================================================================================
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
March 31, 2006
Commission File Number: 001-14534
PRECISION DRILLING TRUST
(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
-------
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On March 31, 2006, Precision Drilling Trust mailed its Annual Report
and Management Information Circular for its Annual Meeting of Shareholders.
The Annual Report, Notice of Annual Meeting of Shareholders, the Management
Information Circular, Instruments of Proxy and Voting Instruction Forms are
attached hereto as Exhibit A.
Pursuant to the requirements of Section 12 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.
Dated: March 31, 2006
PRECISION DRILLING TRUST
By its Administrator PRECISION DRILLING
CORPORATION
By: /s/ Darren Ruhr
----------------------------------
Name: Darren Ruhr
Title: Vice President, Corporate Services
and Corporate Secretary
EXHIBIT A
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[GRAPHIC OMITTED]
[LOGO - PREICISON DRILLING TRUST]
T U R N I N G I N T H E R I G H T D I R E C T I O N
[PICTURE OMITTED]
Annual Report 2005
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ANNUAL MEETING
The Annual General Meeting of the unitholders of Precision Drilling Trust will
be held in the McMurray Room of the Calgary Petroleum Club, 319 - 5th Avenue
SW, Calgary, Alberta, Canada at 3:00 p.m. (Calgary time) on Tuesday, May 9,
2006.
Unitholders are encouraged to attend and those unable to do so are requested
to complete and return the Form of Proxy.
CONTENTS
2 Financial Highlights
3 Precision At-A-Glance
6 Chief Executive Officer's Message
8 President's Message
14 Operations Review: Contract Drilling Services
20 Operations Review: Completion and Production Services
26 The Precision Advantage
34 Safety Management
38 Environmental Management
39 Community Relations
40 Trustees and Directors
42 Corporate Governance
47 Management's Discussion and Analysis
73 Financial Reporting
100 Supplementary Information
103 Unitholder Information
104 Corporate Information
[PICTURE OMITTED]
TURNING IN THE RIGHT DIRECTION
IN OUR BUSINESS, OUR PEOPLE KNOW A JOB IS GOING WELL when we "keep it turning
to the right." It means the rig is working, the well is being drilled, and we
are fullfilling our customer contract. We are doing what we do best, we keep
it turning to the right!
That is where our business begins, when it turns to the right. Drilling
is just the first step in the process with our client. We also provide well
completion and production services, along with a host of logistical support.
During 2005 our asset and business base was restructured into an income
trust, with a focus on our Canadian contract drilling, completion and
production businesses. This was a new turn in the strategic direction of
Precision, but one that positions us well to add value to our unitholders. It
was a turn in the right direction.
PRECISION DRILLING TRUST
A N N U A L R E P O R T 2 0 0 5
2
FINANCIAL HIGHLIGHTS
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(STATED IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER UNIT/SHARE AMOUNTS
WHICH ARE PRESENTED ON A DILUTED BASIS)
-------------------------------------------------------------------------------------------------------------
Years ended December 31, 2005 2004 % change
Revenue $1,269,179 $1,028,488 23
Operating earnings(1) 465,378 331,313 40
Interest, net 29,270 46,280 (37)
Premium on redemption of bonds 71,885 - n/a
Loss on disposal of short-term investments 70,992 - n/a
Gain on disposal of investments - (4,899) n/a
-------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before income taxes 293,231 289,932 1
-------------------------------------------------------------------------------------------------------------
Income taxes 72,383 101,801 (29)
Earnings from continuing operations 220,848 188,131 17
Per unit/share 1.76 1.61 9
Discontinued operations, net of tax(3) 1,409,715 59,273 2,278
-------------------------------------------------------------------------------------------------------------
Net earnings 1,630,563 247,404 559
Per unit/share 13.00 2.11 516
Net capital expenditures(2) 140,077 113,897 23
Long-term debt 96,838 718,850 (87)
Total assets 1,718,882 3,852,049 (55)
Number of units/shares outstanding, end of year (000's) 125,461 121,580 3
=============================================================================================================
(1) OPERATING EARNINGS IS NOT A RECOGNIZED MEASURE UNDER GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP) - SEE EXPLANATION ON PAGE 47.
(2) EXCLUDES ACQUISITIONS AND DISCONTINUED OPERATIONS.
(3) INCLUDES GAIN ON DISPOSITION OF DISCONTINUED OPERATIONS.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS
Certain statements contained in this Annual Report and under the heading
"Management's Discussion and Analysis" on pages 47 to 72 thereof, including
statements which contain words such as "anticipate", "could", "should",
"expect", "seek", "may", "intend", "likely", "will", "believe" and similar
expressions, statements relating to matters that are not historical facts, and
statements of our beliefs, intentions and expectations about developments,
results and events which will or may occur in the future, constitute
"forward-looking information" within the meaning of applicable Canadian
securities legislation and "forward-looking statements" within the meaning of
the "safe harbor" provisions of the UNITED STATES PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, and are based on certain assumptions and
analysis made by us derived from our experience and perceptions.
Forward-looking information and statements in this Annual Report
include, but are not limited to: 2006 expected cash provided by continuing
operations; 2006 capital expenditures, including the amount and nature
thereof; 2006 distributions; oil and natural gas prices and demand; expansion
and other development trends of the oil and natural gas industry; business
strategy, including the 2006 strategy and outlook for our business segments;
expansion and growth of our business and operations, including market share
and position in the market's in which we operate; demand for our products and
services; labour shortages; the maintenance of existing customer, supplier and
partner relationships; supply channels; accounting policies; credit risks; and
other such matters.
All such forward-looking information and statements are based on certain
assumptions and analyses made by us in light of our experience and perception
of historical trends, current conditions and expected future developments, as
well as other factors we believe are appropriate in the circumstances. The
risks, uncertainties, and assumptions are difficult to predict and may affect
operations, including, without limitation: the impact of general economic
conditions in Canada; industry conditions, including the adoption of new
environmental, taxation and other laws and regulations and changes in how they
are interpreted and enforced; the ability of oil and natural gas companies to
raise capital; the effect of weather conditions on operations and facilities;
the existence of operating risks inherent in well servicing, contract drilling
and ancillary oilfield services; volatility of oil and natural gas prices; oil
and natural gas product supply and demand; risks inherent in the ability to
generate sufficient cash flow from operations to meet current and future
obligations; increased competition; the lack of availability of qualified
personnel or management; labour unrest; fluctuations in interest rates; stock
market volatility; opportunities available to or pursued by us and other
factors, many of which are beyond our control. The foregoing factors are not
exhaustive. Many of these risk factors are discussed in our Annual Information
Form and Form 40-F on file with Canadian securities commissions and the United
States Securities and Exchange Commission and are available on SEDAR at
www.sedar.com and on our website at www.precisiondrilling.com.
Actual results, performance or achievements could differ materially from
those expressed in, or implied by, this forward-looking information and
statements and, accordingly, no assurance can be given that any of the events
anticipated by the forward-looking information and statements will transpire
or occur, or if any of them do so, what benefits will be derived therefrom.
Except as required by law, Precision Drilling Trust and Precision Drilling
Corporation disclaim any intention or obligation to update or revise any
forward-looking information or statements, whether as a result of new
information, future events or otherwise. In the event subsequent events prove
past statements about current trends to be materially different, we may choose
to issue a news release explaining the reasons for the difference and update
the guidance on the anticipated impact on revenue, earnings and other key
events.
The forward-looking information and statements contained herein are
expressly qualified by this cautionary statement.
T U R N I N G I N T H E R I G H T D I R E C T I O N
3
PRECISION AT-A-GLANCE
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STRATEGY
------------------------------------------------------------------------------
o Focus on our Target Zero safety SENIOR OPERATIONS MANAGEMENT
culture initiatives to eliminate
workplace incidents. DWAYNE PETERS Senior Vice President
o Continue to develop and enhance RON BERG Senior Vice President,
our employee recruitment and Operations
retention initiatives.
JOHN JACOBSEN Vice President,
o Continue to upgrade equipment Operations
with a focus on keeping customer
needs and regulatory requirements ALEX MACAUSLAND Vice President,
in mind. Operations
o Retain a high quality, diverse ROLLY MARKS Vice President,
fleet of rigs and service Operations
offerings.
DOUG EVASIUK Vice President,
o Maintain a flexible business that Marketing
is responsive to market
conditions and competitive STEVE JAMES Vice President, Health,
pressures. Safety & Environment
o Take advantage of technological TERRY SAKAMOTO Vice President
advances where markets dictate. Finance, Operations
o Focus on growth opportunities
that will further enhance and
diversify our service offerings.
------------------------------------------------------------------------------
CONTRACT DRILLING SERVICES
The Contract Drilling Services business segment forms the foundation of our
oilfield services enterprise. As a result of Precision's divestitures in 2005,
we have returned to our roots, with a focus on contract drilling in the
Western Canada Sedimentary Basin. Precision has the largest drilling rig fleet
in Canada. At December 31, 2005, our 230 drilling rigs represented 30 percent
of the industry's fleet of 770 drilling rigs.
OPERATIONS MANAGEMENT
ROSS PICKERING Operations Manager, Precision Drilling, Operations Support
Centre 1
GRANT HUNTER Operations Manager, Precision Drilling, Operations Support Centre
2
KIM LINDSAY Operations Manager, Precision Drilling, Technical Support Centre
DAVID KEYES Safety Manager, Field Operations, Precision Drilling
CLINT NEUFELD General Manager, LRG Catering
MARTIN BYAR General Manager, Columbia Oilfield Supply
YOOK TONG General Manager, Rostel Industries
(AS AT DECEMBER 31, 2005)
DIVISION SERVICES PROVIDED EQUIPMENT AND FACILITIES
-------- ----------------- ------------------------
Precision Drilling Contract drilling 230 drilling rigs
LRG Catering Camp and catering 92 conventional
and base camps
Rostel Industries Equipment engineering, 48,000 sq. ft.
manufacturing, repair machine shop
and certification
Columbia Oilfield Supply procurement 40,000 sq. ft.
Supply and distribution warehouse and
distribution facility
COMPLETION AND PRODUCTION SERVICES
The Completion and Production Services business segment is Canada's leading
provider of well servicing, snubbing services and oilfield rentals. By
focusing on the needs of our customers, this segment is well positioned to
take advantage of growth opportunities. Precision has the largest fleet of
well servicing rigs in Canada. At December 31, 2005, our 237 service rigs
represented close to 24 percent of the industry's fleet of 1,009 service rigs.
OPERATIONS MANAGEMENT
KEN HUDGEON General Manager, Precision Well Servicing
DON PACK Operations Manager, Precision Well Servicing, South East
RANDY FYCULAK Operations Manager, Precision Well Servicing, North West
JOHN HYSLOP Operations Manager, Precision Well Servicing, Technical Centre
DAN LUNDSTROM Safety Manager, Field Operations, Precision Well Servicing
STEVE FOLK General Manager, Live Well Service
DARCY FALARDEAU General Manager, Precision Rentals
(AS AT DECEMBER 31, 2005)
DIVISION SERVICES PROVIDED EQUIPMENT AND FACILITIES
-------- ----------------- ------------------------
Precision Well completion 237 service rigs
Well Servicing and workover
Live Well Service Snubbing 26 snubbing units
Precision Rentals Drilling, completion 3,700 tanks,
and production separators, 4,000
equipment tools, valves
Tubulars 8,000 joints
Wellsite 300 wellsite trailers
accommodations
Precision in Action
[GRAPHIC OMITTED - ILLUSTRATIONS]
This illustration shows how Precision keeps every well site efficiently
'turning to the right' by delivering a broad and comprehensive range of
oilfield services.
From our 40,000-square-foot distribution centre in Edmonton, Columbia Oilfield
Supply provides consummate oilfield supplies and distribution services
LRG CATERING
This camp accommodates the field personnel on location. It is self-contained
with trailers (below) and a power generation plant (right).
PRECISION RENTALS
This tank farm stores the fuel and oil-based drilling fluids needed to keep
the site running.
PRECISION DRILLING
The unit pictured to the right - one of Precision's large 'triplets' - is the
hub of the well site. At every turn, we leverage our modern and
well-maintained rig fleet to optimize drilling efficiencies.
PRECISION RENTALS
The two fluid handling tanks in front of the loader are provided by Precision
Rentals to support sumpless drilling, which reduces environmental impact.
[GRAPHIC OMITTED - PHOTOGRAPHS]
Precision provides food Precision has the ability A comprehensive informa-
and accommodation services to design, modify and tion technology infra-
at drilling camps for our build its own drilling structure provides an
own rigs as well as third rigs in-house through integrated system that
party operations through Rostel Industries. allows Precision
LRG Catering. personnel to stream-
line operations.
[GRAPHIC OMITTED - ILLUSTRATIONS]
PRECISION RENTALS
We offer an assortment of specialty tubular products to suit customer drilling
needs.
PRECISION RENTALS
This wellsite office and accommodation is used by customer and third-party
personnel.
PRECISION WELL SERVICING/LIVE WELL SERVICE
The heart of a workover completion operation is this service rig from
Precision Well Servicing. Suspended from the mast being readied for action is
a rig-assist snubbing unit provided by Live Well Service
PRECISION RENTALS
This division provides specialty equipment such as blowout preventers.
PREICISON DRILLING TRUST - ANNUAL REPORT 2005
6
Chief Executive Officer's Message
IN THE EVOLUTION OF ANY BUSINESS there are events that change the course and
direction the organization takes from that point forward. There have been many
of these events for Precision - acquisitions and divestitures that changed our
business scope and the services we could offer our customers. We began in 1985
with three basic drilling rigs, sales of less than $1 million and a market
capitalization of $750 thousand. Today Precision has a total fleet of over 460
drilling and service rigs, sales of close to $1.3 billion and a market
capitalization exceeding $4.0 billion. Over the past 20 years we have taken
advantage of many opportunities to redefine our business. Our growth can be
described by tracing the transactions that increased our market share, added a
new product or service, expanded our geographic reach and diversified our
technology.
Over the years, these acquisition and divestiture decisions have been
made with three key evaluation criteria in mind: we wanted to maintain our
core team of people, augment the services we could provide customers and
continue to be profitable. When the opportunity was presented, we expanded
services, upgraded technology, gradually increased management, added business
systems and timed our entry into new markets. We knew what businesses we
wanted to be in; we also knew what business we did not want to be in until the
conditions were right. And throughout these years of growth, our core business
- contract drilling - has continued to be the engine that provided the steady
profitability and capital for further expansion.
During 2005 there were several events that once again impacted our
business. We divested of three business lines: Precision Energy Services which
was our technology services group providing cased hole and open hole wireline
services, drilling and evaluation services and production services; Precision
Drilling International which was our international land rig contractor; and
CEDA International which provided industrial cleaning, catalyst handling and
mechanical services. Each of these were successful businesses, divisions we
had managed and grown over a number of years. However, after years of trying
to build shareholder value through a higher price to earnings share multiple,
our capital market success was limited. We received independent financial and
capital market analysis and advice that our shareholders would not fully
benefit from the inherent value of Precision Energy Services while a
subsidiary of Precision Drilling Corporation. On this basis, we embarked upon
a value creation strategy considering a direct spin off to shareholders or
through sale to a third party, which we did. In the final analysis, our Board
of Directors determined that these businesses would have greater value in the
hands of a larger company that had the required operating structure in place.
These business lines were sold in August and
TURNING IN THE RIGHT DIRECTION
7
Chief Executive Officer's Message
September 2005. The owners of Precision, our unitholders, were benefactors
through the receipt of a special cash payment of $844 million and the transfer
of almost 26 million shares of Weatherford International Ltd. valued at $2.0
billion.
The other significant decision of 2005 was to reorganize the remaining
assets and convert Precision to an income trust. Quite simply, we believe this
restructuring provided unitholders with the opportunity to participate
directly in Precision's ability to generate sustainable profitability.
Precision has always been profitable, despite the cyclical nature of the
drilling business. Our flexible cost structure, variable workforce and strong
management team are the key elements in an efficient business model that has
generated profits through the cycles. The income trust model is the ideal
business structure for entities like Precision with this track record of
profitability. We felt confident that Precision could generate distributions
through periods of low activity and in times of heightened activity, such as
we are experiencing today.
Precision has therefore returned to its roots, with a focus on the
contract drilling business in the Western Canada Sedimentary Basin. Twenty
years of growth has positioned us as the largest energy service business in
our sector. With a dominant market share in each of our core areas of
business, we are well positioned to take advantage of ongoing opportunities
for growth.
So the events of 2005, although larger in scale perhaps, have not altered
the fundamental direction and business of Precision. We continue to have a
strong team of people in place, provide services and products our customers
want and provide profitable returns for our unitholders - we have met our
three key criteria. And so, with the confidence that our business is in
excellent hands, I have decided to formally pass on the day-to-day running of
the business. The "new" team is a highly skilled group that includes young
people we have hired and trained over the years as well as a number of people
who have, in many cases, been with me for the past 20 years. It's a team that
knows the business, understands the customers and is focused on positioning
Precision for the next 20 years of growth. I have retained my role as Chairman
and Chief Executive Officer. Over the next 12 months I will be mentoring this
group led by Gene Stahl as President and Chief Operating Officer.
