Precision
Drilling
Corporation
2014
Annual
Report
Precision
Management’s
Discussion and Analysis
Consolidated Financial
Statements and Notes
Precision
Precision Drilling
Corporation
2014
What’s Inside
6 About Precision
10 2014 Highlights and Outlook
15 Understanding our Business Drivers
The Energy Industry
A Competitive Operating Model
An Effective Strategy
24 2014 Results
2014 Compared to 2013
2013 Compared to 2012
Segmented Results
Quarterly Financial Results
34 Financial Condition
40 Accounting Policies and Estimates
43 Risks in our Business
50
Evaluation of Controls and Procedures
51 Corporate Governance
52
Management’s Report
to the Shareholders
53
Independent Auditors’ Reports
55
Consolidated Financial
Statements and Notes
92 Supplemental Information
94 Shareholder Information
95 Corporate Information
2014 SHARE TRADING SUMMARY
The Toronto Stock Exchange (TSX)
P D
Volume (millions)
Share Price (Cdn$)
$16
$12
$8
$4
)
$
n
d
C
(
e
c
i
r
P
e
r
a
h
S
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Toronto (TSX: PD)
High: $15.65 Low: $6.11 Close December 31, 2014: $7.06 Volume Traded: 360,004,415
The New York Stock Exchange (NYSE)
P DS
Volume (millions)
Share Price (US$)
$16
$12
$8
$4
)
$
S
U
(
e
c
i
r
P
e
r
a
h
S
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
New York (NYSE: PDS)
High: US$14.65 Low: US$5.27 Close December 31, 2014: US$6.06 Volume Traded: 570,212,820
)
s
n
o
i
l
l
i
m
(
e
m
u
o
V
l
)
s
n
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i
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l
i
m
(
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u
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10
7.5
5.0
2.5
0
10
7.5
5.0
2.5
0
Precision Drilling Corporation 2014 Annual Report
1
MD&A
Management’s
Discussion and
Analysis
Precision
Precision Drilling
Corporation
2014
This management’s discussion and analysis
(MD&A) contains information to help you
understand our business and financial
performance. Information is as of March 6,
2015. 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 Cautionary Statement About
Forward-Looking Information and Statements on
page 3. We adopted IFRS effective January 1,
2011, and restated our 2010 results at that time.
The terms we, us, our, Precision Drilling and
Precision mean Precision Drilling Corporation
and our consolidated subsidiaries, and
include any partnerships that we and/or our
subsidiaries are part of.
All amounts are in Canadian dollars unless
otherwise stated.
2
Management’s Discussion and Analysis
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING INFORMATION AND STATEMENTS
We disclose forward-looking information to help current and prospective investors understand our future prospects.
Certain statements contained in this MD&A, including statements that contain words such as “could”, “should”, “can”,
“anticipate”, “estimate”, “intend”, “plan”, “expect”, “believe”, “will”, “may”, “continue”, “project”, “potential” and similar
expressions and statements relating to matters that are not historical facts constitute “forward-looking information”
within the meaning of applicable Canadian securities legislation and “forward-looking statements” within the meaning
of the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995 (collectively,
“forward-looking information and statements”).
In particular, our forward-looking information and statements in this MD&A include, but are not limited to, the following:
the expected use of the net proceeds from our private offering of 5.25% Senior Notes
the potential development of the LNG export sector in Canada and the U.S. and its potential to serve as a catalyst
for future natural gas drilling activity
continuing customer demand for Tier 1 drilling rigs
international expansion plans
our capital expenditure plans including the amounts to be allocated for expansion capital, upgrades and
sustaining and infrastructure expenditures
the number of new build rigs to be delivered to customers including timing of delivery
the plans to add a training rig to our Nisku facility
our strategic priorities for 2015, which includes growing our integrated directional drilling service under the
Schlumberger alliance
amendments to IFRS and their expected impact on our financial statements.
These forward-looking information and statements are based on certain assumptions and analysis made by Precision in
light of our experience and our perception of historical trends, current conditions and expected future developments as
well as other factors we believe are appropriate in the circumstances. These include, among other things:
our ability to continue to make advances in drilling and completion techniques and make efficiency gains
our ability to react to customers’ spending plans as a result of the recent decline in oil prices
the status of current negotiations with our customers and vendors
Tier 1 rigs remaining best suited for the drilling of the majority of unconventional wells
increasing demand for integrated directional drilling capabilities
our ability to deliver rigs to customers on a timely basis
the general stability of the economic and political environment in the jurisdictions where we operate.
Precision Drilling Corporation 2014 Annual Report
3
Whether actual results, performance or achievements will conform to our expectations and predictions is subject to a
number of known and unknown risks and uncertainties which could cause actual results to differ materially from our
expectations. Such risks and uncertainties include, but are not limited to, the following:
volatility in the price and demand for oil and natural gas
fluctuations in customer spending and its impact on the demand for contract drilling, well servicing and ancillary
oilfield services
the risks associated with our investments in capital assets and changing technology
shortages, delays and interruptions in the delivery of equipment, supplies and other key inputs
the effects of seasonal and weather conditions on operations and facilities
the availability of qualified personnel and management
the existence of competitive operating risks inherent in our businesses
changes in environmental and safety rules or regulations including increased regulatory scrutiny on horizontal
drilling and hydraulic fracturing
terrorism, social, civil and political unrest in the foreign jurisdictions where we operate
fluctuations in foreign exchange, interest rates and tax rates
other unforeseen conditions which could impact the use of services supplied by Precision and Precision’s ability
to respond to such conditions
other risks and uncertainties set out in this MD&A under the heading Risks in our Business.
You are cautioned that the foregoing list of risk factors is not exhaustive. Other risks and uncertainties are set out in
reports on file with applicable securities regulatory authorities, including but not limited to our annual information form
(AIF) for the year ended December 31, 2014, which may be accessed on Precision’s SEDAR profile on SEDAR
(www.sedar.com) or under Precision’s EDGAR profile on EDGAR (www.sec.gov).
All of the forward-looking information and statements made in this MD&A are expressly qualified by these cautionary
statements. There can be no assurance that actual results or developments that we anticipate will be realized. We
caution you not to place undue reliance on forward-looking information and statements. The forward-looking information
and statements made in this MD&A are made as of the date hereof. 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
applicable securities law.
4
Management’s Discussion and Analysis
ADDITIONAL GAAP MEASURES
In this MD&A, we reference additional 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 us, and our investors, an indication of the
results from our principal business activities before consideration of how our activities are financed and excluding the
impact of foreign exchange, taxation, non-cash depreciation, amortization and impairment 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 gives us, and our investors, an indication of the results of our principal business activities before
consideration of how our activities are financed and excluding 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 gives us, and our investors, 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 2014 Annual Report
5
About Precision
Management’s
Discussion and
Analysis
Precision Drilling Corporation provides onshore drilling, 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 in the U.S. We also have
operations in Mexico and 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.
Vision
Our vision is to be globally recognized as
the High Performance, High Value provider
of land drilling and related services.
You can read about our strategic priorities
on page 22.
STRENGTH AND FLEXIBILITY
From our founding as a private drilling contractor in the 1950s,
Precision has grown to become one of the most active drillers in
North America. Our strength and flexibility are underpinned by four
distinguishing features:
a competitive operating model that drives efficiency, quality and cost control
size and scale of operations that provide higher margins and better service capabilities
liquidity that allows us to take advantage of business cycle opportunities
a capital structure that provides long-term stability and flexibility.
6
Management’s Discussion and Analysis
TWO BUSINESS SEGMENTS
We operate our business in two segments, supported by vertically integrated business support systems.
Precision Drilling Corporation
Contract Drilling Services
• Drilling rig operations
– Canada
– U.S.
– International
• Directional drilling operations
– Canada
– U.S.
Completion and Production Services
Canada and U.S.
– Service rigs
– Equipment rentals
Canada
– Snubbing and coil tubing
– Camps and catering
– Water systems
Business support systems
• Sales and
marketing
• Procurement and
distribution
Manufacturing
Equipment maintenance
Engineering
and certification
Corporate support
•
systems
Information
• Health, safety and
environment
Human
resources
Finance
Legal and enterprise
risk management
2014 Adjusted EBITDA by Operating Segment
2014 Revenue by Region
Contract
Drilling
Services
91%
Completion
and Production
Services
9%
International
8%
Canada
46%
USA
46%
Precision Drilling Corporation 2014 Annual Report
7
•
•
•
•
•
•
•
•
Contract Drilling Services
We provide onshore drilling services to exploration and production companies in the oil and natural gas industry,
operating in Canada, the U.S. and internationally.
We are the second largest land drilling contractor in North America, servicing approximately 23% of the active land
drilling market in Canada and 5% of the active U.S. market. We also have an international presence with operations
in Mexico and the Middle East.
At December 31, 2014, our Contract Drilling Services segment consisted of:
313 land drilling rigs, including:
– 174 in Canada
– 124 in the U.S.
– 6 in Mexico
– 4 in Saudi Arabia
– 2 in Kuwait
– 2 in the Kurdistan region of Iraq
– 1 in the country of Georgia
capacity for approximately 88 concurrent directional drilling jobs in Canada and the U.S.
engineering, manufacturing and repair services primarily for Precision’s operations
centralized procurement, inventory and distribution of consumable supplies for our global operations.
Drilling Rigs at December 31, 2014
Horsepower
Tier 1
Tier 2
PSST (1)
Total
< 1000
1000-1500
>1500
95
39
14
148
115
20
4
139
7
15
4
26
Geographic location
Canada
U.S.
International
Tier 1
Tier 2
PSST (1)
Total
(1) Precision seasonal, stratification and turnkey rigs.
119
41
14
174
93
23
8
124
5
10
–
15
Total
217
74
22
313
Total
217
74
22
313
Contract Drilling
Revenue
Contract Drilling
Adjusted EBITDA
$ Millions
$2,500
$2,000
$1,500
$1,000
$500
0
$ Millions
$1,000
$800
$600
$400
$200
0
Contract Drilling
Utilization Days
Utilization Days
80,000
60,000
40,000
20,000
0
2010 2011
2012
2013
2014
2010 2011
2012
2013
2014
2010 2011
2012
2013
2014
8
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 presence in the U.S.
On an operating hour basis in 2014, we serviced approximately 11% of the well completion and workover service rig
market demand in Canada.
At December 31, 2014, our Completion and Production Services segment consisted of:
156 well completion and workover service rigs, including:
– 148 in Canada
– 8 in the U.S.
17 snubbing units in Canada
4 coil tubing units in Canada
approximately 2,600 oilfield rental items including surface storage, small-flow wastewater treatment, power
generation, and solids control equipment primarily in Canada
221 wellsite accommodation units in Canada and 65 in the U.S.
50 drilling camps and four base camps in Canada
10 large-flow wastewater treatment units, 25 pump houses and eight potable water production units in Canada.
Service Rig Fleet as at December 31, 2014
Type
Well Completion and Workover Service
Singles:
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
2010
2011
2012
2013
2014
94
25
35
28
18
200
20
–
220
90
19
40
22
18
189
18
–
207
90
19
40
22
19
190
19
5
214
90
19
40
22
20
191
19
12
222
74
7
41
14
20
156
17
4
177
Completion and Production
Revenue
Completion and Production
Adjusted EBITDA
Completion and Production
Service Rig Hours
$ Millions
$400
$300
$200
$100
0
$ Millions
$125
$100
$75
$50
$25
0
Hours
400,000
300,000
200,000
100,000
0
2010 2011
2012
2013
2014
2010 2011
2012
2013
2014
2010 2011
2012
2013
2014
Precision Drilling Corporation 2014 Annual Report
9
2014 Highlights and Outlook
Management’s
Discussion and
Analysis
Adjusted EBITDA and funds provided by operations are additional GAAP measures. See page 5 for more information.
Financial Highlights
Year ended December 31
(thousands of dollars, except where noted)
% increase/
2014
(decrease)
2013
% increase/
(decrease)
Revenue
Adjusted EBITDA
Adjusted EBITDA % of revenue
Net earnings
Cash provided by operations
Funds provided by operations
Investing activities
Capital spending
Expansion
Upgrade
Maintenance and infrastructure
Proceeds on sale
Net capital spending
Business acquisitions (net of cash
acquired)
Earnings per share ($)
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
U.S.
International
Service rig fleet
Service rig operating hours
2,350,538
800,370
34.1%
33,152
680,159
697,474
571,383
136,475
148,832
(101,826)
754,864
–
0.11
0.11
0.25
15.8
25.3
(82.7)
58.9
51.0
102.5
(3.3)
32.3
661.5
44.5
–
(84.1)
(83.3)
19.0
2,029,977
638,833
31.5%
191,150
428,086
461,973
282,145
141,132
112,527
(13,372)
522,432
(0.5)
(4.8)
265.1
(32.6)
(22.9)
(52.7)
8.5
(20.6)
(57.4)
(37.6)
2012
2,040,741
670,792
32.9%
52,360
635,286
598,812
596,194
130,094
141,769
(31,423)
836,634
% increase/
(decrease)
4.6
(3.5)
(72.9)
19.2
1.1
30.9
(13.2)
16.9
96.6
17.8
–
(100.0)
25
(100.0)
0.69
0.66
0.21
263.2
266.7
320.0
0.19
0.18
0.05
(72.9)
(73.1)
n/m
% increase/
2014
(decrease)
313
(4.3)
32,810
35,075
4,036
177
273,194
7.5
15.9
13.5
(20.3)
(3.7)
2013
327
30,530
30,268
3,555
222
283,576
% increase/
(decrease)
1.9
(5.6)
(12.5)
70.4
3.7
(3.8)
2012
321
32,352
34,597
2,086
214
294,681
% increase/
(decrease)
(4.7)
(14.8)
(8.7)
197.2
3.4
(7.2)
10 Management’s Discussion and Analysis
Financial Position and Ratios
(thousands of dollars, except ratios)
Working capital
Working capital ratio
Long-term debt
Total long-term financial liabilities
Total assets
Enterprise value (1)
Long-term debt to long-term debt plus equity (2)
Long-term debt to cash provided by operations
Long-term debt to enterprise value
December 31,
2014
December 31,
2013
December 31,
2012
653,630
2.3
1,852,186
1,881,275
5,308,996
3,265,865
0.43
2.72
0.57
305,783
1.9
1,323,268
1,355,535
4,579,123
3,919,763
0.36
3.09
0.34
278,021
1.7
1,218,796
1,245,290
4,300,263
3,213,406
0.36
1.92
0.38
(1) Share price multiplied by the number of shares outstanding plus long-term debt minus working capital. See page 39 for more information.
(2) Net of unamortized debt issue costs.
2014 OVERVIEW
Net earnings in 2014 were $33 million, or $0.11 per diluted share, compared to $191 million, or $0.66 per diluted share
in 2013. During the year, we recorded a before-tax asset decommissioning charge and goodwill write down totaling
$222 million that reduced net earnings by $182 million and net earnings per diluted share by $0.62. Effective January 1,
2014, we began calculating depreciation on our drilling rigs and service rigs on a straight-line basis, which reduced
net earnings for the year by approximately $29 million, or $0.10 per diluted share, from what net earnings would have
been using the previous depreciation method. We believe that, due to technological developments within the industry,
straight-line depreciation better reflects the allocation of the cost of the assets over their expected lives.
Revenue in 2014 was $2,351 million, 16% higher than in 2013, mainly due to improved utilization and higher average
pricing in our Contract Drilling Services segment. Contract Drilling Services revenue was up 17%, while revenue from
Completion and Production Services was up 6%. Our international drilling activity increased 15% with an average of 15
rigs working in 2014 compared to 13 in 2013.
Adjusted EBITDA in 2014 was $800 million, 25% higher than in 2013. Our Adjusted EBITDA margin was 34%, compared
to 31% in 2013. The increase in Adjusted EBITDA margin was mainly the result of higher utilization and improved margin
in our Contract Drilling Services segment. Adjusted EBITDA margin for the year in our Contract Drilling Services segment
was 41%, compared with 38% in the prior year, while Adjusted EBITDA margin from our Completion and Production
segment was 17% compared to a prior year margin of 19%. A competitive industry and fixed costs contributed to the
lower margin in our Completion and Production Services segment. Our portfolio of term customer contracts, a scalable
operating cost structure, and economies achieved through vertical integration of the supply chain all help us manage our
Adjusted EBITDA margin.
On June 3, 2014, we issued US$400 million of 5.25% Senior Notes due in 2024 in a private offering. The Notes are
guaranteed on a senior unsecured basis by current and future U.S. and Canadian subsidiaries that also guarantee
our revolving credit facility and certain other indebtedness. We expect to use the net proceeds from this placement for
general corporate purposes, including building new drilling rigs.
Drilling activity was robust throughout most of 2014, despite rapidly falling oil prices in the second half of the year. On
the strength of oil prices, the industry momentum at the end of 2013 continued into 2014 as customers in North America
focused on unconventional oil and natural gas liquids targets. Drilling activity in the Middle East and Mexico was strong
throughout 2014, driven primarily by higher oil prices. Natural gas prices were higher for most of the year relative to 2013,
but not high enough to encourage increased gas-directed drilling activity.
Precision Drilling Corporation 2014 Annual Report
11
During the year, we decommissioned 29 drilling rigs, 35 well servicing rigs and two snubbing units and recognized a
non-cash pre-tax decommissioning charge of $127 million. Certain components of the decommissioned equipment
will be used in our ongoing operations. We also recorded a $95 million impairment charge to the goodwill attributable
to Canadian well servicing and the wastewater treatment businesses as it was determined that their carrying values
exceeded their recoverable amounts.
In the fourth quarter of 2014, we increased our quarterly dividend to $0.07 per common share.
OUTLOOK
Contracts
Our strong portfolio of term customer contracts provides a base level
of activity and revenue and, as of March 6, 2015, we had term contracts
in place for an average of 104 rigs: 45 in Canada, 48 in the U.S. and
11 internationally for 2015. In Canada, term contracted rigs normally
generate 250 utilization days per rig year because of the seasonal nature
of wellsite access. In most regions in the U.S. and internationally, term contracts normally generate 365 utilization
days per rig year. In 2014, approximately 49% of our total contract drilling revenue was generated from rigs under
term contract.
for Canada, and one for Kuwait).
We expect to add 17 new-build Super Series
rigs to our fleet in 2015 (13 for the U.S., three
Pricing, Demand and Utilization
The demand for energy is highly correlated with global economic growth and has been rising over the past several years
with the improvement in the global economic situation. In addition, per capita energy consumption has been increasing
in many developing countries. These demand fundamentals, along with the challenges of maintaining or growing global
supply, supported stronger oil prices from 2009 through much of 2014. However, in late 2014 the price of crude oil on
global markets began declining rapidly as global oversupply drove prices down sharply. For the first three quarters of
2014, West Texas Intermediate (WTI) averaged US$99.82 per barrel while from October 1, 2014 to March 6, 2015 WTI
averaged US$63.21 per barrel. WTI closed at US$49.61 per barrel on March 6, 2015.
Natural gas prices have been depressed for a few years, reaching 10-year lows in 2012 before recovering slightly in 2014
to average US$4.33 per MMBtu at Henry Hub. Lower natural gas prices have persisted due to increased production from
unconventional resource development, higher than average storage levels, and the lack of an export market from North
America. Despite the industry-wide decline in natural gas drilling activity, U.S. production has continued to grow, keeping
prices low.
