets of NightHawk Vacuum
Services Ltd. (NightHawk) in September 2002. NightHawk
provides oilfield vacuum services in northern Alberta and
British Columbia.
(b) Paid additional consideration in conjunction with an
acquisition made in 2001. This additional consideration
was payable based on the development of a commercially
viable technology.
NightHawk Other Total
--------------------------------------------------------------------------------------------------------------
Net assets acquired at assigned values:
Working capital $ (47) $ -- $ (47)
Property, plant and equipment 3,097 -- 3,097
Goodwill -- 1,544 1,544
--------------------------------------------------------------------------------------------------------------
3,050 1,544 4,594
--------------------------------------------------------------------------------------------------------------
Consideration:
Cash $ 3,050 $ 1,544 $ 4,594
--------------------------------------------------------------------------------------------------------------
During the year ended December 31, 2001, the Corporation
completed business acquisitions, the most significant of which was
the acquisition of all the issued and outstanding shares of BecField
Drilling Services Ltd. (BecField) in January 2001. BecField provides
directional drilling and measurement-while-drilling services through
its technical field and support personnel to the onshore and offshore
oil and gas industry. It has established operations in Europe and the
Middle East.
BecField Other Total
--------------------------------------------------------------------------------------------------------------
Net assets acquired at assigned values:
Working capital $ 2,446(a) $ 1,136(b) $ 3,582
Property, plant and equipment 5,036 4,074 9,110
Goodwill 23,877 2,783 26,660
Future income taxes -- (800) (800)
--------------------------------------------------------------------------------------------------------------
$ 31,359 $ 7,193 $ 38,552
--------------------------------------------------------------------------------------------------------------
Consideration:
Cash $ 31,359 $ 7,193 $ 38,552
--------------------------------------------------------------------------------------------------------------
(a) INCLUDES CASH OF $ 1,880
(b) INCLUDES CASH OF $ 1,115
--------------------------------------------------------------------------------
ANNUAL REPORT 2003 FINANCIAL REPORTING
page 93
--------------------------------------------------------------------------------
NOTE 15: UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These financial statements have been prepared in accordance
with Canadian GAAP which, in the case of the Corporation conform with
United States generally accepted accounting principles (U.S. GAAP) in
all material respects, except as follows:
a) INCOME TAXES:
In 2000 the Corporation adopted the liability method as
described in Note 1 without restatement of prior years. As a
result, the Corporation recorded an adjustment to retained
earnings and future tax liability in the amount of $70 million
at January 1, 2000. U.S. GAAP required the use of the liability
method prescribed in the Statement of Financial Accounting
Standards (SFAS) No. 109, which substantially conforms with the
Canadian GAAP accounting standard adopted in 2000. Application
of U.S. GAAP in years prior to 2000 would have resulted in $70
million of additional goodwill being recognized at January 1,
2000 as opposed to an implementation adjustment to retained
earnings allowed under Canadian GAAP. In 2001, 2002 and 2003
the U.S. GAAP financial statements would reflect an increase in
goodwill of $63 million and a corresponding increase in
retained earnings. An additional charge to earnings of $3.5
million in 2001 would be required related to the amortization
of the goodwill.
Under Canadian GAAP, future tax liabilities and assets are
calculated by reference to current tax legislation and proposed
legislation that is considered substantively enacted but not
yet enacted into law. U.S. GAAP requires that only enacted
income tax legislation be used for calculation of future tax
amounts. In 2000 the Federal Government of Canada introduced
tax rate reductions that were substantively enacted at December
31, 2000 but that were not passed into legislation until 2001.
The resulting reduction of future tax balances recognized under
Canadian GAAP in 2000 would not be recognized under U.S. GAAP
until 2001.