I would like to thank the Board of Directors for their time and strategic
advice during a year where their counsel was sought and appreciated. I want to
thank all of Precision's customers. Customer needs are at the core of every
business decision we have made and I want to thank you for your loyalty and
support, not only this year but also over 20 years of growth. Finally, I want
to thank all the people of Precision. Your focus and hard work, spirit and
enthusiasm, dedication and creativity have provided Precision with the success
it enjoys today. Thank you.
/s/ HANK B. SWARTOUT
HANK B. SWARTOUT
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PRECISION DRILLING CORPORATION,
ADMINISTRATOR TO PRECISION DRILLING TRUST
MARCH 7, 2006
PREICISON DRILLING TRUST - ANNUAL REPORT 2005
8
President's Message
I AM VERY PLEASED to bring this first report to you the unitholders of the new
Precision Drilling Trust. In my message I will provide a summary of events and
performance of Precision in 2005 as well as an overview of the opportunities
in 2006 and our strategies to capture those opportunities for continued
profitability and growth.
The theme for this year's report is "turning in the right direction" and
in so many ways, Precision has built a reputation for being able to turn to
the right. During 2005 we returned to our business roots, Canadian contract
drilling and complementary energy service businesses. In a sense, we are
"turning to the right" with a drilling business in Canada that represents 30
percent of the industry. In November, Precision was reorganized into an income
trust. While these changes represent a significant shift in our asset mix and
our corporate structure, for a very large group of stakeholders the business
remains essentially unchanged. For our employees, the same team of people who
have been growing our core contract drilling business over the past two
decades remains in place; for our customers in western Canada we remain the
largest energy service entity in the country and continue to be focused on
meeting their drilling, completion and production needs; and for our
investors, we continue to provide returns in the top deciles of our industry
and today can offer a cash distribution in addition to equity value. The
foundation of Precision has always been the Canadian contract drilling,
completion and production operations and that is where our operational focus
is today.
PRECISION IN 2005
In 2005, the oil and natural gas service industry was clearly a very good
business to be in. Industry activity levels set new records in terms of
numbers of wells, active rig count and drilling rates. The 2005 rig release
well count was close to 25,000, up almost 10 percent due to exceptionally high
activity in the second half of the year. This was in part driven by an
increased number of deeper wells - which take longer to drill - as well as by
overall strong demand. Precision's utilization rate averaged 56 percent for
the year. Given that the operating utilization rate only counts the days the
rig is drilling, and not the time required to move or wait on new locations,
this level is approaching the optimum achievable. The benchmark was set in
1997 at a utilization rate of 71 percent.
TURNING IN THE RIGHT DIRECTION
9
President's Message
The strong demand for our services is a function of two factors: first,
the continued demand for crude oil within an environment of tightening supply
worldwide; and second, the dominant role of natural gas in the North American
energy sector. Almost three-quarters of the drilling activity in western
Canada is targeting natural gas reservoirs, making this activity the primary
driver of demand for Canadian oilfield services. While natural gas prices do
fluctuate from variations in seasonal demand, the requirement for natural gas
is on the increase overall. The counterpoint to this demand is the declining
supply curve of North American natural gas reservoirs and, even with the
current level of activity, supply is at best flat. The question of whether
this situation will continue, and for how long, is the subject of much debate.
Our expectation at Precision is that 2006 will be another year of significant
demand for services and strong performance for the Trust.
Our financial and operating performance in 2005 was solid. Revenue
increased 23 percent over the previous year to $1.3 billion. Operating
earnings jumped 40 percent to $465 million. Our earnings from continuing
operations before income taxes was $293 million which was a one percent
increase over the previous year. However, there were a number of one time
expenses resulting from our conversion to a trust that impacted this number in
2005. Specifically, Precision paid a premium of $72 million on the redemption
of corporately held bonds. We also recorded a loss of $71 million on the
shares of Weatherford International Ltd. which were received on August 31,
2005 as partial payment for the sale of our Energy Services and International
Contract Drilling divisions. Also notable is the 23 percent increase in
capital spending which represents monies reinvested in our equipment. Our
approach is to make these kinds of reinvestments when results are strong, and
so it has become almost a matter of policy to match revenue increases to
capital expenditure increases. We believe this is an important mandate that
renews and reinforces our operating infrastructure.
RESPONDING TO OPPORTUNITIES
Let me take a moment to describe how we are positioned to handle the
challenges that will accompany current demand levels. At today's utilization
rates, the only meaningful way to increase capacity to meet additional demand
is to add equipment. We will add 19 new rigs in 2006 and into 2007 at a steady
pace. Of the 19 new rigs, nine are diesel electric triples rated to a depth of
4,000 metres. The remaining 10 will be our unique Super Single(R) rigs rated
for depths of 1,200 to 3,000 metres, now in its ninth generation of
technological advances. This rig exemplifies our emphasis on meeting customer
expectations. In other words, we have built a fleet of drilling rigs over a
number of years, modifying the technology and adding features that allow us to
respond precisely to the requirements of our western Canadian customers. For
example, our Super Single(R) rigs move faster, drill more quickly and operate
successfully under a variety of drilling and geological conditions. This
flexibility saves time and money for our customers, which reduces their costs
and enhances their returns. By focusing on efficiency, we enjoy strong demand
and good utilization rates within the industry.
TURNING IN THE RIGHT DIRECTION
10
President's Message
Our attention to customer needs is also the reason for our breadth of
services, which includes the production and completion services of our service
rig fleet, as well as snubbing units and rental equipment which are required
during and after a well is drilled. Our camp services provide onsite housing
and support for crews on location while the supply and distribution
infrastructure delivers provisions and equipment to crews and customers across
the Western Canada Sedimentary Basin. Complementing our drilling services is
our ability to internally provide pure manufacturing of drilling rig
components.
At today's prices for oil and natural gas, any downtime in a drilling
program is very costly for customers. We understand that, and over the years
Precision has developed efficient business systems to respond to the
"time-equals-money" equation. There are four pillars to our systems. Our
centralized procurement and distribution centre provides a 24/7 distribution
of consumable supplies and parts that are required to keep the rig working.
Our in-house ability to manufacture, refurbish, certify and engineer equipment
and rig components enables us to control response times to meet customer
needs. Our technical support centres are a centralized resource where
employees can access expertise on equipment and personnel matters to support
their needs in the field. Finally, we have centralized all our information
systems onto one common business platform to facilitate standardized business
practices and timely access to information.
In a heady market like we have today, every oilfield service company will
be busy. Over the long term, we have always believed in investing in
relationships and building trust for those times when our customers have
choices. We make sure that our core customers are serviced, which can be
challenging in times of limited rig supply. However, we also manage our fleet
so that we can respond to new customer requests as the opportunity arises. We
see this market as an opportunity to maintain existing relationships and build
new ones.
A key challenge in this market is the ability to train and retain staff,
whether it is in the office or on the rigs. Over the years Precision has
attempted to take a leadership role in this area by developing high standards
of training and safety throughout our operation. Our safety culture is
centered around our Target Zero safety program and the name captures our
vision that we can eliminate all safety related incidents in Precision through
continued training, reinforcing key attitudes and actions and setting a zero
tolerance rule for not adhering to these practices.
We are also introducing a number of initiatives intended to increase our
reach and appeal as an employer. These include targeting other areas of Canada
and sponsoring events to raise awareness in rural areas. The message we want
to send to potential new employees is strong and direct. Given the demand in
the business today, a new employee with the right attitude and aptitude has
the opportunity to move quickly up the ranks and establish a long and
meaningful career. We want to be seen as the employer of choice in this
business and our training programs, our Target Zero safety vision and our
recruitment innovation is a reflection of that.
TURNING IN THE RIGHT DIRECTION
11
President's Message
STRATEGIES FOR GROWTH
Growth has been and continues to be a central component in our strategy
to add unitholder value. Today, accretive growth is being delivered
organically through the addition of new equipment across the organization. We
also remain poised and open to acquisition opportunities at a price that is
affordable and will yield incremental cash flow. Value-adding acquisitions are
most likely to occur, as they have in the past, by building on the expertise
and infrastructure that already exists in Precision. We see opportunities for
growth in the North American market, specifically in the strong western
Canadian environment where we really have not focused on our growth over the
past four years. Our plan for the coming two to three years will be to focus
on these opportunities.
As we move into 2006 we are very excited about the opportunities facing
Precision. With a workforce of approximately 6,500 employees, our investment
in people will build upon the momentum we have already established in
training, recruiting and orientation programs. As an organization we have
enormous depth in our business; our assets and our people are aligned to take
advantage of what lies ahead. Given our understanding of the business, our
efficient business structure and the strong demand for services, we are well
positioned to deliver another year of strong financial and operating results
in 2006. Over the next 12 months our plan is to establish a track record of
distributions to our unitholders, manage our business to take advantage of
organic growth opportunities and remain ready to execute the right
acquisition. With the support of a very strong team, we look forward to
meeting the opportunities and challenges that 2006 will bring.
/s/ GENE STAHL
GENE STAHL
PRESIDENT AND CHIEF OPERATING OFFICER
PRECISION DRILLING CORPORATION,
ADMINISTRATOR TO PRECISION DRILLING TRUST
MARCH 7, 2006
PREICISON DRILLING TRUST - ANNUAL REPORT 2005
12
Officers
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DOUG J. STRONG
Chief Financial Officer
Doug is a veteran of the oilfield services business, having spent 19 years in
this business of which the last 12 years have been with Precision. Doug is a
graduate of the University of Calgary where he received a Bachelor of Commerce
degree in 1982. He earned his Chartered Accountant designation in 1985 and
spent six years in public practice. In 1987 he joined Nabors Drilling
International and spent the subsequent seven years as the International
Controller working from Calgary and Houston. In 1994 he joined Cactus Drilling
as Controller, which was acquired by Precision in 1997. His roles at Precision
have included Senior Controller, Group Controller and most recently Chief
Financial Officer.
GENE C. STAHL
President and Chief Operating Officer
Gene began his career with Precision in 1993 working on the rigs, followed by
a series of marketing roles in a number of Precision's business units. In 2001
he was appointed Investor Relations Officer for Precision, responsible for
communicating corporate strategy and performance to the public markets. In
2003 he led the consolidation and rebranding of a group of companies into what
is today Precision Rentals. In early 2005 he was selected by the Board of
Directors for his current position and brings solid communication skills,
knowledge of the customer base, and a passion and an understanding of
Precision's culture to his role as President and Chief Operating Officer.
DARREN J. RUHR
Vice President, Corporate Services and Corporate Secretary
Darren joined Precision in 1997 as Manager, Business Systems. Over the
subsequent eight years, he assumed roles of increasing responsibility and set
up many of the internal processes, business systems and technology that are at
the heart of Precision's organizational structure. His experience in corporate
infrastructure and information technology was gained through years of
experience with the Bermuda Monetary Authority, Bermuda Electric Light Company
and the Cayman Islands government. In November 2005 Darren assumed his current
position as Vice President, Corporate Services and Corporate Secretary.
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Vice Presidents
[PHOTOGRAPH OMITTED]
TERRY SAKAMOTO
Vice President Finance, Operations
31 years of service
RON BERG
Senior Vice President, Operations
21 years of service
ALEX MACAUSLAND
Vice President, Operations
14 years of service
DWAYNE PETERS
Senior Vice President
22 years of service
DOUG EVASIUK
Vice President, Marketing
12 years of service
STEVE JAMES
Vice President, Health, Safety & Environment
25 years of service
JOHN JACOBSEN
Vice President, Operations
40 years of service
ROLLY MARKS (NOT PICTURED)
Vice President, Operations
25 years of service
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
14
Operations Review
[PHOTOGRAPH OMITTED]
CONTRACT DRILLING SERVICES
Precision Drilling is Canada's largest drilling contractor with a breadth of
services that range from conventional and specialized contract drilling, rig
manufacturing and refurbishing, procuring and distributing supplies, to
providing camps and catering services to rig crews. Our fleet of 230 drilling
rigs is technologically suited to the geology and geography of North America
and our crews are among the best trained in the business. The hallmark of our
approach is our emphasis on efficiency and the safety of our people.
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OPERATIONS REVIEW
PRECISION DRILLING, A DIVISION
OVERVIEW
PRECISION DRILLING IS CANADA'S LARGEST DRILLING rig contractor with a 30
percent market share and a well-maintained modern fleet that consists of 230
rigs covering depth ranges from a few hundred meters to 6,700 meters.
Precision works with its customers to find better ways to explore for and
develop oil and natural gas reserves in the Western Canada Sedimentary Basin
(WCSB). The WCSB has a complex mix of energy reserves - oil sands, heavy oil,
conventional oil, coal bed methane, deep gas and shallow gas - as well as
challenging geography and weather conditions. As the basin matures, Precision
is able to offer its customers greater efficiencies and the best technology
through the provision of a diversified inventory of equipment and highly
qualified and experienced employees.
Our strategy is to reinforce our existing strong asset base by adding new
rigs that excel in the development of niche oil and natural gas production
with broad application to conventional drilling rigs as well. We strive to set
new performance standards for the industry.
Precision's Super Single(R) rigs exemplify this strategy and versatility.
These rigs are superior in almost all shallow to medium depth well types and
have niche capabilities that allow them to outperform in applications that
include slant or directional drilling for multiple well programs from a single
location (pad drilling). Now in their ninth generation of development, these
rigs can be moved quickly, deploy a small footprint to minimize environmental
impact and facilitate safety through the automation of pipe handling.
Another example is the Super Single(R) Light, a scaled down version of
our highly successful Super Single(R) rig. These rigs are highly competitive
in the shallow gas market, but are also equipped with features that make it
much more efficient when it comes to drilling larger diameter wells or wells
that have a directional component.
2005 PERFORMANCE
Precision Drilling had one of the busiest and most successful years in
its history in 2005. A strong global economy and high prices for crude oil and
natural gas resulted in high levels of exploration and production activity in
the WCSB. Poor weather conditions slowed activity at times in the first half
of the year but the resulting pent-up demand for oilfield services drove
activity to higher-than-normal levels in the second half of the year. This was
coupled with a strong pricing environment; the sustained high level of
activity is also partly a reflection of industry infrastructure improvements
in areas of the WCSB that previously were only accessible during the winter
season.
With the sale of our international drilling assets in 2005, Precision
Drilling is now focused on the Canadian market.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
16
Operations Review
Precision's Canadian drilling rig fleet achieved 46,937 operating days in
2005, compared to 41,625 in 2004. Precision's overall operating utilization
rate in 2005 was 56 percent compared to 50 percent in 2004. In the last
quarter of 2005, rig demand reached unprecedented levels and as a result we
achieved record drilling days for the fourth quarter - 14,350 - surpassing the
previous record of 13,983 days set in 1997.
Industry wide, there were a record 770 drilling rigs in the WCSB at the
end of 2005 and a total of 100 additional rigs are estimated to come on stream
over the next 18 months.
Precision's strategy is to have the best, most modern fleet in the
oilfield services sector and to work closely with our customers to ensure that
they have the rigs that meet their exploration and development requirements.
In late 2005, Precision announced a record level of investment with a
capital budget estimate for 2006 of $285 million, of which $165 million is
growth oriented and includes construction of 19 new drilling rigs over a
15-month period through to early 2007. This will further strengthen the
breadth of our rig fleet - from shallow through to deep drilling. Precision
had already secured long-term contracts for 17 of these rigs prior to
announcing the capital expansion program.
Of these 19 rigs, two will be 1,200-metre Super Single(R) Lights, nine
will be 4,000-metre diesel electric triples, and eight will be the 3,000-metre
Super Single(R). The versatility of the Super Single(R) is unmatched in the
industry and its relatively small footprint gives Precision a distinct
competitive advantage in the 2,500- to 3,000-metre well markets while allowing
us to be competitive in the shallower markets.
2006 OUTLOOK
The strong market momentum we witnessed in the second half of 2005 is
expected to carry through well into 2006. Currently, the industry has a
significant inventory of wells with no rigs assigned to them. We are also
seeing a shift by our customers to deeper gas drilling of 3,000- to
4,000-metre depths, which is very service intensive for exploration,
development and completion activity. Precision is well positioned to thrive in
this very active and changing environment and we expect this to lead to
another successful year.
There are, however, some limiting factors in the oilfield services
industry as a whole, including the growing supply of rigs, a highly
competitive recruitment market and seasonal manpower shortages. Precision is
anticipating and managing these challenges. We are adding rigs based on
confirmed customer demand and continuing to build strong, positive
relationships with our customers. Our recruitment and ongoing personnel
programs are designed to attract and retain employees through competitive
compensation and training programs. In spite of these factors, we have managed
extremely well and expect further progress going forward.
We will never cease focusing on building the strongest possible safety
culture within Precision by ensuring the best equipment, the best working
environment and the best operating practices. In 2006, senior management plans
to spend even more time in the field talking to crews about safety in order to
take our safety performance to the next level of excellence.
