P R E C I S I O N D R I L L I N G C O R P O R A T I O N A n n u a l R e p o r t 1 9 9 7 PROFILE PERFORMANCE SUMMARIES REPORT TO SHAREHOLDERS PRECISION DRILLING CORPORATION Precision is Canada’s most active drilling contractor and is the leader in both oilfield and industrial services. Precision attributes its growth and financial success to the culmination of many factors. Adherence to a strategy of premium quality in terms of people and equipment has fueled the Corporation’s success. Management focuses on financial systems and long term strategic planning with a commitment to training REVIEW OF OPERATIONS and safety. Precision’s employees are therefore free to focus on customers in their day-to-day business activities. The impact of this simple approach is evidenced in year-over-year growth in terms of productivity, revenue, earnings and asset value. Precision is headquartered in Calgary, Alberta and provides comprehensive services to the oil and gas exploration and production sector throughout western Canada and internationally. Precision is publicly traded on The Toronto Stock Exchange (symbol PD) and the New York Stock Exchange (symbol PDS). Precision reports its financial results in Canadian dollars. ANNUAL MEETING MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS FINANCIAL STATEMENTS The Annual General Meeting of the Shareholders of Precision Drilling Corporation will be held in the McMurray Room of the Calgary Petroleum Club, 319 - 5th Avenue S.W., Calgary, Alberta at 3:30 p.m. (Calgary time) on Thursday, September 18, 1997. Shareholders are encouraged to attend and those 10 YEAR SUMMARY DATA unable to do so are requested to complete the Form of Proxy and forward it at their earliest convenience. CORPORATE INFORMATION 1 2 4 10 24 35 54 56 PRECISION DRILLING CORPORATION FINANCIAL PERFORMANCE SUMMARY Years ended April 30, 1997 and 1996 (Stated in thousands of dollars except per share amounts) 2 QUARTERLY RESULTS SUMMARIES (Stated in thousands of dollars except per share amounts) Revenue Gross margin Cash flow (1) Per share Net earnings Per share Shareholders’ equity Per share Net capital expenditures Long-term debt Average number of shares outstanding Return on shareholders’ equity (%) Volume of shares traded (2) Average price per share (2) Revenue EBITDA (3) Cash flow (1) Per share Net earnings Per share Revenue EBITDA (3) Cash flow (1) Per share Net earnings Per share 1997 455,037 140,103 76,157 5.15 42,359 2.87 353,387 23.91 53,568 96,305 1996 163,102 51,304 28,170 3.32 17,568 2.07 130,794 15.40 23,135 9,695 % Change + 179 + 173 + 170 + 55 + 141 + 39 + 170 + 55 + 132 + 893 14,781,348 12.0 18,639,348 42.60 8,494,201 13.4 8,416,227 16.92 Q1 74,943 16,411 11,192 0.86 6,835 0.52 Q1 32,510 5,502 4,656 0.57 2,641 0.32 Q2 108,814 26,392 15,940 1.12 10,299 0.73 Q2 36,487 7,548 5,871 0.71 3,362 0.41 Q3 122,824 30,309 20,358 1.36 11,707 0.78 Q3 49,254 15,577 10,622 1.28 7,807 0.94 Q4 148,456 37,625 28,667 1.81 13,518 0.84 Q4 44,851 10,399 7,021 0.76 3,758 0.40 1997 455,037 110,737 76,157 5.15 42,359 2.87 1996 163,102 39,026 28,170 3.32 17,568 2.07 REVENUE Millions of Dollars 0 . 5 5 4 6 . 8 7 1 1 . 3 6 1 6 . 7 9 7 . 7 2 3 . 5 2 1 . 0 4 0 . 1 3 7 . 1 3 3 . 4 4 88 89 90 91 92 93 94 95 96 97 NET EARNINGS Millions of Dollars 4 . 2 4 6 . 7 1 9 . 6 1 0 . 8 7 3 . 8 1 . 4 1 . 3 1 . 9 0 . 6 0 . 88 89 90 91 92 93 94 95 96 97 (1) (2) (3) Funds provided by operations combined with dividend income Relates only to shares traded on The Toronto Stock Exchange EBITDA – Earnings before interest, taxes, dividends, depreciation and amortization PRECISION DRILLING CORPORATION DRILLING PERFORMANCE SUMMARY Years ended April 30, 1997 and 1996 SHARE TRADING SUMMARY (1) SHARE TRADING HISTORY Dollars Volume High/Low Close 70.00 60.00 50.00 40.00 30.00 20.00 10.00 000’s 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1996 1997 Number of drilling rigs Number of operating days (spud to release) Wells drilled Metres drilled (thousands) Rig utilization rate (%) 1996 July 31, 1995 October 31, 1995 January 31, 1996 April 30, 1996 1997 July 31, 1996 October 31, 1996 January 31, 1997 April 30, 1997 1997 222222222222222222222222222222222222222222222222222222222 Market Precision Industry Share % 101 468 21.6 1996 2222222222222222222222222222222222222222222222222222222 Market Share % 18.0 Precision 83 Industry 460 20,448 105,192 3,428 3,661 63.6 14,144 15,607 62.7 19.4 24.2 23.5 16,483 2,700 3,008 54.1 86,406 11,009 12,672 51.3 19.1 24.5 23.7 High ($) Low ($) Close ($) Volume of shares Value ($) 16.50 15.75 19.00 27.75 27.75 33.00 45.00 62.00 67.50 67.50 13.00 13.25 14.50 18.75 13.00 25.50 29.25 41.00 48.10 25.50 14.00 15.75 18.50 25.50 25.50 29.50 43.50 60.90 48.45 48.45 2,530,143 1,403,379 2,820,198 1,662,507 8,416,227 38,630,602 19,200,086 47,261,015 37,301,152 142,392,855 5,227,049 149,937,971 2,801,050 97,882,422 6,179,628 302,843,730 4,431,621 243,376,175 18,639,348 794,040,298 (1) Relates only to shares traded on The Toronto Stock Exchange 1997 REVENUE BY SOURCE Industrial Rental – 9% Oilfield Rental – 8% Well Servicing – 9% Industrial Services – 17% Compression Equipment – 11% Drilling Services – 46% 3 OPERATING SEGMENTS Oilfield Services – 74% Industrial Services – 26% TO OUR SHAREHOLDERS and financial strength - a position from which continued In 1997, we surpassed our $400 million revenue target As Precision goes forward in 1998 we are starting the growth will be generated. with $455 million in revenue, up from $163 million in year in new territory. Precision is now the largest The 1997 financial performance reflects year- 1996. Cash flow increased to $76 million, or $4.83 per drilling contractor in North America in terms of metres over-year growth greater than at any time share fully diluted, compared to $28 million or drilled. We are also a much more diversified service in Precision’s history. The growth is $3.05 per share fully diluted in 1996. Earnings company — having broadened our capabilities in the largely attributable to acquisitions, soared by 141 percent to $42 million, compared to oilfield and industrial service sectors. however, the premium quality of service and $18 million last year. On a fully diluted per share basis, It was a record year for fiscal 1997 financial and equipment added and sustained through Precision’s net earnings were $2.71 per share compared to $1.91 per operating performance, and especially for acquisition and history cannot be overstated as an influencing factor on share for 1996. 4 financing activity. The Corporation is positioned with our results. industry-leading people, equipment, technical expertise “Precision had an excellent year in 1997. While a challenging level of performance has been established, we see opportunities in every aspect of our business that will allow us to grow and perform better.” “Ultimately, a strong financial performance is the premium we provide another group of customers — our shareholders.” There are three key points to make about Precision’s 2. We believe that the drilling and services 3. Acquisition opportunities are unlikely to leading market position which will have a significant sector is evolving, at the insistence of our continue at the pace impact on our future: customers, to provide for more experienced in fiscal 1. While taking advantage of growth opportunities comprehensive services with enhanced 1997. However, 1997 by completing a number of acquisitions, information and control systems. The was also a year of Precision is not just focused on size. Quality increased breadth of services, combined significant internally generated growth and remains the drive behind our activity and as we have acquired companies and assets, we with more sophisticated and costly systems improved bottom line performance in each and support, could be uneconomic without of its business segments. This trend will continue. QUALITY FIRST – EVERYWHERE 5 have quickly established efficiencies and systems to improve performance while supporting our a large operating base and economies of scale. With the advances made in 1997, people and equipment to ensure optimum Precision is positioned to meet the performance for our customers. It is this focus increasing demand of customers while on premium quality, and a belief in a “win- maintaining an optimal cost base. win” formula for ourselves and our customers that will sustain our market position. “Continually striving for quality requires a commitment to our customers and their objectives, anticipating customer needs, providing the right equipment at the right time, operating efficiently and following up to ensure the service met expectations.” During the year, there were seven separate acquisitions At year end, Precision had total long-term debt of $123 Strengthening Market Position completed, of which the most significant were EnServ million, resulting in a manageable debt-to-equity ratio of Corporation (purchase price $228 million), Brelco 35%. Towards the end of 1997, Precision launched a takeover bid for Kenting Energy Services Inc. which, in turn, was As important as completing the transactions is the success in the process of acquiring Cactus Drilling, a division of achieved in effectively combining the acquired Lynx Energy Services Corp. The Corporation followed up Drilling Ltd. and substantially all of the assets of Ducharme Oilfield Rentals Ltd. ($91 million, combined) and Rostel Industries ($9 million). Broadening Services “Precision’s acquisition pace in 1997 is the realization of an industry consolidation trend. The EnServ acquisition significantly broadened the range Providing comprehensive and quality services of services provided by the Corporation. The purchase of efficiently can only be achieved with a large 6 the Ducharme assets expanded Precision’s presence in the asset base and financial capability. Precision’s oilfield equipment rental business. The Brelco acquisition acquisitions were strategic and position the added to the drilling rig fleet at below replacement cost. Corporation for significant, future growth.” with an amended offer to take into account the value of Cactus Drilling. The deal was completed in June 1997 with Precision acquiring all of Kenting’s shares, including those which had been provided to Lynx shareholders as part of the Kenting-Lynx transaction. The acquisition doubled the drilling business of the Corporation by adding 94 drilling rigs, 34 camps, two operating facilities and related equipment. Financing the $446 million Rostel provided much sought after capability to manufacture drilling equipment including rigs. The acquisitions were completed with a combination of cash flow, debt and equity financing. In total, the acquisitions in 1997 added more than $300 million in assets. companies’ people and assets under the Precision transaction was completed by paying $208 million in umbrella. In fact, every acquired company immediately cash, issuing approximately 3.7 million common shares realized improved performance, benefiting all who and approximately 4.8 million Series 4, Preferred Shares. participate in the Corporation. The integration of Kenting and Cactus management and Kenting, Cactus and Rostel assets, Precision confirmed its The often overlooked value of acquisitions is the addition personnel into Precision is complete. The transaction is commitment to the contract drilling business. The of highly trained and experienced personnel to the anticipated to have a substantial and positive impact on Corporation now holds a 40 percent market share with workforce. With the pool of expertise that Precision has the Corporation. 195 of the total industry drilling rig count. assembled the Corporation is well positioned to capture Subsequent to the Kenting transaction, a Canadian The oilfield and industrial services of Precision hold further growth in the marketplace. debenture issue was completed providing $200 million in strong market positions within their respective sectors A Record Year’s Key Events financing, maturing in 2007. The successful closing of the financing reflects the strength of the Corporation in the eyes of the investment community, and represents the first time this size of issue was completed by an oilfield service company, with a “BBB” rating sold exclusively into the Canadian market. For Precision, the debenture issue strengthens its balance sheet, providing the Corporation May 1996 June 1996 EnServ Corporation acquired. New SAP computer system for advanced information management. August 1996 October 1996 November 1996 December 1996 January 1997 February 1997 March 1997 April 1997 Gramlich, US Live & Polar assets sold. Gram-Well Servicing and Gramlich assets purchased. Rostel acquired. Kenting takeover announced. Sale of TRS division announced. 