Precision Drilling Corporation 2012 Annual Report
2012 SHARE TRADING SUMMARY
The Toronto Stock Exchange (TSX)
PD
Volume (millions)
Share Price (Cdn$)
$15
$12
$9
$6
$3
)
$
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C
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P
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0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Toronto (TSX: PD)
High: $12.72 Low: $5.97 Close: $8.22 Volume Traded: 338,041,496
The New York Stock Exchange (NYSE)
P DS
Volume (millions)
Share Price (US$)
$15
$12
$9
$6
$3
)
$
S
U
(
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P
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0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
New York (NYSE: PDS)
High: US$12.89 Low: US$5.82 Close: US$8.28 Volume Traded: 454,653,537
)
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Precision Drilling Corporation 2012 Annual Report
1
Management’s Discussion and Analysis
Consolidated Financial Statements and Notes
Precision Drilling Corporation 2012
What’s inside
6
8
12
13
14
26
36
41
43
43
44
About Precision
2012 Highlights and Outlook
Contract Drilling Services
Completion and Production Services
Understanding Our Business Drivers
The energy industry
A competitive operating model
An effective strategy
Risks to achieving our strategy
2012 Results
Financial Condition
Critical Accounting Estimates
Evaluation of Disclosure Controls and Procedures
Corporate Governance
Consolidated Financial Statements and Notes
2
Management’s Discussion and Analysis
Management’s Discussion and Analysis
This management’s discussion and analysis (MD&A) contains information to help you understand our business and
financial performance. Information is as of March 8, 2013. This MD&A focuses on our consolidated financial statements,
and includes a discussion of known risks and uncertainties relating to the oilfield services sector. It does not, however,
cover the potential effects of general economic, political, governmental and environmental events, or other events that
could affect us in the future.
You should read this MD&A with the accompanying audited consolidated financial statements and notes, which have
been prepared in accordance with International Financial Reporting Standards (IFRS) and with the information in About
forward‑looking information on page 4. We began reporting under IFRS effective January 1, 2011, and restated our 2010
results at that time. 2009 and prior years are presented in accordance with previous Canadian Generally Accepted
Accounting Principles (Previous Canadian GAAP).
The terms, we, us, our, corporation and Precision mean Precision Drilling Corporation and all of our consolidated subsidiaries
and any partnerships that we and/or our subsidiaries are part of.
All amounts are in Canadian dollars unless otherwise stated.
Precision Drilling Corporation 2012 Annual Report
3
ABOUT FORWARD-LOOKING INFORMATION
We disclose forward-looking information to help current and prospective investors understand our future prospects. This
MD&A contains statements about what we believe, intend and expect about developments, results and events that may or
will occur in the future and are forward-looking within the meaning of Canadian securities legislation and the safe harbor
provisions of the United States Private Securities Litigation Reform Act of 1995 (collectively the forward-looking information
and statements).
Forward-looking information and statements in this MD&A:
typically include words and phrases about the future, such as anticipate, could, should, can, expect, seek, may,
intend, likely, will, plan, estimate and believe
are based on certain assumptions and analyses based on our experience, understanding of historical trends, current
conditions and expected future developments, and other factors we believe are appropriate given the circumstances
can be affected by known and unknown risks, uncertainties and other factors which could cause actual results to
differ materially from our expectations.
Actual results, performance or achievements may be significantly different from what is expressed or implied in the
forward-looking information.
Our forward-looking information includes statements about the following, among other things:
performance of the oil and natural gas industry, including commodity prices
our capital expenditures and potential international expansion
2013 strategic plans
deployment of additional rigs, building new ones and upgrading existing ones
the obsolescence of Tier 3 rigs in North American markets over the next few years and Precision exiting the Tier 3
contract drilling business
the supply and demand for oil and natural gas
demand for our equipment and services
the potential impact of current or anticipated regulatory regimes and tax, environmental, health, safety and other laws
the potential impact of seasonal and weather conditions, competition in markets where we compete, technology
advances, finding and retaining employees, reliance on suppliers, credit market conditions, access to additional
financing, foreign exchange, international operations as well as other risks and uncertainties discussed herein
payment of quarterly dividends
our future growth potential
remaining compliant with financial ratio covenants
amounts of contractual obligations not yet accrued.
4
Management’s Discussion and Analysis
Risks and uncertainties
This MD&A discusses a number of risks and uncertainties, including the following among others:
fluctuations in the price and demand for oil and natural gas
fluctuations in the level of oil and natural gas exploration and development activities
fluctuations in the demand for contract drilling, directional drilling, well servicing and ancillary oilfield services
liquidity of the capital markets to fund customer drilling programs
availability of cash flow, debt and/or equity sources to fund our capital and operating requirements, as needed
the sustainability of our dividend
the impact of seasonal and weather conditions on operations and facilities
competitive operating risks inherent in contract drilling, directional drilling, well servicing and ancillary oilfield services
ability to improve our rig technology to improve drilling efficiency
general economic, market or business conditions
changes in laws or regulations
availability of qualified personnel, management or other key inputs
currency exchange fluctuations
operating in foreign countries
other unforeseen conditions that could affect the use of our services
other risks and uncertainties set out in this MD&A under the heading “Risks to Achieve Our Strategy”.
These risks and uncertainties are also discussed in our annual information form (AIF), on file with the Canadian securities
commissions on SEDAR (www.sedar.com) and with the SEC on EDGAR (www.sec.gov).
All of the forward-looking information and statements made in this MD&A are qualified by these cautionary statements.
There can be no assurance that actual results or developments anticipated by us will be realized. We caution you not
to place undue reliance on forward-looking information and statements. We will not necessarily update or revise this
forward-looking information as a result of new information, future events or otherwise, unless we are required to by law.
ADDITIONAL GAAP MEASURES
In this MD&A we reference Generally Accepted Accounting Principles (GAAP) measures that are not defined terms under
IFRS to assess performance because we believe they provide useful supplemental information to investors.
Adjusted EBITDA
We believe that Adjusted EBITDA (earnings before income taxes, finance charges, foreign exchange, impairment of
goodwill, loss on asset decommissioning and depreciation and amortization) as reported in the Consolidated Statement
of Earnings is a useful supplemental measure, because it gives an indication of the results from our principal business
activities prior to consideration of how our activities are financed and the impact of foreign exchange, taxation, non-cash
depreciation and amortization charges and non-cash decommissioning charges.
Operating earnings
We believe that operating earnings, as reported in the Consolidated Statement of Earnings, is a useful measure of our
income because it provides an indication of the results of our principal business activities before consideration of how our
activities are financed and the impact of foreign exchange and taxation.
Funds provided by operations
We believe that funds provided by operations, as reported in the Consolidated Statement of Cash Flow, is a useful measure
because it provides an indication of the funds our principal business activities generated prior to consideration of working
capital, which is primarily made up of highly liquid balances.
Precision Drilling Corporation 2012 Annual Report
5
About Precision
Precision Drilling provides onshore drilling and completion and production services to exploration and production
companies in the oil and natural gas industry.
Headquartered in Calgary, Alberta, Canada, we are Canada’s largest oilfield services company, and one of the largest
drillers in the United States. We also have operations in Mexico and Saudi Arabia, and have announced long-term contracts
for other areas in the Middle East.
Our shares trade on the Toronto Stock Exchange under the symbol PD, and on the New York Stock Exchange under the
symbol PDS.
Two business segments
We operate our business in two segments, supported by vertically integrated business support systems.
Precision Drilling Corporation
Contract Drilling Services
(cid:127) Drilling Rig Operations
– Canada
– United States
– International
(cid:127) Directional Drilling Operations
– Canada
– United States
Business support systems
(cid:127) Sales and
marketing
(cid:127) Procurement
and distribution
Completion and Production Services
(cid:127) Canada and U.S.
– Service Rigs, Snubbing and Coil Tubing
– Equipment rentals
– Camps and catering
(cid:127) Canada
– Wastewater treatment
(cid:127) Manufacturing
(cid:127) Equipment
maintenance
and certification
(cid:127) Engineering
Corporate support
(cid:127) Governance
(cid:127) Information
systems
(cid:127) Health, safety
and environment
(cid:127) Human
resources
(cid:127) Finance
6
Management’s Discussion and Analysis
Revenue by Location
International
3%
Canada
51%
USA
46%
Adjusted EDITDA by Segment
Contract Drilling
Services
87%
Completion and
Production Services
13%
2012 Adjusted EBITDA by Segment
2012 Revenue by Region
Contract
Drilling
Services
87%
Completion &
Production
Services
13%
International
3%
Canada
51%
USA
46%
Vision
Our vision is to be recognized as the High Performance, High Value provider of services for global energy exploration and
development.
Strategy
2012 strategic priorities
2012 results
Execute our High Performance, High Value strategy
Continue to deliver safe, reliable, predictable and repeatable
performance with high environmental responsibility and
community standards.
Execute on existing organic growth opportunities
including contracting additional new build and upgraded drilling
rigs, adding assets and people to the directional drilling and
Completion and Production Services businesses and pursuing
additional rig deployments internationally. Continue to evaluate
accretive acquisitions.
Build our brand
Continue to promote Precision’s High Performance, High Value
brand with customers, employees, investors and within the
communities in which we operate.
Improved safety performance in both operating segments in 2012,
matching the best results in our history.
Delivered 36 new build Tier 1 Super Series drilling rigs to
customers on long-term contracts and upgraded 11 existing drilling
rigs to higher specification assets under long-term contracts.
Established footprint in the Middle East and expanded international
operations from two rigs to eight operating at the end of the year.
However, start-up activities took longer than expected.
Expanded service lines in Completion and Production Services
adding higher end rental offerings and entered the coil tubing
business. Expanded penetration into Northern U.S. markets.
Over the past two years, we have grown our directional drilling
business but financial results and utilization have been weaker
than expected.
Had strong Canadian and U.S. dayrates throughout 2012 and
exceeded employee retention goals across all targeted skill
positions.
Increased recognition from U.S. and international investors while
retaining strong support from Canadian base.
Strength and flexibility
From our founding as a private drilling contractor in the 1950s, Precision Drilling has grown to become one of the most
active drillers in North America.
a competitive operating model drives efficiency, quality and cost control
size and scale provide higher margins and better service
strong liquidity position allows us to take advantage of opportunities throughout business cycles
capital structure provides long-term stability and flexibility
Precision Drilling Corporation 2012 Annual Report
7
2012 Highlights and Outlook
Adjusted EBITDA and funds provided by operations are additional GAAP measures.
Please see page 5 for more information.
Financial highlights
Year ended December 31
(thousands of $, except where noted)
Revenue
Adjusted EBITDA
Adjusted EBITDA % of revenue
Net earnings
Cash provided by operations
Funds provided by operations
Investing activities
Capital spending:
Expansion
Upgrade
Maintenance and infrastructure
Proceeds on sale
Net capital spending
Business acquisitions (net of cash
acquired)
Earnings per share ($):
Basic
Diluted
Dividends per share ($)
n/m – calculation not meaningful.
Operating highlights
Year ended December 31
Contract drilling rig fleet
Drilling rig utilization days:
Canada
United States
International
Service rig fleet
Service rig operating hours1
% increase/
2012
(decrease)
2011
% increase/
(decrease)
2,040,741
670,792
32.9%
52,360
635,286
598,812
596,194
130,094
141,769
(31,423)
836,634
4.6
(3.5)
(72.9)
19.2
1.1
30.9
(13.2)
16.9
96.6
17.8
1,951,027
695,064
35.6%
193,477
532,772
592,388
455,302
149,811
121,244
(15,983)
710,374
25
(100.0)
92,886
0.19
0.18
0.05
(72.9)
(73.1)
n/m
0.70
0.67
–
36.5
59.8
344.4
74.0
46.6
539.7
174.0
142.3
30.4
334.1
n/m
337.5
346.7
–
% increase/
2012
(decrease)
321
(4.7)
32,352
34,597
2,086
214
294,681
(14.8)
(8.7)
197.2
3.4
(7.2)
2011
337
37,970
37,887
702
207
317,418
% increase/
(decrease)
(5.1)
21.8
16.8
16.6
(5.9)
7.9
2010
1,429,653
434,908
30.4%
43,535
306,264
404,165
71,179
54,683
50,039
(12,256)
163,645
–
0.16
0.15
–
2010
355
31,176
32,450
602
220
294,126
% increase/
(decrease)
19.4
6.9
(73.1)
(39.3)
21.9
(56.4)
3,007.0
75.3
(23.3)
(7.8)
–
(75.4)
(76.2)
–
% increase/
(decrease)
0.9
46.9
43.1
(15.2)
–
33.9
1 Prior year comparatives have been changed to include United States based service rig activity.
8
Management’s Discussion and Analysis
Financial position and ratios
Years ended December 31
(thousands of $, except ratios)
Working capital
Working capital ratio
Long-term debt
Total long-term financial liabilities
Total assets
Enterprise value1
Long-term debt to long-term debt plus equity
Long-term debt to cash provided by operations
Long-term debt to enterprise value
2012
278,021
1.7
1,218,796
1,245,290
4,300,263
3,213,406
0.36
1.92
0.38
2011
610,429
2.4
1,239,616
1,267,040
4,427,874
3,528,046
0.37
2.33
0.35
2010
458,003
3.1
804,494
834,813
3,564,540
2,993,083
0.29
2.63
0.27
1 Share price multiplied by the number of shares outstanding plus long-term debt minus working capital. See page 40 for more information.
2012 OVERVIEW
Net earnings this year were $52 million or $0.18 per diluted share, compared to $193 million or $0.67 per diluted share in
2011. This year’s results include the impact of charges associated with asset decommissioning, and an impairment charge
to the goodwill attributable to our Canadian Directional Drilling operations.
Revenue this year was $2,041 million, or 5% higher than 2011, mainly due to higher drilling pricing in both Canada and
the United States, growth in international operations, and product line expansion partially offset by lower utilization days
in North America. Contract Drilling Services revenue was up 6%, while revenue from Completion and Production Services
was down 1%. Our international drilling activity increased three-fold: an average of six rigs working in 2012 compared to
two in 2011.
Adjusted EBITDA this year was $671 million, or 3% lower than 2011. Our adjusted EBITDA margin was 33% this year,
compared to 36% in 2011. The decrease in adjusted EBITDA margin was mainly the result of higher average operating
costs and lower equipment utilization in both Canada and the United States, partially offset by higher average dayrates in
both Canada and the United States. Operating costs were higher because of labour related costs, repairs and maintenance
costs and higher operating costs internationally. Our portfolio of term customer contracts, a highly variable operating
cost structure and economies achieved through vertical integration of the supply chain all help us manage our adjusted
EBITDA margin.
North America industry activity was down on the prior year as a result of volatile oil and natural gas prices, oil transportation
bottlenecks resulting in regional oil price discounts, record inventory levels resulting in depressed natural gas prices and
general global economic uncertainty persisting for much of the year.
In the fourth quarter of 2012 our Board of Directors approved the introduction of an annualized dividend of $0.20 per
common share, payable quarterly.
Outlook
Contracts
Our strong portfolio of term customer contracts provides a base level of activity and revenue, and as at March 8, 2013 we
have term contracts in place for an average of 96 rigs: 52 in Canada, 36 in the United States and 8 internationally in 2013.
In Canada, term contracted rigs normally generate 250 utilization days per rig year because of the seasonal nature of well
access. In most regions in the United States and internationally, they normally generate 365 utilization days per rig year.
Pricing, demand and utilization
The demand for energy has been rising as the global economic situation has improved and per capita energy consumption
has increased in many developing countries. These demand fundamentals, along with the challenges of maintaining or
growing global supply, have supported stronger oil prices since 2009.
Precision Drilling Corporation 2012 Annual Report
9
Natural gas prices, however, remain depressed, reaching 10-year lows in 2012. Lower natural gas prices have persisted
due to higher than average storage levels, increased production from unconventional resource development and the lack
of an export market from North America. Despite lower industry-wide natural gas drilling activity, production remained
stable, meeting or exceeding demand and keeping prices low.
Natural gas demand largely depends on the weather, and moderate North American winter temperatures in 2011 and
2012 hampered overall demand. Other demand drivers, however, like natural gas fired power generation and industrial
applications, have shown positive growth over the past three years and are expected to continue, and the growing potential
of liquefied natural gas (“LNG”) export development could serve as a catalyst for natural gas directed drilling activity in the
medium to long term.
Industry-wide drilling utilization has declined year-over-year in North America, however demand for the higher specification
Tier 1 drilling assets has remained strong, supporting dayrates. We have deployed 60 new build Tier 1 Super Series drilling
rigs since the beginning of 2010 for a total current fleet of 189 Tier 1 drilling rigs and we have upgradeable rigs within
our fleet. We believe the existing new builds and potential rig upgrades favourably position us in the market for premium
drilling rigs.
While the increase in oil and liquids rich natural gas drilling in areas like the Montney, Cardium, Bakken, Viking, Eagle
Ford, Tuscaloosa, Niobrara and Granite Wash have been strong, the oil rig count at March 8, 2013 was 2% higher in the
United States than it was a year ago, and 9% lower in Canada. The overall North American land oil directed rig count on
March 8, 2013 was 3.9 times higher than it was on March 6, 2009. As exploration and production companies continue to
improve unconventional oil drilling and completion techniques, we expect that the economics our customers realize will
drive additional investment capital toward these unconventional plays, supporting drilling activity especially for Tier 1 rigs.
International
We contracted two new build 3000 horsepower (HP) drilling rigs in 2012 for deep drilling operations in Kuwait. The two new
rigs are on long-term contracts and are expected to be deployed in 2014 on a long-term contract. We contracted two 2000
HP rigs for deep drilling operations in Northern Iraq in the Kurdistan region. The two rigs are existing Precision rigs that will
be upgraded for desert operations. These rigs are expected to be deployed mid 2013 under a long-term contract. We also
signed a contract for operations in Mexico that will add a rig to our Mexican fleet in the second quarter of 2013, increasing
our active Mexican fleet to six rigs.
Upgrading the fleet
We and the land drilling industry are in the process of upgrading the drilling rig fleet by building new rigs and upgrading
existing ones. We believe this “retooling” of the industry-wide fleet will make Tier 3 rigs virtually obsolete in North America
over the next few years. In the fourth quarter of 2012 we decommissioned 42 Tier 3 drilling rigs and 10 Tier 2 rigs from
our fleet. We are exiting the Tier 3 contract drilling business but will retain 26 drilling rigs for seasonal, stratification and
turnkey drilling work. These will be categorized as “PSST” rigs. Our focus on the Tier 1 and Tier 2 market is aligned with our
corporate strategy, customer relationships and competitive position.
Capital spending
We expect capital spending in 2013 to be approximately $526 million:
$205 million for expansion capital, which includes the cost to complete the two remaining drilling rigs from the 2012
new build rig program, one new rig build for the North American market, the cost to complete about 50 percent of
two new build rigs going to Kuwait and new equipment for our Completion and Production Services segment
$127 million for upgrade capital, which includes the upgrade of approximately 20 rigs, including the two rigs going
to Northern Iraq in the Kurdistan region
$194 million for sustaining and infrastructure expenditures, which is based on currently anticipated activity levels,
and the cost to consolidate and upgrade our Nisku, Alberta operations facility.
10
Management’s Discussion and Analysis
Revenue and EBITDA
s
n
o
i
l
l
i
m
$
2,500
2,000
1,500
1,000
500
0
2008
2009
2010
2011
2012
Funds From Operations
i
%
n
o
g
r
a
M
50
40
30
20
10
0
700
600
500
400
300
200
100
0
s
n
o
i
l
l
i
M
$
2008
2009
2010
2011
2012
Utilization Days
80,000
60,000
s
y
a
D
40,000
20,000
0
2008
2009
2010
2011
2012
Revenue
Adjusted EBITDA
Adjusted EBITDA Margin
Source: Precision
Note: 2008 and 2009 are prepared
under previous Canadian Generally
Accepted Accounting Principles
Source: Precision
International
USA
Canada
Source: Precision
Precision Drilling Corporation 2012 Annual Report
11
Contract Drilling Services
We provide onshore drilling services to exploration and production companies in the oil and natural gas industry, operating
in the U.S., Canada and internationally.
We are the second largest land drilling contractor in North American servicing approximately 24% of the land drilling market
in Canada and five percent of the United States market. We also have an international presence with operations in Mexico
and the Middle East.
At December 31, 2012, the segment consisted of:
321 land drilling rigs, including:
– 186 in Canada
– 127 in the U.S.
– 3 in Saudi Arabia
– 5 in Mexico
capacity for approximately 91
concurrent directional drilling jobs
in Canada and U.S.
engineering, manufacturing
and repair services primarily for
Precision’s operations
centralized procurement, inventory
and distribution of consumable
supplies primarily for our Canadian,
U.S. and Mexican operations.
Drilling rigs at December 31, 2012
Horsepower
< 1000
1000-1500
>1500
Tier 1
Tier 2
PSST
Total
Geographic location
Tier 1
Tier 2
PSST
Total
94
64
17
175
Canada
105
64
17
186
89
25
4
118
U.S.
83
35
9
127
5
18
5
28
International
–
8
–
8
Total
188
107
26
321
Total
188
107
26
321
Contract Drilling Revenue
Contract Drilling Adjusted EBITDA
Contract Drilling Utilization Days
$ Millions
2,000
1,500
1,000
500
0
$ Millions
800
Utilization Days
80,000
600
400
200
0
60,000
40,000
20,000
0
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
Note: 2008 and 2009 are prepared under previous Canadian
Generally Accepted Accounting Principles
12
Management’s Discussion and Analysis
Completion and Production Services
We provide completion and workover services and ancillary services and equipment rentals to oil and natural gas
exploration and production companies primarily in Canada, with a growing presence in the U.S.
Service rigs and snubbing units each serve about 18% of the market for these services in Canada.
At December 31, 2012, the segment consisted of:
190 well completion and workover
service rigs, including:
– 185 in Canada
– 5 in the U.S.
19 snubbing units, including:
– 16 in Canada
– 3 in the U.S.
5 coil tubing units, including:
– 3 in Canada
– 2 in the U.S.
approximately 3,800 oilfield rental
items including surface storage,
small-flow wastewater treatment,
power generation and solids
control equipment
243 wellsite accommodation units
in Canada and 61 in the U.S.
50 drilling camps and three base
camps in Canada and four drilling
camps in the U.S.
eight large-flow treatment units and
six potable water production units
in Canada
Canadian fleet as at December 31
Type of Service Rig
Horsepower
2008
2009
2010
2011
2012
Singles:
Mobile
Freestanding mobile
Doubles:
Mobile
Freestanding mobile
Skid
Slants:
Freestanding
Total service rigs
Snubbing units
Coil tubing units
Total service rigs, snubbing units
and coil tubing units
150-400
150-400
250-550
200-550
300-860
250-400
2
97
42
23
48
17
229
29
–
258
–
94
28
30
30
18
200
20
–
220
–
94
25
35
28
18
200
20
–
220
–
90
19
40
22
18
189
18
–
207
–
88
18
38
22
19
185
16
3
204
Completion & Production Revenue
Completion & Production
Adjusted EBITDA
Completion and Production
Service Rig Hours
$ Millions
$400
$300
$200
$100
0
$ Millions
$150
$100
$50
0
Hours
400,000
300,000
200,000
100,000
0
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
Note: 2008 and 2009 are prepared under previous Canadian
Generally Accepted Accounting Principles
Precision Drilling Corporation 2012 Annual Report
13
Understanding Our Business Drivers
THE ENERGY INDUSTRY
Precision operates in the energy services business, which is an inherently challenging cyclical industry. Customer demand
depends on the price for their end products: oil, natural gas, and natural gas liquids. Oil is a more global commodity that
depends on global oil economics, while natural gas and natural gas liquids are more regional energy commodities.
We depend on oil and natural gas exploration and production companies to contract us as part of their development. The
economics of their business are dictated by the current and expected future margin between the cost to find and develop
oil and natural gas, and the eventual prices of those products.
To excel in this environment, we operate using a business model designed to control risk and optimize performance. The
model is directly linked to competitive strategy and reflected in our operating capabilities.
Commodity prices
Cash flow to fund exploration and development is dependent on commodity prices: higher prices increase cash flow
and funding. Oil can be transported relatively easily and cheaply, so it is priced in a more global market influenced by an
array of economic and political factors. Recently, transportation constraints have resulted in oil prices in North America
decoupling from global prices. Natural gas and natural gas liquids continue to be priced regionally.
Oil prices moved lower during the economic crisis of 2008, but have increased since the beginning of 2009 as supply and
demand fundamentals have tightened. Natural gas prices have dipped to levels that existed during the economic crisis
of 2008, because increasing supplies of unconventional natural gas, particularly in North America, are keeping markets
well supplied. This is keeping prices competitive compared to oil, and is supporting the projected growth in worldwide
gas consumption.