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OPERATIONS REVIEW
LRG CATERING, A DIVISION
OVERVIEW
LRG CATERING (LRG) IS THE SECOND LARGEST PROVIDER of camp and catering
services to the oil and natural gas industry in western Canada. LRG provides
food and accommodation to personnel working at the well site, typically in
remote locations. LRG has 92 conventional and base camps, representing about
20 percent of the camp and catering business in western Canada.
LRG's traditional five to six unit camps can lodge 20 field employees and
feed up to 50 workers daily. Base camp modules can be expanded to feed and
accommodate larger groups of workers when required.
LRG is based in Edmonton, Alberta and shares a facility with Columbia
Oilfield Supply.
2005 PERFORMANCE
LRG achieved record results in 2005 during a year when the high activity
levels created shortages in oilfield accommodation.
The demand on service companies to support the expanded rig fleets in
western Canada has increased the number of field employees, and the demand for
accommodation. Customers responded by utilizing camps in areas where crews
would normally have used hotels for accommodation. By the fourth quarter of
2005, LRG was running at full capacity as customers started to secure
equipment for the winter.
2006 OUTLOOK
LRG anticipates that demand for camp and catering services will remain
strong in 2006 due to the expected continued growth in well count and drilling
rigs. Assuming an ongoing shortage of hotel accommodation, LRG sees
significant opportunity for the camp and catering industry in 2006. In
response, LRG plans to increase its fleet in 2006 to 102 camps by adding 10
new camps.
[PHOTOGRAPH OMITTED]
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
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Operations Review
ROSTEL INDUSTRIES, A DIVISION
OVERVIEW
ROSTEL INDUSTRIES' (ROSTEL) CORE BUSINESS is the manufacture and refurbishment
of custom drilling rig and service rig components. This uniquely positions
Precision with in-house rig manufacturing capability.
In addition to quality construction and repair services, Rostel sustains
high plant utilization by providing specialized services, including inspection
and certification of critical drilling components such as overhead equipment,
well control equipment and handling tools. Rostel's expertise extends to
having its own in-house engineering group as well as an equipment sales group
that specializes in the distribution of mud pumps and other imported products.
Rostel has enhanced its capabilities through shop expansion, new
computerized machining equipment and expanding its professional engineering
group.
Strategically, Rostel gives Precision the ability to set its own
priorities in controlling the work performed on its equipment. Precision has
direct control over scheduling and sets delivery objectives that meet customer
requirements. Rostel designs and builds over 60 percent of the components for
Precision's Super Single(R) drilling rigs. Rostel's operations are located in
Calgary, Alberta.
2005 PERFORMANCE
Rostel Industries gave Precision a competitive edge in 2005 by providing
essential fabrication infrastructure at a time when the surging oil and gas
sector in Alberta has created record demand at fabrication shops.
2006 OUTLOOK
The booming fabrication sector in Alberta has resulted in a shortage of
skilled trades people that began to have an impact on all fabricators in 2005.
Rostel expects this trend to continue in the short-term and has factored these
limitations into growth expectations for 2006.
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OPERATIONS REVIEW
COLUMBIA OILFIELD SUPPLY, A DIVISION
OVERVIEW
COLUMBIA OILFIELD SUPPLY (COLUMBIA) IS A GENERAL SUPPLY STORE that procures,
packages and distributes large volumes of consumable oilfield supplies to the
contract drilling and well servicing industry. Most of Columbia's activity
supports divisions of Precision, making it an essential extension of the
purchasing process.
Columbia's key strengths are inventory management, demand anticipation
and distribution excellence. Collectively, Precision and its customers benefit
from Columbia's purchasing power, standardized product selection, streamlined
business processes and coordinated distribution. Columbia's operations are
based at its warehouse and distribution facility in Edmonton, Alberta.
Strategically, Columbia gives Precision the ability to set its own
service level priorities and to standardize the products used on its
equipment. Precision has direct control over supply distribution to field
destinations and this enhances its reliability in the execution of operations.
2005 PERFORMANCE
Columbia's activity levels were high during 2005 as a result of increased
utilization from both the drilling and well servicing divisions of Precision
that was brought about by continued favourable commodity prices and strong rig
demand.
2006 OUTLOOK
Columbia's growth is closely integrated with Precision's drilling and
well servicing operations. As a result, in 2006, we anticipate Columbia to
benefit from the continuing demand for oilfield services.
[PHOTOGRAPH OMITTED]
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
20
Operations Review
[PHOTOGRAPH OMITTED]
COMPLETION AND PRODUCTION SERVICES
Completion services begin when the drilling ends and involves preparing the
well for production of oil and natural gas. Workover services are provided at
any time during the producing life of a well. Given the diversity of
conditions encountered in western Canada, Precision's completion and
production services are equally diverse. Precision has a fleet of 237 service
rigs, 26 snubbing units and rental equipment to maintain or enhance well
productivity.
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OPERATIONS REVIEW
PRECISION WELL SERVICING, A DIVISION
OVERVIEW
PRECISION WELL SERVICING (PWS) IS CANADA'S LARGEST SERVICE RIG CONTRACTOR,
providing customers with a complete range of oil and natural gas well services
- completions, workovers, abandonments, well maintenance, high pressure and
critical sour well work and re-entry preparation. Precision's service rig
fleet completes all types of new wells and works over existing wells to
optimize customers' oil and natural gas production.
Well completions are performed to prepare a well for the production of
oil or natural gas. Production or workovers include scheduled preventative
maintenance of wells and timely response on breakdowns for optimizing
performance of a customer's producing well. With the ever increasing inventory
of wells being drilled, there is greater opportunity for production and
completion work.
In general terms, well completions account for one-third of service rig
activity, and are dependent on drilling activity. Production work accounts for
the remaining two-thirds of activity and is dependent on the total number of
producing wells. In western Canada there are over 150,000 producing wells.
Precision Well Servicing made a significant investment in the service rig
business through a major acquisition in October 2000. Up to that time, the
division had received little capital reinvestment and was generating
substandard profitability. Precision saw this as an opportunity to provide
customers with a new value proposition. To this end, PWS has executed a
program to upgrade and standardize systems and equipment. The division is now
halfway through a five-year plan and has replaced over 40 pump trucks, 70
five-ton equipment transporters, and 75 combination trailers, and converted
over 60 rigs to freestanding units. Freestanding service rigs enable safer
operations and improved efficiency. PWS's vision is to put forward a quality
fleet that can generate premium pricing in the industry.
Precision Well Servicing manages its fleet from four operating centres
located in Grande Prairie, Red Deer and Lloydminster, Alberta and Estevan,
Saskatchewan. These operating centres are supported by a Technical Centre
situated in Red Deer. The 237 service rig operation consists of 65 skid double
rigs and 172 mobile rigs, of which 111 are freestanding. The service rig fleet
covers all oil and natural gas well depths by offering both single and double
service rigs with excellent balance between mobile and skid designs. The
composition of our fleet is ideally suited to the industry and PWS is well
established in all of the core regional markets.
In southeastern Alberta and Saskatchewan, where conventional oil and
natural gas fields are reasonably mature, PWS uses primarily freestanding
mobile rigs. The freestanding rig reduces customer costs by providing faster
rig-up and rig-out and eliminates the use of anchors that can lead to
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
22
Operations Review
underground line strikes. The rigs provide an advantage on short production
and completion jobs where the rig must be mobile.
Precision's fleet of skid doubles and 60 percent of the mobile doubles
are situated in British Columbia and central and northwestern Alberta where
there is a larger concentration of deeper oil and natural gas wells. Mobile
double rigs are similar to mobile singles except they can handle deeper and
heavier work. However, a majority of the mobile double rigs are not
freestanding as the additional weight to convert them would limit movement
during restricted road use periods. Skid double rigs are ideal for deeper
natural gas wells which require multi-zone completion or re-completion. This
type of work usually has the service rig working for a greater length of time,
therefore the rig does not need to be moved as often.
A slant rig is capable of performing completion and production work on
slant wells. In addition these rigs possess the versatility to perform as
freestanding mobile singles. Precision Well Servicing's fleet of 15 slant rigs
works primarily in the heavy oil fields of eastern Alberta.
2005 PERFORMANCE
Precision Well Servicing had a very busy 2005 as customers tried to keep
pace with record drilling activity. Unfavourable weather conditions dampened
activity levels in the first half of the year, however, exceptional results
were achieved in the last half of the year as activity levels rebounded.
Demand picked up for both production maintenance and completions. With high
commodity prices, customers re-worked wells with marginal production levels
that had previously been shut in. Offsetting this was the lower demand for
abandonment work, which is typically undertaken when the completions and
production market softens.
Activity for the service rig fleet rose one percent to 477,232 operating
hours, compared to 472,008 hours in 2004. Notably, more rigs ran in the fourth
quarter of 2005 than in the first quarter and the month of October was busier
than January. This is indicative of the strengthening market conditions
experienced during the fourth quarter of 2005 to exit the year.
In 2005, Precision Well Servicing centralized its personnel department,
basing it out of the Technical Centre. The efficiencies created by this
reorganization increased the division's ability to respond quickly and
effectively to manpower issues. PWS also introduced new recruiting
initiatives, including an orientation session which introduces potential
employees to industry practices. These initiatives proved to be timely as they
allowed PWS to meet crewing requirements and achieve record activity levels in
the fourth quarter.
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OPERATIONS REVIEW
2006 OUTLOOK
Precision Well Servicing expects 2006 to be just as active as 2005, with
industry demand and commodity pricing remaining strong. We anticipate that
both completion and production work will increase during the year as customers
try to increase production levels and focus on the backlog of completions.
We will continue with our multi-year service rig upgrade program that
reinforces our core capabilities and strengthens competitiveness in all
regions of the WCSB.
Due to current labour shortages of all skilled trades in Canada,
retention of employees will continue to be critical to PWS in 2006. To help
mitigate this, PWS has established a sixth man rotation to allow for
continuous operations. This swinghand rotation allows crews to take their
scheduled days off. We are also maintaining a pool of relief rig managers,
which enhances the depth of experienced manpower. In addition, PWS has
established an informal partnership with the Atlantic Petroleum Training
College to hire graduates from their oilfield service classes.
LIVE WELL SERVICE, A DIVISION
OVERVIEW
LIVE WELL SERVICE (LIVE WELL) IS A LEADING PROVIDER of snubbing services for
well completions and workovers in western Canada. Live Well's snubbing
operations provide benefits to customers that enable increased well production
rates and higher recoverable reserves. Snubbing operations are intended to
reduce reservoir damage within a natural gas well. Snubbing is a procedure for
moving tubing in and out of a wellbore while a well is under pressure.
Live Well operates 26 snubbing units - 25 hydraulic rig-assist units and
one freestanding unit - which represents approximately 30 percent of the
industry's total fleet. The units are operated out of Nisku, Grande Prairie
and Brooks, Alberta.
Live Well's experience ranges from shallow natural gas to deep critical
sour gas and has established a reputation as the industry leader in providing
snubbing services for critical high pressure wells.
2005 PERFORMANCE
Although drilling and other oilfield services were more active in 2005,
the utilization of snubbing units remained constant as compared to the prior
year. Live Well and the industry faced manpower shortages and was further
challenged by evolving operating practices.
The shortage of experienced personnel is hindering growth in the snubbing
business. In response, Live Well has actively managed relief crew levels, has
promoted from within and most notably is in the process of developing an
in-house training program complete with a test training well to simulate
operating conditions.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
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Operations Review
Live Well broadened its fleet by developing and introducing its first
freestanding unit which incorporates some of the technology developed for the
Super Single(R) rigs. This unit does not require a service rig to be 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.
2006 OUTLOOK
Live Well expects demand for its services to grow in 2006 as natural gas
exploration activity increases and as industry recommended practices are
modified.
In 2006, Live Well will focus on recruitment and training of crews to
ensure it has the right crew levels to meet operating demand. This focus,
combined with Live Well's upgrade of existing snubbing equipment, will enable
the division to promote a safe working environment and sustain its role as a
reliable and efficient provider of snubbing services.
PRECISION RENTALS, A DIVISION
OVERVIEW
PRECISION RENTALS IS ONE OF THE LARGEST oilfield rental companies in western
Canada, providing a diverse range of equipment to oil and natural gas
producers through a wide network of field offices and stocking points.
Precision Rentals has become a leading provider of oilfield rental
equipment by staying close to its customers and responding to their rapidly
changing requirements. As a result, Precision Rentals has evolved considerably
over the past several years, focusing its operations under the Precision
Rentals brand, streamlining operations and broadening its service offering to
better serve customer needs.
The rental equipment offered by Precision Rentals covers a range of
customer needs throughout the oil and natural gas drilling, completion and
production process. Equipment is marketed through three product categories:
surface equipment; tubulars and well control equipment; and wellsite
accommodations.
The surface equipment category is primarily associated with fluid
handling and includes tanks, separators, invert systems, matting, valves and
other tools.
Tubulars and well control equipment are designed for unique well
specifications. Tubular equipment is specialty-sized drill pipe; well control
equipment includes blowout preventers and associated assemblies.
Drilling operations can go around the clock until a well is finished,
making wellsite accommodations a necessity. Referred to as a wellsite unit,
Precision Rentals' accommodations provide offices and lodging for senior
personnel. These units are built with heavy-duty skids to facilitate frequent
moves.
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OPERATIONS REVIEW
2005 PERFORMANCE
Precision Rentals had a record year in 2005 with strong demand,
utilization and prices driven by the high level of exploration and production
activity. This led to standby charges for highly sought after equipment. It
was a particularly good year for wellsite accommodations due to a shortage of
offsite accommodation.
Precision Rentals implemented enterprise-wide software during the year to
support its multi-product delivery strategy and to standardize and improve the
way services are rendered. This initiative has streamlined pricing, equipment
dispatch, delivery and tracking as well as transaction processing.
2006 OUTLOOK
Precision Rentals expects demand for its product lines to remain high in
2006 and will continue to focus on customer relationships and equipment
offerings. The operating specifications for the procurement of new equipment
and refurbishment initiatives will be established through personnel situated
at the Technical Centre in Nisku, Alberta. Demand for wellsite accommodations
is expected to remain high, in line with drilling activity.
Precision Rentals is working to strengthen service delivery and product
mix with a view to optimize utilization.
[PHOTOGRAPH OMITTED]
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
26
The Precision Advantage
For Precision, becoming Canada's leading oil?eld services provider has
involved a deliberate focus on developing and enhancing competitive advantages
that position us in the marketplace. On the following pages we illustrate
these advantages and our attractiveness as an investment.
[PHOTOGRAPH OMITTED]
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[PHOTOGRAPH OMITTED]
At our pre-employment rig
orientation, we simulate many aspects
of drilling that an employee will
experience - from drill floor
activities to evacuation procedures.
PRECISION'S SAFETY CULTURE is second to none in the Canadian oilfield services
industry. Over the past decade, we have initiated and promoted a Target Zero
culture throughout the entire organization with a goal of zero injuries. We
believe this mandate supports us in many ways, from recruiting to insurance.
More importantly, we are committed to provide the safest environment possible
for our employees. It is the right thing to do.
[PHOTOGRAPH OMITTED]
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
28
PRECISION'S ABILITY TO EXECUTE and deliver efficient services to customers is
critical to our continued success. One of the ways we achieve this is by
applying the latest technology. The success of our in-house designed and built
Super Single(R) and Super Single(R) Light rigs are a testament to our
dedication to these efforts. The Super Single(R) platform is considered by
many of our customers to be the most efficient land rig available.
[PHOTOGRAPHS OMITTED]
With stong emphasis on employee
retention, Precision has developed an
experienced workforce that is
knowledgeable and efficient.
Precision draws on its expertise to
modify and design its equipment using
its knowledge to make eqipment that
is safer and more effective.
Precision applies tried and true
technology and proven procedures
toensure reliaibility in the field.
This new, state-of-the-art Super
Single(R) Light represents the ninth
generation of this Precision-designed
rig
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[PHOTOGRAPHS OMITTED]
Precision employees bring extraordinarily
diverse skills, from technical equipment
operation and safety to customer relations
and finance, all working in an environment
of continuous improvement.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
30
[PHOTOGRAPHS OMITTED]
As drilling technology evolves, so do the
adaptations to service rigs, such as this
slant rig used on heavy oil wells.
Demand for drilling rigs in 2005 was
intense and Precision is building 19
additional rigs over the next 15 months to
supplement its fleet of 230.
Mobility is a key characteristic of
Precision's service rig fleet, allowing us
to respond quickly to customer needs.
PRECISION OPERATES ITS CONTRACT DRILLING and completion and production
segments through operating centres where all activities are coordinated.
Integrated business systems enable us to track our inventory so that we know
at any time where our equipment is located. Our operating centres are
supported by three technical centres that manage fleet resources - from
personnel and training to rig equipment.
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[PHOTOGRAPH OMITTED]
PRECISION PROVIDES CUSTOMERS THE BENEFITS of size and reach - the size of our
oilfield services fleet is substantial - 230 drilling rigs and 237 service
rigs - representing the largest and most technically diverse fleet in Canada.
