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
PRECISION DRILLING CORPORATION
ANNUAL INFORMATION FORM
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
MARCH 29, 2005
ANNUAL INFORMATION FORM - 1
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION ......................PAGE 1
CORPORATE STRUCTURE ......................................................PAGE 1
INCORPORATION INFORMATION AND ADDRESS .............................PAGE 1
INTERCORPORATE RELATIONSHIPS .......................................PAGE 2
GENERAL DEVELOPMENT OF THE BUSINESS ......................................PAGE 2
THREE YEAR HISTORY .................................................PAGE 2
SIGNIFICANT ACQUISITIONS AND SIGNIFICANT DISPOSITIONS ..............PAGE 3
DESCRIPTION OF THE BUSINESS OF PRECISION .................................PAGE 3
RISK FACTORS .......................................................PAGE 3
DESCRIPTION OF BUSINESS SEGMENTS ...................................PAGE 7
CONTRACT DRILLING ..................................................PAGE 7
CANADIAN DRILLING .............................................PAGE 8
CANADIAN WELL SERVICING .......................................PAGE 11
INTERNATIONAL DRILLING ........................................PAGE 13
ENERGY SERVICES ....................................................PAGE 14
WIRELINE SERVICES...............................................PAGE 14
DRILLING & EVALUATION SERVICES .................................PAGE 15
PRODUCTION SERVICES ...........................................PAGE 17
RENTAL AND PRODUCTION .............................................PAGE 18
RENTAL SERVICES ...............................................PAGE 18
PRODUCTION SERVICES ...........................................PAGE 19
DIVIDENDS ................................................................PAGE 19
DESCRIPTION OF CAPITAL STRUCTURE .........................................PAGE 19
GENERAL DESCRIPTION ...............................................PAGE 19
RATINGS OF DEBT SECURITIES ........................................PAGE 20
MARKET FOR SECURITIES ....................................................PAGE 21
TRADING PRICE AND VOLUME ..........................................PAGE 21
DIRECTORS AND OFFICERS ...................................................PAGE 23
AUDIT COMMITTEE INFORMATION ..............................................PAGE 24
AUDIT COMMITTEE CHARTER ...........................................PAGE 24
COMPOSITION OF THE AUDIT COMMITTEE ................................PAGE 24
RELEVANT EDUCATION AND EXPERIENCE OF AUDIT COMMITTEE MEMBERS ......PAGE 24
PRE-APPROVAL POLICIES AND PROCEDURES ...............................PAGE 24
AUDITOR FEES ......................................................PAGE 25
LEGAL PROCEEDINGS ........................................................PAGE 25
TRANSFER AGENT AND REGISTRAR .............................................PAGE 25
MATERIAL CONTRACTS .......................................................PAGE 26
INTERESTS OF EXPERTS .....................................................PAGE 26
ADDITIONAL DISCLOSURE ....................................................PAGE 26
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES ..................PAGE 26
SELECTED CONSOLIDATED FINANCIAL INFORMATION .......................PAGE 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .....................................PAGE 27
ADDITIONAL INFORMATION ...................................................PAGE 27
APPENDIX 1: AUDIT COMMITTEE CHARTER AND TERMS OF REFERENCE ...............PAGE 28
ANNUAL INFORMATION FORM - 2
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION
Certain statements contained in this Annual Information Form (AIF) and under the
heading "Management's Discussion and Analysis" on pages 55 to 83 of the 2004
Annual Report and in other sections of such Annual Report, including statements
which may contain words such as "anticipate", "could", "expect", "seek", "may",
"intend", "will", "believe" and similar expressions, statements that are based
on current expectations and estimates about the markets in which the Corporation
operates and statements of the Corporation's belief, intentions and expectations
about development, results and events which will or may occur in the future
constitute "forward-looking statements" within the meaning of the "safe harbor"
provision of the United States Private Securities Litigation Reform Act of 1995,
and are based on certain assumptions and analysis made by the Corporation
derived from its experience and perceptions. Forward-looking statements in this
AIF include, but are not limited to: statements with respect to future capital
expenditures, including the amount and nature thereof; oil and gas prices and
demand; other development trends of the oil and gas industry; business strategy;
expansion and growth of the Corporation's business and operations, including the
Corporation's market share and position in the domestic and international
drilling and oilfield service markets; and other such matters. In addition,
other written or oral statements which constitute forward-looking statements may
be made from time to time by and on behalf of the Corporation. Such
forward-looking statements are subject to important risks, uncertainties, and
assumptions which are difficult to predict which may affect the Corporation's
operations, including, without limitation: the impact of general economic
conditions in Canada, the U.S. and in other countries in which the Corporation
currently does business; industry conditions, including the adoption of new
environmental and other laws and regulations and changes in how they are
interpreted and enforced; volatility of oil and gas prices; oil and gas product
supply and demand; risks inherent in the Corporation's ability to generate
sufficient cash flow from operations to meet its current and future obligations;
increased competition; the lack of availability of qualified personnel or
management; labor unrest; fluctuations in foreign exchange or interest rates;
stock market volatility; opportunities available to or pursued by the
Corporation and other factors, many of which are beyond the control of the
Corporation. The Corporation's actual results, performance or achievements could
differ materially from those expressed in, or implied by, these forward-looking
statements and, accordingly, no assurance can be given that any of the events
anticipated by the forward-looking statements will transpire or occur, or if any
of them do so, what benefits, including the amount of proceeds, the Corporation
will derive therefrom. The Corporation disclaims any intention or obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
CORPORATE STRUCTURE
INCORPORATION INFORMATION AND ADDRESS
Precision Drilling Corporation (the "Corporation" or "Precision") was originally
incorporated on March 25, 1985 and amalgamated with two wholly owned subsidiary
companies on January 1, 2000; on January 1, 2002 it was amalgamated with a
wholly owned subsidiary and further, on January 1, 2004 was amalgamated with a
wholly owned subsidiary, all pursuant to Articles of Amalgamation and other
provisions of the Business Corporations Act of Alberta. The Corporation
maintains its head office and principal place of business at 4200, 150 - 6th
Avenue S.W., Calgary, Alberta T2P 3Y7. The telephone number is (403) 716-4500,
the facsimile number is (403) 264-0251 and the website address is
www.precisiondrilling.com.
ANNUAL INFORMATION FORM - 3
INTERCORPORATE RELATIONSHIPS
The following table sets forth the names of the Material Subsidiaries (which
includes major Limited Partnerships) of Precision, the percentage of shares (or
interest) owned by it and the jurisdiction of incorporation or continuance of
each such subsidiary (or partnership) as of December 31, 2004:
NAME OF SUBSIDIARY OR PARTNERSHIP PERCENTAGE OWNED JURISDICTION OF INCORPORATION
OR CONTINUANCE
------------------------------------------------------------------------------------------------------------
Precision Limited Partnership 100% Alberta
Precision Drilling Technology Services Group Inc. 100% Alberta
PD International Services Inc. 100% Alberta
PD Holdings Mexicana, S. de R.L. de C.V. 100% Mexico
Precision Drilling Holdings, Inc. 100% Delaware
Precision Drilling LP, Inc. 100% Delaware
PD Holdings (USA), L.P. 100% Delaware
Precision USA Holdings, Inc. 100% Delaware
Precision Energy Services, Inc. 100% Delaware
------------------------------------------------------------------------------------------------------------
GENERAL DEVELOPMENT OF THE BUSINESS
THREE YEAR HISTORY
Precision provides oilfield and industrial services to customers in Canada and
internationally. The Corporation has grown through a series of acquisitions of
related businesses as well as reinvestment in its core businesses to become the
largest Canadian integrated oilfield and industrial service contractor. During
the 2002 and 2003 fiscal years, the Corporation reinvested substantially all of
its cash flow from operations to grow its service and product offerings. In
2004, the Corporation again turned to acquisitions as tools for growth.
On May 21, 2004, Precision acquired all of the land drilling business
carried on by GlobalSantaFe Corporation for an aggregate purchase price of
US$316.5 million. That land drilling business, which is now carried on through
the Corporation, consists of 31 land drilling rigs, which are located in Kuwait,
Saudi Arabia, Egypt, Oman and Venezuela.
Also, pursuant to an agreement dated May 8, 2004, the Corporation
purchased all of the issued and outstanding shares of Reeves Oilfield Services
Ltd. for an aggregate purchase price of GBP 92.4 million. Reeves Oilfield
Services Ltd. is an international provider of open hole logging services to the
oil and gas industry which carries out field operations in the western region of
the United States; the Appalachian region of the United States; western Canada;
Australia; Europe; the Middle East and Africa.
For more than the last three years, the Corporation has been the leading
provider, in Canada, of land drilling services to oil and gas exploration and
production companies, based on the number of wells and metres drilled.
Additionally, the Corporation provided the following business services during
2004: well service rigs and snubbing units; procurement and distribution of
oilfield supplies; camp and catering services; manufacture, sale and repair of
drilling equipment; wireline, drilling & evaluation and production services;
rental of mobile combination office and industrial housing; rental of surface
oilfield equipment for drilling, completion and production activities; and
industrial maintenance and turnaround services, including specialized equipment
and labour services, to downstream oil and gas, petrochemical and other process
industry customers.
Over the last three years material dispositions consisted of the
following:
o On March 6, 2003, but effective as of January 1, 2003, Precision
Drilling Corporation sold 100% of the shares of Energy Industries
Inc. which carried on the business of the design, packaging, rental,
sale and servicing of natural gas compression equipment.
o In May 2003, the Corporation sold its 50% interest in Energy
Equipment Rentals General Partnership and Oil Drilling Exploration
(Argentina) SA which were involved in the contract drilling business
in Argentina.
ANNUAL INFORMATION FORM - 4
o Effective February 12, 2004, Precision sold the operating assets of
Fleet Cementers, Inc., the wholly owned subsidiary that carried on
the pumping services for cementing, fracturing and well stimulation,
which business was carried on primarily in Texas and California.
o On March 29, 2004, and effective January 1, 2004, Precision disposed
of the assets of Polar Completions, a division of a wholly owned
subsidiary which carried on the design, manufacture, rental and sale
of downhole completion and production equipment.
o On August 31, 2004, Precision sold all of its shares in United
Diamond Ltd., which carried on the business of designing and
manufacturing Polycrystalline Diamond Compact ( "PDC") drill bits.
Since January 1, 2002, the Corporation has undertaken a number of
internal reorganization transactions as follows:
o On January 1, 2002, Precision was amalgamated with a wholly owned
subsidiary to form and continue as Precision Drilling Corporation.
o On January 1, 2003, Precision Drilling Technology Services Group
Inc., Plains Perforating Ltd., Polar Completions Engineering Inc. and
Northland Energy Corporation were amalgamated to form "new" Precision
Drilling Technology Services Group Inc.
o On April 8, 2003, Montero Oilfield Services Ltd. changed its name to
Precision Rentals Ltd.
o On December 31, 2003, PD Holdings (USA), Inc. was converted from a
Delaware Corporation to a Delaware limited partnership, and now
operates under the name PD Holdings (USA), L.P.
o On January 1, 2004, Precision was amalgamated with a wholly owned
subsidiary to continue as Precision Drilling Corporation.
o On January 1, 2004, Precision transferred substantially all of its
Technology Services assets to a new Alberta corporation, Precision
Drilling Technology Services Group Inc.
o In December 2004, Allegheny Wireline Services, Inc., Reeves Wireline
Services, Inc., Northland-Norward (USA) Inc., Computalog U.S.A., Inc.
and Precision Energy Services, Inc. were merged. The surviving entity
adopted the name Precision Energy Services, Inc.
o On January 1, 2005, Precision Drilling Technology Services Group Inc.
and Reeves Wireline Services Ltd. were amalgamated to continue as
Precision Drilling Technology Services Group Inc.
SIGNIFICANT ACQUISITIONS AND SIGNIFICANT DISPOSITIONS
There were no significant acquisitions or dispositions during 2004 for which
disclosure is required under Part 8 of National Instrument 51-102.