WTI Oil and Henry Hub Natural Gas Prices
160
140
120
100
80
60
40
20
0
l
e
r
r
a
b
/
$
S
U
Jul 08
Jan 09
Jul 09
Jan 10
Jul 10
Jan 11
Jul 11
Jan 12
Jul 12
Jan 13
16
14
12
10
8
6
4
2
t
u
B
M
M
/
$
S
U
0
Jan 08
Henry Hub Natural Gas
West Texas Intermediate Oil (“WTI”)
Source: Precision
14
Management’s Discussion and Analysis
New technology
Recent technological advancements in fracturing, stimulation and horizontal drilling have brought about a shift in development
from conventional to unconventional oil and natural gas reservoirs. This is giving companies cost-effective access to more
complex wells in North America, in existing basins and in new basins that haven’t been economic in the past.
The following chart shows the consistent trend away from vertical wells to the more demanding directional/horizontal well
programs, which require higher capacity equipment and greater technical expertise for drilling. These trends are driving
the demand growth for high performing drilling rigs, which garner premium pricing.
Growth of Rigs Drilling Directional/Horizontal Wells in Canada
Precision’s capabilities are
demonstrated by the high
proportion of rigs drilling
complex wells.
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e
W
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t
a
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i
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Precision
Canada Industry Less Precision
Source: Whelby Data
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D
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a
n
e
c
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e
P
100
90
80
70
60
50
40
30
20
10
0
2006
2007
2008
2009
2010
2011
2012
2013
These technical innovations have been a major factor in the increase in natural gas production in the United States.
Although oil production has been increasing in Canada, natural gas production is declining as the U.S. is becoming less
reliant on Canada as a source of natural gas resulting in pricing pressure on Canadian natural gas.
U.S. Lower 48 Natural Gas and Crude Oil Production
80
70
60
50
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40
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
8
7
6
5
4
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M
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U.S. Lower 48 Natural Gas Production
U.S. Crude Oil Production
Source: Energy Information Administration
Precision Drilling Corporation 2012 Annual Report
15
Canadian Natural Gas and Crude Oil Production
18
16
14
d
/
f
c
B
Canadian Natural Gas Production
Canadian Crude Oil Production
Source: Energy Information Administration
and First Energy Capital
12
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
4.0
3.0
2.0
1.0
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Drilling activity
The graphs below show that since 2010 drilling activity in the United States and Canada has been shifting from natural
gas to oil. The Canadian drilling rig activity graph also shows how Canadian drilling activity fluctuates with the seasons, a
market dynamic that, in general, is not present in the United States.
U.S. Drilling Rig Activity
i
g
n
k
r
o
W
s
g
R
i
1,600
1,200
800
400
0
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Canadian Drilling Rig Activity
i
g
n
k
r
o
W
s
g
R
i
600
400
200
0
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Gas Rigs
Oil Rigs
Source: Baker Hughes, Inc.
Gas Rigs
Oil Rigs
Source: Baker Hughes, Inc.
16
Management’s Discussion and Analysis
A COMPETITIVE OPERATING MODEL
The contract drilling business is highly competitive and there are many industry participants. We compete for drilling
contracts that are usually awarded based on competitive bids.
We believe potential customers focus on pricing and rig availability when selecting a drilling contractor, but also consider
many other things, including drilling capabilities and condition of rigs, quality of rig crews, breadth of service, safety record
and adaptability among others.
Providing High Performance, High Value services to our customers is the core of our competitive strategy. We deliver
High Performance by delivering passionate people supported by superior systems and equipment designed to maximize
productivity and reduce risks. We create High Value by operating safely, lowering customer risks and costs, developing
people, generating financial growth and attracting investment.
Operating efficiency
We keep customer well costs down by maximizing the efficiency of operations in several ways:
using innovative and advanced drilling technology that is efficient and reduces costs
having equipment that is geographically dispersed, reliable and well maintained
monitoring and maintaining our equipment to minimize mechanical downtime
effectively managing operations to keep non-productive time to a minimum
compensating our executive and eligible employees based on performance against safety, operational, employee
retention and financial measures.
Efficient, cost-reducing technology
We focus on providing efficient, cost-reducing drilling technology. Design innovations and technology improvements
capture incremental time savings during all phases of the well drilling process, including multi-well pad capability and
mobility between wells.
The versatile Precision Super Single design includes technical innovations in safety and drilling efficiency in slant or
directional drilling on single or multiple well pad locations in shallow to medium depth wells. Precision Super Single rigs
use extended length tubulars, integrated top drive, innovative unitization to facilitate quick moves between well locations,
a small footprint to minimize environmental impact and enhanced safety features such as automated pipe handling and
remotely operated torque wrenches.
Triple rigs have greater hoisting capacity and are used in deeper exploration and development drilling. Our Super Triple
electric rigs (ST-1200 and ST-1500) are designed to keep the load count as low as possible using widely available conventional
rig moving equipment. Power capabilities are a major design criterion for the new Super Triple rigs. Drilling productivity and
reliability with AC power drive systems provides added precision and measurability along with a computerized electronic
auto driller feature that precisely controls weight, rotation and torque on the drill bit. These rigs use extended length drill
pipe, an integrated top drive, automated pipe handling with iron roughnecks and control automation off the rig floor.
Broad geographic footprint
Geographic proximity and fleet versatility make us a comprehensive provider of High Performance, High Value services
to our customers. Our large diverse fleet of rigs is strategically deployed across most active regions in North America,
including all the major prolific unconventional oil and gas fields. More recently, we have expanded drilling operations into
select international markets.
Managing downtime
Reliable and well maintained equipment minimizes downtime and non-productive time during operations. We manage
mechanical downtime through preventative maintenance programs, detailed inspection processes, an extensive fleet of
strategically placed spare equipment, an in-house supply chain and continuous equipment upgrades.
We minimize non-productive time (move, rig-up and rig-out time) by utilizing walking and skidding systems, decreasing
the number of move loads per rig, and using mechanized equipment for safer and quicker rig component connections.
Precision Drilling Corporation 2012 Annual Report
17
Tracking our results
We unitize key financial information per day and per hour, and compare it to established benchmarks and past performance.
We evaluate the relative strength of our financial position by monitoring our working capital, debt ratios and returns on
capital employed. We track industry rig utilization statistics to evaluate our performance against competitors. And we link
incentive compensation for our senior team to returns generated compared to established benchmarks.
We reward executives and eligible employees through incentive compensation plans for performance against the
following measures:
Safety performance – total recordable incident frequency per 200,000 man-hours. Measured against prior year
performance and current year industry performance in Canada and the United States.
Operational performance – rig down time for repair as measured by time not billed to the customer. Measured
against predetermined target of available billable time.
Key field employee retention – senior field employee retention rates. Measured against predetermined target of
retention.
Financial performance – return on capital employed calculated as a percentage of pre-tax operating earnings divided
by total assets less current liabilities. Measured against predetermined target percentage.
Financial performance – total shareholder return performance against an industry peer group, including dividends,
over a three year period. Measured against predetermined selection of competitors in peer group.
Top tier service
We pride ourselves on providing quality equipment operated by experienced and well trained crews. We also strive to align
our capabilities with evolving technical requirements associated with more complex well bore programs.
Large, diverse fleet of rigs
Our fleet of drilling rigs can handle every kind of onshore conventional and unconventional oil and natural gas wells in
North America.
Our service rigs provide completion, workover, abandonment, well maintenance, high pressure and critical sour gas well
work and well re-entry preparation across the Western Canada Sedimentary Basin and the northern U.S. markets. Service
rigs are supported by three field locations in Alberta, two in Saskatchewan, one in each of Manitoba, British Columbia,
North Dakota, Texas and Pennsylvania.
Snubbing complements traditional natural gas well servicing by allowing customers to work on wells while they are
pressurized and production has been suspended. We have two kinds of snubbing units: rig assist and self-contained.
Self-contained units do not require a service rig on site and are capable of snubbing and performing many other well
servicing procedures.
We are investing in coil tubing units that have the ability to service horizontal wells by pushing the tubing rather than relying
on gravity. Coil tubing often works more effectively in unconventional horizontal wells which represent the majority of wells
drilled in North America today. We began using our first coil tubing unit in the first quarter of 2012 and finished with five
units at the end of 2012.
This year we high-graded our drilling rig fleet by:
adding 36 Tier 1 new build drilling rigs
upgrading 11 drilling rigs – about half of these were Tier upgrades
decommissioning 42 Tier 3 and 10 Tier 2 rigs.
18
Management’s Discussion and Analysis
As at December 31, 2012, 92% of our 321 drilling rigs were Tier 1 or Tier 2 rigs.
Capabilities
Tier 1
high performance rigs
newer design and manufacture
Best suited to the more complex
resources in North American shale
and unconventional plays:
pad development
directional or horizontal drilling
slant drilling
drilling in environmentally sensitive
areas
Tier 2
high performance rigs
modified and new equipment
added to improve performance
Capable of directional and
horizontal drilling
PSST
conventional
mechanical rigs
Designed for traditional, vertical
drilling
used in seasonal and stratification
work in Canada
can be used in our turkey operations
in the United States
Key features
advanced AC, silicone controlled
rectifier (“SCR”), or mechanical
power distribution and controls
mobile in their class (require fewer
some mechanization of tubular
handling equipment
top drive adaptability
SCR or mechanical type power
no automation
lower pump capacity
provide acceptable performance
some are top drive adaptable
trucking loads)
systems
highly mechanized tubular handling
increased hook load and or racking
equipment
capabilities
integrated top drive or top drive
upgraded power generating,
adaptability
electronic or hydraulic control of the
majority of operating parameters
specialized drilling tubulars
high-capacity mud pumps
control systems and other major
components
high-capacity mud pumps
Inventory of ancillary equipment
An inventory of equipment (portable top drives, loaders, boilers, tubulars and well control equipment) supports our fleet
of drilling and service rigs. We also maintain an inventory of key rig components to minimize downtime if there is an
equipment failure.
Precision Rentals supplies customers with an inventory of specialized equipment and wellsite accommodations. LRG
Catering supplies meals and provides accommodation for crews at remote oilfield worksites. Terra Water Systems plays
an essential role in providing water treatment services as well as potable water production plants for LRG Catering and
other camp facilities.
Systematic maintenance
We consistently reinvest capital to sustain and upgrade existing property, plant and equipment, and benchmark equipment
repair and maintenance expenses to activity levels in accordance with our maintenance and certification programs.
We use computer systems to track key preventative maintenance indicators for major rig components, to record equipment
performance history, schedule equipment certifications, reduce downtime and allow for better asset management.
We benefit from internal services for equipment certifications and component manufacturing provided by Rostel Industries
and for standardization and distribution of consumable oilfield products through Columbia Oilfield Supply in Canada and
Precision Supply in the United States.
We have a continuous maintenance program for essential elements, like tubulars and engines.
Upgrade opportunities
We leverage our internal manufacturing and repair capabilities and inventory of quality rigs to address market demand
through upgraded drilling and service rigs. For drilling rigs, the upgrade may result in a change in tier classification.
Precision Drilling Corporation 2012 Annual Report
19
People
Having an experienced, high performance crew is a competitive strength and highly valued by our customers. There are
often shortages of qualified manpower in peak operating periods. We rely heavily on our safety record, investment in
employee development and reputation to attract and retain employees, and focus on initiatives that provide a safe and
productive work environment, opportunity for advancement and added wage security. We have centralized personnel,
orientation and training programs in Canada and the U.S.; however, in the U.S. these functions are sometimes managed
to align with regional labour and customer service requirements. In 2008 we launched Toughnecks, our highly successful
North America field recruiting program.
Systems
Our fully integrated enterprise-wide reporting system has improved business performance through real-time access to
information across all functional areas. All of our divisions operate on a common integrated system using standardized
business processes across finance, payroll, equipment maintenance, procurement and inventory control.
We continue to invest in information systems that provide competitive advantages. Electronic links between field and
financial systems provide accuracy and timely processing. This repository of rig data improves response time to customer
inquiries. Rig manufacturing projects benefit from scheduling and budgeting tools as economies of scale can be identified
and leveraged as construction demands increase.
Safe operations
Safety, environmental stewardship and employee wellness are critical for us and for our customers, and are the foundation
of our culture.
Safety performance is a fundamental contributor to operating performance and the financial results we generate for our
shareholders. Target Zero – our safety vision for eliminating workplace incidents – is a fundamental belief that all injuries
can be prevented. We track safety using an industry standard recordable frequency statistic that benchmarks successes
and isolates areas for improvement. We have taken it to another level by tracking and measuring all injuries regardless of
severity, which is seen as a leading indicator for the potential of a more serious incident. In 2012, 269 of our drilling rigs and
186 of our service rigs and snubbing units achieved Target Zero. We continue to embrace technological advancements
which make operations safer.
Together with our customers, we are continuously looking for opportunities to reduce our consumption of non-renewable
resources and our environmental footprint. We use technology to reduce our impact on the environment, including:
heat recovery and distribution systems
power generation and distribution
fuel management
fuel type
noise reduction
recycling of used materials
use of recycled materials
efficient equipment designs
spill containment.
20
Management’s Discussion and Analysis
AN EFFECTIVE STRATEGY
Precision’s vision is to be recognized as the High Performance, High Value provider of services for global energy exploration
and development.
We work toward that vision by defining and measuring our results against strategic priorities we establish at the beginning
of every year.
2012 Strategic Priorities
2012 Results
Plans for 2013
Execute our High Performance,
High Value strategy
Continue to deliver safe, reliable,
predictable and repeatable performance
with high environmental responsibility
and community standards.
Execute on existing organic growth
opportunities including contracting
additional new build and upgraded drilling
rigs, adding assets and people to the
directional drilling and Completion and
Production Services businesses and
pursuing additional rig deployments
internationally. Continue to evaluate
accretive acquisitions.
Improved safety performance in both
operating segments in 2012, matching
the best results in our history.
Delivered 36 new build Super Series
to customers on long-term contracts
and upgraded 11 existing drilling rigs
to higher specification assets under
long-term contracts.
Established footprint in the Middle East
and expanded international operations
from two rigs to eight operating at the
end of the year. Start-up activities took
longer than expected.
Expanded service lines in Completion
and Production Services adding higher
end rental offerings and entering the coil
tubing business. Expanded penetration
into Northern U.S. markets.
Over the past two years, we have grown
our directional drilling business but
financial results and utilization have
been weaker than expected.
Continue to drive execution excellence in our
people, internal systems and infrastructure
supporting our world class safety, training
and development programs, upgrading
and consolidating our Nisku operations and
leveraging our investments in our Houston
and Red Deer Tech Centers.
Remain poised to seize growth opportunities,
leveraging our balance sheet strength and
flexibility.
Deliver new build rigs to the North American
market and upgrade existing drilling rigs
to higher specification assets on customer
contracts.
Grow High Performance, High Value service
lines for unconventional field development,
such as integrated directional drilling, coil
tubing and rentals.
Continue to expand geographically with
international drilling operations and increased
Completion and Production presence in the
U.S. market.
Build our brand
Continue to promote Precision’s High
Performance, High Value brand with
customers, employees, investors
and within the communities in which
we operate.
Had strong Canadian and U.S. dayrates
throughout 2012 and exceeded employee
retention goals across all targeted
skill positions.
Uphold our reputation and market breadth
in North America while strengthening
our presence in select oilfield markets
internationally.
Increased recognition from U.S. and
international investors while retaining
strong support from Canadian base.
Our corporate and competitive growth strategies are designed to optimize resource allocation and differentiate us from the
competition, generating value for investors.
We see opportunities for growth in our Contract Drilling Services land drilling rig fleet both in North America and
internationally. Unconventional drilling is the primary opportunity in the North American market place. Unconventional
resource development requires advanced Tier 1 drilling rigs and other highly developed services that promote the drilling
of reliable, predictable and repeatable horizontal wells.
The completion and production work associated with unconventional wells provides the most profitable growth opportunities
for Completion and Production Services.
Precision Drilling Corporation 2012 Annual Report
21
RISKS TO ACHIEVING OUR STRATEGY
The following is a list of our key business risks. You’ll find more information and other risks to our business in our annual
information form, which you can find on our website, www.precisiondrilling.com.
Price of oil and gas
We sell our services to oil and natural gas exploration and production companies. Macroeconomic and geopolitical factors
associated with oil and natural gas supply and demand are the primary factors driving pricing and profitability in the oilfield
services industry. Generally, we experience high demand for our services when commodity prices are relatively high and
the opposite is true when commodity prices are low. The volatility of crude oil and natural gas prices accounts for much of
the cyclical nature of the energy services business.
The markets for oil and natural gas are separate and distinct. Oil is a global commodity with a vast distribution network,
although the differential between benchmarks such as West Texas Intermediate and European Brent crude oil can fluctuate.
As in all markets, when supply, demand and other market factors change, so can the spreads between benchmarks. The
most economical way to transport natural gas is in its gaseous state by pipeline, and the natural gas market depends on
pipeline infrastructure and regional supply and demand. However, recent developments in the transportation of liquefied
natural gas in ocean going tanker ships have introduced an element of globalization to the natural gas market.
We try to manage this risk by keeping our cost structure as variable as we can while still being able to maintain the level of
service our customers require.
Weather patterns
Seasonal weather patterns in Canada and the northern part of the U.S. affect activity in the oilfield services industry.
During the spring months, wet weather and the spring thaw make the ground unstable so municipalities and counties
and provincial and state transportation departments enforce road bans that restrict the movement of rigs and other heavy
equipment. This reduces activity and highlights the importance of the location of our equipment prior to the imposition of
the road bans. The timing and length of road bans depend on weather conditions leading to the spring thaw and during
the thawing period. Additionally, certain oil and natural gas producing areas are located in parts of Western Canada that
are only accessible during the winter months because the ground surrounding or containing the drilling sites in these areas
consists of terrain known as muskeg. The rigs and other necessary equipment cannot cross the terrain to reach the drilling
site until the muskeg freezes. Moreover, once the rigs and other equipment have been moved to a drilling site, they may
become stranded or are unable to be relocated to another site if the muskeg thaws unexpectedly. Our business results
depend partly on how long and severe the winter season lasts.
Competition
Periods of high demand often lead to higher capital expenditures on drilling rigs and other oilfield services equipment.
The number of drilling rigs competing for work in markets where we operate has increased as the industry adds new and
upgraded rigs. We expect more new or newer rigs to enter markets where we operate. The industry supply of drilling rigs may
exceed actual demand because of the relatively long life span of oilfield services equipment and the waiting period between
when a decision is made to upgrade or build new equipment and when the equipment is placed into service. Excess supply
resulting from industry-wide capital expenditures could lead to lower demand for term drilling contracts and our equipment
and services. The additional supply of drilling rigs has intensified price competition in the past and could continue to do so
and possibly lead to lower rates in the oilfield services industry generally and lower utilization of existing rigs. If any of these
factors materializes, it would have an adverse effect on our revenues, cash flows, earnings and asset valuation.
Technology
Complex drilling programs for the exploration and development of conventional and unconventional oil and natural gas
reserves demand high performance drilling rigs. The ability of drilling rig service providers to meet this demand depends
on continuous improvement of existing rig technology like drive systems, control systems, automation, mud systems
and top drives to improve drilling efficiency. Our ability to deliver equipment and services that meet customer demand is
critical to our continued success. We cannot assure that our rig technology will continue to meet demands, especially as
rigs age and technology advances, or that our competitors will not develop technological improvements that are more
advantageous, timely or cost effective than our own advancements.
22
Management’s Discussion and Analysis
We have an experienced internal engineering department that works closely with operations and marketing on equipment
design and improvements. We cannot guarantee, however, that our rig technology will continue to meet the needs of our
customers, especially as rigs age and technology advances, or that competitors won’t develop technological improvements
that are more advantageous, timely or cost effective.
Employees and suppliers
Finding and keeping employees
We may not be able to find enough skilled labor to meet our needs, and this could limit growth. We may also have difficulty
finding enough skilled and unskilled labor in the future if demand for our services increases. Shortages of qualified personnel
have occurred in the past during periods of high demand. The demand for qualified rig personnel generally increases with
stronger demand for land drilling services and as new and refurbished rigs are brought into service. Increased demand
typically leads to higher wages that may or may not be reflected in any increases in service rates.
We continually monitor crew availability. We also focus on providing a safe and productive work environment, opportunity
for advancement and added wage security, to retain and attract quality staff.
Reliance on suppliers
We source certain key rig components, raw materials, equipment and component parts from a variety of suppliers in
Canada, the U.S. and overseas. We also outsource some or all construction services for drilling and service rigs, including
new build rigs as part of our capital expenditure program. We maintain relationships with key suppliers and contractors
and an inventory of key components, materials, equipment and parts. We also place advance orders for components that
have long lead times.
To manage this risk, we maintain relationships with several key suppliers and contractors, and an inventory of key
components, materials, equipment and parts. We also place advance orders for components that have long lead times.
We may, however, experience cost increases, delays in delivery due to the strong activity or financial hardship of suppliers
or contractors, or other unforeseen circumstances relating to third parties. If our current or alternate suppliers are unable
to deliver the necessary components, materials, equipment, parts and services we require for our businesses, including
the construction of new build drilling rigs, it can delay service to our customers and have a material adverse effect on our
revenues, cash flows and earnings.
Health, safety and the environment
Safety
Standards for accident prevention in the oil and gas industry are governed by service company safety policies and
procedures, accepted industry safety practices, customer-specific safety requirements and health and safety legislation.
Safety is a key factor that customers consider when selecting an oilfield service company. A decline in our safety
performance could result in lower demand for services, and this could have a material adverse effect on our revenues,
cash flows and earnings. We are subject to various environmental, health and safety laws, rules, legislation and guidelines
which can impose material liability, increase our costs or lead to lower demand for our services.
We manage our safety performance using our Target Zero program, a comprehensive training and assessment program
designed to work toward a vision of no workplace incidents resulting in injury.
Laws, regulations and guidelines
Our operations are affected by numerous laws, regulations and guidelines relating to the protection of the environment
and health and safety, including those governing the management, transportation and disposal of hazardous substances
and other waste materials. These include laws, regulations and guidelines relating to spills, releases, emissions and
discharges of hazardous substances or other waste materials into the environment, requiring removal or remediation of
pollutants or contaminants, and imposing civil and criminal penalties for violations. Some of these apply to our operations
and authorize the recovery of natural resource damages by the government, injunctive relief, and the imposition of stop,
control, remediation and abandonment orders. In addition, our land drilling operations may be conducted in or near
ecologically sensitive areas, such as wetlands, which are subject to special protective measures and may expose us to
additional operating costs and liabilities for noncompliance with certain laws. Some environmental laws and regulations
Precision Drilling Corporation 2012 Annual Report
23
may impose strict and, in certain cases joint and several, liability. This means that in some situations we could be exposed
to liability as a result of conduct that was lawful at the time it occurred, or conditions caused by prior operators or other third
parties, including any liability related to offsite treatment or disposal facility. The costs arising from compliance with these
laws, regulations and guidelines may be material.
We maintain liability insurance, including insurance for certain environmental claims, but coverage is limited and some of
our policies exclude coverage for damages resulting from environmental contamination. We cannot assure that insurance
will continue to be available to us on commercially reasonable terms, that the possible types of liabilities that may be
incurred by us will be covered by the insurance, or that the dollar amount of the liabilities will not exceed our policy limits.
Even a partially uninsured claim, if successful and of sufficient magnitude, could have a material adverse effect on our
business, results of operations and prospects.
Energy and the environment
The issue of energy and the environment has created intense public debate in Canada and around the world in recent
years, and it is likely to continue for the foreseeable future and could potentially have a significant impact on all aspects of
the economy. The trend in environmental regulation has been to impose more restrictions and limitations on activities that
may impact the environment. Any regulatory changes that impose additional environmental restrictions or requirements
on us, or our customers, could increase our operating costs and potentially lead to lower demand for our services and
have an adverse effect on us. For example, there is growing concern about the apparent connection between the burning
of fossil fuels and climate change. Laws, regulations or treaties concerning climate change or greenhouse gas emissions
can have an adverse impact on the demand for oil and natural gas, which could have a material adverse effect on us.
Governments in Canada and the U.S. are also reviewing more stringent regulation or restriction of hydraulic fracturing,
a technology used by some of our customers that involves the injection of water, sand and chemicals under pressure
into rock formations to stimulate oil and natural gas production. This could have a negative impact on the exploration of
unconventional energy resources, which are only commercially viable with the use of hydraulic fracturing. Laws relating
to hydraulic fracturing are in various stages of development at levels of governments in markets where we operate. There
is no assurance of the outcome of these developments, their effect on the regulatory landscape and the contract drilling
industry, or that additional governmental organizations will not seek to pass legislation on hydraulic fracturing in the future.