We supplement our fleet with complementary and integrated services, with a
resulting level of service that provides the customer with a complete package
from the drilling rig through camp and catering support to production
services. We operate across the Western Canada Sedimentary Basin, a 1.5
million square kilometre area that covers essentially all the on-shore crude
oil and natural gas producing regions of Canada.
[PHOTOGRAPH OMITTED]
At Columbia Oilfield Supply, the knowledge
of wellsite requirements is combined with
an understanding of integrated warehouse
management and distribution systems.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
32
[PHOTOGRAPH OMITTED]
Time is money in the drilling business and
wells that are not producing are not
generating cash flow for our customers. We
have developed internal capacity for
equipment repair, certification and
maintenance to minimize downtime.
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OUR PEOPLE HAVE BUILT STRONG, long-term relationships with our customers,
working closely with them to develop and provide value-added services. We
create value for our customers by delivering on the commitments we make. It
all starts with our people.
[PHOTOGRAPHS OMITTED]
Many of our employees have been with
Precision for over twenty years.
Providing accommodation and food
services is an important value-added
service for customers.
Oilfield working conditions can be
challenging, but we make the living
environment as comfortable as possible.
Precision's safety mission is captured
in our "Target Zero" vision. It's
people... it's personal.
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34
Safety Management
WHEN IT COMES TO SAFETY, Precision wants to "make it personal". We want every
employee to think about their personal safety on and off the job starting with
driving to the job site safely, working safely through the day's activities
and returning home safely.
Equally, we want every employee to think about the safety of their
co-workers, as well as the safety of our contractors and customers.
For Precision, safety is all about our people - our people taking
ownership for their own safety, and making the safety of the people around
them their primary concern. As a leader in the Canadian oilfield services
industry, Precision believes that each of our employees can be a safety leader
on the job. Safety is an absolute core value that all of our employees strive
to apply to every aspect of their job, every single day.
TARGETING ZERO
We are building our safety culture on the strong foundation of our
all-encompassing Target Zero vision where "zero injuries" is the only
acceptable goal.
Target Zero is a vision that says our workplace and organization can be
free from injuries, equipment damage and environmental impact.
Our focus on Target Zero is making an impact. Since 2002, employees of
the Precision Drilling division have reduced their Total Recordable Injury
Frequency (TRIF) by over 40 percent. TRIF is an industry standard measure of
safety performance. It measures the number of work related injuries that
require a certain level of medical treatment per 200,000 hours worked,
including lost time injuries, restricted work and medical treatments. A total
of 228 drilling and service rigs stayed recordable incident free in 2005 as
did 83 camps, 15 snubbing units and eight shop facilities. These statistics
prove that our vision is achievable and inspire us to passionately pursue
Target Zero.
However, 2005 also provided sad reminders that we still have work to do.
Tragically, we lost three of our colleagues in 2005: one following an
explosion at a rig site near Brooks, Alberta; a second at a third party
warehouse in Edson, Alberta; and the third in a pedestrian incident in Red
Deer, Alberta. All of these incidents motivate us to improve our ability to
anticipate and reduce risks.
TURNING IN THE RIGHT DIRECTION
35
SAFETY MANAGEMENT
SAFETY IN NUMBERS
The old saying "there's safety in numbers" is certainly true when it
comes to safety in the workplace. Our first line of defence against workplace
injuries begins with a strong emphasis on safety and communication.
Our approach to safety starts with safety meetings - daily, monthly and
quarterly, to deal with the challenges and improvement opportunities in the
workplace. These include meetings with the visible presence of Precision's
senior management addressing safety at rig sites and other locations. These
include team meetings before a drilling rig crew starts a job. These are
informal one-on-one meetings between an individual employee and their
supervisor.
In 2005, Precision's employees - primarily at field locations - held
182,000 safety meetings. It's an impressive number by anyone's standards.
Typically, one of these safety meetings will involve a five or six man
rig crew getting together before conducting a job to discuss the risks
involved in the operation and the procedures required to execute the job
safely. Every safety meeting is documented, reported and tracked so that our
Health, Safety and Environment (HSE) department can monitor performance and
identify safety challenges and opportunities for improvement.
Precision's senior management regularly visit field locations to meet
front line workers to discuss safety issues. These visits demonstrate senior
management's commitment to safety and provide an opportunity for field
personnel to communicate their safety achievements, goals and challenges in
achieving Target Zero. "Safety Stand-Down Week" is an industry initiative
established by the Canadian Petroleum Safety Council, a practice that
Precision had been conducting for several years. This initiative has become
entrenched and at Precision has been extended over the first two months of the
year to reach a greater number of employees. In 2005, senior management
facilitated "Safety Stand-Down" sessions with over 2,700 employees.
CREATING SAFETY LEADERS
Precision provides training programs to build employee awareness about
health, safety and the environment and its Target Zero corporate culture. In
order to reach as many people as possible, we hold courses at our training
centres and in the field that cover a wide range of topics including
observation and communication, driver training, hazard identification and
control, and environmental awareness.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
36
SAFETY MANAGEMENT
Our statistics show that over 90 percent of all recordable injury
incidents directly relate to the behaviour of people. That is why Precision
introduced its unique Observation and Communication Workshop. A key component
of the Target Zero vision, the course is designed to prevent incidents by
improving employee observation and communication skills regarding safety at
the job site.
The workshop teaches employees how to monitor their own safety behaviour
as well as that of their co-workers. Employees also learn how to communicate
the safety issues they observe through positive, open and respectful dialogue
with fellow employees and through formal reports, which allow Precision's HSE
professionals to track, report and recommend improvements. The ultimate goal
of the Observation and Communication Workshop is to provide employees with
effective tools for recognizing and effectively responding to hazards. A major
goal of the workshop is to show every employee how to become an individual
leader in safe work practices by:
o leading by example;
o never accepting that losses "just happen";
o continually focusing on identifying and reducing risk;
o recognizing, intervening and correcting unsafe behaviour;
o clearly communicating health, safety and environmental goals,
expectations and intentions to everyone; and
o fostering a workplace culture where people feel comfortable and
compelled to stop and assess a job if it appears unsafe.
Observation and Communication Workshops have proven to be very effective
in helping to reduce injuries. In 2005 alone, Precision recorded 90,000
observations by employees - pro-active measures, for Precision to identify and
correct "at-risk" behaviour.
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37
SAFETY MANAGEMENT
BACK TO BASICS
Precision is focused on getting "back to basics", which means building
upon core elements within our HSE management system. This will be accomplished
by: improving safety management, training and communication; ensuring that
senior management spend even more time in the field talking to crews about
safety; improving the sharing of HSE information across the organization and
within industry; and furthering our work with customers to develop new safety
initiatives. In communicating our "back to basics" theme, we are telling our
employees that we want them to:
o take safety ownership through active participation;
o observe and communicate, reinforcing safe work and correcting at-risk
activities;
o understand the task and know when to step back;
o arrive at the job site fit for work;
o work closely with third-party services, ensuring that everyone
understands the roles and responsibilities of each person on site;
o drive to survive by wearing seat belts, reducing speed to fit road
conditions and staying alert; and
o enforce - with no deviation - all critical safe work procedures.
The core message of "back to basics" is that people are our priority and
that safety is a 24/7 responsibility of everyone who works for and with
Precision.
[PHOTOGRAPH OMITTED]
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
36
Environmental Management
PRECISION HAS DEVELOPED A COMPREHENSIVE environmental management system which
monitors compliance with environmental standards. Environmental impact occurs
in the field where Precision employees operate equipment, travel and often
stay in remote camps. Precision has established standards of environmental
management to ensure that damage to the environment is minimized.
Precision's investment in environmental management begins with equipment
design and upgrade, where modifications are made with environmental
considerations in mind. For example:
o rigs are designed to create a smaller footprint to minimize ground
disturbance;
o engine upgrades are made to improve fuel efficiency, reduce emissions
and suppress noise;
o equipment is designed to contain fluids in spill trays under line
pipes, in catch pans under the rig floor, in surface tanks rather than
sumps and in catch trays on all pumps; and
o operating support centres have secondary containment for above ground
storage compartments and environmental spill response equipment and
supplies for clean up procedures.
In the event an environmental incident occurs, it is reported,
investigated, remediated and analyzed to enable the continual improvement
process.
Our investment in environmental management is ongoing, with a focus
towards:
o improving our environmental management system;
o providing education to crews and supervisors;
o conducting environmental compliance audits;
o maintaining a high level of housekeeping standards on our equipment;
o performing environmental review during management visits to the field;
and
o ensuring environmental incidents are reported, investigated and
remediated.
TURNING IN THE RIGHT DIRECTION
39
Community Relations
PRECISION BELIEVES IN CREATING A POSITIVE IMPACT in the community by
developing partnerships with our employees and the communities in which we
work and live. We are committed to giving back to our communities by
supporting a variety of charitable organizations with an emphasis on those
charities that are important to our employees and customers.
In 2005, our donations program fulfilled close to 65 percent of requests
received from our employees, customers, local communities, and registered
charitable organizations. These requests fell into six categories, including
health and welfare, education and literacy, arts and culture, civic and
community, environmental, and sports and recreation. In order to provide
ongoing support, certain donations are made over a three to five year period,
including those to organizations such as the Shock Trauma Air Rescue Society
(STARS) and the Alberta Children's Hospital Foundation. Precision also
participates in local United Way campaigns and through our "Gifts-in-Kind"
program, we assist not-for-profit organizations with furniture and computer
needs.
Precision is also proud to sponsor a number of events throughout the year
that provide proceeds to charitable organizations as well as various events
which raise funds for cultural and environmental conservation groups.
In addition to the support provided by Precision, our employees and their
families are equally committed to the communities in which they live and work.
This commitment includes volunteering for local charities, participating in
events supporting medical and wellness research, local arts programs and
coaching youth sports teams.
Precision also recognizes the value of a post-secondary education by
supporting children of employees through its Employees' Dependent Scholarship
Program. Scholarships are awarded to applicants pursuing studies at
universities and colleges in technical or arts facilities who demonstrate
superior academic performance, work experience and community leadership.
Precision also contributes to scholarships at the Southern Alberta Institute
of Technology in Calgary, Alberta and Grant McEwan Community College in
Edmonton, Alberta.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
40
TRUSTEES AND DIRECTORS
[PHOTOGRAPHS OMITTED]
TURNING IN THE RIGHT DIRECTION
41
TRUSTEES AND DIRECTORS
W.C. (MICKEY) DUNN(2)(3) Calgary, Alberta
Director
Mr. Dunn is the Chairman of the Board for True Energy Trust, a founding
shareholder and director of Rentcash Inc. and a director of Vero Energy Inc.
Previously, Mr. Dunn was President and Chief Executive Officer of Cardium
Service and Supply Limited, Cardium Tool Services Inc. and Colorado Silica
Sands Inc. He has been a Director of Precision since September 1992.
BRIAN A. FELESKY, CM, Q.C. Calgary, Alberta
Director
Mr. Felesky is a partner at Felesky Flynn LLP, a law firm specializing in tax
and trust law. Mr. Felesky is a Vice-Chair, Canada West Foundation, a member
of the Senate of Athol Murray College of Notre Dame, a member of the Board of
Governors for the Council for Canadian Unity, a Board member of the Calgary
Stampede Foundation and the Calgary Arts Development Authority. Mr. Felesky
also serves on the Board of Suncor Energy, Inc., Epcor Power LP and Fairquest
Energy Limited. He has been a Director of Precision Drilling Corporation since
December 1, 2005.
ROBERT J.S. GIBSON(1)(3) Calgary, Alberta
Trustee and Director
Mr. Gibson has been President of a private investment firm, Stuart & Company
Limited, since 1973 and is also Managing Director of Alsten Holdings Ltd. He
has been a Director of Precision since June 1996.
PATRICK M. MURRAY(1) Dallas, Texas
Trustee and Director
Mr. Murray is Chairman and CEO of Dresser Inc., a member of the American
Petroleum Institute, and the Society of Petroleum Engineers, a member of the
Board of the World Affairs Council of Greater Dallas, the Valve Manufacturers
Association, the Petroleum Equipment Supplier Association and a director of
Houston-based Harvest Natural Resources, Inc. He has been a director of
Precision since July 2002.
FREDERICK W. PHEASEY(2)(3) Edmonton, Alberta
Director
Mr. Pheasey is the founder and continues as a director of Dreco Energy
Services Ltd., which was acquired by National Oilwell, Inc. in 1997. He served
as Executive Vice President and a director of National Oilwell, Inc. from 1997
to 2004 and continued to serve on the Board of National Oilwell, Inc. to May
2005. Mr. Pheasey has been a Director of Precision since July 2002.
ROBERT L. PHILLIPS(2)(3) Vancouver, British Columbia
Director
A member of Precision's Board of Directors since May 2004, Mr. Phillips was
most recently President and Chief Executive Officer of BCR Group of Companies
from 2001 to 2004. Previously, he was Executive Vice President at MacMillan
Bloedel Limited (1999 - 2001), President and Chief Executive Officer of PTI
Group Inc. (1998 - 1999) and President and Chief Executive Officer of Dreco
Energy Services Ltd. (1994 - 1998). Mr. Phillips also serves on the Board of
several major Canadian corporations including Epcor Utilities Inc., Canadian
Western Bank and MacDonald, Dettwiler and Associates Ltd.
HANK B. SWARTOUT Calgary, Alberta
Chairman, CEO and Director
Mr. Swartout currently holds the position of Chairman and Chief Executive
Officer of Precision Drilling Corporation. For the period from 1985 through
2005, Mr. Swartout held the position of Chairman, President and Chief
Executive Officer of Precision Drilling Corporation. Previously, he held
positions as Manager of Bawden Western Oceanic Offshore, Vice President of Rig
Design and Construction for Dreco, and Manager of Construction for Nabors
Drilling Canada.
H. GARTH WIGGINS(1) Calgary, Alberta
Trustee and Director
Mr. Wiggins has been the President of a private investment firm, Kamloops
Money Management, since 1993. He is also currently a Principal at Kenway,
Mack, Slusarchuk, Stewart Chartered Accountants. Previously, he was Vice
President Finance and Chief Financial Officer of Tri Link Resources Ltd. and a
partner of Farvolden, Wiggins, Balderston Chartered Accountants. He has been a
Director of Precision since September 1997.
(1) Audit Committee Member
(2) Compensation Committee Member
(3) Corporate Governance and Nominating Committee Member
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
42
Corporate Governance
Precision has recently updated its corporate governance policies and
procedures to reflect the conversion of our business to an income trust
structure. Precision Drilling Trust (the "Trust") was created by a declaration
of trust dated as of September 22, 2005 and is governed by a board of trustees
comprised of three members. The board of trustees has delegated a number of
its duties to Precision Drilling Corporation (the "Corporation"), who is the
administrator of the Trust. The Corporation is governed by a board of eight
directors and managed by our executive management team. Our investors hold
units of the Trust or, if eligible to do so, Class B Limited Partnership Units
of Precision Drilling Limited Partnership ("PDLP"), a subsidiary of the Trust,
whose units are the economic equivalent of, and exchangeable on a one-for-one
basis into, units of the Trust. Holders of units of the Trust and PDLP are
herein referred to as "Unitholders".
Our corporate governance practices meet the requirements of National
Instrument 58-101 - Disclosure of Corporate Governance Practices, National
Policy 58-201 - Corporate Governance Guidelines, the relevant provisions of
the United States Sarbanes-Oxley Act of 2002 and the United States Securities
and Exchange Commission regulations. The units of the Trust are listed for
trading on the Toronto Stock Exchange and the New York Stock Exchange. A
complete description of our corporate governance practices is set out in the
Proxy Statement and Management Information Circular of the Trust dated March
15, 2006 (the "Circular") under the heading "Statement of Corporate Governance
Practices". The Circular is available on SEDAR at www.sedar.com and on our
website at www.precisiondrilling.com.
INDEPENDENCE OF THE TRUSTEES AND DIRECTORS
On the recommendation of the Corporation's Corporate Governance and
Nominating Committee, the board of directors has affirmatively determined that
six of the eight directors are independent. Independent directors have no
direct or indirect material relationship with the Trust or the Corporation
within the meaning of Multilateral Instrument 52-110 Audit Committees. Hank B.
Swartout, the Chief Executive Officer of the Corporation and the Chairman of
the board of directors, is not independent because of his executive office.
Brian A. Felesky is not independent because he is a partner at Felesky Flynn
LLP, a law firm that provides tax advice to the Trust and the Corporation. The
independent directors have concluded that Messrs. Swartout and Felesky's lack
of independence does not impair the board of directors' ability to function
independently of management. Rather, Mr. Swartout's extensive knowledge of the
Corporation's business, and Mr. Felesky's broad business experience and
in-depth knowledge of tax laws, are of significant benefit to the operation of
the Corporation's board of directors.
The mandates of the board of trustees and the board of directors are
available on our website under the heading "Corporate Governance" at
www.precisiondrilling.com and are attached as Schedule "A" to the Circular.
