UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO SECTION 13A-16 OR 15D-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
For March 29, 2005
Commission File Number: 001-14534
PRECISION DRILLING CORPORATION
(Exact name of registrant as specified in its charter)
4200, 150 - 6TH AVENUE S.W.
CALGARY, ALBERTA
CANADA T2P 3Y7
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F [_] Form 40-F [X]
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(1). _______
Note: Regulation S-T Rule 101(b)(1) only permits the submission in
paper of a Form 6-K if submitted solely to provide an attached annual report to
security holders.
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(7): _______
Note: Regulation S-T Rule 101(b)(7) only permits the submission in
paper of a Form 6-K if submitted to furnish a report or other document that the
registrant foreign private issuer must furnish and make public under the laws of
the jurisdiction in which the registrant is incorporated, domiciled or legally
organized (the registrant's "home country"), or under the rules of the home
country exchange on which the registrant's securities are traded, as long as the
report or other document is not a press release, is not required to be and has
not been distributed to the registrant's security holders, and, if discussing a
material event, has already been the subject of a Form 6-K submission or other
Commission filing on EDGAR.
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes [_] No [X]
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82- N/A
-------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PRECISION DRILLING CORPORATION
Per: /s/ Jan M. Campbell
------------------------
Jan M. Campbell
Corporate Secretary
Date: March 29, 2005
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Management's Discussion and Analysis, prepared as at March 9, 2005, focuses
on key statistics from the Consolidated Financial Statements, and pertains to
known risks and uncertainties relating to the oilfield and industrial service
sectors. This discussion should not be considered all-inclusive, as it excludes
changes that may occur in general economic, political and environmental
conditions. Additionally, other elements may or may not occur which could affect
the Corporation in the future. In order to obtain the best overall perspective,
this discussion should be read in conjunction with the material contained in
other parts of this annual report, including the audited Consolidated Financial
Statements and the related notes. The effects on the Consolidated Financial
Statements arising from differences in generally accepted accounting principles
between Canada and the United States are described in Note 15 to the
Consolidated Financial Statements. Additional information relating to Precision
Drilling Corporation, including the Annual Information Form, has been filed with
SEDAR and is available at www.sedar.com.
HIGHLIGHTS
(STATED IN THOUSANDS OF CANADIAN DOLLARS,
EXCEPT PER SHARE AMOUNTS, WHICH ARE PRESENTED ON A DILUTED BASIS)
INCREASE Increase Increase
YEARS ENDED DECEMBER 31, 2004 (DECREASE) 2003 (Decrease) 2002 (Decrease)
-------------------------------------------------------------------------------------------------------------------------------
Revenue 2,325,216 425,069 1,900,147 349,549 1,550,598 (247,539)
% change 22% 23% (14%)
Operating earnings (1) 424,453 142,975 281,478 139,124 142,354 (210,881)
% change 51% 98% (60%)
Earnings from
continuing operations 249,587 69,684 179,903 98,680 81,223 (90,600)
% change 39% 121% (53%)
Net earnings 247,404 66,930 180,474 95,488 84,986 (101,548)
% change 37% 112% (54%)
Earnings per share from
continuing operations 4.26 1.01 3.25 1.77 1.48 (1.69)
% change 31% 120% (53%)
Net earnings per share 4.22 0.96 3.26 1.71 1.55 (1.89)
% change 29% 110% (55%)
Cash flow from
continuing operations 444,800 191,827 252,973 64,550 188,423 (233,722)
% change 76% 34% (55%)
Net capital spending 252,604 (37,900) 290,504 50,961 239,543 (101,418)
% change (13%) 21% (30%)
==============================================================================================================================
(1) OPERATING EARNINGS IS NOT A RECOGNIZED MEASURE UNDER CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (GAAP). MANAGEMENT BELIEVES THAT IN ADDITION TO
NET EARNINGS, OPERATING EARNINGS IS A USEFUL SUPPLEMENTAL MEASURE AS IT PROVIDES
AN INDICATION OF THE RESULTS GENERATED BY THE CORPORATION'S PRINCIPAL BUSINESS
ACTIVITIES PRIOR TO CONSIDERATION OF HOW THOSE ACTIVITIES ARE FINANCED OR HOW
THE RESULTS ARE TAXED IN VARIOUS JURISDICTIONS. INVESTORS SHOULD BE CAUTIONED,
HOWEVER, THAT OPERATING EARNINGS SHOULD NOT BE CONSTRUED AS AN ALTERNATIVE TO
NET EARNINGS DETERMINED IN ACCORDANCE WITH GAAP AS AN INDICATOR OF PRECISION'S
PERFORMANCE. PRECISION'S METHOD OF CALCULATING OPERATING EARNINGS MAY DIFFER
FROM OTHER COMPANIES AND, ACCORDINGLY, OPERATING EARNINGS MAY NOT BE COMPARABLE
TO MEASURES USED BY OTHER COMPANIES.
FINANCIAL POSITION AND RATIOS
(STATED IN THOUSANDS OF CANADIAN DOLLARS)
YEARS ENDED DECEMBER 31, 2004 2003 2002
---------------------------------------------------------------------------------------------------------------------
Working capital $ 557,311 $ 248,994 $ 217,788
Working capital ratio 2.5 1.6 1.6
Long-term debt (1) $ 718,870 $ 399,422 $ 514,878
Total assets $ 3,850,773 $ 2,938,608 $ 2,775,747
Long-term debt to long-term debt plus equity (1) 0.24 0.19 0.25
Long-term debt to cash flow from continuing operations (1) 1.6 1.6 2.7
Interest coverage (2) 9.0 8.0 4.1
=====================================================================================================================
(1) EXCLUDES CURRENT PORTION OF LONG-TERM DEBT WHICH IS INCLUDED IN WORKING
CAPITAL.
(2) OPERATING EARNINGS DIVIDED BY NET INTEREST EXPENSE.
PRECISION DRILLING ANNUAL REPORT 2004 1
Economic conditions for the energy industry showed significant improvement
in 2004 with crude oil and natural gas prices maintaining their historically
high levels. In May, Precision completed two unique acquisitions that
significantly advanced the Corporation's strategy to be a global oilfield
service provider. These two factors drove the 22% increase in revenue with a 37%
increase in net earnings, demonstrating the high degree of operating leverage in
our business.
The acquisition of 31 internationally based land rigs and associated
support equipment brought far more than just high quality tangible assets to
Precision. The management and employees associated with the acquired rigs have
established the group as a long-term and highly regarded player in the Middle
East market. This acquisition also uniquely positions Precision to offer our
international customers an integrated package of products and services,
combining our drilling expertise with the products and services of our Energy
Services segment. Our strategy for the international drilling segment in 2005
will be to leverage our existing asset and knowledge base in deep drilling in
order to maximize rig utilization within existing markets where we have a
presence.
The acquisition of Reeves added a unique dimension to our formation
evaluation business. Their tools and service lines not only complement the
existing Precision product lines for formation evaluation, but also provide a
new offering of conveyance methods for delivering critical subsurface
information. These service offerings bring increased market penetration for
Precision in the North American land based wireline business. The combined
portfolio of services will also provide the Corporation with a significant
sustainable competitive advantage in international markets.
We recognized that the group previously identified as Technology Services
needed to be further streamlined during 2004 with the objective of positioning
this group solidly in the mainstream of drilling activity around the world. With
this in mind, we branded the entities within this group under the name Precision
Energy Services to provide a single identity for our global service lines. We
continue to focus our efforts on those technologies and services that are needed
in the development or exploitation of the maturing oil and gas fields around the
world.
Energy Services had a much improved year financially. Revenue increased by
26% and operating earnings improved to $37 million from a loss of $4 million in
2003 reflecting the impact of refocusing our efforts and the development and
implementation of our product line strategies.
Although international revenue sources grew to 37% of total revenue in
2004 compared to 30% in 2003, the Canadian market, and our Canadian Contract
Drilling group in particular, continued to be the foundation of our company. Our
Canadian businesses experienced one of the most active years on record with
nearly 22,000 wells being drilled. The resulting high demand for our services
lead to improved pricing for the majority of our product lines.
SUMMARY OF INCOME STATEMENT
(STATED IN THOUSANDS OF CANADIAN DOLLARS)
YEARS ENDED DECEMBER 31, 2004 2003 2002
----------------------------------------------------------------------------------------------------------
Operating earnings (loss)
Contract Drilling $ 399,487 $ 284,850 $ 183,859
Energy Services 36,719 (3,847) (40,033)
Rental and Production 40,026 39,067 29,913
Corporate and Other (51,779) (38,592) (31,385)
----------------------------------------------------------------------------------------------------------
424,453 281,478 142,354
Interest, net 46,909 35,050 35,123
Dividend income -- -- (39)
Gain on disposal of investments (4,899) (3,355) (900)
----------------------------------------------------------------------------------------------------------
Earnings from continuing operations before
income taxes and non-controlling interest 382,443 249,783 108,170
Income taxes 131,558 69,880 26,947
----------------------------------------------------------------------------------------------------------
Earnings from continuing operations
before non-controlling interest 250,885 179,903 81,223
Non-controlling interest 1,298 -- --
----------------------------------------------------------------------------------------------------------
Earnings from continuing operations 249,587 179,903 81,223
Discontinued operations (2,183) 571 3,763
----------------------------------------------------------------------------------------------------------
Net earnings $ 247,404 $ 180,474 $ 84,986
==========================================================================================================
PRECISION DRILLING ANNUAL REPORT 2004 2
ECONOMIC DRIVERS OF THE GLOBAL OILFIELD SERVICES BUSINESS
Carbon-based fuels account for over 80% of the world's energy sources with
hydrocarbons (crude oil and natural gas) combining to supply over 60% of the
world's energy needs. Coal has been used for over 200 years, crude oil for over
140 years and natural gas for 50 years. Hydro and nuclear electric power is
contributing to the world's total energy supply as are alternative energy
sources such as solar and wind. As history has proven, however, it takes
decades, if not centuries, to displace energy sources. Before carbon-based fuels
can be replaced in any meaningful way, significant research and development is
required to perfect economic production methods and massive investment is
required to build distribution networks and to replace energy transfer devices
such as internal combustion engines. As a result, hydrocarbon production will
remain critical to the world's energy needs for the foreseeable future with
demand forecasted by many to continue to increase.
The provision of these commodities to the consuming public involves a
number of players, each of which take on different risks in the process of
exploring for, producing, refining and distributing hydrocarbons and its
associated refined by-products. Exploration and production companies assume the
risk of finding hydrocarbons in pools of sufficient size to economically develop
and produce the reserves. The economics of exploration and production is
dictated by the current and expected future margin between the cost to find and
develop hydrocarbons and the price at which those products can be sold. The
wider the margin, the more incentive there is to undertake the activities
involved in the process of finding and development.
These activities include acquiring access to prospective lands, shooting
seismic to detect the presence of hydrocarbons, drilling wells and measuring the
characteristics of subsurface geological formations. Exploration and production
companies hire oilfield service companies to perform the majority of these
services. The revenue for an oilfield service company is an exploration and
production company's finding and development costs.
Providing these oilfield services incorporates three main elements:
people, technology and equipment. Attracting, training and retaining qualified
employees is the single biggest challenge for a service company. Exploration and
production activities are taking place in an ever increasing variety of surface
and subsurface conditions. Developing technology and building equipment that can
withstand increasing physical challenges and operate more efficiently is key to
maintaining and improving the economics of crude oil and natural gas production.
The primary economic risks assumed by oilfield service companies are the
volatility of activity levels that translate into utilization rates for its
investment in people, technology and equipment, and cost control to maximize the
margins earned.
The economics of a service company are thus largely driven by the current
and expected price of crude oil and natural gas, which are determined by the
supply and demand for the commodity. Since crude oil can be transported
relatively easily, it is priced in a world wide market, which is influenced by a
wide array of economic and political factors. Natural gas is priced in more
local markets due to the requirement to transport this gaseous product in
pressurized pipelines, although this is changing slowly with the emergence of
liquified natural gas ("LNG").
Price increases over the last two years appear to have moved crude oil
prices into a new paradigm supported by supply and demand fundamentals. World
oil demand increased in both 2003 and 2004 as a result of growing world
economies led by China and India. While perhaps not at the same pace, many
prognosticators are forecasting this growth in demand to continue. Crude oil
production however, has not kept pace with the growing demand. In particular,
OPEC's excess production capacity has hit 30-year lows. Providing further
support for crude oil prices are continued global geopolitical risks, in
particular the possibility of further terrorism in Iraq and Saudi Arabia,
political uncertainty in Russia and instability in Nigeria and Venezuela. The
decline in world surplus production capacity has increased OPEC's ability to
maintain pricing at these levels as has a slowing in the growth of non-OPEC oil
production.
As illustrated above, natural gas prices tend to move in lock step with
crude oil prices maintaining the price per unit of energy content of each fuel
relatively consistent. This pricing relationship may be disrupted for short
periods of time due to oversupply or excess demand for natural gas in local
market areas. The fundamentals of energy supply and demand discussed earlier,
however, bode well for the continuance of strong natural gas prices.
PRECISION DRILLING ANNUAL REPORT 2004 3
PRECISION'S DEVELOPMENT IN THE OILFIELD SERVICES BUSINESS
Precision operates on a global basis and provides a wide array of services to
its customers. From its drilling rig roots to oilfield well servicing, wireline,
drilling & evaluation and production services to rental equipment offerings, the
customer remains our focus. Further the Corporation retains a significant and
growing industrial cleaning and production business in "downstream" oilfield
production facilities that include North America refineries and oil sands mining
and upgrading in northern Alberta.
Precision conducts its business through three segments. The Contract
Drilling segment includes drilling rigs, service rigs and snubbing units,
procurement and distribution of oilfield supplies, camp and catering services,
and the manufacture, sale and repair of drilling equipment. The Energy Services
segment includes wireline, drilling & evaluation and production services. The
Rental and Production segment includes oilfield equipment rental services and
industrial process services.
The following graphs illustrate how each of the Contract Drilling, Energy
Services and Rental and Production segments have historically contributed to
Precision's profitability and investment. CONTRACT DRILLING The Contract
Drilling segment brought a new dynamic to its business in 2004 with the
acquisition of 31 internationally based land rigs in May. Prior to this, the
international strategy was to grow our rig count in select regions where our
technology, which had been proven in the Canadian market place, differentiated
us from the competition and where a significant presence could be established.
The acquisition changed that approach somewhat by adding established businesses
complete with high quality equipment and, more importantly, experienced senior
management and long serving, indigenized field personnel. Of particular interest
to Precision was the instant economies of scale and credibility added to our
Middle East presence where the newly acquired business had been operating for
over 40 years.
The Canadian business units within the segment are well established. Each
core business unit has undergone asset growth and has a lead market role within
Canada. The strength to successfully integrate acquisitions with vertical
integration within and between related ancillary business units has been
developed through the handling of acquisitions over the past 20 years.
Precision's roots began in western Canada as a land drilling contractor
and the Corporation's development has matched that of the WCSB. Initially
founded in 1985 as Cypress Drilling Ltd., the business quickly grew from four
drilling rigs to 19 with the reverse takeover in 1987 of Precision Drilling
Ltd., a company formed in 1952. Over the following decade a series of nine
acquisitions expanded the Canadian drilling rig fleet to 200 as of May 1997 and
a 40% market share of industry rigs. International operations in Venezuela
commenced in 1992 with the Sierra Drilling acquisition. Diversification into
service rigs and snubbing operations came with the 1996 acquisition of EnServ
Corporation. In the second half of the year 2000, Precision became fully vested
in the Canadian service rig business as the CenAlta Energy Services Inc.
acquisition created a combined fleet of 257 service rigs and a leading industry
market share of 28%. The additional acquisition in 2000 of coil tubing drilling
rigs and other shallow drilling rigs rounded out key milestones in our Canadian
asset base growth.
While each business unit is at its own stage in the business life cycle
continuum, drilling has matured the most over the past three years. Today the
business has developed critical equipment mass and employee depth. It has
developed integrity-based systems that enable the business to evolve in meeting
fundamental industry challenges while delivering better profit and safety
performance. Employee retention and seasonal cycles remain a huge manpower
challenge for the industry. This condition is rather unique in that there is a
reasonable supply of equipment; it is the people element that keeps the market
in tight supply. The supply of experienced people yields profit leverage for
oilfield service companies, not just the "iron".
CORE BUSINESS ASSETS
FIVE YEAR HISTORY, END OF YEAR STATUS
2004 2003 2002 2001 2000
----------------------------------------------------------------------------------------------------------------
International (beyond Canada and the U.S.)
Drilling rigs 48 19 16 15 12
United States
Drilling rigs -- 1 1 4 2
Canada
Drilling rigs - 32% of industry 229 225 226 229 230
Service rigs - 27% of industry 239 239 240 257 257
Rig assist snubbing units - 33% of industry 26 25 23 24 19
Oilfield drilling camps - 25% of industry 87 88 74 74 74
Enabling infrastructure (Canada - in square feet)
Equipment manufacture facility 48,000 48,000 48,000 48,000 38,000
Consumable supply procurement
and distribution facility 40,000 40,000 40,000 40,000 40,000
================================================================================================================
PRECISION DRILLING ANNUAL REPORT 2004 4
The following tables provide a worldwide summary of Precision's drilling
and service rig fleets.
2004 2003
TYPE OF DRILLING RIG DEPTH CANADA INTERNATIONAL TOTAL CANADA INTERNATIONAL TOTAL
---------------------------------------------------------------------------------------------------------
Single to 1,200 m 16 -- 16 17 -- 17
Super Single(R) to 2,500 m 21 3 24 16 4 20
Double to 3,500 m 95 10 104 96 7 103
Light triple to 3,600 m 45 10 52 47 8 55
Heavy triple to 9,150 m 41 25 70 39 0 39
Coiled tubing to 1,500 m 11 -- 11 11 -- 11
---------------------------------------------------------------------------------------------------------
Total fleet 229 48 277 226 19 245
=========================================================================================================
TYPE OF SERVICE RIG 2004 2003 2002 2001 2000
------------------------------------------------------------------------------------------------------
Single -- 1 1 4 4
Freestanding mobile single 86 75 50 23 8
Mobile single 19 29 55 91 105
Double 65 57 58 60 59
Freestanding mobile double 9 6 6 5 4
Mobile double 42 46 45 48 50
Heavy double 1 7 7 9 9
Freestanding heavy double 1 2 2 -- --
Freestanding slant 16 16 16 16 16
Swab -- -- -- 1 2
------------------------------------------------------------------------------------------------------
Total fleet 239 239 240 257 257
======================================================================================================
ENERGY SERVICES
Precision Energy Services (formerly Technology Services) commenced in 1998 with
the objective of expanding its suite of well services, globalizing our presence
and introducing a step change in technologies and services provided to our
customers. While the downhole service market was, and remains, dominated by
three large multi-nationals, Precision identified a niche for a more nimble,
Canadian headquartered participant to enhance competition based upon its ability
to deliver quality, cost effective products and services. The Corporation's
mature drilling operation provided the reputation of a respected service
provider and the financial backing required to take on such a venture. In turn,
the Precision Energy Services business would enable the Corporation to
participate in offshore oil and gas operations, a market previously outside its
capabilities.
Through to 2003, activities aimed at achieving Energy Services' objectives
were undertaken across a broad front. In 1998, a foothold into the Energy
Services market was established through the acquisition of Northland Energy and
expanded in 1999 with the acquisition of Computalog Ltd. Significant investments
in research and development were made to create the next generation of
Logging-While-Drilling (LWD), Measurement-While-Drilling (MWD) and Rotary
Steerable Services (RSS) tools. Through the acquisition of BecField Drilling
Services and the EM assets of GeoServices S.A., the segment gained access to
innovative technologies and established a presence in certain regional markets.
By 2001, additional regional centres were founded in the U.S., Mexico, Latin
America, Europe/Africa, Asia/Pacific and the Middle East. The scope of these
initiatives, however, combined with the delay in development and deployment of
new technologies resulted in a cost structure that proved uneconomic for the
associated revenues being generated. The outcome was a net operating loss in
2002 of $40.0 million.
Consequently, Energy Services refocused its efforts in 2003 with the
renewed goal of controlled and profitable growth in targeted areas where an
acceptable long-term return on investment was achievable. New management was
injected into the business, positively changing the style and culture of the
organization. Upon examination of its then existing activities, Precision
identified non-core businesses for disposal and
PRECISION DRILLING ANNUAL REPORT 2004 5
exited non-profitable product lines. Other businesses were rationalized and
refocused. In some instances, this involved consolidating management functions
where geographically possible. In others, cost structures were reduced to better
match anticipated revenue levels and customer contracts were re-evaluated where
uneconomic situations existed. Furthermore, the segment reviewed its technology
development strategy and established a new "technology roadmap", which
rationalized the existing broad inventory of projects and focused its limited
resources on applications that specifically targeted customers' current and
future needs. After incremental expenses of $15 million related to the above
restructuring activities, operating results improved by $36 million over 2002 to
a net operating loss of $4 million in 2003, reflecting the impact of our
efforts.
In 2004, Precision continued to build upon the foundation established in
2003. The Corporation completed the sales of the non-core businesses of Polar
Completions (well completion tools), United Diamond Ltd. (PDC bits) and Fleet
Cementers Inc. (pumping). Reflecting its renewed focus, the segment's products
and services were consolidated under one new brand: Precision Energy Services.
At the same time, the business was reorganized into three product lines:
Wireline Services, Drilling & Evaluation and Production Services supported by a
strong hemisphere based infrastructure. This enabled concentration of expansion
efforts on targeted regions and services, leveraging off of our existing
businesses and the technology roadmap. Wireline provides open hole, cased hole
and slickline wireline logging and mechanical services. Drilling & Evaluation
offers directional drilling and formation evaluation-while-drilling services,
including the LWD/HEL(TM), MWD (electromagnetic and mud pulse telemetry) and RSS
suite of tools. Production Services supplies well testing, controlled and
managed pressure drilling and early-stage production facilities and services.
Within each product line, strategies were developed and implemented based
upon an assessment of existing and future market dynamics and our ability to
capitalize on our strengths relative to those trends. Globally, aging oilfields
and regions have shifted industry focus to exploitation as opposed to
exploration. Furthermore, the Corporation has seen the greatest increase in
upstream spending from national oil companies as opposed to the traditional
major, fully integrated, oil and gas companies. Identifying and understanding
these trends has, in turn, tailored our strategy and focused our management
resources, capital spending, product development initiatives and marketing more
effectively. In Wireline Services for instance, Precision has positioned itself
as an innovative field service provider primarily in marginal or mature onshore
markets. As part of this strategy, the segment acquired Reeves Oilfield Services
in mid-2004 to strengthen its suite of open hole wireline services in this
particular global market segment. This acquisition provided access to world
class personnel and unique enabling technology that complements our existing
fleet of conventional open hole tools and services. In Drilling & Evaluation,
the Corporation's strategy is to grow the business by leveraging off its
operations in existing countries to facilitate the commercialization of the LWD
and RSS tools. In marginal field development activities, which is our primary
market focus, customer results are mainly driven from efficient, cost effective
well construction. Energy Services' aim is to deliver "fit for purpose" cost
effective solutions that meaningfully enhance the performance of our customers'
well construction activities. For Production Services, the near term strategy is
expansion through organic growth, with a focus on cost control as well as
capitalizing on cross product line opportunities. Precision continues to be well
positioned to help satisfy our customers' increasing appetite for underbalanced
drilling, an area where Production Services is recognized as an engineering
leader. Additional growth potential lies in our ability to lever off this
reputation to include other complementary services into integrated cross product
line packaged solutions for customers.
RENTAL AND PRODUCTION
Precision entered this segment of its business in 1996 through the acquisition
of EnServ Corporation. Since then, the Corporation has reduced the operations
carried on by this segment through strategic divestitures, taking advantage of
attractive valuations to dispose of operations not core to Precision's future
growth plans. The industrial rental division was sold in February 1999 while the
gas compression operation was sold effective January 1, 2003, each of which
produced gains for the Corporation. Both of the businesses currently carried on
by the segment, namely, industrial plant maintenance and oilfield equipment
rental, have grown through acquisitions and the pursuit of internal growth
opportunities.
Precision's plant maintenance operations have become increasingly focused
on the expanding activity in northern Alberta's oilsands regions. The
acquisition of JJay Exchanger Industries Ltd. in the second
PRECISION DRILLING ANNUAL REPORT 2004 6
quarter of 2000 solidified the segment's position in this market as a provider
of all the required services in a major refinery or petro-chemical plant
turnaround/shutdown.
Innovation has also played an important role in the segment's steady
growth. Research and development efforts have grown out of our unique knowledge
and experience, with the focus on developing new tools and applications that are
marketable in the field. Examples of products introduced to the market include
the SuperLance(TM) System, which combines Precision's experience in coil tubing
drilling with water blasting technology to increase the efficiency of cleaning
coker units in refineries, and various adaptations of robotics technology to
increase the safety and timeliness of tank cleaning operations.
The oilfield equipment rental business expanded its product offerings in
1997 with the acquisition of substantially all of the business assets of
Ducharme Oilfield Rentals Ltd. whose primary product line was the rental of
portable industrial housing, used at many remote drilling locations in western
Canada. Since then many initiatives have been undertaken to integrate the
delivery of products to customers and increase the profitability of operations.
Among them was the closure of the wellsite trailer manufacturing facility in
favour of less costly outsourcing arrangements in 2002 and more recently the
consolidation of all rental product lines to form Precision Rentals Ltd. This
latter move was in response to changing and growing customer needs to simplify
their purchasing decisions by producing one point of contact to access all their
rental needs.
RESULTS OF OPERATIONS
CONTRACT DRILLING
(STATED IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER DAY/HOUR AMOUNTS)
% OF % OF % OF
YEARS ENDED DECEMBER 31, 2004 REVENUE 2003 REVENUE 2002 REVENUE
-------------------------------------------------------------------------------------------------------------
Revenue $ 1,235,410 $ 992,824 $ 770,147
Expenses:
Operating 704,911 57.1 602,418 60.7 491,433 63.8
General and administrative 35,091 2.8 30,267 3.1 30,463 4.0
Depreciation 92,161 7.5 77,725 7.8 62,524 8.1
Foreign exchange 3,760 0.3 (2,436) (0.3) 1,868 0.2
-------------------------------------------------------------------------------------------------------------
Operating earnings $ 399,487 32.3 $ 284,850 28.7 $ 183,859 23.9
=============================================================================================================
% % %
INCREASE INCREASE INCREASE
2004 (DECREASE) 2003 (DECREASE) 2002 (DECREASE)
-------------------------------------------------------------------------------------------------------------
Number of drilling rigs (end of year) 277 13.1 245 0.8 243 (2.0)
Drilling operating days 52,228 11.8 46,715 33.2 35,081 (25.6)
Revenue per operating day $ 17,953 12.3 $ 15,984 (0.1) $ 16,008 (0.1)
Number of service rigs (end of year) 239 -- 239 (0.4) 240 (6.6)
Service rig operating hours 472,008 7.4 439,519 12.1 392,210 (20.4)
Revenue per operating hour $513 11.0 $462 3.6 $446 4.4
=============================================================================================================
2004 COMPARED TO 2003 The Contract Drilling segment generated record financial
results in 2004 on the strength of increasing global rig demand and expansion
associated with the acquisition of 31 internationally based land drilling rigs.
Revenue increased by $243 million or 24% over 2003 to $1,235 million while
operating earnings increased by $115 million or 40% to $399 million. Revenue and
earnings growth were driven by three factors. First, a major acquisition of land
based drilling assets from GlobalSanteFe Corporation in May 2004 grew our
international rig fleet exponentially. Second, continuing strength in oil and
natural gas commodity price futures led to greater customer demand for all of
our oilfield services and the leverage to increase revenue rates. Third,
operational execution and diligence allowed for the efficient delivery of
services and control over the rate of operating and administrative cost
escalation.
In absolute dollar terms, Contract Drilling revenue has grown at a high
steady pace in recent years. For international drilling, the growth in 2004 is
primarily attributable to investments made to increase the size and market scope
of our international land drilling rig operation. Our international rig fleet
grew by a net 153% to exit the year at a count of 48, while utilization improved
as the year progressed. For Canadian based operations, our equipment fleet size
is slightly larger and each respective business continues with a lead Canadian
market share. Canadian revenue growth in 2004 is primarily attributable to
revenue rate increases.
PRECISION DRILLING ANNUAL REPORT 2004 7
CANADIAN CONTRACT DRILLING
The current year has set new financial benchmarks for Canadian Contract Drilling
as 2004 revenue increased $110 million or 13% over 2003 to $989 million. The
majority of 2004 revenue rate increases flowed through to operating earnings as
overall equipment activity was very similar to 2003 and costs were kept under
control. Although industry activity in Canada was approximately 5% higher, the
industry supply of additional drilling rigs hindered our opportunities to gain
higher utilization over 2003.