Natural gas demand in North America largely depends on the weather with colder winter temperatures and, to a lesser
extent, warmer summer temperatures resulting in greater natural gas demand. Other demand drivers, such as natural
gas fired power generation, industrial applications and transportation, have shown positive growth over the past several
years driven by a preference for natural gas over coal, favourable regulation and lower prices. As well, the potential of
liquefied natural gas (LNG) export development in both Canada and the U.S. could serve as a catalyst for natural gas
directed drilling activity over the medium to long term.
The oil rig count at March 6, 2015 was 37% lower in the U.S. than it was a year ago, and 61% lower in Canada. Despite
declines of over 40% from peak levels in November 2014, the overall North American land oil directed rig count on
March 6, 2015 was approximately three times higher than it was on March 6, 2009, supported by unconventional oil
drilling in plays such as Bakken, Cardium, Montney, Duvernay, Eagle Ford, Granite Wash, Niobrara and Permian. We
expect exploration and production companies drilling unconventional oil and gas wells will continue to seek ways to
increase efficiencies and lower costs in their operations, supporting demand for highly efficient Tier 1 drilling rigs.
12 Management’s Discussion and Analysis
International
We currently have 15 rigs in Mexico and the Middle East, and we plan to deliver another new-build rig to Kuwait in
the first half of 2015.
Upgrading the Fleet
We and some of our competitors have been upgrading the drilling rig fleet by building new rigs and upgrading existing
rigs. We believe this retooling of the industry-wide fleet has been making Tier 3 rigs virtually obsolete in North America.
In the fourth quarter of 2012, we decommissioned 52 rigs from our fleet and exited the conventional Tier 3 contract
drilling business. In the fourth quarter of 2014, we decommissioned a further 29 drilling rigs (19 in Canada and
10 in the U.S.). Our focus on the Tier 1 market is aligned with our corporate strategy, customer relationships and
competitive position.
Capital Spending
We expect capital spending in 2015 to be approximately $487 million ($481 million in the Contract Drilling Services
segment and $6 million in the Completion and Production Services segment):
$370 million for expansion capital, which includes the cost to complete construction of the 17 remaining drilling
rigs from the 2014 new-build rig program
$40 million for upgrade capital
$77 million for sustaining and infrastructure expenditures, which is based on currently anticipated activity levels.
Following is a new-build delivery schedule of expected deliveries in 2015. All of the rigs shown on the table below are
backed by customer contracts.
Rig Deliveries:
Canada
U.S.
International
Q1
Q2
2
7
–
9
–
6
1
7
2015
Q3
1
–
–
1
Q4
Total
–
–
–
–
3
13
1
17
The 13 rigs for the U.S. are Super Triple rigs and are scheduled to be delivered to multiple unconventional basins for
five different customers. The new-build rigs in Canada are ST-1200 rigs for three different customers. The international
new-build ST-1500 rig is expected to be delivered to Kuwait in June 2015. As at March 6, 2015, eight of the 17 rigs had
been delivered and placed into service.
Precision Drilling Corporation 2014 Annual Report
13
i
%
n
g
r
a
M
50
40
30
20
10
0
2010
2011
2012
2013
2014
Revenue and
Adjusted EBITDA
Adjusted EBITDA Margin
Adjusted EBITDA
Revenue
Source: Precision Drilling
Funds From Operations
Note: 2009 was prepared under
previous Canadian GAAP
s
n
o
i
l
l
i
M
$
2,500
2,000
1,500
1,000
500
0
700
600
500
400
300
200
100
0
s
n
o
i
l
l
i
M
$
Source: Precision Drilling
2010
2011
2012
2013
2014
Drilling Utilization Days
80,000
60,000
s
y
a
D
40,000
20,000
0
International
USA
Canada
Source: Precision Drilling
2010
2011
2012
2013
2014
14 Management’s Discussion and Analysis
Understanding our Business Drivers
Management’s
Discussion and
Analysis
THE ENERGY INDUSTRY
Precision operates in the energy services business, which is an inherently challenging cyclical industry. Customer
demand depends on the end price for their products: crude oil, natural gas, and natural gas liquids.
We depend on oil and natural gas exploration and production companies to contract our services as part of their
development activities. The economics of their business are dictated by the current and expected future margin between
their finding and development costs and the eventual market price for the commodities they produce.
Commodity Prices
Our customers’ cash flow to fund exploration and development is dependent on commodity prices: higher prices
increase cash flow and encourage investment.
Oil can be transported relatively easily, so it is generally priced in a global market that is influenced by an array of
economic and political factors. Oil prices had generally been relatively strong since 2009 as supply and demand
fundamentals remained tight. Strong prices contributed to significant drilling activity in North America, resulting in supply
growth, particularly from shale plays in the U.S. This activity, combined with slower than expected global demand growth
and sustained production levels from OPEC, led to a supply-demand imbalance, which resulted in price deterioration
beginning in late 2014 and continuing into 2015.
Natural gas and natural gas liquids continue to be priced regionally. In North America, colder weather late in 2013 and
early 2014 increased demand for natural gas, depleting inventories and causing spot prices to rise at the beginning of
the year. But as the year progressed, supplies of unconventional natural gas increased and inventories reached levels
that are viewed as adequate to keep North American markets well supplied.
WTI Oil Prices and
Henry Hub Natural
Gas Prices
12
t
u
B
M
M
/
$
S
U
8
4
Henry Hub Natural Gas Prices
West Texas Intermediate (“WTI”)
Oil Prices
Source: Precision Drilling
0
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
120
80
40
0
l
e
r
r
a
b
/
$
S
U
Precision Drilling Corporation 2014 Annual Report
15
New Technology
Technological advancements in horizontal drilling, fracturing and stimulation have brought about a shift in development
from conventional to unconventional natural gas and oil reservoirs. This is giving companies cost-effective access to
more complex reservoirs in North America, in existing basins and in new basins that have not been economic in the past.
The following chart shows the consistent trend away from vertical wells to more demanding directional/horizontal well
programs, which require higher capacity equipment and greater technical expertise for drilling. These trends are driving
the demand for high performing, Tier 1 drilling rigs, which garner premium contract rates.
Directional/Horizontal
Wells Drilled as a
Percentage of Total Wells
Drilled in Canada
100
80
60
40
20
t
e
g
a
n
e
c
r
e
P
Precision
Canada Industry Excluding Precision
Source: Whelby Data
0
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
These technical innovations have been a major factor in the increase in natural gas production in the U.S., which is
becoming less reliant on Canada as a source of natural gas. Natural gas production in Canada has been declining
because of lower natural gas directed drilling due to pricing pressure and Canada’s lack of an export market other than
the U.S.
U.S. Lower 48 Production
100
)
d
/
f
c
B
(
s
a
G
l
a
r
u
a
N
t
80
60
40
20
U.S. Lower 48 Natural Gas Production
U.S. Lower 48 Crude Oil Production
Source: Energy Information Administration
0
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
10
8
6
4
2
0
l
)
d
/
s
b
b
M
M
(
l
i
O
e
d
u
r
C
16 Management’s Discussion and Analysis
Canadian Production
20
16
12
8
4
)
d
/
f
c
B
(
s
a
G
l
a
r
u
a
N
t
Canadian Crude Oil Production
Canadian Natural Gas Production
Source: Energy Information Administration
and First Energy Capital
0
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
5
4
3
2
1
0
l
)
d
/
s
b
b
M
M
(
l
i
O
e
d
u
r
C
Drilling Activity
The graphs below show that, since 2010, drilling activity in the U.S. 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 U.S.
U.S. Drilling Rig Activity
1,600
i
g
n
k
r
o
W
s
g
R
i
1,200
800
400
0
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Natural Gas Rigs
Crude Oil Rigs
Source: Baker Hughes, Inc.
Canadian Drilling Rig Activity
600
Natural Gas Rigs
Crude Oil Rigs
Source: Baker Hughes, Inc.
i
g
n
k
r
o
W
s
g
R
i
400
200
0
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Precision Drilling Corporation 2014 Annual Report
17
A COMPETITIVE OPERATING MODEL
The contract drilling business is highly competitive, with numerous industry participants. We compete for long-term
drilling contracts that are often awarded based on a competitive bid process.
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 and safety
record, among others.
Providing High Performance, High Value services to our customers is the core of our competitive strategy. We deliver
High Performance by employing 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 our equipment to minimize mechanical downtime
effectively managing operations to keep non-productive time to a minimum
compensating our executives 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,
such as multi-well pad capability and mobility between wells, capture incremental time savings during the
drilling process.
The versatile Precision Super Series design features technical innovations in safety and drilling efficiency for horizontal
wells on a single or multiple well pad. Precision Super Series rigs use extended length drill pipe, an 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 with iron roughnecks and remotely operated
torque wrenches.
Super Triple electric rigs (ST-1200 and ST-1500) have greater hoisting capacity and are used in deeper exploration and
development drilling, while Super Single rigs are used in shallow to medium depth applications. Power capabilities are
a major design criterion for Super Triple rigs. Drilling productivity and reliability with AC power drive systems provides
added precision and measurability, while a computerized electronic auto driller feature precisely controls weight, rotation
and torque on the drill bit.
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 the most active drilling regions in
North America, including the major unconventional oil and natural gas basins.
18 Management’s Discussion and Analysis
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 located spare equipment, and an in-house supply chain. We minimize non-productive time (move, rig-up
and rig-out time) by utilizing walking and skidding systems, reducing the number of move loads per rig, having lighter
move loads, and using mechanized equipment for safer and quicker rig component connections.
Tracking Our Results
We unitize key financial information per day and per hour, and compare these measures 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 U.S.
Operational performance – rig down time for repair as measured by time not billed to the customer. Measured
against a predetermined target of available billable time.
Key field employee retention – senior field employee retention rates. Measured against predetermined target rates
of retention.
Financial performance – Adjusted EBITDA and return on capital employed calculated as a percentage of pre-tax
operating earnings divided by total assets less current liabilities. Measured against predetermined targets.
Investment returns – total shareholder return performance, including dividends, against an industry peer group
over a three year period. Measured against predetermined competitors in the established 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.
High Performance Rig Fleet
Our fleet of drilling rigs is well positioned to address the unconventional
drilling programs of our customers. The vast majority of our drilling rigs
have been designed or significantly upgraded to drill horizontal wells.
With a breadth of horsepower types and drilling depth capabilities, our
large fleet can address every type of onshore unconventional oil and
natural gas drilling opportunity in North America.
In 2014, we high-graded our drilling rig fleet, as follows:
69%
As at December 31, 2014, 69% of our
313 drilling rigs were Tier 1 rigs.
added 15 Tier 1 new-build drilling rigs, with 17 additional Tier 1 new-build drilling rigs in various stages of
completion expected to be delivered by mid 2015
upgraded 12 drilling rigs, half of which were tier upgrades
decommissioned 29 legacy drilling rigs (19 in Canada and 10 in the U.S.).
Precision Drilling Corporation 2014 Annual Report
19
As at December 31, 2014, 69% of our 313 drilling rigs were Tier 1 rigs.
Tier 1
Rigs are better suited to meet the
challenges of complex customer
requirements for resource
exploitation in North American
shale and unconventional plays
High performance Super Series rigs, innovative in design, capable of drilling directionally or horizontally,
highly mobile (move with pad walking or skidding systems or require fewer trucking loads)
Features
highly mechanized tubular handling equipment
integrated top drive or top drive adaptability
advanced AC, silicone controlled rectifier (SCR) and mechanical power distribution and
control efficiencies
electronic or hydraulic control of the majority of operating parameters
specialized drilling tubulars
high-capacity mud pumps
majority use Range III drill pipe
Tier 2
High performance rigs, capable of drilling directionally or horizontally, generally less mobile than Tier 1 rigs
High performance rigs with new
equipment and modifications to
improve performance and enhance
directional and horizontal drilling
capability
Features
some mechanization of tubular handling equipment
top drive adaptability
SCR or mechanical-type power systems
increased hookload and or racking capabilities
upgraded power generating, control systems and other major components
high-capacity mud pumps
PSST (Precision seasonal,
stratification and turnkey)
Acceptable level of performance for certain drilling requirements but would require major equipment
upgrades to meet the criteria of a Tier 2 or Tier 1 rig
Typically, conventional mechanical
rigs with no automation and lower
pumping capacity
Other than 22 rigs retained for seasonal, stratification and turnkey drilling work, we have exited the
Tier 3 market. We believe that developments in the land drilling industry have made the Tier 3 rigs
virtually obsolete in North America.
Our service rigs provide completion, workover, abandonment, well maintenance, high pressure operations and critical
sour gas well work, and well re-entry preparation across the Western Canada Sedimentary Basin, and the northern U.S.
Service rigs are supported by three field locations in Alberta, two in Saskatchewan, and one in each of Manitoba, British
Columbia, and North Dakota.
Snubbing units complement 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.
Coil tubing units have the ability to service horizontal wells by pushing the tubing rather than relying on gravity. Coil
tubing often works more effectively in the unconventional horizontal wells that are becoming more common. We began
using our first coil tubing unit in the first quarter of 2012 and by the end of 2013 we had 12 units operating. However, in
the fourth quarter of 2014, we sold our U.S. coil tubing assets for cash consideration of $44 million. Our remaining four
coil tubing units continue to serve the Canadian market.
Ancillary Equipment and Services
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 due to
equipment failure.
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 U.S.
Precision Rentals supplies customers with an inventory of specialized equipment and wellsite accommodations.
Precision Camp Services 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
Precision Camp Services and other camp facilities.
20 Management’s Discussion and Analysis
Systematic Maintenance
We consistently reinvest capital to sustain and upgrade existing property, plant and equipment. We match equipment
repair and maintenance expenses to activity levels under our maintenance and certification programs. We use computer
systems to track key preventative maintenance indicators for major rig components, record equipment performance
history, schedule equipment certifications, reduce downtime, and better manage our assets. We have a continuous
maintenance program for essential elements, such as tubulars and engines.
Technical Centres
We operate two contract drilling technical centres, one in Nisku, Alberta and the other in Houston, Texas. We also operate
one Completion and Production Services technical centre in Red Deer, Alberta. These centres house our technical
service and field training groups and enable us to consolidate support and training for our operations. The Houston
facility includes a fully functioning training rig with the latest drilling technologies; a training rig will be added at the Nisku
facility in 2015. In addition, our Houston facility houses our rig manufacturing group.
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 is typically performed at the request of a
customer and includes a term contract. The upgrade may result in a change in tier classification.
People
Having an experienced, high performance crew is a competitive strength
and highly valued by our customers. There are often shortages of
industry manpower in peak operating periods. We rely heavily on our
safety record, investment in employee development, and reputation to
attract and retain employees. Our people strategies 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. In the U.S., these functions are managed to align
with regional labour and customer service requirements.
(www.toughnecks.com), our highly
In 2008, we launched Toughnecks
successful 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 functions.
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 also 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.
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, because they are leading indicators of the potential for a more serious incident. In 2014, 256 of our
drilling rigs and 195 of our service rigs achieved Target Zero. We continue to embrace technological advancements that
make operations safer.
incidents is a core belief that all injuries can
Our safety vision for eliminating workplace
be prevented.
Target Zero
Precision Drilling Corporation 2014 Annual Report
21
Together with our customers, we are continuously looking for opportunities to reduce our consumption of
non-renewable resources and reduce our environmental footprint. We use technology to minimize 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.
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 this vision by defining and measuring our results against strategic
priorities we establish at the beginning of every year.
2014 Strategic Priorities
2014 Results
Execute our High Performance, High Value strategy
Invest in our physical and human capital infrastructure to advance
field level professional development.
Provide industry leading service to customers and demand safe
operations.
Leverage our scale of operations and utilize established systems
to promote consistent and reliable service.
Execute on existing organic growth opportunities
Deliver new-build and upgraded drilling rigs to customer contracts,
expand international activity in existing locations and grow our LNG
drilling leadership position.
Be a recognized leader in the integrated directional drilling
transformation.
Grow our U.S. presence in Completion and Production Services.
Improved safety performance in both operating segments in 2014,
resulting in the best performance in our history.
Completed construction of our Nisku Technical Centre.
Entered into a technology service agreement and marketing alliance
with Schlumberger that enables us to market a full range of downhole
technology.
Increased the utilization of our centralized U.S. repair and
maintenance facility.
Achieved Target Zero for more than 75% of our drilling rigs and 90%
of our service rigs.
Achieved better than predetermined targets for mechanical downtime.
Delivered 15 new-build Super Series rigs to customers on long-term
contracts and upgraded 12 existing drilling rigs to higher specification
assets under long-term contracts.
Signed customer contracts for the delivery of 17 new-build rigs
in 2015.
Seven of the new-build deliveries in 2014 and 2015 are for customers
with an ownership interest in resources expected to support potential
Canadian LNG exports.
Expanded international operations with rig additions in the
Middle East.
Build our brand
Uphold our reputation and market breadth in North America while
strengthening our presence in select oilfield markets internationally.
Delivered strong Canadian and U.S. financial performance throughout
2014 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.
Our corporate and competitive growth strategies are designed to optimize resource allocation and differentiate
us from the competition, generating value for investors. Despite the recent drop in industry activity, long-term
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 marketplace. Unconventional
resource development requires advanced Tier 1 drilling rigs and other highly developed services that facilitate 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.
22 Management’s Discussion and Analysis
STRATEGIC PRIORITIES FOR 2015
Work with our customers to lower well costs
Deliver High Performance, High Value services to customers
to create maximum efficiency and lower risks for development
drilling programs.
Utilize our unique platform of Tier 1 assets, geographically
diverse operations, and highly efficient service offering to deliver
cost-reducing solutions.
Grow our cost-reducing integrated directional drilling service
with the Schlumberger alliance.
Maximize cost efficiency throughout the organization
Continue to leverage Precision’s scale to reduce costs and deliver
High Performance.
Maximize the benefits of the variable nature of operating and
capital costs.
Maintain an efficient corporate cost structure by optimizing systems
for assets, people and business management.
Maintain our uncompromising focus on worker safety, premium
service quality, and employee development.
Reinforce our competitive advantage
Gain market share as Tier 1 rigs remain most in demand.
Manage liquidity and focus activities on cash flow generation
Monitor working capital, debt and liquidity ratios.
High-grade our active rig fleet by delivering new-build rigs
and maximizing customer opportunities to utilize High
Performance assets.
Deliver consistent, reliable, High Performance service.
Retain and continue to develop the industry’s best people.
Maintain a scalable cost structure that is responsive to changing
competition and market demand.
Adjust capital plans according to utilization and customer demand.
Link executive incentive compensation to our performance.
Precision Drilling Corporation 2014 Annual Report
23
2014 Results
Management’s
Discussion and
Analysis
Adjusted EBITDA and operating earnings are additional GAAP measures. See page 5 for more information.
Consolidated Statements of Earnings Summary
Year ended December 31 (thousands of dollars)
2014
2013
2012
2,017,110
343,556
(10,128)
2,350,538
821,490
57,954
(79,074)
800,370
448,669
126,699
225,002
95,170
(946)
109,701
21,077
(12,075)
33,152
1,719,910
323,353
(13,286)
2,029,977
653,664
61,032
(75,863)
638,833
333,159
–
305,674
–
(9,112)
93,248
221,538
30,388
191,150
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
2014
2013
2012
1,077,814
1,096,918
195,487
(19,681)
1,002,199
1,053,966
901,246
137,681
(11,149)
936,113
64,017
(13,355)
2,350,538
2,029,977
2,040,741
2,434,774
2,244,867
629,355
5,308,996
2,082,958
2,006,519
489,646
4,579,123
2,119,891
1,913,810
266,562
4,300,263
Revenue
Contract Drilling Services
Completion and Production Services
Inter-segment elimination
Adjusted EBITDA
Contract Drilling Services
Completion and Production 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 dollars)
Revenue
Canada
U.S.