The three original trustees will be nominated for election at the annual
meeting of Unitholders on May 9, 2006. In addition, Unitholders will be asked
to approve the appointment of the eight current directors to the board of
directors of the Corporation and to appoint KPMG LLP as the Trust's auditors.
TURNING IN THE RIGHT DIRECTION
43
CORPORATE GOVERNANCE
RESPONSIBILITIES OF THE BOARD OF TRUSTEES AND BOARD OF DIRECTORS
The board of trustees and the board of directors are both comprised of
experienced, proven leaders representing a diverse group of professions and a
broad range of industries.
The board of trustees has overall responsibility and authority to manage
the Trust's investments. Effective November 7, 2005, the board of trustees
delegated responsibility for the management and administration of the Trust's
operational matters to the Corporation pursuant to an administration agreement
between the Trust and the Corporation.
In addition to ensuring that the Corporation discharges its obligations
as administrator to the Trust, the board of directors is responsible for the
stewardship of the business and affairs of the Corporation. As such, the board
of directors has responsibility to oversee the conduct of the Corporation's
business, provide direction to management and ensure that all major issues
affecting the business and affairs of the Corporation are given proper
consideration.
COMMUNICATIONS POLICY
The board of directors has adopted a written communications policy which
governs its communications with the media, continuous disclosure obligations
to applicable securities commissions, and public reporting requirements to
Unitholders and the investment community. Issues arising from the application
of the communications policy are dealt with by a committee of the
Corporation's executive officers consisting of Hank B. Swartout, the Chief
Executive Officer, Doug J. Strong, the Chief Financial Officer, Gene C. Stahl,
the President and Chief Operating Officer and Darren J. Ruhr, the Vice
President, Corporate Services and Corporate Secretary.
COMMUNICATION WITH THE BOARD OF DIRECTORS
Unitholders and other interested parties may communicate with the board
of directors by contacting the Vice President, Corporate Services and
Corporate Secretary at the head office of the Corporation. All communications
received will be reviewed and delivered to the appropriate members of the
board of directors, including the Chairman of the board and the chairmen of
applicable committees. The process for communicating with the board of
directors is set out on our website at www.precisiondrilling.com.
BUSINESS CONDUCT AND ETHICS
The board of directors has adopted a Code of Business Conduct and Ethics
(the "Code") expressing the fundamental principles that guide the directors in
their deliberations and shape the Corporation's business activities. The Code
applies to directors, members of our executive management team and all of our
employees. The Code incorporates our guiding principles: upholding the law,
honouring trust, objectivity, confidentiality, integrity and corporate and
individual responsibility. The Code also creates a frame of reference for
dealing with sensitive and complex issues and provides for accountability if
our standards of conduct are not met. Our executive officers have acknowledged
that they have read, understood and will abide by the Code. The text of the
Code can be found under the heading "Corporate Governance" on our website at
www.precisiondrilling.com.
The board of trustees has adopted the principles set out in the Code of
Business Conduct and Ethics of the Corporation and is currently in the process
of working with the board of directors of the Corporation to adopt a Joint
Code of Business Conduct and Ethics, which would apply to the activities of
the Trust, PDLP and the Corporation.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
44
CORPORATE GOVERNANCE
WHISTLEBLOWER POLICIES
The Corporation's Audit Committee has established procedures for the
confidential receipt and handling of complaints regarding accounting and
auditing irregularities and breaches of the Code including the establishment
of a "Whistleblower Hotline", which can be accessed anonymously through the
internet, by email or voicemail. Additional information about the
Whistleblower Hotline and the confidential or anonymous submission of
complaints can be found on our website at www.precisiondrilling.com.
COMMITTEES OF THE BOARD OF DIRECTORS
To assist it in discharging its responsibilities more effectively, the
board of directors has established three committees: the Audit Committee, the
Corporate Governance and Nominating Committee and the Compensation Committee.
Each committee is comprised of independent directors. From time to time, the
board of directors also creates special or ad hoc committees to address
matters of importance to the Corporation.
The members of the Audit Committee are Patrick M. Murray (Chairman), H.
Garth Wiggins and Robert J.S. Gibson. The Audit Committee held six meetings in
2005.
The members of the Corporate Governance and Nominating Committee are
Robert J.S. Gibson (Chairman), W.C. (Mickey) Dunn, Frederick W. Pheasey and
Robert L. Phillips. The Corporate Governance and Nominating Committee held
five meetings in 2005.
The members of the Compensation Committee are Frederick W. Pheasey
(Chairman), W.C. (Mickey) Dunn and Robert L. Phillips. The Compensation
Committee held six meetings in 2005.
In 2005, the board of directors formed a Special Committee of independent
directors to consider and advise the board of directors on the reorganization
of the business of the Corporation into an income trust. The members of the
Special Committee were H. Garth Wiggins (Chairman), W.C. (Mickey) Dunn,
Frederick W. Pheasey, Robert J.S. Gibson, Patrick M. Murray and Robert L.
Phillips. The Special Committee held three meetings in 2005.
The full text of each committee's Charter and Terms of Reference is
available under the heading "Corporate Governance" on our website at
www.precisiondrilling.com.
COMPENSATION OF TRUSTEES AND DIRECTORS
The Corporation's Compensation Committee periodically reviews the
adequacy and form of compensation for trustees and directors. The board of
directors considers the commitment, comparative fees, responsibilities and
potential liabilities of directors and trustees in determining remuneration.
In fiscal 2005 the trustees were paid an annual retainer of US$1,432 for the
period commencing on November 7, 2005 and ending on December 31, 2005, and
fees of US$1,000 per meeting for attendance in person and US$500 for
attendance by telephone.
The Corporation's directors were paid an annual retainer of US$16,000 in
2005 and fees of US$1,000 per meeting for attendance in person and US$500 per
meeting for attendance by telephone. The Chairmen of the Compensation
Committee and the Corporate Governance and Nominating Committee were paid an
additional annual retainer of US$5,000 and the Chairman of the Audit Committee
was paid an annual retainer of US$10,000. Members of the Audit Committee
receive fees of US$2,000 per meeting for attendance in person and US$500 for
attendance by telephone for all meetings of the Audit Committee. The
Corporation appoints an independent director to serve as Lead Director each
quarter and during that quarter the individual appointed receives an
additional payment of US$2,000 per meeting. Trustees and directors who are
required to travel more than three hours by air to attend meetings are paid a
travel allowance of US$1,000 in addition to their travel expenses.
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45
CORPORATE GOVERNANCE
2005 MEETING ATTENDANCE AND COMPENSATION
Board Committee Board Committee Chair Special Travel Expenses
Meetings Meetings Fees(2) Board Retainer Committee Allowance Total Paid(1)
Director Attended(1) Attended(1) US$ Retainer US$ US$ US$ US$ US$ CDN$
-----------------------------------------------------------------------------------------------------------------------------
W.C. (Mickey) Dunn(6) 11/12 14/14 24,000 16,000 - 17,184 - 57,184 3,888
Brian A. Felesky, CM, Q.C.(4) 1/1 - 1,000 1,333 - - - 2,333 -
Robert J.S. Gibson(7) 12/12 14/14 29,500 16,000 5,000 17,184 - 67,684 1,139
Patrick M. Murray(8) 12/12 9/9 30,500 16,000 10,000 17,184 15,000 88,684 37,405
Frederick W. Pheasey(9) 11/12 13/14 22,500 16,000 5,000 17,184 - 60,684 9,538
Robert L. Phillips(10) 12/12 14/14 25,000 16,000 - 17,184 - 58,184 14,670
Hank B. Swartout(5) 12/12 - - - - - - - -
H. Garth Wiggins(11) 12/12 9/9 36,500 16,000 - 21,480 - 73,980 95
=============================================================================================================================
NOTES:
(1) ATTENDANCE IN PERSON OR BY TELEPHONE.
(2) INCLUDES LEAD DIRECTOR FEES, ATTENDANCE AT STRATEGIC PLANNING MEETINGS
AND ATTENDANCE AT MEETINGS HELD WITH MANAGEMENT ON BEHALF OF THE BOARD.
(3) EXPENSES THAT ARE INCURRED BY EACH DIRECTOR RELATED TO BOARD OR COMMITTEE
MEETING ATTENDANCE ARE REIMBURSED.
(4) MR. FELESKY WAS APPOINTED AS A DIRECTOR ON DECEMBER 1, 2005 AND ATTENDED
1/1 BOARD MEETING.
(5) MR. SWARTOUT IS A MEMBER OF MANAGEMENT, THEREFORE DOES NOT RECEIVE
RETAINER OR MEETING FEES.
(6) MR. DUNN IS A MEMBER OF THE COMPENSATION COMMITTEE, CORPORATE GOVERNANCE
AND NOMINATING COMMITTEE AND SPECIAL COMMITTEE.
(7) MR. GIBSON IS A MEMBER OF THE CORPORATE GOVERNANCE AND NOMINATING
COMMITTEE, AUDIT COMMITTEE, SPECIAL COMMITTEE AND IS A TRUSTEE.
(8) MR. MURRAY IS A MEMBER OF THE AUDIT COMMITTEE, SPECIAL COMMITTEE AND IS A
TRUSTEE.
(9) MR. PHEASEY IS A MEMBER OF THE COMPENSATION COMMITTEE, CORPORATE
GOVERNANCE AND NOMINATING COMMITTEE AND SPECIAL COMMITTEE.
(10) MR. PHILLIPS IS A MEMBER OF THE COMPENSATION COMMITTEE, CORPORATE
GOVERNANCE AND NOMINATING COMMITTEE AND SPECIAL COMMITTEE.
(11) MR. WIGGINS IS A MEMBER OF THE AUDIT COMMITTEE, SPECIAL COMMITTEE AND IS
A TRUSTEE.
2006 FEES
As part of its periodic review of compensation, the Compensation
Committee has recommended, and the board of directors and the board of
trustees have each approved, the following fees in Canadian funds for 2006:
Director's Annual Retainer $30,000
Audit Committee Chair - Annual Retainer $12,500
Compensation Committee Chair - Annual Retainer $6,250
Corporate Governance & Nominating Committee Chair - Annual Retainer $6,250
Audit Committee Meeting Fee $2,500
Other Committees and Board Meeting Fees $1,250
Lead Director Fee (per quarter) $2,500
Trustee's Annual Retainer $10,000
Trustee's Meeting Fees $1,250
The fees set out above are to be paid quarterly in arrears commencing on
March 31, 2006. The Lead Director appointed during a fiscal quarter is paid
normal meeting fees for attendance at any meetings of Committees of the board.
The Compensation Committee is responsible for reviewing the compensation
of the Corporation's executive management team and setting compensation
policies applicable to the Corporation. For more information, please refer to
the "Report on Executive Compensation" contained in the Circular.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
46
CORPORATE GOVERNANCE
UNIT OWNERSHIP GUIDELINES
The Compensation Committee has recommended and the board of trustees and
the board of directors have approved unit ownership guidelines applicable to
the trustees, directors, executive officers and management. Pursuant to the
guidelines, directors and trustees are requested to hold units of the Trust or
PDLP equivalent to four times the amount of their respective annual retainers;
the Chief Executive Officer, President, Chief Financial Officer and each of
the Vice Presidents are expected to hold units of the Trust or PDLP equivalent
to five times their respective base salaries; and the next reporting level of
senior employees are expected to hold units of the Trust or PDLP worth three
times their respective base salaries. The Compensation Committee has
recommended that individuals reach these ownership guidelines within five
years.
TRUSTEES AND DIRECTORS HOLDINGS
Units of Precision Class B Limited Partnership
Drilling Trust(1) Units of PDLP(1)
---------------------------------------------------------------------------------------------
W.C. (Mickey) Dunn 15,600 Nil
Brian A. Felesky, CM, Q.C. 1,400 Nil
Robert J.S. Gibson 63,200(2) Nil
Patrick M. Murray 40,000 Nil
Frederick W. Pheasey 44,000 Nil
Robert L. Phillips 5,000(3) Nil
Hank B. Swartout 1,413,579(4) 829,788(5)
H. Garth Wiggins 21,100 Nil
=============================================================================================
NOTES:
(1) AS AT FEBRUARY 28, 2006.
(2) 8,000 OF THE UNITS ARE HELD BY STUART & COMPANY LIMITED, A COMPANY
CONTROLLED BY MR. GIBSON AND 10,000 UNITS ARE HELD IN A RRSP.
(3) 2,000 OF THE UNITS ARE HELD BY R.L. PHILLIPS INVESTMENTS INC., A COMPANY
CONTROLLED BY MR. PHILLIPS.
(4) INCLUDES 10,541 UNITS HELD IN A REGISTERED RETIREMENT PLAN BELONGING TO
MR. SWARTOUT.
(5) THE UNITS ARE HELD BY 1201112 ALBERTA LTD., A COMPANY CONTROLLED BY MR.
SWARTOUT.
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Management's Discussion and Analysis
The Management's Discussion and Analysis, prepared as at March 7, 2006,
focuses on key statistics from the Consolidated Financial Statements, and
pertains to known risks and uncertainties relating to the oilfield services
sector. This discussion should not be considered all-inclusive, as it excludes
changes that may occur in general economic, political and environmental
conditions. Additionally, other elements may or may not occur which could
affect Precision Drilling Trust (the "Trust" or "Precision") in the future. In
order to obtain the best overall perspective, this discussion should be read
in conjunction with the material contained in other parts of this annual
report, including the "Cautionary Statement Regarding Forward-looking
Information and Statements" on page 2, the audited Consolidated Financial
Statements and the related notes. The effects on the Consolidated Financial
Statements arising from differences in generally accepted accounting
principles (GAAP) between Canada and the United States are described in Note
16 to the Consolidated Financial Statements. Additional information relating
to the Trust, including the Annual Information Form, has been filed with SEDAR
and is available at www.sedar.com.
With the conversion of the continuing assets and businesses of Precision
Drilling Corporation to an income trust on November 7, 2005 pursuant to a
plan of arrangement, the Trust, as the successor in interest to Precision
Drilling Corporation, has been accounted for as a continuity of interest.
Commencing with the year ended December 31, 2005 and the comparables for
the quarterly and annual periods for the years ended December 31, 2004
and 2003, the consolidated financial statements of the Trust reflect the
financial position, results of operations and cash flows as if the Trust
had always carried on the business formerly carried on by Precision
Drilling Corporation.
HIGHLIGHTS
(STATED IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER UNIT/SHARE AMOUNTS, WHICH
ARE PRESENTED ON A DILUTED BASIS)
INCREASE Increase
YEARS ENDED DECEMBER 31, 2005 (DECREASE) % CHANGE 2004 (Decrease) % Change 2003
-------------------------------------------------------------------------------------------------------------
Revenue 1,269,179 240,691 23 1,028,488 113,318 12 915,170
Operating earnings(1) 465,378 134,065 40 331,313 78,864 31 252,449
Earnings from continuing operations 220,848 32,717 17 188,131 43,983 31 144,148
Discontinued operations 1,409,715 1,350,442 2,278 59,273 22,947 63 36,326
Net earnings 1,630,563 1,383,159 559 247,404 66,930 37 180,474
Earnings per unit/share from
continuing operations 1.76 0.15 9 1.61 0.30 23 1.31
Net earnings per unit/share 13.00 10.89 516 2.11 0.48 29 1.63
Cash flow from continuing operations 203,101 (84,720) (29) 287,821 86,900 43 200,921
Net capital spending from
continuing operations 140,077 26,180 23 113,897 29,039 34 84,858
Distributions to unitholders 70,510 70,510 N/A - - - -
Distributions per unit 0.56 0.56 N/A - - - -
=============================================================================================================
(1) OPERATING EARNINGS IS NOT A RECOGNIZED MEASURE UNDER CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (GAAP). MANAGEMENT BELIEVES THAT IN
ADDITION TO NET EARNINGS, OPERATING EARNINGS IS A USEFUL SUPPLEMENTAL
MEASURE AS IT PROVIDES AN INDICATION OF THE RESULTS GENERATED BY THE
TRUST'S PRINCIPAL BUSINESS ACTIVITIES PRIOR TO CONSIDERATION OF HOW THOSE
ACTIVITIES ARE FINANCED OR HOW THE RESULTS ARE TAXED. INVESTORS SHOULD BE
CAUTIONED, HOWEVER, THAT OPERATING EARNINGS SHOULD NOT BE CONSTRUED AS AN
ALTERNATIVE TO NET EARNINGS DETERMINED IN ACCORDANCE WITH GAAP AS AN
INDICATOR OF PRECISION'S PERFORMANCE. PRECISION'S METHOD OF CALCULATING
OPERATING EARNINGS MAY DIFFER FROM OTHER ENTITIES AND, ACCORDINGLY,
OPERATING EARNINGS MAY NOT BE COMPARABLE TO MEASURES USED BY OTHER
ENTITIES.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
48
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL POSITION AND RATIOS
(STATED IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT RATIOS)
Years ended December 31, 2005 2004 2003
-------------------------------------------------------------------------------------------------------------
Working capital $ 152,754 $ 557,311 $ 248,994
Working capital ratio 1.4 2.5 1.6
Long-term debt(1) $ 96,838 $ 718,850 $ 399,386
Total assets $ 1,718,882 $ 3,852,049 $ 2,932,030
Long-term debt to long-term debt plus equity(1) 0.08 0.24 0.19
Long-term debt to cash flow from continuing operations(1) 0.5 2.5 2.0
Interest coverage(2) 15.9 7.2 7.4
==============================================================================
(1) EXCLUDES CURRENT PORTION OF LONG-TERM DEBT WHICH IS INCLUDED IN WORKING
CAPITAL.