7 Listed New York Stock Exchange. First SAGD wells drilled. Ducharme & Brelco acquired. Precision reaches $1 billion capitalization. Wrangler snubbing units acquired. Construction of 3 new slant rigs completed. with increased liquidity and financial flexibility. and, most important, generate impressive financial Impact of Acquisitions performance, contributing to the bottom line. In “Acquisitions in 1997 expanded Precision’s service capability and cemented its leading market position, particularly in contract drilling.” By acquiring EnServ and Ducharme, Precision has addition, these service businesses represent further growth strategically diversified into other sectors to enhance its and diversification opportunities for the Corporation. service capability. With the addition of the Brelco, Opportunities addition of new rigs to the industry, the rig supply is drillsite to anywhere in the world, adds to the cost of rig Precision will increase its international marketing efforts, strengthen its longer-term customer relationships and fully capitalize on economies of scale within its business units. For contract drilling, Precision intends to maintain its market position and to grow internally by manufacturing rigs as appropriate to serve the specific requirements of our customers. Internationally, Venezuela is an area that 8 offers the greatest, near-term opportunity for growth. expected to remain tight, sustaining favorable prices for operations and is often economic only if the investment is drilling contractors. Along with price strength, producers spread over a large fleet. Precision’s pursuit of fleet size is are increasingly interested in forging longer term partially in anticipation of leading these technological commitments for rigs and services. Precision has a advances. This will ensure that customers have the number of such relationships and is committed to the service quality they expect, in order to improve their concept because of the opportunity to better serve efficiency and bottom-line. customers’ individual needs while realizing premium fees Quality in Safety for the specialized service. This “win-win” formula has a positive impact on the producers’ and Precision’s The commitment to safety standards and practices is more important than ever. The philosophy of the Corporation, from training and education to salaries and Precision has also established relationships and contacts businesses. in other oil and gas production areas around the world. Underlying Precision’s growth and marketing activities incentives are designed to encourage and support high These relationships will be further developed when are industry-leading information systems and processes. safety standards. A new training facility was opened by existing equipment becomes available or new equipment With its rate of growth, Precision knows the importance Precision for its field employee base in 1997, the first of is constructed. of establishing systems that will accommodate growth, its kind in the Canadian drilling industry. This A process of consolidation in the drilling industry has continued over the last few years and prompted a decline from 58 participants a decade ago, with 547 active rigs, to 29 companies and currently 490 rigs. Even with the serve both management and administration of the investment is a key component of our ability to maintain business and ensure improved performance for all of its a rate of growth while at the same time maintaining a entities and divisions. Increased computerization, in high standard of safety. order to communicate and transmit data from the Outlook already had a significant impact. Additions at the The impact of acquisitions in 1997 and the robust market management level include Art Dumont as Chief conditions are pointing to another year of growth for Operating Officer, Bruce Herron as Senior Vice President, Precision in 1998. Significantly increased revenues, Services Group, Hugh Strain as Senior Vice President, earnings and per share performance are anticipated. Canadian Drilling, Blair Goertzen as Vice President, Well Economies of scale will support cost savings, particularly Servicing, and Derek Martin as Vice President, General through the centralized purchasing operation that is Counsel. Also Larry Coston is Senior Vice President, being implemented. Precision has reached a size where Marketing and Mick McNulty is Vice President, Finance. vertical integration should provide substantial benefit to With record high activity levels in every aspect of our earnings performance. Corporation, the dedication required from all individuals The industry activity level is expected to continue at its is immense. There are few companies, in any sector, record-breaking pace, supporting our growth objectives. which have achieved this magnitude of growth while With opportunities in the international arena and maintaining the quality standard that Precision is noted through some of our recent acquisitions, Precision is well for. I attribute the success to the efforts of employees and (Signed) Hank B. Swartout Chairman of the Board, positioned for continued growth. A number of very capable people joined Precision’s management group and Board during 1997 both via acquisitions and appointment. Murray Mullen and Troy Ducharme joined our Board during the year, and have suppliers, along with the significant support provided by President and Chief Executive Officer Precision’s Board of Directors. I appreciate the July 28, 1997 opportunity to work with these quality people who have worked together to build Precision. 9 REVIEW OF OPERATIONS The acquisitions of Kenting and Cactus, subsequent to 1997 year-end will have a dramatic impact on the Corporation. For accounting purposes, the acquisition is not recorded in 1997. However, this section of the Report includes the effect of these acquisitions to more accurately describe the Corporation, in terms of its service capability, market position and future opportunities. PRECISION DRILLING CORPORATION INDUSTRIAL SERVICES OILFIELD SERVICES 10 CEDA DRILLING RENTALS & OTHER MANUFACTURING WELL SERVICING ENERGY INDUSTRIES ROSTEL INDUSTRIES DRIVE LIVE CERTIFIED RENTALS TRENCHLESS REPLACEMENT SYSTEMS PRECISION SMOKY BRELCO DUCHARME KENTING LRG CATERING CACTUS MONTERO RESOURCES INTERNATIONAL Precision’s industry position as a premium quality provider of drilling, oilfield and industrial services has allowed it to take advantage of the trend towards consolidation in the industry. A series of strategic acquisitions combined with Precision’s leading position in the market place has produced a company that now has more than one billion dollars in assets. The Corporation now has approximately 40 percent market share in contract drilling and considerable market share in each of its service areas. Precision maintains its reputation as a premium quality service company because of its fleet of top-notch equipment and its high calibre of personnel in the field, management and administration. Precision was the top driller for calendar 1996 with the number of metres and wells drilled exceeding all competitors by a substantial margin. Through a series of corporate acquisitions during 1997 and into early fiscal 1998, Precision significantly added to its industry presence. The combination of fewer and fewer participants in the systems, allows the Corporation to continue to grow while OILFIELD SERVICES drilling services industry and minimal new rigs being still maintaining its quality standard. Contract Drilling manufactured, cements a leading industry position for Precision which is expected to be sustained into the foreseeable future. A hallmark of our approach is the commitment to safety Precision has consolidated the activities of Brelco, and training. Premium quality results from an employee Kenting, and Cactus under the Precision Drilling base which is well trained and operates with safe trade name. Precision operates in two business areas: oilfield services procedures. A combination of continual training and and industrial services. Most of its activity takes place within Canada. Precision’s organization and systems have been substantially adapted to allow for the most efficient and effective operation at its larger size. The underlying premise to Precision’s management approach is to employ the best people with the best equipment, and let them develop and manage the business. Many of the acquired companies operate independently under the name they built in the market place. Management supports their efforts with improved systems and financial incentives for employees to stay long term results in a high calibre work force. Throughout its organization, Precision can boast a quality work force increased purchasing power, leading to better margins. which leads the industry and is reflected in its service Precision’s clearly defined approach to management and standard and safety record. 11 Precision’s active fleet of 195 drilling rigs in western Canada covers a broad range of configurations and capabilities. The fleet has grown by 135 percent during the year, achieved for the most part by acquiring other drilling service companies. Growth will continue by Service METRES DRILLED Millions manufacturing new rigs, adding specialized equipment to the fleet and maintaining our service quality. 7 . 3 2 . 3 0 . 3 2 . 2 1 . 1 8 . 7 0 . 0 7 . 0 90 91 92 93 94 95 96 97 MARKET SHARE Percent 5 . 4 2 2 . 4 2 9 . 3 2 8 . 9 1 4 . 4 1 0 . 3 1 0 . 0 1 0 . 0 1 Additional Capability Precision’s fleet is well configured for the varied needs of the western Canadian energy industry. The fleet is made up of 15 singles, designed for shallow drilling depths, 88 doubles and 84 triples, capable of deep wells. The remaining eight rigs are slant rigs and represent 80 percent of the slant drilling rigs active in Canada. Directional drilling, including horizontal wells and multi-leg wells from one entry point is one of the most important changes to the drilling industry in the past decade. Producers are utilizing directional and multi-leg drilling techniques to achieve improved economics and reserve recovery. Precision’s equipment and expertise in these applications, positions it effectively to meet the growing demand. 37 107 12 1,000 2,000 3,000 4,000 5,000 6,000 7,000 metres 51 NUMBER OF RIGS & DRILLING DEPTH CAPACITY 49 90 91 92 93 94 95 96 97 Precision manufactures its slant rigs, equipped with top- An additional five slant rigs are planned in fiscal 1998 drive drilling systems, in order to serve the growing using a similarly structured agreement to ensure the market for directional drilling, largely driven by the costs are fully recovered. producers’ increased focus on heavy oil. An additional Throughout the Corporation’s history, partnering with advantage to these newer rigs is their use of automated producers has led to mutually satisfying results. By pipe handling which is more efficient and can reduce labour costs while also lowering the risk of injury by limiting handling. Financing of these rigs is achieved understanding our customers’ immediate and longer term needs, we can reconfigure existing rigs and design and manufacture new rigs which are optimally suited to their RIG UTILIZATION RATE Percent Industry Precision 8 . 3 6 4 . 3 6 6 . 3 6 7 . 2 6 1 . 6 5 7 . 4 5 1 . 4 5 3 . 1 5 4 . 9 2 3 . 7 3 1 . 4 3 5 . 9 2 1 . 2 4 9 . 2 3 0 . 0 3 3 . 3 2 through customer agreements which result in Precision drilling requirements. In turn, Precision maximizes its investing in the manufacture of the rig based on a four utilization which forms a strong foundation for growth. 