International
Inter-segment elimination
Total assets
Canada
U.S.
International
24 Management’s Discussion and Analysis
2014 COMPARED TO 2013
Net earnings in 2014 were $33 million, or $0.11 per diluted share, compared to $191 million, or $0.66 per diluted share,
in 2013. During the year, we recorded a before-tax asset decommissioning charge and goodwill write down totaling
$222 million that reduced net earnings by $182 million and net earnings per diluted share by $0.62. Effective January 1,
2014, we began calculating depreciation on our drilling rigs and service rigs on a straight-line basis, which reduced net
earnings by approximately $29 million, or $0.10 per diluted share, compared with what net earnings would have been
using the previous depreciation method.
Revenue was $2,351 million, 16% higher than 2013. The increase was the result of improved utilization and average
pricing in our Contract Drilling Services segment.
Adjusted EBITDA in 2014 was $800 million, 25% higher than 2013, primarily because of higher activity levels and higher
average pricing in our Contract Drilling Services segment. Activity, as measured by drilling utilization days, increased 8%
in Canada, 16% in the U.S., and 14% internationally compared to 2013.
Average Oil and Natural Gas Prices
Oil
2014
2013
2012
West Texas Intermediate (per barrel)
US $93.06
US $98.02
US $94.13
Natural gas
Canada
AECO (per MMBtu)
U.S.
Henry Hub (per MMBtu)
$4.45
$3.18
$2.39
US $4.33
US $3.73
US $2.75
Key Statistics
There were 10,942 wells drilled in western Canada in 2014, consistent with the 10,903 drilled in 2013. Despite only
increasing 39 wells, total industry drilling operating days were 9% higher than 2013, at 131,021. Average industry drilling
operating days per well was 12.0 compared to 11.0 in 2013. Average depth of a well increased 8%.
Approximately 37,500 wells were started onshore in the U.S., 5% more than the approximately 35,700 wells started
in 2013.
Goodwill
Under IFRS, we are required annually to assess the carrying value of our assets in cash generating units containing
goodwill. Due to the decrease in oil and natural gas well drilling in Canada and the outlook for pricing, we recognized
a $95 million impairment charge on goodwill in 2014, which represented the full amount of goodwill attributable to our
Canadian well servicing operation and water treatment operations.
Foreign Exchange
We recognized a foreign exchange gain of $1 million in 2014 (2013 – $9 million) because the Canadian dollar weakened
in value against the U.S. dollar and this affected the net U.S. dollar denominated monetary position in our Canadian
dollar-based companies.
Finance Charges
Finance charges were $110 million, an increase of $16 million compared with 2013. The increase is the result of the
issuance of the US$400 million 5.25% Senior Notes due in 2024 and the impact of the weaker Canadian dollar on our
U.S. dollar denominated interest.
Precision Drilling Corporation 2014 Annual Report
25
Income Taxes
Income taxes were a recovery of $12 million, $42 million lower than 2013 mainly because operating results were lower.
On August 7, 2014, the Ontario Court of Appeal ruled in favour of Precision’s wholly owned subsidiary, Inter-Leasing, Inc.,
reversing a decision by the Ontario Superior Court of Justice dated June 2013, regarding the reassessment of Ontario
income tax for Inter-Leasing, Inc.’s 2001 through 2004 taxation years. The Ontario Minister of Revenue made an
application to the Supreme Court of Canada seeking leave to appeal this decision. On March 5, 2015, the Supreme
Court of Canada denied the Ontario Minister of Revenue’s application for leave to appeal. The decision by the Supreme
Court of Canada brought the appeal process to an end and Precision has reflected the $55 million paid to the Ontario
tax authorities in 2008, related to the reassessed taxation years, as a current receivable. It is expected that this amount
plus interest and costs will be received from the Ontario Minister of Revenue in 2015.
2013 COMPARED TO 2012
Net earnings in 2013 were $191 million, or $0.66 per diluted share, compared to $52 million, or $0.18 per diluted share,
in 2012. For 2012, 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.
Revenue was $2,030 million, 1% lower than in 2012. Improved pricing in Canada and increased activity internationally were
offset by lower activity levels in both the Contract Drilling Services and Completion and Production Services segments.
Adjusted EBITDA in 2013 was $639 million, 5% lower than 2012. Lower activity levels were partially offset by higher
average pricing in both operating segments due to changes in product mix. Activity, as measured by drilling utilization
days, dropped 6% in Canada and 13% in the U.S. compared to 2012 but increased 70% internationally.
The volatile global environment and low natural gas prices in much of 2013 reduced utilization for us and for the
industry in general.
Key Statistics
There were 10,903 wells drilled in western Canada in 2013, 1% more than the 10,753 drilled in 2012. Despite the
150 well increase, total industry drilling operating days were 3% lower than 2012, at 120,043. Average industry drilling
operating days per well was 11.0 compared to 11.6 in 2012. Average depth of a well increased 7%. The decrease
in days per well while average depth increased reflects the use of top tier rigs and greater industry experience with
unconventional drilling.
U.S. activity, as measured by onshore well starts, was down 3% year over year. Approximately 35,700 wells were started
in 2013, compared to approximately 36,800 wells in 2012.
Foreign Exchange
We recognized a foreign exchange gain of $9 million in 2013 because the Canadian dollar weakened in value against the
U.S. dollar and this affected the net U.S. dollar denominated monetary position in our Canadian dollar-based companies.
Finance Charges
Finance charges were $93 million, an increase of $6 million compared with 2012 primarily due to the increase in average
outstanding debt in Canadian dollars.
Income Taxes
Income taxes were $30 million, $55 million higher than in 2012 mainly because operating results were higher.
26 Management’s Discussion and Analysis
Segmented Results
CONTRACT DRILLING SERVICES
Financial Results
Adjusted EBITDA and operating earnings are additional GAAP measures. See page 5 for more information.
Year ended December 31
(thousands of dollars, except where noted)
Revenue
Expenses
Operating
General and administrative
Adjusted EBITDA
Depreciation and amortization
Loss on asset decommissioning
Operating earnings
2014
2,017,110
1,147,826
47,794
821,490
381,465
97,947
342,078
% of
revenue
56.9
2.4
40.7
18.9
4.8
17.0
2013
1,719,910
1,019,156
47,090
653,664
292,217
–
361,447
% of
revenue
59.3
2.7
38.0
17.0
–
21.0
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
2014 Compared to 2013
Revenue from Contract Drilling Services was $2,017 million, 17% higher than 2013, mainly due to improved utilization
days and higher average day rates in all of our geographic business units.
Operating expenses were 57% of revenue, compared to 59% in 2013, mainly because of improved results from our
international drilling business and lower operating costs per utilization day in the U.S. Operating expenses per day were
1% higher in Canada and 4% lower in the U.S. mainly because of a reduction in crew labour costs and a larger activity
base over which to spread fixed costs. General and administrative expense for 2014 was in line with 2013.
Operating earnings were $342 million, 5% lower than 2013, and equated to 17% of revenue compared to 21% in 2013.
Included in the 2014 Contract Drilling Services results was a loss on asset decommissioning charge of $98 million
related to the decommissioning of 29 drilling rigs in the fourth quarter.
Capital expenditures in 2014 were $822 million:
$564 million – to expand our asset base
$137 million – to upgrade existing equipment
$121 million – on maintenance and infrastructure.
Most of the expansion capital was on 32 new-build rigs, as part of our rig build program; 15 of these were completed
and placed into service by December 31, 2014, the remaining 17 are expected to be placed into service in 2015.
Operating Statistics
Year ended December 31
Number of drilling rigs (year-end)
Drilling utilization days (operating and moving)
% increase/
(decrease)
(4.3)
2014
313
Canada
U.S.
International
Drilling revenue per utilization day
Canada (Cdn$)
U.S. (US$)
Drilling statistics (Canadian operations only)
Wells drilled
Average days per well
Metres drilled (hundreds)
Average metres per well
32,810
35,075
4,036
22,250
24,330
3,091
9.4
5,864
1,897
7.5
15.9
13.5
0.6
3.2
(3.7)
11.9
5.2
9.2
2013
327
30,530
30,268
3,555
22,108
23,575
3,211
8.4
5,576
1,736
% increase/
(decrease)
1.9
(5.6)
(12.5)
70.4
5.1
(0.5)
4.1
(10.6)
6.6
2.4
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
Precision Drilling Corporation 2014 Annual Report
27
Canadian Drilling
Revenue from Canadian drilling was up $55 million or 8% from 2013. Drilling rig activity, as measured by utilization days,
was up 7%.
In 2014, the industry drilled 10,942 wells in western Canada, in line with the 10,903 wells drilled in 2013. Industry
operating days increased 9% to 131,021 as wells drilled in 2014 were on average 8% deeper than wells drilled in 2013.
Adjusted EBITDA was $357 million, 7% higher than 2013, because of higher drilling activity.
Depreciation expense for the year was $19 million higher than 2013 because of changes in the estimated remaining
useful life of our capital equipment, a change to straight-line depreciation, and depreciation expense associated with
new equipment.
Drilling Statistics – Canada
In 2014, we completed five new-build rigs, transferred one rig from the U.S. to Canada, and decommissioned 19 legacy
rigs, bringing our Canadian 2014 year-end net rig count to 174 (from 187 in the prior year).
The industry drilling rig fleet decreased as well – there were approximately 797 rigs at the end of 2014 compared to
819 at the end of 2013. Our operating day utilization was 42% (2013 – 39%), compared to industry utilization of 44%
(2013 – 40%).
Our average dayrates in Canada increased 1% in 2014 because of rig mix and new-build and upgraded rigs entering
the fleet compared to the prior year, partially offset by competitive pricing in some rig segments.
U.S. Drilling
Revenue from U.S. drilling was higher than 2013 by US$140 million or 20%. Drilling rig activity, as measured by utilization
days, was up 16% while average revenue per day was up 3%.
Adjusted EBITDA was US$359 million, 33% higher than US$270 million in 2013, mainly because of higher industry activity.
Depreciation expense for the year was $29 million higher than 2013 because of changes in the estimated remaining
useful life of our capital equipment, a change to straight-line depreciation, and depreciation expense associated with
new equipment.
Drilling Statistics – U.S.
In 2014, we completed seven new-build rigs, transferred one net rig into our U.S. fleet from our international operations,
transferred one rig to our Canadian fleet, and decommissioned ten rigs, leaving our U.S. year-end net rig count at 124
(127 in 2013). In 2014, we averaged 96 rigs working, a 16% increase from 2013.
Our average dayrates in the U.S. increased 3% in 2014 with the addition of new-build and upgraded rigs to our fleet,
resulting in a better rig mix. Turnkey utilization days increased 24% over 2013 and accounted for approximately 3% of
our U.S. rig utilization.
Drilling Statistics – U.S.
Average number of active land rigs for quarters ended:
March 31
June 30
September 30
December 31
Annual average
(1) Source: Baker Hughes
28 Management’s Discussion and Analysis
2014
2013
Precision
Industry (1)
Precision
Industry (1)
94
93
97
100
96
1,724
1,802
1,842
1,856
1,806
81
80
81
90
83
1,706
1,710
1,709
1,697
1,705
COMPLETION AND PRODUCTION SERVICES
Financial Results
Adjusted EBITDA and operating earnings are additional GAAP measures. See page 5 for more information.
Year ended December 31
(thousands of dollars, except where noted)
Revenue
Expenses
Operating
General and administrative
Adjusted EBITDA
Depreciation and amortization
Loss on asset decommissioning
Operating earnings (loss)
2014
343,556
268,129
17,473
57,954
58,621
28,752
(29,419)
% of
revenue
78.0
5.1
16.9
17.1
8.4
(8.6)
2013
323,353
242,768
19,553
61,032
32,630
–
28,402
% of
revenue
75.1
6.0
18.9
10.1
8.8
2012
326,079
217,326
15,199
93,554
30,758
–
62,796
% of
revenue
66.6
4.7
28.7
9.4
19.3
Revenue from Completion and Production Services was $344 million in 2014, 6% higher than 2013, mainly because
of higher average pricing for our well servicing product line due to product mix, partially offset by lower activity.
Operating earnings were negative $29 million in 2014, $58 million lower than 2013 because of a loss on asset
decommissioning of $29 million and a loss on disposal of our U.S. coil tubing assets of $14 million and higher
depreciation due to the change to straight-line depreciation.
Operating expenses were 78% of revenue, 3% higher than 2013, mainly because of product mix.
Depreciation excluding the loss on disposal of our coil tubing assets in the year was 37% more than 2013 because
of changes in the estimated remaining useful life of our capital equipment, a change to straight-line depreciation, and
depreciation associated with new equipment.
Capital expenditures were $24 million:
$8 million – to expand our asset base
$16 million – on maintenance and infrastructure.
Revenue from Precision Well Servicing in Canada was $189 million, in line with 2013, as higher average hourly pricing
offset lower operating activity.
Revenue from our U.S. based completion and production businesses was US$57 million, 12% higher than 2013.
The increase was the result of continued growth in activity. During the fourth quarter, we sold our U.S. based coil
tubing assets.
Revenue from Precision Rentals was $42 million, 6% lower than 2013. Lower average rates from product mix were
partially offset by higher activity. In 2013 Precision Rentals expanded from three major product lines (surface equipment,
wellsite accommodations, and small flow wastewater treatment systems) to also provide power generation equipment,
solids control equipment, and WaterDams (containment rings).
Revenue from Precision Camp Services was $37 million, 13% higher than 2013, because of an increase in base camp
activity days. Precision operated four base camps and 50 drill camps during 2014.
Precision Drilling Corporation 2014 Annual Report
29
Operating Results
Year ended December 31
Number of service rigs (end of year)
Service rig operating hours (1)
Revenue per operating hour (1)
2014
177
273,194
907
% increase/
(decrease)
(20.3)
(3.7)
6.2
2013
222
283,576
854
% increase/
(decrease)
3.7
(3.8)
14.8
2012
214
294,681
744
% increase/
(decrease)
3.4
(7.2)
8.1
(1) 2012 comparatives have been changed to include U.S. based service rig activity.
In 2014, we decommissioned 35 service rigs and two snubbing units and moved one service rig from Canada to the U.S.
In addition, we moved two snubbing units from the U.S. to Canada and sold our eight U.S. based coil tubing units. We
also added rental equipment to our North American footprint.
Service rig rates increased 6% as we provided higher-end services and crew wage increases were passed through to
customers. Our service rig hours decreased 4% although higher rig rates and our U.S. expansion in well service rigs
partially offset the impact of market activity declines.
CORPORATE AND OTHER
Financial Results
Adjusted EBITDA is an additional GAAP measure. See page 5 for more information.
Year ended December 31 (thousands of dollars, except where noted)
2014
2013
2012
Revenue
Expenses
Operating
General and administrative
Adjusted EBITDA
Depreciation and amortization
Operating earnings (loss)
–
–
79,074
(79,074)
8,583
(87,657)
–
–
75,863
(75,863)
8,312
(84,175)
–
–
72,043
(72,043)
4,774
(76,817)
Our corporate segment has support functions that provide assistance to our other business segments. It includes costs
incurred in corporate groups in both Canada and the U.S.
Corporate and Other expenses were $79 million in 2014, $3 million more than 2013. The increase mainly related to costs
resulting from international growth and the foreign exchange translation on U.S. dollar based costs. In 2014, corporate
general and administrative costs were 3.4% of consolidated revenue compared to 3.7% in 2013 and 3.5% in 2012.
QUARTERLY FINANCIAL RESULTS
Adjusted EBITDA and funds provided by operations are additional GAAP measures. See page 5 for more information.
2014 – Quarters Ended
(thousands of dollars, 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
March 31
672,249
237,274
101,557
0.35
0.35
231,393
170,127
0.06
June 30
475,174
129,695
(7,174)
(0.02)
(0.02)
97,805
228,412
0.06
September 30
December 31
584,590
199,390
52,813
0.18
0.18
196,217
146,733
0.06
618,525
234,011
(114,044)
(0.39)
(0.39)
172,059
134,887
0.07
30 Management’s Discussion and Analysis
2013 – Quarters Ended
(thousands of dollars, except per share amounts)
Revenue
Adjusted EBITDA
Net earnings
Per basic share
Per diluted share
Funds provided by operations
Cash provided by operations
Dividends per share
March 31
595,720
215,181
93,313
0.34
0.33
144,682
62,948
0.05
June 30
378,898
88,248
473
0.00
0.00
33,791
182,345
0.05
September 30
December 31
488,450
137,660
29,443
0.11
0.10
127,684
88,341
0.05
566,909
197,744
67,921
0.24
0.24
155,816
94,452
0.06
Seasonality
Drilling and well servicing activity is affected by seasonal weather patterns and ground conditions. In northern Canada,
some drilling sites can only be accessed in the winter once the terrain is frozen, which is usually late in the fourth quarter.
Thus, activity peaks in the winter, in the fourth and first quarters. In the spring, wet weather and the spring thaw in
Canada and the northern U.S. 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
working capital requirements.
Fourth Quarter 2014 Compared to Fourth Quarter 2013
In the fourth quarter, we recorded a net loss of $114 million, or a net loss per diluted share of $0.39, compared to net
earnings of $68 million, or $0.24 per diluted share, in the fourth quarter of 2013. During the quarter, we recorded a
before-tax asset decommissioning charge and goodwill write down totaling $222 million that reduced net earnings by
$182 million and net earnings per diluted share by $0.62. Effective January 1, 2014, we began calculating depreciation
on our drilling rigs and service rigs on a straight-line basis which reduced net earnings for the fourth quarter by
approximately $2 million, or $0.01 per diluted share, from what net earnings would have been using the previous
depreciation method.
Revenue in the fourth quarter was $619 million, 9% higher than the fourth quarter of 2013, mainly due to higher drilling
activity in the U.S., Canada and internationally along with higher average dayrates in the U.S. and internationally.
Revenue from our Contract Drilling Services and Completion and Production Services segments both increased over
the comparative prior year period by 10% and 5%, respectively.
Adjusted EBITDA in the fourth quarter was $234 million or 18% higher than the fourth quarter of 2013. Our activity for
the quarter, as measured by drilling rig utilization days, increased 4% in Canada, 12% in the U.S. and 2% internationally,
compared to the fourth quarter of 2013.
Our Adjusted EBITDA margin was 38% in the fourth quarter of 2014, compared to 35% in the fourth quarter of 2013.
The increase in Adjusted EBITDA as a percentage of revenue was mainly due to increases in activity and profitability in
our Contract Drilling Services segment and lower costs associated with incentive compensation that is tied to the price
of our common shares, which resulted in a recovery of $10 million in the fourth quarter.
As a percentage of revenue, operating costs were 58% in the fourth quarter of 2014 and 59% in the same quarter of
2013. 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.
Precision Drilling Corporation 2014 Annual Report
31
Contract Drilling Services
Revenue from Contract Drilling Services was $532 million in the fourth quarter, 10% higher than the fourth quarter of
2013, while Adjusted EBITDA increased by 16% to $232 million. The increases were mainly due to higher drilling rig
utilization days in our U.S. and Canadian contract drilling businesses and higher average day rates in our U.S. and
international drilling businesses.
Operating earnings for our international business improved as average day rates increased 27% while drilling rig
utilization days for the quarter were 2% higher than the prior year comparative period. The average day rate was up
as we realized a higher percentage of our fleet utilization from our operations in the Middle East.