The application of U.S. accounting principles would have the
following impact on the consolidated financial statements:
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended December 31, 2003 2002 2001
----------------------------------------------------------------------------------------------------------
Net earnings under Canadian GAAP $ 188,676 $ 91,265 $ 186,534
Adjustments under U.S. GAAP:
Goodwill amortization -- -- (3,502)
Income tax rate -- -- 19,934
----------------------------------------------------------------------------------------------------------
Net income and comprehensive income
under U.S. GAAP $ 188,676 $ 91,265 $ 202,966
----------------------------------------------------------------------------------------------------------
Earnings per share under U.S. GAAP:
Basic $ 3.47 $ 1.70 $ 3.83
Diluted $ 3.41 $ 1.66 $ 3.74
----------------------------------------------------------------------------------------------------------
--------------------------------------------
PRECISION DRILLING CORPORATION
page 94
--------------------------------------------
BALANCE SHEETS
DECEMBER 31, 2003 December 31, 2002
AS REPORTED U.S. GAAP As reported U.S. GAAP
-------------------------------------------------------------------------------------------------------------------
Current assets $ 686,458 $ 686,458 $ 601,827 $ 601,827
Property, plant and equipment 1,588,250 1,588,250 1,457,273 1,457,273
Intangibles 65,262 65,262 71,355 71,355
Goodwill 527,443 590,472 527,443 590,472
Other assets 8,932 8,932 17,443 17,443
Long-term assets
of discontinued operations 32,040 32,040 84,674 84,674
-------------------------------------------------------------------------------------------------------------------
$2,908,385 $2,971,414 $2,760,015 $2,823,044
-------------------------------------------------------------------------------------------------------------------
Current liabilities $ 438,197 $ 438,197 $ 391,571 $ 391,571
Long-term debt 399,422 399,422 514,878 514,878
Future income taxes 320,599 320,599 311,164 311,164
Liabilities of discontinued operations 1,107 1,107 7,383 7,383
Non-controlling interest 3,771 3,771 2,019 2,019
Shareholders' equity 1,745,289 1,808,318 1,533,000 1,596,029
-------------------------------------------------------------------------------------------------------------------
$2,908,385 $2,971,414 $2,760,015 $2,823,044
-------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
The application of U.S. accounting principles would have no
impact on the consolidated statement of cash flows.
STOCK COMPENSATION
In 2003 and 2002 Canadian GAAP and U.S. GAAP were substantially
the same with respect to stock compensation. Prior to 2002,
U.S. GAAP required the disclosure of the impact of using fair
value accounting for stock options if in fact this alternative
was not used. Canadian GAAP did not require such disclosure.
The per share weighted average fair value of stock options
granted during the year ended December 31, 2001 was $19.87 on
the date of grant using the Black-Scholes option pricing model
with the following assumptions: risk free interest rate of
5.75%, expected life of 5 years and expected volatility of 49%.
Had the Corporation determined compensation cost based on the
fair value at the date of grant for its stock options under
SFAS 123, net earnings in accordance with U.S. GAAP would have
decreased by $12.2 million to $190.8 million (basic EPS -
$3.60) for the year ended December 21, 2001.
--------------------------------------------------------------------------------
ANNUAL REPORT 2003 FINANCIAL REPORTING
page 95
--------------------------------------------------------------------------------
NOTE 16: SEGMENTED INFORMATION
The Corporation operates in three industry segments. Contract
Drilling includes drilling rigs, service rigs and hydraulic well
assist snubbing units, procurement and distribution of oilfield
supplies, camp and catering services, and manufacture, sale and
repair of drilling equipment. Technology Services includes wireline,
directional drilling,
measurement-while-drilling/logging-while-drilling services,
separation services, and the design, manufacture and marketing of
polycrystalline diamond compact drill bits. Rental and Production
includes oilfield equipment rental services and industrial process
services.