90 91 92 93 94 95 96 97 or five year dedicated use agreement from a producer. Precision Drilling Statistics (Year Ended April 30th) Metres (000’s) Wells % of Wells Drilled in Canada Source: Daily Oil Bulletin Rig Utilization Rate (Year Ended April 30th) Precision Industry Average Source: CAODC 1997 3,661 3,428 24.2 1997 63.6 62.7 1996 3,008 2,700 24.5 1996 54.1 51.3 1995 3,158 2,893 23.9 1995 63.4 63.8 1994 2,196 2,058 19.8 1994 56.1 54.7 1993 1,054 892 14.4 1993 42.1 32.9 1992 725 575 13.0 1992 30.0 23.3 1991 1990 795 600 10.0 716 513 10.0 1991 39.4 34.1 1990 37.2 29.5 “Precision has worked hard to establish a reputation for quality. That effort continues throughout the Corporation. Acquiring quality people and equipment through 1997 has allowed for expanded services and new opportunities to provide consistent service to a demanding customer base.” 13 Premium Quality into improved efficiency for its customers and lower total As the largest Canadian drilling contractor, Precision is Canada is world renowned for the high quality of its costs than those achieved by the competition. positioned to benefit from increased purchasing power. drilling equipment and the expertise of its drilling Full Service and Support personnel. The robust market conditions and high activity levels support further investments in equipment, and fosters an environment for improved technical capability and efficiency. As the industry leader, Precision carries the reputation for having the highest quality equipment and employing the best people. Service quality is a key component of the Corporation’s success, supporting A valuable component of Precision’s operating base is its fleet of 69 self-contained camps used to accommodate rig crews in remote locations. Precision controls the quality of the working conditions for its crews by owning and managing the camps. This is key to maintaining long-term employee relationships and optimum premium rates and leading to customer loyalty. Precision demonstrates that its commitment to quality translates performance. 14 The Corporation is centralizing its purchasing process in order to achieve economies of scale, reduce costs, improve performance and enhance earnings. Supporting field operations with centralized services, where it makes sense, is an approach that has allowed the Corporation to grow and achieve better results. By focusing on ways of reducing costs across the Company, Precision strengthens its ability to serve customers competitively. “High standards must permeate the Corporation — in front of the customer and behind-the-scenes. Our customers expect excellence from the people they meet from Precision and in the systems and support we provide.” International Drilling Services In addition, Precision has an agreement with a Chinese Well Servicing Precision has expanded its international presence with company for the exclusive distribution of mud pumps the acquisition of Kenting, by adding operations in Oman throughout North America. Precision conducts well servicing activities under the trade names and Azerbaijan to its activities in Venezuela. Expansion of international operations will be focused on DRIVE and LIVE. In Venezuela, the Corporation has signed a letter of intent Venezuela where the Corporation has an established The well servicing business to operate two drilling rigs for a joint venture between a presence and, therefore, the best opportunity to achieve represents an important area of growth with the potential U.S. multinational and a Venezuelan oil company. The economies of scale. The activity in Venezuela is for further improved earnings. In 1997 the well service agreement supplements two existing contracts to operate increasing, mainly because of the growing interest in fleet doubled in size from 25 rigs to 49. slant drilling and service rigs in Venezuela. heavy oil, an area with which Precision has considerable Another agreement, which is a 50-50 joint venture with expertise. Well servicing encompasses a broad range of activities with the purposes of maintaining, repairing or modifying 15 Deutag, provides services during a three-year drilling The ultimate objective of international activity is to focus existing oil and gas wells. Precision has a fleet of 49 program in Azerbaijan for an international consortium on areas which offer the best opportunity to grow and truck-mounted well servicing rigs and has one slant and led by Amoco. mirror the success realized domestically. Precision is in eight conventional service rigs under construction to add In Oman, there is one year remaining in a four-year drilling contract for one rig. The agreement has the potential for a one-year extension. the process of rationalizing its foreign operations, to the fleet in fiscal 1998. consistent with this strategy. Growth Market Opportunity Advanced design and technology improvements A total of 17 rigs were acquired from other Canadian Service rigs are used for new well completions and workovers of existing wells. Workover’s create an active, steady demand for service rigs as well as generating 70 distinguish Precision’s slant service rig capability from our service companies, while four rigs competition. Three custom designed slant service rigs were were purchased in the U.S. and manufactured in 1997. A fourth rig designed for heavy oil refurbished at our facilities. percent of total well servicing revenue in 1997. There are application is to come on-stream in 1998. These rigs are The average utilization rate in approximately 100,000 producing wells in western Canada built under special customer agreements allowing for the calendar 1996 was 90%, which compares favorably to today compared to 74,000 in 1990. This rise in the number full recovery of design and manufacturing costs. industry utilization of 89%. of producing wells suggests that the demand for With producers increasing their focus on heavy oil, the equipment for maintenance work will continue to be high. Corporation added a further 21 rigs to expand its heavy oil INDUSTRY SERVICE RIG UTILIZATION RATES Percent 16 service capability. 100 90 80 70 60 50 40 30 20 10 90 91 92 93 94 95 96 “Precision has developed a well known name in the service industry. The ability to serve the customer with the people and equipment they know and trust is paramount and contributes to Precision’s strong performance.” Customer alliances allow for increased efficiency, an formation. Snubbing is typically applied to natural gas Precision’s fleet of 16 snubbing units is the example of which is the ability to change from the production and requires the use of highly mobile, largest fleet of its kind in Canada traditional 10 hour workdays to two, 12 hour shifts to hydraulic equipment which controls well pressure while and represents 54 percent of optimize rig utilization. work is completed. the market. Snubbing Services The emergence of “under balanced drilling” has added The Corporation has become the The demand for Snubbing units continues to increase another application for snubbing services. industry leader in this service and is the steadily since the development of the technique in 1980. The snubbing units are used for primary well control Snubbing units assist the process of well servicing by during the drilling of the under balanced section and the service provider of choice for two of the industry’s most active oil and gas producers. providing an alternative method of well control without subsequent extraction of the drill string. injecting potentially harmful fluids into the well 17 “Snubbing units provide an alternative method of well control without injecting potentially harmful fluids into the well formation.” International Arena Manufacturing – Compression and Oilfield Equipment of 19 packages are used as rental units when producers Growth in the domestic market continues and is Packaging and servicing of compression equipment is need temporary usage. enhanced by the Corporation’s first venture into the conducted by Energy Industries. Oilfield equipment is The natural gas industry is European market. A contract to provide snubbing manufactured by Rostel Industries. equipment and services in Spain was signed in April Serving the natural gas production sector, Precision designs, growing, particularly because it is the more abundant of the 1997. Additional contracts are being pursued to expand packages, sells and services natural gas compression hydrocarbon reserves in western Canada. The compressor on this introduction to the international marketplace. equipment. Precision has exclusive distributorship rights in market is dominated by three major suppliers and “Serving the natural gas production sector, Precision Enterra. Compressors, typically in the range of 400 to 1,200 growth combined with Precision’s market position bodes Canada for compressors manufactured by Weatherford Precision is the second largest of the three. The forecasted 18 designs, packages, sells and services natural gas compression equipment.” horsepower, are primarily sold to producers, although a fleet well for the future, with the only limiting factor being facility constraints. As the industry grows and an increasing number of compressors are in active use, the need for service and maintenance increases. Precision is well positioned with a new central parts warehouse plus the addition of a service shop positioned in close proximity to the northwest Alberta/northeast British Columbia region where much of the natural gas activity is taking place. Revenue growth is anticipated as production companies Precision’s sites are conveniently located to service Storage tanks make up a significant portion of the rental increase gas sales based on the growing demand, customers throughout the western Canadian sedimentary business and Precision offers a large inventory, including sustained strong prices and the impact of new pipelines basin. customized tanks which are lined and heated to serve the and system expansion. Natural gas exports to the U.S. are Precision’s oilfield equipment rental business was growing heavy oil market. Another specialized piece of estimated by industry specialists to increase substantially substantially increased in size during 1997, mainly equipment for use in sour oil extraction is the vapor tight over the next five to 10 years. This growth in gas sales through the acquisition of a wellsite trailer rental battery which permits the production and temporary will require significant investment in compression to business. Precision now operates the largest, fully storage of sour crude oil. increase deliverability. equipped, wellsite trailer fleet at 335. In addition, this Rostel Industries was acquired in December 1996. The acquisition expanded the rental product line into the acquisition guaranteed Precision’s ability to manufacture downhole tool and motor business. 19 purpose built drilling and other oilfield equipment in a market restricted by tight capacity and technical expertise. Oilfield Equipment Rental and Other Services Rental and other services are provided by Smoky, Ducharme and LRG. The Corporation offers a broad range of products and equipment, used in all aspects and regions of the oil and gas industry, on a rental basis to a variety of customers. “Precision’s sites are conveniently located to service customers throughout the western Canadian sedimentary basin.” Expansion of Precision’s rental equipment network has Oil and Gas and the U.S. These businesses diversify Precision beyond provided better coverage to northern Alberta and southern Precision has a majority interest in a small oil and gas the upstream energy sector into the Saskatchewan. Precision’s opportunities to improve exploration and development company, Montero. The performance from this sector will accompany the cost Corporation invested $5.5 million in projects during downstream aspect of the oil and gas and other industries. savings realized from the improved purchasing power of fiscal 1997 and is in its third full year of a joint venture In line with Precision’s focus the Precision name. operation. Gross revenue has doubled to $1.7 million on premium quality, the industrial process services and Through its catering division, Precision manages camps from 1996 to 1997. industrial equipment rentals have leading industry for on-site personnel in the field. The Corporation catered The Corporation will develop existing properties and positions and a reputation in the market place for quality to approximately 30 camps last year of which it owns a continue to operate its existing wells but has declined to equipment and expertise. 20 total of 20. Operating quality camps is important in order fund further exploration within the joint venture. Industrial Process Services to provide good working conditions for both employees and contractors. Industrial Services Industrial process services are provided by CEDA. Precision’s Industrial Services encompass industrial Precision provides equipment and expertise for the process services and a broad range of industrial refining and petrochemical processing sector of the equipment rental. This segment operates across Canada industry. The Corporation specializes in three general “Precision’s oilfield equipment rental business was substantially increased in size during 1997, mainly through the acquisition of a wellsite trailer rental business.” areas of activity: catalyst handling, industrial services and environmental services. Catalyst handling is provided at refineries, natural gas plants and petrochemical plants where large reactors containing catalysts are operated. The catalyst is removed and replaced on a regular basis Precision extends its quality standard to this area of its pool is planned including the opening of a full service to achieve operating efficiency. Catalyst handling requires business in order to provide safe, reliable and timely facility in northwestern Alberta in the first quarter of skilled technicians and proprietary equipment. services. fiscal 1998. Market demand is anticipated to continue to Industrial services includes the provision of vacuum Environmental services include providing emergency grow for the foreseeable future. trucks, highly specialized mechanical services, high response capability, waste analysis, site clean-up and The manufacturing and engineering activities of TRS pressure water blasting and proprietary chemical waste transfer to disposal locations. were sold during the 1997 fiscal year. A letter of intent has cleaning procedures. These services are usually Industrial Equipment Rental been recently entered into to sell the remaining part of the business which includes the development, licencing and sales of proprietary trenchless equipment. 