Financial
Credit market conditions
The ability to make scheduled debt repayments, refinance debt obligations or access financing depends on our financial
condition and operating performance, which may be affected by prevailing economic and competitive conditions and
certain financial, business and other factors beyond our control. Volatility in the credit markets can increase costs associated
with debt instruments due to increased spreads over relevant interest rate benchmarks, or affect our ability to access those
markets or the ability of third parties we wish to do business with. We may be unable to maintain sufficient cash flow from
operating activities to allow us to pay the principal, premium, if any, and interest on our debt.
In addition, if there is continued or future volatility or uncertainty in the capital markets, access to financing may be uncertain,
and this can have an adverse effect on the industry and our business, including future operating results. Our customers
may curtail their drilling programs, which could result in lower demand for drilling rigs, well service rigs, reduced dayrates
and a decrease in demand for directional drilling and turnkey jobs, other wellsite services or equipment utilization. In
addition, certain customers may be unable to pay suppliers, including us, if they are unable to access the capital markets
to fund their business operations.
Access to additional financing
We will need sufficient cash flows in the future to service and repay our debt. Our ability to generate cash in the future is
affected to some extent by general economic, financial, competitive and other factors that may be beyond our control. If
we need to borrow funds in the future to service our debt, our ability will depend on covenants in the secured facility, 2020
notes, 2019 notes, 2021 notes and other debt agreements we have in the future. We may not be able to access sufficient
amounts under the secured facility or from the capital markets in the future to pay our obligations as they mature or to fund
24
Management’s Discussion and Analysis
other liquidity requirements. If we are not able to borrow a sufficient amount, or generate enough cash flow from operations
to service and repay our debt, we will need to refinance our debt or we will be in default, and we could be forced to reduce
or delay investments and capital expenditures or dispose of material assets. We may not be able to refinance or arrange
alternative measures on favorable terms or at all. If we are unable to service, repay and/or refinance our debt, it could have
a negative impact on our financial condition and results of operations.
We regularly assess our credit policies and capital structure, and have enough liquidity to meet our needs. See page 36
for information about our liquidity.
Foreign exchange
Our U.S. and international operations have revenue, expenses, assets and liabilities denominated in currencies other than
the Canadian dollar (mostly in US dollars and currencies that are pegged to the US dollar). That means that changes in
currency exchange rates affect our income statement, balance sheet and statement of cash flow.
Translation into Canadian dollars – When preparing our consolidated financial statements, we translate the financial
statements for foreign operations that don’t have a Canadian dollar functional currency into Canadian dollars. We
translate assets and liabilities at exchange rates in effect at the balance sheet date. We translate revenues and
expenses using average exchange rates for the month of the transaction. We initially recognize gains or losses from
these translation adjustments in other comprehensive income, and reclassify them from equity to net earnings on
disposal or partial disposal of the foreign operation. Changes in currency exchange rates could materially increase
or decrease our foreign currency-denominated net assets, which would increase or decrease shareholders’ equity.
Changes in currency exchange rates will affect the amount of revenue and expenses we record for our U.S. and
international operations, which will increase or decrease our net earnings. If the Canadian dollar strengthens against
the US dollar, the net earnings we record in Canadian dollars for our international operations will be lower.
Transaction exposure – Some of our long-term debt is denominated in US dollars. We have designated our US dollar
denominated unsecured senior notes as a hedge against the net asset position of our U.S. operations. We convert
the debt at the exchange rate in effect at the balance sheet dates and include the resulting gains or losses in the
statement of comprehensive income. If the Canadian dollar strengthens against the US dollar, we will incur a foreign
exchange gain from the translation of this debt. Most of our international operations are transacted in US dollars
or US dollar-pegged currencies. Transactions for our Canadian operations are mainly in Canadian dollars, but we
occasionally buy goods and supplies for our Canadian operations using US dollars. These types of transactions and
resulting foreign exchange exposure would not typically have a material impact on our financial results.
Liabilities from prior reorganizations
We have retained all liabilities of our predecessor companies, including liabilities relating to corporate and income
tax matters.
International operations
We conduct some of our business outside of Canada and the U.S., like Mexico and the Kingdom of Saudi Arabia. Our
growth plans contemplate establishing operations in other foreign countries, including countries where the political and
economic systems may be less stable than in Canada or the U.S.
Our international operations are subject to risks normally associated with conducting business in foreign countries,
including among others:
insurrection and geopolitical and other political risks
fluctuations in foreign currency and exchange controls
increases in duties, taxes and governmental royalties
renegotiation of contracts with governmental entities
changes in laws and policies governing operations of foreign-based companies.
If there is a dispute with our international operations, we may be under the exclusive jurisdiction of foreign courts, or may
not be able to subject foreign persons to the jurisdiction of a court in Canada or the U.S.
Precision Drilling Corporation 2012 Annual Report
25
2012 Results
Adjusted EBITDA and operating earnings are additional GAAP measures. Please see page 5 for more information.
Summarized consolidated statements of earnings
2012
2011
2010
1,725,240
326,079
(10,578)
2,040,741
649,281
93,554
(72,043)
670,792
307,525
192,469
170,798
52,539
3,753
86,829
27,677
(24,683)
52,360
1,632,037
330,225
(11,235)
1,951,027
665,389
104,252
(74,577)
695,064
251,483
114,893
328,688
–
(23,674)
111,578
240,784
47,307
193,477
1,186,007
255,827
(12,181)
1,429,653
434,167
66,443
(65,702)
434,908
210,103
–
224,805
–
(12,712)
211,327
26,190
(17,345)
43,535
2012
2011
2010
1,053,966
1,071,526
936,113
64,017
(13,355)
866,776
22,994
(10,269)
772,332
634,885
27,239
(4,803)
2,040,741
1,951,027
1,429,653
2,119,891
1,913,810
266,562
4,300,263
2,252,084
2,027,676
148,114
4,427,874
1,720,785
1,789,441
54,314
3,564,540
Year ended December 31 (thousands of $)
Revenue:
Contract Drilling Services
Completion and Product Services
Inter-segment elimination
Adjusted EBITDA:
Contract Drilling Services
Completion and Product Services
Corporate and other
Depreciation and amortization
Loss on asset decommissioning
Operating earnings
Impairment of goodwill
Foreign exchange
Finance charges
Earning before income taxes
Income taxes
Net earnings
Results by geographic segment
Year ended December 31 (thousands of $)
Revenue
Canada
United States
International
Inter-segment elimination
Total assets
Canada
United States
International
26
Management’s Discussion and Analysis
2012 compared to 2011
Net earnings this year were $52 million or $0.18 per diluted share, compared to $193 million or $0.67 per diluted share in
2011. Revenue this year was $2,041 million, or 5% higher than 2011. Net earnings and net earnings per diluted share include
the impact of charges associated with asset decommissioning, and an impairment charge to the goodwill attributable to
our Canadian Directional Drilling operations, as previously disclosed.
Adjusted EBITDA this year was $671 million, or 3% lower than 2011. Lower activity levels were partially offset by improved
pricing in both operating segments. Activity, as measured by drilling utilization days, dropped 15% in Canada and 9% in
the U.S. compared to 2011.
The volatile global environment and lower natural gas prices in much of 2012 reduced utilization for us and for the industry
in general.
Average oil and natural gas prices
Oil
2012
2011
2010
West Texas Intermediate (per barrel)
US $94.13
US $95.02
US $79.38
Natural gas
Canada
AECO (per MMBtu)
United States
Henry Hub (per MMBtu)
$2.39
$3.62
$4.00
US $2.75
US $3.98
US $4.37
Key statistics
There were 10,753 wells drilled in western Canada this year, or 9% fewer than the 11,832 drilled in 2011. Approximately
38,600 wells were started onshore in the U.S., or approximately 2% more than the approximately 37,800 wells started there
in 2011.
Total industry drilling operating days were 14% lower than 2011, at 124,319. Average industry drilling operating days per
well was 11.6 compared to 12.2 in 2011. Average depth of a well increased by 2%. The decrease in days per well while
average depth increased reflects the use of top tier rigs and greater industry experience with unconventional drilling.
Fleet
We and the land drilling industry are in the process of upgrading the drilling rig fleet by building new rigs and upgrading
existing ones. In the fourth quarter of 2012 we decommissioned 42 Tier 3 drilling rigs and 10 Tier 2 rigs from our fleet
and recorded an impairment charge of $192 million. In the fourth quarter of 2011, we recorded an impairment charge of
$115 million related to the decommissioning of 36 drilling rigs and 13 well servicing rigs. We are exiting the Tier 3 contract
drilling business but will retain 26 drilling rigs for seasonal, stratification and turnkey drilling work. These will be categorized
as “PSST” rigs. Our focus on the Tier 1 and Tier 2 market is aligned with our corporate strategy, customer relationships
and competitive position.
Goodwill
Under IFRS, we are required to assess the carrying value of cash-generating units that contain goodwill every year. We
recognized a $53 million goodwill impairment charge this year (the goodwill attributable to our Canadian directional drilling
operations), because of the outlook for natural gas pricing, and the fact that natural gas drilling in Canada is down.
Foreign exchange
We recognized a foreign exchange loss of $4 million because the Canadian dollar strengthened in value against the U.S.
dollar, and the effect that had on the net U.S. dollar denominated monetary position in our Canadian dollar-based companies.
Precision Drilling Corporation 2012 Annual Report
27
Finance charges
Finance charges were $87 million, or $25 million lower than 2011. In 2011, we incurred a $27 million charge for the
make-whole premium from the refinancing of a previously outstanding debt, and the interest expense associated with
Canadian income tax settlements. These were offset by higher interest costs from a higher average long-term debt balance
and a non-recurring gain we recognized in 2011.
Income taxes
Income taxes were $72 million lower than 2011 year mainly because operating results were lower and income tax was
taxed at lower rates.
2011 compared to 2010
Net earnings in 2011 were $193 million or $0.67 per diluted share, compared to $44 million or $0.15 per diluted share in
2010. Revenue in 2011 was $1,951 million compared to $1,430 million in 2010. Net earnings and net earnings per diluted
share include the impact of charges associated with asset decommissioning, as previously disclosed.
Adjusted EBITDA in 2011 was $695 million, or 60% higher than the $435 million in 2010 because of improved pricing and
margins, and higher activity levels in both operating segments. Activity, as measured by utilization days, increased 22% in
Canada and 17% in the U.S. compared to 2010.
Higher oil and natural gas liquids prices increased utilization in 2011 for us and for the industry in general.
Key statistics
There were 11,832 wells drilled in western Canada in 2011, or 1% less than the 11,936 drilled in 2010. Approximately 37,800
wells were started onshore in the U.S. in 2011, or approximately 13% more than the approximately 33,500 wells started
there in 2010.
In Canada, total industry drilling operating days, at 144,646, were 21% higher than 2010. Average industry drilling operating
days per well was 12.2 compared to 10.0 in 2010. The increase in days per well reflects the increase in horizontal drilling.
Wells drilled horizontally typically have a longer drilling distance and take longer to drill.
Foreign exchange
We recognized a foreign exchange gain of $24 million in 2011 compared to a $13 million gain in 2010. The gain in 2011
resulted from the strengthening of the Canadian dollar against the U.S. dollar, and the effect that had on the net U.S. dollar
denominated monetary position in our Canadian dollar-based companies. We designated our U.S. dollar debt as a hedge
of our U.S. denominated operations on November 17, 2010 and July 26, 2011.
Finance charges
Finance charges were $112 million in 2011, or $100 million lower than 2010. In 2010, we incurred a $116 million loss on
settlement of a debt, and debt amortization costs were higher. These were offset by a $27 million make-whole premium we
paid in 2011 from the refinancing of $175 million 10% senior unsecured notes, and the interest expense associated with
Canadian income tax settlements.
Income taxes
In 2011 income taxes were $65 million higher than 2010 mainly because earnings before income taxes were higher, and
we recorded $11 million in income taxes in 2011 that related to a prior year.
28
Management’s Discussion and Analysis
CONTRACT DRILLING SERVICES
Financial results
Adjusted EBITDA and operating earnings are additional GAAP measures. Please see page 5 for more information.
Year ended December 31
(thousands of $, except where noted)
Revenue
Expenses
Operating
General and administrative
Adjusted EBITDA
Depreciation and amortization
Loss on asset decommissioning
Operating earnings
2012
1,725,240
1,036,553
39,406
649,281
271,993
192,469
184,819
% of
revenue
60.1
2.3
37.6
15.8
11.1
10.7
2011
1,632,037
931,062
35,586
665,389
219,194
113,366
332,829
% of
revenue
57.0
2.2
40.8
13.4
7.0
20.4
2010
1,186,007
720,347
31,493
434,167
177,516
–
256,651
% of
revenue
60.7
2.7
36.6
15.0
–
21.6
2012 compared to 2011
Revenue from Contract Drilling Services was $1,725 million this year, or 6% higher than 2011, mainly because drilling rig
revenue per day increased in both Canada and the U.S., and we realized growth in our international and directional drilling
operations. These were partially offset by lower utilization days in North America.
Operating expenses were 60% of revenue this year compared to 57% in 2011, mainly because labour related costs
and costs associated with international and directional drilling activity were higher. Operating expenses per day were
10% higher in Canada and 12% higher in the U.S. mainly because of higher crew labour related costs. General and
administrative expense was higher because of the growth in our international business.
Operating earnings were $185 million this year, or 44% lower than 2011, and 11% of revenue compared to 20% in 2011.
Included in 2012 is a loss on asset decommissioning charge of $192 million related to the decommissioning of 52 drilling
rigs in the fourth quarter. In the fourth quarter of 2011, we recorded an impairment charge of $113 million related to the
decommissioning of 36 drilling rigs.
Capital expenditures in 2012 were $751 million:
$513 million – to expand the underlying asset base
$130 million – to upgrade existing equipment
$108 million – spending on maintenance and infrastructure capital.
Most of the expansion capital was on 38 new build rigs, as part of our rig build program. 36 of these were completed and
placed into service by December 31, 2012.
Canadian Drilling
Revenue from Canadian Drilling was lower by $20 million or 3% when compared to 2011. Drilling rig activity, as measured
by utilization days, was down 15%.
10,753 wells were drilled in Canada in 2012, or 9% fewer than in 2011. Industry operating days decreased 14% to
124,319. These were the result of lower activity as customer demand for oil and liquids-rich natural gas related drilling
activity declined.
Adjusted EBITDA was $332 million, in line with 2011 of $329 million, as a decrease in industry activity was offset by
higher pricing.
Depreciation expense for the year was $9 million higher than 2011 because utilization of our Tier 1 rigs was higher,
depreciation on our Tier 3 rigs increased and a loss on sale of assets was recognized.
Precision Drilling Corporation 2012 Annual Report
29
United States Drilling
Revenue from United States Drilling was US$820 million or 1% less than 2011. Drilling rig activity, as measured by utilization
days, was down 9%.
Average dayrates in the United States increased 9% this year because we had a higher percentage of drilling rigs working
under term contracts, Tier 1 and upgraded rigs were added to the fleet and we experienced increased turnkey activity.
Adjusted EBITDA was US$308 million, or 5% lower than US$325 million in 2011, mainly because industry activity was lower
due to depressed natural gas economics.
Depreciation expense for the year was $32 million higher than 2011 because utilization of our Tier 1 rigs was higher,
increased depreciation on our Tier 3 rigs and recognition of a loss on sale of assets.
Operating statistics
Year ended December 31
Number of drilling rigs (year end)
Drilling utilization days (operating and moving)
Canada
United States
International
Drilling revenue per utilization day
Canada (Cdn$)
United States (US$)
Drilling statistics (Canadian operations only)
Wells drilled
Average days per well
Metres drilled (hundreds)
Average metres per well
2012
321
32,352
34,597
2,086
21,030
23,696
3,085
9.4
5,233
1,696
% increase/
(decrease)
(4.7)
(14.8)
(8.7)
197.2
14.0
9.0
(13.5)
(1.1)
(8.5)
5.8
2011
337
37,970
37,887
702
18,442
21,744
3,566
9.5
5,717
1,603
% increase/
(decrease)
(5.1)
21.8
16.8
16.6
14.3
14.7
11.6
8.0
11.7
0.0
2010
355
31,176
32,450
602
16,139
18,965
3,196
8.8
5,119
1,602
% increase/
(decrease)
0.9
46.9
43.1
(15.2)
(9.5)
(17.4)
45.4
2.3
54.4
6.2
Drilling statistics – Canada
This year we decommissioned 22 rigs and completed 20 new builds, bringing our Canadian 2012 year end net rig count
to 186 (down by 2).
The industry drilling rig fleet increased slightly – there were approximately 822 rigs at the end of 2012 compared to 805
at the end of 2011. Our operating day utilization was 40% (six percentage points lower than 2011), compared to industry
utilization, which was 42% (seven percentage points lower than 2011).
Our average dayrates in Canada increased by 14% this year because we had a better rig mix and demand for our Tier 1
rigs was strong.
Drilling statistics – US
This year we decommissioned 30 rigs, completed 16 new builds and transferred two rigs to our Mexican fleet, bringing our
U.S. 2012 year end net rig count to 127 (down by 16). We averaged 95 rigs working, a 9% decrease over 2011.
30
Management’s Discussion and Analysis
Drilling statistics (lower 48 operations only)
Average number of active land rigs for quarters ended:
March 31
June 30
September 30
December 31
Year to date average
1 Source: Baker Hughes
2012
2011
Precision
Industry1
Precision
Industry1
104
97
90
87
95
1,947
1,924
1,855
1,759
1,871
100
102
106
107
104
1,695
1,803
1,915
1,972
1,846
COMPLETION AND PRODUCTION SERVICES
Financial results
Adjusted EBITDA and operating earnings are additional GAAP measures. Please see page 5 for more information.
Year ended December 31
(thousands of $, except where noted)
Revenue
Expenses
Operating
General and administrative
Adjusted EBITDA
Depreciation and amortization
Loss on asset decommissioning
Operating earnings
2012
326,079
217,326
15,199
93,554
30,758
–
62,796
% of
revenue
66.7
4.7
28.7
9.4
–
19.3
2011
330,225
211,195
14,778
104,252
25,598
1,527
77,127
% of
revenue
64.0
4.5
31.6
7.8
0.5
23.4
2010
255,827
178,585
10,799
66,443
24,128
–
42,315
% of
revenue
69.8
4.2
26.0
9.4
–
16.5
Revenue from Completion and Production Services was $326 million this year, or 1% lower than 2011, mainly because
industry activity was lower as customers reduced their spending on production activity as natural gas prices remained
relatively low. Reduced activity was partially offset by improved pricing for our services and expansion of our services into
the U.S.
Operating earnings were $62,796 this year, or 19% lower than 2011, and 19% of revenue compared to 23% in 2011,
because service rig activity was down, and rental equipment and base camps saw less activity.
Operating expenses were 67% of revenue this year, or three percentage points higher than 2011, mainly because equipment
utilization was down, which increased daily or hourly operating costs associated with fixed operating costs and higher crew
wages starting in the fourth quarter.
Depreciation expense for the year was $5 million higher than 2011 mainly because of depreciation on equipment purchases
in 2011 and 2012.
Capital expenditures were $109 million:
$83 million – to expand the underlying asset base
$26 million – spending on maintenance and infrastructure capital.
Revenue from Precision Well Servicing was $220 million, or 1% lower than 2011, because operating activity was down by
9%. This decline in activity was partially offset by a higher revenue rate per hour.
Precision Drilling Corporation 2012 Annual Report
31
Revenue from Precision Rentals was $53 million, or 7% lower than 2011. Activity was lower because drilling, well servicing
and frac-related activity was down. Precision Rentals expanded from three major product lines (surface equipment,
wellsite accommodations, and tubular equipment) to include power generation equipment, solids control equipment and
WaterDams (containment rings). The expansion increased the overall rental rate compared to 2011.
Revenue from LRG Camp and Catering was $32 million, or 24% lower than 2011 because there were fewer base camp
days this year. LRG operated three base camps and 50 drill camps during 2012.
Operating results
Year ended December 31
Number of drilling rigs (end of year)1
Service rig operating hours2
Revenue per operating hour2
2012
214
294,681
744
% increase/
(decrease)
3.4
(7.2)
8.1
2011
207
317,418
688
% increase/
(decrease)
(5.9)
7.9
8.0
2010
220
294,126
637
% increase/
(decrease)
–
33.9
(3.8)
1 Now includes snubbing services. Comparative numbers have been restated to reflect this change.
2 Prior year comparatives have been changed to include U.S. based service rig activity.
This year we added three coil tubing units in Canada and two in the U.S. Equipment was moved from Canada to the U.S.
as we continue to build on our footprint.
This year our service rig hours decreased 7% as market activity declines was partially offset by our U.S. expansion.
Service rig rates increased 8% due to crew wage increased pass through to customers and the provision of higher
end services.
This year in Completion and Production Services, we moved five service rigs and two snubbing rigs from Canada to the
U.S. and added two new build coil tubing rigs and rental equipment to develop our U.S. business.
CORPORATE AND OTHER
Financial results
Adjusted EBITDA is an additional GAAP measure. Please see page 5 for more information.
Year ended December 31 (thousands of $)
2012
2011
2010
Revenue
Expenses
Operating
General and administrative
Adjusted EBITDA
Depreciation and amortization
Operating earnings (loss)
–
–
72,043
(72,043)
4,774
(76,817)
–
–
74,577
(74,577)
6,691
(81,268)
–
–
65,702
(65,702)
8,459
(74,161)
We view our corporate segment as support functions that provide assistance to more than one segment. It includes costs
incurred in corporate groups in both Canada and the U.S.
Corporate and other expenses were $72 million in 2012, or $3 million less than 2011, mainly related to performance based
incentive plans. In 2012 corporate general and administrative costs were 3.5% of consolidated revenue compared to 3.8%
in 2011 and 4.6% in 2010.
32
Management’s Discussion and Analysis
QUARTERLY FINANCIAL RESULTS
Adjusted EBITDA and funds provided by operations are additional GAAP measures. Please see page 5 for more information.
2012 – quarters ended
(thousands of $, except per share amounts)
Revenue
Adjusted EBITDA
Net earnings (loss)
Per basic share
Per diluted share
Funds provided by operations
Cash provided by operations
Dividends per share
2011 – quarters ended
(thousands of $, except per share amounts)
Revenue
Adjusted EBITDA
Net earnings
Per basic share
Per diluted share
Funds provided by operations
Cash provided by operations
March 31
June 30
September 30
December 31
640,066
245,574
111,081
0.40
0.39
247,739
162,440
–
381,966
97,192
18,261
0.07
0.06
62,373
275,346
–
484,761
151,000
39,357
0.14
0.14
146,124
61,183
–
533,948
177,026
(116,339)
(0.42)
(0.42)
142,576
136,317
0.05
March 31
June 30
September 30
December 31
525,350
186,411
65,560
0.24
0.23
192,337
117,322
345,325
92,566
16,403
0.06
0.06
70,766
176,312
492,944
186,248
83,468
0.30
0.29
73,182
20,281
587,408
229,839
28,046
0.10
0.10
256,103
218,857
The Canadian drilling industry is affected by weather patterns. Activity peaks in the winter, in the fourth and first quarters.
In the spring, wet weather and the spring thaw make the ground unstable. Government road bans restrict the movement
of rigs and other heavy equipment, reducing activity in the second quarter. This leads to quarterly fluctuations in operating
results and requirements for working capital. Activity in the U.S. does not have the same seasonality.
We had a net loss in the fourth quarter of $116 million or $0.42 per diluted share, compared to net earnings of $28 million
in the fourth quarter of 2011. This reflects the impact of charges associated with asset decommissioning and a goodwill
impairment which, combined, reduced net earnings by $179 million and net earnings per diluted share by $0.63 compared
to the fourth quarter of 2011.
Revenue and Adjusted EBITDA were both lower in the fourth quarter compared to the fourth quarter of 2011: revenue
was $534 million compared to $587 million in the fourth quarter of 2011; Adjusted EBITDA was $177 million compared to
$230 million in the fourth quarter of 2011. These results were mainly because of lower activity across most business lines
and higher operating costs, partially offset by higher pricing.
Our Adjusted EBITDA margin was 33% this quarter, compared to 39% in the fourth quarter of 2011. The decrease in Adjusted
EBITDA margin was mainly due to higher average costs and lower equipment utilization in both Canada and the U.S.
Operating costs were higher because of labour related costs and higher operating costs internationally. Our portfolio of
term customer contracts, a highly variable operating cost structure and economies achieved through vertical integration of
the supply chain all help us manage our Adjusted EBITDA margin.