In summary, 2004 was an excellent year with initial winter drilling
revenue rates holding firm through the seasonally soft "spring break up" second
quarter. While adverse third quarter weather prevented some wells from being
drilled, it did add to the backlog of work, strengthening spot market demand and
enabling us to put through an additional revenue rate increase to start the
fourth quarter. For service rig operations, revenue rate increases occurred
throughout the year with significant improvement to start the fourth quarter.
Service rig operating margins are still well below other Canadian Contract
Drilling businesses, but our reinvestment in the employees and the equipment is
narrowing the gap.
The revenue and operating margin improvement is particularly noteworthy as
equipment activity in our two core business, when compared to 2003, went in
opposite directions. Service rig hours increased by 32,489 and four fleet
utilization percentage points over 2003 to 472,008 hours and 54% while drilling
rig spud to rig release operating days decreased by 1,100 days and two fleet
utilization percentage points over 2003 to 41,625 and 50%. The downward pressure
on revenue from the decline in drilling rig activity was more than offset by
rising revenue day rates, as drilling revenue accounted for 50% of the total
revenue increase in Canada. The remaining $54 million revenue increase was
generated by a combination of higher activity and higher revenue rates in each
of our service rig, snubbing and camp and catering operations.
Demand for oilfield services in Canada has been strengthening for nine
successive quarters, from late 2002 through 2004. This demand has enabled
Canadian Contract Drilling to steadily increase revenue and underlying operating
margins even though our overall fleet of equipment has increased just slightly.
In fact, the pace of our revenue increase exceeded the rise in industry wells
drilled by a 3% margin. Wells drilled in western Canada, as reported on a
completion basis, increased by 1,742 or 9% over 2003 to a record well count of
21,593. Revenue out performance is due, in part, to the rising number of wells
in production within western Canada, and the positive impact on production
services associated with our service rig and snubbing activity.
While there is a correlation between our revenue and the industry well
count, further analysis provides insight to upstream drilling trends. The rising
well count is not delivering the same increase in rig operating days as the time
it takes to drill a well continues to decrease. The weighting towards drilling
for shallow natural gas and natural gas in coal accounts for a growing
percentage of the total well count. In many situations these wells are drilled
in hours not days. The number of drilling rigs registered with the Canadian
Association of Oilwell Drilling Contractors (CAODC) increased by 40 or 6% over
2003 to exit 2004 at a record rig count of 700. The number of wells drilled in
western Canada increased by 9% over 2003 yet rig operating days, as reported by
the CAODC, only increased by 5%. The number of service rigs registered with the
CAODC was relatively constant at approximately 900.
To summarize, drilling contractors in western Canada have increased the
available rig count mix to a level that industry will require more than 20,000
wells a year to keep annual rig operating day utilization above 50%. For 2005,
indications are that contractors will increase the available rig count by at
least another 40 rigs, raising the well count threshold even higher.
INTERNATIONAL CONTRACT DRILLING
In financial terms, improving utilization and the impact of the acquisition
mid-way through the second quarter of 2004 enabled International Contract
Drilling to increase revenue by $133 million or 117% over 2003 to $247 million.
After a decade of modest escalating growth through the deployment of
drilling rigs from Canada, the Corporation became a major international land
drilling rig contractor with the successful completion of a $436 million
acquisition in May 2004. The sheer quality and completeness of the acquisition -
management, employees and equipment - set a new foundation and direction for
Contract Drilling.
Our international drilling rig fleet carried reasonably high utilization
throughout the year with the newly acquired strength in the Middle East. Third
quarter rig utilization was adversely affected by a slowdown in Mexico while
fourth quarter utilization benefited from a resumption in Mexico and higher
PRECISION DRILLING ANNUAL REPORT 2004 8
utilization in Venezuela. During the fourth quarter, the rig count in Mexico
decreased by one, as a Super Single(R) rig was moved to Canada.
International Contract Drilling generated higher percentage margins as
compared to 2003 with incremental results over the remaining seven months due to
the acquisition in May. While there is continuing work to reinforce our
operating infrastructure given new management direction and operational scope,
post acquisition margins have compared favourably to expectations.
2003 COMPARED TO 2002 Contract Drilling had a very good year in 2003 as a result
of a sharp rebound in Canadian drilling activity from 2002, higher international
rig activity and a moderate increase in Canadian service rig activity. For 2003,
segment revenues increased by 29% to $993 million, an improvement of $223
million over the prior year. Operating earnings increased by 55% to $285
million, an improvement of $101 million.
Of the $101 million improvement in operating earnings, 69% or $70 million
was attributable to Canadian drilling and service rig operations, reflecting
increased equipment activity and higher pricing due to the strength of record
shallow natural gas well drilling activity. In comparison to 2002, fiscal 2003
steadily gained strength as customers increased field activity to grow
production in an environment where commodity price strength became more
entrenched. The equipment activity increase generated incremental operating
earnings of $50 million.
Higher pricing in 2003 relative to 2002 provided incremental operating
earnings of $20 million. With firm global oil pricing and strong North American
natural gas pricing, sustained demand for Canadian Contract Drilling services
throughout the year allowed for strong revenue rates exiting the fourth quarter
of 2003. In the Canadian market, this was in sharp contrast to 2002, where rates
were low to start the year and continued to erode during the year.
International drilling operations experienced significant expansion in
2003 as operating earnings grew by 31% over 2002, primarily a result of higher
activity. International drilling rig activity increased by 32% over 2002 to
3,990 operating days, an improvement of 975 days. Two-thirds of the additional
days occurred in the Mexico operations where additional rigs were put to work
with the extension of the Burgos integrated services project. Drilling
operations ran for a full year in the Asia/Pacific region, adding 280 days to
the increase in 2003 while Middle East operations commenced in the fourth
quarter of 2003.
During 2003, Contract Drilling controlled capital expenditures with a
focus to strengthen the existing asset base, grow international drilling and be
opportunistic to acquisitions within Canada. Capital expenditures, including
business acquisitions, totaled $106 million, representing an increase of $55
million or 108% compared to 2002. The increase is primarily attributable to
asset base growth as the level of expenditure to upgrade our existing asset base
is a continual priority.
In Canada, the segment's asset base expanded with the acquisition of two
snubbing units, 19 oilfield camps and the construction of one new generation
single drilling rig, a Super Single(R) Light with a 1,200 metre depth rating. A
second such rig commenced drilling in February 2004. Asset reductions included
the decommissioning of one drilling and one service rig, the sale of one surface
hole drilling rig and one camp, as well as the transformation of certain four
unit camps into six unit configurations.
International drilling operations continued along a path of patient
growth. The rig count increased by three to exit the year at 19, with four
additions and net one rig disposal. Three new rigs were built in Canada, with
one deployed to Mexico, one to the Middle East and one platform rig to the
Asia/Pacific region. The latter platform rig was of particular note as it was
Precision's first drilling rig working offshore. The fourth rig was a
retrofitted mechanical light triple deployed to Mexico from the Canadian fleet.
A net one rig ownership interest in Argentina was disposed of during the year.
ENERGY SERVICES (STATED IN THOUSANDS OF CANADIAN DOLLARS)
% OF % OF % OF
YEARS ENDED DECEMBER 31, 2004 REVENUE 2003 REVENUE 2002 REVENUE
-------------------------------------------------------------------------------------------------------------
Revenue $ 874,314 $ 696,599 $ 586,180
Expenses:
Operating 614,994 70.3 514,886 73.9 457,662 78.1
General and administrative 74,876 8.6 70,251 10.1 78,683 13.4
Depreciation and amortization 92,477 10.6 75,174 10.8 52,991 9.0
Research & engineering 48,759 5.6 42,411 6.1 34,680 5.9
Foreign exchange 6,489 0.7 (2,276) (0.3) 2,197 0.4
-------------------------------------------------------------------------------------------------------------
Operating earnings (loss) $ 36,719 4.2 $ (3,847) (0.6) $ (40,033) (6.8)
=============================================================================================================
PRECISION DRILLING ANNUAL REPORT 2004 9
% % %
INCREASE INCREASE INCREASE
2004 (DECREASE) 2003 (DECREASE) 2002 (DECREASE)
-------------------------------------------------------------------------------------------------------------
Wireline jobs performed 45,257 17.8 38,403 24.6 30,813 (18.6)
Directional wells drilled 2,246 (24.0) 2,954 78.6 1,654 44.1
Well testing/CPD(R) man
days (Canada only) 56,301 5.5 53,377 8.4 49,227 (18.1)
=============================================================================================================
2004 COMPARED TO 2003 The impact of refocusing the segment's efforts in 2003 and
the development and implementation of the product line strategies in 2004 are
reflected in the current year's results. Revenue increased by $178 million or
26% over 2003 to $874 million, while operating earnings increased by $41 million
to $37 million. Revenue and earnings growth were driven by significant
improvements in both the Wireline and Drilling & Evaluation product lines,
reflecting the acquisition of Reeves Oilfield Services in 2004 and a significant
increase in oilfield activity due to high commodity prices. WIRELINE SERVICES
The current year results reflect an excellent year for the wireline services.
Revenues generated totaled $425 million, increasing by $126 million or 42% in
2004 over 2003. Total wireline jobs performed grew to 45,257 in 2004 from 38,403
in 2003, an increase of 18%.
Key 2004 milestones include:
* ACQUISITION OF REEVES OILFIELD SERVICES IN MAY FOR $254 MILLION, PROVIDING
ADDITIONAL REVENUES OF $87 MILLION IN 2004.
* TURNAROUND OF THE U.S. OPERATIONS ACHIEVED THROUGH INJECTION OF ADDITIONAL
MANAGEMENT AND OPERATIONS EXPERIENCE AND REORGANIZATION OF THE TECHNICAL
SALES FORCE.
* PROFITABILITY ACHIEVED IN MEXICO WITH VENEZUELA ON TRACK FOR PROFITABILITY
IN 2005, DUE IN PART TO THE REDUCTION IN POLITICAL UNCERTAINTY.
* DEPLOYMENT OF GLOBAL SERVICE DELIVERY TEAMS TO OPTIMIZE CUSTOMER
DELIVERABLES AND FIELD OPERATIONS.
As a result of the Reeves acquisition and the U.S. turnaround, our open
hole business is now not only profitable, but is also set for future growth in
2005 and beyond. In 2004, Precision experienced increased competition in the
cased hole wireline business, where high commodity prices, low barriers to entry
and commoditization of the technology attracted new entrants into the market.
Maintaining the Corporation's market share in the future will depend upon its
ability to differentiate its services through the development of unique "fit for
purpose" tools.
DRILLING & EVALUATION SERVICES
Revenues for the Drilling & Evaluation product line were $271 million in 2004
compared to $223 million 2003, an increase of 21%. Total wells decreased by 24%
from 2003, reflecting fewer directional wells drilled and increased
commoditization of the MWD technology in Canada, offset by increased utilization
of premium LWD/HEL(TM) tools and RS systems internationally. Precision's focus
in 2004 was to demonstrate the reliability and effectiveness of these tools,
resulting in increased customer acceptance as evidenced by the growing number of
wells drilled. Given the limited number of tools, although technical success has
been demonstrated, positive financial impact from these operations has been
limited.
Key 2004 milestones include:
* TWO SUCCESSFUL JOBS IN THE NORTH SEA UTILIZING RSS AND LWD/HEL(TM),
PROVING PRECISION CAN DELIVER IN ONE OF THE HARSHEST ENVIRONMENTS IN THE
WORLD.
* SUCCESSFUL QUALIFICATION TRIALS IN MIDDLE EAST MARKETS.
* SIGNIFICANT SUCCESSES IN MEXICO AND ASIA/PACIFIC WHERE OUR SERVICE AND
TOOL PERFORMANCES HAVE HAD A MEANINGFUL AND POSITIVE IMPACT ON OUR
CUSTOMERS' WELL CONSTRUCTION PERFORMANCE.
PRECISION DRILLING ANNUAL REPORT 2004 10
* AS PART OF OUR COMMITMENT TO DELIVER "FIT FOR PURPOSE" TOOLS, ENERGY
SERVICES DEVELOPED THE COST EFFECTIVE PRECISION EMPULSE(TM) TOOL WHICH IS
TARGETED AT LESS COMPLEX AND LESS HOSTILE PLAYS. THIS ENABLES REDEPLOYMENT
OF LWD/HEL(TM) TOOLS TO HIGHER MARGIN REGIONS THAT ARE BETTER MATCHED TO
THE TOOLS' HOSTILE ENVIRONMENT CAPABILITIES.
In summary, successes with the LWD/HEL(TM) and RSS tools, combined with
the development of the EMpulse(TM) tools resulted in solid results for 2004 and
the foundation for continued growth in 2005. PRODUCTION SERVICES Production
Services generated revenues of $97 million in 2004, on par with those earned in
2003. In the past four years, consistent with the controlled growth strategy,
Energy Services has focused on the development of the wireline and drilling &
evaluation businesses. With the foundation laid for these two businesses, the
segment turned its attention to Production Services in the latter half of 2004.
New management with global experience in the product line was engaged and
charged to deliver and implement a strategic plan consistent with the other two
Energy Services' businesses. As part of this plan, Production Services intends
on capitalizing on its technical prowess in underbalanced drilling applications
and to pursue geographic and service diversification to establish significant
contracts outside of the Canadian market place.
Key 2004 milestones include:
* THE PRODUCT LINE SIGNED ITS FIRST EARLY PRODUCTION CONTRACT IN YEMEN.
* A CONTROLLED PRESSURE DRILLING CONTRACT WAS RE-AWARDED IN THE NORTH SEA
THROUGH A COMPETITIVE BIDDING PROCESS.
* PRECISION WAS AWARDED AND COMPLETED ITS FIRST OFFSHORE CPD(R) CONTRACT IN
INDIA.
On a geographic basis, Energy Services earned a greater proportion of its
revenues outside of Canada, reflecting increased revenues from the U.S. Wireline
Services and international Drilling & Evaluation businesses.
Operational and general and administrative expenses declined as a
percentage of revenue, reflecting increased economies of scale from the growth
of the operation. Depreciation and amortization increased by 23% over 2003,
primarily as a result of the commercialization of the LWD/HEL(TM) and RSS tools
and the acquisition of Reeves. As tool utilization rates increase in 2005 and
beyond, depreciation and amortization as a percentage of revenue is expected to
decrease.
Research and engineering costs increased by $6 million over 2003 to
support the ongoing development of fit for purpose technology. Energy Services
targets to spend 5% of its annual revenue to support ongoing growth and
technological innovation.
Foreign exchange losses of $7 million in the period resulted from
increased activity in foreign jurisdictions combined with a significant
weakening of the US dollar. Outside of Canada, pricing of the segment's
contracts is denominated primarily in US dollars or US dollar equivalents.
2003 COMPARED TO 2002 As noted previously, 2003 was a year of transition for
Energy Services, with new management changing the focus of the business from top
line growth and geographic expansion to enhanced bottom line profitability.
While at the end of the year the transition was not complete, significant
improvements were achieved in all product lines.
Key 2003 milestones include:
* NON-PROFITABLE PRODUCT LINES WERE SHUT DOWN IN MANY REGIONS, ENABLING THE
SEGMENT TO FOCUS ON ITS STRENGTHS IN REGIONS WHERE ECONOMIES OF SCALE WILL
CONTRIBUTE TO PROFITABLE OPERATIONS.
* IDENTIFICATION OF NON-CORE BUSINESSES OF FLEET CEMENTERS, INC. AND POLAR
COMPLETIONS FOR SALE IN 2004.
* COMPLETION OF A TECHNOLOGY REVIEW IN THE THIRD QUARTER, PROVIDING
DIRECTION FOR FUTURE RESEARCH AND ENGINEERING WORK THAT CONSIDERS KEY
CUSTOMER NEEDS AND REQUIREMENTS, IDENTIFIES RELATED PROJECT PARAMETERS AND
SETS PRIORITIES.
PRECISION DRILLING ANNUAL REPORT 2004 11
A critical factor that hampered the roll out of the new suite of Drilling
& Evaluation tools in the first part of 2003 was the ability of the LWD/HEL(TM)
tool to demonstrate that it could reliably perform in many geological
environments. The fourth quarter saw a step change in the reliability of these
tools, with the mean time between failure almost quadrupling in December and
continuing into 2004. With respect to the rotary steerable tool, while several
runs had been completed with over 125 hours in the hole, Precision experienced
reliability challenges of the same nature encountered with the LWD/HEL(TM) tools
in early 2003.
For the year ended December 31, 2003, revenues totaled $697 million, an
increase of 19% over the same period in 2002, with all of the increase driven by
operations in Canada, the U.S. and Mexico. Canadian operations increased in
conjunction with increased drilling activity. This higher demand for services
also resulted in generally improved pricing relative to 2002. Similarly, revenue
and pricing in the U.S. operations responded to the increase in the average rig
count from 830 in 2002 to 1,030 in 2003. The Mexico businesses benefitted from
the extension of the Burgos integrated services project and the award of
additional contracts outside of that project. Combined revenue from the
segment's other regional operations was flat year over year. Increased revenue
associated with a large wireline contract in the Middle East was offset by
reduced Controlled Pressure Drilling(R) (CPD(R)) work in the North Sea. Although
improving late in the year, activity in Venezuela was also lower than 2002 as a
result of the political unrest in that country.
Profitability of the segment improved, from an operating loss of $40
million in 2002 to an operating loss of $4 million in 2003. The effort to review
and rationalize businesses in the segment brought with it incremental expenses
in the form of severance and closure costs and write-downs of unusable assets,
totaling $15 million in 2003. Operating and general and administrative expense
declined as a percentage of revenue reflecting cost reduction initiatives and
economies of scale associated with certain fixed infrastructure costs.
Research and engineering expenditures increased in 2003 as tool
development programs moved from the laboratory to field operations. During the
initial stages of the roll out, product support initiatives were performed by
the research and engineering teams. With the commercialization of operations,
this work was transferred to the operations groups in 2004.
RENTAL AND PRODUCTION
(STATED IN THOUSANDS OF CANADIAN DOLLARS)
% OF % OF % OF
YEARS ENDED DECEMBER 31, 2004 REVENUE 2003 REVENUE 2002 REVENUE
-------------------------------------------------------------------------------------------------------------
Revenue $ 215,492 $ 210,724 $ 192,840
Expenses:
Operating 151,323 72.5 147,911 70.2 139,781 72.5
General and administrative 10,341 4.8 10,762 5.1 9,695 5.0
Depreciation 13,806 6.4 12,533 6.0 13,159 6.8
Foreign exchange (4) -- 292 0.2 292 0.2
-------------------------------------------------------------------------------------------------------------
Operating earnings $ 40,026 18.6 $ 39,067 18.5 $ 29,913 15.5
=============================================================================================================
% % %
INCREASE INCREASE INCREASE
2004 (DECREASE) 2003 (DECREASE) 2002 (DECREASE)
-------------------------------------------------------------------------------------------------------------
Equipment rental days (000's) 838 2.2 820 (34.4) 607 (34.4)
=============================================================================================================
2004 COMPARED TO 2003 Results for the Rental and Production segment in 2004 were
consistent with those of 2003. The industrial plant maintenance business
(carried out by CEDA, a wholly owned subsidiary) has seen a shift in its revenue
base to more work coming from the Fort McMurray oilsands operations. Critical to
CEDA's work at these large facilities is its maintenance of its high safety
standards and performance. During 2004 the CEDA team received the Syncrude
President's Award for "Most Innovative Environmental, Health and Safety Idea
Implemented". This award was based on the introduction of Competency-Based
Training, Safety Audits and the development of the SuperLance(TM) tool used to
remove run limiting fouling in Syncrude's fluid cokers.
The oilfield equipment rental business saw a slight increase in activity
as well as pricing improvements on a number of product lines. This business
continues to streamline its operations and implement management information
systems that are increasing its ability to manage assets and service delivery
across its organization rather than from a regional perspective.
PRECISION DRILLING ANNUAL REPORT 2004 12
2003 COMPARED TO 2002 REVENUE IN THE RENTAL AND PRODUCTION SEGMENT INCREASED BY
9% IN 2003 COMPARED TO 2002. BOTH THE OILFIELD EQUIPMENT RENTAL AND INDUSTRIAL
PLANT MAINTENANCE OPERATIONS CONTRIBUTED TO THE INCREASE. EQUIPMENT RENTAL DAYS
INCREASED IN CONJUNCTION WITH INCREASED DRILLING ACTIVITY AND OPERATING EARNINGS
IN THIS BUSINESS IMPROVED SIGNIFICANTLY AS MOST EXPENSES ARE FIXED IN NATURE.
The cornerstone of the plant maintenance operations continues to be the
work performed at the oilsands projects in northern Alberta. The segment's
ability to offer the complete suite of cleaning, mechanical, catalyst and
dredging services required to maintain these large projects, and the continued
training and development of its employees, differentiates it from its
competitors. Recognition of the value this business brings to its customers has
resulted in continued steady revenue growth and consistent operating margins.
OTHER ITEMS
2004 COMPARED TO 2003
CORPORATE AND OTHER EXPENSES Corporate and other expenses have increased by $13
million or 34% in 2004 compared to 2003. These costs are primarily associated
with the corporate executive, human resources, internal audit, information
technology, treasury, tax, and financial reporting functions. Expenses have
increased in conjunction with the growth of the organization and with the
increased complexities associated with Precision's continued globalization. In
addition, heightened regulatory requirements, in particular those associated
with the Sarbanes-Oxley Act, have resulted in increased personnel requirements.
INTEREST EXPENSE Net interest expense of $47 million increased by 34% in 2004
compared to 2003. Average net debt outstanding (borrowings less cash on hand)
increased 9% as acquisitions made in 2004 were partially financed by additional
borrowings. The combination of the issuance of common shares and long-term
debentures to finance acquisitions and strong cash flow from operations resulted
in a change in the make up of the Corporation's net debt outstanding. In the
first half of 2004 a portion of net debt took the form of short-term borrowings
on its bank facilities at relatively low interest rates. These short-term
borrowings were replaced with long-term debentures at higher interest rates. In
addition, the Corporation's cash balances have increased $101 million during
2004 with this cash being invested in short-term instruments that earn a lower
return than what is paid on the outstanding debentures. Interest expense was
also inflated by fees related to bridge financing facilities put in place in
conjunction with acquisitions completed during the year.
INCOME TAXES The Corporation's tax rate on earnings from continuing operations
before income taxes was 34% in 2004, consistent with expectations at the outset
of the year. The effective tax rate in 2003 was 28%. The increase in the tax
rate is the result of a number of factors. First, the Alberta government reduced
tax rates by 0.5% in each of 2004 and 2003. Canadian GAAP requires that the
effect of these rate reductions be reflected as a decrease of future tax
expense. The impact of these rate reductions on tax expense was $2 million in
2004 and $3 million in 2003. The lower amount in 2004 combined with higher
before tax earnings resulted in a reduced impact on the Corporation's effective
tax rate in 2004 than in 2003. Second, the Corporation's organization structure
generates tax savings which, in absolute dollar terms, are relatively consistent
from year to year. Due to the higher before tax earnings in 2004, the impact on
the effective tax rate was lower than in 2003. The Corporation's effective tax
rate is expected to be in the range of 30-35% in 2005.
2003 COMPARED TO 2002
CORPORATE AND OTHER EXPENSES Expenses in the Corporate and Other segment
increased by $4 million in 2003 compared to 2002. In contrast to the prior year,
variable compensation payments tied to corporate performance increased in 2003.
In addition, directors' and officers' insurance premiums increased as a result
of increased scrutiny of corporate governance practices of public equity market
participants in North America and around the world. General and administrative
expenses were also affected by the ongoing requirements surrounding
Sarbanes-Oxley legislation.
INTEREST EXPENSE Net interest expense remained at approximately $35 million in
2003 and 2002. The impact of a $24 million increase in average debt outstanding
was offset by reduced interest rates. As anticipated at
PRECISION DRILLING ANNUAL REPORT 2004 13
the end of the prior year, interest coverage, defined as operating earnings
divided by net interest expense, returned to 2001 levels.
INCOME TAXES The Corporation's effective tax rate on earnings from continuing
operations before income taxes, non-controlling interest and goodwill
amortization in 2003 was 28% compared to 25% in 2002. The Alberta government
reduced tax rates by 0.5% in each of 2003 and 2002. Canadian GAAP requires that
the effect of these rate reductions be reflected as a decrease of future tax
expense. The impact of these rate reductions on tax expense was similar in 2003
and 2002 at approximately $3 million each year. However, given the higher before
tax earnings in 2003 compared to 2002, the impact of the reductions on the
Corporation's effective tax rate was lower in 2003.
Similarly, the Corporation's organization structure generates tax savings
which, in absolute dollar terms, are relatively consistent from year to year.
Due to the higher before tax earnings in 2003, the impact on the effective tax
rate was lower than in 2002.
LIQUIDITY AND CAPITAL RESOURCES
Historically the oilfield services business has been very cyclical. To manage
the risk of this volatility, Precision has adhered to a philosophy of
maintaining a strong balance sheet. In addition, a strong balance sheet has
allowed the Corporation to grow by providing the financial flexibility to
respond to attractive investment opportunities in the form of both acquisitions
and internal growth. The following graph provides a historical perspective on
how Precision has managed its cash flows and debt levels.
In 2004, the Corporation incurred capital expenditures, net of
dispositions of capital assets, of $253 million and disposed of investments and
discontinued operations for net proceeds of $58 million. Precision also
completed two significant acquisitions during the year: Reeves Oilfield Services
Ltd. for cash of $254 million and international land based drilling rigs for
cash of $436 million. Total capital expenditures and investments for the year,
net of dispositions, was $875 million. These investments were financed by a
combination of cash flow from operations, an equity issue and a long-term debt
issue. Cash flow from operations contributed $445 million during the year, while
the equity issue in August 2004 netted $276 million and the debt issue provided
US$300 million in May 2004. In addition, the Corporation realized $55 million
from the exercise of stock options. The net cash generated by these activities
was more than sufficient to finance the capital expenditures and acquisitions,
resulting in the repayment of $214 million of bank debt and long-term debt that
was outstanding at December 31, 2003 and an increase in cash and cash
equivalents by $101 million.
The Corporation exited 2004 with a long-term debt to long-term debt plus
equity ratio of 24% and a ratio of long-term debt to cash flow from operations
of 161%. The long-term debt to long-term debt plus equity ratio at December 31,
2004 was well within the Corporation's target ratio of 30%, although this ratio
was exceeded at June 30, 2004 with a ratio of 33% as a result of the acquisition
of Reeves and the international land drilling rigs. This ratio was reduced to
24% by year-end with the completion of the aforementioned equity issue in July
2004. The Corporation has in the past, and may in the future, exceed its 30%
target ratio on a temporary basis to finance an acquisition. However, the
objective is to reduce the ratio to below the target within 12-18 months of an
acquisition through cash flow or the raising of additional equity.
In 2005, the Corporation expects cash flow from operations to exceed $550
million and net capital expenditures to amount to approximately $350 million.
The Corporation also expects proceeds from exercising of stock options to be
approximately $25 million. The Corporation currently has three long-term note
issuances outstanding, totaling $719 million with maturities of $200 million in
2007, $150 million in 2010 and $369 million in 2014. All of the long-term debt
has an option for early redemption; however, there would be a substantial
penalty payable if redeemed prior to maturity. As there is no short-term bank
debt outstanding to be repaid, it is expected that the excess cash flow
generated will continue to accumulate in cash and short-term investments,
assuming no material acquisitions. Given the forecasted cash flow for 2005 and
the full year of income from Reeves and the land-based international drilling
rigs and barring any material acquisitions, it is expected that the long-term
debt to long-term debt plus equity ratio and the ratio of long-term debt to
trailing cash flow will improve in 2005 over year-end 2004 figures.
Precision has a number of committed and uncommitted lines of credit
available to finance its activities. The committed facilities consist of a $335
million three-year revolving unsecured credit facility with a
PRECISION DRILLING ANNUAL REPORT 2004 14
syndicate led by a Canadian chartered bank. The facility currently matures in
August 2007, but is extendible annually with consent of the lenders. The
Corporation also has a US$50 million extendible revolving facility with Export
Development Corporation, which is available for financing international projects
and acquisitions. This facility has a one-year revolving period expiring
December 2005, followed by a one-year term period should the revolving period
not be extended. Both committed facilities have similar covenants and events of
default that are the market norm for companies the size and credit quality of
Precision. The facilities also have two financial covenants which are tested
quarterly: total liabilities to equity of less than 1:1 and total debt to the
trailing four quarters cash flow of less than 2.75:1. As at December 31, 2004,
Precision was well within the financial covenant levels, and is expected to
remain so for 2005. There were no borrowings outstanding under either of the
committed facilities at December 31, 2004. In addition to the committed bank
facilities, Precision also has a number of uncommitted operating facilities
worldwide which total approximately $100 million equivalent and are utilized for
working capital management and issuance of letters of credit.