Drilling rig utilization days in Canada (drilling days plus move days) were 8,550 during the fourth quarter of 2014, an
increase of 4% compared to 2013 primarily resulting from the delivery of new-build and upgraded rigs over the last
12 months. Drilling rig utilization days in the U.S. were 9,214, 12% higher than the same quarter of 2013. The increase in
U.S. activity was primarily due to strong demand for Tier 1 assets, which has led to market share gains over the past year
due to our high percentage of Tier 1 assets. The majority of our North American activity came from oil and liquids-rich
natural gas plays.
The majority of activity was in oil and liquids-rich natural gas related plays. We averaged a total of 205 rigs working in
the quarter (93 in Canada, 100 in the U.S., and 12 internationally), compared to an average of 190 rigs in the fourth
quarter of 2013.
Compared to the same quarter in 2013, drilling rig revenue per utilization day was up 1% in the U.S. and down 1% in
Canada. The increase in average dayrates for the U.S. was driven by improved rig mix and higher rates for well-to-well
and re-contracted rigs, partially offset by lower turnkey revenue. In Canada, the dayrate decrease was the result of
competitive pricing in some rig segments, partially offset by new-build and upgraded rigs entering the fleet compared
to the fourth quarter of 2013.
In Canada, 42% of utilization days in the quarter were generated from rigs under term contract, compared to 44% in the
fourth quarter of 2013. In the U.S., 69% of utilization days were generated from rigs under term contract as compared to
62% in the fourth quarter of 2013. At the end of the quarter, we had 48 drilling rigs under contract in Canada, 63 in the
U.S., and 12 internationally.
Operating costs were 55% of revenue for the fourth quarter, compared to 56% of revenue in the fourth quarter of
2013. On a per utilization day basis, operating costs for the drilling rig division in Canada were higher than the prior
year primarily because of higher crew wages and labour burden. In the U.S., operating costs for the quarter on a per
day basis were down from the fourth quarter of 2013, primarily as a result of a decrease in turnkey activity and size of
turnkey jobs.
During the fourth quarter, the Contract Drilling Services segment recognized a loss of $98 million related to the
decommissioning of drilling rigs. Depreciation expense in the quarter was 29% higher than the fourth quarter of 2013
due to changes in the estimated remaining useful life of our capital equipment, a change to straight-line depreciation,
and depreciation expense associated with new equipment.
32 Management’s Discussion and Analysis
Completion and Production Services
Revenue from Completion and Production Services was up $4 million or 5% from the fourth quarter of 2013, as a greater
proportion of higher end services were provided in the current quarter compared with the prior year.
Our North America service rig activity in the fourth quarter was 2% lower than the fourth quarter of 2013 (70,350 operating
hours compared to 72,013 hours in the fourth quarter of 2013). Approximately 86% of the fourth quarter Canadian service
rig activity was oil related. In the fourth quarter of 2014, we sold our U.S. coil tubing assets for total cash of $44 million
incurring a loss on disposal of $14 million.
Average service rig revenue per operating hour in the fourth quarter was $906, $28 higher than the fourth quarter of 2013.
The increase was primarily the result of rig mix as we provided a greater proportion of higher end services in the current
year, partially offset by the sale of our U.S. coil tubing assets that generally received a higher rate per hour.
Adjusted EBITDA was $16 million, in line with the fourth quarter of 2013, as higher average rates were offset by a decline
in activity.
Operating costs as a percentage of revenue increased to 78% in the fourth quarter of 2014, from 76% in the fourth
quarter of 2013. In 2014, operating costs per service rig operating hour were higher than the fourth quarter of 2013,
mainly because of one-time costs associated with the disposition of our U.S. coil tubing operations.
During the fourth quarter, the Completion and Production Services segment recognized a loss of $29 million related to
the decommissioning of 35 well servicing and two snubbing units, along with certain spare equipment. Depreciation,
excluding the $14 million loss on disposal of our U.S. coil tubing assets in the fourth quarter of 2014, was 32% more than
the fourth quarter of 2013 because of changes in the estimated remaining useful life of our capital equipment, a change
to straight-line depreciation, and depreciation associated with new equipment.
Corporate and Other
General and administrative expenses for the quarter were $26 million, $8 million lower than the fourth quarter of 2013.
The decrease was due to lower costs associated with incentive compensation tied to the price of our common shares,
partially offset by increased costs associated with expansion efforts.
Net finance charges were $30 million in the fourth quarter, $7 million higher than the fourth quarter of 2013, mainly
because of the issuance of US$400 million of 5.25% Senior Notes on June 3, 2014 and the effect of the weakening
Canadian dollar on our U.S. dollar denominated interest expense.
Capital expenditures were $338 million in the fourth quarter compared to $123 million in the fourth quarter of 2013.
Spending in the fourth quarter of 2014 included:
$236 million to expand our asset base
$42 million to upgrade existing equipment
$60 million on maintenance and infrastructure.
Precision Drilling Corporation 2014 Annual Report
33
Financial Condition
Management’s
Discussion and
Analysis
The oilfield services business is inherently cyclical. To manage this variability, we focus on maintaining a strong balance
sheet so we have the financial flexibility we need to continue to manage our growth and cash flows, 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 scalable cost structure so we can be responsive to changing competition and market demand. And we invest
in our fleet to make sure we remain competitive. Our maintenance capital expenditures are tightly governed by and
highly responsive to activity levels with additional cost savings leverage provided through our internal manufacturing and
supply divisions. Term contracts on expansion capital for new-build rig programs help provide more certainty of future
revenues and return on our growth capital investments.
LIQUIDITY
In June 2014, we issued US$400 million of 5.25% Senior Notes due in 2024 in a private offering. The Notes are
guaranteed on a senior unsecured basis by current and future U.S. and Canadian subsidiaries that also guarantee
our revolving credit facility and certain other indebtedness. We expect to use the net proceeds from this placement for
general corporate purposes, including building new drilling rigs.
In addition, we amended our credit agreement governing our revolving credit facility to, among other things, voluntarily
reduce the size of the revolving credit facility from US$850 million to US$650 million and extend the maturity to
June 3, 2019.
As at December 31, 2014, our liquidity was supported by a cash balance of $491 million, a senior secured credit facility
of US$650 million, operating facilities totalling approximately $55 million, and a US$25 million secured facility for letters
of credit. Our ability to draw on our senior secured credit facility is governed by financial covenants including a total debt
to EBITDA ratio. See our covenant discussion on page 38.
At December 31, 2014, including letters of credit, we had approximately
$1,942 million (2013 – $1,394 million) outstanding under our secured and
unsecured credit facilities and $30 million in unamortized debt issue
costs. Our secured facility includes financial ratio covenants that are
tested quarterly.
Key Ratios
We ended 2014 with a long-term debt to
long-term debt plus equity ratio of 0.43, and
a ratio of long-term debt to cash provided by
operations of 2.72.
We ended 2014 with a long-term debt to long-term debt plus equity ratio of 0.43 (compared to 0.36 in 2013) and a ratio
of long-term debt to cash provided by operations of 2.72 (compared to 3.09 in 2013).
The current blended cash interest cost of our debt is about 6.2%.
34 Management’s Discussion and Analysis
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 we link our executives’ incentive compensation to the returns to our shareholders
that we generate compared to our peers.
Financial Position and Ratios
(thousands of dollars, except ratios)
Working capital
Working capital ratio
Long-term debt
Total long-term financial liabilities
Total assets
Enterprise value (see table on page 39)
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,
2014
December 31,
2013
December 31,
2012
653,630
2.3
1,852,186
1,881,275
5,308,996
3,265,865
0.43
2.72
2.31
0.57
305,783
1.9
1,323,268
1,355,535
4,579,123
3,919,763
0.36
3.09
2.07
0.34
278,021
1.7
1,218,796
1,245,290
4,300,263
3,213,406
0.36
1.92
1.82
0.38
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
Not rated
Ba1
S&P
BB+
Not rated
BB
CAPITAL MANAGEMENT
To maintain and grow our business, we invest in both growth and sustaining capital. We base expansion capital
decisions on return on capital employed and payback, and we mitigate the risk that we may not be able to fully recover
our capital by requiring two- to five-year term contracts for new-build rigs.
We base our maintenance capital decisions on actual activity levels, using key financial indicators that we express as per
operating day or per operating hour. 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 U.S. dollars and currencies that are pegged to the U.S. dollar). This 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 that the debt supports.
Precision Drilling Corporation 2014 Annual Report
35
Hedge of Investments in U.S. Operations
To December 31, 2014, we designated our US$650 million 6.625% Senior Notes due in 2020 and our US$400 million
6.5% Senior Notes due in 2021 as a hedge of our investment in our U.S. operations. Effective January 1, 2015, we have
included the US$400 million of 5.25% Senior Notes due in 2024 as a designated hedge of our investment in our U.S.
operations. We recognize the effective amount of this hedge (net of tax) in other comprehensive income. We recognize
ineffective amounts (if any) in earnings.
SOURCES AND USES OF CASH
At December 31 (thousands of dollars)
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)
2014
680,159
(629,987)
50,172
329,704
30,999
410,875
2013
428,086
(526,535)
(98,449)
21,517
4,770
(72,162)
2012
635,286
(930,121)
(294,835)
(14,899)
(4,974)
(314,708)
Cash from Operations
In 2014, we generated cash from operations of $680 million compared to $428 million in 2013. The increase is primarily
the result of better operating results and lower income taxes paid in 2014.
Investing Activity
We made growth and sustaining capital investments of $857 million in 2014:
$571 million in expansion capital
$137 million in upgrade capital
$149 million in maintenance and infrastructure capital.
The $857 million in capital expenditures in 2014 was split between segments as follows:
$822 million in Contract Drilling Services
$24 million in Completion and Production Services
$11 million in Corporate and Other.
Expansion and upgrade capital includes the cost of long-lead items purchased for our capital inventory, such as 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.
We sold underutilized capital assets for proceeds of $102 million in 2014.
36 Management’s Discussion and Analysis
Financing Activity
In June 2014, we issued US$400 million of 5.25% Senior Notes due in 2024 in a private offering. The Notes are
guaranteed on a senior unsecured basis by current and future U.S. and Canadian subsidiaries that also guarantee
our revolving credit facility and certain other indebtedness. We expect to use the net proceeds from this placement for
general corporate purposes, including building new drilling rigs.
In addition, we amended our credit agreement governing our revolving credit facility to, among other things, voluntarily
reduce the size of the revolving credit facility from US$850 million to US$650 million and extended the maturity to
June 3, 2019. The US$250 million accordion feature remains and allows the facility to be increased to US$900 million
with additional lender commitments. As at March 6, 2015, our revolving credit facility remains undrawn except for
US$26 million in outstanding letters of credit.
As at March 6, 2015 our operating facility of $40 million with Royal Bank of Canada remained undrawn except for
$22 million in outstanding letters of credit; our operating facility of US$15 million with Wells Fargo remained undrawn;
and our demand facility for letters of credit of $25 million with HSBC Canada had US$12 million available.
Debt
As at December 31, 2014, we had a cash balance of $491 million and available capacity under our secured facilities of
$781 million.
As at December 31, 2014, we had $1,882 million outstanding under our senior unsecured notes.
Amount
Availability
Used for
Maturity
Senior facility (secured)
US$650 million
(extendible, revolving term credit facility
with US$250 million accordion feature)
Operating facilities (secured)
$40 million
Undrawn, except US$26 million in
outstanding letters of credit
General corporate purposes
June 3, 2019
Undrawn, except $20 million in
outstanding letters of credit
Letters of credit and general
corporate purposes
US$15 million
Undrawn
Short term working capital
requirements
Demand letter of credit facility (secured)
US$25 million
Senior notes (unsecured)
Undrawn, except US$8 million in
outstanding letters of credit
Letters of credit
$200 million
US$650 million
US$400 million
US$400 million
Fully drawn
Fully drawn
Fully drawn
Fully drawn
Debt repayment
Debt repayment and general
corporate purposes
Capital expenditures and
general corporate purposes
Capital expenditures and
general corporate purposes
March 15, 2019
November 15, 2020
December 15, 2021
November 15, 2024
Precision Drilling Corporation 2014 Annual Report
37
Covenants
Senior Facility
The revolving term credit facility requires that we 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 an interest to EBITDA coverage ratio, calculated as EBITDA to interest expense, of greater than
2.75:1 for the most recent four consecutive fiscal quarters. For purposes of calculating the leverage ratios, consolidated
total debt includes all outstanding secured and unsecured indebtedness, while consolidated senior debt only includes
secured indebtedness. EBITDA as defined in our revolving term facility agreement differs from Adjusted EBITDA as
defined under Additional GAAP Measures on page 5 by the exclusion of bad debt expense and certain foreign exchange
amounts. As at December 31, 2014 our consolidated senior debt-to-EBITDA ratio was 0.1:1 while our consolidated total
debt-to-EBITDA ratio was 2.4:1.
In addition, the revolving credit facility contains certain covenants that place restrictions on our ability to incur or assume
additional indebtedness; dispose of assets; pay dividends, share redemptions or other distributions; change our
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, 2014, we were in compliance with the
covenants of the revolving credit facility.
Senior Notes
The senior notes require that we comply with certain financial covenants including an interest to EBITDA coverage ratio
of greater than 2.5:1 for the most recent four consecutive fiscal quarters.
In addition, the senior notes contain certain covenants that limit our ability and the ability of certain subsidiaries to incur
additional indebtedness and issue preferred stock; create liens; make restricted payments (including the payment
of dividends); create or permit to exist restrictions on our ability or certain subsidiaries to make certain payments
and distributions; engage in amalgamations, mergers or consolidations; make certain dispositions and engage in
transactions with affiliates. At December 31, 2014 we were in compliance with the covenants of the senior notes.
Contractual Obligations
Our contractual obligations include both financial obligations (long-term debt and interest) and non-financial obligations
(new-build rig 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, 2014
(thousands of dollars)
Long-term debt
Interest on long-term debt
Purchase of property, plant and equipment (1)
Operating leases
Contractual incentive plans (2)
Total
Less than
1 year
–
117,482
189,656
19,143
12,851
339,132
Payments due (by period)
1-3 years
4-5 years
–
234,964
–
27,456
29,794
292,214
200,000
224,672
228,679
17,457
–
More than
5 years
1,682,145
221,546
–
11,005
–
Total
1,882,145
798,664
418,335
75,061
42,645
670,808
1,914,696
3,216,850
(1) The balance due within one year relates to the costs committed to complete the 17 rigs scheduled for delivery in 2015. The balance due in four to five years relates to the costs of
rig equipment with a flexible delivery schedule wherein we can take delivery of the equipment between 2016 and 2019 at our discretion.
(2) 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 five day weighted average share price of $7.14 at December 31, 2014.
38 Management’s Discussion and Analysis
CAPITAL STRUCTURE
Shares outstanding
Deferred shares outstanding
Warrants outstanding
Share options outstanding
March 6,
2015
December 31,
2014
December 31,
2013
December 31,
2012
292,819,921
292,819,921
291,979,671
276,475,770
226,010
–
226,010
–
221,112
–
11,028,021
8,560,088
8,074,694
335,946
15,000,000
6,413,777
You can find more information about our capital structure in our AIF, available on our website and on SEDAR.
Common Shares
Our articles of amalgamation allow us to issue an unlimited number of common shares.
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. In the fourth quarter of 2013, our Board of Directors approved an increase in
the quarterly dividend payment to $0.06 per common share and in the fourth quarter of 2014, our Board of Directors
approved an increase in the quarterly dividend to $0.07 per common share.
Warrants
In December 2013, all of our 15,000,000 outstanding warrants were exercised providing proceeds of $48 million. The
warrants were issued on April 22, 2009, under a private placement. Each warrant was exercisable for one common share
at a price of $3.22 per common share for five years from the date of issue.
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 currently have no
preferred shares issued.
Enterprise Value
(thousands of dollars, 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,
2014
December 31,
2013
December 31,
2012
292,819,921
291,979,671
276,475,770
7.06
2,067,309
1,852,186
(653,630)
3,265,865
9.94
2,902,278
1,323,268
(305,783)
3,919,763
8.22
2,272,631
1,218,796
(278,021)
3,213,406
Precision Drilling Corporation 2014 Annual Report
39
Accounting Policies and Estimates
Management’s
Discussion and
Analysis
CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
Because of the nature of our business, we are required to make estimates about the future that affect the reported
amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent liabilities. 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:
impairment of long-lived assets
depreciation and amortization
income taxes.
Impairment of Long-Lived Assets
Long-lived assets, which include property, plant and equipment, intangibles and goodwill, comprise the majority of
our 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 us to forecast future cash flows to be derived from the utilization of these assets based on assumptions about
future business conditions and technological developments. Significant, unanticipated changes to these assumptions
could require a provision for impairment in the future.
For goodwill, we conduct impairment tests annually in the fourth quarter or whenever there is a change in circumstance
that indicates that the carrying value may not be recoverable. 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 judgment is required
in determining the appropriate discount rate. We use observable market data inputs to develop a discount rate that we
believe approximates the discount rate from market participants.
In deriving the underlying projected cash flows, assumptions must also be made about future drilling activity, margins
and market conditions over the long-term life of the assets or CGUs. We cannot predict if an event that triggers
impairment will occur, when it will occur or how it will occur, or how it will affect reported asset amounts. Although
estimates are reasonable and consistent with current conditions, internal planning and expected future operations,
such estimations are subject to significant uncertainty and judgment.
We performed an impairment test on the well servicing and water treatment CGUs at December 31, 2014, as described
in Note 6 to the Consolidated Financial Statements. These CGUs were found to be impaired and the goodwill associated
with these CGUs was expensed in 2014.
Depreciation and Amortization
Our property, plant and equipment and intangible assets are depreciated and amortized based on estimates of useful
lives and salvage values. These estimates consider data and information from various sources including vendors,
industry practice, and our own historical experience and may change as more experience is gained, market conditions
shift, or new technological advancements are made.
40 Management’s Discussion and Analysis
Determination of which parts of the drilling rig equipment represent a significant cost relative to the entire rig and
identifying the consumption patterns along with the useful lives of these significant parts, are matters of judgment.
This determination can be complex and subject to differing interpretations and views, particularly when rig equipment
comprises individual components for which different depreciation methods or rates are appropriate.
Income Taxes
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 taxable income and expense already recorded.
We establish provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities of the
respective countries in which we operate. 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.
On August 7, 2014, the Ontario Court of Appeal ruled in favour of Precision’s wholly owned subsidiary, Inter-Leasing, Inc.,
reversing a decision by the Ontario Superior Court of Justice in June 2013, regarding the reassessment of Ontario income
tax for Inter-Leasing, Inc.’s 2001 through 2004 taxation years. The Ontario Minister of Revenue made an application to
the Supreme Court of Canada seeking leave to appeal this decision. On March 5, 2015, the Supreme Court of Canada
denied the Ontario Minister of Revenue’s application for leave to appeal. The decision by the Supreme Court of Canada
brought the appeal process to an end and Precision has reflected the $55 million paid to the Ontario tax authorities in
2008, related to the reassessed taxation years, as a current receivable. It is expected that this amount plus interest and
costs will be received from the Ontario Minister of Revenue in 2015.
ACCOUNTING POLICIES ADOPTED JANUARY 1, 2014
Following are accounting policies Precision adopted with an initial application date of January 1, 2014:
IAS 32, Financial Instruments: Presentation
On January 1, 2014, we implemented certain amendments to IAS 32 that require us to provide clarification on the
requirements for offsetting financial assets and financial liabilities on the statement of financial position.
IAS 36, Impairment of Assets
On January 1, 2014, we implemented certain amendments to IAS 36 that require that we disclose, if appropriate,
the recoverable amount of an asset or cash generating unit, and the basis for the determination of fair value less
costs of disposal or value-in-use of the asset, when an impairment loss is recognized or when an impairment loss is
subsequently reversed.