DESCRIPTION OF THE BUSINESS OF PRECISION
RISK FACTORS
OIL AND NATURAL GAS PRICES
The Corporation's revenue, cash flow and earnings are substantially dependent
upon, and affected by, the level of activity associated with oil and gas
exploration and production. Both short-term and long-term trends in oil and gas
prices affect the level of such activity. Worldwide military, political and
economic events, including initiatives by the Organization of Petroleum
Exporting Countries, may affect both the demand for, and the supply of, oil and
gas. Weather conditions, governmental regulation (both in Canada and elsewhere),
levels of consumer demand, the availability of pipeline capacity, and other
factors beyond the Corporation's control may also affect the supply of and
demand for oil and gas and thus lead to future price volatility. Precision
believes that any prolonged reduction in oil and gas prices would depress the
level of exploration and production activity. This would likely result in a
corresponding decline in the demand for the Corporation's services and could
have a material adverse effect on revenues, cash flows and profitability. Lower
oil and gas prices could also cause the Corporation's customers to seek to
terminate, renegotiate or fail to honour contracts; affect the fair market value
of the Corporation's assets which, in turn, could trigger a writedown for
accounting purposes; affect the Corporation's ability to retain skilled
personnel; and affect the Corporation's ability to obtain access
ANNUAL INFORMATION FORM - 5
to capital to finance and grow Precision's businesses. The Corporation cannot
assure that the future level of demand for its services or future conditions in
the oil and gas and oilfield services industries will not decline.
WORKFORCE AVAILABILITY
The Corporation's ability to provide reliable services is dependent upon the
availability of well trained, experienced crews to operate its field equipment.
The Corporation 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, Precision's most experienced people are retained
during periods of low utilization by having them fill lower level positions on
its 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.
PRECISION OPERATES IN A COMPETITIVE INDUSTRY
The oilfield services industry in which the Corporation operates is, and will
continue to be, very competitive. Oilfield service companies compete primarily
on a regional basis, and competition may vary significantly from region to
region at any particular time. Most contracts are awarded on the basis of
competitive bids, which results in price competition. Oilfield service equipment
can be moved from one region to another in response to changes in levels of
activity, which can result in an oversupply in an area. In some markets in which
the Corporation operates, the supply of equipment may exceed the demand,
resulting in further price competition.
Certain competitors are present in more than one of the regions in which
Precision operates. In the United States there are several hundred competitors
with national, regional or local operations. In Canada, the Corporation competes
with many firms of varying size. Internationally, the Corporation competes
directly with various competitors at each location in which it operates. Some of
its international competitors may be better positioned in certain markets,
allowing them to compete more effectively. There is no assurance that the
Corporation's level of competition and associated pressure on pricing will not
affect its margins.
FOREIGN OPERATIONS
The Corporation conducts a portion of its business outside North America,
including the Middle East, Africa, Europe, Asia and South America. It is subject
to risks inherent in foreign operations, such as: loss of revenue, property and
equipment as a result of expropriation, nationalization, war, terrorist threats,
civil insurrection and other political risks; fluctuations in foreign currency
and exchange controls; increases in duties, taxes and governmental royalties and
renegotiation of contracts with governmental entities; and changes in laws and
policies governing operations of foreign-based companies. In addition, in the
international markets in which Precision operates, it is subject to various laws
and regulations that govern the operation and taxation of its businesses and the
import and export of its equipment from country to country, the imposition,
application and interpretation of which laws and policies can prove to be
uncertain. Since the Corporation derives a portion of its revenues from
subsidiaries outside of Canada, the payment of dividends or the making of other
cash payments or advances by these subsidiaries to the Corporation may be
subject to restrictions or exchange controls on the transfer of funds in or out
of the respective countries or result in the imposition of taxes on such
payments or advances. The Corporation has organized its foreign operations, in
part, based on certain assumptions about various tax laws (including capital
gains and withholding taxes), foreign currency exchange and capital repatriation
laws and other relevant laws of a variety of foreign jurisdictions. While the
Corporation believes that such assumptions are reasonable, there is no assurance
that foreign taxing or other authorities will reach the same conclusion.
Further, if such foreign jurisdictions were to change or modify such laws, the
Corporation could suffer adverse tax and financial consequences.
SEASONAL WEATHER PATTERNS
In Canada, the level of activity in the oilfield service industry is influenced
by seasonal weather patterns. During the spring months, wet weather and the
spring thaw make the ground unstable. Consequently, municipalities and
provincial transportation departments enforce road bans that restrict the
movement of rigs and other heavy equipment, thereby
ANNUAL INFORMATION FORM - 6
reducing activity levels and placing an increased level of importance on the
location of the Corporation's equipment prior to imposition of the road bans.
Additionally, certain oil and gas producing areas are located in sections of the
Western Canadian Sedimentary Basin ("WCSB") that are inaccessible, other than
during the winter months, because the ground surrounding or containing the
drilling sites in these areas consists of terrain known as muskeg. Until the
muskeg freezes, the rigs and other necessary equipment cannot cross the terrain
to reach the drilling site. Moreover, once the rigs and other equipment have
been moved to a drilling site, they may become stranded or otherwise unable to
relocate to another site should the muskeg thaw unexpectedly. The Corporation's
financial results depend, at least in part, upon the severity and duration of
the Canadian winter and spring thaw.
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
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.
The Corporation's ability to deliver more efficient services is critical
to its continued success. The Corporation has built upon its experience and
teamed with customers to provide solutions to their unique problems. The
Corporation's ability to design and build specialized equipment has kept it on
the leading edge of technology.
The continued development of Precision's Energy Services segment puts the
Corporation at another level where high-end technological innovation is
paramount to success. Although the Corporation has a team of highly qualified
and experienced professionals that has been assembled and worked together for a
number of years in state of the art development and testing facilities, the
success of future technological endeavors is never certain.
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 DOLLARS
Some of the Company's international operations are considered self sustaining,
while others are considered integrated. 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 translation adjustments
are recognized into income when there has been a reduction in the net investment
of the foreign operations.
For integrated operations, nonmonetary 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 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 them 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, net of tax. 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 DOLLARS
ANNUAL INFORMATION FORM - 7
The Corporation's international operations generate revenue and incur expenses
in currencies other than the Canadian dollar. Foreign currency based earnings
are converted into Canadian dollars for purposes of financial statement
consolidation and reporting. 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 income 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 income 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 translation 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 principle
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 were no such contracts outstanding
at December 31, 2004.
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 the Corporation's future success.
MERGER AND ACQUISITION ACTIVITY
Merger and acquisition activity in the oil and gas exploration and production
sector can impact demand for Precision's services, as customers focus on
internal reorganization activities prior to committing funds to significant
drilling and maintenance projects.
DESCRIPTION OF BUSINESS SEGMENTS
Precision's continuing operations are managed in three segments consisting of
Contract Drilling, Energy Services and Rental and Production. Contract Drilling
includes drilling rigs, service rigs, snubbing units, camp and catering
services, procurement and distribution of oilfield supplies, and manufacture,
sale and repair of drilling equipment. Energy Services includes wireline,
drilling & evaluation and production services. Rental and Production includes
oilfield equipment rental services and industrial maintenance services.
ANNUAL INFORMATION FORM - 8
The Corporation's revenue by industry and geographic segments are illustrated in
the following table:
(In thousands $)
----------------------------------------------------------------------------------------
Years ended December 31, 2004 2003 2002
----------------------------------------------------------------------------------------
Contract Drilling $ 1,235,410 $ 992,824 $ 770,147
Energy Services 874,314 696,599 586,180
Rental and Production 215,492 210,724 192,840
Corporate and other -- -- 1,431
----------------------------------------------------------------------------------------
Total Revenue $ 2,325,216 $ 1,900,147 $ 1,550,598
----------------------------------------------------------------------------------------
(In thousands $)
----------------------------------------------------------------------------------------
Years ended December 31, 2004 2003 2002
----------------------------------------------------------------------------------------
Canada $ 1,476,212 $ 1,333,926 $ 1,007,069
International 849,004 566,221 543,529
----------------------------------------------------------------------------------------
Total $ 2,325,216 $ 1,900,147 $ 1,550,598
----------------------------------------------------------------------------------------
The Corporation sells its services to oil and natural gas exploration and
production companies. Macro economic and geopolitical factors associated with
oil and natural gas supply and demand are the prime drivers for pricing and
profitability within the oilfield services industry. Generally, when commodity
prices are relatively high, demand for the Corporation's services is high, while
the opposite is true when commodity prices are low. The markets for oil and
natural gas are separate and distinct. Oil is a global commodity with a vast
distribution network. Natural gas is most economically transported in its
gaseous state via pipeline, its market is dependent on pipeline infrastructure
and is subject to regional supply and demand factors. Recent developments in the
transportation of liquefied natural gas ("LNG") in ocean going tanker ships has
introduced an element of globalization to the natural gas market. However, the
volume capability of the world's LNG infrastructure is not expected to be large
enough to influence pricing in North American markets for a number of years.
Crude oil and natural gas prices are quite volatile, which accounts for much of
the cyclical nature of the oilfield services business. The oilfield services
business cycles are muted somewhat in non-North American markets where projects
tend to be larger and more long-term, therefore less susceptible to short-term
commodity price fluctuations.
The Corporation derived 63% of its revenue from the Canadian market in
2004, a decrease of 7% from 2003. The oilfield service industry in Canada is
subject to seasonal fluctuation. 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. Equally, wet weather can also defer commencement of
drilling or servicing operations on any given day or well location.
CONTRACT DRILLING
This segment consists of three operational categories: Canadian Drilling;
Canadian Well Servicing; and International Drilling. Canadian Drilling operates
within the upstream sector of the oilfield services industry and provides
drilling rigs as well as camp and catering services. Canadian Drilling also
includes infrastructure support through affiliates that operate as Columbia
Oilfield Supply Ltd. and equipment manufacturer, Rostel Industries Ltd. Canadian
Well Servicing provides service rigs and snubbing units with a majority of its
operations a little further downstream, in the well completion and production
maintenance areas. International Drilling provides drilling rigs to many of the
largest onshore based hydrocarbon producing regions of the world.
ANNUAL INFORMATION FORM - 9
Revenue generated by these operations is as follows:
(In thousands $) 2004 2003 2002
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Years ended December 31, REVENUE % OF Revenue % of Revenue % of
----------------------------------------------------------------------------------------------------------
Canadian Drilling $ 718,245 58 $ 654,572 66 $ 474,051 61
International Drilling 246,612 20 114,131 11 105,108 14
Canadian Well Servicing 270,553 22 224,121 23 190,988 25
----------------------------------------------------------------------------------------------------------
$ 1,235,410 100 $ 992,824 100 $ 770,147 100
----------------------------------------------------------------------------------------------------------
Oil and gas well drilling contracts are carried out on either a daywork,
meterage or turnkey basis. Under daywork contracts, Precision charges the
customer a fixed rate per day regardless of the number of days needed to drill
the well. In addition, daywork contracts usually provide for a reduced day rate
(or a lump sum amount) for mobilization of the rig to the well location and for
assembly and for dismantling of the rig. Under daywork contracts, Precision
ordinarily bears no part of the costs arising from downhole risks (such as time
delays for various reasons, including a stuck or broken drill string or
blowouts). Other contracts could provide for payment on a meterage basis,
whereby Precision is paid a fixed charge for each metre drilled regardless of
the time required or the problems encountered in drilling the well. Some
contracts are carried out on a meterage basis to a specified depth and on a
daywork basis thereafter. Turnkey contracts contemplate the drilling of a well
for a fixed price. Compared to daywork contracts, meterage and turnkey contracts
involve a higher degree of risk to Precision and, accordingly, normally provide
greater profit or loss potential. Over the last five years, Precision's
contracts have been carried out almost exclusively on a daywork basis except for
the contract in the Burgos Basin of Mexico, which is being carried out on a
turnkey basis for each well drilled.
CANADIAN DRILLING
The Corporation owns and operates the largest fleet of land drilling rigs in
Canada, through Precision Drilling, a division of Precision Limited Partnership
("PLP"), with 229 actively marketed rigs located throughout the WCSB, accounting
for 32% of the land drilling rigs in Canada.