(2) OPERATING EARNINGS DIVIDED BY NET INTEREST EXPENSE.
The year 2005 was a period of significant change at Precision. In the
second quarter, Precision entered into an agreement to sell its Energy
Services and International Contract Drilling divisions to Weatherford
International Ltd. ("Weatherford"). This transaction closed on August 31,
2005. As well, Precision sold its industrial plant maintenance business,
carried on by CEDA, on September 13, 2005. In conjunction with funding from
the above transactions, Precision repaid its outstanding debentures on October
17, 2005.
On November 7, 2005 Precision completed its conversion into an income
trust pursuant to a plan of arrangement. As part of this conversion, Precision
made a special cash payment of $844 million and transferred almost 26 million
shares of Weatherford valued at $2.0 billion to shareholders. The resulting
reduction to retained earnings was $2.9 billion.
Underlying all this change, the continuing Canadian business operations,
our foundation, enjoyed a banner year. The continued world demand for crude
oil and the related high commodity prices in combination with record high
North American natural gas prices, manifested itself into a record 24,805
wells being drilled in the Western Canada Sedimentary Basin ("WCSB").
Precision was able to leverage off this demand through improved pricing,
higher equipment utilization and effective cost control, resulting in a $134
million or 40 percent increase in operating earnings from 2004 to 2005. This
strong performance followed a $79 million or 31 percent increase in operating
earnings from 2003 to 2004.
Despite record setting business fundamentals in 2005, earnings from
continuing operations before income taxes amounted to $293 million for an
increase of just one percent over the prior year. Results for 2005 were
reduced by one time items in the amount of $72 million for the premium paid on
early bond redemption, $71 million for the loss on disposal of the short-term
investment related to the 68-day holding period on the 26 million Weatherford
shares and $18 million in reorganization costs associated with the conversion
to an income trust. With the income trust conversion on November 7, 2005
subsequent earnings have benefited from a lower tax rate as the trust
structure has the effect of shifting the income tax burden to unitholders.
The strategic decision to dispose of Energy Services and International
Contract Drilling as well as CEDA has had a significant impact on Precision.
First, it resulted in a gain on disposal of $1.3 billion within 2005
discontinued earnings. Second, Precision's underlying total asset base as at
December 31, 2005 contracted by 55 percent from $3.9 billion in 2004 to $1.7
billion in 2005. Third, Precision's employee workforce was reduced from
approximately 12,000 in more than 25 countries to 6,500 employees in one
country, Canada.
Consistent with the new business footprint, Precision appointed an
experienced management team at the executive and functional corporate level to
effectively manage the business as it moves forward. The new management team
was appointed from within the continuing business divisions, with transition
leadership provided by the founding Chairman and Chief Executive Officer of
Precision, Mr. Hank Swartout.
TURNING IN THE RIGHT DIRECTION
49
MANAGEMENT'S DISCUSSION AND ANALYSIS
With the conversion to an income trust, Precision moved from a cash
retention business model to a cash flow-through model with the adoption of a
policy to make regular monthly cash distributions to unitholders. Precision is
a mature organization that operates in a cyclical industry with sharp seasonal
swings in revenue levels. The actual cash flow available for distribution to
unitholders is a function of numerous factors including financial performance,
debt covenants and obligations, working capital requirements as well as
maintenance and expansion capital expenditure requirements for the purchase of
property, plant and equipment. The capital resources available to Precision as
at December 31, 2005 are strong, with positive working capital of $153 million
and long-term debt of $97 million drawn on the $550 million syndicated loan
facility.
The Canadian business platform has always been the foundation of
Precision. With the contraction in scope to our business roots, our
operational focus is set on Canada. Strategically, Precision expects to
maintain and build upon our core group of people, augment the services we
provide our customers, passionately pursue our Target Zero safety vision and
continue to grow and be profitable. Precision has set its sights on the market
place, with a view to participate in market growth throughout North America
and with a longer term objective to consolidate higher cost, less efficient
competitors.
SUMMARY OF INCOME STATEMENT
(STATED IN THOUSANDS OF CANADIAN DOLLARS)
Years ended December 31, 2005 2004 2003
----------------------------------------------------------------------------------------------------------
Operating earnings (loss)
Contract Drilling Services $ 404,385 $ 282,315 $ 218,012
Completion and Production Services 121,643 77,074 48,706
Corporate and Other (60,650) (28,076) (14,269)
----------------------------------------------------------------------------------------------------------
465,378 331,313 252,449
Interest, net 29,270 46,280 34,066
Premium on redemption of bonds 71,885 - -
Loss on disposal of short-term investments 70,992 - -
Gain on disposal of investments - (4,899) (1,493)
----------------------------------------------------------------------------------------------------------
Earnings from continuing operations before income taxes 293,231 289,932 219,876
Income taxes 72,383 101,801 75,728
----------------------------------------------------------------------------------------------------------
Earnings from continuing operations 220,848 188,131 144,148
Discontinued operations 1,409,715 59,273 36,326
Net earnings $ 1,630,563 $ 247,404 $ 180,474
==========================================================================================================
ECONOMIC DRIVERS OF THE GLOBAL OILFIELD SERVICES BUSINESS
In Canada, the economics of an oilfield service company align with global
and regional fundamentals as described in the paragraphs that follow.
Important regional drivers for the oilfield service business in Canada include
the underlying hydrocarbon make-up of the WCSB and the existence of an
established, competitive and efficient oilfield service infrastructure.
Increasingly, natural gas production is driving economics within the WCSB as
approximately 75 percent of new well completions in 2005 were targeted towards
natural gas. In general terms, drilling activity in the WCSB is split between
the provinces with 75 percent in Alberta, 15 percent in British Columbia and
the remaining 10 percent in Saskatchewan. At present, the activity levels in
northern Canada and areas east are relatively low. Areas in Canada's north
hold significant promise for the future as pipeline and local community
relations are established. The Canadian oilfield service industry dates back
to the 1940s and has given Canada the means to develop its reserves to meet
domestic consumption and to provide large export capacity, primarily to the
United States.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
50
MANAGEMENT'S DISCUSSION AND ANALYSIS
The hydrocarbon structure of the WCSB is world class in its diversity.
Conventional sources of oil and natural gas reservoirs exist at a variety of
depths which are comparatively shallow by global standards. These conventional
sources are accompanied by more costly and challenging reservoirs associated
with oil sands, heavy oil, coal bed methane or natural gas in coal and tight
natural gas in deeper formations. These sources of energy border with the
largest consumer of hydrocarbons in the world, the United States.
Crude oil and natural gas are the primary sources of energy in the world.
As history has proven, it takes decades if not centuries to displace energy
sources. As a result, hydrocarbon production will remain critical to the
world's energy needs for the foreseeable future, with demand forecasted by
many to continue to increase, as illustrated below.
The provision of these commodities to the consuming public involves a
number of players, each of which take on different risks in the process of
exploring for, producing, refining and distributing hydrocarbons and
associated refined by-products. Exploration and production companies assume
the risk of finding hydrocarbons in pools of sufficient size to economically
develop and produce reserves. The economics of exploration and production is
dictated by the current and expected future margin between the cost to find
and develop hydrocarbons and the price at which those products can be sold.
The wider the margin, the more incentive there is to undertake the activities
involved in the process of exploration and development.
WORLD MARKETED ENERGY USED BY FUEL TYPE, 1970-2020
[GRAPHIC OMITTED - LINE CHART]
These activities include acquiring access to prospective lands, shooting
seismic to detect the presence of hydrocarbon-bearing structures, drilling
wells and measuring the characteristics of subsurface geological formations.
Exploration and production companies hire oilfield service companies to
perform the majority of these services. The revenue for an oilfield service
company is part of an exploration and production company's finding and
development costs.
Providing these oilfield services incorporates three main elements:
people, technology and equipment. Attracting, training and retaining qualified
employees is the single biggest challenge for a service company. Exploration
and production activities are taking place in an ever increasing variety of
surface and subsurface conditions. Developing technology and building
equipment that can withstand increasing physical challenges and operate more
efficiently is required to maintain and improve the economics of crude oil and
natural gas production. The primary economic risks assumed by oilfield service
companies are the volatility of activity levels that translate into
utilization rates for its investment in people, technology and equipment, and
cost control to maximize the margins earned.
The economics of a service company are thus largely driven by the current
and expected price of crude oil and natural gas, which are determined by the
supply and demand for these commodities. Since crude oil can be transported
relatively easily, it is priced in a worldwide market, which is influenced by
a wide array of economic and political factors. Natural gas is priced in more
local markets due to the requirement to transport this gaseous product in
pressurized pipelines, although this is changing slowly with the emergence of
liquefied natural gas ("LNG"). North America will need to compete on a global
basis to secure access to LNG supplies as demand in other parts of the world
continues to rise.
TURNING IN THE RIGHT DIRECTION
51
MANAGEMENT'S DISCUSSION AND ANALYSIS
WTI OIL AND U.S. WELLHEAD NATURAL GAS PRICE
[GRAPHIC OMITTED - LINE CHART]
Although, as illustrated, crude oil and natural gas prices have
historically been quite volatile, the upward trend since 2002 has endured and
resulted in very high commodity price levels to exit 2005. Certainly, weather
was a factor in the Gulf of Mexico this past hurricane season, as Katrina and
others caused tremendous damage to production infrastructure and caused a
spike in commodity pricing during September 2005. These events highlight the
narrow tolerance and lack of surplus capacity to compensate for oil or natural
gas production that may suddenly go off-line. The supply and demand balance is
narrow and significant industry reinvestment is required to add and replace
old infrastructure. Many industry observers believe that a new pricing floor
is being set due to the pace of production decline in combination with demand
growth projections. Clearly, hydrocarbons are a non-renewable resource that is
more costly and difficult to discover and develop. West Texas Intermediate
(WTI) oil prices averaged US$56 per barrel during 2005, an increase of 37
percent over the 2004 average of US$41 per barrel. Oil prices continue to be
affected by political instability in some OPEC member nations (Venezuela,
Iraq, Nigeria and Iran) and from a strengthening world economy with energy
demand growth particularly strong in China, India and Southeast Asia.
Consistent with commentary over the past three years, North American
natural gas prices are also being supported by strong fundamentals. North
American Henry Hub natural gas prices surged 45 percent in 2005 averaging
US$8.96 per mmbtu, an increase of US$2.78 per mmbtu over 2004. Demand for
natural gas is increasing with economic growth while supply from relatively
mature producing basins is continuing to gradually decline. The record North
American drilling levels over the past three years have served to slow the
decline in the production rate and this situation is not expected to change in
the near future. High oil prices also serve to support natural gas prices as
the economic benefits of switching between the two fuels is minimal. The graph
at left demonstrates decline rates in natural gas production in Alberta.
RAW NATURAL GAS PRODUCTION BY CONNECTION YEAR IN ALBERTA
[GRAPHIC OMITTED - CHART]
The graph at the top of page 52 shows that the number of producing
natural gas wells has dramatically increased over the past decade. This,
coupled with the previous graph, which indicates natural gas production
remains flat with high decline rates, suggests that more wells are required to
be drilled in order to meet North American supply needs. This situation could
be further magnified if the demand for natural gas continues to strengthen.
The demand for crude oil and natural gas is forecast to increase over the next
two decades.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
52
MANAGEMENT'S DISCUSSION AND ANALYSIS
NUMBER OF PRODUCING WELLS IN WESTERN CANADA
[GRAPHIC OMITTED - BAR CHART]
Over the last decade, customers in North America have shifted focus from
crude oil and are pursuing alternatives such as natural gas, coal and nuclear
power, looking for cleaner sources of energy. The parameters for natural gas,
however, remain the strongest as it is a proven, environmentally efficient
energy source with infrastructure in place. Other sources of natural gas such
as coal bed methane will be required in western Canada to replace the
production decline in sweet and sour natural gas wells in the WCSB.
In spite of record drilling activity, production levels remain relatively
flat. The trend in recent years is for customers to drill shallow gas wells
within existing reservoirs to exploit reserves. This is supported by the fact
that over 75 percent of the natural gas wells drilled in 2005 were shallow
wells. The shallow wells are quick, easy finds with relatively rapid declines
in production rate.
Reserve to production ratios, which are an indication of how quickly
reserves are depleting, are beginning to flatten after a period of decline
starting in the 1990s. The end result of these trends is that drilling
activity must stay the same or increase to allow current production levels to
be maintained. This situation is leading producers to drill deeper resource
plays to extend their natural gas reserve life index. Increasingly, industry
is looking for the next big, prolific natural gas field. This situation bodes
well for the oilfield service industry and Precision's contract drilling
services segment, in particular, with respect to its overweighting in deep
drilling rig capacity.
CANADIAN WELL COMPLETIONS VS U.S. NATURAL GAS WELLHEAD PRICE
[GRAPHIC OMITTED - BAR CHART]
The graph at left depicts the increase in natural gas completions over
the past eleven years and its direct correlation to natural gas pricing. To
begin 2006, we are experiencing the effects of having record amounts of
natural gas in storage as we close out the winter heating season. Natural gas
prices are falling because of the warmer weather that is being experienced
throughout North America. It is important to consider that natural gas prices
are still more than triple the US$2.00 per mmbtu average seen in the 1990s. We
also have to be cognizant of the fact that there is a lead time to drill and
tie-in new discoveries. Even with commodity price declines, it is questionable
whether customers in the short term will slow down exploration and development
given demand growth. Conversely, the lower natural gas prices will most likely
lead to additional consumption.
TURNING IN THE RIGHT DIRECTION
53
MANAGEMENT'S DISCUSSION AND ANALYSIS
Precision is the industry leader in Canada for providing a wide array of
oilfield services. The Canadian industry is in a good position as the United
States, the largest consumer of energy, is looking to Canadian production to
help meet its energy needs. The worldwide demand for crude oil looks to be
ever increasing. China, the world's second largest oil consumer, imports more
than 40 percent of its needs. Additionally, India, the second most populated
country and third largest consumer, currently imports 70 percent of its needs.
In light of this, the supply of drilling rigs in Canada has steadily
increased over the past 12 years to 770, an all-time high. Customer demand as
measured by operating day utilization peaked at 71 percent in 1997 and has
ranged between 38 percent and 60 percent since that time. Rig industry
utilization was 60 percent for 2005. The recent higher utilization levels have
caused the drilling contractors to add capacity. During the year, 50 drilling
rigs were added and an additional 100 new rig builds are anticipated in the
coming year, many of which are without long-term contracts. The bulk of these
new builds are either telescopic doubles or coil tubing units. In the
short-term, capacity is geared towards peak winter demand. In the long-term,
it provides the capacity to drill more wells through better utilization during
the remainder of a year. If commodity prices weaken for a prolonged period,
the industry may have a large supply and demand imbalance. Clearly, the
industry believes that the pace of drilling to sustain natural gas production
for domestic Canadian use and export to the United States will keep equipment
utilization strong.
There were 50 new drilling rigs added to the Canadian industry fleet
during 2005, a seven percent increase to the total. Of these additional rigs,
68 percent had a depth rating of less than 1,500 metres with new coiled tubing
rigs leading the way with 21 and singles with 13. Customer demand to drill
conventional natural gas and oil wells, in combination with improving
commercialization of natural gas in coal, oil sands and tight natural gas
formations are driving demand for rigs to record levels.
NORTH AMERICAN LAND DRILLING RIGS ANNUAL AVERAGE RIG COUNT
[GRAPHIC OMITTED - LINE CHART]
Just as natural gas is a North American commodity, drilling rigs are,
although to a lesser degree, available to work in the Canadian and lower 48
United States markets. It is interesting to note that while the Canadian
drilling rig count is at an all time high, the count in the United States is
one third of the capacity that was in existence in the early 1980s, as
illustrated in the graph at left.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
54
MANAGEMENT'S DISCUSSION AND ANALYSIS
PRECISION'S DEVELOPMENT IN THE OILFIELD SERVICES BUSINESS
Precision began in western Canada as a land drilling contractor and our
development has matched that of the WCSB. Initially founded in 1985 as Cypress
Drilling Ltd., the business quickly grew from four drilling rigs to 19 with
the reverse takeover in 1987 of Precision Drilling Ltd., a company formed in
1952. Over the following decade, a series of nine acquisitions expanded the
Canadian drilling rig fleet to 200 as of May 1997 and established a 40 percent
market share of industry rigs. Diversification into service rigs and snubbing
operations came with the 1996 acquisition of EnServ Corporation. In the second
half of the year 2000, Precision became fully vested in the Canadian service
rig business as the CenAlta Energy Services Inc. acquisition created a
combined fleet of 257 service rigs and a leading industry market share of 28
percent. The additional acquisition in 2000 of coil tubing drilling rigs and
other shallow drilling rigs rounded out key milestones in our Canadian asset
base growth.