IFRIC 21, Levies
On January 1, 2014, we implemented IFRIC 21 that provides an interpretation on IAS 37, Provisions, Contingent Liabilities
and Contingent Assets, with respect to the accounting for levies imposed by governments. IAS 37 sets out criteria for the
recognition of a liability, one of which is the requirement for the entity to have a present obligation as a result of a past
event. The interpretation clarifies that the obligating event is the activity described in the relevant legislation that triggers
the payment of the levy.
ACCOUNTING POLICIES NOT YET ADOPTED
IFRS 9, Financial Instruments
In November 2009, the IASB issued IFRS 9, replacing IAS 39, Financial Instruments: Recognition and Measurement.
IFRS 9 will be issued in three phases. The first phase, which has already been issued, addresses the accounting for
financial assets and financial liabilities. The second phase will address impairment of financial instruments, while the third
phase will address hedge accounting. IFRS 9 uses a single approach to determine whether a financial asset is measured
at amortized cost or fair value, and replaces the multiple category and measurement models in IAS 39. The approach
in IFRS 9 focuses on how an entity manages its financial instruments in the context of its business model, as well as the
contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method
to be used, replacing the multiple impairment methods currently provided in IAS 39.
Precision Drilling Corporation 2014 Annual Report
41
Requirements for financial liabilities were added to IFRS 9 in October 2010. Although the classification criteria for
financial liabilities will not change under IFRS 9, the fair value option may require different accounting for changes to
the fair value of a financial liability resulting from changes to an entity’s own credit risk.
In December 2013, new hedge accounting requirements were incorporated into IFRS 9 that increase the scope of items
that can qualify as a hedged item and change the requirements of hedge effectiveness testing that must be met to use
hedge accounting.
In July 2014, the IASB issued final amendments to IFRS 9, replacing earlier versions of IFRS 9. These amendments to
IFRS 9 introduce a single, forward-looking ‘expected loss’ impairment model for financial assets that will require more
timely recognition of expected credit losses, and a fair value through other comprehensive income category for financial
assets that are debt instruments.
The amendments to IFRS 9 are effective for annual periods beginning on or after January 1, 2018 and are
available for earlier adoption. We do not expect that the implementation of IFRS 9 will have a material effect on the
financial statements.
IFRS 15, Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15 to address how and when to recognize revenue as well as requiring entities to
provide users of financial statements with more informative, relevant disclosures in order to understand the nature,
amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The standard provides
a principles based five-step model to be applied to all contracts with customers. This five-step model involves identifying
the contract(s) with a customer; identifying the performance obligations in the contract; determining the transaction
price; allocating the transaction price to the performance obligations in the contract; and recognizing revenue when
(or as) the entity satisfies a performance obligation.
Application of this new standard is mandatory for annual reporting periods beginning on or after January 1, 2017, with
earlier application permitted. We do not expect that the implementation of IFRS 15 will have a material effect on the
financial statements.
IFRS 11, Joint Arrangements
In May 2014, the IASB issued amendments to IFRS 11 to address the accounting for acquisitions of interests in joint
operations. The amendments address how a joint operator should account for the acquisition of an interest in a joint
operation in which the activity of the joint operation constitutes a business. IFRS 11, as amended, now requires that such
transactions be accounted for using the principles related to business combinations accounting as outlined in IFRS 3,
Business Combinations. The amendments are to be applied prospectively and are effective for annual periods beginning
on or after January 1, 2016, with earlier application permitted. We do not expect that these amendments will have an
impact on the financial statements.
IAS 16, Property, Plant and Equipment and IAS 38, Intangible Assets
In May 2014, the IASB issued amendments to IAS 16 and IAS 38 to clarify acceptable methods of depreciation and
amortization. The amended IAS 16 eliminates the use of a revenue-based depreciation method for items of property,
plant and equipment. Similarly, amendments to IAS 38 eliminate the use of a revenue-based amortization model for
intangible assets except in certain specific circumstances. The amendments are to be applied prospectively and are
effective for annual periods beginning on or after January 1, 2016, with earlier application permitted. We do not expect
that these amendments will have an impact on the financial statements.
42 Management’s Discussion and Analysis
Risks in our Business
Management’s
Discussion and
Analysis
Our key business risks are summarized below. You’ll find more information and other risks in business in our AIF, which
you can find on our website (www.precisiondrilling.com).
Price of Oil and Natural 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.
Lower oil and natural gas prices could also cause our customers to terminate, renegotiate, or fail to honour their
drilling contracts with us, which could affect the anticipated revenues that support our capital expenditure program and
deliveries of new-build rigs. In addition, lower oil and natural gas prices, lower demand for oilfield services, or lower
rig utilization could affect the fair market value of our rig fleet, which in turn could trigger a write down for accounting
purposes. There is no assurance that demands for our services or conditions in the oil and natural gas and oilfield
services sector will not decline in the future.
We have accounts receivable with customers in the oil and natural gas industry and their revenues may be affected
by fluctuations in commodity prices. Our ability to collect receivables may be adversely affected by any prolonged
weakness in oil and natural gas prices.
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 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. Rigs and other necessary equipment cannot cross this 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 be unable to move to another site if the muskeg thaws unexpectedly. Our business results depend partly on
how long the winter drilling season lasts.
Precision Drilling Corporation 2014 Annual Report
43
Competition
The contract drilling business is highly competitive with numerous industry participants. We compete for drilling contracts
that are usually awarded based on competitive bids. We believe pricing and rig availability are the primary factors
potential customers consider when selecting a drilling contractor. We believe other factors are also important, such as
the drilling capabilities and condition of drilling rigs, the quality of service and experience of rig crews, the safety record
of the contractor and the particular drilling rig, the offering of ancillary services, the ability to provide drilling equipment
that is adaptable to and having personnel familiar with new technologies and drilling techniques, and rig mobility
and efficiency.
Historically, contract drilling has been cyclical with periods of low demand, excess rig supply and low dayrates, followed
by periods of high demand, short rig supply and increasing dayrates. Periods of excess drilling rig supply intensify the
competition and often result in rigs being idle. There are numerous contract drilling companies in each of the markets
where we operate, and an oversupply of drilling rigs can cause greater price competition. Contract drilling companies
compete primarily on a regional basis, and the intensity of competition can vary significantly from region to region at any
particular time. If demand for drilling services is better in a region where we operate, our competitors might respond by
moving in suitable drilling rigs from other regions, reactivating previously stacked rigs or purchasing new drilling rigs.
An influx of drilling rigs into a market from any source could rapidly intensify competition and make any improvement in
the demand for our drilling rigs short-lived, which could in turn have a material adverse effect on our revenue, cash flow
and earnings.
Our business results and the strength of our financial position are affected by our ability to strategically manage our
capital expenditure program in a manner consistent with industry cycles and fluctuations in the demand for contract
drilling services. If we do not effectively manage our capital expenditures or respond to market signals relating to the
supply or demand for contract drilling and oilfield services, it could have a material adverse effect on our revenue,
operations and financial condition.
New Capital Expenditures
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 new or newer rigs to continue 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 as well as
the typically long time from when a decision is made to upgrade or build new equipment to when the equipment is built
and placed into service. Excess supply resulting from industry-wide capital expenditures could lead to lower demand for
term drilling contracts and for our equipment and services. The additional supply of drilling rigs has served to intensify
price competition in the past and could continue to do so. This could lead to lower rates in the oilfield services industry
generally and lower utilization of existing rigs. If any of these factors materialize, it would have an adverse effect on our
revenue, cash flow, 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, such as 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 essential to our continued success. We cannot guarantee that our rig technology will continue to meet the
needs of our customers, especially as rigs age and technology advances, or that our competitors will not develop
technological improvements that are more advantageous, timely, or cost effective.
44 Management’s Discussion and Analysis
Employees and Suppliers
Finding and Keeping Employees
We may not be able to find enough skilled labour to meet our needs, and this could limit growth. We may also have
difficulty finding enough skilled and unskilled labour 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.
Other factors can also affect our ability to find enough workers to meet our needs. Our business requires skilled workers
who can perform physically demanding work. Volatility in oil and natural gas activity and the demanding nature of the
work, however, may prompt workers to pursue other kinds of jobs that offer a more desirable work environment and
wages competitive to ours. Our success depends on our ability to continue to employ and retain skilled technical
personnel and qualified rig personnel; if we are unable to, it could have a material adverse effect on our operations.
Our ability to provide reliable services depends on the availability of well-trained, experienced crews to operate our
field equipment. We must also balance our need to maintain a skilled workforce with cost structures that fluctuate with
activity levels. We retain the most experienced employees during periods of low utilization by having them fill lower level
positions on field crews. Many of our businesses experience manpower shortages in peak operating periods, and we
may experience more severe shortages as the industry adds more rigs, oilfield service companies expand, and new
companies enter the business.
We continually monitor crew availability. To retain and attract quality staff, we focus on providing a safe and productive
work environment, opportunity for advancement, and added wage security.
Relying 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 internationally. We also outsource some or all construction services for drilling and service rigs,
including new-build rigs, as part of our capital expenditure programs.
To manage this risk, we maintain relationships with several key suppliers and contractors and place advance orders for
components that have long lead times. We also have an inventory of key components, materials, equipment and parts.
We may, however, experience cost increases, delays in delivery due to 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
revenue, cash flow and earnings.
Health, Safety and the Environment
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.
Standards for accident prevention in the oil and natural 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
revenue, cash flow and earnings.
Precision Drilling Corporation 2014 Annual Report
45
Our operations are affected by numerous laws, regulations and guidelines relating to the protection of the environment,
including those governing the management, transportation and disposal of hazardous substances and other waste
materials. These include those 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 that are subject to special protective measures, which may expose us to additional operating costs
and liabilities for noncompliance with certain laws. Some environmental laws and regulations 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 facilities. 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
we may incur 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.
The issue of energy and the environment has created intense public debate in Canada, the U.S. and around the world
in recent years, and it is likely to continue to be a focus area for the foreseeable future, which 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 considering more stringent regulation or restriction of hydraulic fracturing,
a technology used by most of our customers that involves the injection of water, sand and chemicals under pressure into
rock formations to stimulate oil and natural gas production.
Increasing regulatory restrictions 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 and the outcome of these developments
and their effect on the regulatory landscape and the contract drilling industry is uncertain; however, hydraulic fracturing
laws or regulations that cause a decrease in the completion of new oil and natural gas wells and an associated decrease
in demand for our services could have a material adverse effect on our operations and financial results.
46 Management’s Discussion and Analysis
Financial
Dividends May be Variable
The actual cash flow available for the payment of dividends to shareholders is a function of numerous factors,
including our financial performance, debt covenants and obligations, working capital requirements, capital expenditure
requirements, tax obligations, the impact of interest rates or foreign exchange rates, the growth of the general economy,
the price of crude oil and natural gas, weather and number of common shares outstanding. Dividends may be
increased, reduced, or eliminated entirely depending on our operations and the performance of our assets.
We require sufficient cash flow to service and repay our debt. The market value of our common shares may deteriorate if
we are unable to meet dividend expectations in the future, and that deterioration may be material.
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 reduced dayrates, lower demand for drilling rigs,
well service rigs, directional drilling, turnkey jobs, and other wellsite services, or lower 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.
Our Debt Facilities Contain Restrictive Covenants
Our revolving credit facility and each note indenture contain a number of covenants which, among other things, restrict
us and some of our subsidiaries from conducting certain activities. In addition, we must satisfy and maintain certain
financial ratio tests under the Secured Facility. Events beyond our control could affect our ability to meet these tests. If we
breach any of the covenants, it could result in a default under the Secured Facility or any of the note indentures. If there
is a default, the applicable lenders or note holders could decide to declare all amounts outstanding under the Secured
Facility or any of the note indentures to be due and payable immediately, and terminate any commitments to extend
further credit.
Access to Additional Financing
We will need sufficient cash flow 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 our revolving credit
facility, our note indentures and other debt agreements we may have in the future, and on our credit ratings. 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 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 favourable terms or at all. If we are unable to
service, repay 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 34
for information about our liquidity.
Precision Drilling Corporation 2014 Annual Report
47
Foreign Exchange
Our U.S. and international operations have revenues, expenses, assets and liabilities denominated in currencies other
than the Canadian dollar (mostly in U.S. dollars and currencies that are pegged to the U.S. dollar). This 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 revenues 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 U.S. dollar, the net earnings we record in Canadian dollars for our international
operations will be lower.
Transaction Exposure – We have long-term debt denominated in U.S. dollars. We have designated our senior notes
as a hedge against the net asset position of our U.S. operations. This debt is converted at the exchange rate in
effect at the balance sheet dates with the resulting gains or losses included in the statement of comprehensive
income. If the Canadian dollar strengthens against the U.S. dollar, we will incur a foreign exchange gain from the
translation of this debt. Similarly, if the Canadian dollar weakens against the U.S. dollar, we will incur a foreign
exchange loss from the translation of this debt. The vast majority of our international operations are transacted in
U.S. dollars or U.S. dollar-pegged currencies. Transactions for our Canadian operations are primarily transacted
in Canadian dollars; however, we occasionally purchase goods and supplies in U.S. dollars for our Canadian
operations. However, the U.S. dollar denominated transactions and 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 in Mexico and the Middle East. 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:
an uncertain political and economic environment
the loss of revenue, property and equipment as a result of expropriation, confiscation, nationalization, contract
deprivation and force majeure
war, terrorist acts or threats, civil insurrection, and geopolitical and other political risks
fluctuations in foreign currency and exchange controls
restrictions on the repatriation of income or capital
increases in duties, taxes and governmental royalties
renegotiation of contracts with governmental entities
changes in laws and policies governing operations of foreign-based companies
compliance with anti-corruption and anti-bribery legislation in Canada, the U.S. and other countries
trade restrictions or embargoes imposed by the U.S. or other countries.
48 Management’s Discussion and Analysis
If there is a dispute relating to our international operations, we may be subject to 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.
Government-owned petroleum companies located in some of the countries where we operate now or in the future may
have policies, or may be subject to governmental policies, that give preference to the purchase of goods and services
from companies that are majority-owned by local nationals. As such, we may rely on joint ventures, license arrangements
and other business combinations with local nationals in these countries, which may expose us to certain counterparty
risks, including the failure of local nationals to meet contractual obligations or comply with local or international laws that
apply to us.
In the international markets where we operate, we are subject to various laws and regulations that govern the operation
and taxation of our businesses and the import and export of our equipment from country to country. There may be
uncertainty about how these laws and regulations are imposed, applied or interpreted, and they could be subject to
change. Since we derive a portion of our revenues from subsidiaries outside of Canada and the U.S., the subsidiaries
paying dividends or making other cash payments or advances may be restricted from transferring funds in or out of the
respective countries, or face exchange controls or taxes on any payments or advances. We have organized our foreign
operations partly based on certain assumptions about various tax laws (including capital gains and withholding taxes),
foreign currency exchange, and capital repatriation laws and other relevant laws of a variety of foreign jurisdictions. We
believe these assumptions are reasonable; however, there is no assurance that foreign taxing or other authorities will
reach the same conclusion. If these foreign jurisdictions change or modify the laws, we could suffer adverse tax and
financial consequences.
While we have developed policies and procedures designed to achieve compliance with applicable international laws,
we could be exposed to potential claims, economic sanctions, or other restrictions for alleged or actual violations of
international laws related to our international operations, including anti-corruption and anti-bribery legislation, trade
laws and trade sanctions. The Canadian government, the U.S. Department of Justice, the Securities and Exchange
Commission (SEC), the U.S. Office of Foreign Assets Control, and similar agencies and authorities in other jurisdictions
have a broad range of civil and criminal penalties they may seek to impose against corporations and individuals for
such violations, including injunctive relief, disgorgement, fines, penalties and modifications to business practices and
compliance programs, among other things. While we cannot accurately predict the impact of any of these factors, if any
of those risks materialize, it could have a material adverse effect on our reputation, business, financial condition, results
of operations and cash flow.
Precision Drilling Corporation 2014 Annual Report
49
Evaluation of
Controls and Procedures
Management’s
Discussion and
Analysis
Internal Control over Financial Reporting
Precision maintains internal control over financial reporting that is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with IFRS.
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as
defined in Rules 13a – 15(f) and 15d – 15(f) under the United States Securities Exchange Act of 1934, as amended (the
Exchange Act) and under National Instrument 52-109 Certification of Disclosure in Issuer’s Annual and Interim Filings
(NI 52-109).
Management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), has conducted an
evaluation of Precision’s internal control over financial reporting based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO 2013).
Based on management’s assessment as at December 31, 2014, management has concluded that Precision’s internal
control over financial reporting is effective.
The effectiveness of internal control over financial reporting as of December 31, 2014 was audited by KPMG LLP, an
independent registered public accounting firm, as stated in their Report of Independent Registered Public Accounting
Firm, which is included in this annual report.
Due to its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance
that a misstatement of Precision’s financial statements would be prevented or detected. Further, the evaluation of the
effectiveness of internal control over financial reporting was made as of a specific date, and continued effectiveness in
future periods is subject to the risks that controls may become inadequate.
Disclosure Controls and Procedures
Precision maintains disclosure controls and procedures designed to provide reasonable assurance that information
required to be disclosed in Precision’s interim and annual filings is reviewed, recognized and disclosed accurately and
in the appropriate time period.
An evaluation, as of December 31, 2014, of the effectiveness of the design and operation of Precision’s disclosure
controls and procedures, as defined in Rule 13a – 15(e) and 15d – 15(e) under the Exchange Act and NI 52-109,
was carried out by management, including the CEO and the CFO. Based on that evaluation, the CEO and CFO have
concluded that the design and operation of Precision’s disclosure controls and procedures were effective to ensure that
information required to be disclosed in the reports that Precision files or submits under the Exchange Act or Canadian
securities legislation is recorded, processed, summarized and reported within the time periods specified in the rules and
forms therein.
It should be noted that while the CEO and CFO believe that Precision’s disclosure controls and procedures provide
a reasonable level of assurance that they are effective, they do not expect that Precision’s disclosure controls and
procedures will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide
only reasonable, not absolute, assurance that the objectives of the control system are met.
50 Management’s Discussion and Analysis
Corporate Governance
Management’s
Discussion and
Analysis
At Precision, we believe that a strong culture of corporate governance and ethical behaviour 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.
You can find more information about our approach to governance in our management information circular, available
on our website.
Precision Drilling Corporation 2014 Annual Report
51
Management’s Report to the Shareholders
The accompanying consolidated financial statements and all information in this 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 that 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 this
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 on the financial results of
Precision Drilling Corporation (the Corporation) prepared in accordance with IFRS. The MD&A compares the audited financial
results for the years ended December 31, 2014 to December 31, 2013.
Management is responsible for establishing and maintaining adequate internal control over the Corporation’s financial reporting
and is supported by an internal audit function that 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 2013). Based on this evaluation,
management concluded that the Corporation’s internal control over financial reporting was effective as of December 31, 2014.
Also management determined that there were no material weaknesses in the Corporation’s internal control over financial
reporting as of December 31, 2014.
KPMG LLP (KPMG), 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 completed an audit of the design and effectiveness of the Corporation’s internal control over financial reporting as
of December 31, 2014, as stated in its report included herein, and expressed an unqualified opinion on the design and
effectiveness of internal control over financial reporting as of December 31, 2014.