Drilling rig utilization days (drilling days plus move days) in Canada were 8,242 this quarter, or 23% lower than the fourth
quarter of 2011. Drilling rig utilization days in the U.S. were 8,014 this quarter, or 19% lower than the fourth quarter of 2011.
This was the result of lower customer demand as customers conserved cash and deferred drilling programs into 2013.
Precision Drilling Corporation 2012 Annual Report
33
The majority of activity was from oil and liquids-rich natural gas related plays. We averaged a total of 185 rigs working in the
quarter (average 90 in Canada, 87 in the U.S. and eight internationally), compared to a total average 182 rigs in the third
quarter of 2012 and 225 rigs in the fourth quarter of 2011.
Service rig activity in the fourth quarter was 12% lower than the fourth quarter of 2011 (77,234 operating hours compared
to 88,131 hours in the fourth quarter of 2011).
Contract Drilling Services
Revenue and Adjusted EBITDA from Contract Drilling Services were both down in the fourth quarter compared to the
fourth quarter of 2011: revenue was $452 million, or 9% lower than the fourth quarter of 2011; Adjusted EBITDA was
$172 million, or 21% lower than the fourth quarter of 2011. These results were mainly because of lower drilling rig activity,
partially offset by higher average rates per day in Canada and the U.S. and higher revenue from our international contract
drilling operations.
Customer demand for oil and liquids-rich natural gas related drilling activity was down in the fourth quarter because oil
prices were down. Drilling rig revenue per utilization day in both Canada and the U.S. was up 10% over 2011. The increase
in average dayrates for Canada was the result of improved rig mix and solid demand for Tier 1 assets. In the United States
the majority of the increase was driven by higher turnkey activity.
In Canada, 41% of utilization days in the fourth quarter were generated from rigs under term contract, compared to 38% in
the fourth quarter of 2011. In the U.S., 68% of utilization days were generated from rigs under term contract as compared to
79% in the fourth quarter of 2011. At the end of the quarter, we had 55 drilling rigs working under term contracts in Canada
and 54 in the U.S.
Operating costs were 60% of revenue for the quarter, or six percentage points higher than the fourth quarter of 2011 because
costs were higher internationally, labour related costs were higher and activity was lower, so fixed costs were spread over a
lower revenue base. Operating costs per day in Canada were higher than the fourth quarter of 2011 mainly because crew
wage expenses were higher. Operating costs per day in the United States were higher than in the fourth quarter of 2011
mainly because of higher proportionate turnkey activity as well as higher labour related and overall operating costs. Labour
rate increases are typically recovered through higher dayrates.
We decommissioned 52 rigs in the fourth quarter (22 in Canada and 30 in the U.S.) and recorded an impairment charge
of $192 million. Quarterly depreciation increased 25% over the fourth quarter of 2011. As discussed in our MD&A dated
December 31, 2011, we changed our depreciation policy on certain Tier 3 rigs from the unit of production method to
straight-line over four years, which increased depreciation by approximately $5 million in the fourth quarter of 2012.
Higher utilization of our Tier 1 rigs, losses on asset disposals and depreciation from the growth in directional drilling and
international contract drilling have also increased depreciation.
We use the unit of production method of calculating depreciation for our contract drilling operations except for certain
PSST equipment and directional drilling equipment, where we use the straight-line method.
Completion and Production Services
Revenue and Adjusted EBITDA from Completion and Production Services were both down compared to the fourth quarter
of 2011: revenue was $85 million or 11% lower than the fourth quarter of 2011; Adjusted EBITDA was $22 million or 34%
lower than the fourth quarter of 2011. These results are mainly because customers reduced spending in response to
greater economic uncertainty, which reduced activity across all service lines.
Well servicing activity in the fourth quarter was 12% lower than the fourth quarter of 2011 (77,234 operating hours and
utilization of 39%, compared to 88,131 hours and utilization of 43%). Results were down because of reduced completion
and production work on oil wells. Approximately 95% of the fourth quarter service rig activity was oil related. Our rental
division activity in the fourth quarter was 38% lower than the fourth quarter of 2011 mainly because completion and
frac-related activity was down industry-wide, offset by new equipment added to the fleet.
34
Management’s Discussion and Analysis
Average service rig revenue in the fourth quarter was $740, or $9 per operating hour higher than the fourth quarter of 2011
because our coil tubing operations, which operate at higher rates, started in 2012.
Operating costs as a percentage of revenue increased to 70% in the fourth quarter of 2012, from 61% in the fourth quarter
of 2011. Operating costs per service rig operating hour were higher than in the fourth quarter of 2011 mainly because fuel
costs were higher, and because of the new coil tubing operations.
Depreciation in the fourth quarter of 2012 was 33% higher than the fourth quarter of 2011 because depreciation expense
per unit associated with new equipment was higher, and we incurred losses on asset disposals. We use the straight-line
method of calculating depreciation for our completion and production lines, except for the well servicing division, where
we use the unit of production method.
Consolidated
General and administrative expenses were $30 million in the fourth quarter, or $6 million lower than the fourth quarter of
2011 because of lower costs associated with declines in activity, combined with lower incentive compensation costs tied
to the price of our common shares.
Net finance charges were $22 million in the fourth quarter, or $3 million higher than the fourth quarter of 2011 mainly
because of a non-recurring items in 2011.
Capital expenditures were $187 million in the fourth quarter, compared to $328 million in the fourth quarter of 2011.
Spending in the fourth quarter of 2012 included:
$123 million – to expand the underlying asset base
$23 million – to upgrade existing equipment
$41 million – spending on maintenance and infrastructure capital.
Precision Drilling Corporation 2012 Annual Report
35
Financial Condition
The oilfield services business is inherently cyclical. To manage this, we focus on maintaining a strong balance sheet so
we have the financial flexibility we need to continue to manage our growth and cash flow, no matter where we are in the
business cycle.
We apply a disciplined approach to managing and tracking the results of our operations to keep costs down. We maintain
a variable cost structure so we can be responsive to changing competition and demand. And we invest in our fleet to make
sure we remain competitive.
Term contracts provide more certainty of future revenues and return of capital on our investments.
Liquidity
As at December 31, 2012 our liquidity is supported by a cash balance of $153 million, a senior secured credit facility of
US$850 million, operating facilities totaling approximately $55 million and a $25 million secured facility for letters of credit.
At December 31, 2012, we had approximately $1,290 million (2011 – $1,268 million) outstanding under our secured and
unsecured credit facilities. Our secured facility includes financial ratio covenants that are tested quarterly. We’re compliant
with these covenants and expect to remain compliant.
We ended 2012 with a long-term debt to long-term debt plus equity ratio of 0.36 (compared to 0.37 in 2011) and a ratio of
long-term debt to cash provided by operations of 1.92 (compared to 2.33 in 2011).
The current blended cash interest cost of our debt is about 6.6%.
Ratios and key financial indicators
We evaluate the relative strength of our financial position by monitoring our working capital, debt ratios and liquidity.
We also monitor returns on capital and link our executives’ incentive compensation to the returns we generate, compared
to our peers.
36
Management’s Discussion and Analysis
Financial position and ratios
(in thousands of $, except ratios)
Working capital (includes current portion of long-term debt)
Working capital ratio
Long-term debt
Total long-term financial liabilities
Total assets
Enterprise value
(share price x number of shares outstanding + long-term debt
– working capital – see page 40)
Long-term debt to long-term debt plus equity
Long-term debt to cash provided by operations
Long-term debt to Adjusted EBITDA
Long-term debt to enterprise value
December 31,
2012
December 31,
2011
December 31,
2010
278,021
1.7
1,218,796
1,245,290
4,300,263
3,213,406
0.36
1.92
1.82
0.38
610,429
2.4
1,239,616
1,267,040
4,427,874
3,528,046
0.37
2.33
1.78
0.35
458,003
3.1
804,494
834,813
3,564,540
2,993,083
0.29
2.63
1.85
0.27
Credit rating
Credit ratings affect our ability to obtain short and long-term financing, the cost of this financing, and our ability to engage
in certain business activities cost-effectively.
Corporate credit rating
Senior secured bank credit facility rating
Senior unsecured credit rating
Moody’s
Ba1
S&P
BB+
Not rated
Not rated
Ba1
BB
CAPITAL MANAGEMENT
To maintain and grow our business, we invest both growth and sustaining capital. We base expansion capital decisions
on return on capital employed and payback and mitigate the risk that we may not be able to fully recover our capital by
requiring multi-year term contracts for new build rigs.
We base our maintenance capital decisions on actual activity levels, using key financial indicators that we express on a
per operating day or per operating hour basis. Sourcing internally (through our manufacturing and supply divisions) helps
keep our maintenance capital costs as low as possible.
Foreign exchange risk
Our U.S. and international operations have revenue, expenses, assets and liabilities denominated in currencies other than
the Canadian dollar (mostly in US dollars and currencies that are pegged to the US dollar). That means that changes
in currency exchange rates affect our income statement, balance sheet and statement of cash flow. We manage this
risk by matching the currency of our debt obligations with the currency of cash flows generated by the operations the
debt supports.
Interest rate risk
We minimize interest rate risk by staggering long-term debt maturities.
Hedge of investments in U.S. operations
We have designated our U.S. dollar denominated long-term debt as a hedge of our investment in our operations in the
U.S. We recognize the effective amount of this hedge (net of tax) in other comprehensive income. We recognize ineffective
amounts (if any) in earnings.
Precision Drilling Corporation 2012 Annual Report
37
SOURCES AND USES OF CASH
At December 31 (thousands of $)
Cash from operations
Cash used in investing
Surplus (deficit)
Cash from (used in) financing
Effect of exchange rate changes on cash
Net cash generated (used)
2012
635,286
(930,121)
(294,835)
(14,899)
(4,974)
(314,708)
2011
532,772
(715,462)
(182,690)
366,887
26,448
210,645
Cash from operations
In 2012, we generated cash from operations of $635 million (compared to $533 million in 2011).
Investing activity
We made capital investments of $868 million in 2012:
$596 million in expansion capital expenditures
$130 million in upgrade capital expenditures
$142 million in maintenance and infrastructure capital expenditures.
Of the $868 million in capital expenditures in 2012, $751 was for the Contract Drilling segment, $109 million for the
Completion and Production segment and $8 million for the Corporate and other segment.
Expansion and upgrade capital includes the cost of long lead items purchased for our capital inventory, like top drives, drill
pipe, control systems, engines and other items we can use to complete new build projects or upgrade our rigs in North
America and internationally.
Financing activity
With the exception of foreign exchange translation, our net borrowings in 2012 were the same as in 2011 (2011 increased
by $407 million over 2010).
Our senior secured facility was increased from US$550 million to US$850 million effective August 30, 2012, and the
US$100 million “accordion” feature was increased to US$250 million, allowing the facility to be increased to US$1.1 billion
with additional lender commitments. The term was extended to five years and several negative covenants were relaxed.
Our operating facility was increased from $25 million to $40 million effective August 30, 2012, and remains undrawn except
for $19 million in outstanding letters of credit. Our operating facility of US$15 million remains undrawn as at December 31,
2012. Effective September 27, 2012, we entered into a new US$25 million demand facility for letters of credit and it
remained undrawn as at December 31, 2012.
38
Management’s Discussion and Analysis
Debt
At December 31, 2012, we had approximately $925 million in secured and operating credit facilities, and $1,245 million in
senior unsecured notes (maturing in 2019, 2020 and 2021).
Amount
Availability
Used for
Maturity
Senior facility (secured)
US$850 million (extendible, revolving
term credit facility with US$250 million
accordion feature)
Operating facilities (secured)
$40 million
Undrawn, except US$27 million
in outstanding letters of credit
General corporate purposes
November 17, 2017
Undrawn, except $19 million
in outstanding letters of credit
Letters of credit and general
corporate purposes
US$15 million
Undrawn
Demand letter of credit facility (secured)
Short term working capital
requirements
US$25 million
Undrawn
Letters of credit
Senior notes (unsecured)
$200 million
US$650 million
US$400 million
Fully drawn
Fully drawn
Fully drawn
Debt repayment
Debt repayment and general
corporate purposes
Capital expenditures and
general corporate purposes
March 15, 2019
November 15, 2020
December 15, 2021
Contractual obligations
Our contractual obligations include both financial obligations (long-term debt and interest) and non-financial obligations
(new rig build commitments, operating leases and equity-based compensation for key executives and officers).
The table below shows the amounts of these obligations and when payments are due for each.
At December 31, 2012
(thousands of $)
Long-term
Interest on long-term debt
Rig construction
Operating leases
Contractual incentive plans1
Contingent purchase consideration
Total
Less than
1 year
–
81,710
68,120
15,561
16,260
52,915
234,566
Payments due (by period)
1-3 years
4-5 years
–
163,421
36,443
25,389
18,622
–
243,875
–
163,421
–
16,509
–
–
More than
5 years
1,244,645
241,273
–
23,161
–
–
Total
1,244,645
649,825
104,563
80,620
34,882
52,915
179,930
1,509,079
2,167,450
1 Includes amounts we have not yet accrued but are likely to pay at the end of the contract term. Our long-term incentive plans compensate officers and key employees through cash
payments when their awards vest. Equity-based compensation amounts are shown based on a share price of $8.22 at December 31, 2012.
Precision Drilling Corporation 2012 Annual Report
39
CAPITAL STRUCTURE
Shares outstanding
Shares outstanding
Deferred shares outstanding
Warrants outstanding
Share options outstanding
March 8,
2013
December 31,
2012
December 31,
2011
December 31,
2010
276,502,155
276,475,770
276,081,797
275,686,676
335,946
15,000,000
8,593,251
335,946
15,000,000
6,413,777
417,495
15,000,000
5,154,123
393,717
15,000,000
3,723,123
You can find more information about our capital structure in our annual information form, available online at our corporate
website and on SEDAR.
Common shares
Our articles of amalgamation allow us to issue an unlimited number of common shares. As of December 2012, we issue
an annual dividend paid to our shareholders quarterly.
Warrants
On April 22, 2009, we issued 15,000,000 purchase warrants under a private placement. Each warrant can be exercised
for one common share at a price of $3.22 per common share for five years from the date of issue. No warrants have been
exercised as at December 31, 2012.
Preferred shares
We can issue preferred shares in one or more series. The number of preferred shares that may be authorized for issue at
any time cannot exceed more than half of the number of issued and outstanding common shares. We don’t currently have
any preferred shares issued.
Enterprise value
(in thousands of $, except shares outstanding and per share amounts)
Shares outstanding
Year-end share price on the TSX
Shares at market
Long-term debt
Less working capital
Enterprise value
December 31,
2012
December 31,
2011
December 31,
2010
276,475,770
276,081,797
275,686,676
8.22
2,272,631
1,218,796
(278,021)
3,213,406
10.50
2,898,859
1,239,616
(610,429)
3,528,046
9.60
2,646,592
804,494
(458,003)
2,993,083
40
Management’s Discussion and Analysis
Critical Accounting Estimates
Because of the nature of our business, we are required to make estimates about the future that affect the amount of
assets, liabilities, revenues and expenses we report. Estimates are based on our past experience, our best judgment and
assumptions we think are reasonable.
You’ll find all of our significant accounting policies in Note 3 to the consolidated financial statements. We believe the
following are the most difficult, subjective or complex judgments, and are the most critical to how we report our financial
position and results of operations:
allowance for doubtful accounts receivable
impairment of long-lived assets
depreciation and amortization
income taxes.
Allowance for doubtful accounts receivable
We evaluate the creditworthiness of our customers on an ongoing basis and grant credit based on the customer’s past
payment history, financial condition and expected conditions in the industry. We monitor customer payments regularly
and include a provision for doubtful accounts based on industry conditions and the state of specific accounts. If we have
concerns about a customer’s creditworthiness, we may require cash or a letter of credit or deposit before we provide
services, or we may choose not to provide services.
Bad debt losses to date have been within expected limits and generally related to specific customer circumstances, but
our customers’ ability to fulfill their payment obligations to us may change suddenly and without notice. The cyclical nature
of the oil and gas industry, continuing uncertainty in debt and equity markets, and the risk that a customer may not be
successful in finding the oil and gas reserves they’re looking for can all affect their ability to pay us as expected.
Impairment of long-lived assets
Long-lived assets (property, plant and equipment, intangibles and goodwill) make up the majority of our assets. We review
the carrying value of these assets for impairment periodically or whenever events or changes in circumstances suggest
that we may not be able to recover the carrying amounts of these assets.
For property, plant and equipment, we estimate the future cash flows we would gain from using these assets based on
assumptions about future business conditions and developments in technology. These assumptions may change.
Precision Drilling Corporation 2012 Annual Report
41
A cash generating unit (CGU) is the smallest identifiable group of assets that generates cash independently of inflows from
other assets or groups. We use judgment to aggregate assets into cash generating units and allocate goodwill to them. To
test goodwill for impairment, we calculate the recoverable amount of the CGU or groups of CGUs the goodwill has been
allocated to. This involves estimating future cash flows and applying an appropriate discount rate.
We assessed the carrying value of our long-lived assets for impairment in 2012 and 2011 and concluded:
the goodwill associated with Canada directional drilling was impaired
certain of our drilling rigs were obsolete and would be removed from our operating fleet.
Depreciation and amortization
We depreciate and amortize our property, plant and equipment and intangible assets based on estimates we make about
their useful lives and salvage value. We base these estimates on data and information from different sources, including
vendors, our own historical experience and industry practice. Our estimates may change based on market conditions,
future experience or changes technology.
We assign independent values to costly parts of our drilling rig equipment and depreciate and amortize these parts
separately (called componentization). We use our judgment to decide which parts of a rig represent a significant cost
relative to the entire item, and to assess whether different components have similar consumption patterns and useful lives.
Income taxes
Deferred tax assets and liabilities represent temporary differences between the carrying amounts of our assets and
liabilities (as shown in our financial statements) and their tax bases. They reflect our estimates and assumptions about
when the differences will be reversed, what the effect on our balance sheet will be and what future tax rates will be applied
to the reversals.
We have tax benefits from previous transactions that we expect to be able to use to reduce our income taxes in the future.
If our future cash flows and taxable income differ significantly from what we’ve estimated, or if tax laws in the jurisdictions
where we operate change, amounts we’ve recorded as deferred taxes on our balance sheet could change.
Interpreting complex tax regulations, changes in tax laws, and the amount and timing of future taxable income is
challenging and uncertain. If actual results are different from our assumptions (or our assumptions change) we may need
to adjust the income and expenses we’ve recorded related to taxes. We make provisions for the possible consequences
of future tax audits using reasonable estimates. We base the amount of these provisions on our past experience with tax
audits and differences in interpreting tax regulations in the countries where we operate. See Note 24 to our consolidated
financial statements.
42
Management’s Discussion and Analysis
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to provide reasonable assurance that the information we are required
to disclose in the reports we file with (or submit to) securities regulatory authorities are recorded, processed, summarized
and reported within the time periods specified by Canadian and U.S. securities laws. This includes gathering information
and communicating it to management (including the President and Chief Executive Officer and the Chief Financial Officer)
to allow them to make timely decisions about required disclosure.
We evaluated the effectiveness of our disclosure controls and procedures (as defined under the rules adopted by
the Canadian securities regulatory authorities and by the United States Securities and Exchange Commission) as of
December 31, 2012.
Management (including the President and Chief Executive Officer and Chief Financial Officer) supervised and participated
in the evaluation and concluded that the design and operation of our disclosure controls and procedures were effective as
of that date. However, control systems can only provide reasonable, not absolute, assurance that information will be timely,
complete and accurate, and we cannot guarantee that errors and fraud will not occur.
During the fourth quarter of 2012, there were no changes in internal control over financial reporting that materially affected
(or are reasonably likely to materially affect) our internal control over financial reporting.
Corporate Governance
At Precision, we believe that a strong culture of corporate governance and ethical behavior in decision-making is
fundamental to the way we do business.
We have a strong board made up of directors with a history of achievement, and an effective mix of skills, knowledge and
business experience. The directors oversee the conduct of our business, provide oversight and support our future growth.
They also monitor regulatory developments in Canada and the U.S. to keep abreast of developments in governance and
enhance transparency of our corporate disclosure.
William T. Donovan, B.Sc., MBA
Brian J. Gibson, MBA, CFA, ICD.D (Institute of Corporate Directors)
Robert J. S. Gibson, ICD.D (Institute of Corporate Directors)
Allen R. Hagerman, FCA, B. Comm, MBA, CF (Canadian Institute of Chartered Accountants),
ICD.D (Institute of Corporate Directors)
Stephen J. J. Letwin, B.Sc, MBA, CGA
Kevin O. Meyers, Ph.D. (chemical engineering), B.A.
Patrick M. Murray, B.Sc. (Accounting), MBA
Kevin A. Neveu, B.Sc, P.Eng
Robert L. Phillips, B.Sc. (chemical engineering), LLB
Precision Drilling Corporation 2012 Annual Report
43
Management’s Report to the Shareholders
The accompanying consolidated financial statements and all information in the Annual Report are the responsibility of management.
The consolidated financial statements have been prepared by management in accordance with the accounting policies in the
notes to the consolidated 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 consolidated
financial statements have been prepared within acceptable limits of materiality, and are in accordance with International Financial
Reporting Standards (“IFRS”) appropriate in the circumstances. The financial information elsewhere in the Annual Report has
been reviewed to ensure consistency with that in the consolidated financial statements.
Management has prepared Management’s Discussion and Analysis (“MD&A”). The MD&A is based upon Precision Drilling
Corporation’s (the “Corporation”) financial results prepared in accordance with IFRS. The MD&A compares the audited financial results
for the years ended December 31, 2012 to December 31, 2011 and the years ended December 31, 2011 to December 31, 2010.
Management is responsible for establishing and maintaining adequate internal control over the Corporation’s financial reporting
and is supported by an internal audit function who conducts periodic testing of these controls. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of consolidated financial statements for external reporting purposes in accordance with IFRS. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined
to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with direction from our principal executive officer and principal financial and accounting officer,
management conducted an evaluation of the effectiveness of the Corporation’s internal control over financial reporting.
Management’s evaluation of internal control over financial reporting was based on the Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation,
management concluded that the Corporation’s internal control over financial reporting was effective as of December 31, 2012.
Also management determined that there were no material weaknesses in the Corporation’s internal control over financial reporting
as of December 31, 2012.
KPMG LLP, an independent firm of Chartered Accountants, was engaged, as approved by a vote of shareholders at the Corporation’s
most recent annual meeting, to audit the consolidated financial statements and provide an independent professional opinion.
KPMG LLP completed an audit of the design and effectiveness of the Corporation’s internal control over financial reporting as of
December 31, 2012, as stated in their report included herein and expressed an unqualified opinion on design and effectiveness
of internal control over financial reporting as of December 31, 2012.
The Audit Committee of the Board of Directors, which is comprised of six independent directors who are not employees of the
Corporation, provides oversight to the financial reporting process. Integral to this process is the Audit Committee’s review and
discussion with management and the external auditors of the quarterly and annual financial statements and reports prior to their
respective release. The Audit Committee is also responsible for reviewing and discussing with management and the external
auditors major issues as to the adequacy of the Corporation’s internal controls. The external auditors have unrestricted access to
the Audit Committee to discuss their audit and related matters. The consolidated financial statements have been approved by the
Board of Directors of Precision Drilling Corporation and its Audit Committee.
Kevin A. Neveu
President and
Chief Executive Officer
Precision Drilling Corporation
Robert J. McNally
Executive Vice President and
Chief Financial Officer
Precision Drilling Corporation
March 8, 2013
March 8, 2013
44
Consolidated Financial Statements
Independent Auditors’ Report of Registered
Public Accounting Firm
To the Shareholders and Board of Directors of Precision Drilling Corporation
We have audited the accompanying consolidated financial statements of Precision Drilling Corporation (the “Corporation”), which
comprise the consolidated statements of financial position as at December 31, 2012 and December 31, 2011, the consolidated
statements of earnings, comprehensive income, changes in equity and cash flow for the years then ended, and notes, comprising
a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance
with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal
control as management determines is necessary to enable the preparation of consolidated financial statements that are free from
material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our
audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement
of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal
control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies
used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the
Corporation as at December 31, 2012 and December 31, 2011, and its consolidated financial performance and its consolidated
cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board.
Other Matter
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Corporation’s internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated March 8, 2013 expressed an unqualified opinion on the effectiveness of the Corporation’s internal control
over financial reporting.
Chartered Accountants
Calgary, Canada
March 8, 2013
Precision Drilling Corporation 2012 Annual Report
45
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Precision Drilling Corporation
We have audited Precision Drilling Corporation’s (the “Corporation”) internal control over financial reporting as of December 31,
2012, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Corporation’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report to the Shareholders. Our responsibility is to express an opinion on the
Corporation’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
An entity’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. An entity’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the entity
are being made only in accordance with authorizations of management and directors of the entity; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2012, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance sheets of the Corporation as of December 31,
2012 and December 31, 2011, and the related consolidated statements of income, shareholders’ equity and cash flow for the years
then ended, and our report dated March 8, 2013 expressed an unqualified opinion on those consolidated financial statements.