The Corporation's contractual obligations are outlined in the following
table:
(STATED IN THOUSANDS OF CANADIAN DOLLARS) PAYMENTS DUE BY PERIOD
LESS THAN AFTER
TOTAL 1 YEAR 1 - 3 YEARS 4 - 5 YEARS 5 YEARS
-------------------------------------------------------------------------------------------------------------
Long-term debt $ 718,850 $ -- $ 200,000 $ -- $518,850
Capital lease obligations 38 18 20 -- --
Operating leases 101,100 32,155 48,664 9,516 10,765
-------------------------------------------------------------------------------------------------------------
Total contractual obligations $ 819,988 $ 32,173 $ 248,684 $ 9,516 $529,615
=============================================================================================================
OUTSTANDING SHARE DATA
FEBRUARY 28 DECEMBER 31
-------------------------------------------------------------------------------------------------------------
2005 2004 2003
-------------------------------------------------------------------------------------------------------------
Common shares 61,297,003 60,790,212 54,845,678
Options to purchase common shares 3,047,269 3,347,560 3,393,194
=============================================================================================================
QUARTERLY FINANCIAL SUMMARY
(STATED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS,
WHICH ARE PRESENTED ON A DILUTED BASIS)
YEAR ENDED DECEMBER 31, 2004 Q1 Q2 Q3 Q4 YEAR
-------------------------------------------------------------------------------------------------------------
Revenue 659,365 416,317 570,047 679,487 2,325,216
Operating earnings 169,631 29,037 77,074 148,711 424,453
Earnings from continuing operations 106,082 15,982 41,034 86,489 249,587
Per share 1.88 0.28 0.68 1.40 4.26
Net earnings 100,519 15,995 42,707 88,183 247,404
Per share 1.79 0.28 0.71 1.43 4.22
Funds provided by continuing operations 178,186 38,947 103,095 174,750 494,978
=============================================================================================================
YEAR ENDED DECEMBER 31, 2003 Q1 Q2 Q3 Q4 YEAR
-------------------------------------------------------------------------------------------------------------
Revenue 583,313 342,246 450,942 523,646 1,900,147
Operating earnings 117,033 12,314 60,958 91,173 281,478
Earnings from continuing operations 73,525 8,489 36,455 61,434 179,903
Per share 1.33 0.15 0.66 1.11 3.25
Net earnings 83,129 8,622 35,765 52,958 180,474
Per share 1.51 0.16 0.65 0.95 3.26
Funds provided by continuing operations 131,406 21,215 91,764 108,252 352,637
=============================================================================================================
FOURTH QUARTER DISCUSSION
Sustained high crude oil and natural gas prices generated a strong environment
for the oilfield services business both in Canada and internationally in the
fourth quarter. In addition, the acquisition of 31 internationally based
drilling rigs and of Reeves Oilfield Services Ltd. in the second quarter of 2004
contributed significantly to the year over year improvement in fourth quarter
earnings.
Contract Drilling revenue of $378 million and operating earnings of $138
million increased by 30% and 39% respectively in the fourth quarter of 2004
compared to the same period of 2003. The international
PRECISION DRILLING ANNUAL REPORT 2004 15
drilling operation performed above expectations and contributed revenue of $74
million in the fourth quarter compared to $37 million in 2003.
The Canadian drilling and service rig operations saw activity levels
increase 4% and 13% respectively. The Canadian drilling rig fleet achieved
12,099 operating days in the fourth quarter of 2004 and the service rig fleet
generated 127,694 operating hours, with activity levels being supported by
continued favourable commodity prices and good weather conditions. Strong demand
resulted in winter pricing being maintained throughout the summer and allowed
for rate increases to be implemented for the 2004/2005 winter drilling season.
Drilling revenue per operating day increased by 8% and service revenue per hour
increased by 14%.
Precision's international rig fleet numbered 48 at the end of 2004
compared to 19 at the end of 2003, with one rig sold and one rig relocated to
Canada. The Corporation has greatly enhanced its presence in the eastern
hemisphere with 28 rigs located in the region. Demand for rigs, especially in
the Middle East, is on the rise and as a result recent contract awards have been
for increased day rates. Venezuela, where we have 11 rigs, is also starting to
see improved activity levels. Activity for the 10 rigs located in Mexico have
been dampened somewhat by Pemex budget restrictions, however Precision has
recently been awarded an extension of its integrated services contract that will
maintain utilization at approximately 70% into 2006. We will also be
participating in the bidding on drilling projects for other international
operators in Mexico.
Energy Services revenue increased by $62 million or 34% in the fourth
quarter of 2004 compared to 2003. Operating earnings increased by $19 million
over the same period. The strengthening Canadian dollar resulted in foreign
exchange losses of $3 million in the current quarter compared to a negligible
gain in the fourth quarter of 2003.
The acquisition of Reeves Oilfield Services Ltd. in May accounted for half
of the fourth quarter year over year revenue increase. As well, revenue for
non-Reeves operations increased in all regions. Of particular note is the 123%
revenue increase in Asia/Pacific and the 70% revenue increase in Latin America.
In the Asia/Pacific region, we have seen growth in all our product lines in
India and Bangladesh and operations in Indonesia have returned to profitability.
The improvement in Latin America is due to a gradual increase in activity in
Venezuela as that country pushes to get production levels back to what they were
prior to the general strike. Revenue generated in the United States also
increased by 23% as a result of increased land drilling activity spurred by
sustained high commodity prices.
An important milestone was achieved in the Middle East market in the
fourth quarter with the completion of field trials and qualification to perform
logging-while-drilling and rotary steerable work in the region. We plan to
leverage this technological success and Precision's increased presence in the
region to expand Energy Services' business across all its product lines.
The Rental and Production segment saw a 14% increase in revenue and a 50%
increase in operating earnings in the fourth quarter of 2004 compared to 2003.
The plant maintenance business had a strong quarter with additional work coming
from unplanned refinery shutdowns and from extensions of projects at the
oilsands plants longer into the Christmas season than was usual. The rental
operation also saw increased revenue due to increased pricing on select product
lines as a result of continued strong demand for equipment.
ACCOUNTING CHANGES - STOCK-BASED COMPENSATION PLANS
Effective January 1, 2004, the Corporation adopted the revised Canadian
accounting standards with respect to accounting for stock-based compensation.
Under the new standard, the fair value of common share purchase options is
calculated at the date of the grant and that value is recorded as compensation
expense over the vesting period of those grants. Under the previous standard, no
compensation expense was recorded when stock options were issued with any
consideration received upon exercise credited to share capital.
The Corporation has retroactively applied this standard, with restatement
of prior years, to all common share purchase options granted since January 1,
2002. This has resulted in a charge to net earnings for the year ended December
31, 2004 of $14 million (2003 - $8 million; 2002 - $6 million) or $0.22 diluted
earnings per share (2003 - $0.15; 2002 - $0.11) and a reduction to opening
retained earnings of $15 million at January 1, 2004 ($6 million at January 1,
2003).
CRITICAL ACCOUNTING ESTIMATES
This Management's Discussion and Analysis of Precision's financial condition and
results of operations is based on its consolidated financial statements which
are prepared in accordance with Canadian generally
PRECISION DRILLING ANNUAL REPORT 2004 16
accepted accounting principles. The Corporation's significant accounting
policies are described in Note 1 to its consolidated financial statements. The
preparation of these financial statements requires that certain estimates and
judgments be made that affect the reported assets, liabilities, revenues and
expenses. These estimates and judgments are based on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances. Anticipating future events cannot be done with certainty,
therefore these estimates may change as new events occur, more experience is
acquired and as the Corporation's operating environment changes.
The accounting estimates believed to require the most difficult,
subjective or complex judgments and which are the most critical to our reporting
of results of operations and financial position are as follows:
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
The Corporation performs ongoing credit evaluations of our customers and grants
credit based upon past payment history, financial condition and anticipated
industry conditions. Customer payments are regularly monitored and a provision
for doubtful accounts is established based upon specific situations and overall
industry conditions. The Corporation's history of bad debt losses has been
within expectations and generally limited to specific customer circumstances,
however, given the cyclical nature of the oil and gas industry and the inherent
risk of successfully finding hydrocarbon reserves, a customer's ability to
fulfill its payment obligations can change suddenly and without notice. In
addition, many of our customers are located in international areas that are
inherently subject to risks of economic, political and civil instabilities,
which may impact our ability to collect those accounts receivable.
EXCESS AND OBSOLETE INVENTORY PROVISIONS
Quantities of inventory on hand are regularly reviewed and provisions for excess
or obsolete inventory are established based on historical usage patterns and
known changes to equipment or processes that would render specific items no
longer usable in operations. Significant or unanticipated changes in business
conditions could impact the amount and timing of any additional provision for
excess or obsolete inventory that may be required. The Energy Services segment
of our operations involves the application of new technologies in its efforts to
deliver superior products to our customers and therefore has a greater risk of
obsolescence due to finding or developing better products. The Energy Services
inventories comprise 81% of our total inventory of $114 million. These
inventories are reviewed on a quarterly basis to assess the appropriateness of
quantities and valuation.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, which includes property, plant and equipment, intangibles and
goodwill, comprise the majority of the Corporation's assets. The carrying value
of these assets is periodically reviewed for impairment or whenever events or
changes in circumstances indicate that their carrying amounts may not be
recoverable. This requires the Corporation to forecast future cash flows to be
derived from the utilization of these assets based upon assumptions about future
business conditions and technological developments. Significant, unanticipated
changes to these assumptions could require a provision for impairment in the
future. During the fourth quarter of 2004 the Corporation completed its goodwill
assessment incorporating the work of independent valuation experts resulting in
the conclusion that there was no impairment of the carrying value.
DEPRECIATION AND AMORTIZATION
The Corporation's property, plant and equipment and its intangible assets are
depreciated and amortized based upon estimates of useful lives and salvage
values. These estimates may change as more experience is gained, market
conditions shift or new technological advancements are made. The high
depreciation expense associated with the Energy Services segment is anticipated
to improve with the optimization of equipment fleet sizes in each geographic
region.
As a result of the recent completion of a review of the useful lives of
our drilling rigs and related equipment, Precision will be changing the useful
life of its drilling rigs for the purposes of determining depreciation expense
to 5,000 utilization days from 4,150 utilization days or as previously stated,
3,650 operating days, and its drill string to 1,500 from 1,100 operating days.
Utilization days include both operating and rig move days. This change in
accounting estimate will be applied prospectively beginning January 1, 2005.
INCOME TAXES
PRECISION DRILLING ANNUAL REPORT 2004 17
The Corporation uses the liability method which takes into account the
differences between financial statement treatment and tax treatment of certain
transactions, assets and liabilities. Future tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Valuation allowances are established to reduce
future tax assets when it is more likely than not that some portion or all of
the asset will not be realized. Estimates of future taxable income and the
continuation of ongoing prudent tax planning arrangements have been considered
in assessing the utilization of available tax losses. Changes in circumstances
and assumptions and clarifications of uncertain tax regimes may require changes
to the valuation allowances associated with the Corporation's future tax assets.
BUSINESS RISKS
CRUDE OIL AND NATURAL GAS PRICES
The price received by our customers for the crude oil and natural gas they
produce has a direct impact on cash flow available for them to finance the
acquisition of services provided by the Corporation.
Prices for crude oil are established in a worldwide market in which supply
and demand are subject to a vast array of economic and political influences.
This results in very volatile pricing; a prime example of which is West Texas
Intermediate crude oil trading at US$12 per barrel in late 1998 and in excess of
US$55 per barrel at one point in 2004. Natural gas prices are established in a
more "local" North American market due to the requirement to transport this
gaseous product in pressurized pipelines, although this is changing slowly with
the emergence of LNG. Demand for natural gas is seasonal and is correlated to
heating and electricity generation requirements. Demand for natural gas and fuel
oils is also affected by consumers' ability to switch from one to the other to
take advantage of relative price variations.
The Corporation partially manages the risk of volatile commodity prices,
and thus volatile demand for its services, by striving to maintain cost
structures that are scalable to activity levels. However, cost structures in
Contract Drilling are more variable in nature than those within Energy Services.
In addition, our strong balance sheet and adherence to conservative financing
practices provide the resilience to withstand and benefit from downturns and
upturns in the business cycle.
North American oilfield service activity is largely focused on natural
gas. One objective of the Corporation's international growth initiatives is to
increase our exposure to crude oil activity in less cyclical markets.
WORKFORCE AVAILABILITY
The Corporation's ability to provide reliable services is dependent upon the
availability of well trained, experienced crews to operate our field equipment.
We must also balance the requirement to maintain a skilled workforce with the
need to establish cost structures that vary as much as possible with activity
levels.
Within Contract Drilling, our most experienced people are retained during
periods of low utilization by having them fill lower level positions on our
field crews. The Corporation has established training programs for employees new
to the oilfield service sector and Precision works closely with industry
associations to ensure competitive compensation levels and to attract new
workers to the industry as required.
Many of our Canadian businesses are currently experiencing manpower
shortages. Over 50 drilling rigs have been running without relief crews,
requiring them to shut down when crews need time off. Energy Services Canadian
operations have been supported by additional people and equipment brought in
from other regional operations to meet peak winter demand.
WEATHER
The ability to move heavy equipment in the Canadian oil and natural gas fields
is dependent on weather conditions. As warm weather returns in the spring, the
winter's frost comes out of the ground rendering many secondary roads incapable
of supporting the weight of heavy equipment until they have thoroughly dried
out. The duration of this "spring breakup" has a direct impact on the
Corporation's activity levels. In addition, many exploration and production
areas in northern Canada are accessible only in winter months when the ground is
frozen hard enough to support equipment. The timing of freeze up and spring
breakup affects the ability to move equipment in and out of these areas.
Working with customers, the Corporation strives to position equipment
where possible such that it can be working on location during spring breakup,
limiting the need to move equipment during this time period
PRECISION DRILLING ANNUAL REPORT 2004 18
as much as possible. However, many uncontrollable factors affect our ability to
plan in this fashion and the spring season, which can occur any time from late
March through May, is traditionally our slowest time.
TECHNOLOGY
Technological innovation by oilfield service companies has improved the
effectiveness of the entire exploration and production sector over the
industry's 140-year history. Recently, development of directional and horizontal
drilling, underbalanced drilling, coiled tubing drilling, and methods of
providing real time data during drilling and production operations have
increased production volumes and the recoverable amount of discovered reserves.
Innovations such as 3-D and 4-D seismic have improved the success rate of
exploration wells partially offsetting the decline in the quantity of drillable
prospects.
Our ability to deliver more efficient services is critical to our
continued success. The Corporation has continuously built upon its experience
and teamed with customers to provide solutions to their unique problems. Our
ability to design and build specialized equipment has kept us on the leading
edge of technology. The success of our in-house designed and built Super
Single(R) and Super Single(R) light rigs, both in Canada and abroad, is
testimony of our dedication to these efforts.
The continued development of our Energy Services segment, puts the
Corporation at another level where high-end technological innovation is
paramount to success. We have a team of highly qualified experienced
professionals that has been assembled and working together for a number of years
in state of the art testing facilities. The technologies the Corporation has
developed over this time are at the commercial deployment stage, however, the
success of future technological endeavors is never certain.
ACQUISITION INTEGRATION
The Corporation has worked towards its strategic objective of becoming an
integrated service provider of sufficient size to benefit from economies of
scale and to provide the foundation from which to pursue international
opportunities. Business acquisitions have been an important tool in this pursuit
and will continue to be so in the future. Continued successful integration of
new businesses, people and systems is key to our future success.
FOREIGN OPERATIONS
Precision is working hard to export its expertise and technologies to oil and
gas producing regions around the world. With this comes the risk of dealing with
business and political systems that are much different than the Corporation is
accustomed to in North America. The Corporation has hired employees who have
experience working in the international arena and it is committed to recruiting
qualified resident nationals on the staffs of all of its international
operations.
MERGER AND ACQUISITION ACTIVITY
Merger and acquisition activity in the oil and gas exploration and production
sector can impact demand for our services as customers focus on internal
reorganization activities prior to committing funds to significant drilling and
maintenance projects.
FOREIGN EXCHANGE EXPOSURE
The Corporation's international operations have revenues, expenses, assets and
liabilities in currencies other than the Canadian dollar. Although the
Corporation has exposure to more than 25 international currencies, the only
material exposure is to the U.S. dollar and currencies which are pegged to the
U.S. dollar. The Corporation's income statement, balance sheet and statement of
cash flow are impacted by changes in foreign exchange rates in three main
aspects.
(A) TRANSLATION OF FOREIGN CURRENCY ASSETS AND LIABILITIES TO CANADIAN DOLLAR
Some of the Corporation's international operations are considered self
sustaining, while others are considered integrated, as described in Note 1 (m)
of the financial statements. For self sustaining operations, assets and
liabilities are translated into Canadian dollars using the exchange rate in
effect at the balance sheet dates. Any unrealized translation gains and losses
are deferred and included in a separate component of shareholders' equity called
"cumulative translation adjustment". These cumulative currency translation
adjustments are recognized into income when there has been a reduction in the
net investment of the foreign operations.
For integrated operations, non-monetary assets and liabilities are
recorded in the financial statements at the exchange rate in effect at the time
of the acquisition or expenditure. As a result, the book value of these assets
and liabilities are not impacted by changes in exchange rates. Monetary assets
and liabilities are
PRECISION DRILLING ANNUAL REPORT 2004 19
converted at the exchange rate in effect at the balance sheet dates, and the
unrealized gains and losses are shown on the income statement as "Foreign
exchange". The Corporation has a net monetary asset position for its
international operations, which are predominantly U.S. dollar based. As a
result, if the Canadian dollar strengthens versus the U.S. dollar during a
quarter, the Corporation will incur a foreign exchange loss from the translation
of net monetary assets of integrated operations.
The Corporation has hedged a significant portion of its net asset position
of its self-sustaining international operation by issuing US$300 million in
long-term notes and designating it as a hedge. Gains or losses resulting from
the translation of these notes at period end exchange rates are included in the
cumulative translation adjustment account. The Corporation continually evaluates
its remaining net foreign currency asset position and the appropriateness of
hedging that position but does not currently hedge any of the exposure.
(B) TRANSLATION OF FOREIGN CURRENCY INCOME STATEMENT ITEMS TO CANADIAN DOLLAR
The Corporation's international operations generate revenue and incur expenses
in currencies other than the Canadian dollar. As described in Note 1 (m) to the
financial statements, the foreign currency based earnings are converted into
Canadian dollars for purposes of financial statement consolidation. The
conversion of the Corporation's international revenue and expenses to a Canadian
dollar basis does not result in a foreign exchange gain or loss as with the
translation of assets described above. It does, however, result in lower or
higher net profit from international operations than would have occurred had the
foreign exchange rate not changed. If the Canadian dollar strengthens versus the
U.S. dollar during a quarter, the Canadian dollar equivalent of international
net profit and cash flow will be negatively impacted.
The Corporation does not currently hedge any of its exposure related to
the translation of foreign currency based earnings into Canadian dollars.
(C) TRANSACTION EXPOSURE
The majority of the Corporation's international operations are transacted in
U.S. dollars or U.S. dollar pegged currencies, although in most countries in
which the Corporation operates there will be a certain amount of local currency
expenditures. The U.S. dollar net income for international operations will not
be impacted by a change in the U.S./Canadian exchange rate. The international
U.S. dollar net income will be impacted, however, by a change in the U.S. dollar
exchange rate vis-a-vis local currencies in which the Corporation has revenues
or expenses. As with the conversion of the Corporation's foreign currency
revenue and expenses to a Canadian dollar basis, this transaction exposure does
not result in a foreign exchange gain or loss as with the translation of foreign
currency assets described above. It does, however, result in lower or higher net
income from international operations than would have occurred had foreign
exchange rates not changed.
It is the Corporation's intent to minimize the impact of currencies other
than the U.S. dollar on the results of international operations. The main method
of reducing this exposure is through the structure of international contracts
whereby the Corporation will attempt to structure a portion of the revenue
stream in local currency to offset the expected local currency expenses, with
the balance of revenue paid in U.S. dollars. The Corporation may also enter into
foreign exchange derivative contracts to manage residual mismatches in foreign
currency cash flows, although, there are no outstanding contracts at December
31, 2004.
(D) SENSITIVITIES
Based on the Corporation's current operations, the following is an estimate of
the Corporation's full year exposure to a 5% strengthening of the Canadian
dollar against the U.S. dollar (i.e. for a full year relative to the December
2004 month end rate). The sensitivity is based on current level of operations
and the structure of our international contracts, as well as the level of
monetary assets at the end of 2004. All of these factors are subject to change
during the year, which would impact the Corporation's sensitivity to changes in
the Canadian/U.S. exchange rate.
ITEM IMPACT AMOUNT
--------------------------------------------------------------------------------
Revenue Decrease $51 million
Earnings before foreign exchange rate impact on
foreign currency assets Decrease $10 million
Foreign exchange loss on foreign currency assets Increase $6 million
================================================================================
PRECISION DRILLING ANNUAL REPORT 2004 20
DISCLOSURE CONTROLS AND PROCEDURES
The Chief Executive Officer and the Chief Financial Officer have evaluated the
effectiveness of Precision's disclosure controls and procedures as of December
31, 2004 and have concluded that such disclosure controls and procedures were
effective to provide reasonable assurance that material information relating to
the Corporation or its subsidiaries is made known to them.
OUTLOOK
Macro energy fundamentals remain positive as worldwide energy demand continues
to be firm, supported to a large extent by the growing economies of China and
India. OPEC has remained disciplined and rational with respect to managing the
supply dynamics for oil and worldwide production capacity is challenged to meet
growing needs. Natural gas fundamentals are also strong in the face of healthy
industrial demand and ongoing production challenges. These factors, which
analysts are predicting will not change in the foreseeable future, have lead to
the sustainment of historically high crude oil and natural gas prices. As a
result, the financial capabilities of our customers have been greatly
strengthened over the past year and the returns they are generating are
compelling them to increase their exploration and development spending.
With these fundamentals as the backdrop, Precision anticipates the demand
for its products and services to be very strong in 2005 and into 2006. The
Canadian Association of Oilwell Drilling Contractors is forecasting over 24,000
wells to be drilled in Canada in 2005, an all time high, and we are also
expecting increased overall international activity. The biggest challenge we
face in filling the increased demand for our services is attracting employees
with sufficient expertise and training. We will increasingly focus on
recruiting, training and retaining people so that we can continue to respond to
our customers needs.
Precision has remained true to its conservative financial principles,
maintaining a strong balance sheet to support the pursuit of further growth
opportunities.
PRECISION DRILLING ANNUAL REPORT 2004 21
MANAGEMENT'S REPORT TO THE SHAREHOLDERS
The accompanying consolidated financial statements and all information in the
Annual Report are the responsibility of management. The consolidated financial
statements have been prepared by management in accordance with the accounting
policies in the notes to financial statements. When necessary, management has
made informed judgments and estimates in accounting for transactions which were
not complete at the balance sheet date. In the opinion of management, the
financial statements have been prepared within acceptable limits of materiality,
and are in accordance with Canadian generally accepted accounting principles
(GAAP) appropriate in the circumstances. The financial information elsewhere in
the Annual Report has been reviewed to ensure consistency with that in the
consolidated financial statements.
Management has prepared Management's Discussion and Analysis (MD&A). The
MD&A is based upon the Corporation's financial results prepared in accordance
with Canadian GAAP. The MD&A compares the audited financial results for the
years ended December 31, 2004 to December 31, 2003 and the years ended December
31, 2003 to December 31, 2002. Note 15 to the consolidated financial statements
describes the impact on the consolidated financial statements of significant
difference between Canadian and United States GAAP.
Management maintains an appropriate system of internal control designed to
give reasonable assurance that transactions are properly authorized, assets are
safeguarded and financial records properly maintained to provide reliable
information for the preparation of financial statements.
KPMG LLP, an independent firm of Chartered Accountants, was engaged, as
approved by a vote of shareholders at the Corporation's most recent annual
general and special meeting, to audit the consolidated financial statements in
accordance with generally accepted auditing standards in Canada and provide an
independent professional opinion.
The Audit Committee of the Board of Directors, which is comprised of three
independent directors who are not employees of the Corporation, provides
oversight to the financial reporting process. Integral to this process is the
Audit Committee's review and discussion with management and the external
auditors of the quarterly and annual financial statements and reports prior to
their respective release. The Audit Committee is also responsible for reviewing
and discussing with management and the external auditors major issues as to the
adequacy of the Corporation's internal controls. The consolidated financial
statements have been approved by the Board of Directors on the recommendation of
the Audit Committee.
HANK B. SWARTOUT DALE E. TREMBLAY
CHAIRMAN OF THE BOARD, PRESIDENT SENIOR VICE PRESIDENT FINANCE
AND CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
FEBRUARY 8, 2005
PRECISION DRILLING ANNUAL REPORT 2004 1
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Precision Drilling
Corporation as at December 31, 2004 and 2003 and the consolidated statements of
earnings and retained earnings and cash flow for each of the years in the
three-year period ended December 31, 2004. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Corporation as at December
31, 2004 and 2003 and the results of its operations and its cash flow for each
of the years in the three-year period ended December 31, 2004 in accordance with
Canadian generally accepted accounting principles.