The Audit Committee of the Board of Directors, which is comprised of five 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 KPMG 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 KPMG major issues
as to the adequacy of the Corporation’s internal controls. KPMG has unrestricted access to the Audit Committee to discuss
its audit and related matters. The consolidated financial statements have been approved by the Board of Directors 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 6, 2015
March 6, 2015
52
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, 2014 and December 31, 2013, 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, 2014 and December 31, 2013, 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, 2014, based on the criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013),
and our report dated March 6, 2015 expressed an unqualified opinion on the effectiveness of the Corporation’s internal control
over financial reporting.
Chartered Accountants
March 6, 2015
Calgary, Canada
Precision Drilling Corporation 2014 Annual Report
53
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, 2014, based on the criteria established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (2013). 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, 2014, based on the criteria established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (2013).
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 statements of financial position of the Corporation as
of December 31, 2014 and December 31, 2013, and the related consolidated statements of earnings, comprehensive income,
shareholders’ equity and cash flow for the years then ended, and our report dated March 6, 2015 expressed an unqualified
opinion on those consolidated financial statements.
Chartered Accountants
March 6, 2015
Calgary, Canada
54
Consolidated Financial Statements
Consolidated Statements of Financial Position
(Stated in thousands of Canadian dollars)
ASSETS
Current assets:
Cash
Accounts receivable
Income tax recoverable
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,
2014
December 31,
2013
$
491,481
$
598,063
55,138
9,170
1,153,852
3,297
3,928,826
3,302
219,719
80,606
549,697
–
12,378
642,681
58,435
3,561,734
3,917
312,356
4,155,144
3,936,442
$
5,308,996
$
4,579,123
(Note 22)
(Note 23)
(Note 4)
(Note 5)
(Note 6)
Accounts payable and accrued liabilities
(Note 22)
$
493,038
$
332,838
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
Shareholders’ equity:
Shareholders’ capital
Contributed surplus
Retained earnings
Accumulated other comprehensive income (loss)
(Note 13)
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
Approved by the Board of Directors:
(Note 8)
(Note 9)
(Note 10)
(Note 11)
7,184
500,222
14,252
14,837
1,852,186
486,133
2,367,408
4,060
336,898
14,431
17,836
1,323,268
487,347
1,842,882
(Note 12)
2,315,539
2,305,227
31,109
48,426
46,292
29,175
88,416
(23,475)
2,441,366
2,399,343
$
5,308,996
$
4,579,123
Allen R. Hagerman
Director
Robert L. Phillips
Director
Precision Drilling Corporation 2014 Annual Report
55
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 22)
(Note 22)
(Note 4)
(Note 14)
(Note 11)
(Note 18)
2014
2013
$
2,350,538
$
2,029,977
1,405,827
144,341
1,248,637
142,507
800,370
448,669
126,699
225,002
95,170
(946)
109,701
21,077
10,172
(22,247)
(12,075)
33,152
0.11
0.11
$
$
$
$
$
$
638,833
333,159
–
305,674
–
(9,112)
93,248
221,538
45,017
(14,629)
30,388
191,150
0.69
0.66
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
2014
2013
$
33,152
$
191,150
171,092
109,195
(101,325)
(72,135)
$
102,919
$
228,210
Years ended December 31,
(Stated in thousands of Canadian dollars)
Net earnings
Unrealized gain on translation of assets and liabilities
of operations denominated in foreign currency
Foreign exchange loss on net investment hedge
with U.S. denominated debt, net of tax
Comprehensive income
See accompanying notes to consolidated financial statements.
56
Consolidated Financial Statements
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 22)
Investments:
Purchase of property, plant and equipment
(Note 4)
Proceeds on sale of property, plant and equipment
Changes in income tax recoverable
Changes in non-cash working capital balances
(Note 22)
Financing:
Repayment of long-term debt
Debt issue costs
Dividends paid
Increase in long-term debt
Issuance of common shares on the exercise of options
Issuance of common shares on the exercise of warrants
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.
2014
2013
$
33,152
$
191,150
16,197
448,669
126,699
95,170
(3,971)
109,701
(12,075)
(6,033)
(15,601)
8,463
(103,816)
919
697,474
(17,315)
680,159
(856,690)
101,826
55,138
69,739
(629,987)
(30,670)
(10,166)
(73,142)
436,600
7,082
–
329,704
30,999
410,875
80,606
$
491,481
$
20,708
333,159
–
–
(9,216)
93,248
30,388
(3,754)
(109,326)
3,761
(89,156)
1,011
461,973
(33,887)
428,086
(535,804)
13,372
6,144
(10,247)
(526,535)
–
(883)
(58,113)
29,781
2,432
48,300
21,517
4,770
(72,162)
152,768
80,606
Precision Drilling Corporation 2014 Annual Report
57
Consolidated Statements of Changes in Equity
(Stated in thousands of Canadian dollars)
Balance at January 1, 2014
Net earnings for the period
Other comprehensive income for
the period
Dividends
Shareholders’
capital
Contributed
surplus
Accumulated
other
comprehensive
income (loss)
(Note 13)
Retained
earnings
Total equity
$ 2,305,227
$
29,175
$
(23,475)
$
88,416
$ 2,399,343
–
–
–
–
–
–
(3,230)
5,164
–
33,152
33,152
69,767
–
–
–
–
(73,142)
–
–
69,767
(73,142)
7,082
5,164
Share options exercised
(Note 12)
10,312
Share based compensation expense
(Note 8)
–
Balance at December 31, 2014
$ 2,315,539
$
31,109
$
46,292
$
48,426
$ 2,441,366
Shareholders’
capital
Contributed
surplus
Accumulated
other
comprehensive
loss (Note 13)
Retained
earnings
(deficit)
Total equity
$ 2,251,982
$
24,474
$
(60,535)
$
(44,621)
$ 2,171,300
(Stated in thousands of Canadian dollars)
Balance at January 1, 2013
Net earnings for the period
Other comprehensive income for
the period
Dividends
–
–
–
–
–
–
Share options exercised
(Note 12)
3,707
(1,275)
Shares issued on redemption of
non-management directors’ DSUs
Warrants exercised
Share based compensation expense
(Note 8)
1,238
48,300
–
(1,031)
–
7,007
–
191,150
191,150
37,060
–
–
–
–
–
–
(58,113)
–
–
–
–
37,060
(58,113)
2,432
207
48,300
7,007
Balance at December 31, 2013
$ 2,305,227
$
29,175
$
(23,475)
$
88,416
$ 2,399,343
See accompanying notes to consolidated financial statements.
58
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, the United States and certain international locations. 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 6, 2015.
(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(r) and (s).
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 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 2014 Annual Report
59
(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
Seasonal, stratification and turnkey
drilling equipment
Service rig equipment
Drilling rig spare equipment
Service rig spare equipment
Rental equipment
Other equipment
Light duty vehicles
Heavy duty vehicles
Buildings
5 years
10 years
20 years
4 years
20 years
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
–
–
10%
0 to 20%
10%
–
–
0 to 25%
–
–
–
–
straight-line
straight-line
straight-line
straight-line
straight-line
straight-line
straight-line
straight-line
straight-line
straight-line
straight-line
straight-line
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.
60
Notes to Consolidated Financial Statements
(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.
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.
Precision Drilling Corporation 2014 Annual Report
61
(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 after 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.
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 CGUs 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 at 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.
62
Notes to Consolidated Financial Statements
(j) Revenue Recognition
The Corporation’s services are generally sold based on service orders or contracts with a customer that include fixed or
determinable prices based on 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 on
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.
(l) Provisions
Provisions are recognized when the Corporation has a present obligation (legal or constructive) as a result of a past event,
when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and when
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 non-management
directors, officers, and other eligible employees. As estimated by management, the fair values 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.
The Corporation has implemented an employee share purchase plan that allows eligible employees to purchase common
shares through payroll deductions. Under this plan, contributions made by employees are matched to a specific percentage
by the Corporation. The contributions made by the Corporation are expensed as incurred.
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.
Precision Drilling Corporation 2014 Annual Report
63
(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.
(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 has 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.
64
Notes to Consolidated Financial Statements
(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.
(r) Critical Accounting Judgments
(i) Depreciation and Amortization
Precision’s property, plant and equipment and its intangible assets are depreciated and amortized based on estimates of
useful lives and salvage values. These estimates consider 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.
Determination of which parts of the drilling rig equipment represent significant cost relative to the entire rig and identifying
the consumption patterns along with the useful lives of these significant parts, are matters of judgment. This determination
can be complex and subject to differing interpretations and views, particularly when rig equipment comprises individual
components for which different depreciation methods or rates are appropriate.
(ii) Income Taxes
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 taxable 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 countries 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.
(s) Critical Accounting Assumptions and Estimates
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 on assumptions
about future business conditions and technological developments. Significant, unanticipated changes to these
assumptions could require a provision for impairment in the future.
Precision Drilling Corporation 2014 Annual Report
65
For goodwill, we conduct impairment tests annually in the fourth quarter or whenever there is change in circumstance
that indicates that the carrying value may not be recoverable. The recoverability of goodwill requires a calculation of
the recoverable amount of the 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 judgment is required in determining the
appropriate discount rate. We use observable market data inputs to develop a discount rate that we believe approximates
the discount rate from market participants.
In deriving the underlying projected cash flows, assumptions must also be made about future drilling activity, margins
and market conditions over the long-term life of the assets or CGUs. Precision cannot predict if an event that triggers
impairment will occur, when it will occur or how it will occur, or how it will affect reported asset amounts. Although estimates
are reasonable and consistent with current conditions, internal planning and expected future operations, such estimations
are subject to significant uncertainty and judgment.
(t) Accounting Policies Adopted January 1, 2014
The Corporation adopted the following new and revised accounting standards, including any consequential amendments.
Changes in accounting policies adopted by the Corporation were made in accordance with the applicable transitional
provisions as provided in those standards and amendments.
The adoption of these standards on January 1, 2014 had no impact on the amounts recorded in the Corporation’s financial
statements.
(i) IAS 32, Financial Instruments: Presentation
On January 1, 2014, the Corporation implemented certain amendments to IAS 32 which require the Corporation to provide
clarification on the requirements for offsetting financial assets and financial liabilities on the statement of financial position.
(ii) IAS 36, Impairment of Assets
On January 1, 2014, the Corporation implemented certain amendments to IAS 36 which require that the Corporation
disclose, if appropriate, the recoverable amount of an asset or cash generating unit, and the basis for the determination of
fair value less costs of disposal or value-in-use of the asset, when an impairment loss is recognized or when an impairment
loss is subsequently reversed.
(iii) IFRIC 21, Levies
On January 1, 2014, the Corporation implemented IFRIC 21 which provides an interpretation on IAS 37, Provisions,
Contingent Liabilities and Contingent Assets, with respect to the accounting for levies imposed by governments. IAS 37
sets out criteria for the recognition of a liability, one of which is the requirement for the entity to have a present obligation
as a result of a past event. The interpretation clarifies that the obligating event is the activity described in the relevant
legislation that triggers the payment of the levy.
(u) Accounting Standards, Interpretations and Amendments to Existing Standards not yet Effective
(i) IFRS 9, Financial Instruments
In November 2009, the IASB issued IFRS 9, replacing IAS 39, Financial Instruments: Recognition and Measurement.
IFRS 9 will be issued in three phases. The first phase, which has already been issued, addresses the accounting for
financial assets and financial liabilities. The second phase will address impairment of financial instruments, while the third
phase will address hedge accounting. IFRS 9 uses a single approach to determine whether a financial asset is measured
at amortized cost or fair value, and replaces the multiple category and measurement models in IAS 39. The approach
in IFRS 9 focuses on how an entity manages its financial instruments in the context of its business model, as well as the
contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to
be used, replacing the multiple impairment methods currently provided in IAS 39.
66
Notes to Consolidated Financial Statements
Requirements for financial liabilities were added to IFRS 9 in October 2010. Although the classification criteria for financial
liabilities will not change under IFRS 9, the fair value option may require different accounting for changes to the fair value of
a financial liability resulting from changes to an entity’s own credit risk.
In December 2013, new hedge accounting requirements were incorporated into IFRS 9 that increase the scope of items
that can qualify as a hedged item and change the requirements of hedge effectiveness testing that must be met to use
hedge accounting.
In July 2014, the IASB issued final amendments to IFRS 9, replacing earlier versions of IFRS 9. These amendments to
IFRS 9 introduce a single, forward-looking ‘expected loss’ impairment model for financial assets that will require more
timely recognition of expected credit losses, and a fair value through other comprehensive income category for financial
assets that are debt instruments.
The amendments to IFRS 9 are effective for annual periods beginning on or after January 1, 2018 and are available for
earlier adoption. The Corporation does not expect that the implementation of IFRS 9 will have a material effect on the
financial statements.
(ii) IFRS 15, Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15 to address how and when to recognize revenue as well as requiring entities to
provide users of financial statements with more informative, relevant disclosures in order to understand the nature,
amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The standard provides
a principles based five-step model to be applied to all contracts with customers. This five-step model involves identifying
the contract(s) with a customer; identifying the performance obligations in the contract; determining the transaction price;
allocating the transaction price to the performance obligations in the contract; and recognizing revenue when (or as) the
entity satisfies a performance obligation.
Application of this new standard is mandatory for annual reporting periods beginning on or after January 1, 2017, with
earlier application is permitted. The Corporation does not expect that the implementation of IFRS 15 will have a material
effect on the financial statements.
(iii) IFRS 11, Joint Arrangements
In May 2014, the IASB issued amendments to IFRS 11 to address the accounting for acquisitions of interests in joint
operations. The amendments address how a joint operator should account for the acquisition of an interest in a joint
operation in which the activity of the joint operation constitutes a business. IFRS 11, as amended, now requires that such
transactions be accounted for using the principles related to business combinations accounting as outlined in IFRS 3,
Business Combinations. The amendments are to be applied prospectively and are effective for annual periods beginning
on or after January 1, 2016, with earlier application permitted. The Corporation does not expect that these amendments will
have an impact on the financial statements.
(iv) IAS 16, Property, Plant and Equipment and IAS 38, Intangible Assets
In May 2014, the IASB issued amendments to IAS 16 and IAS 38 to clarify acceptable methods of depreciation and
amortization. The amended IAS 16 eliminates the use of a revenue-based depreciation method for items of property, plant
and equipment. Similarly, amendments to IAS 38 eliminate the use of a revenue-based amortization model for intangible
assets except in certain specific circumstances. The amendments are to be applied prospectively and are effective for
annual periods beginning on or after January 1, 2016, with earlier application permitted. The Corporation does not expect
that these amendments will have an impact on the financial statements.
Precision Drilling Corporation 2014 Annual Report
67
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Cost
Accumulated depreciation
Rig equipment
Rental equipment
Other equipment
Vehicles
Buildings
Assets under construction
Land
Cost
Balance,
December 31, 2012
Additions
Disposals
Reclassifications
Effect of foreign
currency exchange
differences
Balance,
December 31, 2013
Additions
Disposals
2014
2013
$
$
$
5,898,980
(1,970,154)
3,928,826
3,182,090
104,492
$
$
$
5,260,263
(1,698,529)
3,561,734
3,033,159
108,453
97,887
24,682
89,539
397,556
32,580
78,670
42,993
49,506
219,433
29,520
$
3,928,826
$
3,561,734
Rig
Equipment
Rental
Equipment
Other
Equipment
Vehicles
Buildings
Assets
Under
Construction
Land
Total
$ 3,986,743 $ 152,351 $ 171,637
$
63,196 $
72,069
$ 133,791
$
28,594
$ 4,608,381
143,252
6,346
1,651
3,588
(52,659)
(1,126)
(2,971)
(5,324)
–
–
–
380,788
179
535,804
270,615
10,508
14,141
4,900
825
(300,989)
–
–
(62,080)
–
163,445
1,866
936
3,251
2,070
5,843
747
178,158
4,511,396
169,945
185,394
69,611
74,964
219,433
29,520 5,260,263
144,169
2,939
5,504
4,356
5,320
692,560
1,842
856,690
Asset decommissioning
(286,898)
–
–
–
(155,002)
(1,587)
(4,853)
(43,084)
(69)
–
–
–
–
(204,595)
–
(286,898)
Reclassifications
Effect of foreign
currency exchange
differences
Balance,
December 31, 2014
453,862
1,650
27,990
7,335
36,968
(527,805)
–
–
248,802
1,411
3,992
1,639
3,090
13,368
1,218
273,520
$ 4,916,329 $ 174,358 $ 218,027 $
39,857 $ 120,273 $ 397,556 $
32,580 $ 5,898,980
68
Notes to Consolidated Financial Statements
Accumulated Depreciation
Rig
Equipment
Rental
Equipment
Other
Equipment
Vehicles
Buildings
Assets
Under
Construction
Land
Total
Balance,
December 31, 2012
$ 1,167,252
$
61,000
$
93,279
$
22,437
$
21,484
$
–
$
–
$ 1,365,452
Depreciation expense
295,807
9,695
15,518
8,299
3,774
Disposals
Reclassifications
Effect of foreign
currency exchange
differences
Balance,
December 31, 2013
(43,423)
(1,007)
(2,937)
(5,069)
8,314
(8,557)
273
(20)
–
(10)
50,287
361
591
971
210
1,478,237
61,492
106,724
26,618
25,458
Depreciation expense
392,565
10,789
16,815
6,468
4,818
Disposals
(63,305)
(1,364)
(4,845)
(18,270)
Asset decommissioning
(160,200)
–
1,549
(1,501)
–
2
–
(95)
(19)
–
45
–
–
–
–
–
–
–
–
–
–
–
–
333,093
(52,436)
–
–
52,420
– 1,698,529
–
–
431,455
(87,803)
–
(160,200)
–
–
Reclassifications
Effect of foreign
currency exchange
differences
Balance,
December 31, 2014
85,393
450
1,444
454
432
–
–
88,173
$ 1,734,239 $
69,866 $ 120,140 $
15,175 $
30,734 $
– $
– $ 1,970,154
In 2014, the Corporation incurred a $126.7 million loss on the decommissioning of certain drilling and service rigs and ancillary
equipment. The assets were decommissioned due to the inefficient nature of the assets and the high cost to maintain. The
charge was allocated $97.9 million (2013 – $nil) to the Contract Drilling Services segment and $28.8 million (2013 – $nil) to the
Completion and Production Services segment.
Effective January 1, 2014, the Corporation changed the method for depreciating its drilling and service rig equipment from
unit-of-production to straight-line. Precision believes that due to technological developments within the industry, straight-line
depreciation better reflects the allocation of the cost of the assets over their expected lives. The change in depreciation
method resulted in $42.7 million of additional depreciation over what would have been expensed had the previous method
been continued.