CONTRACT TECHNOLOGY RENTAL AND CORPORATE
2003 DRILLING SERVICES PRODUCTION AND OTHER TOTAL
---------------------------------------------------------------------------------------------------------------------
Revenue $ 992,824 $ 714,385 $ 210,724 -- $ 1,917,933
Operating earnings 285,753 4,842 39,350 (32,835) 297,110
Research and engineering -- 42,419 -- -- 42,419
Depreciation and
amortization 77,725 75,578 12,533 4,952 170,788
Total assets 1,423,036 1,257,235 166,300 61,814 2,908,385
Goodwill 257,531 241,340 28,572 -- 527,443
Capital expenditures* 99,034 177,756 15,158 22,979 314,927
---------------------------------------------------------------------------------------------------------------------
Contract Technology Rental and Corporate
2002 Drilling Services Production and Other Total
---------------------------------------------------------------------------------------------------------------------
Revenue $ 770,147 $ 603,088 $ 192,840 $ 1,431 $ 1,567,506
Operating earnings 184,553 (31,733) 30,090 (27,351) 155,559
Research and engineering -- 34,862 -- -- 34,862
Depreciation and
amortization 62,524 53,347 13,159 4,354 133,384
Total assets 1,312,459 1,127,550 240,842 79,164 2,760,015
Goodwill 257,531 241,340 28,572 -- 527,443
Capital expenditures* 50,686 189,092 22,346 9,868 271,992
---------------------------------------------------------------------------------------------------------------------
Contract Technology Rental and Corporate
2002 Drilling Services Production and Other Total
---------------------------------------------------------------------------------------------------------------------
Revenue $ 1,004,265 $ 614,152 $ 194,567 $ 2,224 $ 1,815,208
Operating earnings 298,737 52,257 39,365 (28,574) 361,785
Research and engineering -- 31,677 -- -- 31,677
Depreciation and
amortization 75,170 47,694 13,388 3,019 139,271
Total assets 1,367,682 987,061 241,044 55,571 2,651,358
Goodwill 257,531 239,796 28,572 -- 525,899
Capital expenditures* 122,575 203,547 27,352 18,218 371,692
---------------------------------------------------------------------------------------------------------------------
* EXCLUDES BUSINESS ACQUISITIONS
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PRECISION DRILLING CORPORATION
page 96
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The Corporation's operations are carried on in the following
geographic locations:
2003 CANADA INTERNATIONAL TOTAL
----------------------------------------------------------------------
Revenue $ 1,349,565 $ 568,368 $ 1,917,933
Assets 2,121,832 786,553 2,908,385
----------------------------------------------------------------------
2002 Canada International Total
----------------------------------------------------------------------
Revenue $ 1,022,489 $ 545,017 $ 1,567,506
Assets 2,081,200 678,815 2,760,015
----------------------------------------------------------------------
2001 Canada International Total
----------------------------------------------------------------------
Revenue $ 1,320,989 $ 494,219 $ 1,815,208
Assets 2,175,877 475,481 2,651,358
----------------------------------------------------------------------
NOTE 17: FINANCIAL INSTRUMENTS
(a) FAIR VALUE
The carrying value of cash, accounts receivable and accounts
payable and accrued liabilities approximate their fair value
due to the relatively short period to maturity of the
instruments. The fair value of long-term debt, exclusive of the
unsecured debentures, approximates its carrying value as it
bears interest at floating rates. The $200 million Series 1
debentures have a fair value of approximately $216.2 million as
at December 31, 2003 (December 31, 2002 - $210.5 million) and
the $150 million Series 2 unsecured debentures have a fair
value of approximately $170.8 million at December 31, 2003
(December 31, 2002 - $161.1 million). As at December 31, 2003
investments have a carrying value of $3.8 million (December 31,
2002 - $11.1 million) and a fair value of approximately $5.2
million (December 31, 2002 - $12.7 million).
(b) CREDIT RISK
Accounts receivable includes balances from a large number of
customers. The Corporation assesses the credit worthiness of
its customers on an ongoing basis as well as monitoring the
amount and age of balances outstanding. Accordingly, the
Corporation views the credit risks on these amounts as normal
for the industry. As at December 31, 2003 the Corporation's
allowance for doubtful accounts was $16.0 million (December 31,
2002 - $14.9 million).