21 undertaken at customer locations, frequently under critical time pressure during scheduled shutdowns or emergencies. Industrial equipment rentals are conducted through Certified Rentals and Trenchless Replacement Services (TRS). A large inventory of industrial equipment is managed by Precision and is rented to a variety of industries at nine facilities; eight in western Canada and one in eastern Canada. The rental pool has over 100,000 items of which approximately 25,000 items are individually bar-coded for inventory control and usage tracking. The objective is to offer the largest, most modern rental inventory in the industry. Continued expansion of facilities and the rental SAFETY ENVIRONMENT Over the past few years Precision has formulated a The Corporation continues to view environmental issues participatory approach to safety that strives for a as key priorities at all levels of the organization. There is commitment at all levels of the organization. a strong focus on the management of waste materials Responsibility for the safety of employees and related resulting from oilfield and industrial services. Procedures procedures belong not just in the hands of a single have been developed with the full involvement of field manager, but rather permeates throughout the entire employees to monitor and properly dispose of all waste organization. All officers, managers and employees are materials. Training courses covering the protection of the expected to share an involvement and accountability for environment are encouraged at field and management 22 safe operations. This approach manifests itself in levels. Management provides reports to the Board of structured training programs in both the oilfield and Directors on a regular basis and is establishing an industrial segments of the Corporation. On the drilling Environmental Committee to specifically monitor side, where there is a well established bench-marking regulatory observance and environmental practices. The LOST TIME ACCIDENT FREQUENCY Compensible accidents per 200,000 man hours MEDICAL AID FREQUENCY Accidents per 200,000 man hours worked worked 2 3 . 5 Industry Precision 9 4 . 4 4 2 . 4 4 0 . 4 1 0 . 4 2 0 . 3 2 0 . 3 2 8 . 2 2 5 . 2 4 5 . 2 0 1 . 2 6 3 . 1 5 3 . 1 5 3 . 1 7 8 . 0 1 0 7 . 0 1 Industry Precision 9 6 . 8 9 5 . 6 9 9 . 5 3 1 . 6 5 9 . 5 2 7 . 5 4 0 . 5 6 9 . 2 2 0 . 2 7 2 . 4 2 4 . 3 5 1 . 1 system, the Corporation has consistently out-performed Corporation believes that it is in compliance with 90 91 93 94 92 (Calendar Years) 95 96 90 91 93 94 92 (Calendar Years) 95 96 the industry when measuring lost time accident and applicable legislation and that no material contingent medical aid frequencies. liabilities exist regarding environmental matters. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS “Precision’s outlook is extremely positive. While the oil and gas economics remain strong, Precision will maximize the efforts of its manpower and the utilization of its equipment to generate excellent results. Precision’s premium quality 23 will ensure it remains the supplier of choice in any market condition and its international opportunities will provide new markets for excess capacity.” PRECISION DRILLING CORPORATION The Management's Discussion and Analysis focuses on key statistics from the Consolidated Financial Statements, and pertains to known risks MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 and with the Corporation’s audited financial statements for the years ended April 30, 1997 24 and 1996, together with the related notes. Our 1997 Consolidated Financial Statements include the operations of the following companies: PRECISION DRILLING CORPORATION (includes the rental business of Ducharme effective February 1, 1997) ARROWSTAR DRILLING PARTNERSHIP LRG CATERING LTD. MONTERO RESOURCES CORP. TRENCHLESS REPLACEMENT SERVICES LTD. PRECISION DRILLING DE VENEZUELA C.A. through P.D. INTERNATIONAL SERVICES INC. P. D. TECHNICAL SERVICES INC. ENSERV CORPORATION (effective June 1, 1996) ROSTEL INDUSTRIES LTD. (effective January 1, 1997) BRELCO DRILLING LTD. (effective February 1, 1997) (cid:219) (cid:219) (cid:219) (cid:219) (cid:219) (cid:219) (cid:219) (cid:219) (cid:219) (cid:219) PRECISION DRILLING CORPORATION The Corporation has grown substantially in fiscal 1997, primarily through a series of acquisitions to become the largest Canadian oilfield service MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS company based on, among other things, revenue. The diversification achieved with these acquisitions is reflected in the change in revenue split with Canadian contract drilling revenues now representing only 46% of total Company revenues in fiscal year 1997 down from 92% of total Company revenues in fiscal year 1996. CHANGE IN BUSINESS MIX – 1997/1996 1997 1996 46% – Contract Drilling – 92% 54% – Other – 8% 25 Results of Operations Revenues: Revenues for the fiscal year ended April 30, 1997 increased by $291.9 million over the fiscal year ended April 30, 1996, or 179%, to $455.0 million. Oilfield services revenues increased $171.8 million, or 105% to $334.9 million, and industrial services revenues contributed $120.1 million. The EnServ acquisition contributed $231.2 million of revenues from 11 months of operations during the fiscal year ended April 30, 1997, and captured all of the industrial services revenues. In the Corporation's oilfield services segment, drilling services revenues increased $58.5 million, or 39% from $150.2 million in the fiscal year ended April 30, 1996 to $208.7 million in the fiscal year ended April 30, 1997. This increase was principally a result of a 24% increase in rig operating days (spud to release) from higher rig fleet utilization, compared to a 22% increase in rig operating days for the Canadian land PRECISION DRILLING CORPORATION drilling industry as a whole. The Corporation also realized improved pricing for its drilling services, partially offset by a protracted spring break- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS up at the start of the current fiscal year. The addition of Brelco, effective February 1, 1997, contributed $13.0 million of revenue in the fiscal year ending April 30, 1997. Well servicing revenues of $39.3 million, gas compression equipment revenues of $50.5 million and oilfield equipment, manufacturing, rental and other revenues of $36.4 million were recorded in the fiscal year ended April 30, 1997 principally as a result of the EnServ acquisition. The Corporation believes that these businesses also experienced increased revenues as a result of the overall improvement in Canadian oilfield activity. The Corporation's industrial services businesses were derived from the EnServ acquisition during the fiscal year ended April 30, 1997. Industrial process services contributed $80.1 million of revenues and industrial equipment rental contributed $40.0 million of revenues from 11 months of operations ended April 30, 1997. A high level of utilization of refineries and other petrochemical and processing plants in Canada and the United 26 States continued throughout the fiscal year benefitting both industrial process services and equipment rentals. OPERATING SEGMENTS Operating Segments Oilfield services include: contract drilling, well servicing, gas compression equipment and oilfield equipment, rentals and other services provided to exploration and production companies. Industrial services include: rental equipment, industrial maintenance and catalyst handling services provided to refineries, gas plants, petrochemical complexes and other process facilities. Oilfield Services – 74% Industrial Services – 26% PRECISION DRILLING CORPORATION SEGMENT PERFORMANCE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Years ended April 30 Revenue Oilfield services: 1997 1996 1997 REVENUE BY SOURCE Contract drilling Well servicing Compression equipment Oilfield equipment, rental and other Industrial services: Process services Equipment rental Total revenues Operating earnings Oilfield services Industrial services Total operating earnings $ 208,709 $ 39,260 50,511 36,408 334,888 80,101 40,048 120,149 455,037 69,720 15,838 85,558 $ $ $ $ $ $ 150,215 – – 12,887 163,102 – – – 163,102 31,290 – 31,290 Operating Expenses: As a percentage of revenue, operating expenses remained at 69% for 1997 the same as 1996. In dollar terms, operating expenses increased $203.1 million, or 182% to $314.9 million for the current fiscal year due to newly acquired businesses ($178.9 million) and increased utilization of the Corporation's drilling rigs. General and Administrative Expenses: General and administrative expenses increased $17.1 million, or 139% to $29.4 million in the fiscal year ended April 30, 1997. As a percentage of revenue, administrative costs decreased from 8% for the fiscal year ended April 30, 1996 to 6% for the fiscal year ended April 30, 1997. The increased costs relate to an Industrial Rental – 9% Oilfield Rental – 8% Well Servicing – 9% Industrial Services – 17% Compression Equipment – 11% Drilling Services – 46% GROSS REVENUE Millions of Dollars GROSS MARGIN Millions of Dollars 27 0 . 5 5 4 1 . 0 4 1 6 . 8 7 1 1 . 3 6 1 6 . 7 9 . 3 4 4 . 1 0 4 . 0 1 3 . 7 1 3 2 . 6 5 3 . 1 5 5 . 9 2 . 3 3 1 6 7 . 0 7 . 6 8 . 6 7 . 5 6 . . 7 7 2 3 5 2 . additional $14.7 million of expenses associated with the acquired businesses and an 88 89 90 91 92 93 94 95 96 97 88 89 90 91 92 93 94 95 96 97 PRECISION DRILLING CORPORATION increase of $2.4 million related to the Corporation's pre- CASH FLOW Millions of Dollars NET EARNINGS Millions of Dollars WORKING CAPITAL Millions of Dollars MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS acquisition businesses. As a percentage of revenue, general and 2 . 6 7 administrative costs remained consistent from fiscal year 1996 to 4 . 2 4 fiscal year 1997 for the Corporation's pre-acquisition businesses. Depreciation and Amortization Expenses: Depreciation and amortization expenses increased $17.4 million, or 225% to $25.2 million for the fiscal year ended April 30, 1997 compared to the fiscal year ended April 30, 1996. This increase was principally due to additional depreciation of $12.4 2 . 4 5 . 2 0 . 0 4 . 2 9 . 3 3 . 8 2 2 . 8 2 3 . 6 1 5 . 7 6 . 7 1 9 . 6 1 0 . 8 7 . 3 8 . 1 4 . 1 3 . 1 9 . 0 6 . 0 4 . 8 9 . 3 8 . 5 3 . 2 2 . 5 6 . 4 6 . 4 3 . 3 0 . 7 6 8 . 9 3 28 million relating to assets of acquired businesses and goodwill amortization of $3.4 million related to these acquisitions. 88 89 90 91 92 93 94 95 96 97 88 89 90 91 92 93 94 95 96 97 88 89 90 91 92 93 94 95 96 97 CASH FLOW PER SHARE Dollars NET EARNINGS PER SHARE Dollars LONG TERM DEBT Millions of Dollars Interest Expense (net): Interest expense increased $3.2 million to a net expense of $3.9 million for the fiscal year ended April 30, 1997 from a net expense of $735,000 for the fiscal year ended April 30, 1996. This increase in interest expense was attributable to additional borrowings to complete various acquisitions and to construct four slant drilling rigs. 5 1 . 5 6 4 . 3 2 3 . 3 8 0 . 2 5 2 . 1 8 8 . 0 0 7 0 . 9 6 0 . 4 4 0 . 5 3 0 . 8 3 0 . 0 1 0 . 7 8 . 2 6 0 . 2 7 0 . 2 3 . 3 2 1 2 0 . 1 3 6 . 0 3 2 0 . . 4 1 1 0 0 . . 4 2 6 0 1 0 . . 1 7 1 . 4 4 1 . 8 0 1 2 6 . 4 2 . . 9 3 8 6 . 88 89 90 91 92 93 94 95 96 97 88 89 90 91 92 93 94 95 96 97 88 89 90 91 92 93 94 95 96 97 PRECISION DRILLING CORPORATION Dividend Income: A dividend from the Corporation's investment in Western Rock Bit Company MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Limited in the amount of $653,000 was received during the fiscal year ended April 30, 1997 compared to $381,000 received from such investment during 1996. 