Precision's Canadian land drilling rigs have varying configurations and
capabilities which allows it to provide services in virtually all areas of
drilling activity in the WCSB. Precision's rigs have drilling depth capacities
of up to 7,600 metres. All of Precision's Canadian drilling rigs are winterized,
allowing for operations in the harsh weather conditions faced in the Canadian
drilling environment. Conventional rigs are configured to handle either one, two
or three joints of range 2 drill pipe at one time and are categorized as
singles, doubles or triples based on this capability. As well, Precision has
coiled tubing drilling rigs which utilize a single strand of pipe coiled around
a reel. As the rig drills, the coiled tubing is unwound and when the bit returns
to surface the coiled tubing is rewound onto the reel. Except for connecting the
bottom hole assembly, which usually includes the drill bit and a drilling fluid
powered motor, which provides the rotation for drilling, no other connections
are necessary. As a result coiled tubing rigs can drill very fast at shallower
depths. These rigs are well suited for shallow vertical drilling.
Single, double and coiled tubing rigs are generally used in the shallow
drilling market, while triple rigs, which have greater hoisting capacity, are
used in deeper exploration and development drilling, usually carried out in
western Canada's foothills and Rocky Mountain regions. The deeper rig fleet
(triples) includes specialized rigs for deep sour gas well drilling and Arctic
class rigs that, although currently operating in Alberta and British Columbia,
are equipped to operate in very cold temperatures. The remaining rigs in
Precision's fleet are Super Single(R) rigs, which garner an industry market
share of 88% within their rig class. The Super Single(R) rigs are manufactured
by Precision and are equipped with top-drive drilling systems, range 3 drill
pipe and automated pipe handling and are capable of slant drilling.
The Super Single(R) Light, a smaller capacity, specialized version of the
Super Single(R), was operational throughout 2004. Two Super Single(R) Light rigs
are in the fleet today and the Corporation plans to build three more in 2005.
These rigs have been built for drilling shallow wells up to 1,200 metres in
depth. Using jointed range 3 drill pipe, the design incorporates proven
technology and reliability in a light weight, easily moved load configuration.
These rigs compete with coiled tubing rigs and offer greater drilling capability
over a wider range of well parameters.
Slant drilling involves tilting a rig mast from vertical and is primarily
used to drill multiple directional wells from one location. In certain
instances, Super Single(R) rigs allow for drilling to be carried out on a more
cost effective basis than using conventional drilling techniques. Drilling
multiple wells from one location for instance, improves the
ANNUAL INFORMATION FORM - 10
economics of developing shallow heavy oil reserves in the WCSB. Additionally the
same technique also allows for exploitation of reserves located in
environmentally sensitive areas or inaccessible locations and eliminates the
costs of building access roads for multiple drilling locations. Precision
believes the Super Single(R) drilling rig category will continue to offer
significant revenue growth. In addition to conventional wells, Precision's Super
Single(R) drilling rigs have been adapted to meet operational needs in the
development of oil sands production in northern Alberta.
Precision has taken a lead role in drilling numerous steam assisted
gravity drainage ("SAGD") projects that involve a centralized mud system and
other innovative rig design features. SAGD is used extensively in the production
of heavy oil reserves and oil sands in-situ bitumen.
A total of 43 of Precision's drilling rigs are electrically powered, with
the remaining rigs mechanically powered. Diesel-electric powered rigs provide
precise rotational control and are considered more power efficient than
mechanical rigs. A diesel-electric rig is well suited for horizontal and
directional drilling. Many of Precision's mechanically powered rigs are also
capable of horizontal and directional drilling by equipping the rigs with
additional equipment which Precision has readily available. Precision
continually seeks to upgrade and modify its rig fleet to maximize performance.
During 2004, two light triple rigs were converted to electric power with a
complete retrofit and design change extending their depth rating to 4,000
metres. Precision works hard to remain abreast of, and in many cases, leads
advances in specialized drilling techniques and technology to maximize power
output and minimize environmental impact.
To facilitate customer requirements on moderate to deep wells, Precision
owns 16 mobile top drives. A top drive is used to rotate the drill string and
provides greater efficiency in the drilling of a well compared to the
traditional rotary table. A top drive is suspended in the mast of the drilling
rig and is powered by a hydraulic or electric motor. All Super Single(R)
drilling rigs are equipped with a permanently mounted top drive as part of the
rig inventory.
The following rig type table lists the drilling depth capability of
Precision's drilling rigs and the total Canadian land drilling industry's rigs
in the WCSB as at December 31, 2004. In addition, the capabilities of
Precision's rigs operating outside Canada are listed.
CANADA INTERNATIONAL
------ -------------
PRECISION INDUSTRY (2) PRECISION
--------- ------------ ---------
# of # of # of % of PD Market # of % of
Rig Type Depth Rating to Rigs Fleet Rigs Fleet Share % (3) Rigs Fleet
-----------------------------------------------------------------------------------------------------------------------
Single 1,200m 16 7 111 15 14 -- --
Super Single(R)(1) 2,500m 21 9 24 3 88 3 6
Double 3,500m 95 41 330 46 29 10 21
Light triple 3,600m 45 20 118 17 38 10 21
Heavy triple 7,600m 41 18 101 14 41 25 52
Coiled tubing 1,500m 11 5 36 5 31 -- --
-----------------------------------------------------------------------------------------------------------------------
Total 229 100 720 100 32 48 100
-----------------------------------------------------------------------------------------------------------------------
Notes:
(1) Super Single(R) excludes single rigs that do not have automated pipe
handling systems, or do not have a self contained top drive, or cannot run
range 3 drill pipe/casing.
(2) Source: Daily Oil Bulletin's Rig Locator Report as of December 31, 2004.
Precision has allocated each company's rig fleet by rig type.
(3) Market share means Precision's rigs as a percentage of the industry's rigs.
During 2004, the industry added significant drilling capacity in Canada with
approximately 45 new drilling rigs, a 7% increase. Almost all of the additional
rigs had a depth rating of less than 3,000 metres with new coiled tubing rigs
leading the way with 12 and a 50% rig type increase. Customer demand to drill
conventional natural gas and oil wells, in combination with the improving
commercialization of natural gas in coal, oil sands and tight natural gas
formations are driving demand for rigs to record levels.
Precision has a balanced offering in all rig types, with particular
strength in deep drilling. As the Corporation's customers turn to deeper wells
to discover new reserves, Precision's 41% market share in rigs with a capacity
greater than 3,600 metres is noteworthy. Drilling opportunities for tight
natural gas in deeper geological formations is a market
ANNUAL INFORMATION FORM - 11
where Precision has particular leverage, a market many expect to emerge in
Canada much the way it has in the United States.
Precision has consistently been the most active land drilling contractor
in Canada as measured by metres and wells drilled. Since 1997, Precision has
sustained a market share in those categories of greater than 30%. During 2004,
Precision achieved a utilization rate of just over 50% for its drilling rigs
compared to the average industry utilization rate in Canada of just under 53%.
Precision's strategy with respect to its drilling operations emphasizes
achieving an industry equivalent level of utilization for its equipment, thereby
enabling Precision to maintain a stable workforce. Precision believes that
continuing reinvestment in its already strong fleet of drilling rigs should
allow it to retain a leading role in the Canadian land drilling market.
The following table lists the drilling rig utilization rates and
certain other drilling statistics for Precision in Canada and the total Canadian
land drilling industry in the WCSB for the years indicated:
UTILIZATION RATES (%) METRES DRILLED (000S) WELLS DRILLED(2)
--------------------- --------------------- ----------------
% of % of
Precision Industry(1) Precision Industry (1) Industry Precision Industry (1) Industry
-----------------------------------------------------------------------------------------------------------------------
2004 50.3 52.9 8,021 23,526 34.1 7,525 21,793 34.5
2003 52.0 53.1 8,604 21,802 39.5 8,451 20,694 40.8
2002 38.3 39.4 6,222 15,708 39.6 6,315 14,920 42.3
2001 51.6 53.0 7,384 18,855 39.2 6,907 17,359 39.8
2000 52.5 55.2 6,771 18,242 37.1 6,143 16,565 37.1
-----------------------------------------------------------------------------------------------------------------------
Notes
(1) Industry numbers exclude drilling rigs not registered with the Canadian
Association of Oilwell Drilling Contractors (CAODC) and non-reporting
CAODC member contractors.
(2) The number of wells drilled is reported on a rig release basis.
For calendar year 2004, Precision drilled 7,525 exploration and
development wells, accounting for 35% of industry wells in western Canada.
Precision supports initiatives to increase the involvement with First
Nations communities in its business. This is directed towards local employment
to supplement oilfield service manpower needs and to foster the economic
participation of aboriginals in commerce that is taking place in and around
their traditional lands. The economic arrangements include joint ownership of
one drilling rig through the Four Lakes Precision Drilling Limited Partnership
and sponsorship based on rig activity to support community development in remote
areas.
The drilling industry in Canada requires specialized skill and knowledge
which, for the past decade, has been in systemic short supply with equipment
capacity expansion to meet the growing number of wells drilled. A drilling rig
crew is comprised of a rig manager, driller, derrickman, motorman, floorhands
and leasehands. The floor and lease positions are entry level with motor,
derrick and driller more advanced. Each position has certain prerequisite
qualifications and training. Well control, H2S, first aid, fall protection, work
place hazardous materials and various aspects of Precision's health safety and
environment management systems are all key training components.
While the shortage of labour in the oilfield service industry is widely
known, emphasis should be placed on the retention of experienced employees.
Precision has an ample flow of new applicants seeking a job in the drilling
industry as a leasehand or floorhand. The shortage is not new applicants, it
lies with the senior experienced positions of derrickman, driller and rig
manager. A shortage occurs in high activity periods when most of the rig fleet
is working. The service industry loses experienced employees to its customers,
to other oilfield industries and to other industries due to the nature of the
work and the well-to-well uncertainty of continuing employment.
With 229 drilling rigs in Canada, Precision has a pool of equipment and an
invaluable pool of experienced employees. Precision's ability to work an entire
fleet of rigs, given Canadian seasonality, arises from its ability to retain
experienced employees in low activity periods, orientate new employees and
effectively administer personnel and payroll functions.
Precision approaches this challenge through a number of measures that
include:
o In-house 3-day orientation courses including rig simulation
o Scheduling and financial assistance towards required training and
certification
ANNUAL INFORMATION FORM - 12
o Target Zero(TM) Safety vision
o In-house Rig Manager course
o In-house Employee Observation and Communication seminar o
Designated Driller program
o Centralized field personnel and payroll departments
o Integrated information systems and standardized technology at the
desktop
o Continuous field support through management and safety
The provision of an experienced competent crew is a competitive strength,
highly valued by customers.
In addition to company initiatives such as those above, the Corporation is
active as a member of the Canadian Association of Oilwell Drilling Contractors
in bringing about the world's first designated trade certification for drilling
rig workers. With registration commencing in the summer of 2005, Alberta is the
first jurisdiction to recognize the specialized skill and knowledge a driller
possesses. The compulsory journeyman trade certification will be called "Rig
Technician". The apprenticeship program requires the successful completion of
three training levels and the accumulation of 6,750 hours of experience with
1,000 as a driller. In the long-term, this initiative should foster individual
career opportunities, high quality training, consistent use of industry
recommended practices and the retention of experienced workers.
The Corporation owns three subsidiaries: Columbia Oilfield Supply Ltd.,
LRG Catering Ltd. and Rostel Industries Ltd. which provide support services
primarily to Precision's Canadian Contract Drilling operations, and in some
cases to the oilfield industry.
Columbia Oilfield Supply Ltd. ("Columbia") became a wholly owned
subsidiary of Precision in 1997 and has been in business since 1977 as a general
supply store to the oilfield service industry with drilling contractors as their
main customers. Columbia's prime focus is to facilitate the consumable
requirements of Precision's drilling, well servicing and snubbing operations in
Canada. Columbia's system of procurement is tightly integrated with operational
purchasing. The handling of high volume supplies and distribution to the
worksite further enhances Precision's operational model. The standardization of
parts and supplies, in combination with centralized vendor relationship
management, provides significant value.