CHARTERED ACCOUNTANTS
CALGARY, CANADA
FEBRUARY 8, 2005
PRECISION DRILLING ANNUAL REPORT 2004 2
CONSOLIDATED BALANCE SHEETS
(STATED IN THOUSANDS OF DOLLARS)
AS AT DECEMBER 31, 2004 2003
-------------------------------------------------------------------------------------------------------------
(RESTATED - NOTE 2)
ASSETS
Current assets:
Cash and cash equivalents $ 122,012 $ 21,370
Accounts receivable (Note 18) 690,999 539,370
Inventory 114,352 95,210
Future income tax asset (Note 11) 8,711 1,524
Assets of discontinued operations (Note 20) -- 30,508
-------------------------------------------------------------------------------------------------------------
936,074 687,982
Property, plant and equipment, net of accumulated depreciation (Note 3) 1,945,521 1,584,954
Intangibles, net of accumulated amortization of 29,869 (2003 - $19,844) 191,665 65,262
Goodwill (Note 4) 735,413 527,443
Other assets (Note 5) 9,116 8,932
Future income tax asset (Note 11) 32,984 28,699
Assets of discontinued operations (Note 20) -- 35,336
-------------------------------------------------------------------------------------------------------------
$ 3,850,773 $ 2,938,608
=============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (Note 6) $ -- $ 147,909
Accounts payable and accrued liabilities (Note 18) 340,372 258,803
Incomes taxes payable 31,103 7,136
Current portion of long-term debt (Note 7) 18 17,158
Future income tax liability (Note 11) 7,270 791
Liabilities of discontinued operations (Note 20) -- 7,191
-------------------------------------------------------------------------------------------------------------
378,763 438,988
Long-term debt (Note 7) 718,870 399,422
Future income tax liability (Note 11) 431,399 350,031
Future income taxes of discontinued operations (Note 20) -- 1,107
Non-controlling interest -- 3,771
Shareholders' equity:
Share capital (Note 8) 1,274,967 936,744
Contributed surplus (Note 8) 26,024 14,266
Cumulative translation adjustment (Note 17) (20,933) --
Retained earnings 1,041,683 794,279
-------------------------------------------------------------------------------------------------------------
2,321,741 1,745,289
Commitments and contingencies (Notes 10 and 19)
-------------------------------------------------------------------------------------------------------------
$ 3,850,773 $ 2,938,608
=============================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Approved by the Board:
HANK B. SWARTOUT PATRICK M. MURRAY
DIRECTOR DIRECTOR
PRECISION DRILLING ANNUAL REPORT 2004 3
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(STATED IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, 2004 2003 2002
---------------------------------------------------------------------------------------------------------
(RESTATED (RESTATED
- NOTE 2) - NOTE 2)
Revenue $ 2,325,216 $ 1,900,147 $ 1,550,598
Expenses:
Operating 1,471,228 1,265,215 1,088,876
General and administrative 173,673 143,322 147,303
Depreciation and amortization 203,829 170,384 133,028
Research and engineering 48,759 42,411 34,680
Foreign exchange 3,274 (2,663) 4,357
---------------------------------------------------------------------------------------------------------
1,900,763 1,618,669 1,408,244
---------------------------------------------------------------------------------------------------------
Operating earnings 424,453 281,478 142,354
Interest:
Long-term debt 46,963 34,492 34,378
Other 855 1,425 1,334
Income (909) (867) (589)
Dividend income -- -- (39)
Gain on disposal of investments (4,899) (3,355) (900)
---------------------------------------------------------------------------------------------------------
Earnings from continuing operations before income
taxes and non-controlling interest 382,443 249,783 108,170
Income taxes: (Note 11)
Current 100,256 57,029 61,019
Future 31,302 12,851 (34,072)
---------------------------------------------------------------------------------------------------------
131,558 69,880 26,947
---------------------------------------------------------------------------------------------------------
Earnings from continuing operations
before non-controlling interest 250,885 179,903 81,223
Non-controlling interest 1,298 -- --
---------------------------------------------------------------------------------------------------------
Earnings from continuing operations 249,587 179,903 81,223
Gain (loss) on disposal of discontinued operations (Note 20) (616) 17,460 --
Discontinued operations, net of tax (Note 20) (1,567) (16,889) 3,763
---------------------------------------------------------------------------------------------------------
Net earnings 247,404 180,474 84,986
Retained earnings, beginning of year (Note 2) 794,279 613,805 528,819
---------------------------------------------------------------------------------------------------------
Retained earnings, end of year $ 1,041,683 $ 794,279 $ 613,805
=========================================================================================================
Earnings per share from continuing operations: (Note 12)
Basic $ 4.32 $ 3.31 $ 1.51
Diluted $ 4.26 $ 3.25 $ 1.48
---------------------------------------------------------------------------------------------------------
Earnings per share: (Note 12)
Basic $ 4.28 $ 3.32 $ 1.58
Diluted $ 4.22 $ 3.26 $ 1.55
=========================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
PRECISION DRILLING ANNUAL REPORT 2004 4
CONSOLIDATED STATEMENTS OF CASH FLOW
(STATED IN THOUSANDS OF DOLLARS)
YEARS ENDED DECEMBER 31, 2004 2003 2002
-------------------------------------------------------------------------------------------------------
(RESTATED (RESTATED
- NOTE 2) - NOTE 2)
Cash provided by (used in):
Continuing operations:
Earnings from continuing operations $ 249,587 $ 179,903 $ 81,223
Items not affecting cash:
Depreciation and amortization 203,829 170,384 133,028
Stock-based compensation 13,837 8,001 6,174
Future income taxes 31,302 12,851 (34,072)
Gain on disposal of investments (4,899) (3,355) (900)
Amortization of deferred financing costs 1,579 1,286 1,294
Unrealized foreign exchange gain
on long-term monetary items (1,555) (16,433) (2,039)
Non-controlling interest 1,298 -- --
-------------------------------------------------------------------------------------------------------
Funds provided by continuing operations 494,978 352,637 184,708
Changes in non-cash working
capital balances (Note 18) (50,178) (99,664) 3,715
-------------------------------------------------------------------------------------------------------
444,800 252,973 188,423
Discontinued operations (Note 20):
Funds provided by (used in) discontinued operations 3,689 (309) 10,512
Changes in non-cash working capital
balances of discontinued operations (447) 5,763 288
-------------------------------------------------------------------------------------------------------
3,242 5,454 10,800
Investments:
Business acquisitions, net of cash acquired (Note 14) (679,814) (6,800) (4,594)
Purchase of property, plant and equipment (282,224) (314,921) (267,794)
Purchase of intangibles (320) (6) (4,198)
Proceeds on sale of property, plant and equipment 29,940 24,423 32,449
Proceeds on disposal of investments 8,665 10,966 1,872
Investments (90) (1,080) (5,672)
Proceeds on disposal of discontinued operations 49,299 67,274 --
-------------------------------------------------------------------------------------------------------
(874,544) (220,144) (247,937)
Financing:
Increase in long-term debt 522,136 85,228 119,380
Repayment of long-term debt (173,260) (145,657) (102,275)
Deferred financing costs on long-term debt (5,612) -- --
Issuance of common shares, net of costs 276,428 -- --
Issuance of common shares on exercise of options 55,361 23,613 25,756
Change in bank indebtedness (147,909) 2,588 9,937
-------------------------------------------------------------------------------------------------------
527,144 (34,228) 52,798
-------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 100,642 4,055 4,084
Cash and cash equivalents, beginning of year 21,370 17,315 13,231
-------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 122,012 $ 21,370 $ 17,315
=======================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
PRECISION DRILLING ANNUAL REPORT 2004 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS STATED IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
Precision Drilling Corporation (the "Corporation") is a global oilfield services
company providing a broad range of drilling, production and evaluation services.
The financial statements are prepared in accordance with generally
accepted accounting principles (GAAP) in Canada. Management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the periods. Actual results could differ from these estimates.
1. SIGNIFICANT ACCOUNTING POLICIES:
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Corporation and its subsidiaries, all of which are wholly-owned at December 31,
2004. In 2004, the Corporation disposed of its one partially owned subsidiary.
(B) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and short term investments with
maturities of three months or less.
(C) INVENTORY
Inventory is primarily comprised of operating supplies and spare parts and
is carried at the lower of average cost and replacement cost.
(D) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost, including costs of
direct material, labour, and indirect overhead for manufacturing items. Where
costs are incurred to extend the useful life of property, plant and equipment or
to increase its capabilities, the amounts are capitalized to the related asset.
Costs incurred to repair or maintain property, plant and equipment are expensed
as incurred.
Drilling rig equipment is depreciated by the unit-of-production method
based on 3,650 drilling days with a 20% salvage value. Drill pipe and drill
collars are depreciated over 1,100 drilling days and have no salvage value.
Service rig equipment is depreciated by the unit-of-production method based on
24,000 hours for single and double rigs and 48,000 hours for heavy double rigs.
Service rigs have a 20% salvage value.
Field technical equipment is depreciated by the straight-line method over
periods ranging from 2 to 10 years.
Rental equipment is depreciated by the straight-line method over periods
ranging from 10 to 15 years. Other equipment is depreciated by the straight-line
method over periods ranging from 3 to 10 years.
Light duty vehicles are depreciated by the straight-line method over 4
years. Heavy duty vehicles are depreciated by the straight-line method over
periods ranging from 7 to 10 years.
Buildings are depreciated by the straight-line method over periods ranging
from 10 to 30 years.
(E) INTANGIBLES
Intangibles, which are comprised of acquired technology and customer
relationships, are recorded at cost and amortized by the straight-line method
over their useful lives ranging from 5 to 20 years.
(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. Goodwill is allocated as of the
date of the business combination to the Corporation's reporting segments that
are expected to benefit from the business combination.
Goodwill is not amortized and is tested for impairment annually in the
fourth quarter, or more frequently if events or changes in circumstances
indicate that the asset might be impaired. The impairment test is carried out in
two steps. In the first step, the carrying amount of the reporting segment is
compared with its fair value. When the fair value of a reporting segment exceeds
its carrying amount, goodwill of the reporting segment is considered not to be
impaired and the second step of the impairment test is unnecessary. The second
step is carried out when the carrying amount of a reporting segment exceeds its
fair value, in
PRECISION DRILLING ANNUAL REPORT 2004 6
which case the implied fair value of the reporting segment's goodwill is
compared with its carrying amount to measure the amount of the impairment loss,
if any. The implied fair value of goodwill is determined in the same manner as
the value of goodwill is determined in a business combination described in the
preceding paragraph, using the fair value of the reporting segment as if it was
the purchase price. When the carrying amount of reporting a segment's goodwill
exceeds the implied fair value of the goodwill, an impairment loss is recognized
in an amount equal to the excess.
(G) LONG LIVED ASSETS
On a periodic basis, management assesses the carrying value of long lived
assets for indications of impairment. Indications of impairment include items
such as an ongoing lack of profitability and significant changes in technology.
When an indication of impairment is present, the Corporation tests for
impairment by comparing the carrying value of the asset to its net recoverable
amount. If the carrying amount is greater than the net recoverable amount, the
asset is written down to its estimated fair value.
(H) INVESTMENTS
Investments in shares of associated companies, over which the Corporation
has significant influence, are accounted for by the equity method. Other
investments are carried at cost. If there are other than temporary declines in
value, these investments are written down to their net realizable value.
(I) DEFERRED FINANCING COSTS
Costs associated with the issuance of long-term debt are deferred and
amortized by the straight-line method over the term of the debt. The
amortization is included in interest expense.
(J) INCOME TAXES
The Corporation follows the liability method of accounting for future
income taxes. Under the liability method, future income tax assets and
liabilities are determined based on "temporary differences" (differences between
the accounting basis and the tax basis of the assets and liabilities), and are
measured using the currently enacted, or substantively enacted, tax rates and
laws expected to apply when these differences reverse. Income tax expense is the
sum of the Corporation's provision for current income taxes and the difference
between opening and ending balances of the future income tax assets and
liabilities.
(K) REVENUE RECOGNITION
The Corporation's services are generally sold based upon purchase orders
or contracts with the customer that include fixed or determinable prices based
upon daily, hourly or job rates. Customer contract terms do not include
provisions for significant post-service delivery obligations. Revenue is
recognized when services and equipment rentals are rendered and only when
collectability is reasonably assured.
(L) EMPLOYEE BENEFIT PLANS
At December 31, 2004, approximately 36% of the Corporation's employees
were enrolled in the Corporation's retirement plans. The majority participate in
defined contribution plans with approximately 3% of participating employees
enrolled in a defined benefit plan.
Employer contributions to defined contribution plans are expensed as
employees earn the entitlement and contributions are made.
The Corporation accrues the cost of pensions earned by employees under its
defined benefit plan, which is actuarially determined using the projected
benefit method pro-rated on services and management's best estimate of expected
plan investment performance, salary escalation and retirement ages of employees.
For the purpose of calculating the expected return on plan assets, those assets
are valued at quoted market value at the balance sheet date. The discount rate
used to calculate the interest cost on the accrued benefit obligation is the
long-term market rate at the balance sheet date. Past service costs from plan
amendments are amortized on a straight-line basis over the average remaining
service period of employees active at the date of amendment (EARSL). The excess
of the net cumulative unamortized actuarial gain or loss over 10% of the greater
of the accrued benefit obligation and the market value of plan assets is
amortized over EARSL.
The Corporation has entered into an employment agreement with a senior
officer, which provides for a one-time payment upon retirement. The amount of
this retirement allowance increases by a fixed amount for each year of service
over a ten year period commencing April 30, 1996. The estimated cost of this
benefit is accrued and charged to earnings on a straight-line basis over the ten
year period.
(M) FOREIGN CURRENCY TRANSLATION
PRECISION DRILLING ANNUAL REPORT 2004 7
Accounts of the Corporation's integrated foreign operations are translated
to Canadian dollars using average exchange rates for the year for revenue and
expenses. Monetary assets and liabilities are translated at the year-end
exchange rate and non-monetary assets and liabilities are translated using
historical rates of exchange. Gains or losses resulting from these translation
adjustments are included in net earnings.
Accounts of the Corporation's self-sustaining operations are translated to
Canadian dollars using average exchange rates for the year for revenue and
expenses. Assets and liabilities are translated at the year-end exchange rate.
Gains or losses resulting from these translation adjustments are included
in the cumulative translation adjustment account in shareholders' equity.
Transactions in foreign currencies are translated at rates in effect at
the time of the transaction. Monetary assets and liabilities are translated at
current rates. Gains and losses are included in net earnings.
Gains and losses arising on translation of long-term debt designated as a
hedge of self-sustaining foreign operations are deferred and included in the
cumulative translation adjustment account in shareholders' equity on a net of
tax basis.
(N) HEDGING RELATIONSHIPS
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 self-sustaining 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 the hedge's 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. If the
hedging relationship is terminated or ceases to be effective, hedge accounting
is not applied to subsequent gains or losses. Any previously deferred amounts
are carried forward and recognized in earnings in the same period as the hedged
item.
(O) STOCK-BASED COMPENSATION PLANS
The Corporation has equity incentive plans, which are described in Note 8.
The fair value of common 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. Upon exercise of the share purchase option, the
associated amount is reclassified from contributed surplus to share capital.
Consideration paid by employees upon exercise of share purchase options is
credited to share capital.
(P) RESEARCH AND ENGINEERING
Research and engineering costs are charged to income as incurred. Costs
associated with the development of new operating tools and systems are expensed
during the period unless the recovery of these costs can be reasonably assured
given the existing and anticipated future industry conditions. Upon successful
completion and field testing of the tools and systems, any deferred costs are
transferred to the related capital asset accounts.
(Q) PER SHARE AMOUNTS
Basic per share amounts are calculated using the weighted average number
of shares outstanding during the year. Diluted per share amounts are calculated
based on the treasury stock method, which assumes that any proceeds obtained on
exercise of options would be used to purchase common shares at the average
market price during the period. The weighted average number of shares
outstanding is then adjusted by the difference between the number of shares
issued from the exercise of options and shares repurchased from the related
proceeds.
(R) COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the
current financial statement presentation.
2. ACCOUNTING CHANGES:
PRECISION DRILLING ANNUAL REPORT 2004 8
STOCK-BASED COMPENSATION PLANS
Effective January 1, 2004, the Corporation adopted the revised Canadian
accounting standards with respect to accounting for stock-based compensation.
Under the new standard, the fair value of common share purchase options is
calculated at the date of the grant and that value is recorded as compensation
expense over the vesting period of those grants. Under the previous standard, no
compensation expense was recorded when stock options were issued with any
consideration received upon exercise credited to share capital.
The Corporation has retroactively applied this standard, with restatement
of prior years, to all common share purchase options granted since January 1,
2002. This has resulted in a charge to net earnings for the year ended December
31, 2004 of $13.8 million (2003 - $8.2 million; 2002 - $6.3 million) or $0.22
diluted earnings per share (2003 - $0.15; 2002 - $0.11) and a reduction to
opening retained earnings of $14.5 million at January 1, 2004 ($6.3 million at
January 1, 2003).
3. PROPERTY, PLANT AND EQUIPMENT:
ACCUMULATED NET BOOK
2004 COST DEPRECIATION VALUE
-------------------------------------------------------------------------------------------------------------
Rig equipment $ 1,462,009 $ 397,987 $ 1,064,022
Field technical equipment 713,729 190,153 523,576
Rental equipment 77,246 32,117 45,129
Other equipment 287,764 126,372 161,392
Vehicles 109,749 38,558 71,191
Buildings 80,313 17,636 62,677
Land 17,534 -- 17,534
-------------------------------------------------------------------------------------------------------------
$ 2,748,344 $ 802,823 $ 1,945,521
=============================================================================================================
ACCUMULATED NET BOOK
2003 COST DEPRECIATION VALUE
-------------------------------------------------------------------------------------------------------------
Rig equipment $ 1,128,300 $ 324,097 $ 804,203
Field technical equipment 601,752 113,617 488,135
Rental equipment 77,640 30,128 47,512
Other equipment 198,821 95,105 103,716
Vehicles 88,329 23,444 64,885
Buildings 76,589 15,603 60,986
Land 15,517 -- 15,517
-------------------------------------------------------------------------------------------------------------
$ 2,186,948 $ 601,994 $ 1,584,954
=============================================================================================================
4. GOODWILL:
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 (1) $ 546,921
Disposal of subsidiaries (9,229)
Reduction of carrying amounts related to discontinued operations (5,982)
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 (1) 531,710
Acquisitions 222,617
Effect of foreign exchange on goodwill of self-sustaining foreign operations (15,621)
Reduction of carrying amounts related to discontinued operations (3,293)
-------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004 $ 735,413
=============================================================================================================
(1) INCLUDES AMOUNTS ASSIGNED TO DISCONTINUED OPERATIONS
5. OTHER ASSETS:
2004 2003
-------------------------------------------------------------------------------------------------------------
Deferred financing costs, net of accumulated amortization $ 9,116 $ 5,083
Investments, at cost less provision for impairment -- 3,539
Investments, at equity -- 310
-------------------------------------------------------------------------------------------------------------
$ 9,116 $ 8,932
=============================================================================================================
6. BANK INDEBTEDNESS:
At December 31, 2004, the Corporation had available $63.0 million and
US$30.7 million under uncommitted credit facilities, of which none had been
drawn (December 31, 2003 - $17.9 million).
PRECISION DRILLING ANNUAL REPORT 2004 9
Availability of these facilities was reduced by outstanding letters of credit in
the amount of $33.3 million. Interest rates on the facilities are calculated at
the respective lending institution's prime interest rate less an applicable
margin ranging from zero to 0.75%.
At December 31, 2003, the Corporation had included $130.0 million of
borrowings under its extendible revolving unsecured facility in bank
indebtedness, as the funds were used to finance working capital.
7. LONG-TERM DEBT:
2004 2003
--------------------------------------------------------------------------------
Unsecured debentures-- Series 1 $ 200,000 $ 200,000
Unsecured debentures-- Series 2 150,000 150,000
Unsecured notes, US$300.0 million 368,850 --
EDC facility (US$2,639) -- 3,459
EDC facility (US$20,000) -- 26,214
EDC facility (US$20,190) -- 26,463
Extendible revolving unsecured facility -- 9,815
Other 38 629
--------------------------------------------------------------------------------
718,888 416,580
Less amounts due within one year 18 17,158
--------------------------------------------------------------------------------
$ 718,870 $ 399,422
================================================================================
The $200.0 million 6.85% Series 1 unsecured debentures mature June 26,
2007 and have an effective interest rate of 7.44% after taking into account
deferred financing costs. The debentures are redeemable at any time at the
option of the Corporation upon payment of a redemption price equal to the
greater of an amount calculated with reference to the yield on a Government of
Canada bond with the same maturity, and par.
The $150.0 million 7.65% Series 2 unsecured debentures mature October 27,
2010 and have an effective interest rate of 7.71% after taking into account
deferred financing costs. The debentures are redeemable at any time at the
option of the Corporation upon payment of a redemption price equal to the
greater of an amount calculated with reference to the yield on a Government of
Canada bond with the same maturity, and par.
The US$300.0 million 5.625% unsecured notes mature June 1, 2014 and have
an effective interest rate of 5.71% after taking into account deferred financing
costs. The notes are redeemable at any time at the option of the Corporation
upon payment of a redemption price equal to the greater of an amount calculated
with reference to the yield on a United States treasury security with the same
maturity, and par.
The $3.5 million unsecured term financing facility with Export Development
Canada (EDC) matured on January 20, 2004 and bore interest at six-month U.S.
Libor plus applicable margin. The margin was dependent upon the Corporation's
credit rating, which at December 31, 2003 resulted in a margin of 0.8%.
The $26.2 million unsecured term financing facility with EDC was repaid
and cancelled in 2004 and bore interest at six-month U.S. Libor plus applicable
margin. The margin was dependent upon the Corporation's credit rating, which at
December 31, 2003 resulted in a margin of 0.9%.
The Corporation has a three year revolving unsecured facility of $335.0
million (or U.S. equivalent) with a syndicate led by a Canadian chartered bank.
The facility matures August 31, 2007 and is renewable annually at the option of
the lenders. Advances are available to the Corporation under this facility
either at the bank's prime lending rate, U.S. base rate, U.S. Libor plus
applicable margin or Bankers' Acceptance plus applicable margin or in
combination. The applicable margin is dependent on the Corporation's credit
rating and the percentage of the total facility outstanding, which at December
31, 2004 resulted in a margin of 0.8%. The facility is extendible annually at
the option of the lenders. No amounts were drawn on this facility at December
31, 2004. As at December 31, 2003, the Corporation had drawn $139.8 million
under this facility, of which $130.0 million was included in bank indebtedness
as the funds were used to finance working capital. The facility requires that
the Corporation maintain a ratio of total liabilities to total equity of less
than 1:1 and a ratio of debt to cash flow of less than 2.75:1.
The Corporation has a US$50 million unsecured facility with EDC maturing
on December 8, 2005 and bearing interest at six-month U.S. Libor plus applicable
margin. The margin is dependent upon the Corporation's margin on its $335
million three year revolving unsecured credit facility, which at
PRECISION DRILLING ANNUAL REPORT 2004 10
December 31, 2004 resulted in a margin of 0.8%. The facility is extendible upon
mutual agreement between the Corporation and EDC, or can be converted, at the
Corporation's option, to a term loan repayable in two equal semi-annual
installments. No amounts were drawn on this facility at December 31, 2004. At
December 31, 2003, the Corporation had drawn $26.5 million (US$20.2 million)
under this facility. The facility requires that the Corporation maintain a ratio
of total liabilities to total equity of less than 1:1 and a ratio of debt to
cash flow of less than 2.75:1.
Principal repayments after 2004 are as follows:
-------------------------------------------------------------------------------------------------------------
2005 $ 18
2006 20
2007 200,000
2010 and thereafter 518,850
-------------------------------------------------------------------------------------------------------------
$ 718,888
=============================================================================================================
8. SHARE CAPITAL:
(A) AUTHORIZED
o unlimited number of non-voting cumulative convertible redeemable
preferred shares without nominal or par value;
o unlimited number of common shares without nominal or par value.
(B) ISSUED
COMMON SHARES: NUMBER AMOUNT
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 53,176,038 $ 887,160
Options exercised - cash consideration 890,715 25,756
- reclassification from contributed surplus -- 171
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 54,066,753 $ 913,087
Options exercised - cash consideration 778,925 23,613
- reclassification from contributed surplus -- 44
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 54,845,678 $ 936,744
Issuance of common shares, net of costs and related tax effect 4,400,000 280,783
Options exercised - cash consideration 1,544,534 55,361
- reclassification from contributed surplus -- 2,079
-------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004 60,790,212 $1,274,967
=============================================================================================================
In the third quarter of 2004, the Corporation issued 4,400,000 common
shares at US$49.80 for net proceeds of approximately $276.5 million. Proceeds of
the offering were primarily used to repay indebtedness incurred in connection
with the acquisition of all of the issued and outstanding shares of Reeves
Oilfield Services Ltd.
(C) CONTRIBUTED SURPLUS
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ --
Stock-based compensation expense 6,279
Reclassification to common shares on exercise of options (171)
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 6,108
Stock-based compensation expense 8,202
Reclassification to common shares on exercise of options (44)
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ 14,266
Stock-based compensation expense 13,837
Reclassification to common shares on exercise of options (2,079)
-------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004 $ 26,024
=============================================================================================================
(D) EQUITY INCENTIVE PLANS
The Corporation has equity incentive plans under which a combined total of
3,941,132 options to purchase common shares are reserved to be granted to
employees and directors. Of the amount reserved, 3,347,560 options have been
granted. Under these plans, the exercise price of each option equals the market
PRECISION DRILLING ANNUAL REPORT 2004 11
value of the Corporation's stock on the date of the grant and an option's
maximum term is 10 years. Options vest over a period from 1 to 4 years from the
date of grant as employees or directors render continuous service to the
Corporation.
A summary of the equity incentive plans as at December 31, 2002, 2003 and
2004, and changes during the periods then ended is presented below:
WEIGHTED
AVERAGE
OPTIONS RANGE OF EXERCISE OPTIONS
OUTSTANDING EXERCISE PRICE PRICE EXERCISABLE
-------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2001 4,406,281 $ 13.50 - 65.90 $ 35.21 1,217,428
Granted 786,050 41.06 - 52.61 48.77
Exercised (890,715) 13.50 - 44.38 28.92
Cancelled (182,288) 25.50 - 65.90 40.19
-------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2002 4,119,328 $ 13.50 - 65.90 $ 38.93 1,627,777
Granted 416,000 49.28 - 51.04 50.61
Exercised (778,925) 13.50 - 51.00 30.34
Cancelled (363,209) 31.05 - 65.90 44.89
-------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2003 3,393,194 $ 13.50 - 65.90 $ 41.69 2,038,198
Granted 1,690,500 40.25 - 72.63 63.53
Exercised (1,544,534) 13.50 - 57.55 35.83
Cancelled (191,600) 31.05 - 65.90 51.36
-------------------------------------------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 2004 3,347,560 $ 31.05 - 72.63 $ 54.87 1,290,151
=============================================================================================================
The range of exercise prices for options outstanding at December 31, 2004
are as follows:
TOTAL OPTIONS OUTSTANDING EXERCISABLE OPTIONS
-------------------------------------------------------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
EXERCISE CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES: NUMBER PRICE LIFE (YEARS) NUMBER PRICE
-------------------------------------------------------------------------------------------------------------
$ 31.05 - 39.99 321,250 $ 37.29 0.68 291,875 $ 37.92
40.00 - 49.99 585,910 44.02 3.26 449,226 43.28
50.00 - 59.99 911,975 52.60 4.40 547,175 52.41
60.00 - 69.99 1,477,425 63.79 4.61 1,875 65.10
70.00 - 72.63 51,000 72.63 4.75 -- --
-------------------------------------------------------------------------------------------------------------
$ 31.05 - 72.63 3,347,560 $ 54.87 3.94 1,290,151 $ 45.97
=============================================================================================================
In accordance with the Corporation's stock option plans, these options
have an exercise price equal to the market price at date of grant. The per share
weighted average fair value of stock options granted during the year ended
December 31, 2004 was $15.66 (2003 - $19.48; 2002 - $20.85) based on the date of
grant valuation using the Black-Scholes option pricing model with the following
assumptions: average risk-free interest rate of 3.44% (2003 - 3.47%; 2002 -
4.53%), average expected life of 2.97 years (2003 - 3.42 years; 2002 - 3.88
years) and expected volatility of 32.33% (2003 - 47%; 2002 - 49%).
For the year ended December 31, 2004, stock-based compensation costs
included in net earnings totaled $13.8 million (2003 - $8.2 million; 2002 - $6.3
million).
9. EMPLOYEE BENEFIT PLANS:
The Corporation has registered pension plans covering a significant number
of its employees. Of participating employees, approximately 97% participate in
the defined contribution plan and approximately 3% participate in the defined
benefit plan.
(A) DEFINED CONTRIBUTION PLAN
Under the defined contribution plan, the Corporation matches individual
contributions up to 5% of the employee's compensation. Expense under the defined
contribution plan in 2004 was $7.3 million (2003 - $7.5 million, 2002 - $6.9
million).
(B) DEFINED BENEFIT PLANS
PRECISION DRILLING ANNUAL REPORT 2004 12
The defined benefit plans were acquired as part of the Reeves Oilfield
Services Ltd. acquisition in 2004 (see Note 14) and have been closed to new
employees since the date of acquisition. The latest actuarial valuations of the
defined benefit pension plans were at December 31, 2004. The measurement date
used to determine plan assets and accrued benefit obligation was December 31,
2004. Significant actuarial assumptions adopted in measuring the Corporation's
accrued benefit obligation at the measurement date included a liability discount
rate of between 5.5% and 6.0%, an expected long-term rate of return on plan
assets of between 5.8% and 6.4% and a rate of compensation increase of between
3.8% and 5.0%, excluding promotions. At the measurement date, the plans had an
unfunded deficit of $13.5 million as accrued benefit obligations of $41.5
million exceeded plan assets of $28.0 million. The Corporation will contribute
to the plans in 2005. The unfunded deficit liability is included in accounts
payable and accrued liabilities on the consolidated balance sheet.
Expense under the defined benefit plans in 2004 totaled $1.1 million.
(C) RETIREMENT ALLOWANCE
With respect to the retirement allowance described in Note 1(l), the
Corporation charged $335,000 to earnings in 2004 (2003 - $351,000; 2002 -
$371,000) and at December 31, 2004 had accrued a total of $2.7 million, which
amount is included in accounts payable and accrued liabilities.
10. COMMITMENTS:
The Corporation has commitments for operating lease agreements, primarily
for vehicles and office space, in the aggregate amount of $101.1 million.
Payments over the next five years are as follows:
-------------------------------------------------------------------------------------------------------------
2005 $ 32,155
2006 23,018
2007 15,252
2008 10,394
2009 9,516
=============================================================================================================
Rent expense included in the statements of earnings is as follows:
-------------------------------------------------------------------------------------------------------------
2004 $ 23,158
2003 23,924
2002 18,085
=============================================================================================================
11. INCOME TAXES:
The provision for income taxes differs from that which would be expected
by applying statutory rates. A reconciliation of the difference is as follows:
2004 2003 2002
-------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before
income taxes and non-controlling interest $ 382,443 $ 249,783 $ 108,170
Income tax rate 36% 36% 39%
-------------------------------------------------------------------------------------------------------------
Expected income tax provision $ 137,679 $ 89,922 $ 42,186
Add (deduct):
Non-deductible expenses 7,315 2,380 2,084
Income taxed in jurisdictions with lower tax rates (19,006) (14,062) (13,450)
Non-deductible stock-based compensation 3,378 2,880 2,408
Non-taxable disposition of investment -- (2,327) --
Other 4,088 (5,925) (3,730)
-------------------------------------------------------------------------------------------------------------
133,454 72,868 29,498
Reduction of future tax balances due to
substantively enacted tax rate reductions (1,896) (2,988) (2,551)
-------------------------------------------------------------------------------------------------------------
$ 131,558 $ 69,880 $ 26,947
=============================================================================================================
Effective income tax rate 34% 28% 25%
=============================================================================================================
In 2004, the Province of Alberta enacted a 1.0% reduction in tax rates
(2003 - 0.5%; 2002 - 0.5%). These reductions have been reflected as a reduction
in future tax expense in the respective years.