1997 SOURCES OF FUNDS TOTAL: $455.3 MILLION Income Taxes: Income taxes increased $27.4 million to $39.9 million, principally as a result of the increase in earnings before income taxes and minority interest and a higher effective tax rate in the current fiscal year. The Corporation's effective tax rate was 41% in the prior year but increased to 49% in fiscal 1997. The lower tax rate for 1996 resulted from the utilization of loss carry forwards during that fiscal year. Net Earnings: Net earnings increased $24.8 million, or 141%, to $42.4 million in the fiscal year ended April 30, 1997. Financial Condition and Liquidity Funds Provided by Operations: Funds provided by operating activities, before changes in non-cash working capital components, for the current fiscal year were $75.5 million compared to $27.8 million for 1996. The increase was primarily due to higher earnings in line with the improved operating results. Investments: Net cash used in investing activities was $416.5 million in the fiscal year ended April 30, 1997, including expenditures of $219.3 million (net of cash received in the transaction of $9.0 million) for the EnServ acquisition and $99.3 million for the acquisition of Brelco, substantially all of the assets of Ducharme and the assets of the Rostel division from Taro Industries Limited. Other capital expenditures totaled $68.9 million in the 1997 fiscal year and were primarily related to the purchase of oilfield Long-term Debt Increase – 40% Proceeds on Sale of Equipment – 3% Funds from Operations – 17% Non-cash Working Capital – 1% Common Share Issue – 39% 1997 USES OF FUNDS TOTAL: $507.3 MILLION 29 Purchase of Equipment – 13% Repayment of Long-term Debt – 15% Investments – 9% Acquisitions – 63% PRECISION DRILLING CORPORATION equipment, industrial equipment, and facility upgrades at the Nisku Operations Centre. Proceeds on sale of property, plant and equipment were MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS primarily related to the disposal of oilfield and industrial rental assets totaling $8.2 million and rental compressors totaling $2.5 million. Investments of $44.9 million were principally the shares held in Kenting Energy Services Inc. (Kenting) and Lynx Energy Services Corporation (Lynx) related to the acquisition completed subsequent to year end. Financing: The Corporation received net proceeds from financing activities of $286.9 million in the fiscal year ended April 30, 1997 compared to $49.0 million in 1996. During the current fiscal year, the Corporation received $70.0 million in proceeds from a loan which was used to finance a portion of the EnServ acquisition. The loan was fully repaid on November 29, 1996 with the proceeds from the issuance of approximately 1.7 million common shares in conjunction with the Corporation’s listing on the New York Stock Exchange. The acquisition loan was redrawn to $70.0 million in January 1997, for the purposes of completing the acquisition of Brelco and substantially all of the assets of Ducharme. An additional $43.6 million was drawn to finance the acquisition of shares in Kenting and Lynx, prior to the offer being made for all the shares of Kenting. Also in 1997, the Corporation issued approximately 3.4 million common shares to the shareholders of EnServ and approximately 185,000 common shares to the shareholders of Ducharme Oilfield Rentals Ltd., in connection with these acquisitions. Liquidity: At April 30, 1997, the Corporation had total long term debt of $123.3 million, including the $70.0 million acquisition loan, $43.6 million related to the Kenting and Lynx shares and $9.6 million of project term loans related to the construction of five slant drilling rigs. The Corporation's total long-term debt-to-equity ratio was 35% at April 30, 1997. The acquisition loan bears interest generally at the lender's prime rate. Other interest rates which are available to the Corporation are U.S. base rate, U.S. Libor rate and banker's acceptance rate plus appropriate fees. The principal amount of the acquisition loan is being repaid in six equal semi-annual payments of $11.7 million, although the lender has the right to repayment on demand. The Corporation also has the right at any 30 PRECISION DRILLING CORPORATION time, to prepay without penalty all, or any portion, of the loan. The loan is secured by a MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS security interest in the property and accounts receivable of the Corporation and subsidiary guarantees. TOTAL ASSETS Millions of Dollars NET FIXED ASSETS Millions of Dollars 5 . 8 2 3 8 . 2 0 6 The Corporation's operating loan was increased to $245.0 million for the purpose of the acquisition of Kenting. The facility bears interest at the lender's prime rate, but other interest rates are available to the Corporation similar to the acquisition loan. The operating loan is secured by a security interest in the property and accounts receivable of the Corporation and subsidiary guarantees. Subsequent to year end, the Corporation filed a prospectus for the issue of unsecured debentures in the amount of $200 million with an interest rate of 6.85% due June 2007. The proceeds were used to reduce the operating loan. The debentures were issued on June 26, 1997 and at the same time the bank released security that it held related to both the acquisition and operating loans. The bank maintains security on project term loans related to the construction of rigs. Prior to the issuance of the debentures the Corporation purchased a forward interest contract which set the effective rate of interest on the debentures at 7.44% The Corporation believes that the combination of its working capital, its credit facility and cash flow from operations will provide the Corporation with sufficient capital resources 6 . 5 7 1 1 . 9 1 1 6 . 0 0 1 0 . 2 8 8 . 6 6 8 . 4 6 2 . 1 0 3 . 0 1 4 . 7 2 4 . 1 3 7 . 8 2 6 . 8 3 8 . 0 2 7 . 8 1 1 . 9 1 7 . 5 1 3 . 2 2 9 . 3 88 89 90 91 92 93 94 95 96 97 88 89 90 91 92 93 94 95 96 97 SHAREHOLDERS’ EQUITY Dollars per Share NET CAPITAL ADDITIONS Millions of Dollars 31 1 9 . 3 2 0 4 . 5 1 7 1 . 8 7 3 . 6 9 6 . 3 8 4 2 . 5 6 2 . 7 2 2 . 5 4 . 0 1 . 1 1 . 5 0 . . 2 1 0 2 4 1 . . 2 1 3 2 . 6 . 3 5 1 . 3 2 8 . 1 1 8 . 0 1 and liquidity to fund its ongoing operations. 88 89 90 91 92 93 94 95 96 97 88 89 90 91 92 93 94 95 96 97 PRECISION DRILLING CORPORATION Recent Developments MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On February 3, 1997, the Corporation launched an unsolicited takeover bid for all the outstanding shares of Kenting. The acquisition would add 68 drilling rigs to the Corporation's existing fleet and firmly establish it as the number one drilling contractor in Canada with a market share of 34%. At the same time as Precision made its offer, Kenting announced the merger of one of its subsidiaries with Lynx. Although unexpected, this development made the acquisition more attractive to the Corporation as it would add 26 more rigs and improve the Corporation's market share to approximately 40%. Accordingly, on February 19, 1997 the Corporation announced its intention to complete the transaction inclusive of the Lynx amalgamation. On April 16, 1997 the management of Kenting agreed to support an amended Precision bid. On May 5, 1997, Precision acquired 36.4 million Kenting shares or almost 99% of the shares then outstanding. However, this excluded the 7.3 million Kenting shares which were to be issued on completion of the Lynx amalgamation. Accordingly the Corporation extended its bid until June 2, 1997 in order to acquire 32 the newly issued Lynx shares and the balance of the Kenting shares. By June 2, 1997 Precision had acquired a further 6.2 million Kenting shares and was now in possession of 99% of all the outstanding Kenting shares. The Corporation subsequently acquired the balance of the Kenting shares through the use of the compulsory acquisition provisions of the Business Corporations Act (Alberta). The total consideration for the acquisition of both Kenting and Lynx was $445.9 million including $207.8 million in cash, plus 4.8 million Series 4, Preferred Shares and 3.7 million Precision common shares. Business Risk and Management The Corporation's results for April 30, 1997 are most directly affected by the number of oil and gas wells drilled as well as the current and anticipated demand for oil and gas as an energy source. PRECISION DRILLING CORPORATION Factors which can affect Precision's business include: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PRICE OF OIL AND NATURAL GAS REGULATORY INTERVENTION TAXATION CHANGES CHANGES IN EQUITY MARKETS WEATHER EXCHANGE RATES These events have the most significant impact on performance and, although they are beyond management's control, Precision's business strategies are designed to limit the negative impact while taking advantages of opportunities that arise when the business environment is difficult. Much of Precision's labour force is mobilized only when business is available, therefore reduced demand for equipment and services is somewhat matched by reduced costs. 33 Precision continues to manage risk by strengthening its relationships with its customers by introducing innovative new technologies which assist in increasing our customers' production and profitability. The Corporation's financial strength, attention to costs, and conservative balance sheet management, enable Precision to maintain the most modern and efficient oilfield service equipment in the industry. Continuing expansion and up-grading of the slant and conventional rig fleet and other oilfield equipment allow the Corporation to meet drilling and servicing requirements. The investment made in industrial and rental services has provided Precision with operations which tend to mitigate the cyclical nature of upstream operations which are traditionally highly sensitive to changes in the prices of natural gas and oil. A comprehensive insurance and risk management program is maintained to protect the Corporation's assets and operations. This program meets or exceeds current industry standards. The Corporation complies with current environmental requirements and constantly seeks ways to improve upon procedures through on-going participation in various industry related committees and programs. (cid:219) (cid:219) (cid:219) (cid:219) (cid:219) (cid:219) PRECISION DRILLING CORPORATION Outlook MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The outlook for the 1998 fiscal year is excellent, considering the opportunities generated by acquisition, market strength and a healthy economic climate. In fiscal 1997, Precision proved its ability to expand effectively. Diversification, in terms of services and geographic markets was achieved and market position in all business areas was significantly enhanced. These objectives were realized while maintaining financial strength and without earnings dilution. Precision's momentum continues without interruption despite the exponential increase in activity affecting all areas of the Corporation. In 1998 there will be an ongoing reinvestment in equipment maintenance and upgrades based on Precision's commitment to quality field operations. In 1998, facility construction and equipment purchases are planned in response to market demand. In the international arena, 34 Venezuela is a key focal point with growth anticipated to result from deployment of people and equipment. Acquisitions continue to be viewed as a feasible option for growth because of the ongoing need to add experienced people along with equipment. The first priority for acquisitions will be the expansion of existing businesses within Precision's broad base of services. An existing acquisition line of $70 million is currently available. The success of 1997 indicates that future opportunities are numerous and wide-ranging. As long as an investment offers the opportunity for Precision to provide quality services along with quality earnings, it will be considered. With the various opportunities to grow and expand, Precision anticipates 1998 will again reflect strong financial performance. PRECISION DRILLING CORPORATION MANAGEMENT’S REPORT TO THE SHAREHOLDERS Years ended April 30, 1997 and 1996 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 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 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, an independent firm of Chartered Accountants, has been engaged, as approved by a vote of shareholders at the Corporation’s most recent annual general meeting, to audit the consolidated financial statements in accordance with generally accepted auditing standards in Canada and 35 provide an independent