(c) INTEREST RATE RISK
The Corporation manages its exposure to interest rate risks
through a combination of fixed and floating rate borrowings. As
at December 31, 2003, 39% of its total borrowings was at
floating rates.
(d) FOREIGN CURRENCY RISK
The Corporation is exposed to foreign currency fluctuations in
relation to its international operations; however, management
believes this exposure is not material to its overall
operations.
--------------------------------------------------------------------------------
ANNUAL REPORT 2003 FINANCIAL REPORTING
page 97
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NOTE 18: SUPPLEMENTAL INFORMATION
2003 2002 2001
-----------------------------------------------------------------------------------------------------------
Cash interest paid $ 36,721 $ 35,660 $ 45,967
Cash income taxes paid 43,994 89,856 11,066
Components of change in non-cash working capital balances:
Accounts receivable $(113,519) $ 14,231 $ (35,607)
Inventory (6,344) (13,982) (18,245)
Accounts payable and accrued liabilities 2,632 20,000 15,878
Income taxes payable 16,085 (20,850) 15,374
-----------------------------------------------------------------------------------------------------------
$(101,146) $ (601) $ (22,600)
-----------------------------------------------------------------------------------------------------------
The components of accounts payable and accrued liabilities are as
follows:
2003 2002
----------------------------------------------------------------------------------------------------------
Accounts payable $ 62,958 $ 66,015
Accrued liabilities
Payroll 43,901 43,547
Other 153,686 148,351
----------------------------------------------------------------------------------------------------------
$ 260,545 $257,913
----------------------------------------------------------------------------------------------------------
NOTE 19: CONTINGENCIES
The Corporation, through the performance of its services and
product sales obligations, is sometimes named as a defendant in
litigation. One such case relates to a former agent of the
Corporation in Indonesia who filed a suit in Indonesian courts
seeking a pronouncement that they be the sole agent for certain of
the Corporation's product lines in Indonesia and they are seeking
damages of US$17.5 million. This matter is at trial and all written
evidence and oral testimony has been presented by all parties. The
outcome of this and other claims is not determinable at this time;
however, their ultimate resolution is not expected to have a material
adverse effect on the Corporation.
The Corporation maintains a level of insurance coverage deemed
appropriate by management and for matters for which insurance
coverage can be acquired.
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PRECISION DRILLING CORPORATION
page 98
--------------------------------------------
NOTE 20: DISCONTINUED OPERATIONS
On March 6, 2003, the Corporation sold Energy Industries Inc.,
a wholly-owned subsidiary included in the Rental and Production
segment, for $60.0 million cash. The effective date of the
transaction was January 1, 2003. Energy Industries designed and
manufactured modularized natural gas compression packages. Although
Energy Industries had been profitable since its acquisition by
Precision in 1996, the compression packaging business was determined
to be not core to the Corporation's energy services globalization
strategy.
In May 2003 the Corporation sold its 50% interest in Energy
Equipment Rentals General Partnership ("EER") and Oil Drilling
Exploration (Argentina) SA ("OD&E") for cash proceeds of $6.9
million, net of transaction costs. Both entities were components of
the Contract Drilling segment.
The review of the business plan for the Technology Services
segment was completed in the fourth quarter of 2003. One of the
outcomes of this process was the identification of two product lines,
namely pressure pumping and completion services carried on by the
Fleet Cementers and Polar Completions divisions respectively, as
being not core to the segment's ongoing growth initiatives. As a
result, a program has been initiated to dispose of these businesses
and discussions are being held with interested parties.