PRECISION DRILLING ANNUAL REPORT 2004 13
The Corporation's operations are complex and computation of the provision
for income taxes involves tax interpretations, regulations and legislation that
are continually changing. There are tax matters that have not yet been confirmed
by taxation authorities, however, management believes the provision for income
taxes is adequate.
The net future tax liability is comprised of the tax effect of the
following temporary differences:
2004 2003
-------------------------------------------------------------------------------------------------------------
Liabilities:
Property, plant and equipment and intangibles $ 354,876 $ 290,371
Operations of a partnership with different tax year 124,251 92,163
Deferred financing costs 1,584 1,774
-------------------------------------------------------------------------------------------------------------
$ 480,711 $ 384,308
-------------------------------------------------------------------------------------------------------------
Assets:
Losses carried forward $ 83,425 $ 87,487
Valuation allowance (15,140) (24,056)
Accrued liabilities 15,452 278
-------------------------------------------------------------------------------------------------------------
83,737 63,709
-------------------------------------------------------------------------------------------------------------
$ 396,974 $ 320,599
=============================================================================================================
The Corporation has available losses of $246.8 million of which, after
valuation allowances, the benefit of $203.8 million has been recognized. These
losses expire depending upon the year incurred and various limitations under tax
codes in the jurisdictions in which the losses were incurred.
During 2004, $7.5 million, representing future tax expense on foreign
exchange gains associated with the Corporation's US$300 million unsecured notes
was charged to the cumulative translation adjustment account in shareholders'
equity.
12. PER SHARE AMOUNTS:
The following table summarizes the common shares used in calculating
earnings per share:
FOR THE YEARS ENDED DECEMBER 31, 2004 2003 2002
-------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding - basic 57,827 54,430 53,702
Effect of stock options 778 869 1,113
-------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding - diluted 58,605 55,299 54,815
=============================================================================================================
13. SIGNIFICANT CUSTOMERS:
During the years ended December 31, 2004, 2003 and 2002, no one customer
accounted for more than 10% of the Corporation's revenue.
14. ACQUISITIONS:
Acquisitions have been accounted for by the purchase method with results
of operations acquired included in the financial statements from the effective
date of acquisition. The details of acquisitions for the past three years are as
follows.
During the year ended December 31, 2004, in accordance with the
Corporation's globalization and technology advancement strategies, the
Corporation completed several acquisitions, the most significant of which were:
(a) -On May 14, 2004, the Corporation acquired all of the issued and
outstanding shares of Reeves Oilfield Services Ltd. (Reeves), including a 56.5%
interest in Allegheny Wireline Services, Inc. (Allegheny). On October 14, 2004,
the Corporation acquired the remaining 43.5% interest in Allegheny. In the
intervening period from the date of acquisition of Reeves to the acquisition of
the remaining interest in Allegheny, earnings attributable to non-controlling
interest totaled $1.3 million. Reeves provides open hole and cased hole logging
services to the oil and gas industry with operations in Canada, the United
States, Australia, Africa, Europe and the Middle East. Intangible assets
acquired relate entirely to intellectual property. The Reeves operations have
been included in the Energy Services segment.
(b) -On May 21, 2004, the Corporation acquired land drilling assets,
located in Venezuela and the Middle East, from GlobalSantaFe Corporation
(GlobalSantaFe). Intangible assets acquired relate to non-
PRECISION DRILLING ANNUAL REPORT 2004 14
competition agreements and customer contracts. The GlobalSantaFe operations have
been included in the Contract Drilling segment.
REEVES GLOBALSANTAFE OTHER TOTAL
-------------------------------------------------------------------------------------------------------------
Net assets acquired at assigned values:
Working capital $ 23,000(1) $ 12,463 $ 60 $ 35,523
Intangible assets 106,900 33,138 -- 140,038
Property, plant and equipment 41,730 296,655 1,547 339,932
Goodwill (no tax basis) 118,531 103,956 130 222,617
Non-controlling interest in
earnings of intervening period 1,298 -- -- 1,298
Future income taxes (37,732) (9,720) -- (47,452)
-------------------------------------------------------------------------------------------------------------
$ 253,727 $ 436,492 $ 1,737 $ 691,956
=============================================================================================================
Consideration:
Cash $ 253,727 $ 436,492 $ 1,737 $ 691,956
=============================================================================================================
(1) INCLUDES CASH OF $12,142
In February 2003, the Corporation completed the acquisition of the
operating assets of MacKenzie Caterers (1984) Ltd. (MacKenzie), a provider of
oilfield camp and catering services in western Canada, for $6.8 million. No
value was assigned to intangibles or goodwill.
In September 2002, the Corporation acquired the business assets of
NightHawk Vacuum Services Ltd. (NightHawk) for $3.1 million. NightHawk provided
oilfield vacuum services in northern Alberta and British Columbia. No value was
assigned to intangibles or goodwill. In addition, the Corporation paid $1.5
million in additional consideration in conjunction with an acquisition made in
2001. This consideration was payable based on the development of a commercially
viable technology and was accounted for as goodwill.
15. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:
These financial statements have been prepared in accordance with Canadian
GAAP which conform with United States generally accepted accounting principles
(U.S. GAAP) in all material respects, except as follows:
(A) INCOME TAXES
In 2000 the Corporation adopted the liability method of accounting for
future income taxes without restatement of prior years. As a result, the
Corporation recorded an adjustment to retained earnings and future tax liability
in the amount of $70.0 million at January 1, 2000. U.S. GAAP required the use of
the liability method prescribed in the Statement of Financial Accounting
Standards (SFAS) No. 109, which substantially conforms to the Canadian GAAP
accounting standard adopted in 2000. Application of U.S. GAAP in years prior to
2000 would have resulted in $70.0 million of additional goodwill being
recognized at January 1, 2000 as opposed to an implementation adjustment to
retained earnings allowed under Canadian GAAP. In 2002, 2003 and 2004 the U.S.
GAAP financial statements would reflect an increase in goodwill of $63.0 million
and a corresponding increase in retained earnings. An additional charge to
retained earnings of $3.5 million would be required related to amortization of
this goodwill in 2001. (B) STOCK-BASED COMPENSATION
In 2004, under Canadian GAAP, the Corporation adopted the fair value of
accounting for stock-based compensation with restatement of prior years for
share purchase options granted after January 1, 2002. U.S. GAAP allows the use
of either the intrinsic method, as prescribed by Accounting Principles Board
(APB) Opinion 25, or the fair value method as prescribed by SFAS 123. Where
companies elect to use the intrinsic method, disclosure of the impact of using
the fair value method is required.
Application of the intrinsic method in accordance with APB Opinion 25
would have resulted in an increase in net income of $13.8 million for 2004 (2003
- $8.2 million, 2002 - $6.3 million) and with a corresponding increase in
shareholders' equity. Had the Corporation determined compensation based on the
fair value at the date of grant for its options under SFAS 123, net earnings in
accordance with U.S. GAAP would have been $247.8 million in 2004, $180.7 million
in 2003 and $80.9 million in 2002. Basic earnings per share would have been
$4.28 in 2004, $3.32 in 2003 and $1.51 in 2002.
(C) ACQUISITIONS
PRECISION DRILLING ANNUAL REPORT 2004 15
Under U.S. GAAP, when significant acquisitions have occurred, supplemental
disclosure is required on a pro forma basis of the results of operations for the
current prior periods as though the business combination had occurred at the
beginning of the period unless it is not practicable to do so. At December 31,
2004, the Corporation did not have access to sufficient information to provide
this disclosure.
(D) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board (FASB)
issued SFAS 123R Share Based Payment - An Amendment of FASB Statement Nos. 123
and 95. The Statement addresses the accounting for transactions in which an
enterprise receives employee services in exchange for (a) equity instruments of
the enterprise or (b) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of such
equity instruments. Companies will be required to recognize an expense for
compensation cost related stock-based compensation on a basis consistent with
SFAS 123 for periods beginning on or after June 15, 2005.
The application of U.S. accounting principles would have the following
impact on the consolidated
financial statements:
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended December 31, 2004 2003 2002
-------------------------------------------------------------------------------------------------------------
Net earnings under Canadian GAAP $ 247,404 $ 180,474 $ 84,986
Adjustments under U.S. GAAP:
Stock-based compensation expense 13,837 8,202 6,279
-------------------------------------------------------------------------------------------------------------
Net income under U.S. GAAP 261,241 188,676 91,265
Cumulative Translation Adjustment (20,933) -- --
-------------------------------------------------------------------------------------------------------------
Comprehensive Income under U.S. GAAP $ 240,308 $ 188,676 $ 91,265
=============================================================================================================
Earnings per share under U.S. GAAP:
Basic $ 4.52 $ 3.47 $ 1.70
Diluted $ 4.46 $ 3.41 $ 1.66
=============================================================================================================
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 DECEMBER 31, 2003
AS REPORTED U.S. GAAP AS REPORTED U.S. GAAP
-------------------------------------------------------------------------------------------------------------
Current assets $ 936,074 $ 936,074 $ 687,982 $ 687,982
Property, plant and equipment 1,945,521 1,945,521 1,584,954 1,584,954
Intangibles 191,665 191,665 65,262 65,262
Goodwill 735,413 798,442 527,443 590,472
Other assets 9,116 9,116 8,932 8,932
Future income tax asset 32,984 32,984 28,699 28,699
Long-term assets of
discontinued operations -- -- 35,336 35,336
-------------------------------------------------------------------------------------------------------------
$ 3,850,773 $ 3,913,802 $2,938,608 $3,001,637
=============================================================================================================
Current liabilities $ 378,673 $ 378,763 $ 438,988 $ 438,988
Long-term debt 718,870 718,870 399,422 399,422
Future income taxes 431,399 431,399 350,031 350,031
Future income taxes of
discontinued operations -- -- 1,107 1,107
Non-controlling interest -- -- 3,771 3,771
Shareholders' equity 2,321,741 2,384,770 1,745,289 1,808,318
-------------------------------------------------------------------------------------------------------------
$ 3,850,773 $ 3,913,802 $2,938,608 $3,001,637
=============================================================================================================
CONSOLIDATED STATEMENT OF CASH FLOWS
The application of U.S. accounting principles would have no impact on the
consolidated statement of cash flows, except that under U.S. accounting
principles, no subtotal for funds provided by continuing operations before
changes in non-cash working capital balances is allowed.
16. SEGMENTED INFORMATION:
PRECISION DRILLING ANNUAL REPORT 2004 16
The Corporation operates in three industry segments. Contract Drilling
includes drilling rigs, service rigs and hydraulic well assist snubbing units,
procurement and distribution of oilfield supplies, camp and catering services,
and manufacture, sale and repair of drilling equipment. Energy Services
(formerly Technology Services) includes Wireline, Drilling & Evaluation and
Production Services. Rental and Production includes oilfield equipment rental
services and industrial process services.
CONTRACT ENERGY RENTAL AND CORPORATE
2004 DRILLING SERVICES PRODUCTION AND OTHER TOTAL
-------------------------------------------------------------------------------------------------------------
Revenue $ 1,235,410 $ 874,314 $ 215,492 $ -- $ 2,325,216
Operating earnings 399,487 36,719 40,026 (51,779) 424,453
Research and engineering -- 48,759 -- -- 48,759
Depreciation and amortization 92,161 92,477 13,806 5,385 203,829
Total assets 1,920,893 1,627,572 179,521 122,787 3,850,773
Goodwill 350,941 355,770 28,702 -- 735,413
Capital expenditures* 110,192 136,091 17,201 19,060 282,544
=============================================================================================================
CONTRACT ENERGY RENTAL AND CORPORATE
2003 DRILLING SERVICES PRODUCTION AND OTHER TOTAL
-------------------------------------------------------------------------------------------------------------
Revenue $ 992,824 $ 696,599 $ 210,724 $ -- $ 1,900,147
Operating earnings 284,850 (3,847) 39,067 (38,592) 281,478
Research and engineering -- 42,411 -- -- 42,411
Depreciation and amortization 77,725 75,174 12,533 4,952 170,384
Total assets 1,423,036 1,287,458 166,300 61,814 2,938,608
Goodwill 257,531 241,340 28,572 -- 527,443
Capital expenditures* 99,034 177,756 15,158 22,979 314,927
=============================================================================================================
CONTRACT ENERGY RENTAL AND CORPORATE
2002 DRILLING SERVICES PRODUCTION AND OTHER TOTAL
-------------------------------------------------------------------------------------------------------------
Revenue $ 770,147 $ 586,180 $ 192,840 $ 1,431 $ 1,550,598
Operating earnings 183,859 (40,033) 29,913 (31,385) 142,354
Research and engineering -- 34,680 -- -- 34,680
Depreciation and amortization 62,524 52,991 13,159 4,354 133,028
Total assets 1,312,459 1,143,282 240,842 79,164 2,775,747
Goodwill 257,531 241,340 28,572 -- 527,443
Capital expenditures* 50,686 189,092 22,346 9,868 271,992
=============================================================================================================
* EXCLUDES BUSINESS ACQUISITIONS
The Corporation's operations are carried on in the following geographic
locations:
2004 CANADA INTERNATIONAL TOTAL
-------------------------------------------------------------------------------------------------------------
Revenue $ 1,476,212 $ 849,004 $ 2,325,216
Assets 2,234,848 1,615,925 3,850,773
=============================================================================================================
2003 CANADA INTERNATIONAL TOTAL
-------------------------------------------------------------------------------------------------------------
Revenue $ 1,333,926 $ 566,221 $ 1,900,147
Assets 2,121,832 816,776 2,938,608
=============================================================================================================
2002 CANADA INTERNATIONAL TOTAL
-------------------------------------------------------------------------------------------------------------
Revenue $ 1,007,069 $ 543,529 $ 1,550,598
Assets 2,081,200 694,547 2,775,747
=============================================================================================================
17. FINANCIAL INSTRUMENTS:
(A) FAIR VALUE
The carrying value of cash and cash equivalents, accounts receivable and
accounts payable and accrued liabilities approximate their fair value due to the
relatively short period to maturity of the instruments. The fair value of
long-term debt, exclusive of the unsecured debentures and notes, approximates
its carrying value as it bears interest at floating rates.
The fair values of the unsecured debentures and notes have been calculated
with reference to the year end prevailing interest and foreign exchange rates
and are as follows:
PRECISION DRILLING ANNUAL REPORT 2004 17
DECEMBER 31, 2004 DECEMBER 31, 2003
($ MILLIONS) CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------------------------------------------------------------------------------------------------------
Unsecured debentures - Series 1 200.0 215.4 200.0 216.2
Unsecured debentures - Series 2 150.0 174.5 150.0 170.8
Unsecured notes, US$300.0 million 368.9 384.8 -- --
=============================================================================================================
(B) CREDIT RISK
Accounts receivable includes balances from a large number of customers
primarily operating in the oil and gas industry. The Corporation assesses the
credit worthiness of its customers on an ongoing basis as well as monitoring the
amount and age of balances outstanding. Accordingly, the Corporation views the
credit risks on these amounts as normal for the industry. As at December 31,
2004 the Corporation's allowance for doubtful accounts was $13.7 million
(December 31, 2003 - $16.0 million). (C) INTEREST RATE RISK
The Corporation manages its exposure to interest rate fluctuations through
the issuance of fixed rate borrowings. As at December 31, 2004, all of the
Corporation's debt was subject to fixed interest rates.
(D) FOREIGN CURRENCY RISK
The Corporation is exposed to foreign currency fluctuations in relation to
its international operations. To manage a portion of this exposure, the
Corporation has designated the US$300.0 million notes as a hedge against foreign
currency fluctuations of its investment in self-sustaining foreign operations. A
foreign exchange gain of $43.1 million associated with these notes has been
included in the cumulative translation adjustment account in shareholders'
equity.
18. SUPPLEMENTAL INFORMATION:
2004 2003 2002
-------------------------------------------------------------------------------------------------------------
Interest paid $ 46,335 $ 36,721 $ 35,660
Income taxes paid 74,694 43,994 89,856
Components of change in non-cash working capital balances:
Accounts receivable $ (136,858) $ (112,161) $ 13,941
Inventory 3,090 (6,709) (12,100)
Accounts payable and accrued liabilities 62,660 2,854 19,521
Income taxes payable 20,930 16,352 (17,647)
-------------------------------------------------------------------------------------------------------------
$ (50,178) $ (99,664) $ 3,715
=============================================================================================================
The components of accounts receivable are as follows:
2004 2003
-------------------------------------------------------------------------------------------------------------
Trade $ 470,679 $ 358,445
Accrued trade 154,815 133,926
Prepaids and other 65,505 46,999
-------------------------------------------------------------------------------------------------------------
$ 690,999 $ 539,370
=============================================================================================================
The components of accounts payable and accrued liabilities are as follows:
2004 2003
-------------------------------------------------------------------------------------------------------------
Accounts payable $ 179,679 $ 62,626
Accrued liabilities
Payroll 76,596 43,741
Unfunded pension deficit 13,526 --
Other 70,571 152,436
-------------------------------------------------------------------------------------------------------------
$ 340,372 $ 258,803
=============================================================================================================
19. CONTINGENCIES:
The Corporation, through the performance of its services, product sales
and business arrangements, is sometimes named as a defendant in litigation. One
such case relates to a former agent of the Corporation in Indonesia who has sued
in Indonesia civil courts seeking, among other things, damages of US$17.5
million in a suit filed in 2002 and damages of US$0.7 million in a suit filed in
2003. At
PRECISION DRILLING ANNUAL REPORT 2004 18
intermediate appeal, damages in the first suit have been reduced to
US$4.0 million and a further appeal is continuing. All claims against the
Corporation in the second suit were rejected at trial. In addition, criminal
charges against principals of the former Indonesia agent have been laid by the
state in connection with this matter and are at trial. The outcome of this and
other claims against the Corporation is not determinable at this time, however,
their ultimate resolution in not expected to have a material adverse effect on
the Corporation.
The Corporation maintains a level of insurance coverage deemed appropriate
by management and for matters for which insurance coverage can be acquired.
20. DISCONTINUED OPERATIONS:
On February 12, 2004, the Corporation sold substantially all of the assets
of Fleet Cementers, Inc. for proceeds of $25.7 million. On May 7, 2004, the
Corporation sold the assets of the Polar Completions division for proceeds of
$15.0 million, subject to working capital adjustments. On August 31, 2004, the
Corporation sold its 65% interest in United Diamond Ltd. for proceeds of $8.5
million. Additional proceeds in the amount of up to $9.5 million are receivable
with respect to the sale of United Diamond Ltd., contingent upon the extent of
future business undertaken between the Corporation and United Diamond Ltd. No
portion of the $9.5 million of contingent proceeds has been recognized. These
assets were included in what is now called the Energy Services segment
(previously Technology Services) and were disposed of as they were not a core
component to the Corporation's energy services globalization strategy.
Effective January 1, 2003, the Corporation sold Energy Industries Inc., a
wholly-owned subsidiary included in the Rental and Production segment, for $60.0
million cash. Energy Industries designed and manufactured modularized natural
gas compression packages. These assets were included in the Rental and
Production segment and were disposed of as they were not a core component to the
Corporation's globalization strategy.
In May 2003, the Corporation sold its 50% interest in Energy Equipment
Rentals General partnership ("EER") and Oil Drilling Exploration (Argentina) SA
("OD&E") for cash proceeds of $6.9 million, net of transaction costs. Both
entities were components of the Contract Drilling segment and were disposed of
as they were not a core component to the Corporation's contract drilling
globalization strategy.
Results of the operations of these businesses have been classified as
results of discontinued operations. The following table provides additional
information with respect to amounts included in the results of discontinued
operations:
2004 2003 2002
--------------------------------------------------------------------------------------------------------
Revenue
Energy Industries $ -- $ -- $ 81,563
Fleet Cementers, Polar Completions
and United Diamond 23,885 65,936 53,187
Other -- 560 3,802
--------------------------------------------------------------------------------------------------------
$ 23,885 $ 66,496 $ 138,552
========================================================================================================
Gain on disposal of Energy Industries $ -- $ 13,071 $ --
Gain on disposal of EER and OD&E -- 4,389 --
Loss on disposal of Fleet Cementers' assets (362) -- --
Loss on disposal of United Diamond (254) -- --
--------------------------------------------------------------------------------------------------------
$ (616) $ 17,460 $ --
========================================================================================================
Results of operations before income taxes
Energy Industries $ -- $ -- $ 13,545
Fleet Cementers, Polar Completions
and United Diamond 4,999 (8,155) (2,116)
Other -- 49 (1,154)
Writedown of assets held for sale (6,117) (10,799) --
--------------------------------------------------------------------------------------------------------
(1,118) (18,905) 10,275
Income tax expense (recovery) (933) (3,768) 5,361
--------------------------------------------------------------------------------------------------------
Results of operations, before non-controlling interest (185) (15,137) 4,914
Non-controlling interest 1,382 1,752 1,151
--------------------------------------------------------------------------------------------------------
(1,567) (16,889) 3,763
Discontinued operations $ (2,183) $ 571 $ 3,763
========================================================================================================
PRECISION DRILLING ANNUAL REPORT 2004 19
The following table provides additional information with respect to
amounts included in the balance sheet as assets and liabilities held for sale:
2004 2003
---------------------------------------------------------------------------------------------------------
Accounts receivable $ -- $ 12,637
Inventory -- 16,360
Other -- 1,511
---------------------------------------------------------------------------------------------------------
$ -- $ 30,508
=========================================================================================================
Property, plant and equipment $ -- $ 30,306
Goodwill -- 4,267
Other -- 763
---------------------------------------------------------------------------------------------------------
$ -- $ 35,336
=========================================================================================================
Accounts payable and accrued liabilities $ -- $ 6,452
Other -- 739
---------------------------------------------------------------------------------------------------------
$ -- 7,191
=========================================================================================================
Future income taxes $ -- $ 1,107
=========================================================================================================
The following table provides additional information with respect to
amounts included in the statements of cash flow related to discontinued
operations:
2004 2003 2002
---------------------------------------------------------------------------------------------------------
Net earnings (loss) of discontinued operations $ (2,183) $ 571 $ 3,763
Items not affecting cash:
Loss (gain) on disposal of discontinued operations 616 (17,460) --
Depreciation and amortization 1,163 8,744 8,401
Writedown of assets of discontinued operations 3,293 10,799 --
Stock-based compensation -- 201 105
Future income taxes (582) (4,916) (2,908)
Non-controlling interest 1,382 1,752 1,151
---------------------------------------------------------------------------------------------------------
Funds provided by (used in) discontinued operations $ 3,689 $ (309) $ 10,512
=========================================================================================================
Components of change in non-cash working capital balances:
2004 2003 2002
---------------------------------------------------------------------------------------------------------
Accounts receivable $ 401 $ 1,485 $ 16,888
Inventory 618 3,608 (9,416)
Accounts payable and accrued liabilities (3,835) 1,709 (4,263)
Income taxes payable 2,369 (1,039) (2,921)
---------------------------------------------------------------------------------------------------------
$ (447) $ 5,763 $ 288
=========================================================================================================
21. GUARANTEES:
The Corporation has entered into agreements indemnifying certain parties
primarily with respect to tax and specific third party claims associated with
businesses sold by the Corporation. Due to the nature of the indemnifications,
the maximum exposure under these agreements cannot be estimated. No amounts have
been recorded for such indemnities as the Corporation's obligations under them
are not probable and estimable.
PRECISION DRILLING ANNUAL REPORT 2004 20
MANAGEMENT INFORMATION CIRCULAR
AS OF FEBRUARY 28, 2005, EXCEPT AS OTHERWISE PROVIDED.
FOR THE ANNUAL AND SPECIAL MEETING OF THE SHAREHOLDERS
TO BE HELD ON MAY 10, 2005
SOLICITATION OF PROXIES BY MANAGEMENT
THIS MANAGEMENT INFORMATION CIRCULAR (the "Circular") IS FURNISHED IN CONNECTION
WITH THE SOLICITATION OF PROXIES BY THE MANAGEMENT OF PRECISION DRILLING
CORPORATION ("Precision" or the "Corporation") to be used at the Annual and
Special Meeting of the Shareholders of the Corporation (the "Meeting") to be
held in the Devonian Room at the Calgary Petroleum Club, 319 - 5th Avenue S.W.,
Calgary, Alberta, on the 10th day of May 2005 at 3:00 o'clock in the afternoon,
(Calgary time) and at any adjournment thereof, for the purposes set forth in the
enclosed Notice of Meeting accompanying this Management Information Circular.
The Corporation has retained, for a fee, the services of Georgeson Shareholder
Communications Canada Inc. ("Georgeson") to assist it in the solicitation of
proxies from shareholders of the Corporation for the Meeting. If you have any
questions about the information contained in this circular or require assistance
in completing your form of Proxy, please contact Georgeson at 1-877-288-2178. It
is expected that the solicitation will be done by mail, electronically, by
telephone or in person. The Corporation estimates that the costs which might be
incurred for such solicitation could be up to $80,000. The cost of solicitation
will be borne by the Corporation.
APPOINTMENT AND REVOCATION OF PROXIES
A SHAREHOLDER SUBMITTING A PROXY HAS THE RIGHT TO APPOINT A PERSON TO REPRESENT
SUCH SHAREHOLDER AT THE MEETING OTHER THAN HANK B. SWARTOUT OR DALE E. TREMBLAY.
TO EXERCISE THIS RIGHT THE SHAREHOLDERS MAY INSERT THE NAME OF THE DESIRED
REPRESENTATIVE IN THE BLANK SPACE PROVIDED THEREIN AND STRIKE OUT THE OTHER
NAMES OR SUBMIT ANOTHER APPROPRIATE FORM OF PROXY.
Instruments of proxy must be deposited at Computershare Trust Company of
Canada, Proxy Department, 100 University Avenue, 9th Floor, Toronto, Ontario,
M5J 2YI, not less than 48 hours before the time for holding the Meeting. A proxy
must be executed by the shareholder or his attorney authorized in writing or, if
such Shareholder is a corporation, under its seal or by an officer or attorney
thereof duly authorized.
An instrument of proxy may be revoked by the person giving it at any time
prior to the exercise thereof. If a person who has given a proxy attends
personally at the Meeting, such person may revoke the proxy and vote in person.
In addition to revocation in any other manner permitted by law, a proxy may be
revoked by instrument in writing or, if the Shareholder is a corporation, under
its corporate seal or by an officer or an attorney thereof duly authorized, and
deposited either with Computershare Trust Company of Canada at the address
described above at any time up to and including the last day of business
preceding the day of the Meeting or at any adjournment thereof, at which the
proxy is to be used, or with the Chairman of such meeting on the day of the
Meeting or adjournment thereof, and upon either of such deposits, the proxy
shall be revoked.
EXERCISE OF DISCRETION BY PROXIES
The persons named in the enclosed form of proxy will vote the shares in respect
of which they are appointed in accordance with the direction of the shareholders
appointing them where voting is by way of a show of hands or by ballot. In the
absence of such direction, such shares will be voted, for the approval of the
election of the nominees hereinafter set forth as directors of the Corporation,
for the re-appointment of KPMG LLP Chartered Accountants as Auditor of the
Corporation, for approval of the Common Share split and for the approval of the
2005 Stock OptionPlan. The enclosed form of proxy confers discretionary
authority upon the persons named therein with respect to any amendments or
variations in the matters outlined in the accompanying Notice of Meeting or any
other business which may properly come before the Meeting. The management of the
Corporation knows of no such amendments, variations or other business to come
before the Meeting other than the matters referred to in the Notice of Meeting.
VOTING SECURITIES AND PRINCIPAL HOLDERS OF VOTING SECURITIES
As at February 28, 2005 the Corporation had outstanding 61,297,033 Common
Shares, each carrying the right to one vote per share. The record date for
determination of the persons entitled to receive notice of and attend and vote
at the Meeting is March 21, 2005. The Common Shares are the only class of voting
shares of the Corporation which are issued and outstanding. The directors and
senior officers of the Corporation do not know of any person or company
beneficially owning, directly or indirectly, Common Shares carrying more than
10% of the voting rights attached to all of the issued and outstanding Common
Shares of the Corporation.
CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of the Corporation for the fiscal years
ended December 31, 2004 and December 31, 2003 together with the report of the
Corporation and Auditors thereon, are included in the Annual Report which has
been mailed to the shareholders of the Corporation with this Circular.
PARTICULARS OF MATTERS TO BE ACTED UPON
1. ELECTION OF DIRECTORS
The Business Corporations Act (Alberta) contemplates that directors who are
elected, hold office for a term expiring not later than the close of the next
annual meeting of shareholders following their election or until their
successors are elected or they vacate their office in accordance with the
By-Laws of the Corporation. It is proposed that seven directors will be elected
to office at the Meeting. The persons named in the enclosed form of proxy intend
to vote for the election of the persons named herein. It is not contemplated
that nominees will be unable to serve as directors, but, if that should occur
for any reason prior to the Meeting, the persons named in the enclosed form of
proxy reserve the right to vote for other nominees at their discretion.