professional opinion. The audit committee of the Board of Directors, which is comprised of three 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. (Signed) Dale E. Tremblay (Signed) M. J. McNulty Senior Vice President, Finance and Chief Financial Officer Vice President, Finance June 26, 1997 PRECISION DRILLING CORPORATION AUDITORS’ REPORT TO THE SHAREHOLDERS We have audited the consolidated balance sheets of Precision Drilling Corporation as at April 30, 1997 and 1996 and the consolidated statements of earnings and retained earnings and changes in financial position for years then ended. These financial statements are the responsibility of the Years ended April 30, 1997 and 1996 Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with 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 April 30, 1997 and 1996 and the results of its operations and the changes in its financial position for the years then ended in accordance with 36 generally accepted accounting principles. (Signed) KPMG Chartered Accountants Calgary, Canada June 26, 1997 PRECISION DRILLING CORPORATION CONSOLIDATED BALANCE SHEETS April 30, 1997 and 1996 (Stated in thousands of dollars) Assets Current assets: Cash Accounts receivable Inventory Investments Property, plant and equipment, at cost less accumulated depreciation Goodwill, net of amortization of $3,401 note 2 note 3 Liabilities and Shareholders’ Equity Current liabilities: Bank indebtedness Accounts payable and accrued liabilities Income taxes payable Current portion of long-term debt Long-term debt Deferred income taxes Shareholders’ equity: Share capital Retained earnings Commitments Subsequent events note 4 note 5 note 7 note 14 See accompanying notes to consolidated financial statements. Approved by the Board: (Signed) Hank B. Swartout Director (Signed) Ronald G. Winkelaar Director 1997 1996 $ 470 $ $ $ 123,433 29,485 153,388 49,540 328,503 71,407 $ 602,838 $ 1,012 66,149 19,429 27,002 113,592 96,305 39,554 256,029 97,358 353,387 51,981 33,142 4,162 89,285 4,324 81,958 – 175,567 524 17,047 – 4,698 22,269 9,695 12,809 75,795 54,999 130,794 $ 602,838 $ 175,567 37 38 PRECISION DRILLING CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS Revenue Expenses: Years ended April 30, 1997 and 1996 (Stated in thousands of dollars except per share amounts) Operating General and administrative Depreciation and amortization note 6 Operating earnings Interest Long-term debt Other Income Dividend income Foreign exchange Earnings before income taxes and minority interest Income taxes Current Deferred Earnings before minority interest Minority interest Net earnings Retained earnings, beginning of year Retained earnings, end of year Earnings per share: Basic Fully diluted See accompanying notes to consolidated financial statements. 1997 1996 $ 455,037 $ 163,102 314,934 29,366 25,179 369,479 85,558 3,146 1,315 (522) (653) – 82,272 31,294 8,619 39,913 42,359 – 42,359 54,999 97,358 2.87 2.71 $ $ $ 111,798 12,278 7,736 131,812 31,290 727 276 (268) (381) 671 30,265 9,831 2,670 12,501 17,764 196 17,568 37,431 54,999 2.07 1.91 $ $ $ PRECISION DRILLING CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION Years ended April 30, 1997 and 1996 (Stated in thousands of dollars except per share amounts) Cash provided by (used in): Operations: Net earnings Deduct dividend income Charges not affecting cash: Depreciation and amortization Deferred income taxes Minority interest Funds provided by operations Changes in non-cash working capital components Investments: Acquisitions Purchase of property, plant and equipment Proceeds on sale of property, plant and equipment Investments Dividend income Purchase of minority interest in subsidiary Financing: Increase in long-term debt Repayment of long-term debt Issuance of common shares, net Increase (decrease) in cash Cash, beginning of year Cash (bank indebtedness), end of year Funds provided by operations per share: Basic Fully diluted Cash is defined as cash net of bank indebtedness See accompanying notes to consolidated financial statements. 1997 1996 $ 42,359 $ 653 41,706 25,179 8,619 – 75,504 2,076 77,580 (318,683) (68,856) 15,288 (44,919) 653 – (416,517) 183,626 (74,819) 178,131 286,938 (51,999) 51,457 (542) 5.11 4.79 $ $ $ $ $ $ 17,568 381 17,187 7,736 2,670 196 27,789 (14,201) 13,588 – (24,299) 1,164 108 381 (241) (22,887) 14,671 (11,030) 45,312 48,953 39,654 11,803 51,457 3.27 3.00 39 PRECISION DRILLING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended April 30, 1997 and 1996 (Stated in thousands of dollars except per share amounts) The Corporation’s principal activities include the provision of land drilling services; well servicing; the design, packaging, sale and service of natural gas compression equipment; the manufacture and rental of oilfield and industrial equipment; and the provision of industrial services to downstream oil and gas, petrochemical and other process industry customers. 1. Significant accounting policies: (a) Principles of consolidation: The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries, EnServ Corporation, LRG Catering Ltd., Trenchless Replacement Services Ltd., P. D. International Services Inc. (including its foreign subsidiaries), Rostel Industries Ltd., Brelco Drilling Ltd., its 95% interest in Montero Resources Corp. and its 50% interest in the Arrowstar Drilling Partnership. The financial statements are prepared in accordance with generally accepted accounting principles in Canada. (b) Inventory: Inventory is valued at the lower of average cost and replacement value. (c) Investments: 40 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. (d) Property, plant and equipment: Drilling rig equipment is depreciated on a unit-of-production method based on 3,000 drilling days. Service rig equipment is depreciated on a unit-of-production method based on an estimated useful life of the equipment varying from 1,500 to 2,000 days. Rental equipment is depreciated on a straight-line basis over periods ranging from 3 to 25 years. Other equipment is depreciated on a declining balance basis at rates of 10% to 30%. Equipment recorded under capital leases is amortized on a straight-line basis over its estimated useful life. Light duty vehicles are depreciated on a declining balance basis at a rate of 30%. Heavy duty vehicles are depreciated on a straight-line basis over periods ranging from 8 to 10 years. Buildings are depreciated on a declining balance basis at a rate of 5%. PRECISION DRILLING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended April 30, 1997 and 1996 (Stated in thousands of dollars except per share amounts) Oil and gas properties are accounted for under the full cost method under which all costs of exploration and development of such properties are capitalized. These costs are depleted on the unit-of-production method based upon estimated proven reserves as determined by independent engineers. Capitalized costs are limited to estimated future net revenues determined using year end prices. (e) Goodwill: Goodwill is recorded at cost and amortized on a straight-line basis over 20 years. The recoverability of goodwill is assessed periodically based on estimated future cash flows. (f) Post employment benefits: The Corporation has entered into an employment agreement with a senior officer which provides for certain post employment benefits. Costs of these benefits are charged to earnings on a straight-line basis over ten years. (g) Foreign currency translation: Accounts of foreign operations, 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 are translated at the year end current exchange rate and non-monetary assets are translated using historical rates of exchange. Gains or losses resulting from these translation adjustments are included in net earnings. (h) Use of estimates: 41 The preparation of financial statements in conformity with generally accepted accounting principles requires management 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. 2. Investments: Shares of Kenting Energy Services Inc. and Lynx Energy Services Corp., at cost Others, at cost Others, at equity 1997 43,626 4,519 1,395 49,540 $ $ $ $ 1996 – 4,324 – 4,324 During the year ended April 30, 1996 the Corporation determined that it no longer exercised significant influence in an associated company. As a result, the Corporation changed its basis of accounting for the investment from equity to cost. PRECISION DRILLING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended April 30, 1997 and 1996 (Stated in thousands of dollars except per share amounts) 42 3. Property, plant and equipment: 1997 Rig equipment Rental equipment Other equipment Vehicles Buildings Oil and gas properties Land 1996 Rig equipment Other equipment Vehicles Buildings Oil and gas properties Land Cost Accumulated depreciation Net book value $ 186,748 $ 47,166 $ 139,582 118,326 35,677 16,960 17,554 11,220 7,157 393,642 101,553 7,335 5,361 2,968 6,285 1,283 124,785 $ $ $ 4,729 5,789 4,686 1,991 778 – 65,139 36,230 2,576 2,291 1,447 283 – 42,827 $ $ $ 113,597 29,888 12,274 15,563 10,442 7,157 328,503 65,323 4,759 3,070 1,521 6,002 1,283 81,958 $ $ $ Included in property, plant and equipment are assets with a net book value of $52,576 at April 30, 1997 ($7,315 at April 30, 1996) that are without tax basis. During 1996, the estimated life of drilling equipment was changed from 2,000 to 3,000 drilling days. The change in estimate resulted in a reduction of depreciation expense for 1996 of $2,300 and an increase in net earnings after income taxes of $1,265 ($0.15 per share) from what otherwise would have been reported had the change not been made. Depreciation and amortization for 1997 includes amortization of goodwill in the amount of $3,401. PRECISION DRILLING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended April 30, 1997 and 1996 (Stated in thousands of dollars except per share amounts) 4. Long-term debt: Operating Loan Acquisition Loan Project Term Loans Capital lease obligations Less amounts due within one year 1997 43,626 70,000 9,604 77 123,307 27,002 96,305 $ $ 1996 – – 14,348 45 14,393 4,698 9,695 $ $ The Corporation has a revolving demand operating loan facility (“Operating Loan”) with a maximum availability in the amount of $245,000. The Operating Loan has been classified as long-term as it has been refinanced with long-term debt. The Corporation financed a portion of the acquisition of EnServ Corporation with a non-revolving demand acquisition loan facility (“Acquisition Loan”) in the amount of $70,000. The Acquisition Loan was fully repaid on November 29, 1996 with proceeds from the issue of 1,725,000 common shares for proceeds of $73,046. In January 1997, the Acquisition Loan was fully redrawn for the purposes of completing the acquisition of all of the issued shares of Brelco Drilling Ltd. and substantially all of the business assets of Ducharme Oilfield Rentals Ltd. and certain of its subsidiaries’ business assets. Although the bank has the right to repayment of the Acquisition Loan upon demand, it is scheduled for repayment 43 in six equal semi-annual installments commencing April 30, 1997. The Corporation has the option to prepay all or any portion of the Acquisition Loan from time to time without penalty. Any prepayment would be applied in inverse order of maturity to regularly scheduled payments. Advances under the Acquisition Loan and Operating Loan can be drawn in either Canadian or U.S. funds. The loans bear interest at the bank’s prime lending rate. Other interest rates which are available to the Corporation in respect of the loans are U.S. base rate, U.S. Libor rate plus 0.875% to 1% and bankers’ acceptance rates plus stamping fee. The Corporation financed the construction of five slant drilling rigs with demand loans (“Project Term Loans”) bearing interest at the bank’s prime lending rate plus 1/4%. Although the bank has the right to repayment upon demand, loan payments are scheduled for repayment in minimum monthly installments aggregating $390. The lender has the right, under specific security agreements, to receive the net proceeds from operations associated with each rig to be utilized as payment of each loan. Interest capitalized in connection with the construction of rig equipment in the amount of $28 (1996 - $424) has been credited to other interest expense. The Acquisition Loan, Operating Loan and Project Term Loans, are all held with the same Canadian chartered bank and are secured by a General Security Agreement covering all the Corporation’s personal property assets and a general assignment of book debts. PRECISION DRILLING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended April 30, 1997 and 1996 (Stated in