Results of the operations of these businesses have been
classified as results of discontinued operations. The following table
provides additional information with respect to amounts included in
the results of discontinued operations:
2003 2002 2001
-------------------------------------------------------------------------------------------------------------
Gain on disposal of Energy Industries $ 13,071 $ -- $ --
Gain on disposal of EER and OD&E 4,389 -- --
-------------------------------------------------------------------------------------------------------------
$ 17,460 $ -- $ --
-------------------------------------------------------------------------------------------------------------
Revenue
Gas compression $ -- $ 81,563 $ 77,313
Pressure pumping and completion services 48,150 36,279 55,287
Other 560 3,802 5,755
-------------------------------------------------------------------------------------------------------------
Discontinued operations before income taxes $ 48,710 $ 121,644 $ 138,355
-------------------------------------------------------------------------------------------------------------
Results of operations before income taxes
Gas compression $ -- $ 13,545 $ 11,685
Pressure pumping and completion services (15,585) (9,042) 7,078
Other 49 (1,154) (637)
Writedown of assets held for sale (10,799) -- --
-------------------------------------------------------------------------------------------------------------
(26,335) 3,349 18,126
Income tax expense (recovery) (6,420) 1,618 7,302
-------------------------------------------------------------------------------------------------------------
Discontinued operations $ (19,915) $ 1,731 $ 10,824
-------------------------------------------------------------------------------------------------------------
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ANNUAL REPORT 2003 FINANCIAL REPORTING
page 99
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The following table provides additional information with
respect to amounts included in the balance sheet as
assets/liabilities held for sale:
2003 2002
----------------------------------------------------------------------------------------------
Accounts receivable $ 7,157 $ 12,468
Inventory 12,482 40,165
Other 1,511 (908)
----------------------------------------------------------------------------------------------
$ 21,150 $ 51,725
----------------------------------------------------------------------------------------------
Capital assets $ 27,010 $ 64,171
Goodwill 4,267 19,478
Other 763 1,025
----------------------------------------------------------------------------------------------
$ 32,040 $ 84,674
----------------------------------------------------------------------------------------------
Accounts payable $ 4,473 $ 10,655
Other 739 584
----------------------------------------------------------------------------------------------
$ 5,212 $ 11,239
----------------------------------------------------------------------------------------------
Future income taxes $ 1,107 $ 7,383
----------------------------------------------------------------------------------------------
The following table provides additional information with
respect to amounts included in the cash flow statement of funds
provided by (used in) assets classified as discontinued operations:
2003 2002 2001
-----------------------------------------------------------------------------------------------------------
Net earnings of discontinued operations $ (2,455) $ 1,731 $ 10,824
Items not affecting cash:
Gain on disposal of discontinued operations (17,460) -- --
Depreciation and amortization 8,340 8,045 5,849
Goodwill amortization -- -- 1,198
Writedown of assets of discontinued operations 10,799 -- --
Future income taxes (4,916) (2,908) (610)
-----------------------------------------------------------------------------------------------------------
Funds provided (used in) by discontinued operations $ (5,692) $ 6,868 $ 17,261
-----------------------------------------------------------------------------------------------------------
Components of change in non-cash working capital balances
related to discontinued operations:
2003 2002 2001
---------------------------------------------------------------------------------------
Accounts receivable $ 2,843 $ 16,598 $ (6,002)
Inventory 3,243 (7,534) (5,477)
Accounts payable and accrued liabilities 1,931 (4,742) 596
Income taxes payable (772) 282 (688)
---------------------------------------------------------------------------------------
$ 7,245 $ 4,604 $(11,571)
---------------------------------------------------------------------------------------
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PRECISION DRILLING CORPORATION
page 100
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NOTE 21: GUARANTEES
The Corporation has entered into agreements indemnifying
certain parties primarily with respect to tax and specific third
party claims associated with businesses sold by the Corporation. Due
to the nature of the indemnifications, the maximum exposure under
these agreements cannot be estimated. No amounts have been recorded
for such indemnities as the Corporation's obligations under them are
not probable and estimable.