Precision Drilling Income Trust announced Monday it will suspend distributions to unitholders for an indefinite period because of “the challenging economic environment” and a drop in demand for its drilling services.
“Contraction in the global economy and low commodity prices have led to a decline in customer demand for Precision's services early in 2009,” Kevin Neveu, Precision's president and chief executive officer, said in a statement.
“The shift in momentum has been swift and Precision has responded with initiatives designed to generate free cash flow and strengthen its balance sheet. Our priorities remain aligned with our previously announced debt reduction objective, the integration of Grey Wolf and execution of our 2009 business plan,” Mr. Neveu said.
The company reported profit of $92-million, or 71 cents per diluted unit for the quarter ended Dec, 31, 2008, compared with $9-million, or 71 cents per diluted unit in the corresponding period a year earlier.
Revenue for the fourth quarter of 2008 was $335-million, up 35 per cent from revenue of $249-million in the corresponding period a year earlier.
However, Precision said the increases “resulted from the trend established during the third quarter of 2008 as customer demand from high commodity prices carried over to the start of the fourth quarter.
“By the end of the quarter, commodity prices had declined as the economic recession deepened and customer demand declined. Net earnings were reduced by an income tax expense of $10-million in the fourth quarter of 2008 as opposed to an income tax benefit of $13-million in the last quarter of 2007,” the company said.
In addition to suspending its distributions to unitholders, Precision's chief financial officer Doug Strong said during a conference call Monday that the company proposes to issue $150-million (U.S.) worth of new trust units in Canada and the United States.
Precision also “intends to refinance our $400-million [U.S.] bridge facility,” Mr. Strong said.
Mr. Neveu said the company's growth in the United States, along with the completion of the acquisition of Houston-based Grey Wolf on Dec. 23, 2008, contributed to the growth in fourth-quarter earnings and revenue.
“We finished 2008 with a strategic acquisition to gain market share in the United States land drilling market and the people and assets of Grey Wolf are already proving to be an excellent fit with Precision. We believe Precision's broad North American presence positions us to be a significant land driller for oil and clean, economic and strategically significant natural gas throughout the industry cycle,” he said.
However the company had warned in December that it might have to cut distributions to finance the takeover at a time when business was falling off.
Mr. Neveu said during the conference call that Precision was not caught off guard by the downturn – although it had not predicted the magnitude of the slump.
“I tell you, I believe our industry right now is plagued by a lack of visibility going forward [and] although it's very difficult to provide a mid to long-term view, we understand the short-term challenges facing our company,” Mr. Neveu said.
The Canadian winter drilling season is at its lowest levels since 1999, he said.
“This has been driven by a combination of low commodity prices and the inability of our customers to access credit.”
In response, Mr. Neveu said the company has implemented strict cost controls and a hiring freeze, but it will not “cannibalize” its assets and will position itself for the eventual economic recovery.
“Frankly, the leadership and management of Precision has experienced and managed through several similar cycles before. Our people know now to respond and how to execute our business strategy through lower activity cycles,” Mr. Neveu said.
“As part of its ongoing debt reduction plan, the trust expects to keep capital expenditures at efficient levels during 2009. Precision expects to spend approximately $239-million [Cdn] in capital expenditures for 2009, with approximately $75-million being for upgrade capital and $164-million being for previously committed expansion capital,” the company said.
“Precision is taking steps to add certainty to its capital and debt structure and announced today that the board of trustees has suspended cash distributions for an indefinite period. This measure was taken in response to lower financial operating performance at the start of 2009. The suspension of cash distributions allows Precision to increase debt repayment capability and balance sheet strength.
“Accordingly, no distributions will be paid in March, 2009 to Trust or Precision Drilling Limited Partnership unitholders of record on February 27, 2009, or for an indefinite period thereafter. The previously announced distribution of $0.04 per unit payable on February 17, 2009 to Trust and Precision Drilling Limited Partnership unitholders of record on January 30, 2009 is unaffected by the suspension.”