thousands of dollars except per share amounts) 44 Capital lease obligations bear interest at fixed rates ranging from 7.0% to 11.5% and are secured by certain leased vehicles. The outstanding amounts may be terminated by defined notice. Principal long-term debt repayments are as follows: 1998 1999 2000 2001 5. Share capital: $ 27,002 26,834 25,598 247 The authorized share capital of the Corporation consists of an unlimited number of preferred shares of no par value and an unlimited number of common shares of no par value. During 1997, the shareholders of the Corporation approved the amendment to the articles of the Corporation to delete the reference to Class A common voting shares and to redesignate them as common shares and to delete as authorized capital the Class B and Class C common shares. The following is a summary of the changes in share capital: Balance, April 30, 1995 Options exercised Issued for cash Expenses of issue, net of related tax benefit of $770 Balance, April 30, 1996 Options exercised Warrants exercised Issued for cash Expenses of issue, net of related tax benefit of $2,103 Issued on acquisition of EnServ Corporation Issued on acquisition of the business assets of Ducharme Oilfield Rentals Ltd. Balance, April 30, 1997 Common Shares 8,181,399 309,275 2,100,000 – 10,590,674 217,221 250,000 1,725,000 – 3,396,537 185,185 16,364,617 Issued $ $ Amount 29,520 2,302 45,150 (1,177) 75,795 2,657 3,813 73,046 (2,518) 93,236 10,000 256,029 PRECISION DRILLING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended April 30, 1997 and 1996 (Stated in thousands of dollars except per share amounts) At April 30, 1997 the Corporation has stock options outstanding for 1,428,050 common shares under its equity incentive plans. The options become exercisable over four years in equal amounts and expire from time to time up to November 2002 at prices varying between $4.50 and $59.00 per share. Details of options outstanding are as follows: Outstanding at April 30, 1995 Granted Exercised Cancelled or expired Outstanding at April 30, 1996 Granted Exercised Cancelled or expired Outstanding at April 30, 1997 6. Income taxes: Number of Shares 768,332 228,500 (309,275) (13,900) 673,657 1,092,889 (217,221) (121,275) 1,428,050 Exercise Prices ($) 2.25 - 16.00 13.00 - 23.12 2.25 - 15.00 4.30 - 15.00 2.25 - 23.12 27.50 - 59.00 2.25 - 16.00 14.00 - 28.15 4.50 - 59.00 Weighted Average Price ($) 10.18 16.97 7.47 12.79 13.74 32.81 12.23 27.28 27.35 Options Exercisable 189,101 111,096 141,530 45 The provision for income taxes differs from that which would be expected by applying statutory rates. A reconciliation of the difference is as follows: Earnings before income taxes and minority interest Income tax rate Expected income tax provision Add (deduct): Utilization of loss carryforwards Losses of subsidiaries Non-deductible expenses and other Dividend income from taxable Canadian corporation Income taxes at different rates in foreign jurisdiction $ $ $ $ 1997 82,272 45% 37,022 – 606 2,474 (294) 105 $ 39,913 $ 1996 30,265 45% 13,619 (1,694) 275 932 (171) (460) 12,501 PRECISION DRILLING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended April 30, 1997 and 1996 (Stated in thousands of dollars except per share amounts) 7. Commitments: The Corporation has commitments for operating lease agreements in the aggregate amount of $12,642. Annual payments over the next five years are as follows: 1998 1999 2000 2001 2002 3,924 2,983 2,179 1,604 1,068 $ Rent expense included in the statements of earnings is as follows: 1997 1996 8. Earnings and funds provided by operations per share: $ 1,853 476 46 Fully diluted per share amounts reflect the dilutive effect of the exercise of the options outstanding. Earnings on the funds which would have been received on exercise of the options have been imputed at 5% per annum (1995 - 6%). Per share amounts have been calculated on the weighted average number of common shares outstanding. The weighted average shares outstanding for 1997 was 14,781,348 (1996 - 8,494,201). 9. Related party transaction: The Corporation participates with a publicly traded company in a joint venture formed for the purposes of exploring and developing oil and gas properties. A director and officer of the Corporation has a minor interest in the joint venture. To April 30, 1997, the Corporation has advanced $10,464 (1996 - $4,964) to the joint venture. 10. Significant customers: During 1997, the Corporation had two major customers from which is derived 16% of its revenue. In 1996, the Corporation derived 46% of its revenue from contracts with three major customers. PRECISION DRILLING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended April 30, 1997 and 1996 (Stated in thousands of dollars except per share amounts) 11. Acquisitions: During 1997, the Corporation acquired all of the issued and outstanding shares of EnServ Corporation and Brelco Drilling Ltd., purchased all of the assets of Rostel Industries and substantially all of the business assets of Ducharme Oilfield Rentals Ltd. and the business assets of certain subsidiaries of Ducharme. The acquisitions have been accounted for by the purchase method with the results of operations of the acquired entities included in the financial statements from the respective dates of acquisition. The details of the acquisitions are as follows: Date of acquisition Net assets acquired at assigned values: Working capital Property, plant and equipment Goodwill Investments Long-term debt Deferred income taxes Consideration: Shares Cash (a) Includes cash of $9,000 (b) Includes bank indebtedness of $92 EnServ June 1, 1996 Rostel December 31, 1996 Brelco and Ducharme January 31, 1997 $ $ $ $ 46,010 (a) 120,247 74,008 – (107) (11,813) 228,345 93,236 135,109 228,345 $ $ $ $ 1,522 6,352 800 – – – 8,674 – 8,674 8,674 $ $ $ $ 10,535 (b) 88,156 – 297 – (8,416) 90,572 10,000 80,572 90,572 $ $ $ $ Total 58,067 214,755 74,808 297 (107) (20,229) 327,591 103,236 224,355 327,591 47 PRECISION DRILLING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended April 30, 1997 and 1996 (Stated in thousands of dollars except per share amounts) 12. United States generally accepted accounting principles: These financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“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: Consolidated balance sheets Under U.S. GAAP, asset values assigned in acquisitions of subsidiaries are required to be restated to pre-tax amounts resulting in higher property, plant and equipment book values with a corresponding increase in deferred income taxes. These differences are amortized to earnings over the lives of the remaining assets. The impact on the consolidated balance sheets is as follows: April 30, 1997 Property, plant and equipment Deferred income taxes April 30, 1996 Property, plant and equipment Deferred income taxes Consolidated statements of earnings As reported Increase U.S. GAAP $ $ $ $ 328,503 39,554 81,958 12,809 $ $ $ $ 23,659 23,659 3,292 3,292 $ $ $ $ 352,162 63,213 85,250 16,101 The application of U.S. GAAP had no material effect on the reported amounts of net earnings under Canadian GAAP. Under U.S. GAAP earnings per share reflects the application of treasury stock method for outstanding options. The earnings per share data under U.S. GAAP is as follows: Primary Fully diluted 1997 2.75 2.74 $ $ $ $ 1996 1.97 1.94 U.S. GAAP requires the accrual of the expected costs of providing post-retirement benefits over the period in which employees are rendering their services in exchange for their benefits. The application of U.S. GAAP in this instance would not materially affect the Corporation’s results of operations or financial position. 48 PRECISION DRILLING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended April 30, 1997 and 1996 (Stated in thousands of dollars except per share amounts) Consolidated statements of changes in financial position Using U.S. GAAP, the following non-cash investing and financing activities are required to be excluded from the consolidated statement of changes in financial position: Investments: Acquisitions Financing: Issue of common shares 1997 1996 $ $ 103,236 (103,236) $ $ – – Bank indebtedness would not be included as a component of cash position. The change in bank indebtedness would be presented as a financing activity as follows: Change in bank indebtedness Dividend income would be presented as an operating activity rather than an investing activity. The effect of these differences on the consolidated statement of changes in financial position is as follows: Operations: As reported Effect of above differences Under U.S. GAAP Investments: As reported Effect of above differences Under U.S. GAAP Financing: As reported Effect of above differences Under U.S. GAAP 49 1997 542 1997 77,580 653 78,233 (416,517) 102,583 (313,934) 286,938 (102,694) 184,244 $ $ $ $ $ $ $ 1996 – 1996 13,588 381 13,969 (22,887) (381) (23,268) 48,953 – 48,953 $ $ $ $ $ $ $ PRECISION DRILLING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended April 30, 1997 and 1996 (Stated in thousands of dollars except per share amounts) Supplementary disclosures required under U.S. GAAP are as follows: Cash interest paid Cash income taxes paid Components of change in non-cash working capital: Accounts receivable Inventory Accounts payable and accrued liabilities Income taxes payable Other Additional disclosures required under U.S. GAAP are as follows: The components of accounts payable and accrued liabilities are as follows: 50 Accounts payable Accrued liabilities: Payroll Other The net deferred tax liability is comprised of the tax effect of the following temporary differences: Deferred tax liabilities: Property, plant and equipment Deferred tax assets: Loss carryforwards of subsidiaries Share issue costs Valuation allowance Net deferred tax liability $ $ $ 1997 4,163 14,719 (16,095) (6,953) 9,874 15,250 – $ 2,076 1997 $ 33,846 $ 8,754 23,549 66,149 1997 $ 66,187 – 2,974 2,974 – $ 63,213 1996 1,279 21,235 (156) (1,276) (1,957) (11,005) 193 (14,201) 1996 12,161 2,826 2,060 17,047 1996 16,871 156 770 926 156 16,101 $ $ $ $ $ $ $ $ PRECISION DRILLING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended April 30, 1997 and 1996 (Stated in thousands of dollars except per share amounts) Stock Compensation: Under Canadian GAAP, no compensation cost has been recognized for stock options in the financial statements. Under U.S. GAAP, the Corporation applied APB Opinion No. 25 in accounting for stock options and, accordingly, no compensation cost is recognized in earnings. The per share weighted average fair value of stock options granted during 1997 and 1996 was $15.58 and $8.35 on the date of grant using the Black Scholes option pricing model with the following weighted average assumptions: 1997 – risk free interest rate of 6.6%, expected life of 5 years and expected volatility of 40%, 1996 – risk free interest rate of 7.3%, expected life of 4 years and expected volatility of 40%. 