Precision's success is dependant on providing a complement of oilfield
services that are cost effective to exploration and production companies,
enabling them to find and develop hydrocarbon pools of sufficient size to
economically produce. Precision prides itself on providing quality equipment
operated by teams of highly experienced and well trained crews. In order to
facilitate customer needs and to optimally manage our business, Precision is
divided into two operating segments:
Contract Drilling Services is comprised of:
o Precision Drilling - 230 drilling rigs - 30 percent of industry
o LRG Catering ("LRG") - 92 drilling camps - 20 percent of industry
o Rostel Industries ("Rostel") - manufactures and refurbishes drilling
rig components
o Columbia Oilfield Supply ("Columbia") - centralized procurement,
inventory and distribution of consumable supplies
Completion and Production Services is comprised of:
o Precision Well Servicing ("PWS") - 237 service rigs - 24 percent of
industry
o Live Well Servicing Ltd. ("Live Well") - 26 snubbing units - 30 percent
of industry
o Precision Rentals - 3,700 storage tanks, 8,000 joints of specialty
drill pipe, 4,000 handling tools, 300 wellsite accommodation units - 15
percent of the industry
The following graphs illustrate how the Contract Drilling Services
segment and the Completion and Production Services segment have historically
contributed to Precision's profitability and investment.
REVENUE OPERATING EARNINGS
[GRAPHICS OMITTED -- LINE CHARTS]
TURNING IN THE RIGHT DIRECTION
55
MANAGEMENT'S DISCUSSION AND ANALYSIS
Precision is tightly integrated in terms of operational management,
safety, engineering, information technology, accounting and senior management.
Each division has experienced asset growth and performs a lead market role
within Canada. Communication is a skill that has been refined and ingrained in
the operating culture. Precision works closely with customers to ensure their
needs are being meet. The ability to successfully combine acquisitions through
vertical integration within and between related ancillary business units has
been developed over the past 20 years.
While each division is at its own stage in the business life cycle,
Precision Well Servicing in particular has matured the most over the past four
years as it follows the proven Precision Drilling model. The remaining
divisions are in the process of following suit. Accordingly, each division has
developed critical equipment mass and employee depth. Precision has
implemented and is further developing integrity-based systems that enable the
business to be versatile in order to meet fundamental industry challenges
while delivering better profit and safety performance.
While safety and quality of service continue as our primary focus, close
behind are our basic and simple methods of controlling costs in conjunction
with revenue generation. Canada is a market that has allowed the segments to
mature into an efficient and productive business model, but not without
challenge. Due to the seasonal and economic cycles associated with our
industry, our fixed support infrastructure is required to be lean with
elasticity to expand direct variable costs to meet high equipment demand
periods and conversely, to shrink with drops in utilization. Fixed cost
support infrastructure relates to salaried office personnel and systems while
variable costs typically relate to employees that work directly with equipment
on the job, in the field. The variable, hourly paid field employees work and
are paid when associated equipment is generating revenue.
The supply of experienced people yields profit leverage for oilfield
service companies, not just the "iron". Employee retention and seasonal cycles
remain manpower challenges for the industry. The already tight supply for
people is being further challenged by the number of rigs being added to the
industry along with the expansion of newly formed oilfield service companies.
Despite the above, in the fourth quarter of 2005, Precision Drilling had only
15 of 230 rigs operating without a full crew complement. Precision has been
cognizant of the need to hire, train and retain qualified field staff. In
order to alleviate crew shortages there are centralized personnel groups to
more effectively recruit and retain employees. In addition, we have
pre-employment rig orientation training where in 2005 we put through 1,500
candidates, an increase of 43 percent over 2004.
Precision has a balanced drilling rig offering, with particular strength
in deep drilling. As customers turn to deeper wells to discover new reserves,
Precision's 40 percent market share in rigs with a depth capacity greater than
3,600 meters is noteworthy. Drilling opportunities for tight natural gas in
deeper reservoirs is a market where Precision has particular advantage, a
market many expect to emerge in Canada.
CAPITAL EXPENDTURES
[GRAPHIC OMITTED -- LINE CHARTS]
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
56
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following provides a summary of Precision's drilling and service rig
fleets:
PRECISION DRILLING
Precision Fleet Industry Fleet(2)
-------------------------------------------------------------------------------------------------------------
Maximum Number % of Market Number % of
Type of Drilling Rig Depth Rating of Rigs Total Share %(3) of Rigs Total Change(4)
-------------------------------------------------------------------------------------------------------------
Single 1,200m 17 7 14 124 16 13
Super Single(R)(1) 3,000m 21 9 88 24 3 0
Double 3,000m 94 41 27 344 45 14
Light triple 3,600m 44 19 39 114 15 (4)
Heavy Triple 6,700m 43 19 40 107 14 6
Coiled tubing 1,500m 11 5 19 57 7 21
-------------------------------------------------------------------------------------------------------------
Total fleet 230 100 30 770 100 50
=============================================================================================================
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 January 4, 2006.
Precision has allocated the industry rig fleet by rig type.
(3) Market share means Precision's rigs as a percentage of the industry's
rigs.
(4) Change in number of industry rigs as compared to prior year.
Maximum
Type of Drilling Rig Depth Rating 2005 2004 2003 2002 2001
-------------------------------------------------------------------------------------------------------------
Single 1,200m 17 16 18 17 16
Super Single(R) 3,000m 21 21 15 16 17
Double 3,000m 94 95 96 96 99
Light triple 3,600m 44 45 47 47 48
Heavy Triple 6,700m 43 41 39 39 38
Coiled tubing 1,500m 11 11 10 11 11
-------------------------------------------------------------------------------------------------------------
Total fleet 230 229 225 226 229
=============================================================================================================
PRECISION WELL SERVICING
Type of Service Rig 2005 2004 2003 2002 2001
-------------------------------------------------------------------------------------------------------------
Freestanding mobile single 88 86 75 50 23
Mobile single 17 19 30 56 95
Double 64 65 57 58 60
Freestanding mobile double 8 9 6 6 5
Mobile double 44 42 46 45 48
Heavy double 1 2 9 9 9
Freestanding slant 15 16 16 16 16
Swab - - - - 1
-------------------------------------------------------------------------------------------------------------
Total fleet 237 239 239 240 257
=============================================================================================================
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57
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
CONTRACT DRILLING SERVICES SEGMENT
(STATED IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE INDICATED)
% OF % of % of
YEARS ENDED DECEMBER 31, 2005 REVENUE 2004 Revenue 2003 Revenue
-------------------------------------------------------------------------------------------------------------
Revenue $ 916,221 $ 727,710 $ 663,619
Expenses:
Operating 448,930 49.0 382,886 52.6 379,842 57.2
General and administrative 23,911 2.6 19,190 2.6 15,676 2.4
Depreciation 39,233 4.3 42,245 5.8 47,895 7.2
Foreign exchange (238) - 1,074 0.2 2,194 0.3
-------------------------------------------------------------------------------------------------------------
Operating earnings $ 404,385 44.1 $ 282,315 38.8 $ 218,012 32.9
=============================================================================================================
% INCREASE % Increase
2005 (DECREASE) 2004 (Decrease) 2003
-------------------------------------------------------------------------------------------------------------
Number of drilling rigs (end of year) 230 0.4 229 1.8 225
Drilling operating days 46,937 12.8 41,625 (1.5) 42,275
Drilling revenue per operating day ($/day) 18,034 9.3 16,494 11.5 14,792
Number of wells drilled 7,766 3.2 7,525 (11.0) 8,451
Average days per well 6.0 9.1 5.5 10.0 5.0
Number of meters drilled (000s) 8,901 11.0 8,021 (6.8) 8,604
Average meters per well 1,146 7.5 1,066 4.7 1,018
=============================================================================================================
2005 COMPARED TO 2004
THE CONTRACT DRILLING SERVICES SEGMENT generated record financial results
in 2005 on the strength of unprecedented drilling activity in western Canada
and improved pricing for related services. Revenue increased by $189 million
or 26 percent over 2004 to $916 million while operating earnings increased by
$122 million or 43 percent to $404 million. As a percentage of revenue,
operating earnings increased to 44 percent in 2005 as compared to 39 percent
in 2004. The margin increase was primarily attributable to pricing
improvements.
Operating expenses were lower as a percentage of revenue despite crew
wage rate increases. These costs declined from 53 percent of revenue in 2004
to 49 percent in 2005, and on a per operating day basis, they have remained
flat. Higher equipment utilization has lowered the daily cost associated with
fixed operating cost components. Variable costs are controlled through
extensive analysis and cost awareness. This combined with the ability to
mitigate cost escalations through volume purchasing and relationships with
suppliers further enhanced profitability.
Oil and natural gas prices were the story of 2005. Economic conditions
for energy continued to show significant improvement with crude oil and
natural gas establishing record pricing. These commodity prices had Canada's
oil and gas companies drilling a record 24,805 wells on a rig release basis,
an increase of nine percent over 2004. In fact, new record well counts have
been set for three successive years. As customers push to bring on-stream as
much production as possible during these times, oilfield service firms benefit
from this surge in spending. Precision, the largest oilfield service provider
in Canada, was a direct benefactor.
The Canadian drilling industry is subject to seasonality, with peak
activity levels during winter months from November through to March. Typically
during the latter half of March, weather conditions turn warmer to the point
that thawing occurs and causes ground conditions to become too soft and
unstable. These unstable ground conditions increase operating costs for
customers and cause seasonal road bans to be temporarily imposed. This event
can extend into June in certain areas, and is commonly referred to as "spring
break-up". In some areas of the extreme
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
58
MANAGEMENT'S DISCUSSION AND ANALYSIS
north, where there is only winter access over ice bridges, this break-up
period can span April through November. Timing for these northern rigs becomes
critical for customers that need to migrate the equipment south to areas where
summer drilling can occur.
This rise in activity has been strengthening on a comparative quarterly
basis year over year for the past three years. This demand has enabled the
Contract Drilling Services segment to steadily increase revenue and underlying
operating margins even though the overall fleet of equipment has increased
just slightly.
Drilling contractors in western Canada have increased the available rig
count to a level that will require the industry to drill more than 20,000
wells, at an average of seven days per well, to keep annual operating day
utilization above 50 percent. For 2006, indications are that drilling
companies may add another 100 rigs, which will raise the well count threshold
even higher.
Capital expenditures for the Contract Drilling Services segment in 2005
were $107 million and included $54 million to grow and expand the underlying
asset base and $53 million to sustain and upgrade existing equipment. The
majority of the expansion capital expenditure was associated with new drilling
rig construction.
THE PRECISION DRILLING DIVISION has once again set new financial
benchmarks for 2005. Revenue increased by $160 million or 23 percent over 2004
to $846 million. Just over half of this revenue growth was associated with
increased activity and the remainder with increased rates. The division
entered the year with great anticipation as rig demand exceeded rig
availability by a wide margin. Then came the March melt down as warm weather
in western Canada caused a somewhat premature end to the winter drilling
season. Soon after, the June rains rolled in and thwarted thoughts of an
exceptional second quarter. Disappointing activity results for the first half
of the year were strictly weather related. These activity levels caused
customer drilling programs to fall behind and created a backlog. As ground
conditions dried in July, the impact of this pent-up demand led to an
outstanding third and fourth quarter.
CONTRACT DRILLING SERVICES
[GRAPHIC OMITTED -- LINE CHART]
Rig demand continued to build momentum through to the end of the year.
Overall, the industry benefited from the pricing leverage established from
strong third quarter activity. Accordingly, increased pricing was established
in the fourth quarter for the winter drilling season. Rig shortages also
created a large spot market of operators who did not have equipment booked for
the winter, enabling the division to charge premium prices.
Operating earnings in the Precision Drilling division increased by 46
percent due in part to the 13 percent increase in operating activity combined
with the nine percent increase in revenue per operating day. Depreciation
expense for the year was $11 million lower due to the effects of a change in
the estimated life of rig assets to 5,000 utilization days from 4,150 in 2005.
Precision Drilling was able to maintain its cost per operating day at its 2004
rate. Crew labour costs in 2005 were 52 percent of operating costs up two
percent from 2004. The 2005 cost of drilling, maintenance and overhead on a
per day basis was consistent with 2004. An important component of
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59
MANAGEMENT'S DISCUSSION AND ANALYSIS
the success of the division is the degree to which the cost structures have
been developed to be as variable as possible with activity levels. This
flexibility has allowed the division to respond quickly to sudden changes in
equipment utilization and produce superior returns in periods of high activity
similar to 2005.
THE PRECISION DRILLING DIVISION is slightly larger than it was in 2004.
In the fourth quarter, two Super Single(R) Light rigs were added to the fleet
and one rig was sold. The net addition is the start of Precision's strategy to
organically expand through the addition of versatile rigs backed by long-term
customer commitments. Precision Drilling commenced 19 new rig builds in 2005
and expects that all but two will be field ready in 2006. The division's rig
fleet is expected to average 237 for 2006, exiting the year at 247 rigs.
LRG CATERING DIVISION, has been sized to support Precision's drilling rig
fleet and also had an outstanding year. LRG camp days increased over the prior
year by 26 percent in 2005 leading to a revenue increase of 40 percent. The
growing number of field personnel in the industry is putting overwhelming
pressure on other accommodation sources, such as hotels. Customers compensated
by utilizing camps in areas where crews would normally have returned to town
for lodging. LRG operating expenses increased due to higher labour and grocery
costs and these increases were more than offset by an increase in revenue
rates. In terms of capital expenditures, LRG grew its fleet by adding five new
six-unit camps.
ROSTEL INDUSTRIES AND COLUMBIA OILFIELD SUPPLY DIVISIONS continue to
provide valuable support for this segment and are best measured by the
efficiencies and contributions made to Precision through cost savings.
Rostel's core business is the manufacture and refurbishment of custom drilling
and service rig components. Columbia is a general supply store that procures
and distributes large volumes of consumable oilfield supplies for the
Precision divisions. Columbia is an essential extension of the purchasing
process that ensures all rigs are provided with timely and reliable running
supplies to keep them operational. More importantly, Columbia allows
operations in Precision to standardize product use and quality.
2004 COMPARED TO 2003
THE CONTRACT DRILLING SERVICES SEGMENT generated increased financial
results in 2004 due to an improvement in oil and natural gas commodity prices,
which led to greater customer demand for all of the segment's oilfield
services and the leverage to increase revenue rates. Operational execution and
diligence allowed for the efficient delivery of services and control over the
rate of operating and administrative cost escalations.
The segment reported revenues of $728 million, $64 million more than
2003, an increase of 10 percent. These results were generated with an
equipment fleet size that was relatively unchanged from the prior year.
Revenue growth in 2004 was primarily attributable to revenue rate increases.
Operating earnings increased by $64 million or 29 percent to $282 million. As
a percentage of revenue, operating earnings increased to 39 percent in 2004 as
compared to 33 percent in 2003. The margin increase was attributable to higher
pricing even though operating day utilization for the drilling rig fleet was
two percent lower in 2003. The second half of the year benefited from rising
commodity prices enabling the segment to increase rates commencing in the
fourth quarter. However, poor weather conditions in the third quarter hampered
industry drilling activity.
Operating expenses were lower as a percentage of revenue, improving to 53
percent in 2004 from 57 percent in 2003. The improvement is attributable to
higher revenue rates partially offset by higher labour costs.
Capital expenditures amounted to $75 million in 2004. This was comprised
of $37 million in growth initiatives for the construction of new rigs and
camps and was matched by $38 million in expenditures to sustain and upgrade
existing equipment.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
60
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE PRECISION DRILLING DIVISION revenue increased by $55 million or
nine percent over 2003 to $687 million. The majority of 2004 revenue was
attributable to rate increases that flowed through to operating earnings as
overall activity was very similar to 2003. In 2004 winter drilling revenue
rates held firm through the second quarter. While adverse third quarter
weather prevented some wells from being drilled, it did add to the backlog of
work, strengthening spot market demand and enabling the division to put
through an additional revenue rate increase to start the fourth quarter.
Although industry activity in Canada was approximately five percent higher
than 2003, the industry supply of additional drilling rigs hindered
opportunities to gain higher utilization. Precision Drilling's rig fleet
increased by four rigs in 2004, ending the year at 229 rigs. Operating costs
were reasonably well contained with a six percent fourth quarter labour rate
increase and static maintenance costs.
LRG CATERING DIVISION experienced a seven percent increase in camp days
and a 16 percent increase in revenue. Much of the rate increase was due to the
impact of three new base camps commissioned in the fourth quarter.