Chartered Accountants
Calgary, Canada
March 8, 2013
46
Consolidated Financial Statements
Consolidated Statements of Financial Position
(Stated in thousands of Canadian dollars)
ASSETS
Current assets:
Cash
Accounts receivable
Inventory
Total current assets
Non-current assets:
Income tax recoverable
Property, plant and equipment
Intangibles
Goodwill
Total non-current assets
Total assets
LIABILITIES AND EQUITY
Current liabilities:
December 31,
2012
December 31,
2011
$
152,768
$
509,547
13,787
676,102
64,579
3,242,929
6,101
310,552
467,476
576,243
7,163
1,050,882
64,579
2,942,296
6,471
363,646
3,624,161
3,376,992
$
4,300,263
$
4,427,874
(Note 23)
(Note 4)
(Note 5)
(Note 6)
Accounts payable and accrued liabilities
(Note 23)
$
333,893
$
436,667
Income tax payable
Total current liabilities
Non-current liabilities:
Share based compensation
Provisions and other
Long-term debt
Deferred tax liabilities
Total non-current liabilities
Contingencies and guarantees
Commitments
Shareholders’ equity:
Shareholders’ capital
Contributed surplus
Deficit
(Note 8)
(Note 9)
(Note 10)
(Note 11)
(Note 24)
(Note 17)
(Note 12)
Accumulated other comprehensive loss
(Note 13)
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
Approved by the Board of Directors:
64,188
398,081
8,676
17,818
1,218,796
485,592
1,730,882
3,786
440,453
11,303
16,121
1,239,616
587,790
1,854,830
2,251,982
2,248,217
24,474
(44,621)
(60,535)
18,396
(83,160)
(50,862)
2,171,300
2,132,591
$
4,300,263
$
4,427,874
Allen R. Hagerman
Director
Patrick M. Murray
Director
Precision Drilling Corporation 2012 Annual Report
47
Consolidated Statements of Earnings
Years ended December 31,
(Stated in thousands of Canadian dollars, except per share amounts)
Revenue
Expenses:
Operating
General and administrative
Earnings before income taxes, finance charges, foreign
exchange, impairment of goodwill, loss on asset
decommissioning and depreciation and amortization
Depreciation and amortization
Loss on asset decommissioning
Operating earnings
Impairment of goodwill
Foreign exchange
Finances charges
Earnings before tax
Income taxes:
Current
Deferred
Net earnings
Earnings per share:
Basic
Diluted
(Note 23)
(Note 23)
(Note 4)
(Note 14)
(Note 11)
(Note 18)
2012
2011
$
2,040,741
$
1,951,027
1,243,301
126,648
1,131,022
124,941
670,792
307,525
192,469
170,798
52,539
3,753
86,829
27,677
70,576
(95,259)
(24,683)
52,360
0.19
0.18
$
$
$
$
$
$
695,064
251,483
114,893
328,688
–
(23,674)
111,578
240,784
43,779
3,528
47,307
193,477
0.70
0.67
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
Years ended December 31,
(Stated in thousands of Canadian dollars)
Net earnings
Unrealized gain (loss) on translation of assets and liabilities
of operations denominated in foreign currency
Foreign exchange gain (loss) on net investment
hedge with U.S. denominated debt, net of tax
($nil; 2011 – $2,148 recovery)
Comprehensive income
See accompanying notes to consolidated financial statements.
48
Consolidated Financial Statements
2012
2011
$
52,360
$
193,477
(32,878)
33,050
23,205
42,687
(37,692)
$
188,835
$
Consolidated Statements of Cash Flow
Years ended December 31,
(Stated in thousands of Canadian dollars)
Cash provided by (used in):
Operations:
Net earnings
Adjustments for:
Long-term compensation plans
Depreciation and amortization
Loss on asset decommissioning
Impairment of goodwill
Foreign exchange
Finance charges
Income taxes
Other
Income taxes paid
Income taxes recovered
Interest paid
Interest received
Funds provided by operations
Changes in non-cash working capital balances
(Note 23)
Investments:
Business acquisitions, net of cash acquired
Purchase of property, plant and equipment
Proceeds on sale of property, plant and equipment
Changes in non-cash working capital balances
(Note 19)
(Note 4)
(Note 23)
Financing:
Repayment of long-term debt
Premium paid on settlement of unsecured senior notes
Debt issue costs
Debt facility amendment costs
Dividends paid
Increase in long-term debt
Issuance of common shares on the exercise of options
Changes in non-cash working capital balances
(Note 23)
Effect of exchange rate changes on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
See accompanying notes to consolidated financial statements.
2012
2011
$
52,360
$
193,477
19,350
307,525
192,469
52,539
4,403
86,829
(24,683)
1,018
(10,403)
721
(85,251)
1,935
598,812
36,474
635,286
(25)
(868,057)
31,423
(93,462)
(930,121)
–
–
(2,855)
(149)
(13,821)
–
1,926
–
20,555
251,483
114,893
–
(24,330)
111,578
47,307
(2,564)
(124,682)
82,883
(79,902)
1,690
592,388
(59,616)
532,772
(92,886)
(726,357)
15,983
87,798
(715,462)
(175,000)
(26,688)
(13,303)
(1,134)
–
581,520
2,238
(746)
(14,899)
366,887
(4,974)
(314,708)
467,476
$
152,768
$
26,448
210,645
256,831
467,476
Precision Drilling Corporation 2012 Annual Report
49
Consolidated Statements of Changes in Equity
Shareholders’
capital
Contributed
surplus
Accumulated
other
comprehensive
loss (Note 13)
Deficit
Total equity
$ 2,248,217
$
18,396
$
(50,862)
$
(83,160)
$ 2,132,591
(Stated in thousands of Canadian dollars)
Balance at January 1, 2012
Net earnings for the period
Other comprehensive loss for
the period
Dividends
–
–
–
–
–
–
Share options exercised
(Note 12)
3,050
(1,124)
Issued on redemption of
non-management directors DSUs
706
(706)
Issued on waiver of right to dissent
by dissenting unitholder
Share based compensation expense
(Note 8)
9
–
(3)
7,911
–
52,360
52,360
(9,673)
–
–
–
–
–
–
(13,821)
–
–
–
–
(9,673)
(13,821)
1,926
–
6
7,911
Balance at December 31, 2012
$ 2,251,982
$
24,474
$
(60,535)
$
(44,621)
$ 2,171,300
(Stated in thousands of Canadian dollars)
Balance at January 1, 2011
Net earnings for the period
Other comprehensive loss for
the period
Shareholders’
capital
Contributed
surplus
Accumulated
other
comprehensive
loss (Note 13)
Deficit
Total equity
$ 2,244,417
$
11,266
$
(46,220)
$
(276,637)
$ 1,932,826
–
–
–
–
–
193,477
193,477
(4,642)
–
–
–
–
–
–
–
(4,642)
2,238
–
8,692
Share options exercised
(Note 12)
3,416
(1,178)
Issued on redemption of
non-management directors DSUs
Share based compensation expense
(Note 8)
384
–
(384)
8,692
Balance at December 31, 2011
$ 2,248,217
$
18,396
$
(50,862)
$
(83,160)
$ 2,132,591
See accompanying notes to consolidated financial statements.
50
Consolidated Financial Statements
Notes to Consolidated Financial Statements
(Tabular amounts are stated in thousands of Canadian dollars except share numbers and per share amounts)
NOTE 1. DESCRIPTION OF BUSINESS
Precision Drilling Corporation (“Precision” or the “Corporation”) is incorporated under the laws of the Province of Alberta, Canada
and is a provider of contract drilling and completion and production services primarily to oil and natural gas exploration and
production companies in Canada and the United States. The address of the registered office is 800, 525 – 8th Avenue S.W.,
Calgary, Alberta, Canada, T2P 1G1.
NOTE 2. BASIS OF PREPARATION
(a) Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards
(“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
These consolidated financial statements were authorized for issue by the Board of Directors on March 8, 2013.
(b) Basis of measurement
The consolidated financial statements have been prepared using the historical cost basis except as detailed in the Corporation’s
accounting policies in Note 3 and are presented in thousands of Canadian dollars.
(c) Use of estimates and judgments
The preparation of the consolidated financial statements requires management to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingencies. These estimates and
judgments are based on historical experience and on various other assumptions that are believed to be reasonable under
the circumstances. The estimation of anticipated future events involves uncertainty and, consequently, the estimates used in
preparation of the consolidated financial statements may change as future events unfold, more experience is acquired or the
Corporation’s operating environment changes. Significant estimates and judgments used in the preparation of the financial
statements are described in Note 3.
NOTE 3. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of consolidation
These consolidated financial statements include the accounts of the Corporation and all of its subsidiaries and partnerships
substantially all of which are wholly-owned. The financial statements of the subsidiaries are prepared for the same period as the
parent entity, using consistent accounting policies. All significant intercompany balances, transactions and any unrealized gains
and losses arising from intercompany transactions, have been eliminated.
Subsidiaries are entities (including special-purpose entities) controlled by the Corporation. Control exists when Precision has the
power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control,
potential voting rights that currently are exercisable are taken into account. The financial statements of subsidiaries are included
in the consolidated financial statements from the date that control commences until the date that control ceases.
Precision does not hold investments in any companies where it exerts significant influence and does not hold interests in any
special-purpose entities.
The acquisition method is used to account for acquisitions of subsidiaries and assets that meet the definition of a business under
IFRS. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred
or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business
combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair
value of the identifiable assets, liabilities and contingent liabilities acquired is recorded as goodwill. If the cost of acquisition is
less than the fair value of the net assets of the subsidiary acquired, the difference is recognized immediately in the statement of
earnings. Transaction costs, other than those associated with the issuance of debt or equity securities, that the Corporation incurs
in connection with a business combination are expensed as incurred.
Precision Drilling Corporation 2012 Annual Report
51
(b) Cash and cash equivalents
Cash and cash equivalents consist of cash and short-term investments with original maturities of three months or less.
(c) Inventory
Inventory is primarily comprised of operating supplies and is carried at the lower of average cost, being the cost to acquire the
inventory, and net realizable value. Inventory is charged to operating expenses as items are sold or consumed at the amount of
the average cost of the item.
(d) Property, plant and equipment
Property, plant and equipment are carried at cost, less accumulated depreciation and any accumulated impairment losses.
Cost includes an expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets
includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition
for their intended use and borrowing costs on qualifying assets.
The cost of replacing a part of an item of property, plant and equipment is recognized in the carrying amount of the item if it is
probable that the future economic benefits embodied within the part will flow to the Corporation, and its cost can be measured
reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing of property, plant and
equipment (repair and maintenance) are recognized in profit or loss as incurred.
Property, plant, and equipment are depreciated as follows:
Expected life
Salvage value
Basis of depreciation
Drilling rig equipment:
– Power & Tubulars
– Dynamic
– Structural
Service rig equipment
Drilling rig spare equipment
Service rig spare equipment
Rental equipment
Other equipment
Light duty vehicles
Heavy duty vehicles
Buildings
1,700 utilization days
3,400 utilization days
5,000 utilization days
24,000 service hours
up to 15 years
up to 15 years
10 to 15 years
3 to 10 years
4 years
7 to 10 years
10 to 20 years
–
–
20%
20%
–
–
0 to 25%
–
–
–
–
unit-of-production
unit-of-production
unit-of-production
unit-of-production
straight-line
straight-line
straight-line
straight-line
straight-line
straight-line
straight-line
Assets that are depreciated on a unit of production method that have less than 60 utilization days (drilling rig equipment) or 600
service hours (service rig equipment) in a rolling 12 month period are deemed to be idle and are depreciated at a rate of five
utilization days or 50 service hours per month until the asset exceeds the utilization threshold. Commencing January 1, 2012
certain drilling rigs are now depreciated on a straight-line basis over their estimated remaining economic life of four years (see
note 4).
Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from
disposal with the carrying amount of property, plant and equipment, and are recognized in the statements of earnings.
The estimated useful lives, residual values and methods or depreciation are reviewed annually, and adjusted prospectively if
appropriate.
(e) Intangibles
Intangible assets that are acquired by the Corporation with finite lives are initially recorded at estimated fair value and subsequently
measured at cost less accumulated amortization and any accumulated impairment losses.
Subsequent expenditures are capitalized only when it increases the future economic benefits of the specific asset to which
it relates.
52
Notes to Consolidated Financial Statements
Amortization is recognized in profit and loss using the straight-line method based over the estimated useful lives of the respective
assets as follows:
Customer relationships
Patents
Brand
1 to 5 years
10 years
1 to 5 years
The estimated useful lives and methods of amortization are reviewed annually, and adjusted prospectively if appropriate.
(f) Goodwill
Goodwill is the amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated
to the assets acquired, less liabilities assumed, based on their fair values.
If the fair value of the identifiable net assets acquired exceeds the fair value of the consideration, Precision reassesses whether
it has correctly identified and measured the assets acquired and liabilities assumed. If that excess remains after reassessment,
Precision recognizes the resulting gain in profit or loss on the acquisition date.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment
testing, goodwill acquired in a business combination is, from the acquisition date, attributed to the cash generating unit or groups
of cash generating units that are expected to benefit and as identified in the business combination.
(g) Impairment
(i) Financial assets
A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there
is any objective evidence that it is impaired. A financial asset is tested for impairment if objective evidence indicates that one
or more events have had a negative effect on the estimated future cash flows of that asset.
Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an
amount due to the Corporation on terms that the Corporation would not consider otherwise, and indications that a debtor will
enter bankruptcy. Precision considers evidence of impairment for receivables at both a specific asset and collective level. All
individually significant receivables are assessed for specific impairment. All significant receivables found not to be specifically
impaired are then collectively assessed for impairment by grouping together receivables with similar risk characteristics.
An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its
carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate.
Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are
assessed collectively in groups that share similar credit risk characteristics.
All impairment losses are recognized in profit or loss.
An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was
recognized. For financial assets measured at amortized cost the reversal is recognized in profit or loss.
(ii) Non-financial assets
The carrying amounts of the Corporation’s non-financial assets, other than inventories and deferred tax assets, are reviewed
at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the
asset’s recoverable amount is estimated. For goodwill and other intangible assets that have indefinite lives or that are not yet
available for use an impairment test is completed at the same time each year.
For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates
cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the
“cash-generating unit” or “CGU”). The recoverable amount of an asset or a CGU is the greater of its value in use and its fair
value less costs to sell.
In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount
rate that reflects current market assessments of the time value of money and the risks specific to the asset. Value in use
is generally computed by reference to the present value of the future cash flows expected to be derived from the cash
generating unit.
Precision Drilling Corporation 2012 Annual Report
53
An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount.
Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGU’s are allocated first to
reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amounts of the other assets
in the CGU on a pro rata basis.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior
years are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment
loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have
been determined, net of depreciation or amortization, if no impairment loss had been recognized.
(h) Borrowing costs
Interest and borrowing costs that are directly attributable to the acquisition, construction or production of assets that take a
substantial period of time to prepare for their intended use are capitalized as part of the cost of those assets. Capitalization ceases
during any extended period of suspension of construction or when substantially all activities necessary to prepare the asset for
its intended use are complete.
All other interest and borrowing costs are recognized in earnings in the period in which they are incurred.
(i) Income taxes
Income tax expense is recognized in net earnings except to the extent that it relates to items recognized directly in equity, in which
case it is recognized in equity.
Current tax is the expected tax payable or receivable on the taxable earnings or loss for the year, using tax rates enacted or
substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognized using the liability method, providing for temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized on
the initial recognition of assets or liabilities in a transaction that is not a business combination. In addition, deferred tax is not
recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax
rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or
substantively enacted by the reporting date. The effect of a change in tax rates on deferred tax assets and liabilities is recognized
in net earnings in the period that includes the date of enactment or substantive enactment. Deferred tax assets and liabilities are
offset if there is a legally enforceable right to offset and they relate to taxes levied by the same tax authority on the same taxable
entity, or on different tax entities that are expected to settle current tax liabilities and assets on a net basis or their tax assets and
liabilities will be realized simultaneously.
A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the
temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that
it is no longer probable that the related tax benefit will be realized.
(j) Revenue recognition
The Corporation’s services are generally sold based upon service orders or contracts with a customer that include fixed or
determinable prices based upon daily, hourly or job rates. Customer contract terms do not include provisions for significant
post-service delivery obligations. Revenue is recognized when services and equipment rentals are rendered and only when
collectability is reasonably assured. The Corporation also provides services under turnkey contracts whereby it drills a well to an
agreed upon depth under specified conditions for a fixed price, regardless of the time required or the problems encountered in
drilling the well. Revenue from turnkey drilling contracts is recognized using the percentage-of-completion method based upon
costs incurred to date and estimated total contract costs. Anticipated losses, if any, on uncompleted contracts are recorded at the
time the estimated costs exceed the contract revenue.
(k) Employee benefit plans
Precision sponsors various defined contribution retirement plans for its employees. The Corporation’s contributions to defined
contribution plans are expensed as employees earn the entitlement.
54
Notes to Consolidated Financial Statements
(l) Provisions
Provisions are recognized when the Corporation has a present obligation (legal or constructive) as a result of a past event, it is
probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate
can be made of the amount of the obligation.
The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end
of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured
using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.
(m) Share based incentive compensation plans
The Corporation has established several cash settled share based incentive compensation plans for officers, non-management
directors and other eligible employees. The fair values as estimated by management of the amounts payable to eligible
participants under these plans are recognized as an expense with a corresponding increase in liabilities over the period that the
participants become unconditionally entitled to payment. The recorded liability is re-measured at the end of each reporting period
until settlement with the resultant change to the fair value of the liability recognized in net earnings for the period. When the plans
are settled, the cash paid reduces the outstanding liability.
Prior to January 1, 2012, the Corporation had an equity settled deferred share unit plan whereby non-management directors of
Precision could elect to receive all or a portion of their compensation in fully-vested deferred share units. Compensation expense
was recognized based on the fair value price of the Corporation’s shares at the date of grant with a corresponding increase to
contributed surplus. Upon redemption of the deferred share units into common shares, the amount previously recognized in
contributed surplus is recorded as an increase to shareholders’ capital. The Corporation continues to have obligations under
this plan.
A share option plan has been established for certain eligible employees. Under this plan the fair value of share purchase options is
calculated at the date of grant using the Black-Scholes option pricing model and that value is recorded as compensation expense
over the grant’s vesting period with an offsetting credit to contributed surplus. A forfeiture rate is estimated on the grant date and
is adjusted to reflect the actual number of options that vest. Upon exercise of the equity purchase option, the associated amount
is reclassified from contributed surplus to shareholders’ capital. Consideration paid by employees upon exercise of the equity
purchase options is credited to shareholders’ capital.
(n) Foreign currency translation
Transactions of the Corporation’s individual entities are recorded in the currency of the primary economic environment in which
it operates (its functional currency). Transactions in currencies other than the entities functional currency are translated at rates
in effect at the time of the transaction. At each period end monetary assets and liabilities are translated at the prevailing period
end rates. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Gains and
losses are included in net earnings except for gains and losses on translation of long-term debt designated as a hedge of foreign
operations which are deferred and included in accumulated other comprehensive income.
For the purpose of preparing the Corporation’s consolidated financial statements, the financial statements of each foreign
operation that does not have a Canadian dollar functional currency are translated into Canadian dollars. Assets and liabilities
are translated at exchange rates in effect at the balance sheet date. Revenues and expenses are translated using average
exchange rates for the month of the respective transaction. Gains or losses resulting from these translation adjustments are
recognized initially in other comprehensive income and reclassified from equity to net earnings on disposal or partial disposal of
the foreign operation.
(o) Per share amounts
Basic per share amounts are calculated using the weighted average number of shares outstanding during the period. Diluted per
share amounts are calculated by using the treasury stock method for equity based compensation arrangements. The treasury
stock method assumes that any proceeds obtained on exercise of equity based compensation arrangements would be used to
purchase common shares at the average market price during the period. The weighted average number of shares outstanding
is then adjusted by the difference between the number of shares issued from the exercise of equity based compensation
arrangements and shares repurchased from the related proceeds.
Precision Drilling Corporation 2012 Annual Report
55
(p) Financial instruments
(i) Non-derivative financial assets
Financial assets are classified as either fair value through profit and loss, loans and receivables, held to maturity or available
for sale. Financial liabilities are classified as either fair value through profit and loss or other financial liabilities. Non-derivative
financial instruments are recognized initially at fair value plus, for instruments not at fair value through profit or loss, any
directly attributable transaction costs. Transaction costs attributable to fair value through profit or loss items are expensed
as incurred. Subsequent to initial recognition non-derivative financial instruments are measured based on their classification.
Accounts receivable are classified as “loans and receivables”. After their initial fair value measurement, they are measured
at amortized cost using the effective interest rate method. For the Corporation, the measured amount generally corresponds
to historical cost.
Accounts payable and accrued liabilities and long-term debt are classified as “other financial liabilities”. After their initial fair
value measurement, they are measured at amortized cost using the effective interest rate method. For the Corporation, the
measured amount generally corresponds to historical cost.
(ii) Derivative financial instruments
The Corporation may enter into certain financial derivative contracts in order to manage the exposure to market risks from
fluctuations in interest rates or exchange rates. These instruments are not used for trading or speculative purposes. Precision
has not designated its financial derivative contracts as effective accounting hedges, and thus not applied hedge accounting,
even though it considers certain financial contracts to be economic hedges. As a result, financial derivative contracts are
classified as fair value through profit or loss and are recorded on the balance sheet at estimated fair value. Transaction costs
are recognized in profit or loss when incurred.
Derivatives embedded in other instruments or host contracts are separated from the host contract and accounted for
separately when their economic characteristics and risks are not closely related to the host contract. Embedded derivatives
are recorded on the balance sheet at estimated fair value and changes in the fair value are recognized in earnings.
(q) Hedge accounting
The Corporation utilizes foreign currency long-term debt to hedge its exposure to changes in the carrying values of the Corporation’s
net investment in certain foreign operations as a result of changes in foreign exchange rates.
To be accounted for as a hedge, the foreign currency long-term debt must be designated and documented as a hedge, and
must be effective at inception and on an ongoing basis. The documentation defines the relationship between the foreign currency
long-term debt and the net investment in the foreign operations, as well as the Corporation’s risk management objective and
strategy for undertaking the hedging transaction. The Corporation formally assesses, both at inception and on an ongoing basis
whether the changes in fair value of the foreign currency long-term debt is highly effective in offsetting changes in fair value of the
net investment in the foreign operations. The portion of gains or losses on the hedging item that is determined to be an effective
hedge is recognized in other comprehensive income, net of tax, and is limited to the translation gain or loss on the net investment,
while the ineffective portion is recorded in earnings. If the hedging relationship is terminated or ceases to be effective, hedge
accounting is not applied to subsequent gains or losses. The amounts recognized in other comprehensive income are reclassified
to net earnings when corresponding exchange gains or losses arising from the translation of the foreign operation are recorded
in net earnings.
56
Notes to Consolidated Financial Statements
(r) Critical accounting estimates and judgments
(i) Allowance for doubtful accounts receivable
Precision performs ongoing credit evaluations of its customers and grants credit based upon past payment history, financial
condition and anticipated industry conditions. Customer payments are regularly monitored and a provision for doubtful
accounts is established based upon specific situations and overall industry conditions.
(ii) Property, plant and equipment
The componentization of Precision’s property, plant and equipment, specifically drilling rig equipment, is based upon
management’s judgment as to which components constitute a significant cost in relation to the entire item. The componentization
process also requires management’s judgment in assessing whether individual components have similar consumption
patterns and useful lives.
(iii) Depreciation and amortization
Precision’s property, plant and equipment and its intangible assets are depreciated and amortized based upon estimates
of useful lives and salvage values. These estimates are based on data and information from various sources including
vendors, industry practice and Precision’s own historical experience and may change as more experience is gained, market
conditions shift or new technological advancements are made.
(iv) Impairment of long-lived assets
Long-lived assets, which include property, plant and equipment, intangibles and goodwill, comprise the majority of
Precision’s assets. The carrying value of these assets is periodically reviewed for impairment or whenever events or changes
in circumstances indicate that their carrying amounts may not be recoverable. For property, plant and equipment this requires
Precision to forecast future cash flows to be derived from the utilization of these assets based upon assumptions about
future business conditions and technological developments. Significant, unanticipated changes to these assumptions could
require a provision for impairment in the future.