LRG Catering Ltd. ("LRG") is a camp and catering company providing food
and accommodations to the Canadian oil and gas drilling industry and became a
wholly owned subsidiary of Precision in 1993. A typical drilling camp consists
of a five or six-unit structure that can accommodate 20 field employees and feed
up to 50 workers daily. Established in 1976, LRG has grown significantly over
the past seven years. LRG operates 87 quality camp facilities with additional
base camp offerings. LRG contracts its business directly with oil and gas
customers or indirectly as an ancillary service through the drilling rig
contract of its affiliate, Precision Drilling. Whether direct or indirect, LRG
primarily serves the lodging and meal requirements of Precision's drilling rigs
working in remote locations.
Rostel Industries Ltd. ("Rostel") was established in 1976 as a machining
and fabricating shop and became a wholly owned subsidiary of Precision in 1996.
Rostel provides drilling equipment manufacture, certification and repair
services. It also repairs and certifies, as required, rig components such as
crowns, handling tools, traveling blocks and blowout preventers. This business
uniquely positions the Corporation as the only Canadian drilling contractor with
in-house rig building capability.
CANADIAN WELL SERVICING
Over the past four years, the Corporation has worked to strengthen all aspects
of its well services business, from equipment and safety to cost control and
profitability. Commencing in 1996 with the acquisition of EnServ Corporation and
bolstered by the acquisition of CenAlta Energy Services Inc. in 2000, the
Corporation has operated the largest fleet of service rigs in Canada for the
past four years.
Today, the Corporation has a diverse service rig fleet capable of
performing service and completion jobs in any depth range, including heavy oil
wells. It operates as Precision Well Servicing ("PWS"), a division of Precision
Limited Partnership . The characteristics of the fleet, which currently operates
only in the WCSB, is illustrated in the following table:
ANNUAL INFORMATION FORM - 13
2004 2003 2002
--------------------------------------------------------------------------------------------------
# OF % OF # of % of # of % of
Type of Service Rig RIGS FLEET Rigs Fleet Rigs Fleet
--------------------------------------------------------------------------------------------------
Freestanding mobile single 86 36 75 31 50 21
Single -- -- 1 -- 1 --
Mobile single 19 8 29 12 55 23
Double 65 27 57 24 58 24
Freestanding mobile double 9 3 6 3 6 2
Mobile double 42 17 46 19 45 19
Heavy double 1 1 7 3 7 3
Freestanding heavy double 1 1 2 1 2 1
Freestanding slant 16 7 16 7 16 7
--------------------------------------------------------------------------------------------------
Total 239 100 239 100 240 100
--------------------------------------------------------------------------------------------------
During 2004, the service rig fleet generated 472,008 operating hours
for a utilization rate of 54% based on 239 available rigs. The calculation
assumes that available hours per year is 3,650 for each rig.
# of Rigs # of Operating Hours Rig Utilization %
-----------------------------------------------------------------------------------------------
2004 239 472,008 54
2003 239 439,519 50
2002 240 392,210 45
-----------------------------------------------------------------------------------------------
During 2004, PWS maintained an industry market share of 26% based on an
average registered CAODC industry service rig fleet of approximately 900 in
western Canada. PWS continued to upgrade its fleet through initiatives that
include freestanding conversion and new five ton transporters, new pump trucks,
engines, doghouses and mud pumps. As at December 31, 2004, PWS had 112
freestanding service rigs representing 47% of its service rig fleet. This is an
increase of 13 rigs and 6% over 2003. A freestanding rig is more efficient to
set up, minimizes surface disturbance and, as there is no need for mooring,
reduces the possibility of striking underground pipelines.
Well service rigs are typically operated by a crew of four or five workers
and include additional equipment such as circulating pumps, tanks, blowout
preventers and tools. These rigs are mobile and can be moved to new locations
quickly and with relative ease. In general, well servicing activities are
conducted during daylight hours. PWS typically charges its customers an hourly
rate for its services based on a number of considerations including market
demand in the region, the type of rig and complement of equipment required.
Service rigs are typically used during the completion phase of a well, instead
of larger, more expensive drilling rigs, to reduce the cost of completing the
well. The demand for well completion services is related to the level of
drilling activity in a region. The demand for production or "workover" services
is based upon the total number of active wells, their age and their producing
characteristics. Consequently, demand for completion services is generally more
volatile than workover services. Completion services accounted for approximately
34% of PWS's well servicing activity in 2004.
Completion services prepare a newly drilled well for production.
Completion services may involve cleaning out the wellbore, and the installation
of production tubing, downhole equipment and wellheads. Service rigs work
jointly with other services to perforate the wellbore to open the producing
zones and in stimulating the producing zones to improve productivity. The well
completion process may take one day to many weeks to complete and PWS provides a
service rig to assist during most or all of this process.
Workover services are generally provided when a well needs major repairs
or modifications and often involve operations similar to those conducted during
the initial completion of a well. Workovers may also involve restoring or
enhancing production in an existing producing zone, changing to a new producing
zone, converting the well for use as an injection well for enhanced recovery
operations or plugging and abandoning the well. Workover services also include
major subsurface repairs such as casing repair or replacement, recovery of
tubing and removal of foreign objects, such as lost tools, in the wellbore.
Workover activities may require a few days to several weeks to complete. During
this time PWS could work alongside other oilfield services on the well location
as directed by its customer. These other services include well testing and
stimulation.
ANNUAL INFORMATION FORM - 14
Well maintenance services are often required to ensure continuous and
efficient operation of producing wells. These services include routine
mechanical repairs such as repairing broken pumping equipment in an oil well or
replacing damaged rods and tubing. Maintenance services are generally required
throughout the life of a producing well and are typically required more often
for oil wells than gas wells. Well maintenance activities may require a few
hours to several days to complete. While workover and maintenance activities are
not directly linked to drilling activities, they are influenced by both the
short-term and long-term outlooks for oil and gas prices as well as reservoir
depletion. Furthermore, an increase in drilling activity leads to more producing
wells that in time require workover and maintenance services in future years.
Live Well Service ("Live"), also a division of PLP, currently markets 25
portable hydraulic rig assist snubbing units and one stand alone unit in western
Canada. Rig assist snubbing units are equipped with specialized pressure control
devices, which allows for completions and workover operations while the well is
under pressure. This type of unit is a hydraulic rig assist unit, which can be
rigged up in less than two hours onto a service rig floor. It is called rig
assist because it requires a rig to also be present on the well location.
Snubbing units may also be part of the equipment used in Controlled Pressure
Drilling(R) ("CPD(R)") operations during the drilling or completion of a well.
Live completed the construction of a proprietary, stand-alone snubbing
unit during December 2004 and a patent is pending. With field testing scheduled
for the first quarter of 2005 the stand-alone unit is a unique and innovative
design. The unit does not require a service rig on the well location. It is
designed to be self-sufficient with automated tubular handling and numerous
control features to further enhance safe, cost effective snubbing operations.
Traditional well servicing operations requires the pressure in a well to
be neutralized, or killed, prior to performing such operations so that they can
be conducted safely. Certain wells can be damaged if they are killed, as the
fluids used in the process may cause the flow characteristics of the producing
formation to be adversely affected. Consequently, snubbing units have been
developed to perform certain workover, completion and CPD(R) activities without
killing the well. The Corporation believes that the use of snubbing units is
increasing as oil and gas companies become more aware of the potential risks of
formation damage that can be avoided by using snubbing units and techniques.
Snubbing is typically performed on natural gas wells. The escalating trend
toward higher natural gas well drilling and low pressure production in the WCSB
is having a positive effect on demand for Live's services.
INTERNATIONAL DRILLING
On May 21, 2004, Precision acquired all of the land drilling business carried on
by GlobalSantaFe Corporation for an aggregate purchase price of US$316,500,000.
This land drilling business, which is now carried on through the Corporation,
consisted of 31 land drilling rigs located in Kuwait, Saudi Arabia, Egypt, Oman
and Venezuela. In addition to the 31 excellent quality primarily heavy duty land
rigs, the Corporation also acquired an extensive fleet of specialized rig
transport equipment, approximately 1,300 experienced international staff of some
27 nationalities and expanded its geographical base significantly in the Middle
East, North Africa and South America.
Prior to this acquisition, the strategy was to grow the Corporation's rig
count in select international regions where its technology, which had been
proven in the Canadian market place, differentiated Precision 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 its
Middle East presence where the newly acquired business had been operating for
over 40 years.
This acquisition transformed Precision into the third largest provider of
land rigs in the international market and broadened the Corporation's
international product offering. As a result, Contract Drilling's operating days
in the international market increased exponentially compared with 2003.
At December 31, 2004, Precision's international drilling operations
included 48 rigs as follows:
In Kuwait, Precision has a total of 12 predominantly heavy duty land rigs
with eight currently operating under long-term daywork contracts for both the
Kuwait national oil company and in the neutral zone between Kuwait and Saudi
Arabia. In addition there is an extensive fleet of transport and supply
equipment supporting these operations.
In Saudi Arabia, Precision has four heavy duty land rigs operating under
long-term daywork contracts.
ANNUAL INFORMATION FORM - 15
In Oman, Precision has a total of four rigs with three currently operating
under long-term daywork contracts.
In Egypt, Precision has four predominantly heavy duty land rigs all
currently operating under medium-term daywork contracts for three separate oil
companies. In addition there is a fleet of transport equipment supporting these
operations.
In India, Precision has two rigs, one land rig working on a medium-term
daywork contract and one rig on an offshore platform operating on a medium-term
daywork contract.
In the Persian Gulf, Precision has one heavy duty land rig operating on a
medium-term daywork contract.
In Mexico, Precision has a total of 10 land rigs with between six and 10
operating at any time under a contract for integrated services provided by
Precision on a turnkey basis.
In Venezuela, Precision currently has 11 predominantly heavy duty land
rigs with eight currently operating under medium-term daywork contracts for both
the national oil company and other international operators.
ENERGY SERVICES
The Energy Services segment (formerly Technology Services) carries on business
through three main business lines, being: Wireline Services, Drilling &
Evaluation Services and Production Services. Wireline includes open hole, cased
hole and slickline services. Drilling & Evaluation includes measurement while
drilling ("MWD"), logging while drilling ("LWD"), directional drilling and
rotary steerable services. Production Services includes well testing and
Controlled Pressure Drilling(R) (which includes underbalanced drilling
services). In addition to the three main business lines, Energy Services derives
other revenues from the provision of project management services on the Burgos
Project in Mexico.
Revenue generated by Energy Services operations is as follows:
(In thousands $) 2004 2003 2002
-------------------------------------------------------------------------------------------------------------
Years ended December 31 REVENUE % OF Revenue % of Revenue % of
-------------------------------------------------------------------------------------------------------------
Wireline Services $ 424,575 49 $ 298,568 43 $ 227,497 39
Drilling & Evaluation Services 270,595 31 223,442 32 178,675 30
Production Services 97,437 11 95,426 14 100,670 17
Other Services 81,707 9 79,163 11 79,338 14
-------------------------------------------------------------------------------------------------------------
$ 874,314 100 $ 696,599 100 $ 586,180 100
-------------------------------------------------------------------------------------------------------------
WIRELINE SERVICES
Wireline logging services are used to measure the physical properties of
underground formations to help determine the location and potential
deliverability of oil and gas in a reservoir after a hole is drilled. The
provision of wireline services is divided into three categories; open hole,
cased hole and slickline services. Precision gained a foothold in the wireline
market in 1999 through the acquisition of Computalog Ltd., which had long
enjoyed a reputation primarily in Canada for quality service in cased hole and
open hole wireline logging. In 2004, the Corporation acquired UK-based Reeves
Oilfield Services Ltd., a provider of unique Compact(TM) open hole technology
with operations in the U.S., Canada, Europe, the Middle East, Africa and
Australia.
Open hole logging assists in locating oil and gas by measuring certain
characteristics of geological formations and providing permanent records called
"logs". Cased hole services are performed at various times throughout the life
of the well and include perforating, completion logging, production logging and
wellbore integrity services. Wireline services are provided from surface logging
units, which lower tools and sensors into the wellbore mainly on a single or
multiple conductor wireline. However other conveyance methods are also
available. As the wireline pulls the tools through the wellbore, log
measurements are gathered and relayed through the wireline cable to a
computerized surface data acquisition and processing system. These systems are
an integral component of each wireline unit.