The following table states the name and age of the proposed directors of
the Corporation, his province or state and country of residence, together with
all other positions and offices with the Corporation now held by him, his
principal occupation or employment, the year in which he was first elected a
director of the Corporation, the number of Options held by him that are
exercisable for Common Shares of the Corporation and the number of Common Shares
of the Corporation that he has advised are beneficially owned by him, directly
or indirectly, as of the date hereof.
NAME, AGE AND RESIDENCE PRINCIPAL OCCUPATION OF EMPLOYMENT DIRECTOR SINCE SHARES OWNED OPTIONS HELD
--------------------------------------------------------------------------------------------------------------------
W.C. (Mickey) Dunn (2)(3) Chairman, True Energy Inc. September, 1992 6,300 10,000
Age : 51
Edmonton, Alberta, Canada
--------------------------------------------------------------------------------------------------------------------
Robert J. S. Gibson (1)(3) President, Stuart & Company Limited June, 1996 24,000 10,000
Age: 58
Calgary, Alberta, Canada
--------------------------------------------------------------------------------------------------------------------
Patrick M. Murray (1) Chairman and Chief Executive Officer, July, 2002 5,000 15,000
Age: 62 Dresser, Inc.
Dallas, Texas, USA
--------------------------------------------------------------------------------------------------------------------
NAME, AGE AND RESIDENCE PRINCIPAL OCCUPATION OF EMPLOYMENT DIRECTOR SINCE SHARES OWNED OPTIONS HELD
--------------------------------------------------------------------------------------------------------------------
Fred W. Pheasey (2)(3) Executive Vice President, July, 2002 Nil 20,000
Age: 62 National Oilwell, Inc.
Edmonton, Alberta, Canada
--------------------------------------------------------------------------------------------------------------------
Robert L. Phillips (2)(3) Corporate Director May 11, 2004 1,000 20,000
Age: 54
Vancouver,
British Columbia, Canada
--------------------------------------------------------------------------------------------------------------------
Hank B. Swartout Chairman of the Board, President and
Age: 53 Chief Executive Officer of the Corporation July, 1987 424,089 900,000
Calgary, Alberta, Canada
--------------------------------------------------------------------------------------------------------------------
H. Garth Wiggins (1) Principal, Kenway Mack Slusarchuk Stewart
Age: 56 Chartered Accountants
Calgary, Alberta, Canada September, 1997 6,100 10,000
--------------------------------------------------------------------------------------------------------------------
Notes:
(1) Audit Committee Member
(2) Compensation Committee Member
(3) Corporate Governance and Nominating Committee Member
2. APPOINTMENT OF AUDITORS
The nominees named in the enclosed form of proxy intend to vote for the
re-appointment of KPMG LLP, Chartered Accountants, as Auditor of the Corporation
to hold office until the next annual meeting of shareholders. Should for any
reason the said firm be unwilling or unable to accept the re-appointment, the
nominees named reserve the right to vote for the appointment of another auditor
in their discretion.
3. COMMON SHARE SPLIT
At the Meeting, shareholders will be asked to vote on a special resolution (the
"Special Resolution") amending the Corporation's Articles to divide the issued
and outstanding Common Shares on a two for one basis (the "Share Split").
The trading price of the Common Shares has increased from $57.48
(US$44.80) on January 5, 2004 to $75.52 (US$62.80) on December 31, 2004. The
trading price of Common Shares has continued to increase this year, recently
reaching an all time high of $97.50 (US$79.28) on March 4, 2004.
The Board of Directors believes that the Share Split will encourage
greater market liquidity and wider distribution among retail investors, as a
lower share price makes a board lot more affordable.
Under existing Canadian income tax law and taking into account all
published proposals for amendments, the proposed subdivision of Common Shares
will not result in taxable income or in any gain or loss to the holders of
Common Shares. In computing any gain or loss on the disposition of the Common
Shares, holders of Common Shares will be required to reduce the adjusted cost
base of each Common Share to an amount equal to one-half of the adjusted cost
base of each Common Share currently held.
Also, under existing United States federal income tax law, generally the
proposed subdivision of Common Shares will not result in taxable income or in
any gain or loss to the holders of Common Shares. The tax basis in the existing
Common Shares will generally be allocated proportionately among the Common
Shares held after the completion of the proposed subdivision, resulting in a tax
basis in each Common Share that is one-half of the basis of the Common Shares
held immediately prior to the subdivision. The holding period of the Common
Shares held after the proposed subdivision will include the holding period of
the existing Common Shares for purposes of determining whether a subsequent sale
of Common Shares qualifies as a short-term or long-term capital gain or loss. If
a holder has two or more lots of Common Shares, bought at different dates and
prices, special rules apply and the holder should consult his or her tax advisor
regarding the method for allocating the tax basis and for determining the
holding
period of each Common Share. Other rules may apply to holders who are subject to
special provisions under the U.S. Internal Revenue Code.
If the Special Resolution is passed at the Meeting and the Share Split is
implemented, Articles of Amendment will be filed to divide the Common Shares and
shareholders of record as of the close of business on a date to be determined by
the Corporation, expected to be May 20, 2005 (the "Record Date"), will keep
their current share certificates and will be provided with additional share
certificates representing the additional Common Shares to which they are
entitled as a result of the Share Split. It is currently expected that the
Corporation or its transfer agent, Computershare Trust Company of Canada, will
mail such certificates on or about May 30, 2005 (the "Mailing Date"). Currently
outstanding share certificates representing Common Shares should be retained by
the holders thereof and should not be forwarded to the Corporation or its
transfer agent. Pursuant to the rules of the Toronto Stock Exchange, the Common
Shares will commence trading on a subdivided basis at the opening of business on
the second trading day preceding the Record Date. On that same date Common
Shares listed on the New York Stock Exchange ("NYSE") will commence trading with
rights entitling holders to an additional Common Share for each Common Share
held upon commencement of trading Common Shares on a split basis on the NYSE.
Pursuant to the rules of the NYSE, the Common Shares will commence trading on a
subdivided basis on that exchange one business day after the Mailing Date.
To be effective, the resolution to amend the Articles to give effect to
the Share Split must be passed by two-thirds of the votes cast thereon by the
shareholders at the Meeting. The text of the Special Resolution is set out
below. The Board of Directors unanimously recommends that shareholders vote in
favour of this resolution. The persons designated in the enclosed voting
instruction form or form of proxy, unless instructed otherwise, intend to vote
FOR the foregoing resolution.
TEXT OF SPECIAL RESOLUTION
BE IT RESOLVED as a special resolution that:
1. Pursuant to section 173 of the Business Corporations Act (Alberta)
(the "Act"), the Articles of the Corporation be amended to divide
the issued and outstanding Common Shares on a two-for-one basis;
2. Any one of the directors or officers of the Corporation is hereby
authorized to sign all such documents, including without limitation,
Articles of Amendment, and to do all such acts and things, including
without limitation, delivering such Articles of Amendment to the
Director under the Act, as such director or officer determines, in
his or her discretion, to be necessary or advisable in order to
properly implement and give effect to the foregoing; and
3. The directors of the Corporation may, in their discretion, without
further approval of the shareholders, revoke this special resolution
at any time before the issue of a Certificate of Amendment in
respect of the foregoing.
4. APPROVAL OF THE 2005 STOCK OPTION PLAN
The Corporation established a new Stock Option Plan on March 9, 2005 (the "2005
Plan") which provides for the issuance of that number of Common Shares,
including Common Shares reserved for issuance under previous stock option plans,
equal to up to 10% of the issued and outstanding Common Shares of the
Corporation. A copy of the 2005 Plan is attached hereto as Schedule "B". The
previous stock option plans of the Corporation (the "Previous Plans") provide
for the future issuance of an aggregate of 3,941,132 Common Shares upon the
exercise of options granted pursuant to such Previous Plans.
In accordance with policies of the Toronto Stock Exchange, it is proposed
that the 2005 Plan, in the form set forth in Schedule "B" hereto, be approved by
the shareholders at the Meeting.
The following chart provides more detail with respect to the previous
stock option plans of the Corporation, all of which were approved by
shareholders of the Corporation.
PERCENTAGE OF PERCENTAGE OF
OUTSTANDING OPTIONS AVAILABLE OPTIONS
NO. OF OPTIONS NO. OF OPTIONS NO. OF OPTIONS TO OUTSTANDING OPTIONS TO OUTSTANDING
STOCK OPTION PLAN ORIGINALLY LISTED EXERCISED OUTSTANDING COMMON SHARES AVAILABLE COMMON SHARES
--------------------------------------------------------------------------------------------------------------------------
1996 Plan #1 435,266 435,266 -- 0.0000 -- 0.0000
1996 Plan #2 1,217,462 1,216,762 -- 0.0000 700 0.0012
1996 Plan #3 590,988 581,988 5,000 0.0082 4,000 0.0066
1997 to 2000 Plan #4 3,339,526 2,830,369 409,917 0.6742 99,240 0.1632
2001 Plan #5 1,405,180 589,100 764,450 1.2573 51,630 0.0849
2002 Plan #6 891,363 204,623 617,268 1.0152 69,472 0.1143
2003 Plan #7 400,000 -- 200,000 0.3289 200,000 0.3289
2004 Plan #8 1,518,955 -- 1,350,925 2.2219 168,030 0.2763
--------------------------------------------------------------------------------------------------------------------------
TOTAL 9,798,740 5,858,108 3,347,560 5.5057 593,072 0.9754
==========================================================================================================================
Note: An additional 500 options are reserved pursuant to a stock option plan
implemented prior to 1996 Plan #1.
All of the numbers in this chart (other than the Total amounts) are as at
December 31, 2004, and as at that date, 60,801,192 Common Shares were issued and
outstanding.
In addition to the foregoing, the Corporation provides the following
summary information with respect to the 2005 Plan:
ELIGIBLE PARTICIPANTS
The eligible participants under the 2005 Plan includes a person who is an
officer, employee or director of the Corporation or its subsidiaries and the
Board of Directors may at any time, and from time to time, designate those
optionees who are to be granted an option pursuant to the 2005 Plan and grant an
option to such optionees. However, the Board of Directors shall have the right
to delegate to the President of the Corporation the administration and operation
of the 2005 Plan and the right to designate optionees and grant options to such
optionees, with the exception of grants of options to directors and the
President. In addition, no option shall be granted to any director of the
Corporation who is not an officer of the Corporation if such grant could result,
at any time, in the total number of Common Shares issuable to all directors of
the Corporation who are not officers of the Corporation pursuant to the exercise
of options exceeding 0.5% of the issued and outstanding Common Shares of the
Corporation.
OPTIONS TO INSIDERS
The number of Common Shares issuable (or reserved for issue) to insiders under
all security based compensation arrangements shall not at any time exceed 10% of
the issued and outstanding Common Shares and the number of Common Shares issued
to insiders under all security based compensation arrangements, within a one
year period shall not exceed 10% of the issued and outstanding Common Shares.
MAXIMUM OPTIONS AVAILABLE TO ANY INDIVIDUAL
THE AGGREGATE NUMBER OF COMMON SHARES RESERVED FOR ISSUANCE TO ANY ONE
INDIVIDUAL PURSUANT TO THE 2005 PLAN AND THE PREVIOUS PLANS SHALL NOT EXCEED 5%
OF THE ISSUED AND OUTSTANDING COMMON SHARES OF THE CORPORATION.
EXERCISE PRICE
THE 2005 PLAN PROVIDES THAT THE EXERCISE PRICE OF AN OPTION GRANTED UNDER THE
2005 PLAN SHALL BE AS DETERMINED BY THE BOARD OF DIRECTORS WHEN SUCH OPTION IS
GRANTED, SUBJECT TO ANY LIMITATIONS IMPOSED BY ANY RELEVANT STOCK EXCHANGE OR
REGULATORY AUTHORITY AND SHALL NOT BE LESS THAN AN AMOUNT EQUAL TO THE MARKET
VALUE OF THE COMMON SHARES. THE MARKET VALUE MEANS THE PER SHARE CLOSING PRICE
OF THE COMMON SHARES ON THE TORONTO STOCK EXCHANGE ON THE TRADING DAY
IMMEDIATELY PRECEDING THE DATE OF SUCH GRANT PROVIDING THAT SUCH PRICE MUST NOT
BE LOWER THAN THE CLOSING PRICE ON THE TORONTO STOCK EXCHANGE ON THAT DAY.
VESTING OF OPTIONS
THERE ARE NO RESTRICTIONS ON THE VESTING OF OPTIONS AND VESTING IS DEALT WITH IN
THE INDIVIDUAL STOCK OPTION AGREEMENTS. HOWEVER, THE 2005 PLAN AND THE PREVIOUS
PLANS PROVIDE THAT VESTING OF OPTIONS MAY BE ACCELERATED BY THE DIRECTORS IN THE
EVENT OF:
1. a change of control of the Corporation; or
2. in the case of an outside director who retires as a director due to the
implementation of the Corporation's policy that directors must retire from
the Board due to a term limit of no more than 14 years or due to an age
limit of greater than 69 years in which case all outstanding and unvested
options may be exercised within 60 days of the date of termination of such
director.
MAXIMUM TERMS OF OPTIONS
THE MAXIMUM TERM OF AN OPTION GRANTED PURSUANT TO THE 2005 PLAN IS FIVE YEARS
FROM THE DATE OF THE GRANT.
CESSATION OF ENTITLEMENT
THE 2005 PLAN AND THE PREVIOUS PLANS, PROVIDE FOR THE SAME CESSATION OF
ENTITLEMENT WHICH INCLUDES:
1. in the case of death of an optionee, the right to exercise an option shall
extend to the earlier of one year after the date of death or the expiry
date of the option set forth in the stock option agreement to the extent
such option was exercisable by optionee on the date of death of the
optionee; and
2. in the case of termination or cessation of employment of an optionee for
any reason (other than death), the right to exercise an option shall be
limited to and shall expire on the earlier of 60 days after the date of
termination or cessation or the expiry date of the option set forth in the
stock option agreement, to the extent such option was exercisable by
optionee on the date of termination of such employment.
ASSIGNABILITY
NO RIGHT OR INTEREST OF ANY OPTIONEE IN OR UNDER THE 2005 PLAN IS ASSIGNABLE OR
TRANSFERABLE EXCEPT BY BEQUEATH OR THE LAWS OF DESCENT AND DISTRIBUTION.
AMENDMENT OF THE PLAN
THE CORPORATION MAY, IN ITS DISCRETION, SUBJECT TO STOCK EXCHANGE AND ANY OTHER
APPROPRIATE REGULATORY APPROVAL AND SHAREHOLDER APPROVAL, IF REQUIRED BY ANY
RELEVANT STOCK EXCHANGE, AMEND OR TERMINATE THE 2005 PLAN AT ANY TIME. NO SUCH
AMENDMENT OR TERMINATION WILL, WITHOUT THE CONSENT OF AN OPTIONEE, ALTER OR
IMPAIR ANY RIGHTS WHICH HAVE ACCRUED TO AN OPTIONEE PRIOR TO THE EFFECTIVE DATE
THEREOF. IN ADDITION, THE CORPORATION MAY AMEND OR TERMINATE THE 2005 PLAN AT
ANY TIME IN ORDER TO CONFORM TO APPLICABLE LAW OR REGULATION, WHETHER OR NOT
SUCH AMENDMENT OR TERMINATION WOULD AFFECT ANY ACCRUED RIGHTS.
FINANCIAL ASSISTANCE
NO FINANCIAL ASSISTANCE HAS BEEN PROVIDED BY THE CORPORATION TO ANY PARTICIPANT
UNDER ANY STOCK OPTION PLAN TO FACILITATE THE PURCHASE OF SECURITIES UNDER SUCH
PLANS.
TEXT OF ORDINARY RESOLUTION
THE RESOLUTION TO APPROVE THE 2005 PLAN MUST BE PASSED BY A MAJORITY OF THE
VOTES CAST THEREON BY THE SHAREHOLDERS. THE TEXT OF THE ORDINARY RESOLUTION IS
SET OUT BELOW. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS
VOTE IN FAVOUR OF THIS RESOLUTION. THE PERSONS DESIGNATED IN THE ENCLOSED VOTING
INSTRUCTION FORM OR FORM OF PROXY, UNLESS INSTRUCTED OTHERWISE, INTEND TO VOTE
FOR THE FOREGOING RESOLUTION.
BE IT RESOLVED AS AN ORDINARY RESOLUTION THAT:
1. THE CORPORATION'S 2005 STOCK OPTION PLAN SUBSTANTIALLY IN THE FORM
APPENDED TO THE MANAGEMENT INFORMATION CIRCULAR OF THE CORPORATION DATED
MARCH 9, 2005, AS SCHEDULE B, BE AND THE SAME IS HEREBY RATIFIED,
CONFIRMED AND APPROVED; AND
2. ANY ONE OFFICER OR DIRECTOR OF THE CORPORATION BE AND IS HEREBY AUTHORIZED
ON BEHALF OF AND IN THE NAME OF THE CORPORATION TO TAKE ALL NECESSARY
STEPS AND PROCEEDINGS, TO EXECUTE, DELIVER AND FILE ANY AND ALL
DECLARATIONS, AGREEMENTS, DOCUMENTS AND OTHER INSTRUMENTS AND TO DO ALL
SUCH OTHER ACTS AND THINGS, WHETHER UNDER CORPORATE
SEAL OF THE CORPORATION OR OTHERWISE) THAT MAY BE NECESSARY OR DESIRABLE
TO GIVE EFFECT TO THE PROVISIONS OF THIS RESOLUTION.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
SUMMARY COMPENSATION TABLE
The following table sets forth all annual and long-term compensation, in
Canadian dollars, of the individuals who were, at December 31, 2004, the Chief
Executive Officer, the Chief Financial Officer and the next three most highly
compensated Executive Officers (collectively the "Named Executive Officers"),
for the 2004, 2003, and 2002 financial years of the Corporation.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------------------------------------------------------------------------------------------------
AWARDS PAYOUTS
------------------------
SECURITIES SHARES OR
OTHER UNDER UNITS SUBJECT ALL
ANNUAL OPTIONS/SARS TO RESALE LTIP OTHER
NAME AND FISCAL SALARY BONUS COMPENSATION GRANTED RESTRICTIONS PAYOUTS COMPENSATION
PRINCIPAL POSITION (1) YEAR ($) ($)(1) ($)(2) (#) ($) ($) ($)(3)
----------------------------------------------------------------------------------------------------------------------------
Swartout, Hank B.(4) 2004 831,000(5) 3,200,000 200,000 138,520
President and Chief 2003 800,000 1,870,000 200,000 147,800
Executive Officer 2002 550,000 -- 200,000 163,750
----------------------------------------------------------------------------------------------------------------------------
Tremblay, Dale E. 2004 260,000(5) 500,000 _ 8,250
Senior Vice President Finance 2003 250,000 500,000 -- 7,750
and Chief Financial Officer 2002 250,000 -- 37,500 6,750
----------------------------------------------------------------------------------------------------------------------------
Kelly, Ian E. 2004(6) 169,000(5) 300,000 80,000 8,454
Senior Vice President -- -- -- -- --
International Drilling -- -- -- -- --
King, John R. 2004 274,000(5) 530,000 90,000 8,250
Senior Vice President 2003(7) 177,000 345,000 60,000 7,356
Energy Services 2002 -- -- -- --
----------------------------------------------------------------------------------------------------------------------------
McNulty, Michael J. 2004 208,000(5) 400,000 -- 8,250
Senior Vice President 2003 194,000 400,000 42,500 7,750
Operations Finance 2002 170,000 90,000 -- 6,750
----------------------------------------------------------------------------------------------------------------------------
Notes:
(1) The amounts listed are the bonus amounts earned during the year indicated
and relate to performance criteria which was met for that year, but the cash
amounts, if applicable are actually paid during the next year.
(2) "Other Annual Compensation" did not exceed the lesser of $50,000 and 10% of
the total annual salary and bonus of the Named Executive Officers.
(3) Amount includes company RRSP contributions.
(4) Mr. Swartout is entitled to a retiring allowance established in 1996, which
contemplates an amount equal to US $1,500,000 plus US $100,000 which is
accumulated for each year commencing on April 30, 1996, and for ten years
thereafter.
(5) Amount reflects 27 pay periods in 2004, rather than the normal 26, and
amount shown for Mr. Kelly also includes the one additional pay period.
(6) Amount reflects the period from May 15 to December 31, 2004.
(7) Amount reflects the period from March 14 to December 31, 2003.
OPTION/SAR GRANTS DURING FINANCIAL YEAR ENDED DECEMBER 31, 2004
MARKET VALUE OF
SECURITIES % OF TOTAL SECURITIES UNDERLYING
UNDER OPTIONS/SARS EXERCISE OPTIONS/SARS ON THE
OPTIONS/SARS GRANTED TO EMPLOYEES OR BASE PRICE DATE OF GRANT EXPIRATION
NAME GRANTED (#)(1) IN FINANCIAL YEAR ($/SECURITY) ($/SECURITY)(2) DATE
---------------------------------------------------------------------------------------------------------------------
Swartout, Hank B. 100,000 5.92 56.75 56.75 Dec 31/10
100,000 5.92 63.73 63.73 Dec 31/10
---------------------------------------------------------------------------------------------------------------------
Tremblay, Dale E. -- -- -- -- --
---------------------------------------------------------------------------------------------------------------------
Kelly, Ian E. 80,000 4.73 63.73 63.73 June 30/09
---------------------------------------------------------------------------------------------------------------------
King, John R. 60,000 3.55 64.70 64.70 March 31/09
---------------------------------------------------------------------------------------------------------------------
McNulty, Michael J. -- -- -- -- --
---------------------------------------------------------------------------------------------------------------------
Notes:
(1) Options are exercisable for Common Shares of the Corporation and, except for
those issued to Hank Swartout after January 2001, vest over a four year
period with a maximum term being five years. Options issued to Hank Swartout
after January 2001 vest one year after the issue date and are exercisable
until the earlier of December 31, 2010 or sixty days after he ceases to be
employed full-time by the Corporation.
(2) The exercise price of all stock options are based upon the closing price on
the Toronto Stock Exchange on the last trading day preceding the date of the
grant.
AGGREGATED OPTION EXERCISES/SAR EXERCISES
DURING FINANCIAL YEAR ENDED DECEMBER 31, 2004 AND FINANCIAL YEAR END OPTION/SAR VALUES
VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SECURITIES AGGREGATE OPTIONS/SARS OPTIONS/SARS AT
ACQUIRED VALUE AT DEC. 31, 2004 DEC. 31, 2004
ON EXERCISE REALIZED (#) EXERCISABLE/ ($) EXERCISABLE/
NAME (#) ($)(1) UNEXERCISABLE UNEXERCISABLE(2)
---------------------------------------------------------------------------------------------------------------------
Swartout, Hank B. 296,033 9,980,211 800,000/200,000 22,602,000/3,056,000
---------------------------------------------------------------------------------------------------------------------
Tremblay, Dale E. 105,193 3,661,700 37,500/37,500 846,000/920,625
---------------------------------------------------------------------------------------------------------------------
Kelly, Ian E. -- -- - /80,000 - /943,200
---------------------------------------------------------------------------------------------------------------------
King, John R. 2,000 51,060 28,000/120,000 734,720/1,790,100
---------------------------------------------------------------------------------------------------------------------
McNulty, Michael J. 24,500 681,622 25,000/40,000 581,625/979,200
---------------------------------------------------------------------------------------------------------------------
Notes:
(1) This amount is calculated by multiplying the number of Common Shares under
options exercised, by an amount equal to the difference between the market
value of the Common Shares on the date of exercise and the exercise price of
those options.
(2) This amount has been calculated by multiplying the number of Common Shares
under options (the "In-the-Money Options") owned by the Named Executive
Officer which have an exercise price of less than $75.52 (being the closing
price of the Common Shares on December 31, 2004) by the difference between
$75.52 and the exercise price of those In-the-Money Options.
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO AVAILABLE FOR FURTHER ISSUANCE
BE ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE UNDER EQUITY COMPENSATION
OUTSTANDING OPTIONS, PRICE OF OUTSTANDING OPTIONS, PLANS (EXCLUDING SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN A)
PLAN CATEGORY (A) (B) (C)
-----------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 3,347,560 $54.87 593,072
-----------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security holders -- -- --
-----------------------------------------------------------------------------------------------------------------------------
TOTAL 3,347,560 $54.87 593,072
=============================================================================================================================
LONG TERM INCENTIVE PLANS
Other than the Corporation's Employee Stock Option Plans, details of which are
provided below, the Corporation does not have any plans which provide
compensation intended to serve as an incentive for performance to occur over a
period longer than one year.
EMPLOYMENT CONTRACTS
Precision has entered into employment contracts with four of its five Named
Executive Officers.
The employment agreement with Hank B. Swartout provides for an annual base
salary to be reviewed annually but which shall be based on the base salaries of
the Chief Executive Officers of similar corporations. The base salary for Mr.
Swartout for 2004 was set at $800,000 and for 2005 has been set at $840,000. The
agreement contains a provision for an annual bonus in an amount based upon
certain parameters established by the directors which are subject to a cash
value added calculation up to a maximum of four times the base salary for the
applicable year. The amount of the bonus is recommended by the Compensation
Committee and approved by the Board of Directors of the Corporation. The
Agreement also provides for the issuance of options to purchase Common Shares of
the Corporation on the basis of 100,000 options each six months commencing
effective January 1, 2001 and ending July 1, 2005. Such options will vest after
a one year period and be exercisable until the earlier of December 31, 2010 or
60 days after he ceases to be employed full time by the Corporation. In
addition, the CEO Agreement provides that upon termination of his employment;
(i) as a result of a hostile takeover bid he shall be entitled to compensation
equal to four times the Best Year; and (ii) as a result of termination without
cause or a change of control of the Corporation, (except pursuant to a hostile
takeover bid), he shall be entitled to compensation equal to three times the
Best Year; and, (iii) in any event, a retirement allowance equal to US
$1,500,000 plus a separate amount of US $100,000 which is to be accumulated each
fiscal year commencing April 30, 1996, and for a period of 10 years thereafter.
For the purposes of the foregoing, "Best Year" means, the amount equal to the
highest amount paid (or payable) with respect to basic salary plus bonus for any
one year during the last three years prior to the termination date.
The agreements with Dale E. Tremblay and Michael J. McNulty provide for a
base salary, benefits, bonuses and stock options to be determined by the
Corporation, from time to time, and also provide for a retirement allowance
equal to one and one-half times the Best Year Amount plus one-twelfth of the
Best Year Amount for each full year from the effective date of service to the
date of termination of employment, up to a maximum of one-half of the Best Year
Amount, and acceleration of vesting of all outstanding options, in the event of
termination without cause after a change of control. The maximum retiring
allowance would be equal to two times the Best Year Amount after six years of
employment from the effective date of service. The "Best Year Amount" means the
highest annual base salary during any of the three most recent calendar years
and the highest amount of the bonus attributable to the Executive for any one
year during the three calendar years prior to the year of termination. In
addition, the agreements also provide for a payment of one and one-half times
the Average Year Amount plus one-twelfth the Average Year Amount for each full
year of employment from the effective date of service up to a maximum of
one-half of the Average Year Amount in the event of termination without cause
prior to a change of control. The maximum retiring allowance would equal two
times the Average Year Amount after six years of employment from the effective
date of service in the event of termination without cause prior to a change of
control. The "Average Year Amount" means the annual base salary for the year
during which the employment of the Executive is terminated and the simple
average amount of the bonuses attributable to the Executive for the three years
immediately preceding the year during which the employment of the Executive is
terminated. The definitions "Average Year Amount" and "Best Year Amount" are to
be in force for the duration of time that the Executive's bonus is determined
utilizing the measurement of Cash Value Added ("CVA"). Should the method of
measurement differ from CVA in the future, this definition will be
reviewed and may be altered by reducing to two years from three years for the
bonus calculation upon the approval of the Chief Executive Officer and the
Chairman of the Compensation Committee of the Board of Directors.
The agreement with John R. King provides for a base salary, benefits,
bonuses and stock options to be determined by the Corporation, from time to
time, and also provides for a retirement allowance equal to two times the Best
Year Amount plus one-twelfth of the Best Year Amount for each full year from the
effective date of service to the date of termination of employment, up to a
maximum of one-half of the Best Year Amount, and acceleration of vesting of all
outstanding options, in the event of termination without cause after a change of
control. The maximum retiring allowance would be equal to two and one-half times
the Best Year Amount after six years of employment from the effective date of
service. In addition, the agreement also provides for a payment of two times the
Average Year Amount plus one-twelfth the Average Year Amount for each full year
of employment from the effective date of service up to a maximum of one-half of
the Average Year Amount in the event of termination without cause prior to a
change of control. The maximum retiring allowance would equal two and one-half
times the Average Year Amount after six years of employment from the effective
date of service in the event of termination without cause prior to a change of
control. The definitions "Average Year Amount" and "Best Year Amount" are to be
in force for the duration of time that the Executive's bonus is determined
utilizing the measurement of CVA. Should the method of measurement differ from
CVA in the future, this definition will be reviewed and may be altered by
reducing to two years from three years for the bonus calculation upon the
approval of the Chief Executive Officer and the Chairman of the Compensation
Committee of the Board of Directors.