The recoverability of goodwill requires a calculation of the recoverable amount of the cash generating unit (“CGU”) or groups
of CGUs to which goodwill has been allocated. A CGU is the smallest identifiable group of assets that generates cash
inflows that are largely independent of the cash inflows from other assets or groups of assets. Judgment is required in the
aggregation of assets into CGUs. The recoverability calculation requires an estimation of the future cash flows from the CGU
or group of CGUs and the appropriate discount rate to be applied. Significant, unanticipated changes to these assumptions
could require a provision for impairment in the future.
(v) Income taxes
Deferred tax assets and liabilities arise from temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and contain estimates regarding the nature and timing of reversal
for the temporary differences as well as the future tax rates that will apply to those reversals. Deferred tax assets also
reflect the benefit of unutilized tax losses that can be carried forward to reduce income taxes in future years. Judgment
is required to assess the recoverability of these unutilized tax losses and requires Precision to make significant estimates
related to expectations of future taxable income. To the extent that future cash flows and taxable income differ significantly
from estimates, or changes in tax laws in jurisdictions in which Precision operates occurs, the amount recorded as deferred
taxes on the balance sheet could be impacted.
Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and
timing of future taxable income. Differences arising between the actual results and the assumptions made, or future changes
to such assumptions, could necessitate future adjustments to tax income and expense already recorded. The Corporation
establishes provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities of the
respective counties in which it operates. The amount of such provisions is based on various factors, such as experience
of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority.
(vi) Share based compensation
Precision uses an option pricing model to determine the fair value of certain share based compensation awards. Inputs to the
model requires estimates be made of interest rates, expected lives and forfeiture rates of the awards, and the price volatility
of the Corporation’s shares.
Precision Drilling Corporation 2012 Annual Report
57
(s) Accounting policies adopted January 1, 2013
The Corporation adopted IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosures of
Interests in Other Entities, as well as the consequential amendments to IAS 28 Investments in Associates and Joint Ventures
(2011) and IFRS 13 Fair Value Measurement, with a date of initial application of January 1, 2013.
The adoption of these standards on January 1, 2013 will have no impact on the amounts recorded in the Corporation’s financial
statements.
(i) IFRS 10 Consolidated Financial Statements
IFRS 10 introduces a new control model that is applicable to all investees; among other things, it requires the consolidation
of an investee if the Corporation controls the investee on the basis of de facto circumstances.
Subsidiaries are entities controlled by the Corporation. The Corporation controls an entity when it is exposed to, or has rights
to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the
entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control
commences until the date that control ceases.
(ii) IFRS 11 Joint Arrangements
Joint arrangements are arrangements of which the Corporation has joint control, established by contracts requiring
unanimous consent for decisions about the activities that significantly affect the arrangements’ returns. Under IFRS 11, joint
arrangements are classified as either joint operations or joint ventures depending on the Corporation’s rights to the assets
and obligations for the liabilities of the arrangements. When making this assessment, the Corporation considers the structure
of the arrangements, the legal form of any separate vehicles, the contractual terms of the arrangement and other facts and
circumstances. Previously, the structure of the arrangement was the sole focus of classification.
The Corporation has no joint arrangements under IFRS 11.
(iii) IFRS 12 Disclosures of Interests in Other Entities
IFRS 12 sets out certain disclosures that are required relating to interests in subsidiaries, associates, joint arrangements
and unconsolidated structured entities. The Corporation does not have any investments that are not consolidated nor has it
entered into any joint arrangements or structured entities.
The Corporation’s subsidiaries, as detailed in note 25, are all wholly owned. The determination of whether to consolidate
these entities did not involve any significant judgments or assumptions. There are no significant restrictions on the ability
of the Corporation to access or use the assets, and settle the liabilities of the Corporation and its subsidiaries except for
customary limitations in the Corporation’s credit facility.
(iv) IFRS 13 Fair Value Measurement
IFRS 13 defines fair value, sets out a single standard a framework for measuring fair value and the required disclosures about
fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.
IFRS 13 is applied prospectively to fair value measurements occurring on or after January 1, 2013. The additional disclosure
requirements of IFRS 13 are also applied prospectively and will be presented, as relevant, in the 2013 interim and annual
financial statements.
(t) Accounting policies not yet adopted
IFRS 9 Financial Instruments (2010), IFRS 9 Financial Instruments (2009)
IFRS 9 (2009) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2009),
financial assets are classified and measured based on the business model in which they are held and the characteristics of
their contractual cash flows. IFRS 9 (2010) introduces additions relating to financial liabilities. The IASB currently has an active
project to make limited amendments to the classification and measurement requirements of IFRS 9 and add new requirements to
address the impairment of financial assets and hedge accounting.
IFRS 9 (2010 and 2009) is effective for annual periods beginning on or after 1 January 2015 with early adoption permitted.
The Corporation is currently evaluating the impact of adopting this standard on its financial statements.
58
Notes to Consolidated Financial Statements
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Cost
Accumulated depreciation
Rig equipment
Rental equipment
Other equipment
Vehicles
Buildings
Assets under construction
Land
Cost
2012
2011
$
$
$
4,608,381
(1,365,452)
3,242,929
2,819,491
$
$
$
4,129,718
(1,187,422)
2,942,296
2,432,867
91,351
78,358
40,759
50,585
133,791
28,594
58,589
55,205
10,239
28,133
336,605
20,658
$
3,242,929
$
2,942,296
Rig
Equipment
Rental
Equipment
Other
Equipment
Vehicles
Buildings
Assets
under
construction
Land
Total
Balance, December 31,
2010
$ 3,138,513 $
89,894 $ 114,528 $
26,078 $
42,867 $
66,721 $
18,974 $ 3,497,575
Business acquisitions
23,650
–
377
–
1,271
–
357
25,655
119,973
11,617
22,486
4,966
3,848
562,196
1,271
726,357
Additions
Disposals
(23,054)
(2,110)
(3,948)
(3,287)
Asset decommissioning
(130,167)
–
–
Reclassifications
271,770
13,292
9,546
–
87
Removal of fully
–
–
–
–
–
(32,399)
–
(130,167)
39
(294,734)
–
–
depreciated assets
(1,923)
–
(676)
(60)
–
–
–
(2,659)
Effect of foreign
currency exchange
differences
Balance, December 31,
2011
Additions
Disposals
42,290
14
250
267
57
2,422
56
45,356
3,441,052
112,707
142,563
28,051
48,082
336,605
20,658 4,129,718
256,661
17,068
18,330
32,994
21,998
512,139
8,867
868,057
(26,796)
(920)
(8,311)
(2,267)
(971)
(38,405)
(857)
(78,527)
Asset decommissioning
(262,192)
–
–
–
–
–
–
(262,192)
Reclassifications
619,351
24,530
19,144
4,959
2,295
(670,279)
–
–
(71)
–
–
–
–
–
–
(71)
Removal of fully
depreciated assets
Effect of foreign
currency exchange
differences
Balance, December 31,
2012
(41,333)
(1,034)
(18)
(541)
665
(6,269)
(74)
(48,604)
$ 3,986,743 $ 152,351 $ 171,637 $
63,196 $
72,069 $ 133,791 $
28,594 $ 4,608,381
Precision Drilling Corporation 2012 Annual Report
59
Removal of fully
depreciated assets
Effect of foreign
currency exchange
differences
Balance, December 31,
2012
Accumulated Depreciation
Rig
Equipment
Rental
Equipment
Other
Equipment
Vehicles
Buildings
Assets
under
construction
Land
Total
Balance, December 31,
2010
$ 799,305 $
49,079 $
82,466 $
16,704 $
17,623 $
– $
– $ 965,177
Depreciation expense
231,415
5,542
10,073
3,939
2,285
Disposals
(12,580)
(1,812)
(3,764)
(2,943)
Asset decommissioning
(15,273)
–
–
Reclassifications
Removal of fully
(466)
1,148
(682)
–
–
depreciated assets
(1,923)
–
(676)
(60)
–
–
–
–
Effect of foreign
currency exchange
differences
Balance, December 31,
2011
7,707
161
(59)
172
41
1,008,185
54,118
87,358
17,812
19,949
Depreciation expense
274,129
7,901
14,280
6,917
2,341
Disposals
(35,697)
(785)
(8,213)
(2,132)
(884)
Asset decommissioning
(69,723)
–
Reclassifications
60
(156)
–
646
–
16
–
(566)
–
–
(71)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
253,254
(21,099)
(15,273)
–
–
(2,659)
–
8,022
– 1,187,422
–
–
–
–
–
305,568
(47,711)
(69,723)
–
(71)
(9,702)
(78)
(721)
(176)
644
–
–
(10,033)
$ 1,167,252 $
61,000 $
93,279 $
22,437 $
21,484 $
– $
– $ 1,365,452
In 2012 the Corporation incurred a $192.5 million (2011 – $114.9 million) loss on the decommissioning of certain drilling rigs. The
assets were decommissioned due to the inefficient nature of the asset and the high cost to maintain. The charge was allocated
$192.5 million (2011 – $113.4 million) to the Contract Drilling Services segment and $nil (2011 – $1.5 million) to the Completion
and Production Services segment.
During 2012 the Corporation reviewed the remaining economic lives of certain drilling rigs and determined that due to current
market conditions the lives of these rigs should be reduced to four years and depreciation be charged on a straight-line basis
to their estimated salvage value. The effect of this change was to increase depreciation expense by $21.3 million in 2012. As
these rigs were previously depreciated on a unit of production basis, the impact of the change on future periods cannot be
reasonably estimated.
60
Notes to Consolidated Financial Statements
NOTE 5. INTANGIBLES
Cost
Accumulated amortization
Customer relationships
Patents and brands
Loan commitment fees related to revolving credit facility
Cost
2012
12,388
(6,287)
6,101
1,890
21
4,190
6,101
$
$
$
$
$
$
$
$
Customer
relationships
Patents and
brands
Loan
commitment
fees
2011
9,925
(3,454)
6,471
3,283
118
3,070
6,471
Total
Balance, December 31, 2010
Business acquisitions
Effect of foreign currency exchange differences
Removal of fully amortized assets
$
Balance, December 31, 2011
Business acquisitions
Additions
Effect of foreign currency exchange differences
Removal of fully amortized assets
$
4,321
3,425
556
(3,702)
4,600
–
–
(25)
–
931
793
15
(1,319)
420
–
–
(8)
(359)
$
4,905
$
10,157
–
–
–
4,905
–
2,855
–
–
4,218
571
(5,021)
9,925
–
2,855
(33)
(359)
Balance, December 31, 2012
$
4,575
$
53
$
7,760
$
12,388
Accumulated amortization
Balance, December 31, 2010
Amortization expense
Effect of foreign currency exchange differences
$
Removal of fully amortized assets
Balance, December 31, 2011
Amortization expense
Effect of foreign currency exchange differences
Removal of fully amortized assets
Customer
relationships
Patents and
brands
$
2,697
1,798
524
(3,702)
1,317
1,376
(8)
–
892
722
7
(1,319)
302
96
(7)
(359)
Loan
commitment
fees
$
202
$
1,633
–
–
1,835
1,735
–
–
Total
3,791
4,153
531
(5,021)
3,454
3,207
(15)
(359)
Balance, December 31, 2012
$
2,685
$
32
$
3,570
$
6,287
Precision Drilling Corporation 2012 Annual Report
61
NOTE 6. GOODWILL
Balance, December 31, 2010
Business acquisitions
Exchange adjustment
Balance, December 31, 2011
Business acquisitions
Impairment charge
Exchange adjustment
Balance, December 31, 2012
$
284,532
78,034
1,080
363,646
25
(52,539)
(580)
$
310,552
During 2012 the Corporation determined that the carrying value of the goodwill allocated to the Canadian directional drilling CGU
exceeded its recoverable amount and recognized an impairment loss of $52.5 million. The recoverable amount was based on its
value in use determined by discounting expected future cash flows to be generated from the continuing use of the assets within
the CGU.
Key assumptions used in the calculation of value in use included a discount rate of 15%, terminal value growth rate of nil % and
average projected annual cash flow growth over the next four years of 40%. No terminal value growth rate was used due to the
finite lives of the underlying assets of the CGU. Projected cash flow was based on future expected outcomes taking into account
past experience and management expectation of future market conditions. A 10% change in the key assumptions would not
change the amount of the impairment loss recognized.
NOTE 7. BANK INDEBTEDNESS
At December 31, 2012, Precision had available $40.0 million (2011 – $25.0 million) and US$15.0 million (2011 – US$15.0 million)
under secured operating facilities, and a secured US$25.0 million (2011 – $nil) facility for the issuance of letters of credit and
performance and bid bonds to support international operations. As at December 31, 2012 no amounts had been drawn on any
of the facilities. Availability of the $40.0 million facility was reduced by outstanding letters of credit in the amount of $18.9 million
(2011 – $0.5 million). The facilities are primarily secured by charges on substantially all present and future property of Precision
and its material subsidiaries. Advances under the $40.0 million facility are available at the banks’ prime lending rate, U.S.
base rate, U.S. Libor plus applicable margin or Banker’s Acceptance plus applicable margin, or in combination and under the
US$15.0 million and US$25.0 million facilities at the bank’s prime lending rate.
62
Notes to Consolidated Financial Statements
NOTE 8. SHARE BASED COMPENSATION PLANS
Liability classified plans
Deferred
Share Units
Long-Term
Incentive
Plan
Restricted
Share Units
Performance
Share Units
Share
Appreciation
Rights
Non-
Management
Director’s
DSU
Balance, December 31, 2010
$
1,638
$
3,721
$
8,463
$
8,655
$
2,176
$
Expensed (recovered) during
the period
Payments
Balance, December 31, 2011
Expensed (recovered) during
the period
Payments
Balance, December 31, 2012
Current
Long-term
Total
$ 24,653
26,093
(10,512)
40,234
10,693
(26,151)
–
–
–
–
816
–
313
(23)
(1,189)
(3,698)
9,538
(5,472)
16,668
(73)
(403)
(80)
12,529
25,250
1,693
5,094
6,022
(1,195)
(7,938)
(17,494)
(1)
762
(44)
(718)
$
$
$
–
–
–
–
$
$
$
–
–
–
–
–
–
–
$ 9,685
$ 13,778
$
497
$
816
$ 24,776
$
6,324
$
9,279
$
497
$
–
$ 16,100
3,361
4,499
–
816
8,676
$
9,685
$ 13,778
$
497
$
816
$ 24,776
(a) Restricted Share Units and Performance Share Units
Precision has two cash settled share based incentive plans for officers and other eligible employees. Under the Restricted
Share Unit (“RSU”) incentive plan shares granted to eligible employees vest annually over a three year term. Vested shares
are automatically paid out in cash at a value determined by the fair market value of the shares at the vesting date. Under the
Performance Share Unit (“PSU”) incentive plan shares granted to eligible employees vest at the end of a three-year term. Vested
shares are automatically paid out in cash in the first quarter following the vested term at a value determined by the fair market
value of the shares at the vesting date and based on the number of performance shares held multiplied by a performance factor
that ranges from zero to two times. The performance factor is based on Precision’s share price performance compared to a peer
group over the three-year period. For performance shares granted in 2010, Precision’s Board of Directors has the discretion to
reduce the plan payout by half if Precision’s average return on capital does not exceed 10% over the three year term. A summary
of the RSUs and PSUs outstanding under these share based incentive plans are presented below:
Outstanding at December 31, 2010
Granted
Redeemed
Forfeitures
Outstanding at December 31, 2011
Granted
Issued as a result of cash dividends
Redeemed
Forfeitures
RSUs
Outstanding
1,287,176
1,208,224
(528,578)
(129,992)
1,836,830
1,117,850
11,566
(864,857)
(221,139)
PSUs
Outstanding
1,719,965
589,370
(13,128)
(166,699)
2,129,508
802,000
11,972
(851,499)
(143,029)
Outstanding at December 31, 2012
1,880,250
1,948,952
Precision Drilling Corporation 2012 Annual Report
63
Prior to the implementation of the RSU and PSU incentive plans mentioned above, Precision had a Performance Savings Plan.
Certain liabilities under this plan continued to exist as eligible participants were able to elect to receive a portion of their annual
performance bonus in the form of deferred share units (“DSUs”). These notional share units were redeemable in cash and were
required to be redeemed within 60 days of ceasing to be an employee of Precision or by the end of the second full calendar year
after receipt of the DSUs. A summary of the DSUs outstanding under this share based incentive plan is presented below:
Deferred Share Units
Balance, December 31, 2010
Redeemed on employee resignations and withdrawals
Balance, December 31, 2011
Redeemed on employee resignations and withdrawals
Balance, December 31, 2012
Outstanding
167,442
(95,872)
71,570
(71,570)
–
(b) Share Appreciation Rights
The Corporation has a U.S. dollar denominated Share Appreciation Rights (“SAR”) plan under which eligible participants were
granted SAR’s that entitle the rights holder to receive cash payments calculated as the excess of the market price over the
exercise price per share on the exercise date. The SAR’s vest over a period of 5 years and expire 10 years from the date of grant.
At December 31, 2012, the intrinsic value of these awards was $nil (2011 – $61 thousand).
Share Appreciation Rights
Outstanding
Range of
Exercise Price
(US $)
Weighted
Average Exercise
Price (US $)
Outstanding at December 31, 2010
745,615
$ 9.26 – 17.92
$ 14.79
Exercised
Forfeited
Outstanding at December 31, 2011
Exercised
Forfeited
(25,163)
(14,764)
705,688
(721)
9.26 – 15.79
15.22 – 17.38
9.26 – 17.92
9.26 – 9.59
(26,725)
15.22 – 17.92
12.83
16.27
14.83
9.45
15.55
Exercisable
707,327
705,688
Outstanding at December 31, 2012
678,242
$ 9.26 – 17.38
$ 14.81
678,242
Range of Exercise Prices (US $):
$ 9.26 – 11.99
12.00 – 14.99
15.00 – 17.38
$ 9.26 – 17.38
Total SAR’s Outstanding and Exercisable
Weighted
Average Exercise
Price (US $)
$ 9.26
13.26
15.82
$ 14.81
Weighted Average
Remaining
Contractual Life
(Years)
1.23
2.10
4.43
3.75
Number
59,903
115,478
502,861
678,242
64
Notes to Consolidated Financial Statements
(c) Non-management directors
Effective January 1, 2012 Precision instituted a new deferred share unit plan for non-management directors whereby fully vested
deferred share units are granted quarterly based upon an election by the non-management director to receive all or a portion of
their compensation in deferred share units. These deferred share units are redeemable in cash or an equal number of common
shares upon the director’s retirement. The redemption of deferred share units in cash or common shares is solely at Precision’s
discretion. Non-management directors can receive a lump sum payment or two separate payments anytime up until December
15 of the year following retirement. If the non-management director does not specify a redemption date, the deferred share units
will be redeemed on a single date six months after retirement. The cash settlement amount is based upon the weighted average
trading price for Precision’s shares on the Toronto Stock Exchange for the five days immediately prior to payout. A summary of the
DSUs outstanding under this share based incentive plan is presented below:
Deferred Share Units
Balance, January 1, 2012
Granted
Issued as a result of cash dividends
Balance, December 31, 2012
Equity settled plans
Outstanding
–
101,535
429
101,964
(d) Non-management directors
Prior to January 1, 2012, Precision had a deferred share unit plan for non-management directors. Under the plan fully vested
deferred share units were granted quarterly based upon an election by the non-management director to receive all or a portion of
their compensation in deferred share units. These deferred share units are redeemable into an equal number of common shares
any time after the director’s retirement. A summary of this share based incentive plan is presented below:
Deferred Share Units
Balance, December 31, 2010
Granted
Redeemed
Balance, December 31, 2011
Issued as a result of cash dividends
Redeemed
Balance, December 31, 2012
Outstanding
393,717
70,974
(47,196)
417,495
1,630
(83,179)
335,946
For the year ended December 31, 2012 no amounts were expensed under this plan. For the year ended December 31, 2011 the
Corporation, expensed $0.8 million as share based compensation with a corresponding increase in contributed surplus.
(e) Option plan
The Corporation has a share option plan under which a combined total of 10,303,253 options to purchase shares are reserved
to be granted to employees. Of the amount reserved 7,094,988 options net of forfeiture have been granted. Under this plan, the
exercise price of each option equals the fair market of the option at the date of grant determined by the weighted average trading
price for the five days preceding the grant. The options are denominated in either Canadian or U.S. dollars and vest over a period
of three years from the date of grant as employees render continuous service to the Corporation and have a term of seven years.
Precision Drilling Corporation 2012 Annual Report
65
A summary of the status of the equity incentive plan is presented below:
Canadian share options
Options
Outstanding
Range of
Exercise Price
Weighted
Average
Exercise Price
Outstanding as at December 31, 2010
2,341,769
$
5.22 – 8.59
$
Granted
Exercised
Forfeitures
Outstanding as at December 31, 2011
Granted
Exercised
Forfeitures
1,241,050
10.44 – 14.50
(141,240)
(174,008)
3,267,571
1,117,050
(237,545)
(133,279)
5.85 – 8.59
5.85 – 14.50
5.22 – 14.50
7.15 – 10.67
5.85 – 10.44
5.85 – 14.50
Outstanding as at December 31, 2012
4,013,797
$
5.22 – 14.50
$
7.24
10.66
6.81
9.17
8.45
10.60
6.01
10.27
9.13
U.S. share options
Options
Outstanding
Range of
Exercise Price
(US $)
Weighted
Average
Exercise Price
(US $)
Outstanding as at December 31, 2010
1,381,354
$
4.95 – 8.06
$
Granted
Exercised
Forfeitures
Outstanding as at December 31, 2011
Granted
Exercised
Forfeitures
872,319
(206,685)
(160,436)
1,886,552
867,000
(72,409)
(281,163)
10.55 – 15.21
4.95 – 8.06
4.95 – 10.55
4.95 – 15.21
7.14 – 10.74
4.95 – 10.55
4.95 – 15.21
Outstanding as at December 31, 2012
2,399,980
$
4.95 – 15.21
$
6.77
10.95
6.35
8.36
8.61
10.58
6.94
9.84
9.23
Options
Exercisable
386,013
1,008,305
1,846,603
Options
Exercisable
158,177
396,188
935,035
The weighted average share price at the date of exercise for share options exercised in 2012 was $9.42 (2011 – $13.70) for the
Canadian share options and US$10.10 (2011 – US$14.37) for the U.S. share options.
The range of exercise prices for options outstanding at December 31, 2012 are as follows:
Canadian share options
Total Options Outstanding
Exercisable Options
Range of Exercise Prices:
$ 5.22 – 6.99
7.00 – 8.99
9.00 – 14.50
$ 5.22 – 14.50
Number
789,228
1,071,952
2,152,617
Weighted
Average
Exercise Price
$ 5.85
8.54
10.63
4,013,797
$ 9.13
Weighted Average
Remaining
Contractual Life
(Years)
3.35
4.17
5.61
4.78
Weighted
Average
Exercise Price
$ 5.85
8.57
10.61
Number
789,228
693,375
364,000
1,846,603
$ 7.81
U.S. share options
Total Options Outstanding
Exercisable Options
Weighted
Average
Exercise Price
(US $)
Weighted Average
Remaining
Contractual Life
(Years)
Range of Exercise Prices (US $):
$ 4.95 – 5.99
6.00 – 8.99
9.00 – 15.21
$ 4.95 – 15.21
Number
323,692
659,252
1,417,036
$ 4.95
7.83
10.86
2,399,980
$ 9.23
3.35
4.35
5.64
4.98
Weighted
Average
Exercise Price
(US $)
$ 4.95
7.86
11.02
$ 7.61
Number
323,692
386,445
224,898
935,035
66
Notes to Consolidated Financial Statements
The per option weighted average fair value of the share options granted during 2012 was $4.79 (2011 – $4.94) estimated on
the grant date using the Black-Scholes option pricing model with the following assumption: average risk-free interest rate 1%
(2011 – 2%), average expected life of four years (2011 – four years), expected forfeiture rate of 5% (2011 – 5%) and expected
volatility of 59% (2011 – 59%). Included in net earnings for the year ended December 31, 2012 is an expense of $7.9 million
(2011 – $7.9 million).
NOTE 9. PROVISIONS AND OTHER
Balance December 31, 2010
Expensed during the year
Payment of deductibles and uninsured claims
Effects of foreign currency exchange differences
Balance December 31, 2011
Expensed during the year
Payment of deductibles and uninsured claims
Effects of foreign currency exchange differences
Balance December 31, 2012
Current
Long-term
Workers’
compensation
$
23,741
7,894
(8,179)
528
23,984
11,604
(8,436)
(551)
$
26,601
December 31,
2012
December 31,
2011
$
$
8,783
17,818
26,601
$
$
7,863
16,121
23,984
Precision maintains a provision for the deductible and uninsured portions of workers’ compensation and general liability claims.