Open hole logging may be performed at different intervals during the well
drilling process or immediately after a well is drilled. This logging data
provides a valuable benchmark that future well procedures may be referenced to.
The open hole sensors and tools are used to determine well lithology and the
presence of hydrocarbons. Formation characteristics such as resistivity, density
and porosity are measured using electrical, nuclear, acoustic, magnetic and
mechanical technologies. This data is then used to characterize the reservoir
and describe it in terms of porosity, oil, gas, or water content and an
estimation of productivity. This information can be further refined at a later
time in one of the
ANNUAL INFORMATION FORM - 16
Corporation's log interpretation centers. Wireline services can relay this
information from the wellsite on a real time basis via a secure satellite
transmission network and secure internet connection to the client's office for
faster evaluation and decisions. Most of its open hole tools and sensors are
proprietary.
After the wellbore is cased and cemented, the cased hole division can
perform a number of different services. Perforating the casing allows oil and
gas to flow to the surface. Production logging may be performed throughout the
life of the well to measure temperature, fluid type, flow rate, pressure and
other reservoir characteristics. This helps the operator analyze and monitor
well performance and determine when a well may need a workover or further
stimulation. In addition, cased hole services may involve wellbore remediation,
which could include the positioning and installation of various plugs and
packers to maintain production or repair well problems. Some of Precision's
cased hole tools are proprietary.
At Precision's facilities in Fort Worth, Texas and East Leake in the UK,
Precision designs, assembles and services open hole and cased hole logging
tools, and surface equipment. The specialized truck-mounted and skid-mounted
wireline logging units are manufactured and assembled to the Corporation's
specifications by third parties. The focus of open hole wireline research and
engineering has been on the development of new and/or improved downhole sensors
for Precision's Compact(TM) and standard logging suites. In cased hole, the Slim
Monopole Array Sonic, Pulsed Neutron Decay Detector, Ultrasonic Cement Scanner,
Production Fluid Identifier and Casing Inspection Tool, are in the final stages
of development.
Slickline, which utilizes a solid steel non-conductor line, in place of a
single or multiple conductor braided line used in electric logging, is used
primarily in producing wells for running downhole memory tools, manipulating
downhole production devices and fishing services.
In 2004, the Corporation opened a new training facility in Fort Worth,
Texas. The facility is used to train employees in health, safety and environment
awareness, as well as job specific skills such as employee orientation,
equipment operation, defensive driving and the handling and security of
hazardous materials.
Precision provides wireline and slickline services with a total of 320
units deployed from its service centres in Canada, the U.S., and
internationally.
DRILLING & EVALUATION SERVICES
Directional drilling is the use of equipment and engineering to intentionally
change the angle of a wellbore so that the trajectory of the wellbore can be
accurately controlled, drilling efficiency can be enhanced or formations or
obstructions can be circumvented in order to reach the pay zone. The acquisition
of Computalog Ltd. in 1999 marked Precision's entry into the directional
drilling services market. Directional drilling services offered worldwide were
strengthened with the acquisitions of BecField Drilling Services Ltd. in January
2001, and the electromagnetic ("EM")/MWD technology, from Geoservices, S.A. in
October 2000.
Precision supplies specialized equipment including MWD, LWD, rotary
steerable systems, surveying and drilling motors along with experienced
personnel for directional and horizontal drilling operations. Those services are
available for directional control, slant well drilling, single and multi-lateral
horizontal wells, and other directional applications. Directional drilling and
some MWD equipment is engineered and assembled in Edmonton, Alberta and Fort
Worth, Texas while LWD and other MWD tools are manufactured and assembled in
Houston, Texas. Precision Energy Services has MWD/LWD related research and
engineering facilities in Hannover, Germany; Tewkesbury, England; and Houston,
Texas.
A MWD system is usually connected behind a mud motor or rotary steerable
system and relays continuous real time information to the surface to monitor the
trajectory of the well being drilled. A LWD system is connected behind a mud
motor or rotary steerable system and monitors formation characteristics while
drilling, similar to the measurements made with open hole logging tools, and
relays the data to surface in real time. MWD and LWD information is transmitted
to the surface via pressure pulses or by electromagnetic waves. Using MWD
information, the operator steers the drill bit to the prescribed target
location. Unlike previous technologies, MWD and LWD do not require the drill
string to be tripped out of the hole while the well trajectory and formation
characteristics are being measured, thus saving valuable time.
ANNUAL INFORMATION FORM - 17
The desire for new technology was the rationale behind the formation of
Advantage R & D, Inc., ("Advantage") in 1999. Advantage focuses on the research
and engineering of MWD and LWD technologies and advanced directional drilling
systems. The Advantage research and engineering strategy has initially been
directed towards the high temperature MWD and LWD market with respect to
land-based as well as deep-water drilling markets. Advantage has developed
directional, gamma ray, resistivity, neutron porosity, bulk density, pressure
while drilling and downhole environment severity sensors. During 2004, the
Corporation completed the design and testing of its Revolution(R) rotary
steerable system for a variety of hole sizes from 5-7/8 inch to 14 inch. In
addition, the 4-3/4 inch and 6-3/4 inch models completed extensive field trials
during 2004 and have been fully commercialized, while the 8-1/4 inch model is in
field testing and is planned to be commercialized in the first half of 2005. The
Revolution(R) system is a slim, automated downhole drilling assembly that
enables precise wellbore steering while maximizing the rate of penetration.
Advantage is located in Houston, Texas, in a research and development facility
that has state of the art testing equipment complete with extensive well
simulation capabilities.
The directional drilling facility in Edmonton, Alberta is responsible for
the design and assembly of pressure pulse MWD systems and certain directional
survey tools which are manufactured to Precision's specifications by third
parties in Canada. The Edmonton facility is also responsible for the design of
drilling motors which are manufactured by third parties in Canada to Precision's
specifications and assembled at its Fort Worth facilities. These MWD, survey and
drilling motors are utilized by the Corporation worldwide in providing
directional drilling services.
Precision has established a portfolio of patents and patent applications
directed to key aspects of its MWD, LWD and rotary steerable services. The
Corporation has focused on patents covering key aspects of technology in LWD
nuclear and resistivity measurements, electromagnetic telemetry and its
Revolution(R) rotary steerable system. In addition, with the acquisition of the
EM/MWD businesses of Geoservices, Precision acquired a worldwide, exclusive
license to electromagnetic telemetry patents and patent applications owned by
Geoservices for use in MWD services.
Precision Energy Services provides Drilling & Evaluation services in
nearly all global markets. The largest is the North American market followed by
a strong presence in Latin America, Asia and the Middle East. Precision opened
new operations in the North Sea in 2004, providing rotary steerable and LWD
services in both the UK and Norwegian North Sea sectors. Middle East Operations
include ongoing work in northern Africa.
PRODUCTION SERVICES
Production Services provides separation services, well testing and Controlled
Pressure Drilling(R) ("CPD(R)") or underbalanced drilling ("UBD") services to
oil and gas producers. Precision entered the production services market through
the acquisition of Northland Energy Corporation and InterTech Drilling Solutions
Ltd. in mid 1998. In 2000, Precision acquired the Entest Corp. personnel and
equipment to expand its well testing and CPD(R) operation into low and medium
pressure market segments in Canada. The acquisition of Norward Energy Services
in 2001 further increased the capabilities of the Corporation to provide high
pressure and sour separation services to Canada as well as gaining a testing
operation in the northwest United States. In 2001, to facilitate expansion
outside of Canada, the Corporation acquired the assets of ITS-Testco LLC to
establish a separation services base in Mexico to service an integrated services
contract in the Burgos region and facilitate expansion of services elsewhere in
Mexico. In 2001, the Corporation also acquired the testing assets of Core
Laboratories/Pencor in Venezuela.
The separation business supplies personnel and equipment on a wellsite to
recover a mixture of solids, liquids and gases from oil and gas wells. Precision
designs equipment and provides training to its personnel to enable safe
separation of the recovered solids, liquids and gases while accurately measuring
each component and ensuring proper well control. These services are used during
drilling, post stimulation or after recompletion of existing wells and the
service is commonly called well clean up or flow back, while the actual process
of measurement and evaluation of reservoir fluids is called well or flow
testing. The operator requires a well to be properly cleaned up prior to
undertaking any well or flow test to ensure that the true deliverability of the
well can be determined. To provide more efficient operations with environmental
benefits Precision has continued to develop its services with the introduction
of in-line testing, allowing separated fluids to be captured for sale instead of
flaring or burning. Should flaring of gases be necessary, due to a lack of
pipeline infrastructure, Precision's enclosed ground burners and incinerators
operating at elevated temperatures provide a more efficient means of hydrocarbon
disposal when compared to conventional flare stacks.
ANNUAL INFORMATION FORM - 18
The CPD(R)/UBD business provides engineers, personnel and surface control
equipment, offering a complete service to drill a CPD(R) or UBD well. The
concept of CPD(R) is to use a lighter drilling medium than that normally used to
ensure hydrostatic pressure in the wellbore is lowered to reduce drilling
related challenges and formation damage and allow formation characterization
during drilling operations. Often exhaust gas, or inert gas such as nitrogen is
injected downhole with the drilling mud to create the required lighter drilling
medium. Reservoir fluids can be allowed to flow to the surface as the well is
being drilled instead of exposing the reservoir to drilling mud invasion due to
the overpressure nature of a mud column in the wellbore. This concept attempts
to avoid formation damage experienced in many wells, particularly horizontal
wells, which are more susceptible to formation damage problems caused by the
drilling mud itself due to the lengthened duration of drilling within the
reservoir. With the increase in the number of horizontal wells being drilled and
the increase of sub-hydrostatic reservoirs, where drilling challenges such as
lost circulation and differential sticking are often encountered, the use of
CPD(R)/UBD technology has been steadily increasing.
Production Services has successfully exploited its proprietary rotating
blow-out preventer ("RBOP(R)"), and exhaust gas processors ("EGP") with several
patents granted and other patent applications pending. The RBOP(R) device seals
off the wellbore annulus at surface by gripping and sealing around the drill
pipe and rotating freely with it. It then diverts the pressurized flow of
drilling fluids, gas, oil and cuttings to a choke manifold and separation
package. The EGP satisfied the service gas requirements of CPD(R) and, with the
acquisition of nitrogen membrane systems, Precision has total CPD(R)/UBD service
gas capabilities.
Precision is the largest provider of well testing, flowback and CPD(R)
services in Canada with its principal operations in Alberta, together with
operations in British Columbia and Saskatchewan. In the Rocky Mountain Region of
the U.S., the Corporation maintains the largest single market share at
approximately 25% competing primarily against smaller local and Canadian
players.
From its East coast operation in the UK, Precision operates a CPD(R) and
testing services business, with a focus on the North Sea, Eastern Europe and
North Africa.
In the Middle East, Precision has established operations in Oman, Saudi
Arabia and Yemen, where the business provides CPD(R) services and early
production facilities.
RENTAL AND PRODUCTION
The rental services component of the Rental and Production segment of the
Corporation is carried out through Precision Rentals Ltd. ("Precision Rentals"),
a large provider of oilfield equipment serving the western Canadian market. The
production services component of this segment is carried out through CEDA
International Corporation ("CEDA"), which is a leading provider of industrial
maintenance and turnaround services, including specialized catalyst handling,
both in Canada and the U.S.
Revenue generated in Rentals and Production is as follows:
In thousands $) 2004 2003 2002
-----------------------------------------------------------------------------------------------------------
Years ended December 31 REVENUE % OF Revenue % of Revenue % of
-----------------------------------------------------------------------------------------------------------
Rental Services $ 39,690 18 $ 36,478 17 $ 24,469 13
Production Services 175,802 82 174,246 83 168,371 87
-----------------------------------------------------------------------------------------------------------
Total $ 215,492 100 $ 210,724 100 $ 192,840 100
-----------------------------------------------------------------------------------------------------------
RENTAL SERVICES
Precision Rentals Ltd. ("Precision Rentals") is an oilfield rental company
serving the equipment needs of producers throughout western Canada. Its
operations are well positioned with a comprehensive network of field offices and
equipment stocking points, making Precision Rentals one of the largest providers
of oilfield rental equipment in Canada. Precision Rentals' equipment is divided
into three product categories:
o Surface drilling, completions and production equipment;
o Specialty drill string tubulars and well control equipment; and
o Field and wellsite accommodations.