COMPENSATION AND ROLE OF THE COMPENSATION COMMITTEE
Precision's senior executive compensation is governed by Precision's
Compensation Committee, which is currently comprised of three independent board
members, (the "Committee"), acting at the pleasure of the Board of Directors.
The Committee, as part of its mandate, evaluates the performance of Precision's
Chief Executive Officer, (the "CEO"), and recommends his compensation to the
Board of Directors. The Committee ratifies the compensation of Precision's other
senior executives and reviews the design and competitiveness of Precision's
incentive compensation. From January 1, 2004 the members of the Committee were
W.C. (Mickey) Dunn and Murray K. Mullen, with Fred W. Pheasey joining the
Committee in May of 2004 and Robert L. Phillips joining the Committee in October
2004. Mr. Mullen resigned from Precision's Board of Directors on October 14,
2004. The Committee meets as required, meeting twice in 2004.
REPORT ON EXECUTIVE COMPENSATION
The compensation of Precision's senior executives is determined on the basis of
several factors, including competitive compensation structures in the locales
the individuals are employed, compensation practices prevailing in the
international oilfield service community, individual performance and overall
corporate performance. Competitive compensation is measured using benchmarks of
peer group companies and periodic reviews of compensation surveys. Compensation
consists of base salary, bonuses, stock options and benefits. The overriding
goal of the compensation policies is to create long term investor value,
incentivize and reward superior executive performance and attract and retain
individuals that deliver the overriding goal.
BASE SALARY
Precision's compensation of its senior executives is designed to have a
significant portion of their total compensation, performance based. Accordingly,
Precision endeavours to establish base salaries for each of the senior executive
officers at or below the median level for similar positions in companies of
comparable size within the international drilling and oilfield service industry.
BONUSES FOR ELIGIBLE EXECUTIVES
In addition to base salaries, eligible senior executives have participated in a
cash value added ("CVA") bonus plan from 2001. The amount available for the
payments in the plan, (the "CVA Amount"), is Precision's cash value added,
calculated using a formula pre-approved by the Committee, less Precision's base
operating earnings threshold, or cost of capital. The base earnings threshold is
the product of Precision's capital employed as defined for the CVA calculation,
and Precision's weighted average cost of capital percentage. Precision's
weighted average cost of capital percentage is determined by an independent
financial services firm. If Precision's base earnings are not exceeded there are
no plan payouts. If there is a CVA Amount, the Committee determines the
percentage of the CVA Amount available for bonus plan payments, (the "CVA
payout") and the allocation to each eligible executive. The guidelines are that
up to 50% of the CVA payout to a maximum of four times base salary may be
awarded to the CEO, with the balance of the CVA payout to the remaining eligible
executives to a maximum of two times their base salary.
The CVA Amount for 2001was $233 million and the Committee set the amount
available for the payments in the plan at 3.2% of the CVA Amount, being $7.2
million. Of the amount available for payments pursuant to the bonus plan, the
CEO received $2.2 million, four times his base salary and two other eligible
executives received two times their base salary, totaling in aggregate, $1.1
million. No other payouts under the CVA plan were made from the 2001 CVA amount.
The amounts were paid in 2002. There was no CVA Amount for 2002. The amount
available for payments in the plan in 2003 was set at 3.2% of the CVA Amount.
Precision generated a CVA Amount of $97.4 million in 2003, and thus the amount
available for the payments in the plan was $3.1 million. The CEO was awarded
$1.9 million which was more than 50% of the CVA payout but less than four times
his base salary. Three other eligible executives were awarded two times their
base salary, totaling in aggregate, $1.2 million. The amounts were paid in 2004.
The amount available for payments in the plan in 2004 was set at 3.2% of the CVA
Amount. Precision generated a CVA Amount of $172 million in 2004, and thus the
amount available for the payments in the plan was $5.5 million. The CEO received
$3.2 million which was four times his base salary. Three other eligible
executives were awarded two times their base salary, totaling in aggregate, $1.4
million. No additional discretionary bonuses were awarded to the eligible
executives for 2004.
STOCK OPTIONS
The allocation of stock options to purchase Common Shares and the terms thereof
are designed to be an integral component of compensation. Precision has a number
of option plans that are similar, with the principal difference being the amount
of shares available for issue under each plan. The option strike price is the
closing price of Precision's Common Shares on the Toronto Stock Exchange on the
trading day immediately preceding the grant. Prior to 2005, the Toronto Stock
Exchange required each stock option plan to have a stated maximum number of
shares available to be issued. Precision, historically, has not had more than
10% of its issued shares reserved for issuance pursuant to its stock option
plans. Precision does not grant options pursuant to new option plans without
prior shareholder approval of the plans.
The terms of options granted to the CEO are established by contract,
described under the heading "Compensation of the Chief Executive Officer". Stock
options granted to others are determined by the Chief Executive Officer and
ratified by the Compensation Committee.
Options to directors and employees other than the CEO, are issued pursuant
to individual stock option agreements. The agreements provide for vesting of the
granted options generally over four years, expiring after five years from the
date of the agreement.
Prior to 2003, Precision established option plans that provide for expiry
up to ten years from their grant. Options granted under the 2003 Plan expire no
later than eight years from the date of grant. Precision's 2004 stock option
plan provides for expiry on a date which is no later than five years from the
date of grant. At December 31, 2004, Precision had 3.3 million options
outstanding under its option plans, of which 1.3 million had vested.
BENEFITS
Precision's group benefits are essentially the same for all full time employees
in Canada. In addition, executive officers have additional accidental death and
dismemberment benefits. Based on surveys Precision has participated in,
Precision's benefits are competitive and are in the top quartile on plan design
and cost sharing arrangements. Employees pay for long term disability and
optional benefits and Precision pays the balance of the benefit cost for
salaried employees, with non salaried employees contributing towards medical,
dental, life and accident insurance premiums.
Precision has registered pension plans covering a significant number of
its employees. Of participating employees, approximately 97% participate in a
defined contribution plan and approximately 3% participate in a defined benefit
plan. In addition, Precision has a group Registered Retirement Savings Plan
funded by the employees.
Full time employees are eligible to participate in basic, optional and
dependent life insurance, accidental death and dismemberment insurance, extended
health and dental care, short and long term disability and an employee
assistance program.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The financial aspirations of Precision's shareholders and its CEO are aligned.
Throughout Precision's growth through 2000, the CEO was compensated in different
manners, evolving from a salary based on achievements to an arrangement where he
was compensated with a base salary plus a percentage of cash flow.
By 2000, Precision was embarking on a venture, relatively new to
Precision, in the Energy Services segment of the business that would entail a
significant increase in research and development expenditures for new and
improved downhole tool technology and capital to provide for worldwide
geographical expansion of that expanding business. The Board of Directors
determined that this strategic investment would need to be made over several
years and would require a significant personal commitment from the CEO to
generate a result meaningful to Precision.
The new venture with the inherent risks involved in developing new or
improved technology coupled with the cyclical nature of the international
oilfield services industry led the Board of Directors to recognize that the
formula that establishes the CVA Amount could result in the amounts available
for payments in the plan being substantially reduced. Thus, the Committee
reasoned that a higher relative weight should be given to options granted to the
Chief Executive Officer over a longer period which the Board of Directors deemed
advisable to provide a meaningful incentive.
Precision's Chief Executive Officer is currently compensated in accordance
with the terms of an employment agreement effective January 1, 2001, extending
to December 31, 2005. Precision entered into the agreement, in part referring to
recent compensation surveys.
The CEO's agreement provides a base salary of $550,000, subject to annual
review. The agreement provides that for review purposes in 2002, the Committee
would refer to the compensation provided to the chief executive officers of BJ
Services Company, Smith International, Inc., Weatherford International Inc.,
Baker Hughes Incorporated and Pride International Inc. in determining the CEO's
base salary. The Committee determined an $800,000 base salary was warranted. The
CEO declined to accept the upward adjustment and his base salary remained at
$550,000. The CEO's base salary was increased to $800,000 on January 1, 2003.
The CEO's base salary was not increased for 2004. It is reviewed annually and
has been set at $840,000 for 2005.
Presented by the Compensation Committee.
W.C. (MICKEY) DUNN
FRED W. PHEASEY
ROBERT L. PHILLIPS
COMPENSATION OF THE DIRECTORS
The Board, through its Compensation Committee, periodically reviews the adequacy
and form of compensation for its directors. Employee directors do not receive
fees. The Board considers time commitment, comparative fees and responsibilities
in determining remuneration. For 2004, each director received a base retainer of
US$16,000 and meeting fees of US$1,000 per meeting for attendance in person and
US$500 for attendance by telephone. The Chairmen of the Compensation Committee
and the Corporate Governance and Nominating Committee are also entitled to a
yearly retainer of US$5,000 and the Chairman of the Audit Committee is also
entitled to receive a yearly retainer of US$10,000. Members of the Audit
Committee receive meeting fees of US$2,000 per meeting for attendance in person
and US$500 for attendance by telephone and members of the Compensation Committee
and Corporate Governance and Nominating Committees receive meeting fees of
US$1,000 per meeting for attendance in person and US$500 per meeting for
attendance by telephone. The Lead Director receives US$2,000 per meeting that he
served as Lead Director. Directors that are required to travel more than three
hours by air to board or committee meetings are paid a travel allowance of
US$1,000. Expenses that are incurred by each Director related to Board or
Committee meeting attendance, are reimbursed. In addition, each non-employee
director has been granted options to purchase Common Shares of the Corporation
("Options") at market price at the time of the grant.
There is no formal agreement with respect to the granting of Options to
non-employee directors. Options were first granted to non-employee directors in
1999 on the basis of 15,000 Options to each non-employee director, vesting at
5,000 Options per year with all Options expiring in five years from the date of
the grant. A further 5,000 Options were issued to each non-employee director in
2000 and 2001, that vested in one year and had an expiry of five years from the
date of the grant. In 2002, Options to purchase 20,000 common shares of the
Corporation were granted to Fred W. Pheasey and Patrick M. Murray at the time
they were appointed as directors of the Corporation. Those Options vest at 5,000
per year for a four year period and expire five years from the date of the
grant. No Options were issued to any other directors in 2002 or 2003. In 2004,
Options to purchase 20,000 common shares of the Corporation were granted to Mr.
Robert L. Phillips at the time he was elected a new director of the Corporation.
Those Options vest at 5,000 per year for a four year period and expire five
years from the date of the grant. In all cases the exercise price for Options
issued was the closing price on the Toronto Stock Exchange on the day prior to
the grant. The 2005 Plan also provides that Options granted to the Corporation's
non-employee directors, in aggregate, shall not exceed 0.5% of the Corporation's
issued and outstanding Common Shares.
The Corporation has purchased directors and officers liability insurance
policies, which expire May 1, 2005. The policies cover corporate indemnification
of directors and officers and individual directors and officers in circumstances
where the Corporation does not indemnify such individuals. The policies have a
$60 million limit and corporate indemnification deductibles apply. The annual
premium for this coverage is $1,127,250.
During the financial year ended December 31, 2004, the directors of the
Corporation were paid compensation in the aggregate of US$249,500.
The following table sets forth all compensation, including expenses paid
to the directors of the Corporation for the 2004 financial year.
NAME BOARD RETAINER CHAIR RETAINER MEETING FEES(1) TRAVEL ALLOWANCE TOTAL FEES EXPENSES PAID
(US$) (US$) (US$) (US$) (US$) (CDN$)
------------------------------------------------------------------------------------------------------------------------
W.C. (Mickey) Dunn 16,000 - 18,000 1,000 35,000 771
------------------------------------------------------------------------------------------------------------------------
Robert J.S. Gibson 16,000 5,000 23,500 -- 44,500 --
------------------------------------------------------------------------------------------------------------------------
Murray K. Mullen (2) 8,000 2,500 9,000 -- 19,500 --
------------------------------------------------------------------------------------------------------------------------
Patrick M. Murray 16,000 7,500 17,500 10,000 51,000 23,128
------------------------------------------------------------------------------------------------------------------------
NAME BOARD RETAINER CHAIR RETAINER MEETING FEES(1) TRAVEL ALLOWANCE TOTAL FEES EXPENSES PAID
(US$) (US$) (US$) (US$) (US$) (CDN$)
------------------------------------------------------------------------------------------------------------------------
Frederick W. Pheasey 16,000 2,500 15,000 -- 33,500 13,309
------------------------------------------------------------------------------------------------------------------------
Robert L. Phillips 16,000 -- 9,000 -- 25,000 5,195
Hank B. Swartout (3) N/A N/A N/A N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------
H. Garth Wiggins 16,000 -- 25,000 -- 41,000 68
------------------------------------------------------------------------------------------------------------------------
(1) Includes Lead Director fees, attendance at Strategic Planning Meetings and
attendance at meetings held with management on behalf of the Board.
(2) Murray K. Mullen resigned from the Board of Directors on October 14, 2004.
(3) Hank B. Swartout is a member of management and therefore does not receive
retainer or meeting fees.
CORPORATE GOVERNANCE
The Toronto Stock Exchange Committee on Corporate Governance issued a series of
proposed guidelines for effective corporate governance (the "TSX Report") which
the Toronto Stock Exchange adopted. The Corporation is required to disclose
certain specified corporate governance information with reference to the TSX
Report. The guidelines address items such as the constitution and independence
of corporate boards, the functions to be performed by boards and their
committees and the effectiveness of education of boards. The report of the
Corporate Governance Committee which compares the corporate governance practices
of the Corporation to the guidelines set forth in the TSX Report is set out in
Schedule "A" hereto.
The Board of Directors of the Corporation believes that sound corporate
governance practices are essential to the effectiveness of the Corporation and
these practices should be reviewed regularly.
MANDATE OF THE BOARD
The Corporation's Board of Directors are stewards of the organization. As such
they have a responsibility to oversee the conduct of the business and to provide
direction to management and ensure all major issues affecting the business
affairs of the organization are given proper consideration.
With the assistance of senior management, who report on the risks of the
Corporation's business, the Board considers, and has input into, the assessment
and management of those risks on a regular basis.
The Board takes responsibility for appointing the Chief Executive Officer
and is consulted on the appointment of other senior officers and is also
responsible for the consideration of succession issues. The Board, through the
Compensation Committee, formally reviews the Chief Executive Officer's
remuneration and performance. Senior management participates in appropriate
professional and personal development activities, courses and programs on a self
directed basis and the Board supports management's commitment to training and
development of all employees.
The Board requires accurate, timely and effective communication to the
Corporation's shareholders. Regular news releases are made at least quarterly
which report quarterly and annual results. Supplemental releases are made
highlighting material facts and updating the Corporation's activities. The Board
currently delegates this ongoing reporting responsibility to management. The
Board, in conjunction with its Audit Committee, assesses the integrity of the
Corporation's internal controls and management.
BOARD COMPOSITION AND COMMITTEES
The Board is currently composed of seven members. The Board has appointed three
committees, the Audit Committee, the Compensation Committee and the Corporate
Governance and Nominating Committee. All members of those Committees are
independent of Precision.
SUMMARY OF BOARD AND COMMITTEE MEETING ATTENDANCE
CORPORATE GOVERNANCE
BOARD MEETINGS AUDIT COMMITTEE COMPENSATION COMMITTEE AND NOMINATING COMMITTEE
NAME ATTENDED (1) MEETINGS ATTENDED MEETINGS ATTENDED MEETINGS ATTENDED
---------------------------------------------------------------------------------------------------------------------
W.C. (Mickey) Dunn 8/8 N/A 2/2 5/5
---------------------------------------------------------------------------------------------------------------------
Robert J.S. Gibson 8/8 6/6 N/A 5/5
---------------------------------------------------------------------------------------------------------------------
Murray K. Mullen (2) 5/8 N/A 2/2 N/A
---------------------------------------------------------------------------------------------------------------------
Patrick M. Murray 8/8 6/6 N/A N/A
---------------------------------------------------------------------------------------------------------------------
Frederick W. Pheasey (3) 8/8 N/A 1/2 5/5
---------------------------------------------------------------------------------------------------------------------
Robert L. Phillips (4) 3/8 N/A 0/2 2/5
---------------------------------------------------------------------------------------------------------------------
Hank B. Swartout 8/8 N/A N/A N/A
---------------------------------------------------------------------------------------------------------------------
H. Garth Wiggins 8/8 6/6 N/A N/A
---------------------------------------------------------------------------------------------------------------------
(1) Attendance in person or by telephone.
(2) Murray K. Mullen resigned from the Board of Directors on October 14, 2004.
(3) Mr. Pheasey was appointed to the Compensation Committee on July 27, 2004 and
attended all Committee meetings subsequent to that appointment.
(4) -Mr. Phillips was elected to the Board May 11, 2004. Mr. Phillips attended
all three board meetings held subsequent to his election. Mr. Phillips
attended two of the three Corporate Governance and Nominating Committee
meetings subsequent to his appointment to that Committee on May 11, 2004.
Mr. Phillips was appointed to the Compensation Committee on October 27,
2004. There were no Compensation Committee meetings held subsequent to that
appointment.
In addition to the above-described meetings, the Corporation held an
all-day strategy session in September 2004, attended by all the Directors. The
Directors meet annually to review and approve the operating and capital budget
of the Corporation.
The Corporation is required to have an Audit Committee. The directors who
are currently members of that Committee are Robert J.S. Gibson, Patrick M.
Murray and H. Garth Wiggins all of who are not members of management and are
independent. The Compensation Committee members include W.C. (Mickey) Dunn, Fred
W. Pheasey and Robert L. Phillips. The Corporate Governance and Nominating
Committee members include W.C. (Mickey) Dunn, Robert J.S. Gibson, Fred W.
Pheasey and Robert L. Phillips.
The Audit Committee is responsible for reviewing the Corporation's
financial reporting procedures, internal controls and the performance of the
external and internal auditors. The members of the Audit Committee have direct
access to the external auditors. For further information relating to the Audit
Committee and the Corporation's external auditors, please refer to the section
entitled "Audit Committee" in the Corporation's Annual Information Form dated
March 22, 2005. The Annual Information Form is also available through the
Internet on the Canadian System for Electronic Document Analysis and Retrieval
(SEDAR) which may be accessed at www.sedar.com or obtained without charge from
the Corporate Secretary of the Corporation, 4200, 150 - 6th Avenue S.W.,
Calgary, Alberta, Canada (Telephone 403-716-4500).
The Compensation Committee reviews and approves the Corporation's goals
and objectives relevant to the Chief Executive Officer's compensation and
recommends for approval by the independent directors, the Chief Executive
Officer's compensation package in light of the goals and objectives and reviews
the overall remuneration and personnel policies developed by management.
The Corporate Governance and Nominating Committee has the general
responsibility for developing and monitoring Precision's approach to corporate
governance matters and is responsible for recommending to the Board its size,
composition and membership, succession planning for directors and Board
Committee structure.
LOANS TO DIRECTORS
There are no loans outstanding from Precision to any of its directors.
SARBANES-OXLEY INITIATIVES
The U.S. Sarbanes-Oxley Act has mandated numerous changes in how companies
govern themselves and disclose information. Precision is now subject to new U.S.
rules arising from the Sarbanes-Oxley Act due to the fact that it is listed on
the New York Stock Exchange ("NYSE").
One of the requirements arising out of the Sarbanes-Oxley Act is that
companies such as Precision must have their Chief Executive Officer and Chief
Financial Officer certify that the Corporation has designed disclosure controls
and procedures to ensure that material information relating to Precision is made
known to the Securities and Exchange Commission and to the public generally.
In order to meet the new legislative requirements and allow the Chief
Executive Officer and the Chief Financial Officer to make the appropriate
certification, a disclosure committee of certain senior management personnel of
the Corporation has been formed in order to oversee, on a continuous basis, the
new disclosure requirements.
The mandate of the Disclosure Committee is to oversee disclosure controls
and procedures which are designed to ensure timely collection and evaluation of
financial and non-financial information; capture information that is relevant to
an assessment of the need to disclose developments and risks that pertain to the
company's businesses; and cover information that must be evaluated in the
context of the disclosure requirement of the U.S. Securities Exchange Act Rule
12b-20, which provides that "in addition to the information expressly required
to be included in a statement or report, there shall be added such further
material information, if any, as may be necessary to make the required
statements, in the light of the circumstances under which they were made, not
misleading".
The Disclosure Committee addresses the evaluation of the disclosure
controls, which evaluation will review the performance of the disclosure process
in terms of identified weaknesses and mistakes as well as evaluating ways that
the Corporation's systems can grow and evolve with its business so that
weaknesses do not arise in the future.
In addition to the Sarbanes-Oxley Act, the NYSE has also mandated
additional corporate governance requirements for its listed corporations. As a
Canadian company listed on the NYSE, the Corporation is not required to comply
with most corporate governance listing standards and instead may comply with
domestic requirements. However, the Corporation has voluntarily chosen to adopt
corporate governance practices that comply with NYSE corporate governance
listing standards in almost all respects. The requirements include, among
others, a requirement to have audit, corporate governance and nominating and
compensation committees of the board of directors and that such committees
establish charters that state each of those committees' roles and
responsibilities. As well, the corporate governance and nominating committee is
to establish corporate governance guidelines and ethics policies that relate to
overall board and corporate management.
In response thereto, each of the Corporate Governance and Nominating
Committee, the Compensation Committee and the Audit Committee has reviewed and
revised its charter to include any Sarbanes-Oxley Act or NYSE requirements. The
revised charters for each of those committees, along with the Code of Ethics
Acknowledgement and Affirmation, and the Code of Business Conduct and Ethics are
posted on the Corporation's website at www.precisiondrilling.com. One of the
other requirements of a foreign issuer is to disclosure the significant ways in
which Precision's corporate governance practices differ from those required of
U.S. domestic companies under NYSE standards. The disclosure of these
differences are set forth on Precision's website at www.precisiondrilling.com.
Additionally, the Corporate Governance and Nominating Committee has a
mandate to ensure that there is a process to allow all levels of employees
access to appropriate Board members to bring "Whistleblower" issues to the Board
which are not being adequately dealt with by management of the Corporation. The
Audit Committee has been
given the authority and has established a process for the confidential receipt
and handling of employer complaints (Whistleblower Hotline).
The NYSE has also mandated that each of the members of the Corporate
Governance and Nominating, the Compensation and Audit Committees must be
"independent" directors (as defined under the NYSE listing standards).
Additionally, with respect to the Audit Committee, the Corporation must disclose
that at least one of those members qualifies as an "Audit Committee financial
expert".
INTEREST OF INSIDERS IN MATERIAL TRANSACTIONS
There were no material interests, direct or indirect, of directors and senior
officers of the Corporation, nominees for director, any shareholder who
beneficially owns more than 10% of the Common Shares of the Corporation, or any
known associate or affiliate of such persons, in any transaction since the
commencement of the Corporation's last completed financial year, or any proposed
transaction which has materially affected or would materially affect the
Corporation or any of its subsidiaries.
INTEREST OF CERTAIN PERSONS AND COMPANIES IN MATTERS TO BE ACTED UPON
Management of the Corporation is not aware of any material interest of any
director or nominee for director, or senior officer or any one who has held
office as such since the beginning of the Corporation's last financial year or
any associate or affiliate of any of the foregoing in any matter to be acted on
at the Meeting except as disclosed herein.
ADDITIONAL INFORMATION
Additional financial information is provided in the Corporation's comparative
consolidated financial statements and management's discussion and analysis for
the most recently completed fiscal year ended December 31, 2004, contained in
the Corporation's Annual Report for the year ended December 31, 2004. The
Corporation will provide to any person upon request a copy of the Corporation's
current Annual Information Form, together with a copy of any document or the
pertinent pages of any document incorporated by reference in the Corporation's
current Annual Information Form, the Corporation's audited financial statements
and related management's discussion and analysis contained in the Annual Report
for the year ended December 31, 2004, together with the report of the auditors
thereon, and one copy of the Corporation's interim financial statements
subsequent to such audited financial statements and a copy of this Management
Information Circular. These documents can be obtained free of charge by
contacting the Corporate Secretary of the Corporation at 4200, 150 - 6th Avenue
S.W., Calgary, Alberta T2P 3Y7, or by accessing the Corporation's website at
www.precisiondrilling.com, or on SEDAR at www.sedar.com.
DIRECTORS APPROVAL
The Board of Directors of the Corporation has approved the content and sending
of this Circular.
March 22, 2005
Jan M. Campbell
CORPORATE SECRETARY
Report of the Corporate Governance and Nominating Committee of the Board of
Directors of Precision Drilling Corporation (the "Corporation" or "Precision")
1. THE BOARD SHOULD EXPLICITLY ASSUME RESPONSIBILITY FOR THE STEWARDSHIP
OF THE CORPORATION.
YES
The Board has a formal mandate with the responsibility for the
stewardship of the Corporation, which it seeks to discharge by establishing
policies along with providing leadership to management and an appropriate level
of supervision of these policies.
a) ADOPTION OF A STRATEGIC PLANNING PROCESS.
YES
The Board has established a strategic planning process that is conducted on an
annual basis at a special meeting of the Board and senior management.
b) IDENTIFICATION OF PRINCIPAL RISKS AND IMPLEMENTING RISK MANAGEMENT SYSTEMS.
YES
The Board identifies and considers the risks in the operations of the
business of Precision and establishes policies to monitor and manage those
risks. In addition, the Board receives quarterly environmental incident reports,
reports on legal issues and compliance reports.
c) SUCCESSION PLANNING AND MONITORING SENIOR MANAGEMENT.
YES
The Board periodically reviews the adequacy of the Corporation's succession
plan. Senior management participates in appropriate professional and personal
development activities, courses and programs on a self directed basis and the
Board supports management's commitment to training and development of all
employees.
d) COMMUNICATION POLICY.
YES
The Corporation has a written communication policy pertaining to dealing with
the media and with respect to all continuous disclosure and public reporting
requirements to its shareholders and the investment community. Issues arising
from this Communication Policy are dealt with by a committee of officers of the
Corporation consisting of the Chief Executive Officer, the Chief Financial
Officer, the Senior Vice President Operations Finance, the Vice President and
Chief Accounting Officer, the Corporate Secretary, and legal counsel. The
disclosed information is released through newswire services, the internet
website and mailings to shareholders.
2. MAJORITY OF DIRECTORS SHOULD BE UNRELATED.
Yes
Six of the seven directors of the Corporation are independent and unrelated. An
"unrelated" director under the guidelines is a director who is independent from
management and is free from any interest or any business or other relationship
which could, or could reasonably be perceived to, materially interfere with the
director's ability to act with a view to the best interests of the Corporation,
other than interests and relationships arising from shareholdings. A "related"
director under the guidelines is a director who is not an unrelated director.
The Corporation does not have a significant shareholder.
3. DISCLOSE FOR EACH DIRECTOR, WHETHER HE OR SHE IS RELATED, AND HOW THAT
CONCLUSION WAS REACHED.
YES
The Board is responsible for determining whether or not each director is an
unrelated director. To do this, the Board analyzes the relationship of each of
the directors with the Corporation. Mr. Hank B. Swartout, who is the Chairman
and Chief Executive Officer of the Corporation is a related director. The
remaining directors, being W.C. (Mickey) Dunn, Robert J.S. Gibson, Patrick M.
Murray, Fred W. Pheasey, Robert L. Phillips and H. Garth Wiggins are all
unrelated directors.
4. APPOINTMENT OF A COMMITTEE RESPONSIBLE FOR APPOINTMENT/ASSESSMENT OF
DIRECTORS.
Yes
Precision's Corporate Governance and Nominating Committee is comprised
exclusively of independent, unrelated directors and has a mandate which includes
making recommendations to the Board with respect to nominees to the Board of
Directors and individual directors.
5. IMPLEMENT A PROCESS FOR ASSESSING THE EFFECTIVENESS OF THE BOARD, ITS
COMMITTEES AND INDIVIDUAL DIRECTORS.
YES
Precision's Corporate Governance and Nominating Committee has the mandate to
periodically review the effectiveness of the Board, its committees and
individual directors and does carry out such review on an annual basis.
6. PROVIDE ORIENTATION AND EDUCATION PROGRAMS FOR THE NEW RECRUITS TO THE
BOARD.
YES
The current practice requires the Corporate Governance and Nominating Committee
to provide an orientation for new Board members. The process of education and
orientation has been formalized by adoption of a Director's manual to assist in
that formal orientation program.
7. CONSIDER THE SIZE OF THE BOARD, WITH A VIEW TO IMPROVING EFFECTIVENESS.
YES
Precision's Corporate Governance and Nominating Committee has the ongoing
mandate of assessing the size of the Board and its composition to determine
whether it has all of the necessary constituents for effective decision making.