The amount accrued for the provision for losses incurred varies depending on the number and nature of the claims outstanding
at the balance sheet dates. In addition, the accrual includes management’s estimate of the future cost to settle each claim such
as future changes in the severity of the claim and increases in medical costs. Precision uses third parties to assist in developing
the estimate of the ultimate costs to settle each claim, which is based upon historical experience associated with the type of each
claim and specific information related to each claim. The specific circumstances of each claim may change over time prior to
settlement and as a result, the estimates made as of the balance sheet dates may change.
Precision Drilling Corporation 2012 Annual Report
67
NOTE 10. LONG-TERM DEBT
Secured revolving credit facility
Unsecured senior notes:
6.625% senior notes due 2020 (US$650.0 million)
6.5% senior notes due 2021 (US$400.0 million)
6.5% senior notes due 2019
Less net unamortized debt issue costs
2012
$
–
$
646,685
397,960
200,000
2011
–
661,050
406,800
200,000
1,244,645
1,267,850
(25,849)
(28,234)
$
1,218,796
$
1,239,616
(a) Secured revolving credit facility
The secured revolving credit facility provides Precision with senior secured financing for general corporate purposes, including
for acquisitions, of up to US$850 million with a provision for an increase in the facility of up to an additional US$250 million.
The secured revolving credit facility is secured by charges on substantially all of Precision’s present and future assets and the
present and future assets of its material U.S. and Canadian subsidiaries and, if necessary, in order to adhere to covenants under
the revolving credit facility, on certain assets of certain subsidiaries organized in a jurisdiction outside of Canada or the U.S.
The secured revolving credit facility requires that Precision comply with certain financial covenants including leverage ratios of
consolidated senior debt to earnings before interest, taxes, depreciation and amortization as defined in the agreement (“EBITDA”)
of less than 3:1 and consolidated total debt to EBITDA of less than 4:1 for the most recent four consecutive fiscal quarters; and
a interest coverage ratio of greater than 2.75:1 for the most recent four consecutive fiscal quarters. As well the revolving credit
facility contains certain covenants that place restrictions on Precision’s ability to incur or assume additional indebtedness; dispose
of assets; make or pay dividends, share redemptions or other distributions; change its primary business; incur liens on assets;
engage in transactions with affiliates; enter into mergers, consolidations or amalgamations; and enter into speculative swap
agreements. At December 31, 2012 Precision complied with the covenants of the revolving credit facility.
The revolving credit facility has a term of five years, with an annual option on Precision’s part to request that the lenders extend,
at their discretion, the facility to a new maturity date not to exceed five years from the date of the extension request. The current
maturity date of the revolving credit facility is November 17, 2017.
Under the revolving credit facility amounts can be drawn in U.S. dollars and/or Canadian dollars and was undrawn as at
December 31, 2012 and 2011. Up to US$200 million of the revolving credit facility is available for letters of credit denominated in
United States and/or Canadian dollars and as at December 31, 2012 outstanding letters of credit amounted to US$26.8 million
(2011 – US$22.6 million).
The interest rate on loans that are denominated in U.S. dollars is, at the option of Precision, either a margin over a U.S. base rate
or a margin over LIBOR. The interest rate on loans denominated in Canadian dollars is, at the option of Precision, either a margin
over the Canadian prime rate or a margin over the bankers’ acceptance rate; such margins will be based on the then applicable
ratio of consolidated total debt to EBITDA.
(b) Unsecured senior notes
Precision has outstanding the following unsecured senior notes:
US$650.0 million of 6.625% Senior Notes due 2020. These notes bear interest at a fixed rate of 6.625% per annum, and
mature on November 15, 2020. Interest is payable semi-annually on May 15 and November 15 of each year, commencing
on May 15, 2011.
$200.0 million of 6.5% Senior Notes due 2019. These notes bear interest at a fixed rate of 6.5% per annum, and mature
on March 15, 2019. Interest is payable semi-annually on March 15 and September 15 of each year, commencing on
September 15, 2011.
US$400.0 million of 6.5% Senior Notes due 2021. These notes bear interest at a fixed rate of 6.5% per annum, and mature
on December 15, 2021. Interest is payable semi-annually on June 15 and December 15 of each year, commencing on
December 15, 2011.
68
Notes to Consolidated Financial Statements
The 6.625% Senior Notes due 2020 and the 6.5% Senior Notes due 2019 are unsecured, ranking equally with existing and
future senior unsecured indebtedness, and have been guaranteed by current and future U.S. and Canadian subsidiaries that
guaranteed the revolving credit facility. These notes contain certain covenants that limit Precision’s ability and the ability of certain
subsidiaries to, incur additional indebtedness and issue preferred stock; create liens; make restricted payments; create or permit
to exist restrictions on the ability of Precision or certain subsidiaries to make certain payments and distributions; engage in
amalgamations, mergers or consolidations; make certain dispositions and transfers of assets; and engage in transactions with
affiliates. If the notes receive an investment grade rating by Standard & Poor’s and Moody’s Investors Service and Precision
and its subsidiaries are not in default under the indenture governing the notes, then Precision will not be required to comply with
particular covenants contained in the indenture.
The 6.5% Senior Notes due 2021 are unsecured, ranking equally with existing and future senior unsecured indebtedness, and
have been guaranteed by current and future U.S. and Canadian subsidiaries that guaranteed the revolving credit facility. These
notes contain certain covenants that limit Precision’s ability and the ability of certain subsidiaries to, incur additional indebtedness
and issue preferred stock; create liens; make restricted payments; create or permit to exist restrictions on the ability of Precision
or certain subsidiaries to make certain payments and distributions; engage in amalgamations, mergers or consolidations; make
certain dispositions and transfers of assets; and engage in transactions with affiliates. If the notes receive an investment grade
rating by Standard & Poor’s or Moody’s Investors Service and Precision and its subsidiaries are not in default under the indenture
governing the notes, then Precision will not be required to comply with particular covenants contained in the indenture.
Precision may redeem, prior to November 15, 2013, up to 35% of the 6.625% Senior Notes due 2020 with the net proceeds of
certain equity offerings. Prior to November 15, 2015, Precision may redeem the notes in whole or in part at 106.625% of their
principal amount, plus accrued interest. As well, Precision may redeem the notes in whole or in part at any time on or after
November 15, 2015 and before November 15, 2018, at redemption prices ranging between 103.313% and 101.104% of their
principal amount plus accrued interest. Anytime on or after November 15, 2018 the notes can be redeemed for their principal
amount plus accrued interest. Upon specified change of control events, each holder of a note will have the right to sell to Precision
all or a portion of its notes at a purchase price in cash equal to 101% of the principal amount, plus accrued interest to the date
of purchase.
Precision may redeem, prior to March 15, 2014, up to 35% of the 6.5% Senior Notes due 2019 with the net proceeds of certain
equity offerings at a redemption price equal to 106.5% of the principal amount plus accrued interest. Prior to March 15, 2015,
Precision may redeem the notes in whole or in part at 100.0% of their principal amount, plus accrued interest and the greater
of 1.0% of the principal amount of the note to be redeemed and the excess, if any, of the present value of the March 15, 2015
redemption price plus required interest payments through March 15, 2015 (calculated using the Government of Canada rate plus
100 basis points) over the principal amount of the note. As well, Precision may redeem the notes in whole or in part at any time
on or after March 15, 2015 and before March 15, 2017, at redemption prices ranging between 103.250% and 101.6254% of their
principal amount plus accrued interest. Anytime on or after March 15, 2017 the notes can be redeemed for their principal amount
plus accrued interest. Upon specified change of control events, each holder of a note will have the right to sell to Precision all
or a portion of its notes at a purchase price in cash equal to 101% of the principal amount, plus accrued interest to the date
of purchase.
Precision may redeem, prior to December 15, 2014, up to 35% of the 6.5% Senior Notes due 2021 with the net proceeds of certain
equity offerings at a redemption price equal to 106.5% of the principal amount plus accrued interest. Prior to December 15, 2016,
Precision may redeem the notes in whole or in part at 100.0% of their principal amount, plus accrued interest and the greater of
1.0% of the principal amount of the note to be redeemed and the excess, if any, of the present value of the December 15, 2016
redemption price plus required interest payments through December 15, 2016 (calculated using the United States Treasury rate
plus 50 basis points) over the principal amount of the note. As well, Precision may redeem the notes in whole or in part at any time
on or after December 15, 2016 and before December 15, 2019, at redemption prices ranging between 103.250% and 101.083%
of their principal amount plus accrued interest. Anytime on or after December 15, 2019 the notes can be redeemed for their
principal amount plus accrued interest. Upon specified change of control events, each holder of a note will have the right to sell
to Precision all or a portion of its notes at a purchase price in cash equal to 101% of the principal amount, plus accrued interest
to the date of purchase.
At December 31, 2012 no mandatory principal repayments are required in the next five years.
Precision Drilling Corporation 2012 Annual Report
69
(c) Guarantor disclosures
The following presents supplemental condensed consolidating financial information for the parent company, guarantor subsidiaries
and the non-guarantor subsidiaries, respectively.
Condensed consolidating statement of financial position as at December 31, 2012
Parent
Guarantor
subsidiaries
Non-Guarantor
subsidiaries
Consolidating
adjustments
Total
Assets
Cash
Other current assets
Intercompany receivables
Investments in subsidiaries
Income tax recoverable
Property, plant and equipment
Intangibles
Goodwill
Total assets
Liabilities and Shareholders’ Equity
Current liabilities
Intercompany payables and debt
Long-term debt
Other long-term liabilities
Total liabilities
Shareholders’ equity
$
114,709
$
15,709
$
22,350
$
9,238
394,112
5,412,168
9,441
57,939
4,190
–
6,001,797
103,383
2,200,650
1,218,796
245,377
3,768,206
2,233,591
$
$
465,695
2,082,616
3,099
–
3,043,239
1,911
310,552
5,922,821
264,788
185,855
–
273,547
724,190
5,198,631
$
$
–
3
$
152,768
523,334
48,398
65,279
(2,542,007)
–
(5,415,267)
55,138
142,104
–
–
–
(353)
–
–
$
$
$
$
333,269
$
(7,957,624)
29,910
$
–
155,502
(2,542,007)
–
(6,838)
178,574
154,695
–
–
(2,542,007)
(5,415,617)
–
–
64,579
3,242,929
6,101
310,552
4,300,263
398,081
–
1,218,796
512,086
2,128,963
2,171,300
Total liabilities and shareholders’ equity
$
6,001,797
$
5,922,821
$
333,269
$
(7,957,624)
$
4,300,263
Condensed consolidating statement of financial position as at December 31, 2011
Assets
Cash
Other current assets
Intercompany receivables
Investments in subsidiaries
Income tax recoverable
Property, plant and equipment
Intangibles
Goodwill
Total assets
Liabilities and Shareholders’ Equity
Current liabilities
Intercompany payables and debt
Long-term debt
Other long-term liabilities
Total liabilities
Shareholders’ equity
Parent
Guarantor
subsidiaries
Non-Guarantor
subsidiaries
Consolidating
adjustments
Total
$
440,760
$
5,815
$
20,901
$
–
$
467,476
7,974
341,327
4,961,327
9,441
54,263
3,070
–
5,818,162
56,049
2,082,700
1,239,616
285,289
3,663,654
2,154,508
$
$
557,142
1,972,678
68
–
2,850,502
3,401
363,646
5,753,252
376,328
176,221
–
330,352
882,901
4,870,351
$
$
(881)
583,406
(2,380,359)
–
(4,961,395)
–
–
–
64,579
(7,804)
2,942,296
19,171
66,354
55,138
45,335
–
–
–
–
$
$
$
$
206,899
$
(7,350,439)
8,960
$
(884)
121,438
(2,380,359)
–
(427)
129,971
76,928
–
–
(2,381,243)
(4,969,196)
6,471
363,646
4,427,874
440,453
–
1,239,616
615,214
2,295,283
2,132,591
Total liabilities and shareholders’ equity
$
5,818,162
$
5,753,252
$
206,899
$
(7,350,439)
$
4,427,874
70
Notes to Consolidated Financial Statements
Condensed consolidating statement of earnings for the year ended December 31, 2012
Guarantor
subsidiaries
Non-Guarantor
subsidiaries
Consolidating
adjustments
Total
$
1,986,590
$
64,779
$
(10,779)
$
2,040,741
$
Parent
151
82
27,246
1,173,157
94,014
80,841
5,388
Revenue
Operating expense
General and administrative expense
Earnings (loss) before income taxes,
finance charges, foreign exchange,
impairment of goodwill, loss on
asset decommissioning and
depreciation and amortization
Depreciation and amortization
Loss on asset decommissioning
Operating earnings (loss)
Impairment of goodwill
Foreign exchange
Finance charges
Equity in earnings of subsidiaries
Earnings (loss) before tax
Income taxes
Net earnings (loss)
(27,177)
3,405
–
(30,582)
–
4,252
86,780
(196,489)
74,875
30,011
719,419
303,693
192,469
223,257
52,539
(189)
48
–
170,859
(49,342)
(21,450)
7,922
–
(29,372)
–
(310)
1
–
(29,063)
(5,352)
(10,779)
1,243,301
–
–
(7,495)
–
7,495
–
–
–
196,489
(188,994)
–
126,648
670,792
307,525
192,469
170,798
52,539
3,753
86,829
–
27,677
(24,683)
$
44,864
$
220,201
$
(23,711)
$
(188,994)
$
52,360
Condensed consolidating statement of earnings for the year ended December 31, 2011
Revenue
Operating expense
General and administrative expense
Earnings (loss) before income taxes,
finance charges, foreign exchange,
impairment of goodwill, loss on
asset decommissioning and
depreciation and amortization
Depreciation and amortization
Loss on asset decommissioning
Operating earnings (loss)
Foreign exchange
Finance charges
Equity in earnings of subsidiaries
Earnings (loss) before tax
Income taxes
Net earnings (loss)
$
Parent
200
316
30,596
Guarantor
subsidiaries
Non-Guarantor
subsidiaries
Consolidating
adjustments
Total
$
1,930,451
$
28,131
$
(7,755)
$
1,951,027
1,110,428
88,914
27,984
5,480
(7,706)
(49)
1,131,022
124,941
(30,712)
5,246
–
(35,958)
(23,628)
111,518
(402,481)
278,633
79,089
731,109
241,200
114,893
375,016
(26)
64
–
374,978
(32,193)
(5,333)
(1,031)
–
(4,302)
(20)
(4)
–
(4,278)
411
–
6,068
–
(6,068)
–
–
402,481
(408,549)
–
695,064
251,483
114,893
328,688
(23,674)
111,578
–
240,784
47,307
$
199,544
$
407,171
$
(4,689)
$
(408,549)
$
193,477
Precision Drilling Corporation 2012 Annual Report
71
Condensed consolidating statement of comprehensive income for the year ended December 31, 2012
Net earnings
Other comprehensive income (loss)
Comprehensive income (loss)
Parent
44,864
23,205
68,069
$
$
Guarantor
subsidiaries
Non-Guarantor
subsidiaries
Consolidating
adjustments
$
$
220,201
(30,899)
189,302
$
$
(23,711)
(1,934)
(25,645)
$
$
(188,994)
(45)
(189,039)
Condensed consolidating statement of comprehensive income for the year ended December 31, 2011
Net earnings
Other comprehensive income (loss)
Comprehensive income (loss)
Parent
199,544
(37,692)
161,852
$
$
Guarantor
subsidiaries
Non-Guarantor
subsidiaries
Consolidating
adjustments
$
$
407,171
34,006
441,177
$
$
(4,689)
(987)
(5,676)
$
$
(408,549)
31
(408,518)
Total
52,360
(9,673)
42,687
Total
193,477
(4,642)
188,835
$
$
$
$
Condensed consolidating statement of cash flow for the year ended December 31, 2012
Parent
Guarantor
subsidiaries
Non-Guarantor
subsidiaries
Consolidating
adjustments
Total
$
(135,797)
$
775,145
$
(65,654)
$
61,592
$
635,286
(171,158)
(14,899)
(806,436)
41,996
(43,971)
111,040
91,444
(153,036)
(4,197)
(811)
(326,051)
440,760
9,894
5,815
34
1,449
20,901
Cash and cash equivalents, end of year
$
114,709
$
15,709
$
22,350
$
Condensed consolidating statement of cash flow for the year ended December 31, 2011
Parent
Guarantor
subsidiaries
Non-Guarantor
subsidiaries
Consolidating
adjustments
Total
$
(52,058)
$
586,869
$
(38,829)
$
36,790
$
532,772
(126,861)
366,887
(598,680)
(5,006)
(8,281)
60,156
18,360
(55,150)
Cash provided by (used in):
Operations
Investments
Financing
Effects of exchange rate changes on
cash and cash equivalents
Increase (decrease) in cash and
cash equivalents
Cash and cash equivalents,
beginning of year
Cash provided by (used in):
Operations
Investments
Financing
Effects of exchange rate changes on
cash and cash equivalents
Increase (decrease) in cash and
cash equivalents
Cash and cash equivalents,
beginning of year
(930,121)
(14,899)
(4,974)
(314,708)
467,476
$
152,768
(715,462)
366,887
26,448
210,645
256,831
$
467,476
–
–
–
–
–
–
–
–
23,586
2,651
211
211,554
(14,166)
13,257
229,206
19,981
7,644
Cash and cash equivalents, end of year
$
440,760
$
5,815
$
20,901
$
72
Notes to Consolidated Financial Statements
NOTE 11. INCOME TAXES
The provision for income taxes differs from that which would be expected by applying statutory Canadian income tax rates.
A reconciliation of the difference at December 31 is as follows:
Earnings before income taxes
Federal and provincial statutory rates
Tax at statutory rates
Adjusted for the effect of:
Non-deductible expenses
Non-taxable capital gains
Income taxed at lower rates
Impact of foreign tax rates
Withholding taxes
Taxes related to prior years
Other
Income tax expense (recovery)
$
$
$
$
2012
27,677
25%
6,919
15,975
(546)
(30,191)
(26,559)
4,009
1,053
4,657
2011
240,784
27%
65,012
7,857
(1,245)
(32,260)
(7,026)
3,664
10,986
319
$
(24,683)
$
47,307
In 2011, taxes related to prior years of $11.0 million includes the Canada Revenue Agency and provincial income tax settlement
of prior years income taxes totaling $34.8 million offset by a reduction in prior period unrecognized tax benefits (including interest
and penalties) of $23.8 million.
The net deferred tax liability is comprised of the tax effect of the following temporary differences:
Deferred income tax liability:
Property, plant and equipment and intangibles
$
686,833
$
735,815
2012
2011
Partnership deferrals
Debt issue costs
Other
Deferred income tax assets:
Losses (expire from time to time up to 2032)
Debt issue costs
Long-term incentive plan
Other
Net deferred income tax liability
60,906
1,561
4,260
91,319
–
5,704
753,560
832,838
244,888
221,982
–
13,917
9,163
2,568
13,026
7,472
$
485,592
$
587,790
Included in the net deferred tax liability is $242.6 million (2011 – $ 324.9 million) of tax effected temporary differences related to
the Corporations’ United States operations.
Precision Drilling Corporation 2012 Annual Report
73
The movement in temporary differences is as follows:
Property,
plant and
equipment
and
intangibles
Other
deferred
income tax
liabilities
Partnership
deferrals
Losses
Debt issue
costs
Long-term
incentive
plan
Other
deferred
income tax
assets
Net
deferred
income tax
liability
Balance December 31, 2010
$ 676,803
$ 55,819
$
2,094
$ (136,056)
$
(6,802)
$
(8,846)
$
(4,773)
$ 578,239
Recognized in net earnings
45,686
35,500
5,712
(80,896)
4,234
(4,011)
(2,697)
3,528
Recognized in other
comprehensive income
Acquired in business
acquisitions (Note 19)
Effect of foreign currency
exchange differences
–
844
12,482
–
–
–
(2,148)
–
46
–
–
(5,030)
–
–
–
–
–
–
–
(2,148)
844
(169)
(2)
7,327
Balance December 31, 2011
735,815
91,319
5,704
(221,982)
(2,568)
(13,026)
(7,472)
587,790
Recognized in net earnings
(37,034)
(30,413)
(1,413)
(27,784)
4,129
(1,058)
(1,686)
(95,259)
Recognized in other
comprehensive income
Effect of foreign currency
exchange differences
–
(11,948)
–
–
–
–
(31)
4,878
–
–
–
167
–
–
(5)
(6,939)
Balance December 31, 2012
$ 686,833
$ 60,906
$
4,260
$ (244,888)
$
1,561
$ (13,917)
$
(9,163)
$ 485,592
On December 31, 2012 Precision had $34.4 million (2011 – $34.3 million) of unrecognized tax benefits that, if recognized, would
have a favourable impact on Precision’s effective income tax rate in future periods. Precision classifies interest accrued on
unrecognized tax benefits and income tax penalties as income tax expense. Included in the unrecognized tax benefit as at
December 31, 2012 is interest and penalties of $9.2 million (2011 – $8.6 million).
Reconciliation of unrecognized tax benefits
Year ended December 31,
Unrecognized tax benefits, beginning of year
Additions:
Prior year’s tax positions
Reductions:
Prior year’s tax positions
Unrecognized tax benefits, end of year
2012
2011
$
34,300
$
54,825
2,033
2,133
(1,976)
(22,658)
$
34,357
$
34,300
It is anticipated that approximately $0.6 million (2011 – $1.2 million) of an unrecognized tax position that relates to prior year
activities will be realized during the next 12 months. Subject to the results of audit examinations by taxing authorities and/or
legislative changes by taxing jurisdictions, Precision does not anticipate further adjustments of unrecognized tax positions during
the next 12 months that would have a material impact on the financial statements of Precision.
74
Notes to Consolidated Financial Statements
NOTE 12. SHAREHOLDERS’ CAPITAL
(a) Authorized – unlimited number of voting common shares
– unlimited number of preferred shares, issuable in series, limited to an amount
equal to one half of the issued and outstanding common shares
(b) Issued
Common shares
Balance, December 31, 2010
Options exercised – cash consideration
– reclassification from contributed surplus
Issued on redemption of non-management directors DSUs
Balance, December 31, 2011
Options exercised – cash consideration
– reclassification from contributed surplus
Issued on redemption of non-management directors DSUs
Issued on waiver of right to dissent by dissenting unitholder
Number
Amount
275,686,676
$
2,244,417
347,925
–
47,196
2,238
1,178
384
276,081,797
$
2,248,217
309,954
–
83,179
840
1,926
1,124
706
9
Balance, December 31, 2012
276,475,770
$
2,251,982
(c) Warrants
On April 22, 2009 the Corporation issued 15,000,000 purchase warrants pursuant to a private placement. Each warrant is
exercisable into common shares of the Corporation at a price of $3.22 per share for a period of five years from the date of issue.
No warrants have been exercised as at December 31, 2012.
(d) Dividends
During 2012 the Corporation approved and paid a dividend of $0.05 per common share (2011 – nil) for a total payment of
$14 million (2011 – nil). On February 14, 2013 the Board of Directors declared a dividend of $0.05 per common share payable on
March 15, 2013 to shareholders of record on February 28, 2013.
NOTE 13. ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, December 31, 2010
Other comprehensive loss
Balance, December 31, 2011
Other comprehensive loss
Balance, December 31, 2012
NOTE 14. FINANCE CHARGES
Interest:
Long-term debt
Tax settlement and reassessment
Other
Income
Amortization of debt issue costs
Loss on settlement of debt facilities
Debt amendment fees
Other
Finance charges
Unrealized
foreign currency
translation gains
(losses)
Foreign exchange
gain (loss) on net
investment hedge
Accumulated
other
comprehensive
loss
$
(61,037)
$
14,817
$
(46,220)
33,050
(27,987)
(32,878)
(37,692)
(22,875)
23,205
(4,642)
(50,862)
(9,673)
$
(60,865)
$
330
$
(60,535)
2012
2011
$
85,113
$
–
138
(1,933)
4,120
–
149
(758)
69,959
15,372
164
(1,683)
3,444
26,942
1,134
(3,754)
$
86,829
$
111,578
Precision Drilling Corporation 2012 Annual Report
75
NOTE 15. EMPLOYEE BENEFIT PLANS
The Corporation has a defined contribution pension plan covering a significant number of its employees. Under this plan, the
Corporation matches individual contributions up to 5% of the employee’s eligible compensation. Total expense under the defined
contribution plan in 2012 was $11.1 million (2011 – $8.6 million).