In response to changing market dynamics over the past three years,
Precision Rentals has undergone considerable change. In 2002, the in-house
manufacturing facility for wellsite accommodations was closed and in 2003 three
single
ANNUAL INFORMATION FORM - 19
product divisions, formerly known as Ducharme Rentals, Big D Rentals and
Smoky Oilfield Rentals, were combined under the name Precision Rentals.
Throughout 2004, the focus has been to document and modify business processes to
facilitate a new multi-product delivery strategy. For 2005, these efforts will
result in the implementation of a new enterprise-wide accounting software
package.
Precision Rentals continues to reinvest in new equipment to keep its fleet
in good condition and of a mix to meet customer demand. The rate of reinvestment
has averaged almost 50% of after tax cash flow margins over the past four years,
without any expansion by way of acquisition of competing businesses.
The inventory of the surface drilling, completions and production line
includes storage tanks, high and low pressure oil and gas separators, sump and
shale tanks and related equipment. Precision Rentals also supplies the patented
Vapour Tight Oil Battery(TM), which allows for safe, single well production of
oil with H2S content through the use of a 500-barrel vessel with gas metering
and flaring capabilities.
The inventory of the speciality tubulars and well control line consists of
approximately 10,000 joints of specialty drill pipe and collars, 4,000 handling
tools, valves, kellys and floats and blowout prevention equipment (which
includes valves, pumps and diverter systems).
The field and well site accommodation portion of Precision Rentals
consists of a fleet of approximately 281 fully equipped and furnished units.
These units are often delivered to rig locations using Precision Rental's own
air-ride trucks and tri-axle trailers.
PRODUCTION SERVICES
CEDA is a leading provider of industrial maintenance and turnaround services and
other specialized services to various production industries in Canada and the
U.S. The main areas of its operations are industrial cleaning, catalyst handling
and mechanical services, usually carried out in large plants such as refineries,
gas plants, petro-chemical facilities and the pulp and paper industry.
Industrial cleaning encompasses high pressure water blasting, large scale
industrial vacuuming (174 vacuum trucks) and specialized chemical cleaning. High
pressure water blasting equipment (81 units and 15 bundle blasters) pumps water
at pressures up to 40,000 psi to clean equipment and systems that are externally
accessible. When equipment and systems are not externally accessible, cleaning
requires the circulation of chemical formulations through a closed system.
Specialized chemical cleaning utilizes a team of chemists, engineers and service
technicians who combine their expertise to provide highly specialized and
environmentally sound chemical cleaning services. Catalyst handling involves the
removal and replacement of catalyst in reactors at refineries or petrochemical
facilities. Mechanical services include bolt tensioning, machining and leak
repair services. Specialized mechanical services utilize technology and
equipment to unfasten, repair and refasten flanges and piping systems with
resulting savings of time and money and reduction of fugitive emissions. These
services are usually undertaken at customer locations, frequently under critical
time constraints, during scheduled shut downs or emergencies.
With many years of experience in providing dredging, dewatering and water
recycling services, CEDA operates a modern fleet of equipment that includes
portable dredges, dewatering centrifuges and unique oil-skimming equipment
capable of assisting companies in dealing with a variety of water-related
maintenance services. The equipment and staff work in a variety of industries
from chemical plants and refineries to mining, utilities and pulp and paper
operations.
In Canada, CEDA and its subsidiaries operate from 18 operating centers
plus a network of three dealerships. In the U.S., CEDA provides a full suite of
services out of 10 major operating centers.
DIVIDENDS
No dividends have been paid on any Common Shares of the Corporation since its
inception. There is no current intention to change the policy of not paying
dividends. Any decision to pay dividends on the Common Shares in the future will
be made by the Board of Directors of the Corporation and will be based on the
Corporation's earnings, financial requirements and other conditions at the time.
ANNUAL INFORMATION FORM - 20
DESCRIPTION OF CAPITAL STRUCTURE
GENERAL DESCRIPTION
The authorized capital of Precision consists of an unlimited number of Common
Shares, the holders of which are entitled to vote at all meetings of
shareholders, receive any dividends declared on Common Shares and receive the
remaining property of the Corporation upon dissolution in equal rank with the
holders of all other Common Shares, subject to any superior rights. In addition,
there are an unlimited number of preferred shares which, as a class, may be
issued in one or more series and the directors may fix from time to time before
such issue the number of preferred shares which is to comprise each series along
with the designation, rights, privileges, restrictions and other conditions
attaching to each series including rights on winding-up, and if there are any
cumulative dividends or amounts payable on the return of capital in respect of a
series of preferred shares that are not paid in full, all series of preferred
shares shall participate rateably in respect of the accumulated dividends and
return of capital. As at February 28, 2005 there were 61,297,033 Common Shares
issued and outstanding and no preferred shares of any kind or series.
RATINGS OF DEBT SECURITIES
The following ratings have been assigned to the Corporation's debt securities by
the rating agencies noted below. Please note that a security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the applicable rating organization.
DBRS Moody's S & P
--------------------------------------------------------------------------------
Senior Unsecured Debt BBB Baa2 BBB+
--------------------------------------------------------------------------------
The above noted ratings have the following meanings:
DOMINION BOND RATING SERVICES LIMITED ("DBRS")
DBRS' credit ratings are on a long-term debt rating scale that ranges from AAA
to D, which represents the range from highest to lowest quality of such
securities rated. A rating of BBB by DBRS is the fourth highest of nine
categories and, according to DBRS, is assigned to debt securities of adequate
credit quality. Protection of interest and principal is considered acceptable
but the entity is fairly susceptible to adverse changes in financial and
economic conditions, or there may be other adverse conditions present which
reduce the strength of the entity and its rated securities.
MOODY'S INVESTOR SERVICES ("MOODY'S")
Moody's credit ratings are on a long-term debt rating scale that ranges from Aaa
to C, which represents the range from highest to lowest quality of such
securities rated. A rating of Baa by Moody's is the fourth highest of nine
categories and, according to Moody's, is assigned to debt securities that are
subject to moderate credit risk. They are considered medium-grade and as such
may possess certain speculative characteristics. Moody's appends numerical
modifiers 1, 2 and 3 to each rating classification from Aa to Caa. The modifier
2 indicates a ranking in the mid-range of that generic rating category.
STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES, INC. ("S&P")
S&P's credit ratings are on a long-term debt rating scale that ranges from AAA
to D, which represents the range from highest to lowest quality of such
securities rated. A rating of BBB+ by S&P is the fourth highest of eleven
categories and, according to S&P, indicates that the obligor has adequate
capacity to meet its financial commitments. However, adverse conditions or
changing circumstances are most likely to lead to a weakened capacity of the
obligor to meet commitments. The addition of a plus (+) or minus (-) designation
after a rating indicates relative standing within a particular rating category.
ANNUAL INFORMATION FORM - 21
MARKET FOR SECURITIES
TRADING PRICE AND VOLUME
The Common Shares of the Corporation are listed for trading on the Toronto
Stock Exchange ("TSX") and trade under the symbol PD and PD.U, and on the New
York Stock Exchange ("NYSE") under the symbol PDS. The following tables set
forth the monthly and quarterly price range and volume traded for the Common
Shares of the Corporation on the TSX and the NYSE for fiscal 2004.
TSX (1)
(In Canadian dollars, except volume traded amounts)
Period High Low Close Volume Traded
----------------------------------------------------------------------------------------------------------------------
Jan 65.00 55.89 61.41 6,739,564
Feb 64.73 60.05 64.10 4,460,143
Mar 67.50 59.60 61.30 6,037,618
----------------------------------------------------------------------------------------------------------------------
Q1 67.50 55.89 61.30 17,237,325
----------------------------------------------------------------------------------------------------------------------
Apr 69.37 60.78 65.25 7,093,921
May 68.45 58.16 59.92 7,666,421
June 65.49 58.32 63.73 5,405,453
----------------------------------------------------------------------------------------------------------------------
Q2 69.37 58.16 63.73 20,165,795
----------------------------------------------------------------------------------------------------------------------
July 66.90 62.60 66.00 4,485,086
Aug 68.40 62.55 64.70 4,825,164
Sept 73.24 64.34 72.63 6,806,023
----------------------------------------------------------------------------------------------------------------------
Q3 73.24 62.55 72.63 16,116,273
----------------------------------------------------------------------------------------------------------------------
Oct 77.96 70.54 75.40 6,609,893
Nov 78.70 69.32 77.75 6,198,438
Dec 78.00 69.90 75.52 6,134,184
----------------------------------------------------------------------------------------------------------------------
Q4 78.70 69.32 75.52 18,942,515
----------------------------------------------------------------------------------------------------------------------
2004 Totals 78.70 55.89 75.52 72,461,908
----------------------------------------------------------------------------------------------------------------------
(1) All price and volume information is from the TSX website.
TSX - PD.U (1)
(In U.S. dollars, except volume traded amounts)
Period High Low Close Volume Traded
----------------------------------------------------------------------------------------------------------------------
Feb(2) 48.40 45.80 46.83 2,200
Mar 49.79 45.70 46.72 1,900
----------------------------------------------------------------------------------------------------------------------
Q1 49.79 45.70 46.72 4,100
----------------------------------------------------------------------------------------------------------------------
Apr 51.00 46.75 47.75 11,100
May 49.25 42.75 43.75 20,500
June 47.50 43.50 47.50 4,100
----------------------------------------------------------------------------------------------------------------------
Q2 51.00 42.75 47.50 35,700
----------------------------------------------------------------------------------------------------------------------
July 51.00 47.25 49.50 6,400
Aug 51.50 47.63 50.01 5,200
Sept 57.50 49.83 57.50 4,400
----------------------------------------------------------------------------------------------------------------------
Q3 57.50 47.25 57.50 16,000
----------------------------------------------------------------------------------------------------------------------
Oct 61.51 56.50 61.00 6,100
Nov 66.00 58.00 66.00 1,500
Dec 63.00 59.00 62.50 900
ANNUAL INFORMATION FORM - 22
Period High Low Close Volume Traded
----------------------------------------------------------------------------------------------------------------------
Q4 66.00 56.50 62.50 8,500
----------------------------------------------------------------------------------------------------------------------
2004 Totals 66.00 42.75 62.50 64,300
(1) All price and volume information is from the TSX website. (2) Began trading
February 2, 2004.
NYSE (1)
(In U.S. dollars, except volume traded amounts)
Period High Low Close Volume Traded
----------------------------------------------------------------------------------------------------------------------
Jan 49.57 43.30 46.33 4,321,700
Feb 48.56 45.12 47.93 3,117,800
Mar 50.50 45.02 46.58 4,455,600
----------------------------------------------------------------------------------------------------------------------
Q1 50.50 43.30 46.58 11,895,100
----------------------------------------------------------------------------------------------------------------------
Apr 51.30 46.48 47.90 4,656,900
May 49.85 42.30 43.32 5,808,900
June 48.01 43.06 48.01 4,068,600
----------------------------------------------------------------------------------------------------------------------
Q2 51.30 42.30 48.01 14,534,400
----------------------------------------------------------------------------------------------------------------------
July 51.18 46.88 49.73 4,359,600
Aug 51.98 47.54 49.40 4,875,100
Sept 57.75 49.39 57.50 6,176,700
----------------------------------------------------------------------------------------------------------------------
Q3 57.75 46.88 57.50 15,411,400
----------------------------------------------------------------------------------------------------------------------
Oct 63.19 55.85 61.66 7,168,400
Nov 66.19 57.80 65.55 6,370,000
Dec 64.95 57.51 62.80 5,288,000
----------------------------------------------------------------------------------------------------------------------
Q4 66.19 55.85 62.80 18,826,400
----------------------------------------------------------------------------------------------------------------------
2004 Totals 66.19 42.30 62.80 60,667,300
(1) All price and volume information is from the NYSE website.
DIRECTORS AND OFFICERS
The following table sets forth all of the current directors and officers of the
Corporation together with the positions currently held by them with the
Corporation, their principal occupation or employment during the last five years
and the year in which they were first elected a director of the Corporation.