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 to $40,247 ($2.61 per share) and $17,330 ($1.95 per share) for the years ended April 30, 1997 and 1996 respectively. Pro-forma earnings reflect compensation cost amortized over the options’ vesting period. Acquisitions: The following unaudited pro-forma consolidated statements of earnings information assumes that the acquisitions of EnServ Corporation, Brelco Drilling Ltd., Rostel Industries and Ducharme Oilfield Rentals Ltd. as set out in note 11 occurred as of May 1, 1995. Revenue: Oilfield services Industrial services Total revenue Net earnings Earnings per share: Primary Fully diluted 51 Pro-forma Year Ended April 30 1997 396,424 134,722 531,146 42,281 2.67 2.66 $ $ $ $ $ 1996 304,258 108,327 412,585 22,510 1.80 1.78 $ $ $ $ $ PRECISION DRILLING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended April 30, 1997 and 1996 (Stated in thousands of dollars except per share amounts) 13. Segment information: Prior to the acquisition of EnServ Corporation in June 1996, the Corporation’s operations were essentially in one business segment. As a result of the acquisition, the Corporation operates in two industry segments (which are substantially in one geographic segment), oilfield services (which includes drilling services, well services, compression equipment sales and services and oilfield equipment rental services) and industrial services (which includes equipment rentals and other industrial process services), as follows: Revenue Operating earnings Depreciation and amortization Assets Capital expenditures* * (excludes acquisitions) $ $ Year ended April 30, 1997 Industrial Services 120,149 15,838 6,406 94,825 20,697 $ Oilfield Services 334,888 69,720 18,773 508,013 48,159 Total 455,037 85,558 25,179 602,838 68,856 52 14. Subsequent events: In May 1997, the Corporation acquired approximately 99% of the then issued and outstanding shares of Kenting Energy Services Inc. (“Kenting”) pursuant to an offer to purchase (the “Offer to Purchase”) all of the common shares of Kenting. The Offer to Purchase allowed Kenting shareholders to tender their shares for either cash, common shares of the Corporation or Series 4, Preferred Shares of the Corporation. On May 28, 1997, a wholly owned subsidiary of Kenting amalgamated with Lynx Energy Services Corp. (“Lynx”) which at the time only included Cactus Drilling (a division of Lynx) and as a result an additional 7,300,000 common shares of Kenting were issued to the former shareholders of Lynx. The Offer to Purchase was extended to June 2, 1997 and the remaining shares of Kenting were acquired. The total consideration paid in connection with the acquisition amounts to approximately $446,000 and is comprised of the following: $208,000 cash, 3,741,887 common shares of the Corporation and 4,805,134 Series 4, Preferred Shares of the Corporation. The net assets acquired at approximate values include the following: net current assets - $11,700; investments - $53,700; property, plant and equipment - $251,700; goodwill - $150,000; long-term debt - $14,400; and deferred income tax liability - $6,700. PRECISION DRILLING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended April 30, 1997 and 1996 (Stated in thousands of dollars except per share amounts) The acquisition will be accounted for by the purchase method with the results of operations of the acquired entity included in the financial statements of the Corporation from the date of acquisition. For the purposes of the Offer to Purchase, the Corporation has created 16,484,000 Series 4, Preferred Shares. The Series 4, Preferred Shares have a par value of $9.10 each and are cumulative, redeemable, convertible with a dividend rate of $0.2275 per share per annum. The Corporation filed a prospectus for the issue of unsecured debentures in the amount of $200,000 with an interest rate of 6.85% due June 2007, the proceeds of which were used to pay down bank borrowings drawn for the acquisition of Kenting. Prior to the issuance of the indebtedness, the Corporation purchased a forward interest contract which set the effective rate of interest on the debentures at 7.44%. The debentures were issued on June 26, 1997 and at the same time the General Security Agreement referred to in Note 4 was released by the bank. The bank will maintain specific security on the Project Term Loans related to the construction of rigs. 15. Financial instruments: The carrying values 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 approximates its carrying value as it bears interest at floating rates. Investments include marketable securities of which the carrying values approximate fair values. 53 PRECISION DRILLING CORPORATION STATEMENTS OF EARNINGS AND RETAINED EARNINGS Years ended April 30, 1988 – 1997 (Thousands of dollars except per share amounts) 54 Revenue Expenses: Operating General and administrative Depreciation and amortization Foreign exchange Write-down of equipment Interest long-term Interest other, net 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 $ 455,037 163,102 178,597 97,550 44,301 31,021 40,075 31,686 37,730 25,196 314,934 111,798 122,419 68,083 30,970 23,396 31,496 24,672 30,171 18,667 29,366 12,278 12,070 25,179 7,736 9,800 – – 3,146 793 671 – 727 8 19 – 1,196 347 8,809 4,982 – – 330 204 4,269 2,209 3,548 1,717 3,885 1,459 – – 389 – – – 620 – – – 582 73 3,884 1,165 – 5,093 1,065 84 3,593 1,396 2,281 564 – – 1,367 150 – – – 93 373,418 133,218 145,851 82,408 37,837 29,281 37,495 35,963 36,677 21,605 81,619 29,884 32,746 15,142 6,464 1,740 2,580 (4,277) 1,053 3,591 Forgiveness of long-term debt Dividend income – 653 – 381 – 718 – – – 322 – 498 – – Earnings before taxes and minority interest 82,272 30,265 33,464 15,142 6,786 2,238 2,580 Income taxes: Current Deferred (recovery) Earnings before minority interest Minority interest Net earnings 31,294 8,619 9,831 2,670 14,916 1,431 39,913 12,501 16,347 42,359 17,764 17,117 – 196 231 3,793 3,340 7,133 8,009 8 42,359 17,568 16,886 8,001 Retained earnings, beginning of year 54,999 37,431 20,724 12,723 1,520 1,480 3,000 3,786 45 3,741 8,982 44 900 944 1,294 – 1,294 7,997 27 1,167 1,194 1,386 – 1,386 6,611 5,150 – 873 – – – – 1,053 3,591 18 (31) (13) 886 – 886 – 496 496 557 – 557 5,725 5,168 – 1,811 1,811 1,780 – 1,780 3,388 Adjustment on purchase and cancellation of share capital Retained earnings, end of year Earnings per share - Basic - Fully Diluted – – (179) – – (309) – – – – 97,358 54,999 37,431 20,724 12,723 8,982 7,997 6,611 5,725 5,168 2.87 2.71 2.07 1.91 2.06 1.88 1.02 n/a 0.63 n/a 0.23 n/a 0.24 n/a 0.16 n/a 0.10 n/a 0.38 n/a $ $ $ PRECISION DRILLING CORPORATION ADDITIONAL SELECTED FINANCIAL DATA Years ended April 30, 1988 – 1997 Returns Return on Sales (1) Return on Assets (2) Return on Equity (3) (All dollar amounts are stated in thousands Financial Position ($) of dollars except per share amounts) Working capital Current ratio Net fixed assets Total assets Long-term debt 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 9.3% 10.8% 7.0% 10.0% 12.0% 13.4% 9.5% 14.2% 25.2% 8.2% 8.0% 8.4% 9.7% 16.0% 17.0% 4.2% 4.5% 8.6% 3.5% 4.4% 9.7% 2.8% 3.2% 7.0% 1.5% 7.1% 1.8% 17.7% 4.8% 26.9% 39,796 67,016 1.35 4.01 8,354 1.21 3,335 1.11 328,503 81,958 66,798 64,776 602,838 175,567 119,055 100,629 123,307 14,393 10,752 17,050 6,173 1.69 22,266 38,564 2,407 4,472 2.01 4,583 1.62 3,787 1.53 2,481 3,874 1.34 2.99 19,050 18,704 15,711 20,777 3,878 28,661 31,419 27,415 31,229 10,043 6,170 8,943 6,250 11,400 – Shareholders’ equity 353,387 130,794 66,951 50,146 22,065 15,111 14,278 12,724 11,675 6,618 Total long-term debt to shareholders’ equity 0.35 0.11 0.16 0.34 Net capital additions including acquisitions 372,251 23,135 11,822 47,492 0.11 5,425 Gross margin Gross margin - % of sales Cash flow (4) Cash flow per share Depreciation and amortization Common Share Data Book value per share ($)(5) Earnings per share ($)(6) Price Earnings Ratio (7) Weighted average common 140,103 51,304 56,178 29,467 13,331 30.8% 31.5% 31.5% 30.2% 76,157 28,170 28,348 16,331 5.15 25,179 3.32 7,736 3.46 9,800 2.08 4,982 23.91 2.87 16.88 15.40 2.07 12.32 8.17 2.06 6.74 6.37 1.02 16.1 30.1% 7,475 1.25 2,209 3.69 0.63 16.1 0.41 2,063 7,625 0.63 4,452 8,579 0.49 1,074 7,014 0.98 985 – 502 7,559 6,529 24.6% 21.4% 22.1% 20.0% 25.9% 3,911 0.69 1,717 2.65 0.23 9.8 4,012 0.70 1,459 2.48 0.24 10.4 1,963 0.35 1,165 2.27 0.16 17.4 2,449 4,155 0.44 1,396 2.12 0.10 19.8 0.88 564 1.40 0.38 – 55 shares outstanding (000’s) 14,781 8,494 8,199 7,869 5,972 5,696 5,748 5,609 5,508 4,724 (1) (2) (3) (4) (5) (6) (7) Return on Sales was calculated by dividing net earnings by total revenues. Return on Assets was calculated by dividing net earnings by total year-end assets. Return on Equity was calculated by dividing net earnings by total shareholders’ equity. Funds provided from operations excluding forgiveness of debt for 1990 and funds provided from operations combined with dividend income. Book value per share was calculated by dividing shareholders’ equity by total weighted average number of common shares outstanding. Earnings per share was calculated by dividing net earnings by the weighted average number of common shares outstanding. Year-end closing price divided by earnings per share. CORPORATE INFORMATION Subsidiaries Subsidiaries Divisions 56 Head Office Suite 700, 112 - 4th Avenue S.W. Calgary, Alberta T2P 0H3 Telephone: (403) 264-4882 Facsimile: (403) 266-1480 Drilling Operations Centres 8615 - 44th Street S.E. Calgary, Alberta T2C 2P5 Telephone: (403)279-7979 Facsimile: (403) 236-9058 807 - 25th Avenue Nisku, Alberta T9E 7Z4 Telephone: (403) 955-7011 Facsimile: (403) 955-7291 1513 - 8th Street Nisku, Alberta T9E 7S7 Telephone: (403) 955-7922 Facsimile: (403) 955-7067 504 - 22nd Avenue Nisku, Alberta T9E 7X6 Telephone: (403) 955-2615 Facsimile: (403) 955-2588 1903 - 8th Street Nisku, Alberta T9E 7Z4 Telephone: (403) 955-2521 Facsimile: (403) 955-6270 CEDA International Corporation P. D. International Services Inc. 200, 6712 Fisher Street S.E. Calgary, Alberta T2H 2A7 Telephone: (403) 253-3233 Facsimile: (403) 252-6700 Suite 700, 112 - 4th Avenue S.W. Calgary, Alberta T2P 0H3 Telephone: (403) 264-4882 Facsimile: (403) 266-1480 Drive Well Servicing 7774 - 47th Avenue Close Red Deer, Alberta T4P 2J9 Telephone: (403) 346-8921 Facsimile: (403) 347-9266 Certified Rentals Inc. P. D. Technical Services Inc. Ducharme Oilfield Rentals 6110 - 86th Street Edmonton, Alberta T6E 5K2 Telephone: (403) 461-2900 Facsimile: (403) 463-8855 Columbia Oilfield Supply Ltd. 4304 - 97th Street Edmonton, Alberta T6E 5G4 Telephone: (403) 437-5110 Facsimile: (403) 436-0229 LRG Catering Ltd. 8760 - 50th Avenue Edmonton, Alberta T6E 5K8 Telephone: (403) 944-9003 Facsimile: (403) 462-0676 Montero Resources Corp. Suite 700, 112 - 4th Avenue S.W. Calgary, Alberta T2P 0H3 Telephone: (403) 264-4882 Facsimile: (403) 266-1480 2nd Floor, Trident House, Broad Street Bridgetown, Barbados Telephone: (246) 437-8921 Facsimile: (246) 429-3485 Precision Drilling de Venezuela, C.A. Ciudad Ojeda, Venezuela Telephone: 011-58-65-20295 Facsimile: 011-58-65-29703 Rostel Industries Ltd. 9699 Sheppard Road S.E. Calgary, Alberta T2C 4K5 Telephone: (403) 720-3999 Facsimile: (403) 720-3838 3101, 500 - 4th Avenue S.W. Calgary, Alberta T2P 2V6 Telephone: (403) 266-4703 Facsimile: (403) 265-5393 Energy Industries 4303 - 11th Street N.E. Calgary, Alberta T2E 6K4 Telephone: (403) 250-9415 Facsimile: (403) 250-1339 Live Well Service 607 - 15th Avenue Nisku, Alberta T0C 2G0 Telephone: (403) 955-2029 Facsimile: (403) 955-8949 Smoky Oilfield Rentals RR #2, Site 7, Box 33 Grande Prairie, Alberta T8V 2Z9 Telephone: (403) 532-0788 Facsimile: (403) 532-5602 DIRECTORS OFFICERS OPERATIONS MANAGEMENT OPERATIONS MANAGEMENT TRANSFER AGENT Troy E. Ducharme Calgary, Alberta W.C. (Mickey) Dunn (2) Edmonton, Alberta Robert J. S. Gibson (1) (2) Calgary, Alberta Murray K. Mullen (3) Calgary, Alberta Brian E. Roberts (1) (3) Calgary, Alberta Hank B. Swartout Calgary, Alberta Hank B. Swartout Chairman of the Board, Tom Facette Derek Suttie Vice President & General Manager, Vice President & General Manager, President & Chief Executive Officer Smoky Oilfield Rentals Ducharme Oilfield Rentals Arthur E. Dumont Chief Operating Officer Dale E. Tremblay Ivan Heidecker Assistant General Manager, Energy Industries Yook Tong General Manager, Rostel Industries Ltd. Senior Vice President, Finance John Jacobsen Doug White & Chief Financial Officer Vice President Operations, Drilling President, Larry P. Coston Rick Kautz Senior Vice President, Marketing Vice President, BANKER W.B.G. (Bruce) Herron Senior Vice President, Services Group Ernie Koop Royal Bank of Canada Calgary, Alberta Columbia Oilfield Supply Ltd. LRG Catering Ltd. Ronald G. Winkelaar (1) (3) Calgary, Alberta Hugh W. Strain Senior Vice President, Canadian Drilling (1) Audit Committee Member (2) Compensation Committee Member (3) Corporate Governance Committee Member J. Blair Goertzen Vice President & General Manager, Well Services Limited Partnership Alexander T. Lemmens Vice President, Corporate Development Derek C. Martin Vice President, General Counsel & Corporate Secretary M.J. (Mick) McNulty Vice President, Finance LEGAL COUNSEL Howard, Mackie Calgary, Alberta AUDITORS KPMG Calgary, Alberta President, CEDA International Corporation Larry MacPherson General Manager, Live Well Service Tim O’Brien Vice President & General Manager, Certified Rentals Inc. Dwayne Peters Vice President Operations, Drilling Gord Skulmoski Vice President Operations, Drilling AND REGISTRARS Montreal Trust Company of Canada Calgary, Alberta Bank of Nova Scotia Trust Company of New York New York, New York STOCK EXCHANGES The Toronto Stock Exchange Trading Symbol: PD The New York Stock Exchange Trading Symbol: PDS TRADING PROFILE - TORONTO May 1, 1996 to April 30, 1997 High: $67.50 Low: $25.50 Volume Traded - 18.6 million TRADING PROFILE - NEW YORK November 15, 1996 to April 30, 1997 High: US$503/8 Low: US$303/8 Volume Traded - 8.3 million PUBLISHED INFORMATION Annual Information Form as of April 30, 1997 Estimated Interim Release Dates 1998 First Quarter: September 25, 1997 1998 Second Quarter: December 19, 1997 1998 Third Quarter: March 26, 1998 PRECISION DRILLING CORPORATION Suite 700, 112 - 4th Avenue S.W. Calgary, Alberta T2P 0H3 Telephone: (403) 264-4882 Facsimile: (403) 266-1480 1 9 9 7 A n n u a l R e p o r t Printed in Canada