NOTE 16. RELATED PARTY TRANSACTIONS
Compensation of key management personnel
The remuneration of key management personnel is as follows:
Salaries and other benefits
Equity settled share based compensation
Cash settled share based compensation
$
2012
6,988
3,257
4,872
2011
6,065
3,297
7,106
15,117
$
16,468
$
$
Key management personnel are comprised of the directors and executive officers of the Corporation. Certain executive officers
have entered into employment agreements with Precision which provide termination benefits of up to 24 months base salary plus
up to two times targeted incentive compensation upon dismissal without cause.
NOTE 17. COMMITMENTS
(a) Operating lease commitments
The Corporation has commitments under various operating lease agreements, primarily for vehicles and office space. Terms of
the office leases run for a period of one to ten years while the vehicle lease are typically for terms of between three and four years.
Expected non-cancellable operating lease payments are as follows:
Less than one year
Between one and five years
Later than five years
2012
15,561
$
41,898
23,161
80,620
$
$
$
2011
12,874
39,555
28,528
80,957
One of the leased properties was sublet by the Corporation.
The following amounts were recognized as expenses in respect of operating leases in the consolidated statement of earnings:
Operating leases
Sub-lease recoveries
2012
19,075
(583)
18,492
$
$
2011
13,789
(814)
12,975
$
$
(b) Capital commitments
At December 31, 2012 the Corporation has commitments to purchase property, plant and equipment totaling $157.5 million
(2011 – $195.0 million). Payments of $121.0 million and $36.5 million for these commitments are expected to be made in 2013
and 2014, respectively.
76
Notes to Consolidated Financial Statements
NOTE 18. PER SHARE AMOUNTS
The following tables reconcile the net earnings and weighted average shares outstanding used in computing basic and diluted
earnings per share:
Net earnings – basic and diluted
(Stated in thousands)
Weighted average shares outstanding – basic
Effect of share warrants
Effect of stock options and other equity compensation plans
Weighted average shares outstanding – diluted
NOTE 19. BUSINESS ACQUISITIONS
2012
2011
$
52,360
$
193,477
2012
276,276
9,418
933
286,627
2011
275,899
11,106
1,711
288,716
On March 29, 2011 Precision acquired all the issued and outstanding shares of Drake Directional Drilling, LLC and Drake MWD
Service, LLC (collectively “Drake”). These companies provide directional drilling services in Texas, Louisiana, Oklahoma and
Colorado and have been included in the Contract Drilling Services segment.
On September 9, 2011 Precision acquired all the issued and outstanding shares of Axis Energy Services Holdings Inc. (“Axis”).
Axis provides directional drilling and MWD (measurement while drilling) services, primarily in Western Canada and has been
included in the Contract Drilling Services segment.
In conjunction with the Axis acquisition, the purchase price was adjusted to the extent that earnings before finance charges,
foreign exchange, income taxes and depreciation and amortization during the period from acquisition to December 31, 2011
and working capital at December 31, 2011 for the acquired entities is above or below a predetermined amount. As at the date of
the acquisition, Precision estimated the amount of this additional consideration to be $20.4 million and recorded the contingent
consideration in accounts payable and accrued liabilities. As at December 31, 2011 Precision reduced the estimated contingent
liability to $18.1 million and recognized a $3.8 million recovery in the statement of earnings and a $1.5 million increase to goodwill
as a result of working capital adjustments. In 2012 the contingent liability was settled, resulting in a $758 thousand recovery in the
statement of earnings and a $25 thousand increase to goodwill.
The details of the acquisitions are as follows:
Net assets at assigned values:
Working capital
Property, plant and equipment
Intangible assets
Goodwill (not deductible)
Deferred income taxes
Consideration:
Cash
Contingent consideration
(1) Working capital includes cash of $2,609
(2) Working capital includes bank overdraft of $675
Drake
Axis
Total
$
3,292 (1)
$
6,363 (2)
$
5,513
1,460
25,521
–
35,786
35,786
–
35,786
$
$
$
20,142
2,759
52,514
(844)
80,934
59,034
21,900
80,934
$
$
$
$
$
$
9,655
25,655
4,219
78,035
(844)
116,720
94,820
21,900
116,720
Precision Drilling Corporation 2012 Annual Report
77
NOTE 20. SEGMENTED INFORMATION
The Corporation operates primarily in Canada and the United States, in two industry segments; Contract Drilling Services and
Completion and Production Services. Contract Drilling Services includes drilling rigs, directional drilling, procurement and
distribution of oilfield supplies, and manufacture, sale and repair of drilling equipment. Completion and Production Services
includes service rigs, snubbing units, oilfield equipment rental, camp and catering services, and wastewater treatment units.
2012
Revenue
Operating earnings
Depreciation and amortization
Loss on asset decommissioning
Total assets
Goodwill
Capital expenditures*
2011
Revenue
Operating earnings
Depreciation and amortization
Loss on asset decommissioning
Total assets
Goodwill
Capital expenditures*
* Excludes business acquisitions
Contract
Drilling
Services
Completion
and
Production
Services
Corporate
and Other
Inter-
segment
Eliminations
Total
$
1,725,240
$
326,079
$
–
$
(10,578)
$
2,040,741
184,819
271,993
192,469
3,495,604
198,413
750,763
Contract
Drilling
Services
62,796
30,758
–
551,893
112,139
109,202
Completion
and
Production
Services
(76,817)
4,774
–
252,766
–
8,092
–
–
–
–
–
–
170,798
307,525
192,469
4,300,263
310,552
868,057
Corporate
and Other
Inter-
segment
Eliminations
Total
$
1,632,037
$
330,225
$
–
$
(11,235)
$
1,951,027
332,829
219,194
113,366
3,380,843
251,507
637,060
77,127
25,598
1,527
473,811
112,139
76,922
(81,268)
6,691
–
573,220
–
12,375
–
–
–
–
–
–
328,688
251,483
114,893
4,427,874
363,646
726,357
The Corporation’s operations are carried on in the following geographic locations:
2012
Revenue
Total assets
2011
Revenue
Total assets
Canada
United States
International
Inter-
segment
Eliminations
Total
$
1,053,966
$
936,113
$
64,017
$
(13,355)
$
2,040,741
2,119,891
1,913,810
266,562
–
4,300,263
Canada
United States
International
Inter-
segment
Eliminations
Total
$
1,071,526
$
866,776
$
22,994
$
(10,269)
$
1,951,027
2,252,084
2,027,676
148,114
–
4,427,874
During the year ended December 31, 2012, revenues from one customer of the Corporation’s Contract Drilling Services and
Completion and Production Services segments accounted for $222.7 million (2011 – $158.4 million) of the Corporation’s
total revenue.
78
Notes to Consolidated Financial Statements
NOTE 21. FINANCIAL INSTRUMENTS
Financial Risk Management
The Board of Directors is responsible for identifying the principal risks of Precision’s business and for ensuring the implementation
of systems to manage these risks. With the assistance of senior management, who report to the Board of Directors on the risks of
Precision’s business, the Board of Directors considers such risks and discusses the management of such risks on a regular basis.
Precision has exposure to the following risks from its use of financial instruments:
(a) Credit risk
Accounts receivable includes balances from a large number of customers primarily operating in the oil and gas industry. The
Corporation manages credit risk by assessing the creditworthiness of its customers before providing services and on an ongoing
basis as well as monitoring the amount and age of balances outstanding. In some instances the Corporation will take additional
measures to reduce credit risk including obtaining letters of credit and prepayments from customers. When indicators of credit
problems appear the Corporation takes appropriate steps to reduce its exposure including negotiating with the customer, filing
liens and entering into litigation. The Corporation views the credit risks on these amounts as normal for the industry. Precision’s
most significant customer accounted for $23.0 million of the trade receivables amount at December 31, 2012 (2011 – $43.8 million).
The movement in the allowance for doubtful accounts during the year was as follows:
Balance at January 1
Impairment loss recognized
Amounts written off as uncollectible
Impairment loss reversed
Effect of movement in exchange rates
Balance at December 31
The ageing of trade receivables at December 31 was:
Not past due
Past due 0-30 days
Past due 31-120 days
Past due more than 120 days
2012
2011
$
12,179
$
12,848
348
(174)
–
(166)
915
(418)
(1,328)
162
$
12,187
$
12,179
2012
2011
Gross
Provision for
impairment
Gross
Provision for
impairment
$
197,194
$
100,217
27,861
15,016
–
–
–
12,187
$
235,461
$
97,200
35,866
11,874
$
340,288
$
12,187
$
380,401
$
–
–
305
11,874
12,179
(b) Interest rate risk
As at December 31, 2012 and 2011, all of Precision’s long-term debt bears fixed interest rates. As a result Precision is not exposed
to significant fluctuations in interest expense as a result of changes in interest rates based on the debt outstanding at the end of
the year.
(c) Foreign currency risk
The Corporation is exposed to foreign currency fluctuations in relation to the working capital and long-term debt of its’ United
States operations and certain long-term debt facilities of its’ Canadian operations. The Corporation has no significant exposures
to foreign currencies other than the U.S. dollar. The Corporation monitors its foreign currency exposure and attempts to minimize
the impact by aligning appropriate levels of U.S. denominated debt with cash flows from U.S. based operations.
Precision Drilling Corporation 2012 Annual Report
79
The following financial instruments were denominated in U.S. dollars:
Cash
Accounts receivable
Accounts payable and accrued liabilities
Long-term liabilities, excluding long-term incentive plans
Net foreign currency exposure
Impact of $0.01 change in the U.S. dollar to Canadian dollar
exchange rate on net earnings
Impact of $0.01 change in the U.S. dollar to Canadian dollar
exchange rate on comprehensive income
$
$
$
2012
2011
Canadian
Operations (1)
U.S.
Operations
Canadian
Operations (1)
U.S.
Operations
$
39,693
$
61,515
$
297,553
$
37,385
56
(13,028)
–
26,721
267
–
$
$
$
237,370
(184,593)
(17,909)
96,383
–
964
$
$
$
50
(16,969)
–
280,634
2,806
–
$
$
$
224,275
(205,143)
(15,851)
40,666
–
407
(1) excludes US$1,050 million of long-term debt that has been designated as a hedge of the Corporation’s net investment in certain self-sustaining foreign operations.
(d) Liquidity risk
Liquidity risk is the exposure of the Corporation to the risk of not being able to meet its financial obligations as they become due.
The Corporation manages liquidity risk by monitoring and reviewing actual and forecasted cash flows to ensure there are available
cash resources to meet these needs. The following are the contractual maturities of the Corporation’s financial liabilities as at
December 31, 2012:
(Stated in thousands)
Long-term debt
Interest on long-term debt (1)
Commitments
Total
2013
2014
2015
2016
2017
Thereafter
Total
$
–
$
–
$
–
$
–
$
–
$ 1,244,645
$ 1,244,645
81,710
136,596
81,710
50,356
81,710
11,476
81,710
8,980
81,710
241,275
649,825
7,529
23,161
238,098
$ 218,306
$ 132,066
$
93,186
$
90,690
$
89,239
$ 1,509,081
$ 2,132,568
(1) interest has been calculated based upon debt balances, interest rates and foreign exchange rates in effect as at December 31, 2012 and excludes amortization of long-term debt
issue costs.
Fair values
The carrying value of cash, accounts receivable, and accounts payable and accrued liabilities approximate their fair value due to
the relatively short period to maturity of the instruments. The fair value of the unsecured senior notes at December 31, 2012 was
approximately $1,330 million (2011 – $1,290 million).
Financial assets and liabilities recorded or disclosed at fair value in the consolidated balance sheet are categorized based upon
the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels are based on the amount of
subjectivity associated with the inputs in the fair determination and are as follows:
Level I—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level II—Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability
through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level III—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability
at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the
inputs to the model.
The estimated fair value of unsecured senior notes is based on level II inputs. The fair value is estimated considering the risk free
interest rates on government debt instruments of similar maturities, adjusted for estimated credit risk, industry risk and market
risk premiums.
80
Notes to Consolidated Financial Statements
NOTE 22. CAPITAL MANAGEMENT
The Corporation’s strategy is to carry a capital base to maintain investor, creditor and market confidence and to sustain future
development of the business. The Corporation seeks to maintain a balance between the level of long-term debt and shareholders’
equity to ensure access to capital markets to fund growth and working capital given the cyclical nature of the oilfield services
sector. The Corporation strives to maintain a conservative ratio of long-term debt to long-term debt plus equity. As at December 31,
2012 and 2011 these ratios were as follows:
Long-term debt
Shareholders’ equity
Total capitalization
Long-term debt to long-term debt plus equity ratio
$
$
2012
1,218,796
2,171,300
3,390,096
0.36
$
$
2011
1,239,616
2,132,591
3,372,207
0.37
During 2011, Precision pursued market opportunities to put long-term debt financing in place. The Company issued US$400 million
aggregate principal amount of 6.5% senior unsecured notes due 2021 and $200 million aggregate principal amount of 6.5%
senior unsecured notes due 2019 in private placements and retired the $175 million 10% senior unsecured notes.
As at December 31, 2012 liquidity remains sufficient as Precision has $152.8 million (2011 – $467.5 million) in cash and access
to a US$850 million senior secured revolving credit facility (2011 – US$550 million) and $79.8 million (2011 – $40.3 million) secured
operating facilities. The US$850 million Secured Revolver remains undrawn except for US$26.8 million (2011 – US$22.6 million)
in outstanding letters of credit. Availability of the $25 million secured operating facility was reduced by $18.9 million (2011 –
$0.5 million) of outstanding letters of credit and there was no amount drawn on the US$15 million secured operating facility. There
were no letters of credit issued under the US$25 million secured letter of credit facility.
NOTE 23. SUPPLEMENTAL INFORMATION
Components of change in non-cash working capital balances:
Accounts receivable
Inventory
Accounts payable and accrued liabilities
Pertaining to:
Operations
Investments
Financing
The components of accounts receivable are as follows:
Trade
Accrued trade
Prepaids and other
2012
2011
61,052
$
(137,620)
(6,707)
(111,333)
(56,988)
36,474
(93,462)
–
$
$
$
$
(1,712)
166,768
27,436
(59,616)
87,798
(746)
$
$
$
$
$
2012
2011
$
328,101
$
368,222
125,035
56,411
161,581
46,440
$
509,547
$
576,243
Precision Drilling Corporation 2012 Annual Report
81
The components of accounts payable and accrued liabilities are as follows:
Accounts payable
Accrued liabilities:
Payroll
Other
2012
2011
$
146,234
$
255,194
79,978
107,681
85,613
95,860
$
333,893
$
436,667
Precision presents expenses in the consolidated statement of earnings by function with the exception of depreciation and
amortization and loss on asset decommissioning which are presented by nature. Operating expense and general and administrative
expense would include $495.2 million and $4.8 million (2011 – $359.7 million and $6.7 million) respectively of depreciation and
amortization and loss on asset decommissioning if the statements of earnings were presented purely by function. The following
table presents operating and general and administrative expenses by nature:
Wages, salaries and benefits
Purchased materials, supplies and services
Share-based compensation
Allocated to:
Operating expense
General and administrative
2012
2011
$
795,243
$
736,365
556,103
18,603
1,369,949
1,243,301
126,648
1,369,949
$
$
$
484,813
34,785
1,255,963
1,131,022
124,941
1,255,963
$
$
$
NOTE 24. CONTINGENCIES AND GUARANTEES
The business and operations of the Corporation are complex and the Corporation has executed a number of significant financings,
business combinations, acquisitions and dispositions over the course of its history. The computation of income taxes payable as a
result of these transactions involves many complex factors as well as the Corporation’s interpretation of relevant tax legislation and
regulations. The Corporation’s management believes that the provision for income tax is adequate and in accordance with IFRS
and applicable legislation and regulations. However, there are tax filing positions that have been and can still be the subject of
review by taxation authorities who may successfully challenge the Corporation’s interpretation of the applicable tax legislation and
regulations, with the result that additional taxes could be payable by the Corporation and the amount owed, with estimated interest
but without penalties, could be up to $58 million. This amount is included in the estimated amount pertaining to the long-term
income tax recoverable on the balance sheet of $65 million.
The Corporation, through the performance of its services, product sales and business arrangements, is sometimes named as a
defendant in litigation. The outcome of such claims against the Corporation is not determinable at this time; however, their ultimate
resolution is not expected to have a material adverse effect on the Corporation.
The Corporation has entered into agreements indemnifying certain parties primarily with respect to tax and specific third party
claims associated with businesses sold by the Corporation. Due to the nature of the indemnifications, the maximum exposure
under these agreements cannot be estimated. No amounts have been recorded for the indemnities as the Corporation’s
obligations under them are not probable or estimable.
82
Notes to Consolidated Financial Statements
NOTE 25. SUBSIDIARIES
Significant subsidiaries
Precision Limited Partnership
Precision Drilling Canada Limited Partnership
Precision Diversified Oilfield Services Corp.
Precision Directional Services Ltd.
Precision Drilling (US) Corporation
Precision Drilling Company LP
Precision Completion & Production Services Ltd.
Precision Directional Services, Inc.
Grey Wolf Drilling Limited
Country of
incorporation
Canada
Canada
Canada
Canada
United States
United States
United States
United States
Cyprus
Ownership interest
2012
100
100
100
100
100
100
100
100
100
2011
100
100
100
100
100
100
100
100
100
Precision Drilling Corporation 2012 Annual Report
83
Consolidated Statements of Earnings
Years ended December 31,
(Stated in millions of Canadian dollars,
except per unit/share amounts)
Revenue
Expenses:
Operating
General and administrative
Earnings before income taxes, finance charges,
foreign exchange, impairment of goodwill, loss
on asset decommissioning, and depreciation
and amortization (Adjusted EBITDA)
Depreciation and amortization
Loss on decommissioning
Operating earnings
Impairment of goodwill
Foreign exchange
Finance charges
Earnings before income taxes
Income taxes
Net earnings
Earnings per unit/share:
Basic
Diluted
2012
2011
IFRS
2010
2009
2008
Previous CGAAP
$ 2,040.7
$ 1,951.0
$ 1,429.7
$ 1,197.4
$ 1,101.9
1,243.3
126.6
1,131.0
124.9
670.8
307.5
192.5
170.8
52.5
3.8
86.8
27.7
(24.7)
52.4
695.1
251.5
114.9
328.7
–
(23.7)
111.6
240.8
47.3
193.5
886.8
108.0
434.9
210.1
–
224.8
–
(12.7)
211.3
26.2
(17.3)
43.5
692.2
98.2
407.0
138.0
82.1
186.9
–
(122.8)
147.4
162.3
0.6
161.7
598.2
67.2
436.5
83.8
–
352.7
–
(2.0)
14.1
340.6
37.9
302.7
$
$
0.19
0.18
$
$
0.70
0.67
$
$
0.16
0.15
$
$
0.65
0.63
$
$
2.23
2.23
84
Supplemental Information
Additional Selected Financial Information
Years ended December 31,
(Stated in millions of Canadian dollars,
except per unit/share amounts)
Return on sales – % (1)
Return on assets – % (2)
Return on equity – % (3)
Working capital
Current ratio
2012
2.6
1.2
2.4
2011
IFRS
9.9
4.9
9.5
2010
2009
2008
Previous CGAAP
3.0
1.3
2.2
13.5
3.6
6.2
27.5
12.4
19.6
$
278.0
$
610.4
$
458.0
$
320.9
$
345.3
1.7
2.4
3.1
3.5
2.0
PP&E and intangibles
$ 3,249.0
$ 2,948.8
$ 2,538.8
$ 2,917.1
$ 3,248.9
Total assets
Long-term debt
Shareholders’ equity
Long-term debt to long-term debt plus equity
Interest coverage (4)
Net capital expenditures excluding
business acquisitions
Adjusted EBITDA
Adjusted EBITDA – % of revenue
$ 4,300.3
$ 4,427.9
$ 3,564.5
$ 4,191.7
$ 4,833.7
$ 1,218.8
$ 1,239.6
$
804.5
$
748.7
$ 1,368.3
$ 2,171.3
$ 2,132.6
$ 1,932.8
$ 2,584.5
$ 2,323.9
0.36
2.0
836.6
670.8
32.9
$
$
0.37
2.9
710.4
695.1
35.6
$
$
0.29
1.1
163.6
434.9
30.4
$
$
0.22
1.3
177.5
407.0
34.0
$
$
0.37
24.9
219.1
436.5
39.6
$
$
Operating earnings
$
170.8
$
328.7
$
224.8
$
186.9
$
352.7
Operating earnings – % of revenue
8.4
16.8
15.7
15.6
32.0
Cash flow from continuing operations
$
635.3
$
532.8
$
306.3
$
504.7
$
343.9
Cash flow from continuing operations
per unit/share:
Basic
Diluted
Book value per unit/share (5)
Price earnings ratio (6)
Basic weighted average units/shares
outstanding (000’s)
$
$
$
2.30
2.22
7.85
43.26
$
$
$
1.93
1.85
7.72
15.00
$
$
$
1.11
1.07
7.01
41.74
$
$
$
2.02
1.94
9.38
11.77
$
$
$
2.54
2.53
14.51
4.21
276,276
275,899
275,655
249,925
135,568
(1) Return on sales was calculated by dividing earnings from continuing operations by total revenues.
(2) Return on assets was calculated by dividing net earnings by quarter average total assets.
(3) Return on equity was calculated by dividing net earnings by quarter average total shareholders’ equity.
(4) Interest coverage was calculated by dividing operating earnings by finance charges.
(5) Book value per unit/share was calculated by dividing shareholders’ equity by shares outstanding.
(6) Year end closing price divided by basic earnings per unit/share.
Precision Drilling Corporation 2012 Annual Report
85
Shareholder Information
STOCK EXCHANGE LISTINGS
Our shares are listed on the Toronto
Stock Exchange under the trading
symbol PD and on the New York
Stock Exchange under the trading
symbol PDS.
TRANSFER AGENT
AND REGISTRAR
Computershare Trust Company
of Canada
Calgary, Alberta
TRANSFER POINT
Computershare Trust Company NA
Denver, Colorado
2012 TRADING PROFILE
Toronto (TSX: PD)
High: $12.72
Low: $5.97
Close: $8.22
Volume Traded: 338,041,496
New York (NYSE: PDS)
High: US$12.89
Low: US$5.82
Close: US$8.28
Volume Traded: 454,653,537
ACCOUNT QUESTIONS
Our transfer agent can help you
with shareholder related services,
including:
change of address
lost share certificates
transferring shares to another
person
estate settlement.
Contact them at:
Computershare Trust Company
of Canada
100 University Avenue,
9th Floor, North Tower
Toronto, Ontario, Canada
M5J 2Y1
Telephone: 1-800-564-6253
(toll free in Canada and the United States)
1-514-982-7555
(international direct dialing)
Email: service@computershare.com
ONLINE INFORMATION
To receive news releases by email, or
to view this report online, please visit
the Investor Relations section of our
website at www.precisiondrilling.com.
You can find additional information
about us, including our annual
information form, 2012 annual report
and management information circular,
under our profile on the SEDAR
website at www.sedar.com and on
the EDGAR website at www.sec.gov.
PUBLISHED INFORMATION
Please contact us if you would like
additional copies of this annual
report, or copies of our 2012
annual information as filed with the
Canadian securities commissions
and under Form 40-F with the
United States Securities and
Exchange Commission:
Investor Relations
Suite 800, 525 – 8th Avenue SW
Calgary, Alberta, Canada
T2P 1G1
Telephone: 403.716.4500
86
Shareholder Information
Corporate Information
DIRECTORS
William T. Donovan
Brian J. Gibson
Robert J. S. Gibson
Allen R. Hagerman, FCA
Stephen J. J. Letwin
Kevin O. Meyers
Patrick M. Murray
Kevin A. Neveu
Robert L. Phillips
LEAD BANK
Royal Bank of Canada
Calgary, Alberta
AUDITORS
KPMG LLP
Calgary, Alberta
HEAD OFFICE
Suite 800, 525 – 8th Avenue SW
Calgary, Alberta, Canada
T2P 1G1
Telephone: 403.716.4500
Email: info@precisiondrilling.com
www.precisiondrilling.com
OFFICERS
Kevin A. Neveu
President and
Chief Executive Officer
Joanne L. Alexander
Senior Vice President, General
Counsel and Corporate Secretary
Niels Espeland
President, International Operations
Doug Evasiuk
Senior Vice President,
Sales and Marketing
Kenneth J. Haddad
Senior Vice President,
Business Development
Robert J. McNally
Executive Vice President and
Chief Financial Officer
Darren J. Ruhr
Senior Vice President,
Corporate Services
Gene C. Stahl
President, Drilling Operations
Douglas J. Strong
President, Completion and
Production Services
Precision Drilling Corporation 2012 Annual Report
87
Precision Drilling Corporation
Suite 800, 525 – 8th Avenue SW
Calgary, Alberta, Canada T2P 1G1
Telephone: 403.716.4500
Email: info@precisiondrilling.com
www.precisiondrilling.com
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