Each director is elected at the annual meeting of shareholders to serve until
the next annual meeting or until a successor is elected or appointed. Officers
are appointed annually and serve at the discretion of the Board of Directors of
the Corporation.
Name Title Principal Occupation Director Since(1)
----------------------------------------------------------------------------------------------------------------------
W.C. (Mickey) Dunn (3)(4) Director Chairman, True Energy Ltd. September 1992
Age: 51
Edmonton, Alberta, Canada
----------------------------------------------------------------------------------------------------------------------
Robert J.S. Gibson (2)(4) Director President, Stuart & Company Limited June 1996
Age: 58
Calgary, Alberta, Canada
----------------------------------------------------------------------------------------------------------------------
Patrick M. Murray (2) Director Chairman, President and Chief Executive Officer July 2002
Age: 62 Dresser, Inc. since April 2001. Prior to that, from
Dallas, Texas, USA -1997 to 2001 Mr. Murray was President of Dresser
Equipment Group and Senior Vice President
Strategic Initiatives of Dresser Industries.
----------------------------------------------------------------------------------------------------------------------
Fred W. Pheasey (3)(4) Director Executive Vice President July 2002
Age: 62 National Oilwell, Inc.
Edmonton, Alberta, Canada
----------------------------------------------------------------------------------------------------------------------
ANNUAL INFORMATION FORM - 23
Name Title Principal Occupation Director Since(1)
----------------------------------------------------------------------------------------------------------------------
Robert L. Phillips Director Corporate Director May 2004
Age: 54 Mr. Phillips was most recently President and
Vancouver, British Columbia, Chief Executive Officer of BCR Group
Canada of Companies from 2001 to 2004.
Prior to that, he was
Executive Vice President
at MacMillan Bloedel
Limited from 1999 to
2001.
----------------------------------------------------------------------------------------------------------------------
Hank B. Swartout Chairman of the Officer of the Corporation July 1987
Age: 53 Board, President
Calgary, Alberta, Canada and Chief
Executive Officer
----------------------------------------------------------------------------------------------------------------------
H. Garth Wiggins (2) Director Principal, Kenway, Mack, Slusarchuk, September 1997
Age: 56 Stewart
Calgary, Alberta, Canada Chartered Accountants
----------------------------------------------------------------------------------------------------------------------
Jan M. Campbell Corporate Officer of the Corporation N/A
Calgary, Alberta, Canada Secretary
----------------------------------------------------------------------------------------------------------------------
R.T. (Bob) German Vice President Officer of the Corporation N/A
Calgary, Alberta, Canada and Chief
Accounting Officer
----------------------------------------------------------------------------------------------------------------------
Ian E. Kelly Senior Vice Officer of the Corporation since May N/A
Calgary, Alberta, Canada President 2004. Prior to joining Precision, Mr. Kelly
International was Vice President for the Mediterranean
Contract Drilling and Middle East Operations for GlobalSantaFe
Corporation since 1999.
----------------------------------------------------------------------------------------------------------------------
John R. King Senior Vice Officer of the Corporation since March N/A
Calgary, Alberta, Canada President 2003. Prior thereto, Mr. King was a
Energy Services Founder and Managing Director of RedTree
Capital Corporation since February 1998.
----------------------------------------------------------------------------------------------------------------------
M.J. (Mick) McNulty Senior Vice Officer of the Corporation N/A
Calgary, Alberta, Canada President
Operations Finance
----------------------------------------------------------------------------------------------------------------------
Dale E. Tremblay Senior Vice Officer of the Corporation N/A
Calgary, Alberta, Canada President Finance
and Chief Financial
Officer
(1) The Corporation has a policy that any non-employee director cannot be a
board member for more than 14 years or after he reaches 70 years of age.
(2) Audit Committee Member.
(3) Compensation Committee Member.
(4) Corporate Governance and Nominating Committee Member.
To the knowledge of the Corporation, as of the date hereof, the directors
and officers of the Corporation, as a group, beneficially own, directly or
indirectly, or exercise control or direction over 498,641 Common Shares, which
represents 0.8% of the issued and outstanding Common Shares at February 28,
2005. The information as to shares beneficially owned has been furnished by the
respective directors and officers of the Corporation individually.
AUDIT COMMITTEE INFORMATION
AUDIT COMMITTEE CHARTER
The Charter and Terms of Reference of the Audit Committee is set forth in
Appendix 1 of this Annual Information Form.
COMPOSITION OF THE AUDIT COMMITTEE
The Audit Committee of the Corporation consists of Patrick M. Murray (Chairman),
H. Garth Wiggins and Robert J. S. Gibson. Each member of the Audit Committee is
independent and none received, directly or indirectly, any compensation from the
Corporation other than for services as a member of the Board of Directors and
its committees. All members of the Audit Committee are financially literate as
defined under Multilateral Instrument 52-110 - Audit
ANNUAL INFORMATION FORM - 24
Committees. In addition, the Board of Directors has determined that both Messrs.
Murray and Wiggins qualify as "financial experts" under the Sarbanes-Oxley Act
of 2002.
RELEVANT EDUCATION AND EXPERIENCE OF AUDIT COMMITTEE MEMBERS
In addition to each member's general business experience, the education and
experience of each Audit Committee member that are relevant to the performance
of his responsibilities as an Audit Committee member are as follows: Patrick M.
Murray (Chair) is the Chairman, President and Chief Executive Officer of
Dresser, Inc. Mr. Murray received a B.S. degree in Accounting from Seton Hall
University in 1964 and an MBA from the same university in 1973. Mr. Murray has
been a member of Precision's Audit Committee since April 2003. H. Garth Wiggins
received his Bachelor of Electrical Engineering from the University of
Saskatchewan in 1970 and his Chartered Accountant designation in 1974. Mr.
Wiggins is a Principal at Kenway, Mack, Slusarchuk, Stewart Chartered
Accountants. Mr. Wiggins has been a member of Precision's Audit Committee since
September 1997. Robert J.S. Gibson was educated at the University of Calgary and
the University of Alberta. Mr. Gibson is the President of Stuart & Company
Limited and has been a member of Precision's Audit Committee since June 1997.
PRE-APPROVAL POLICIES AND PROCEDURES
Under the Charter and Terms of Reference of the Audit Committee, the Audit
Committee is required to review and pre-approve the objectives and scope of the
external audit work and proposed fees. In addition, the Audit Committee is
required to review and pre-approve all non-audit services, including tax
services, which the Corporation's external Auditor is to perform.
The Audit Committee implemented specific procedures regarding the
pre-approval of services to be provided by the Corporation's external Auditors
commencing in 2003. These procedures specify certain prohibited services that
are not to be performed by the Corporation's external Auditor. In addition,
these procedures require that at least annually, prior to the period in which
the services are proposed to be provided, the Corporation's management, shall in
conjunction with the Corporation's external Auditor, prepare and submit to the
Audit Committee a complete list of all proposed services to be provided to the
Corporation by the Corporation's external Auditor. Under the Audit Committee
pre-approval procedures, for those services proposed to be provided by the
Corporation's external Auditor that have not been previously approved by the
Audit Committee, the Chairman of the Audit Committee has the authority to grant
pre-approvals of such services. The decision to pre-approve a service covered
under this procedure is required to be presented to the full Audit Committee at
the next scheduled meeting. At each of the Audit Committee's regular meetings,
the Audit Committee is to be provided with an update as to the status of
services previously pre-approved.
Pursuant to these procedures, since their implementation in 2003, 100% of
each of the services provided by the Corporation's external Auditor relating to
the fees reported as audit, audit-related, tax and all other were pre-approved
by the Audit Committee or its delegate.
AUDITOR FEES
The following table provides information about fees billed to the Corporation
for professional services rendered by KPMG LLP, the Corporation's external
Auditor, during fiscal 2004 and 2003:
(In thousands $) 2004 2003
--------------------------------------------------------------------------------
Audit fees $ 2,257 $ 1,295
Audit-related fees 24 --
Tax fees 456 703
All other fees 5 618
--------------------------------------------------------------------------------
Total $ 2,742 $ 2,616
--------------------------------------------------------------------------------
AUDIT FEES. Audit fees consist of fees for the audit of the Corporation's
annual financial statements or services that are normally provided in connection
with statutory and regulatory filings or engagements.
ANNUAL INFORMATION FORM - 25
AUDIT-RELATED FEES. Audit-related fees consist of fees for assurance and
related services that are reasonably related to the performance of the audit or
review of the Corporation's financial statements and are not reported as Audit
Fees. In 2004, the services provided in this category relate to due diligence
assistance with respect to an acquisition.
TAX FEES. Tax fees consist of fees for tax compliance services, tax advice
and tax planning. During fiscal 2004 and 2003, the services provided in this
category included assistance and advice in relation to the preparation of
corporate income tax returns for the Corporation and its subsidiaries, tax
advice and planning, commodity tax and property tax consultation.
ALL OTHER FEES. In 2004, other fees related to translation of financial
statements and information. In 2003, other fees included investigative and
forensic services, translation of financial statements and information,
consultation regarding compliance with Sarbanes-Oxley implementation and advice
on foreign registrations.
LEGAL PROCEEDINGS
The Corporation is not involved in any legal proceedings that it believes might
have a material adverse effect on its business or results of operations.
TRANSFER AGENT AND REGISTRAR
Computershare Trust Company of Canada, located in Calgary, Alberta, is the
transfer agent and registrar of the Common Shares of the Corporation. In the
United States, the co-transfer agent is Computershare Trust Company, Inc.
located in New York, New York.
MATERIAL CONTRACTS
The material contracts that the Corporation either entered into in 2004 or which
were entered into earlier but which are still in effect are as follows:
On May 8, 2004, the Corporation entered into an agreement with 3i Group
PLC and certain other shareholders of Reeves Oilfield Services Ltd. to make an
offer to purchase all of the issued and outstanding shares of Reeves Oilfield
Services Ltd. Subsequently, the Corporation acquired the entire share capital of
Reeves Oilfield Services Ltd. for a total purchase price of GBP 92.4 million.
Further details of the transaction are set out under Wireline Services in the
Energy Services section in the Description of the Business Activities of
Precision.
On May 21, 2004, the Corporation entered into an agreement to acquire the
land drilling business of GlobalSantaFe Corporation and certain of its
subsidiaries for an aggregate purchase price of US$316,500,000, details of which
are set out under International Drilling in the Description of the Business
Activities of Precision.
INTERESTS OF EXPERTS
KPMG LLP, the Corporation's external Auditor, has prepared an opinion with
respect to the Corporation's consolidated financial statements as at and for the
year ended December 31, 2004.
ADDITIONAL DISCLOSURE
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of Precision's fiscal year ended December 31, 2004, an evaluation
of the effectiveness of Precision's "disclosure controls and procedures" (as
such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) was carried out by Precision's
principal executive officer and principal financial officer. Based upon that
evaluation, the principal executive officer and principal financial officer have
concluded that as of the end of that fiscal year, Precision's disclosure
controls and procedures are effective to ensure that
ANNUAL INFORMATION FORM - 26
information required to be disclosed by Precision in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission
rules and forms.
During the fiscal year ended December 31, 2004, there were no changes in
Precision's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, Precision's internal
control over financial reporting.
It should be noted that while Precision's principal executive officer and
principal financial officer believe that Precision's disclosure controls and
procedures provide a reasonable level of assurance that they are effective, they
do not expect that Precision's disclosure controls and procedures or internal
control over financial reporting will prevent all errors and fraud. A control
system, no matter how well conceived or operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
SUMMARY OF OPERATING RESULTS
The following table sets forth selected financial information of the Corporation
for each of the years ended, as indicated:
(In millions of $ except per share amounts)
--------------------------------------------------------------------------------------------------------
Years ended December 31, 2004 2003 (1) 2002 (1)
--------------------------------------------------------------------------------------------------------
Revenue 2,325.2 1,900.1 1,550.6
Earnings from continuing operations 249.6 179.9 81.2
Earnings from continuing operations per share:
Diluted 4.26 3.25 1.48
Net earnings 247.4 180.5 85.0
Net earnings per share:
Diluted 4.22 3.26 1.55
Cash provided by operations (2) 448.0 258.4 199.2
Total assets 3,850.8 2,938.6 2,775.7
Long-term debt (3) 718.9 399.4 514.9
--------------------------------------------------------------------------------------------------------
(1) The data set out for the years ended December 31, 2003 and 2002 is
comparative in all material respects and have been restated for the adoption of
the revised Canadian accounting standards with respect to accounting for
stock-based compensation.