NOTE 5. INTANGIBLES
Cost
Accumulated amortization
Customer relationships
Patents and brands
Loan commitment fees related to revolving credit facility
2014
8,997
(5,695)
3,302
–
–
$
$
$
3,302
3,302
$
2013
12,221
(8,304)
3,917
616
16
3,285
3,917
$
$
$
$
Precision Drilling Corporation 2014 Annual Report
69
Cost
Balance, December 31, 2012
$
4,575
$
53
$
7,760
$
12,388
Customer
Relationships
Patents and
Brands
Loan
Commitment
Fees
Total
Additions
Effect of foreign currency exchange differences
Removal of fully amortized assets
Balance, December 31, 2013
Additions
Effect of foreign currency exchange differences
Removal of fully amortized assets
–
78
(1,128)
3,525
–
47
(3,572)
–
–
–
53
–
–
(53)
883
–
–
8,643
354
–
–
Balance, December 31, 2014
$
–
$
–
$
8,997
$
Accumulated Amortization
Balance, December 31, 2012
Amortization expense
Effect of foreign currency exchange differences
Removal of fully amortized assets
Balance, December 31, 2013
Amortization expense
Effect of foreign currency exchange differences
Removal of fully amortized assets
Customer
Relationships
Patents and
Brands
Loan
Commitment
Fees
$
2,685
$
32
$
3,570
$
1,294
58
(1,128)
2,909
619
44
(3,572)
5
–
–
37
16
–
(53)
1,788
–
–
5,358
337
–
–
Balance, December 31, 2014
$
–
$
–
$
5,695
$
883
78
(1,128)
12,221
354
47
(3,625)
8,997
Total
6,287
3,087
58
(1,128)
8,304
972
44
(3,625)
5,695
NOTE 6. GOODWILL
Balance, December 31, 2012
Exchange adjustment
Balance, December 31, 2013
Impairment charge
Exchange adjustment
Balance, December 31, 2014
$
310,552
1,804
312,356
(95,170)
2,533
$
219,719
In connection with the annual test for goodwill impairment, the Corporation determined that the carrying value of the goodwill
allocated to the Canadian well servicing and the wastewater treatment CGUs exceeded their recoverable amounts and
recognized impairment losses of $88.9 million and $6.2 million, respectively. These impairment charges resulted in the entire
goodwill balance of these CGUs being written off. Both CGUs are included in the Completion and Production Services segment.
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.
70
Notes to Consolidated Financial Statements
Key assumptions used in the calculation of value in use for the Canadian well servicing CGU included a discount rate of 12.5%,
terminal value growth rate of nil % and average projected annual cash flow growth over the next five years of 16%. 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.
Key assumptions used in the calculation of value in use for the wastewater treatment CGU included a discount rate of 13.0%,
terminal value growth rate of nil % and no projected annual cash flow growth over the next five years. 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.
Of the remaining carrying value of goodwill, $172.3 million is associated with the Canadian contract drilling CGU. Upon
performance of the annual test for goodwill impairment for this CGU, it was determined that no impairment was required. The
key assumptions used in the calculation of value in use included a discount rate of 10.5%, terminal value growth rate of nil%
and average projected growth of annual cash flows over the next five years of 3%. There was no terminal value growth rate used
due to the finite lives of the underlying assets of the CGU. The growth rate was based on future expected outcomes taking into
account past experience and management expectation of future market conditions. A discount rate higher than 18.5% would
have resulted in an impairment of goodwill.
NOTE 7. BANK INDEBTEDNESS
At December 31, 2014 and 2013, Precision had available $40.0 million and US$15.0 million under secured operating
facilities, and a secured US$25.0 million facility for the issuance of letters of credit and performance and bid bonds to support
international operations. As at December 31, 2014 and 2013, no amounts had been drawn on any of the facilities. Availability
of the $40.0 million and US$25.0 million facility were reduced by outstanding letters of credit in the amount of $20.5 million
(2013 – $17.3 million) and US$8.1 million (2013 – US$0.2 million), respectively. 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 bank’s 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.
NOTE 8. SHARE BASED COMPENSATION PLANS
Liability Classified Plans
Restricted
Share Units
Performance
Share Units
Share
Appreciation
Rights
Non-
Management
Directors’ DSUs
Total
Balance, December 31, 2012
$
9,685
$
13,778
$
Expensed (recovered) during the period
Payments
Balance, December 31, 2013
Expensed (recovered) during the period
Payments and redemptions
Balance, December 31, 2014
Current
Long-term
11,622
(7,769)
13,538
7,618
(10,572)
10,584
6,847
3,737
$
$
8,137
(8,953)
12,962
5,220
(4,413)
13,769
5,243
8,526
$
$
$
10,584
$
13,769
$
$
$
497
(251)
–
246
(95)
(70)
81
81
–
81
$
816
$
24,776
1,245
(207)
1,854
135
–
1,989
–
1,989
$
$
20,753
(16,929)
28,600
12,878
(15,055)
26,423
12,171
14,252
$
$
$
1,989
$
26,423
Precision Drilling Corporation 2014 Annual Report
71
(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. A summary of the RSUs and PSUs outstanding under these share based incentive plans
is presented below:
December 31, 2012
Granted
Issued as a result of cash dividends
Redeemed
Forfeitures
December 31, 2013
Granted
Issued as a result of cash dividends
Redeemed
Forfeitures
December 31, 2014
RSUs
Outstanding
PSUs
Outstanding
1,880,250
1,295,739
51,113
(869,744)
(243,863)
2,113,495
1,387,293
52,369
(1,016,242)
(290,219)
1,948,952
1,258,650
54,623
(696,171)
(128,126)
2,437,928
1,704,188
76,994
(439,256)
(329,821)
2,246,696
3,450,033
(b) Share Appreciation Rights
The Corporation has a U.S. dollar denominated Share Appreciation Rights (SAR) plan under which eligible participants were
granted SARs 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 SARs vest over a period of five years and expire 10 years from the date of
grant. At December 31, 2014, the intrinsic value of these awards was $nil (2013 – $7,000).
Share Appreciation Rights
Outstanding
Range of
Exercise Price
(US$)
Weighted
Average Exercise
Price (US$)
678,242
$ 9.26 – 17.38
(90,080)
13.26 – 17.38
588,162
$ 9.26 – 17.38
(31,506)
(112,915)
9.26 – 9.26
9.26 – 17.38
443,741
$ 13.26 – 17.38
$ 14.81
15.42
$ 14.71
9.26
13.85
$ 15.32
Exercisable
678,242
588,162
443,741
Total SARs Outstanding and Exercisable
Weighted
Average Exercise
Price (US$)
$ 13.26
15.47
17.38
$ 15.32
Weighted Average
Remaining
Contractual Life
(Years)
0.10
2.71
1.13
1.82
Number
100,609
261,064
82,068
443,741
December 31, 2012
Forfeited
December 31, 2013
Exercised
Forfeited
December 31, 2014
Range of Exercise Prices (US$):
$ 13.26 – 14.99
15.00 – 15.99
16.00 – 17.38
$ 13.26 – 17.38
72
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 on an election by the non-management director to receive all or a
portion of his or her compensation in deferred share units. These deferred share units are redeemable in cash or for 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 any
time 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 on
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
December 31, 2012
Granted
Issued as a result of cash dividends
Redeemed
December 31, 2013
Granted
Issued as a result of cash dividends
December 31, 2014
Equity Settled Plans
Outstanding
101,964
105,338
2,836
(21,563)
188,575
85,183
4,829
278,587
(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 on an election by the non-management director to receive all or a portion of
his or her 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
December 31, 2012
Issued as a result of cash dividends
Redeemed
December 31, 2013
Issued as a result of cash dividends
December 31, 2014
Outstanding
335,946
5,459
(120,293)
221,112
4,898
226,010
(e) Option Plan
The Corporation has a share option plan under which a combined total of 16,569,134 options to purchase common shares
are reserved to be granted to employees. Of the amount reserved, 11,066,588 options 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 2014 Annual Report
73
A summary of the status of the equity incentive plan is presented below:
Canadian share options
December 31, 2012
Granted
Exercised
Forfeitures
December 31, 2013
Granted
Exercised
Forfeitures
Options
Outstanding
Range of
Exercise Prices
4,013,797
$
5.22 – 14.50
$
1,237,500
(172,158)
(178,253)
4,900,886
881,700
(530,738)
(97,534)
7.82 – 9.02
5.85 – 10.67
5.85 – 14.50
5.22 – 14.50
10.15 – 14.31
5.85 – 11.16
5.85 – 10.67
December 31, 2014
5,154,314
$
5.22 – 14.50
$
U.S. share options
December 31, 2012
Granted
Exercised
Forfeitures
December 31, 2013
Granted
Exercised
Forfeitures
Options
Outstanding
Range of
Exercise Prices
(US$)
2,399,980
$
4.95 – 15.21
$
1,025,100
(189,887)
(61,385)
3,173,808
827,300
(309,512)
(285,822)
8.99 – 9.28
4.95 – 10.55
7.14 – 15.21
4.95 – 15.21
9.18 – 9.18
4.95 – 10.96
4.95 – 14.58
December 31, 2014
3,405,774
$
4.95 – 15.21
$
Weighted
Average
Exercise Price
9.13
8.99
7.43
9.77
9.14
10.24
8.07
9.62
9.43
Weighted
Average
Exercise Price
(US$)
9.23
9.00
5.89
10.82
9.32
9.18
8.26
9.77
9.35
Options
Exercisable
1,846,603
2,676,865
3,185,500
Options
Exercisable
935,035
1,438,335
1,795,639
The weighted average share price at the date of exercise for share options exercised in 2014 was $12.98 (2013 – $10.11) for the
Canadian share options and US$12.07 (2013 – US$9.90) for the U.S. share options.
The range of exercise prices for options outstanding at December 31, 2014 is as follows:
Canadian share options
Total Options Outstanding
Options Exercisable
Range of Exercise Prices:
$ 5.22 – 6.99
7.00 – 8.99
9.00 – 9.99
10.00 – 14.50
$ 5.22 – 14.50
Number
487,102
842,609
1,123,084
2,701,519
Weighted
Average
Exercise Price
$ 5.85
8.55
9.02
10.51
5,154,314
$ 9.43
Weighted Average
Remaining
Contractual Life
(Years)
1.35
2.22
5.12
4.43
3.93
Number
487,102
820,055
367,442
1,510,901
Weighted
Average
Exercise Price
$ 5.85
8.57
9.02
10.64
3,185,500
$ 9.19
74
Notes to Consolidated Financial Statements
U.S. share options
Total Options Outstanding
Options Exercisable
Range of Exercise Prices (US$):
Number
Weighted
Average
Exercise Price
(US$)
Weighted Average
Remaining
Contractual Life
(Years)
$ 4.95 – 6.99
7.00 – 8.99
9.00 – 9.99
10.00 – 15.21
$ 4.95 – 15.21
95,868
$ 4.95
1,394,295
780,000
1,135,611
8.57
9.18
10.79
3,405,774
$ 9.35
1.35
4.17
6.10
3.66
4.36
Weighted
Average
Exercise Price
(US$)
Number
95,868
$ 4.95
768,046
4,998
926,727
8.25
9.11
10.80
1,795,639
$ 9.39
The per option weighted average fair value of the share options granted during 2014 was $3.17 (2013 – $3.26) estimated on
the grant date using the Black-Scholes option pricing model with the following assumption: average risk-free interest rate 1%
(2013 – 1%), average expected life of four years (2013 – four years), expected forfeiture rate of 5% (2013 – 5%) and expected
volatility of 46% (2013 – 53%). Included in net earnings for the year ended December 31, 2014 is an expense of $5.2 million
(2013 – $7.0 million).
Employee share purchase plan
In 2014, the Corporation implemented an employee share purchase plan to encourage employees to become Precision
shareholders and to attract and retain people. Under the plan, eligible employees can contribute up to 10% of their regular base
salary through payroll deduction with Precision matching 20% of the employee’s contribution. These contributions are used to
purchase the Corporation’s shares in the open market. No vesting conditions apply. During 2014, the Corporation recorded
compensation expense of $0.5 million (2013 – $nil).
NOTE 9. PROVISIONS AND OTHER
Balance December 31, 2012
Expensed during the year
Payment of deductibles and uninsured claims
Effects of foreign currency exchange differences
Balance December 31, 2013
Expensed during the year
Payment of deductibles and uninsured claims
Effects of foreign currency exchange differences
Balance December 31, 2014
Current
Long-term
Workers’
Compensation
$
26,601
4,350
(8,546)
1,781
24,186
5,215
(11,272)
1,852
$
19,981
December 31,
2014
December 31,
2013
$
$
5,144
14,837
19,981
$
$
6,350
17,836
24,186
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 on 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 2014 Annual Report
75
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)
5.25% Senior Notes due 2024 (US$400.0 million)
6.5% Senior Notes due 2019
Less net unamortized debt issue costs
2014
2013
$
–
$
29,781
754,065
464,040
464,040
200,000
1,882,145
691,340
425,440
–
200,000
1,346,561
(29,959)
(23,293)
$
1,852,186
$
1,323,268
(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$650.0 million with a provision for an increase in the facility of up to an additional US$250.0 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 an 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, 2014, Precision was in compliance 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 June 3, 2019.
Under the revolving credit facility, amounts can be drawn in U.S. dollars and/or Canadian dollars and, as at December 31, 2014,
no amounts (2013 – US$28.0 million) were drawn under this facility. Up to US$200.0 million of the revolving credit facility is
available for letters of credit denominated in U.S and/or Canadian dollars and as at December 31, 2014 outstanding letters of
credit amounted to US$25.6 million (2013 – US$28.6 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.
76
Notes to Consolidated Financial Statements
(b) Unsecured Senior Notes
Precision has outstanding the following unsecured senior notes:
$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.
These notes 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.
Prior to March 15, 2015, Precision may redeem these 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 these 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 101.625% of their principal amount plus accrued interest. Any time on or after
March 15, 2017, these 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.
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.
These notes 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.
Prior to November 15, 2015, Precision may redeem the 6.625% Senior Notes due 2020 in whole or in part at 106.625% of
their principal amount, plus accrued interest. As well, Precision may redeem these 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. Any time on or after November 15, 2018, these 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.
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.
Precision Drilling Corporation 2014 Annual Report
77
These notes 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.
Prior to December 15, 2016, Precision may redeem these 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 these 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. Any
time on or after December 15, 2019, these 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.
US$400.0 million of 5.25% Senior Notes due 2024
These notes bear interest at a fixed rate of 5.25% per annum and mature on November 15, 2024. Interest is payable
semi-annually on May 15 and November 15 of each year.
These notes 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 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.
Prior to May 15, 2017, Precision may redeem up to 35% of the 5.25% Senior Notes due 2024 with the net proceeds of
certain equity offerings at a redemption price equal to 105.25% of the principal amount plus accrued interest. Prior to
May 15, 2019, Precision may redeem these 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 May 15, 2019 redemption price plus required interest payments through May 15, 2019 (calculated using the
United States Treasury rate plus 50 basis points) over the principal amount of the note. As well, Precision may redeem
these notes in whole or in part at any time on or after May 15, 2019 and before May 15, 2022, at redemption prices ranging
between 102.625% and 100.875% of their principal amount plus accrued interest. Any time on or after May 15, 2022, these
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.
Long-term debt obligations at December 31, 2014 will mature as follows:
2019
Thereafter
$
200,000
1,682,145
$
1,882,145
78
Notes to Consolidated Financial Statements
(c) Guarantor Disclosures
The following presents supplemental condensed consolidating financial information for the parent corporation, guarantor
subsidiaries and the non-guarantor subsidiaries, respectively.
Condensed Consolidating Statement of Financial Position as at December 31, 2014
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
$
337,848
$
97,980
$
55,653
$
–
3
$
491,481
662,371
3,923
364,958
6,026,160
3,297
59,485
3,302
–
6,798,973
49,622
2,628,522
1,852,186
47,713
4,578,043
2,220,930
$
$
513,465
2,555,200
61
–
144,980
73,404
–
–
3,459,563
409,923
–
–
(2,993,562)
(6,026,221)
–
(145)
–
–
$
$
–
219,719
6,845,988
384,452
169,855
–
473,415
1,027,722
5,818,266
$
$
$
$
683,960
$
(9,019,925)
66,148
$
–
195,185
(2,993,562)
–
(5,906)
255,427
428,533
–
–
(2,993,562)
(6,026,363)
–
–
3,297
3,928,826
3,302
219,719
5,308,996
500,222
–
1,852,186
515,222
2,867,630
2,441,366
Total liabilities and shareholders’ equity
$
6,798,973
$
6,845,988
$
683,960
$
(9,019,925)
$
5,308,996
Condensed Consolidating Statement of Financial Position as at December 31, 2013
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
$
27,160
$
23,039
$
30,407
$
3,592
424,178
5,904,795
–
56,501
3,286
–
6,419,512
40,624
2,442,373
1,323,268
263,410
4,069,675
2,349,837
$
$
456,574
2,342,467
69
–
3,261,610
631
312,356
6,396,746
240,052
202,986
–
262,308
705,346
5,691,400
$
$
–
3
$
80,606
562,075
101,906
74,795
(2,841,440)
–
(5,904,864)
58,435
243,858
–
–
–
(235)
–
–
$
$
$
$
509,401
$
(8,746,536)
56,222
$
–
196,081
(2,841,440)
–
(6,104)
246,199
263,202
–
–
(2,841,440)
(5,905,096)
–
–
58,435
3,561,734
3,917
312,356
4,579,123
336,898
–
1,323,268
519,614
2,179,780
2,399,343
Total liabilities and shareholders’ equity
$
6,419,512
$
6,396,746
$
509,401
$
(8,746,536)
$
4,579,123
Precision Drilling Corporation 2014 Annual Report
79
Condensed Consolidating Statement of Earnings (Loss) for the Year ended December 31, 2014
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)
$
Parent
172
98
26,798
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
Total
$
2,179,259
$
195,487
$
(24,380)
$
2,350,538
1,281,955
107,028
148,154
10,515
(24,380)
1,405,827
–
144,341
(26,724)
8,106
–
(34,830)
–
5,274
109,628
(206,095)
56,363
23,050
790,276
415,973
126,699
247,604
95,170
(8,450)
87
–
160,797
(37,581)
$
33,313
$
198,378
$
36,818
24,430
–
12,388
–
2,230
(14)
–
10,172
2,456
7,716
–
160
–
(160)
–
–
–
206,095
(206,255)
–
800,370
448,669
126,699
225,002
95,170
(946)
109,701
–
21,077
(12,075)
$
(206,255)
$
33,152
Condensed Consolidating Statement of Earnings (Loss) for the Year ended December 31, 2013
Revenue
Operating expense
$
General and administrative expense
Earnings (loss) before income taxes,
finance charges, foreign exchange,
and depreciation and amortization
Depreciation and amortization
Operating earnings (loss)
Foreign exchange
Finance charges
Equity in earnings of subsidiaries
Earnings (loss) before tax
Income taxes
Net earnings (loss)
Parent
143
273
29,174
(29,304)
7,393
(36,697)
(3,356)
92,112
(360,468)
235,015
43,615
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
Total
$
1,912,750
$
137,681
$
(20,597)
$
2,029,977
1,148,786
101,407
120,175
11,926
662,557
309,939
352,618
(5,198)
1,141
–
356,675
(15,431)
5,580
15,576
(9,996)
(558)
(5)
–
(9,433)
2,204
(20,597)
1,248,637
–
–
251
(251)
–
–
360,468
(360,719)
–
142,507
638,833
333,159
305,674
(9,112)
93,248
–
221,538
30,388
$
191,400
$
372,106
$
(11,637)
$
(360,719)
$
191,150
80
Notes to Consolidated Financial Statements
Condensed Consolidating Statement of Comprehensive Income for the Year ended December 31, 2014
Net earnings
Other comprehensive income (loss)
Comprehensive income (loss)
Parent
33,313
(101,325)
(68,012)
$
$
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
$
$
198,378
141,519
339,897
$
$
7,716
29,324
37,040
$
$
(206,255)
249
(206,006)
Condensed Consolidating Statement of Comprehensive Income for the Year ended December 31, 2013
Net earnings
Other comprehensive income (loss)
Comprehensive income (loss)
Parent
191,400
(72,135)
119,265
$
$
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
$
$
372,106
98,105
470,211
$
$
(11,637)
10,720
(917)
$
$
(360,719)
370
(360,349)
Total
33,152
69,767
102,919
Total
191,150
37,060
228,210
$
$
$
$
Condensed Consolidating Statement of Cash Flow for the Year ended December 31, 2014
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
Total
Cash provided by (used in):
Operations
Investments
Financing
Effects of exchange rate changes on
cash and cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents,
beginning of year
$
(142,565)
$
815,939
$
6,785
$
–
$
680,159
101,403
329,704
22,146
310,688
(478,613)
(267,482)
5,097
74,941
(139,018)
153,723
3,756
25,246
27,160
23,039
30,407
(113,759)
113,759
–
–
–
–
(629,987)
329,704
30,999
410,875
80,606
$
491,481
Cash and cash equivalents, end of year
$
337,848
$
97,980
$
55,653
$
Condensed Consolidating Statement of Cash Flow for the Year ended December 31, 2013
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
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating
Adjustments
Total
$
(207,558)
$
693,757
$
(58,113)
$
–
$
428,086
96,685
21,517
1,807
(87,549)
(458,810)
(229,688)
2,071
7,330
(68,951)
134,229
892
8,057
114,709
15,709
22,350
(95,459)
95,459
–
–
–
–
(526,535)
21,517
4,770
(72,162)
152,768
$
80,606
Cash and cash equivalents, end of year
$
27,160
$
23,039
$
30,407
$
Precision Drilling Corporation 2014 Annual Report
81
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)
$
$
$
$
2014
21,077
25%
5,269
26,829
(1,123)
(33,356)
(12,695)
3,932
(3,980)
3,049
2013
221,538
25%
55,385
4,097
(626)
(31,118)
(5,957)
3,343
4,738
526
$
(12,075)
$
30,388
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
$
730,742
$
749,760
2014
2013
Partnership deferrals
Debt issue costs
Other
Deferred income tax assets:
Losses (expire from time to time up to 2034)
Long-term incentive plan
Other
Net deferred income tax liability
55,848
4,905
1,921
34,938
2,966
6,569
793,416
794,233
284,776
13,939
8,568
285,438
14,800
6,648
$
486,133
$
487,347
Included in the net deferred tax liability is $235.8 million (2013 – $257.8 million) of tax effected temporary differences related to
the Corporation’s United States operations.