This review is carried out annually. In addition, the Board has instituted a
policy of term limits of fifteen (15) years on the Board and age limits of
seventy (70) years.
8. REVIEW OF COMPENSATION OF DIRECTORS IN LIGHT OF RISKS AND
RESPONSIBILITIES.
YES
The Compensation Committee is mandated to review annually and recommend to the
Board the remuneration of Directors.
9. a) COMMITTEES SHOULD BE GENERALLY COMPOSED OF NON-MANAGEMENT DIRECTORS.
YES
The Audit Committee, the Compensation Committee and the Corporate Governance and
Nominating Committee are comprised solely of non-management members.
b) MAJORITY OF COMMITTEE MEMBERS SHOULD BE UNRELATED.
YES
All of the committee members are unrelated.
10. APPOINT A COMMITTEE RESPONSIBLE FOR APPROACH TO CORPORATE GOVERNANCE
ISSUES.
YES
The Corporate Governance and Nominating Committee is mandated to be responsible
to the Board to develop Precision's approach to governance.
11. DEFINE LIMITS TO MANAGEMENT'S RESPONSIBILITIES BY DEVELOPING MANDATES
FOR:
i) THE BOARD; AND
ii) THE CEO.
YES
The Board has an express mandate. The Corporation's objectives and the CEO's
annual goals and objectives are defined as part of the annual operating and
capital budget approved by the Board.
12. ESTABLISH PROCEDURES TO ENABLE THE BOARD TO FUNCTION INDEPENDENTLY OF
MANAGEMENT.
YES
While the Corporation does not have a chair separate from
management, the Board has in place procedures to function independently of
management. The Board appoints a Lead Director from the independent and
unrelated Directors at each regularly held in-camera session. The Lead Director
is responsible for developing the agenda for, and presiding over in-camera
sessions and acting as principal liaison between the non-management Directors
and the CEO on matters dealt with during the in-camera session.
13. ESTABLISH AN AUDIT COMMITTEE WITH A SPECIFICALLY DEFINED MANDATE.
YES
Precision's Audit Committee is comprised of independent, unrelated directors and
has a mandate which includes overseeing the Corporation's financial reporting
procedures and reviewing the internal accounting control systems for the
Corporation with the auditors and management.
14. IMPLEMENT A SYSTEM TO ENABLE INDIVIDUAL DIRECTORS TO ENGAGE OUTSIDE
ADVISORS AT THE CORPORATION'S EXPENSE.
YES
Individual Directors can engage outside advisors with the authorization of the
Corporate Governance and Nominating Committee.
PRECISION DRILLING CORPORATION
2005 STOCK OPTION PLAN
(EFFECTIVE AS OF MARCH 9, 2005)
1. PURPOSE
The purpose of this 2005 Plan is to provide an incentive to the officers,
employees and directors of Precision Drilling Corporation (the "Corporation") or
any of its subsidiaries to achieve the longer term objectives of the
Corporation, to give suitable recognition to the ability and industry of such
persons who contribute materially to the success of the Corporation and to
attract to, and retain in, the employ of the Corporation, persons of experience
and ability, by providing them with the opportunity to acquire an increased
proprietary interest in the Corporation.
2. DEFINITIONS
When used in this 2005 Plan, unless there is something in the subject matter or
context inconsistent therewith, the following words and terms shall have the
respective meanings ascribed to them as follows:
(a) "Board of Directors" means the Board of Directors of the Corporation;
(b) "Common Shares" means the Common Shares of the Corporation and any shares
or securities of the Corporation into which such Common Shares are
changed, converted, subdivided, consolidated or reclassified;
(c) "Corporation" means Precision Drilling Corporation and any successor
corporation and any reference herein to action by the Corporation means
action by or under the authority of its Board of Directors or a duly
empowered committee appointed by the Board of Directors;
(d) "Market Value" means the per share closing price for the Common Shares on
the Toronto Stock Exchange on the Trading Day immediately preceding the
date of such grant providing that such price must not be lower than the
closing price for the Toronto Stock Exchange on that day;
(e) "Option" means an option granted by the Corporation to an Optionee
entitling such Optionee to acquire a designated number of Common Shares
from treasury at a price to be determined by the Board of Directors, but
subject to the provisions hereof;
(f) "Option Period" means such period as may be determined by the Board of
Directors during which an Optionee may exercise an Option, commencing on
the date such Option is granted to such Optionee and ending as specified
in this 2005 Plan, or in the Stock Option Agreement but in no event shall
an Option expire on a date which is later than five (5) years after the
grant of the Option;
(g) "Optionee" means a person who is an officer, employee or director of the
Corporation or its subsidiaries who is granted an Option pursuant to this
2005 Plan;
(h) "2005 Plan" shall mean the Corporation's stock option plan as embodied
herein; and
(i) "Trading Day" means a day on which at least a board lot of Common Shares
shall have been sold through the facilities of The Toronto Stock Exchange
or other relevant stock exchange.
3. ADMINISTRATION AND ELIGIBILITY
The 2005 Plan shall be administered by the Board of Directors. The Board of
Directors shall have full and final discretion to interpret the provisions of
the 2005 Plan and, with the exception set forth in subparagraph 6(b) hereof, to
prescribe, amend, rescind and waive rules and regulations to govern the
administration and operation of the 2005 Plan, and all decisions and
interpretations made by the Board of Directors shall be binding and conclusive
upon the Optionees and the Corporation subject to shareholder approval if
required by any relevant stock exchange. The Board of Directors may at any time,
and from time to time, designate those Optionees who are to be granted an Option
pursuant to the 2005 Plan and grant an Option to such Optionee. Notwithstanding
the foregoing, or any other provision contained herein, the Board of Directors
shall have the right to delegate to the President of the Corporation the
administration and operation of the 2005 Plan and the right to designate
Optionees and grant Options to such Optionees, with the exception of grants of
options to directors and the President.
4. COMMON SHARES RESERVED
(a) The number of authorized but unissued Common Shares that may be subject to
Options granted to Optionees under the 2005 Plan at any time, including
Common Shares reserved for issuance pursuant to previous stock option
plans of the Corporation, shall not exceed 10% of the issued and
outstanding Common Shares of the Corporation from time to time.
(b) The aggregate number of Common Shares reserved for issuance to any one (1)
individual pursuant to this 2005 Plan and all previous stock option plans,
shall not exceed five percent (5%) of the issued and outstanding Common
Shares of the Corporation.
(c) The number of Common Shares issuable (or reserved for issue) to insiders
under all security based compensation arrangements shall not at any time
exceed 10% of the issued and outstanding Common Shares and the number of
Common Shares issued to insiders under all security based compensation
arrangements, within a one year period shall not exceed 10% of the issued
and outstanding Common Shares.
(d) The foregoing provisions of this paragraph 4 are subject to the
appropriate adjustment, as set forth in paragraph 11 hereof, both in the
number of Common Shares covered by individual grants and the total number
of Common Shares authorized to be issued hereunder, to give effect to any
relevant changes in the capitalization of the Corporation.
(e) Common Shares in respect of which Options are not exercised will be
available for subsequent Options.
5. PARTICIPATION
(a) Participation in the 2005 Plan shall be entirely voluntary and any
decision not to participate shall not affect an Optionee's relationship or
employment with the Corporation.
(b) Notwithstanding any express or implied term of this 2005 Plan to the
contrary, the granting of an Option pursuant to the 2005 Plan shall in no
way be construed as a guarantee of employment by the Corporation to the
Optionee.
(c) No Optionee shall have any of the rights of a shareholder in respect to
Common Shares under an Option until such Common Shares shall have been
paid for in full and issued by the Corporation pursuant to this 2005 Plan.
6. OPTION AGREEMENTS
(a) Subject to subparagraph 6(b), a written agreement will be entered into
between the Corporation and each Optionee to whom an Option is granted
hereunder, which agreement will set out the number of Common Shares
subject to option, the exercise price and any other terms and conditions
approved by the Board of Directors, all in accordance with the provisions
of this 2005 Plan (herein referred to as the "Stock Option Agreement").
The Stock Option Agreement will be in such form as the Board of Directors
may from time to time approve, and may contain such terms as may be
considered necessary in order that the Option will comply with any
provisions respecting options in the income tax or other laws in force in
any country or jurisdiction of which the Optionee may from time to time be
a resident or citizen or the rules of any regulatory body having
jurisdiction over the Corporation.
(b) No Options shall be granted to any director of the Corporation who is not
also an officer of the Corporation if such grant could result, at any
time, in the total number of Shares issuable to all directors of the
Corporation who are not also officers of the Corporation pursuant to
Options exceeding 0.50% of the issued and outstanding Common Shares of the
Corporation.
7. EXERCISE OF OPTIONS
(a) Subject to Paragraph 8 hereof, Optionee shall be entitled to exercise an
Option granted to Optionee at any time prior to the expiry of the Option
Period, subject to vesting limitations which may be imposed by the Board
of Directors at the time such Option is granted.
(b) The exercise price of an Option granted under the 2005 Plan shall be as
determined by the Board of Directors when such Option is granted subject
to any limitations imposed by any relevant stock exchange or regulatory
authority, and shall not be less than an amount equal to the Market Value
of the Common Shares.
8. TERMINATION OF OPTIONS
Unless specifically amended or otherwise dealt with in a Stock Option Agreement:
(i) in the case of death of an Optionee, the right to exercise an Option
shall extend to the earlier of (i) one year after the date of death
or (ii) the expiry date of the Option set forth in the Stock Option
Agreement, to the extent such Option was exercisable by Optionee on
the date of death of the Optionee; and
(ii) in the case of termination or cessation of employment of an Optionee
for any reason (other than death) the right to exercise an Option
shall be limited to and shall expire on the earlier of 60 days after
the date of termination or cessation, or the expiry date of the
Option set forth in the Stock Option Agreement, to the extent such
Option was exercisable by Optionee on the date of termination of
such employment. For greater certainty, any reference to a cessation
of employment of the Optionee with the Corporation for any reason,
other than death, is a reference to the occurrence of such fact
howsoever that arises, and if any Optionee is entitled to reasonable
notice of termination of employment or compensation in lieu thereof,
or is entitled to a specific period of notice or compensation in
lieu thereof, then the Optionee is not entitled to claim any right
to further unvested Common Shares which may be available pursuant to
an Option or further time to exercise vested Common Shares available
pursuant to an Option during the said reasonable notice period or
during the said specific notice period, or to compensation in lieu
thereof by way of general damages, or special damages, whether in
contract, in tort or otherwise.
(iii) The Corporation shall have the authority to either provide for in
the future or to amend all outstanding option agreements of outside
directors of the corporation (being a director of the corporation
who is not also a full time employee of the corporation) to provide
for the right to such director to exercise all of that director's
outstanding options within sixty (60) days of termination as a
director of the corporation if such termination occurs as a result
of a forced retirement due to the implementation of a policy to
force directors to retire from the board due to a term limit of more
than fourteen (14) years as a board member or due to an age limit of
greater than sixty-nine (69) years.
9. OPTIONEE'S RIGHTS NOT TRANSFERABLE
(a) No right or interest of any Optionee in or under the 2005 Plan is
assignable or transferable, in whole or in part, either directly or by
operation of law or otherwise in any manner except by bequeath or the laws
of descent and distribution.
(b) Subject to the foregoing, the terms of the 2005 Plan shall bind the
Corporation, its successors and assigns, and each Optionee, his heirs,
executors, administrators and personal representatives.
10. TAKEOVER OR CHANGE IN CONTROL The Corporation shall have the power, in the
event of:
(a) any disposition of substantially all of the assets of the Corporation, on
the dissolution, merger, amalgamation or consolidation of the Corporation,
with or into any other corporation, or the merger, amalgamation or
consolidation of any other corporation into the Corporation,
(b) any change in control of the Corporation, or
(c) an offer is made generally to the holders of the Corporation's voting
securities to purchase those securities and which is a "takeover bid" as
defined in the Securities Act (Alberta), to amend the Stock Option
Agreement to permit the exercise of any or all of the remaining Options
prior to the completion of any such transaction. If the Corporation shall
exercise such power, the Option shall be deemed to have been amended to
permit the exercise thereof in whole or in part by the Optionee at any
time or from time to time as determined by the Corporation prior to the
completion of such transaction. For the purposes of the foregoing, a
change in control of the Corporation shall occur if there becomes a
Control Person (as defined in the Alberta Securities Act) with respect to
the securities of the Corporation, who is not a Control Person as at the
effective date of this 2005 Plan.
11. ANTI-DILUTION OF THE OPTION In the event of:
(a) any subdivision, redivision or change of the Common Shares at any time
during the term of the Option into a greater number of Common Shares, the
Corporation shall deliver, at the time of any exercise thereafter of the
Option, such additional number of shares as would have resulted from such
subdivision, redivision or change if the exercise of the Option had been
made prior to the date of such subdivision, redivision or change;
(b) any consolidation or change of the Common Shares at any time during the
term of the Option into a lesser number of Common Shares, the number of
shares deliverable by the Corporation on any exercise thereafter of the
Option shall be reduced to such number of shares as would have resulted
from such consolidation or change if the exercise of the Option had been
made prior to the date of such consolidation or change;
(c) any reclassification of the Common Shares at any time outstanding or
change of the Common Shares into other shares, or in case of the
consolidation, amalgamation or merger of the Corporation with or into any
other corporation (other than a consolidation, amalgamation or merger
which does not result in a reclassification of the outstanding Common
Shares or a change of the Common Shares into other shares), or in case of
any transfer of the undertaking or assets of the Corporation as an
entirety or substantially as an entirety to another Corporation, at any
time during the term of the Option, the Optionee shall be entitled to
receive, and shall accept, in lieu of the number of Common Shares to which
he was theretofore entitled upon exercise of the Option, the kind and
amount of shares and other securities or property which such holder would
have been entitled to receive as a result of such reclassification,
change, consolidation, amalgamation, merger or transfer if, on the
effective date thereof, he had been the holder of the number of Common
Shares to which he was entitled upon exercise of the Option.
12. AMENDMENT AND TERMINATION
(a) The Corporation may in its discretion, subject to stock exchange and other
appropriate regulatory approval and to shareholder approval, if required
by any relevant stock exchange, amend or terminate the 2005 Plan at any
time. No such amendment or termination will, without the consent of an
Optionee, alter or impair any rights which have accrued to Optionee prior
to the effective date thereof.
(b) The Corporation may amend or terminate this 2005 Plan at any time in order
to conform to applicable law or regulation, whether or not such amendment
or termination would affect any accrued rights.
13. APPLICABLE LAW
This 2005 Plan shall be governed by, administered and construed in accordance
with the laws of the Province of Alberta and the laws of Canada applicable
therein.
14. GENDER
Wherever the singular or masculine or neuter is used in this 2005 Plan, the same
shall be construed as meaning the plural or feminine or body corporate and vice
versa, where the context or the parties so require.
15. COSTS
The Corporation shall pay all costs of administering the 2005 Plan.
16. EFFECTIVE DATE
The effective date of this 2005 Stock Option Plan shall be March 9, 2005.
17. REPRICING PROHIBITED
No award of Options may be repriced, replaced, regranted through cancellation,
or modified without shareholder approval (except in connection with a change in
the Corporation's capitalization), if the effect would be to reduce the exercise
price for the shares underlying such award.
PRECISION DRILLING CORPORATION
4200, 150 - 6th AVE SW, Calgary, Alberta, Canada T2P 3Y7
T 403 716 4500 F 403 264 0251 www.precisiondrilling.com
PRECISION DRILLING CORPORATION
NOTICE OF THE ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY given that the Annual and Special Meeting (the "Meeting") of
the Shareholders of Precision Drilling Corporation (the "Corporation") will be
held in the Devonian Room, at the Calgary Petroleum Club, 319 - 5th Avenue S.W.,
Calgary, Alberta, on the 10th day of May 2005, at the hour of 3:00 o'clock in
the afternoon (Calgary time) for the following purposes:
1. to elect the Directors for the ensuing year;
2. to appoint an Auditor for the ensuing year;
3. to amend the Corporation's articles to divide the issued and outstanding
Common Shares on a two-for-one basis;
4. to approve the 2005 Stock Option Plan;
5. to transact such other business as may properly come before the Meeting or
any adjournment thereof. The specific details of the matters proposed to
be put before the Meeting are set forth in the Management Information
Circular accompanying and forming part of this Notice.
The Board of Directors have fixed the record date for the Meeting as of
March 21, 2005 (the "Record Date"). Only holders of Common Shares of record at
the close of business on March 21, 2005 are entitled to receive notice of the
Meeting. Shareholders of record will be entitled to vote those shares included
in the list of shareholders entitled to vote at the Meeting prepared as at the
Record Date, unless any such shareholder transfers his shares after the Record
Date and the transferee of those shares establishes that he owns the shares and
demands, not later than 10 days before the Meeting that the transferee's name be
included in the list of shareholders entitled to vote at the Meeting, in which
case such transferee shall be entitled to vote such shares at the Meeting.
Shareholders of the Corporation who are unable to personally be present at
the Meeting may date and sign the form of proxy accompanying this Notice and
return the same to the offices of Computershare Trust Company of Canada, Proxy
Department, 100 University Avenue, 9th Floor, Toronto, Ontario, M5J 2YI.
Forms of Proxy, in order to be valid and acted upon at the Meeting, must
be returned to the aforesaid offices of Computershare Trust Company of Canada
not less than 48 hours before the time fixed for holding the Meeting or any
adjournment thereof or with the Chairman of the Meeting prior to commencement
thereof.
A copy of the Corporation's current Annual Report which includes its
Consolidated Financial Statements for the fiscal years ended December 31, 2004
and December 31, 2003, the Management Information Circular with respect to the
Meeting, the Corporation's Annual Information Form for the fiscal year ended
December 31, 2004, as filed with Canadian provincial securities commissions and,
under cover of an Annual Report on Form 40-F, with the United States Securities
and Exchange Commission, and any interim financial statements of the Corporation
subsequent to the Financial Statements for the year ended December 31, 2004, may
be obtained by writing to Precision Drilling Corporation to the attention of the
Corporate Secretary, Suite 4200, 150-6th Avenue S.W., Calgary, Alberta T2P 3Y7.
Dated at Calgary, Alberta this 22 day of March, 2005.
BY ORDER OF THE BOARD OF DIRECTORS,
JAN M. CAMPBELL
CORPORATE SECRETARY
PROXY
SOLICITED BY MANAGEMENT
FOR THE ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 10, 2005
The undersigned shareholder of Precision Drilling Corporation (the
"Corporation"), hereby appoints Hank B. Swartout or failing him, Dale E.
Tremblay, or instead of either of the foregoing,_______________________________
of _____________________________________________________________________ , as
proxy to attend and act for and on behalf of the undersigned at the Annual and
Special Meeting of the Corporation (the "Meeting") to be held at 3:00 p.m.
(Calgary time) on Tuesday, the 10th day of May 2005, at the Calgary Petroleum
Club, Devonian Room, 319 - 5th Avenue S.W., Calgary, Alberta and at any
adjournment thereof, notice of which Meeting with the Management Information
Circular accompanying same has been received by the undersigned, at every poll
which may take place in consequence including polls on procedural matters which
may come before said meeting, with specific power and authority to vote as
specified below.
The undersigned hereby directs the proxyholder to vote the shares
represented by this instrument of proxy in the following manner:
1. To elect as directors for the ensuing year, all nominees as follows:
W.C. (Mickey) Dunn Patrick M. Murray Hank B. Swartout
Robert J.S. Gibson Fred W. Pheasey H. Garth Wiggins
Robert L. Phillips
[_] VOTE FOR [_] VOTE WITHHELD
2. To appoint KPMG LLP, Chartered Accountants as Auditor of the Corporation
for the ensuing year.
[_] VOTE FOR [_] VOTE WITHHELD
3. To amend the Corporation's Articles to divide the issued and outstanding
Common Shares on a two-for-one basis.
[_] VOTE FOR [_] VOTE WITHHELD
4. To approve the 2005 Stock Option Plan as described in the Management
Information Circular.
[_] VOTE FOR [_] VOTE WITHHELD
The instrument appointing a proxy shall be in writing and shall be executed by
the shareholder or his attorney authorized in writing, or if the shareholder is
a corporation under its corporate seal or by an officer or attorney thereof,
duly authorized and shall be dated.
The undersigned hereby revokes any prior proxies to vote the common shares
covered by this Proxy.
This Proxy is solicited by management and the costs of same will be borne by the
Corporation.
Each common shareholder has the right to appoint a proxyholder, other than the
persons designated in the form of Proxy, who need not be a shareholder to attend
and to act for him on his behalf at the Meeting. To exercise such right, the
names of management's nominees should be crossed out and the name of the common
shareholder's nominee should be legibly printed in the blank space provided, or
another proxy in proper form should be completed.
In order for this Proxy to be effective, it must be deposited at the offices of
Computershare Trust Company of Canada, Proxy Department, 100 University Avenue,
9th Floor, Toronto, Ontario, M5J 2YI, not less than 48 hours before the Meeting
or any adjournment thereof or with the Chairman of the Meeting prior to the
commencement thereof.
In addition to any other manner permitted by law, a shareholder who has given a
proxy may revoke it as to any matter on which a vote has not already been cast
pursuant to the authority conferred by it, by signing in person or by attorney
authorized in writing a written revocation of proxy and by depositing such
instrument of revocation at the office of Computershare Trust Company of Canada,
Proxy Department, 100 University Avenue, 9th Floor, Toronto, Ontario, M5J 2YI,
at any time up to and including the last business day preceding the day of the
Meeting or any adjournment thereof or with the Chairman of the Meeting on the
day thereof or on the day of any adjournment thereof.
Management knows of no other matters to come before the Meeting other than the
matters referred to in the Notice. However, if any amendments, variations or new
matters properly come before the Meeting, this proxy confers discretionary
authority upon the shareholder's nominee to vote on such matters in accordance
with the nominee's best judgement.
THE SECURITIES REPRESENTED BY THIS PROXY WILL BE VOTED, AND WHERE THE
SHAREHOLDER HAS SPECIFIED A CHOICE WITH RESPECT TO THE ABOVE MATTERS, WILL BE
VOTED AS DIRECTED ABOVE OR, IF NO DIRECTION IS GIVEN, WILL BE VOTED IN FAVOUR OF
THE RESOLUTIONS APPROVING THE ELECTION OF DIRECTORS, THE APPOINTMENT OF AN
AUDITOR, THE COMMON SHARE SPLIT AND THE APPROVAL OF THE 2005 STOCK OPTION PLAN.
DATED this _______ day of _______________________________ , 2005.
___________________________________________________________________
Signature of Shareholder
___________________________________________________________________
Please print name of Shareholder
Please sign exactly as name appears on the address label on the left. Joint
owners should each sign. Executors, administrators and trustees, etc. should
attach evidence of their authority and a corporation should affix its seal
hereto. Holders of Common Shares who do not expect to attend the Meeting in
person are requested to date and sign this Instrument of Proxy appointing a
proxy and return it in the envelope provided for that purpose.
FORM 13-502F1
ANNUAL PARTICIPATION FEE FOR REPORTING ISSUERS
_________________________
REPORTING ISSUER NAME:
PRECISION DRILLING CORPORATION
PARTICIPATION FEE FOR THE FINANCIAL YEAR ENDING: 31-DEC-04
COMPLETE ONLY ONE OF 1, 2 OR 3:
1. CLASS 1 REPORTING ISSUERS (CANADIAN ISSUERS - LISTED IN CANADA AND/OR
THE U.S.)
Market value of equity securities:
_________________________________
Total number of equity securities of a class or series
outstanding at the end of the issuer's most recent
financial year 60,790,212
Simple average of the closing price of that class or
series as of the last trading day of each of the months
of the financial year (under paragraph 2.5(a)(ii)(A)
or (B) of the Rule) X 67.31
Market value of class or series = 4,091,739
_____(A)
(Repeat the above calculation for each class or
series of equity securities of the reporting issuer
that are listed and posted for trading, or quoted
on a marketplace in Canada or the United States
of America at the end of the financial year) _____(A)
Market value of corporate debt or preferred shares
of Reporting Issuer or Subsidiary Entity referred to
in Paragraph 2.5 (b)(ii): 774,700
[PROVIDE DETAILS OF HOW DETERMINATION WAS MADE.] _____(B)
(Repeat for each class or series of corporate debt
or preferred shares) _____(B)
FINANCIAL STMTS MARKET VALUE
--------------- ------------
Unsecured debentures - Series 1 200,000 215,400
Unsecured debentures - Series 2 150,000 174,500
Unsecured notes, US$300.0 million 368,900 384,800
--------------- --------------
774,700
--------------
TOTAL CAPITALIZATION (ADD MARKET VALUE OF ALL CLASSES
AND SERIES OF EQUITY SECURITIES AND MARKET VALUE OF
DEBT AND PREFERRED SHARES) (A) + (B) = 4,866,439
TOTAL FEE PAYABLE IN ACCORDANCE WITH APPENDIX A OF THE RULE $ 50,000.00
Reduced fee for new Reporting Issuers (see section 2.8
of the Rule) _____
Total Fee Payable X Number of
months
year or elapsed
since most
_______________
_______________
12
Late Fee, if applicable $ --
(please include the calculation pursuant to section 2.9 of the Rule)
APPENDIX A - CORPORATE FINANCE PARTICIPATION FEES
CAPITALIZATION PARTICIPATION FEE
-------------- -----------------
$0 to under $25 million $ 1,000
$25 million to under $50 million $ 2,500
$50 million to under $100 million $ 7,500
$100 million to under $250 million $15,000
$250 million to under $500 million $25,000
$500 million to under $1 billion $35,000
$1 BILLION TO UNDER $5 BILLION $50,000
$5 billion to under $10 billion $65,000
$10 billion to under $25 billion $75,000
Over $25 billion $85,000
TRADING SUMMARY FOR: PD
------------------------------------------------------------------------------------------------------
# OF VOLUME
DATE OPEN HIGH LOW CLOSE TRADES TRADED VALUE TRADED
------------------------------------------------------------------------------------------------------
12/31/2004 74.8 75.83 74.8 75.52 264 110,725 8,355,129.74
11/30/2004 78 78.7 77.64 77.75 696 281,150 21,964,211.13
10/29/2004 73.5 75.74 72.8 75.4 564 165,073 12,314,123.35
9/30/2004 72 72.91 71.55 72.63 767 385,804 27,881,471.87
8/31/2004 65.2 65.75 64.69 64.7 436 197,570 12,878,917.34
7/30/2004 65.19 66.79 65.16 66 511 238,371 15,754,926.54
6/30/2004 63.7 64.13 63.3 63.73 358 105,937 6,745,154.85
5/31/2004 59 60.4 59 59.92 120 115,527 6,929,568.55
4/30/2004 66.01 66.81 65.25 65.25 370 252,377 16,578,849.69
3/31/2004 61.5 61.98 60.97 61.3 604 169,138 10,370,464.56
2/27/2004 64.25 64.73 63.62 64.1 472 325,405 20,906,199.33
1/30/2004 60.5 61.79 60.5 61.41 416 247,755 15,120,182.08
OSC Fee fiscal 2004
TSX share schedule
ADJ CLOSE
x Y/E
Y/E SHARES SHARES
DATE ADJ CLOSE OUTSTANDING OUTSTANDING
---- --------- ----------- -----------
Dec-04 75.52 60,790,212 4,590,876,810
Nov-04 77.75 60,790,212 4,726,438,983
Oct-04 75.40 60,790,212 4,583,581,985
Sep-04 72.63 60,790,212 4,415,193,098
Aug-04 64.70 60,790,212 3,933,126,716
Jul-04 66.00 60,790,212 4,012,153,992
Jun-04 63.73 60,790,212 3,874,160,211
May-04 59.92 60,790,212 3,642,549,503
Apr-04 65.25 60,790,212 3,966,561,333
Mar-04 61.30 60,790,212 3,726,439,996
Feb-04 64.10 60,790,212 3,896,652,589
Jan-04 61.41 60,790,212 3,733,126,919
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SIMPLE AVERAGE 67.31 60,790,212 4,091,738,511
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SIMPLE AVERAGE IN $'000S $ 4,091,739
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Debt (Cdn $ '000s)
Unsecured debentures - series 1 @ Dec 31, 2004 fair value 215,000
Unsecured debentures - series 2 @ Dec 31, 2004 fair value 174,500
Unsecured notes, US$300.0 million 384,800 |
EDC facility (US $2,639) - |
EDC facility (US $20,000) - |
EDC facility (US $20,190) - | ____ Balances excluded as not publicly
Extendable revolving unsecured facility - | traded debt Part 3.3
Capital lease obligations - |
Bank indebtedness - |
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$ 774,700
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TOTAL CAPITALIZATION $ 4,866,439
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