(2) Cash flow provided by operations includes discontinued operations. (3)
Excluding current portion of long-term debt.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's Discussion and Analysis relating to the consolidated financial
statements for the fiscal year ended December 31, 2004 forms part of the
Corporation's 2004 Annual Report and is incorporated herein by reference and
forms an integral part of this Annual Information Form. The Management's
Discussion and Analysis appears on pages 55 to 83 of the 2004 Annual Report.
ADDITIONAL INFORMATION
Additional information concerning the Corporation is available through the
Internet on the Canadian System for Electronic Document Analysis and Retrieval
("SEDAR") which may be accessed at www.sedar.com. Copies of such information may
also be obtained on the Corporation's website at www.precisiondrilling.com or on
request without charge from the Corporate Secretary of the Corporation, 4200,
150 - 6th Avenue S.W., Calgary, Alberta, Canada T2P 3Y7 (Telephone (403)
716-4500).
Additional information, including information as to directors and officers
remuneration and indebtedness, principal holders of the Corporation's securities
and options to purchase securities under equity compensation plans is contained
in the Management Information Circular of the Corporation provided for the
Annual and Special Meeting of shareholders of
ANNUAL INFORMATION FORM - 27
the Corporation to be held on May 10, 2005. Additional financial information is
provided in the Corporation's Financial Statements and the Management's
Discussion and Analysis for the year ended December 31, 2004, which are
contained in the Annual Report of the Corporation for the year ended December
31, 2004. Copies of such documents may be obtained in the manner set forth
above.
APPENDIX 1: AUDIT COMMITTEE CHARTER AND TERMS OF REFERENCE
AUDIT COMMITTEE CHARTER AND TERMS OF REFERENCE
GENERAL
The purpose of this document is to establish the terms of reference of the Audit
Committee of Precision Drilling Corporation (the "Corporation").
It is critical that the external audit function, a mechanism key to
investor protection, is working effectively and efficiently, and that
information is being relayed to the Board of Directors in an accurate and timely
fashion. The activities of the Audit Committee are fundamental to the process.
STATUTORY AND REGULATORY REFERENCES
The requirement to have an Audit Committee is established in Section 171 of the
Alberta Business Corporations Act and, in addition, is required pursuant to the
Alberta Securities Act and the U.S. Securities Exchange Act of 1934 (the "U.S.
Exchange Act") for corporations listed on the New York Stock Exchange (the
"NYSE").
COMMITTEE STRUCTURE
The Board of Directors of the Corporation shall elect annually, from members of
the Board of Directors, an Audit Committee which shall be comprised of not less
than three members, at least half of which are resident Canadians. All members
of the Audit Committee must be independent directors (as defined in the rules of
the Alberta Securities Act and the U.S. Exchange Act), every Audit Committee
member must be financially literate and at least one of those members must
qualify as a financial expert as defined in the U.S. Exchange Act by having
accounting or related financial management expertise. No Audit Committee member
shall serve on the audit committee of more than three public companies without
prior determination by the Board of Directors that such simultaneous service
does not impair the ability of such director to serve effectively on the Audit
Committee.
Each member of the Audit Committee shall serve during the pleasure of the
Board of Directors and, in any event only so long as that person shall be a
Director. The Directors may fill vacancies in the Audit Committee by election
from among their number.
The Audit Committee shall have the power to fix its quorum at not less
than a majority of its members and to determine its own rules of procedure
subject to applicable regulatory requirements and any regulations imposed by the
Board of Directors from time to time.
The external Auditor of the Corporation will be entitled to receive notice
of every meeting of the Audit Committee and, at the expense of the Corporation,
to attend and be heard thereat, and if so requested by a member of the Audit
Committee, shall attend every meeting of the Committee held during the term of
the office of the external Auditor. The external Auditor of the Corporation or
any member of the Audit Committee may call a meeting of the Committee.
PURPOSE
The Audit Committee shall have responsibility for overseeing the development and
maintenance of the Corporation's systems for financial reporting. Accounting for
transactions and internal control over financial reporting lies with senior
management with oversight responsibilities vested in the Board of Directors. The
Audit Committee is a permanent committee of the Board whose purpose is to assist
the Board by dealing with specific issues including:
o those that may affect the integrity of financial reporting to the
shareholders, accounting and internal controls;
ANNUAL INFORMATION FORM - 28
o the Corporation's compliance with legal and regulatory requirements as
they relate to financial reporting matters;
o the external Auditor's qualifications and independence;
o the performance of the Corporation's internal audit function and its
external Auditor; and
o conducting an evaluation of the external Auditor's qualifications and
independence.
COMMITTEE RESPONSIBILITIES
The Audit Committee shall:
o Review the annual financial and quarterly statements prepared for
distribution to the shareholders;
o Report through the Chairman to the Board of Directors following each
meeting of the Audit Committee. The report would outline the nature of
discussions and the major decisions reached by the Committee;
o Recommend to the Board of Directors the external Auditor to be
appointed as the Auditor of the Corporation and the compensation of
such external Auditor;
o Require the external Auditor to report directly to the Audit Committee;
o Pre-approve all non-audit services to be provided to the Corporation or
subsidiary entities by the Corporation's external Auditor. The Audit
Committee may delegate to the Chairman of the Audit Committee the
authority to pre-approve non-audit services. Non-audit services that
have been pre-approved by the Chairman of the Audit Committee, must be
presented to the Audit Committee at its first scheduled meeting
following such pre-approval;
o Review and discuss with management and the external Auditor, as
applicable, (a) major issues regarding accounting principles and
financial statement presentations including any significant changes in
the Corporation's selection or application of accounting principles,
and major issues as to the adequacy of the Corporation's internal
controls and any special audit steps adopted in light of material
control deficiencies; (b) analysis prepared by management or the
external Auditor setting forth significant financial reporting issues
and judgments made in connection with the preparation of the financial
statements, including analysis of the effects of alternative Canadian
Generally Accepted Accounting Principles ("GAAP") methods on the
financial statements; (c) any management letter provided by the
external Auditor and the Corporation's response to that letter and
other material written communication between the external Auditor and
management; (d) any problems, difficulties or differences encountered
in the course of the audit work including any disagreements with
management or restrictions on the scope of the external Auditor's
activities or on access to requested information and management's
response thereto; (e) the effect of regulatory and accounting
initiatives, as well as any off-balance sheet structures on the
financial statements of the Corporation; and (f) earnings press
releases (paying particular attention to any use of "pro forma" or
"adjusted" "non-GAAP" information, as well as financial information and
earnings guidance (generally on a case-by-case basis) provided to
analysts and rating agencies;
o Discuss with management the Corporation's major financial risk
exposures and the steps management has taken to monitor and control
such exposures, including the Corporation's risk assessment and risk
management policies;
o Annually request and review a report from the external Auditor
regarding (a) the external Auditor's quality-control procedures, (b)
any material issues raised by the most recent quality-control review or
peer review of the firm, or by any inquiry or investigation by
governmental or professional authorities within the preceding five
years respecting one or more independent audits carried out by the
firm, (c) any steps taken to deal with any such issues, and (d) all
relationships between the external Auditor and the Corporation;
o Evaluate the qualifications, performance and independence of the
external Auditor, including a review and evaluation of the lead partner
of the external Auditor and set clear hiring policies for employees or
former employees of the external Auditor;
ANNUAL INFORMATION FORM - 29
o Ensure that the lead audit partner of the external Auditor and the
audit partner responsible for reviewing the audit are rotated at least
every five years as required by the Sarbanes-Oxley Act of 2002, and
further consider rotation of the external Auditor's firm itself;
o Discuss with management and the external Auditor any accounting
adjustments that were noted or proposed by the external Auditor but
were not adopted (as immaterial or otherwise);
o Establish procedures for (a) the receipt, retention and treatment of
complaints received by the Corporation regarding accounting, internal
controls or auditing matters, and (b) the confidential, anonymous
submission by employees of the Corporation of concerns regarding
questionable accounting or auditing matters;
o Review other financial information included in the Corporation's Annual
Report to ensure that it is consistent with the Board of Directors'
knowledge of the affairs of the Corporation and is unbiased and
non-selective;
o Review the Management's Discussion and Analysis component of the Annual
Report and the quarterly reports;
o Take steps to ensure that adequate procedures are in place for the
review of the Corporation's public disclosure of financial information
extracted or derived from the Corporation's financial statements and
periodically assessing the adequacy of those procedures;
o Prepare any report required by law, regulations or exchange requirement
to be included in the Corporation's periodic reports;
o Meet at least four times a year on a quarterly basis or more frequently
as circumstances require, and at least annually with the internal and
external Auditor of the Corporation;
o Report regularly to the Board of Directors of the Corporation;
o Review planning for, and the results of, the annual external audit and
solely approve:
- The external Auditor's engagement letter as agreed between the
external Auditor and financial management of the Corporation.
- The reasonableness of audit fees as agreed between the external
Auditor and corporate management.
- Audit scope, including locations to be visited, areas of audit
risk, materiality as it affects audit judgment, timetable,
deadlines, coordination with internal audit.
- The audit report to the Corporation's shareholders and any other
reports prepared by the external Auditor.
- The informal reporting from the external Auditor on accounting
systems and internal controls, including management's response.
- Non-audit related services provided by the external Auditor.
- Assessment of the external Auditor's performance.
- The external Auditor's appointment or re-appointment or
replacement.
o Review and evaluate the scope, risk assessment, and nature of the
internal audit plan and any subsequent changes;
o Consider and review the following issues with management and the head
of internal audit:
- Significant findings of the internal audit group as well as
management's response to them.
- Any difficulties encountered in the course of their internal
audits, including any restrictions on the scope of their work or
access to required information.
- The internal auditing budget and staffing.
- The Audit Services Charter.
- Compliance with the The Institute of Internal Auditors' Standards
for the Professional Practice of Internal Auditing.
o Approve the appointment, replacement, or dismissal of the head of the
internal audit group; and
o Direct the head of the internal audit group to review any specific
areas the Committee deems necessary.
In addition, the Audit Committee shall hold in-camera meetings with
representatives of the external and internal auditors to discuss the audit
related issues including the quality of accounting personnel.
The Audit Committee shall have such other powers and duties as may from
time to time by resolution be assigned to it by the Board.
The Audit Committee shall also carry out an annual performance evaluation
of that Committee and review and reassess annually the adequacy of the Charter
and recommend changes, as appropriate to the Board of Directors.
ANNUAL INFORMATION FORM - 30
COMMITTEE AUTHORITY
The Audit Committee shall have the authority, to the extent it deems necessary
or appropriate, to retain special legal, accounting or other consultants to
advise the Committee and carry out its duties, and to conduct or authorize
investigations into any matters within its scope of responsibilities. The Audit
Committee shall have the authority to set and pay the compensation for any
advisors employed by the Audit Committee.
The Audit Committee may request any officer or employee of the Corporation
or the Corporation's outside counsel or external or internal auditors to attend
a meeting of the Audit Committee or to meet with any members of, or consultants
to the Audit Committee.
The Audit Committee shall review the Committee's charter and terms of
reference and, as required, propose changes to the Board.
The Audit Committee shall have the authority to communicate directly with
the internal and external Auditor.
LIMITATION OF AUDIT COMMITTEE'S ROLE
While the Audit Committee has the responsibilities and powers set forth in its
Charter, it is not the duty of the Audit Committee to prepare financial
statements, plan or conduct audits or to determine that the Corporation's
financial statements and disclosures are complete and accurate and are in
accordance with generally accepted accounting principles and applicable rules
and regulations. These are the responsibilities of management and the external
Auditor.
PRECISION DRILLING CORPORATION
4200, 150 - 6th AVE SW, Calgary, Alberta, Canada T2P 3Y7
T 403 716 4500 F 403 264 0251 www.precisiondrilling.com
ANNUAL INFORMATION FORM - 31