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, 2012
$ 686,833
$ 60,906
$
4,260
$ (244,888)
$
1,561
$ (13,917)
$
(9,163)
$ 485,592
Recognized in net earnings
28,176
(25,968)
2,312
(22,968)
1,405
(173)
2,587
(14,629)
Effect of foreign currency
exchange differences
34,751
Balance, December 31, 2013
749,760
Recognized in net earnings
(65,223)
–
34,938
20,910
(3)
(17,582)
6,569
(285,438)
(4,626)
24,655
–
2,966
1,939
(710)
(72)
16,384
(14,800)
(6,648)
487,347
1,856
(1,758)
(22,247)
Effect of foreign currency
exchange differences
46,205
–
(22)
(23,993)
–
(995)
(162)
21,033
Balance, December 31, 2014 $ 730,742
$ 55,848
$
1,921
$ (284,776)
$
4,905
$ (13,939)
$
(8,568)
$ 486,133
82
Notes to Consolidated Financial Statements
On December 31, 2014, Precision had $32.7 million (2013 – $30.9 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, 2014 was interest and penalties of $11.4 million (2013 – $10.1 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
2014
2013
$
30,930
$
34,357
2,492
2,031
(722)
(5,458)
$
32,700
$
30,930
It is anticipated that approximately $8.0 million (2013 – $0.5 million) of unrecognized tax positions that relate 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.
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, 2012
Options exercised – cash consideration
– reclassification from contributed surplus
Issued on redemption of non-management directors’ DSUs
Issued on exercise of warrants
Balance, December 31, 2013
Options exercised – cash consideration
– reclassification from contributed surplus
Balance, December 31, 2014
Number
Amount
276,475,770
$
2,251,982
362,045
–
141,856
15,000,000
2,432
1,275
1,238
48,300
291,979,671
$
2,305,227
840,250
–
7,082
3,230
292,819,921
$
2,315,539
(c) Dividends
During 2014, the Corporation approved and paid dividends of $0.25 per common share (2013 – $0.21) for total payments of
$73 million (2013 – $58 million). On February 12, 2015, the Board of Directors declared a dividend of $0.07 per common share
payable on March 12, 2015 to shareholders of record on February 27, 2015.
Precision Drilling Corporation 2014 Annual Report
83
NOTE 13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
December 31, 2012
Other comprehensive income
December 31, 2013
Other comprehensive income
December 31, 2014
NOTE 14. FINANCE CHARGES
Interest:
Long-term debt
Other
Income
Amortization of debt issue costs
Finance charges
Unrealized
Foreign Currency
Translation Gains
(Losses)
Foreign Exchange
Gain (Loss) on Net
Investment Hedge
Accumulated
Other
Comprehensive
Income (Loss)
$
(60,865)
$
330
$
(60,535)
109,195
48,330
171,092
(72,135)
(71,805)
(101,325)
$
219,422
$
(173,130)
$
37,060
(23,475)
69,767
46,292
2014
2013
$
106,837
$
88,516
368
(987)
3,483
1,356
(967)
4,343
$
109,701
$
93,248
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 2014 was $15.1 million (2013 – $13.0 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
$
2014
9,193
3,241
3,235
2013
6,752
3,433
8,051
15,669
$
18,236
$
$
Key management personnel are comprised of the directors and executive officers of the Corporation. Certain executive officers
have entered into employment agreements with Precision that provide termination benefits of up to 24 months base salary plus
up to two times targeted incentive compensation upon dismissal without cause.
84
Notes to Consolidated Financial Statements
NOTE 17. COMMITMENTS
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 10 years while the vehicle leases 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
2014
19,143
$
44,913
11,005
2013
16,833
41,258
15,714
75,061
$
73,805
$
$
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
2014
21,516
(870)
20,646
$
$
2013
19,578
(1,024)
18,554
$
$
Capital Commitments
At December 31, 2014, the Corporation had commitments to purchase property, plant and equipment totaling $418.3 million
(2013 – $178.8 million). Payments of $189.6 million for these commitments are expected to be made in 2015 and $228.7 million
in 2019.
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
2014
2013
$
33,152
$
191,150
2014
292,533
–
1,271
2013
277,583
9,327
971
293,804
287,881
Precision Drilling Corporation 2014 Annual Report
85
NOTE 19. 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 the manufacture, sale and repair of drilling equipment. Completion and Production Services
includes service rigs, snubbing units, coil tubing units, oilfield equipment rental, camp and catering services, and wastewater
treatment units.
2014
Revenue
Operating earnings
Depreciation and amortization
Loss on asset decommissioning
Total assets
Goodwill
Capital expenditures
2013
Revenue
Operating earnings
Depreciation and amortization
Total assets
Goodwill
Capital expenditures
Contract
Drilling
Services
Completion
and
Production
Services
Corporate
and Other
Inter-
Segment
Eliminations
Total
$
2,017,110
$
343,556
$
–
$
(10,128)
$
2,350,538
(29,419)
(87,657)
342,078
381,465
97,947
4,425,531
202,751
821,713
Contract
Drilling
Services
58,621
28,752
412,423
16,968
24,401
Completion
and
Production
Services
8,583
–
471,042
–
10,576
–
–
–
–
–
–
225,002
448,669
126,699
5,308,996
219,719
856,690
Corporate
and Other
Inter-
Segment
Eliminations
Total
$
1,719,910
$
323,353
$
–
$
(13,286)
$
2,029,977
361,447
292,217
3,837,919
200,217
446,566
28,402
32,630
590,992
112,139
83,470
(84,175)
8,312
150,212
–
5,768
–
–
–
–
–
305,674
333,159
4,579,123
312,356
535,804
The Corporation’s operations are carried on in the following geographic locations:
2014
Revenue
Total assets
2013
Revenue
Total assets
Canada
United States
International
Inter-
Segment
Eliminations
Total
$
1,077,814
$
1,096,918
$
195,487
$
(19,681)
$
2,350,538
2,434,774
2,244,867
629,355
–
5,308,996
Canada
United States
International
Inter-
Segment
Eliminations
Total
$
1,002,199
$
901,246
$
137,681
$
(11,149)
$
2,029,977
2,082,958
2,006,519
489,646
–
4,579,123
During the years ended December 31, 2014 and 2013, no one individual customer accounted for more than 10% of the
Corporation’s total revenue.
86
Notes to Consolidated Financial Statements
NOTE 20. 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 $22.7 million of the trade receivables amount at December 31,
2014 (2013 – $19.6 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
2014
2013
$
11,703
$
12,187
115
(5,645)
–
240
325
(1,172)
(138)
501
$
6,413
$
11,703
2014
2013
Gross
Provision for
Impairment
Gross
Provision for
Impairment
$
219,000
$
108,946
47,365
11,141
$
386,452
$
–
–
–
6,413
6,413
$
177,141
$
98,529
28,897
21,584
$
326,151
$
–
–
–
11,703
11,703
(b) Interest Rate Risk
As at December 31, 2014 and 2013, all of Precision’s long-term debt, with the exception of the secured revolving credit facility,
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, a 100 basis point change in interest rates would
change the annual interest expense by $nil (2013 – $0.3 million).
(c) Foreign Currency Risk
The Corporation is primarily exposed to foreign currency fluctuations in relation to the working capital of its foreign 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 2014 Annual Report
87
The following financial instruments were denominated in U.S. dollars:
2014
2013
Canadian
Operations (1)
Foreign
Operations
Canadian
Operations (1)
Foreign
Operations
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
$
$
$
$
272,981
$
115,716
$
–
(18,165)
–
254,816
2,548
–
$
$
$
270,984
(270,863)
(12,790)
103,047
–
1,030
$
$
$
995
26
(13,385)
–
(12,364)
124
–
$
53,327
290,995
(180,626)
(16,770)
146,926
–
1,469
$
$
$
(1) Excludes U.S. dollar 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, 2014:
2015
2016
2017
2018
2019
Thereafter
Total
Long-term debt
$
–
$
–
$
–
$
–
$ 200,000
$ 1,682,145
$ 1,882,145
Interest on long-term debt (1)
117,482
117,482
117,482
117,482
107,190
221,546
798,664
Commitments
Total
208,799
14,743
12,713
10,065
236,071
11,005
493,396
$ 326,281
$ 132,225
$ 130,195
$ 127,547
$ 543,261
$ 1,914,696
$ 3,174,205
(1) Interest has been calculated based on debt balances, interest rates, and foreign exchange rates in effect as at December 31, 2014 and excludes amortization of long-term debt
issue costs.
Fair Values
The carrying value of cash, accounts receivable, and accounts payable and accrued liabilities approximates 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, 2014
was approximately $1,668 million (2013 – $1,403 million).
Financial assets and liabilities recorded or disclosed at fair value in the consolidated balance sheet are categorized based on
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.
88
Notes to Consolidated Financial Statements
NOTE 21. 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, 2014 and 2013, these ratios were as follows:
Long-term debt
Shareholders’ equity
Total capitalization
Long-term debt to long-term debt plus equity ratio
$
$
2014
1,852,186
2,441,366
4,293,552
0.43
$
$
2013
1,323,268
2,399,343
3,722,611
0.36
As at December 31, 2014, liquidity remained sufficient as Precision had $491.5 million (2013 – $80.6 million) in cash and
access to a US$650.0 million senior secured revolving credit facility (2013 – US$850.0 million) and $86.4 million (2013 –
$82.5 million) secured operating facilities. As at December 31, 2014, no amounts (2013 – US$28.0 million) were drawn on
the US$650.0 million secured revolving credit facility with availability reduced by US$25.6 million (2013 – US$28.6 million) in
outstanding letters of credit. Availability of the $40.0 million and US$25.0 million secured operating facilities was reduced by
outstanding letters of credit of $20.5 million (2013 – $17.3 million) and US$8.1 million (2013 – US$ 0.2 million), respectively.
There was no amount drawn on the US$15.0 million secured operating facility.
NOTE 22. SUPPLEMENTAL INFORMATION
Components of changes in non-cash working capital balances are as follows:
Accounts receivable
Inventory
Income tax recoverable
Accounts payable and accrued liabilities
Pertaining to:
Operations
Investments
The components of accounts receivable are as follows:
Trade
Accrued trade
Prepaids and other
The components of accounts payable and accrued liabilities are as follows:
Accounts payable
Accrued liabilities:
Payroll
Other
2014
2013
$
(20,986)
$
(23,110)
3,946
(55,138)
124,602
52,424
(17,315)
69,739
$
$
$
$
$
$
1,658
–
(22,682)
(44,134)
(33,887)
(10,247)
2014
2013
$
380,039
$
314,448
147,616
70,408
152,768
82,481
$
598,063
$
549,697
2014
2013
$
295,468
$
148,081
86,496
111,074
81,586
103,171
$
493,038
$
332,838
Precision Drilling Corporation 2014 Annual Report
89
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 $566.7 million and $8.6 million (2013 – $324.8 million and $8.3 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
2014
2013
$
930,402
$
773,901
601,724
18,042
1,550,168
1,405,827
144,341
1,550,168
$
$
$
589,394
27,849
1,391,144
1,248,637
142,507
1,391,144
$
$
$
NOTE 23. 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 $3 million. This amount is included in the estimated
amount pertaining to the long-term income tax recoverable on the balance sheet of $3 million.
On August 7, 2014, the Ontario Court of Appeal ruled in favour of Precision’s wholly owned subsidiary, Inter-Leasing, Inc.,
reversing a decision by the Ontario Superior Court of Justice in June 2013, regarding the reassessment of Ontario income
tax for Inter-Leasing, Inc.’s 2001 through 2004 taxation years. The Ontario Minister of Revenue made an application to the
Supreme Court of Canada seeking leave to appeal this decision. On March 5, 2015, the Supreme Court of Canada denied
the Ontario Minister of Revenue’s application for leave to appeal. The decision by the Supreme Court of Canada brought the
appeal process to an end and Precision has reflected the $55 million paid to the Ontario tax authorities in 2008, related to the
reassessed taxation years, as a current receivable. It is expected that this amount plus interest and costs will be received from
the Ontario Minister of Revenue in 2015.
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.
90
Notes to Consolidated Financial Statements
NOTE 24. 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
Grey Wolf Drilling (Barbados) Ltd.
Country of
Incorporation
Canada
Canada
Canada
Canada
United States
United States
United States
United States
Cyprus
Barbados
Ownership Interest
2014
100
100
100
100
100
100
100
100
100
100
2013
100
100
100
100
100
100
100
100
100
–
Precision Drilling Corporation 2014 Annual Report
91
Precision
Drilling
Corporation
Supplemental Information
Consolidated Statements of Earnings
General and administrative
144.3
142.5
126.6
124.9
1,405.8
1,248.6
1,243.3
1,131.0
2014
2013
2012
2011
2010
$ 2,350.5
$ 2,029.9
$ 2,040.7
$ 1,951.0
$ 1,429.7
800.4
448.7
126.7
225.0
95.1
(0.9)
109.7
21.1
(12.1)
33.2
638.8
333.1
–
305.7
–
(9.1)
93.3
221.5
30.3
191.2
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
$
$
0.11
0.11
$
$
0.69
0.66
$
$
0.19
0.18
$
$
0.70
0.67
$
$
0.16
0.15
Years ended December 31,
(in millions of Canadian dollars, except per share amounts)
Revenue
Expenses:
Operating
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 share:
Basic
Diluted
92
Supplemental Information
Additional Selected Financial Information
Years ended December 31,
(in millions of Canadian dollars, except per share amounts)
Return on sales – % (1)
Return on assets – % (2)
Return on equity – % (3)
Working capital
Current ratio
PP&E and intangibles
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
Operating earnings
Operating earnings – % of revenue
2014
2013
2012
2011
2010
1.4
0.7
1.3
9.4
4.3
8.4
2.6
1.2
2.4
9.9
4.9
9.5
3.0
1.3
2.2
$
653.6
$
305.8
$
278.0
$
610.4
$
458.0
2.3
1.9
1.7
2.4
3.1
$ 3,932.1
$ 3,565.7
$ 3,249.0
$ 2,948.8
$ 2,538.8
$ 5,309.0
$ 4,579.1
$ 4,300.3
$ 4,427.9
$ 3,564.5
$ 1,852.2
$ 1,323.3
$ 1,218.8
$ 1,239.6
$
804.5
$ 2,441.4
$ 2,399.3
$ 2,171.3
$ 2,132.6
$ 1,932.8
0.43
2.1
754.9
800.4
34.1
$
$
0.36
3.3
522.4
638.8
31.5
$
$
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
$
$
$
225.0
$
305.7
$
170.8
$
328.7
$
224.8
9.6
15.1
8.4
16.8
15.7
Cash flow from continuing operations
$
680.2
$
428.1
$
635.3
$
532.8
$
306.3
Cash flow from continuing operations per share:
Basic
Diluted
Book value per share (5)
Price earnings ratio (6)
$
$
$
2.33
2.32
8.34
64.2
$
$
$
1.54
1.49
8.22
$
$
$
2.30
2.22
7.85
$
$
$
1.93
1.85
7.72
$
$
$
1.11
1.07
7.01
14.41
43.26
15.00
41.74
Basic weighted average shares outstanding (000s)
292,533
277,583
276,276
275,899
275,655
(1) Return on sales was calculated by dividing earnings from continuing operations by total revenue.
(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 net interest expense.
(5) Book value per share was calculated by dividing shareholders’ equity by shares outstanding.
(6) Price earnings ratio was calculated using year-end closing price divided by basic earnings per share.
Precision Drilling Corporation 2014 Annual Report
93
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
2014 TRADING PROFILE
Toronto (TSX: PD)
High: $15.65
Low: $6.11
Close: $7.06
Volume Traded: 360,004,415
New York (NYSE: PDS)
High: US$14.65
Low: US$5.27
Close: US$9.31
Volume Traded: 570,212,820
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.
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 U.S.)
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 Precision, including our annual
information form 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 2014 annual
information form as filed with the
Canadian securities commissions
and under Form 40-F with the
U.S. Securities and Exchange
Commission:
Investor Relations
Suite 800, 525 – 8th Avenue SW
Calgary, Alberta, Canada
T2P 1G1
Telephone: 403.716.4500
94
Shareholder Information
Corporate Information
DIRECTORS
William T. Donovan (1)(2)
North Palm Beach, Florida, USA
Brian J. Gibson (1)(2)
Mississauga, Ontario, Canada
Allen R. Hagerman, FCA (1)(3)
Millarville, Alberta, Canada
Catherine J. Hughes (2)(3)
Calgary, Alberta, Canada
Stephen J. J. Letwin (2)(3)
Toronto, Ontario, Canada
Kevin O. Meyers (2)(3)
Anchorage, Alaska, USA
Patrick M. Murray (1)(3)
Dallas, Texas, USA
Kevin A. Neveu
Calgary, Alberta, Canada
Robert L. Phillips (1)(2)(3)
West Vancouver, British Columbia,
Canada
1. Member of Audit Committee
2. Member of Corporate Governance,
Nominating and Risk Committee
3. Member of Human Resources and
Compensation Committee
OFFICERS
Kevin A. Neveu
President and
Chief Executive Officer
Niels Espeland
President, International Operations
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
Doug B. Evasiuk
Senior Vice President,
Sales and Marketing
Veronica Foley
Vice President, Legal and
Corporate Secretary
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 2014 Annual Report
95
P
R
I
N
T
E
D
I
N
C
A
N
A
D
A
Precision
Drilling
Corporation
Suite 800, 525 – 8th Avenue SW
Calgary, AB, Canada T2P 1G1
Telephone: 403.716.4500
Email: info@precisiondrilling.com
www.precisiondrilling.com