COMPLETION AND PRODUCTION SERVICES SEGMENT
(STATED IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT WHERE INDICATED)
% OF % of % of
YEARS ENDED DECEMBER 31, 2005 REVENUE 2004 Revenue 2003 Revenue
-------------------------------------------------------------------------------------------------------------
Revenue $ 369,667 $ 313,386 $263,218
Expenses:
Operating 209,657 56.7 196,113 62.6 176,295 67.0
General and administrative 11,021 3.0 12,708 4.0 12,447 4.7
Depreciation 27,402 7.4 27,508 8.8 25,720 9.8
Foreign exchange (56) - (17) - 50 -
-------------------------------------------------------------------------------------------------------------
Operating earnings $ 121,643 32.9 $ 77,074 24.6 $ 48,706 18.5
=============================================================================================================
% INCREASE % Increase % Increase
2005 (DECREASE) 2004 (Decrease) 2003 (Decrease)
-------------------------------------------------------------------------------------------------------------
Number of service rigs (end of year) 237 (0.8) 239 - 239 -
Service rig operating hours 477,232 1.1 472,008 7.4 439,519 12.1
Revenue per operating hour ($/hr.) 600 17.0 513 11.0 462 3.6
=============================================================================================================
2005 COMPARED TO 2004
THE COMPLETION AND PRODUCTION SERVICES SEGMENT, also generated record
financial results in 2005 on the strength of industry activity in western
Canada and improved pricing for services. Revenue increased by $56 million or
18 percent over 2004 to $370 million while operating earnings increased by $45
million or 58 percent to $122 million. As a percentage of revenue, operating
earnings increased to 33 percent in 2005 as compared to 25 percent in 2004.
The margin increase is attributable to the enhanced operating performance of
the service rig fleet as the division was able to increase rates throughout
the year. Equipment demand has provided the ability to establish pricing
levels that are based on possession rather than just usage.
Operating expenses declined from 63 percent of revenue in 2004 to 57
percent in 2005 and, on a per operating hour basis, increased marginally due
to higher labour costs. This segment continues to strengthen its systems and
cost controls as it follows the proven model built around the drilling
business. Analytical tools are extensively used as we continue to benefit from
Precision's enterprise-wide information system. Centralization of personnel,
accounting, purchasing, and equipment management has provided economies of
scale and more effective deployment of the segment's resources.
The segment is beginning to benefit from unprecedented industry activity
in 2005 which set records for the number of wells completed and the number of
producing wells in western Canada. The 24,805 wells rig released in
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61
MANAGEMENT'S DISCUSSION AND ANALYSIS
2005 brings the total in the past three years to 69,365. This has put extreme
pressure on equipment demands as customers were eager to increase their
production levels to benefit from high commodity prices.
The Completion and Production segment is also affected by the cyclical
nature of the seasons. The first and fourth quarters are the most active as
colder weather conditions allow for unrestricted movement of heavy equipment
on county and provincial roads. The first quarter traditionally produces the
highest utilization as customers are able to work northern areas only
accessible at this time. However, the fourth quarter of 2005 produced
exceptional results as customers caught up on the backlog of work deferred
from the first half of the year. This resulted from an early "spring break-up"
and an exceptionally wet second quarter.
COMPLETION AND PRODUCTION SERVICES
[GRAPHIC OMITTED -- LINE CHART]
Service rig contractors in western Canada have kept the industry rig
fleet count relatively constant over the past five years at a level of
approximately 1,000 service rigs. Precision and the industry have adjusted to
the shift in focus from oil to natural gas by customers. Recent growth in the
WCSB has been associated with natural gas production which is beginning to
increase demand for completion and production services providing additional
opportunities for Precision's diverse service rig fleet.
Surging oilfield activity in the drilling sector has created shortages in
both equipment and manpower. The well documented manpower shortage continues
to be a concern. Strong customer relationships, reliable equipment and a safe
working environment are important aspects in employee recruitment and
retention.
The reinvestment in equipment over the last several years has helped to
position the Completion and Production segment as an industry leader. Capital
spending in 2005 amounted to $35 million, an increase of nine percent over
2004. This included expansion capital of $8 million for a freestanding
snubbing unit, additional pump trucks, wellsite accommodations and storage
tanks. Maintenance capital to sustain the existing asset base included
replacement trucks for transporters, snubbing units and pump trucks as well as
rental drill pipe, snubbing equipment and a facility upgrade in Grande
Prairie, Alberta.
THE PRECISION WELL SERVICING DIVISION has set a new financial benchmark
in 2005. Revenue increased $44 million or 18 percent over 2004 to $286
million. A slight increase in activity combined with higher rates accounted
for the increase. PWS achieved 55 percent utilization, a nominal improvement
over the prior year. Activity levels were dampened in the first half of 2005
due to poor weather conditions, leading to a rebound in the latter half due to
the backlog of work. By the end of the year activity levels had only exceeded
the prior year by 5,224 operating hours or one percent. The opportunity to
make up additional hours in the last half of the year was just a factor of
calendar time as there was plenty of work available. Rig rates therefore were
the major contributor to the increased revenue. Traditional winter pricing
takes affect on October 1 and coupled with record fourth quarter activity in
2005, the division generated record quarterly results to exit the year. The
influx of junior oil and gas companies created a spot market that allowed for
stronger pricing.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
62
MANAGEMENT'S DISCUSSION AND ANALYSIS
Operating earnings for this division improved by $38 million resulting in
a 79 percent improvement over the prior year, due mainly to price increases.
In addition, operating costs were marginally higher year over year on a per
operating hour basis due to higher labour costs. Cost efficiencies were
achieved by consolidating operating centres in the latter part of the prior
year.
Capital expenditures in 2005 continued to emphasize the upgrading and
standardization of equipment. This includes upgrades to rig carriers through
new electronic engines and design changes to adapt axle configurations for
lighter road weights. This design change allows for greater utilization during
periods when restrictive road bans are in effect. The strategy is to optimize
service availability to generate revenue without having to increase the size
of the rig fleet. Today, approximately 60 percent of the service rig fleet is
able to move year round.
LIVE WELL'S activity decreased slightly in 2005. The demand for snubbing,
while finishing strong, paused early in the year. Despite this, revenue
increased by $4 million or 12 percent over 2004 to $32 million. The
improvement was attributable to higher hourly operating and standby rates
established in the last half of the year. Strong activity in the fourth
quarter allowed Live Well to exit 2005 with strong utilization. Operating
earnings increased by seven percent over the prior year due to price
increases.
Lower utilization was due, in part, to the industry's challenge to modify
and improve recommended industry practices. Snubbing services are associated
with producing natural gas wells and involves safety risks that can be greater
than other oilfield services. Live Well is working with its industry partners
and customers to bring about constructive change.
In terms of capital expenditures, Live Well upgraded its fleet of
hydraulic rig assist snubbing units through scheduled truck chassis
replacement and introduced its first freestanding snubbing unit. This
proprietary, automated design includes a pipe handling system that sets new
standards for safety and efficiency.
PRECISION RENTALS reported a revenue increase of $8 million or 19 percent
over 2004 to $51 million. The increase is attributable to higher drilling
activity which led to higher demand for rental equipment. This demand enabled
the division to benefit from higher utilization and improved pricing for each
of its three product categories: surface equipment; tubulars and well control
equipment; and wellsite accommodations. This accretion was established in the
fourth quarter, consistent with Precision's other divisions. Operating
earnings increased by 37 percent over the prior year.
The operation has been restructured and now consists of multiple
operating centres strategically located in the WCSB. This new structure allows
Precision Rentals to logistically manage all product categories from each
location and is supported by a new enterprise-wide information system. This
initiative has brought about improvements in service delivery, equipment
standardization and a more structured pricing regime.
In terms of capital expenditures, Precision Rentals continues to reinvest
in each of its product categories to keep its equipment in premium condition
and achieve the most efficient design available in the industry. The division
expanded its wellsite accommodation fleet in 2005 by eight percent with the
purchase of 24 units.
2004 COMPARED TO 2003
THE COMPLETION AND PRODUCTION SEGMENT generated revenues of $313 million,
which is $50 million or 19 percent higher than revenues of $263 million in
2003. Operating earnings increased by $28 million or 58 percent to $77
million. The increase in revenue is attributable to a balanced mix of rate
increases and higher equipment utilization. The Precision Well Servicing
division contributed 78 percent of the revenue increase. Operating expenses
were lower as a percentage of revenue, showing an improvement from 67 percent
of revenue in 2003 to 63 percent in 2004. Continued reinvestment as well as
the streamlining of operations has enabled the Completion and Production
segment to provide premium equipment and services to customers. Capital
spending in 2004 amounted
TURNING IN THE RIGHT DIRECTION
63
MANAGEMENT'S DISCUSSION AND ANALYSIS
to $32 million and included expansion capital of $7 million for additional
pump trucks, storage tanks and initial construction of a freestanding snubbing
unit. Maintenance capital in the amount of $25 million was incurred to sustain
the existing asset base through upgrades that included transporters, pump
trucks, wellsite units, surface tanks and facilities.
FOR THE PRECISION WELL SERVICING DIVISION, revenue increased $39 million
or 19 percent over 2003 to $242 million. Service rig activity increased by
32,489 hours to 472,008 in 2004, for utilization of 54 percent. This higher
demand enabled the division to increase average revenue per operating hour by
11 percent over the prior year. Although upstream drilling activity was
marginally lower year over year, Precision's service rig division was able to
increase revenue and began to capitalize on the commitment made toward the
reinvestment in its people and equipment. Operating costs were marginally
higher year over year on a per operating hour basis. The higher service rig
activity provided better coverage of lower fixed overhead costs but not enough
to offset higher major maintenance costs associated with equipment repair and
certification. Precision's service rig fleet was unchanged in 2004 at 239
rigs, representing an industry market share of approximately 26 percent.
LIVE WELL'S snubbing unit activity increased approximately 10 percent
over 2003 as demand for snubbing continued to gain momentum in line with the
industry's emphasis on natural gas production. Revenue increased $7 million or
33 percent over 2003 to $28 million. With the acquisition of two snubbing
units in December 2003, the fleet size increased to 25 units. Operating
earnings rose by 63 percent over 2003 due to the growth in fleet size and
higher pricing.
PRECISION RENTAL'S revenue increased $4 million or 10 percent over 2003
to $43 million. Operating earnings rose by 13 percent over 2003 despite a one
percent decline in industry drilling activity. Precision Rentals was more
profitable as a result of pricing improvements on a number of product
categories. In 2004, the division began to realize benefits and synergies from
the restructuring process to take advantage of a consolidated marketing group
and the centralization of certain business functions.
OTHER ITEMS
2005 COMPARED TO 2004
CORPORATE AND OTHER EXPENSES Corporate and other expenses increased by
$33 million or 116 percent in 2005 as compared to 2004. Included in these
expenses are $18 million in costs associated with the conversion to an income
trust comprising a one-time severance payment of $13 million to a senior
executive and $5 million in legal, accounting and advisory fees. Excluding
those costs, corporate and other expenses increased by $15 million or 53
percent year over year of which $6 million is attributable to a reduction in
foreign exchange gains and the remaining $9 million to severance and retention
bonus payments, increased legal and advisory fees related to other internal
reorganization activities, examining strategic and financing alternatives, and
increased internal and external audit costs to comply with financial reporting
requirements.
INTEREST EXPENSE Net interest expense of $29 million declined by 37
percent in 2005 compared to 2004. This reduction is attributable to the
repayment of the outstanding bonds (debentures) in October 2005 and from being
in a surplus cash position, to the date of trust conversion, which generated
$10 million in interest income.
PREMIUM ON REDEMPTION OF BONDS In October 2005, the outstanding bonds
were repaid, resulting in a charge of $72 million that was absent in 2004.
LOSS ON DISPOSAL OF SHORT-TERM INVESTMENTS Precision received 26 million
shares of Weatherford International Ltd. as part of the consideration for the
disposal of the Energy Services and International Contract Drilling divisions.
Substantially all of the shares were transferred to shareholders in
conjunction with the November 7, 2005 plan of arrangement and a $71 million
loss was incurred.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
64
MANAGEMENT'S DISCUSSION AND ANALYSIS
DISCONTINUED OPERATIONS During the third quarter of 2005, Precision
completed two significant business divestitures. These businesses contributed
$74 million in net earnings which have been included in discontinued
operations. Combined with the gains on disposition in the amount of $1.3
billion, discontinued operations contributed net earnings of $1.4 billion
towards the financial results in fiscal 2005.
First, Precision disposed of its Energy Services and International
Contract Drilling divisions to Weatherford, resulting in an after tax gain of
$1.2 billion. Precision has recorded a $20 million receivable in conjunction
with a working capital calculation pursuant to the agreement. This amount is
subject to change depending on the outcome of ongoing discussions with the
purchaser and could result in an adjustment to the proceeds on disposition.
Management estimates that ultimate settlement of this issue will not have a
material impact on the recorded gain on disposal of discontinued operations.
Second, Precision disposed of the industrial services business carried on
by CEDA for an after tax gain of $132 million.
INCOME TAXES Precision's effective tax rate on earnings from continuing
operations before income taxes was 25 percent in 2005 compared to 35 percent
in 2004. The decrease in the tax rate is primarily a result of the conversion
to an income trust in November 2005 which has the effect of shifting the
income tax burden of the Trust to the unitholders. The Trust incurs taxes to
the extent that there are federal large corporation and certain provincial
capital taxes, as well as taxes on any taxable income, of its underlying
subsidiaries, not distributed to unitholders. In addition, future income taxes
arise from differences between the accounting and tax basis of the operating
entities assets and liabilities.
2004 COMPARED TO 2003
CORPORATE AND OTHER EXPENSES Corporate and other expenses increased by
$14 million or 97 percent in 2004 as compared to 2003. These costs are
primarily associated with the corporate executive, human resources, internal
audit, information technology, treasury, tax, and financial reporting
functions. Expenses increased in conjunction with the growth of the
organization and with the complexities associated with Precision's former
strategy to globalize its business. In addition, heightened regulatory
requirements, in particular those associated with the Sarbanes-Oxley Act, have
resulted in increased personnel requirements.
INTEREST EXPENSE Net interest expense of $46 million increased by 36
percent in 2004 compared to 2003. Average net debt outstanding (borrowings
less cash on hand) increased nine percent as acquisitions made in 2004 were
partially financed by additional borrowings. The combination of the issuance
of common shares and long-term debentures to finance acquisitions and strong
cash flow from operations resulted in a change in the make up of Precision's
net debt outstanding. In the first half of 2004, a portion of net debt took
the form of short-term borrowings on its bank facilities at relatively low
interest rates. These short-term borrowings were replaced with long-term
debentures at higher interest rates. Interest expense was inflated by fees
related to bridge financing facilities put in place in conjunction with
acquisitions completed during the year.
INCOME TAXES Precision's effective tax rate on earnings from continuing
operations before income taxes was 35 percent in 2004 consistent with the rate
of 34 percent experienced in 2003.
TURNING IN THE RIGHT DIRECTION
65
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
In 2005, dispositions of the Energy Services and International Contract
Drilling divisions and CEDA provided proceeds of $1.3 billion. Cash flow from
operations was $203 million, while the exercise of share purchase options and
increases in long-term debt and sources of funds through financing activities
added $227 million. An additional $15 million was provided from the sale of
Weatherford shares that were not distributed as part of the plan of
arrangement. Precision incurred capital expenditures from continuing
operations, net of dispositions of capital assets, of $140 million and capital
spending for discontinued operations of $110 million. In conjunction with the
CEDA disposition, Precision purchased all the outstanding shares of CASCA
Electric Ltd. and CASCA Tech Inc. for $30 million. A total of $844 million was
paid to shareholders as part of the plan of arrangement, while $704 million
was used to repay the outstanding public debt. In addition, $43 million was
used to repurchase and cancel the common shares held by dissenting
shareholders and $64 million was used in settlement of share purchase options.
On December 15, 2005, the initial monthly cash distribution of the Trust for
November, 2005 in the amount of $34 million, was paid to unitholders.
The Trust exited 2005 with a long-term debt to long-term debt plus equity
ratio of eight percent and a ratio of long-term debt to cash flow from
operations of 48 percent.
In 2006, Precision expects cash provided by continuing operations, before
an estimated use of funds in the amount of $200 million for working capital
changes, to be approximately $550 million. Net capital expenditures are
expected to be $285 million with $165 million directed towards organic growth
initiatives to expand equipment fleets and the remaining $120 million towards
sustaining and upgrading existing property, plant and equipment assets. There
was bank indebtedness and long-term debt in the combined amount of $117
million at December 31, 2005. On the basis that the Trust sustains cash
distributions at a monthly rate of $0.27 per unit throughout the year, total
cash distributions in the amount of $407 million are expected to be paid to
unitholders assuming an average of 125.5 million units outstanding during the
year. Given these estimates and forecast amounts, Precision expects long-term
debt to increase by approximately $340 million to exit 2006 with a balance
close to $435 million. The application of funds towards the $200 million
estimated change in working capital balances and a partial use of funds for
growth-oriented capital expenditures is expected to weaken the long-term debt
to long-term debt plus equity ratio from eight percent in 2005 to
approximately 27 percent in 2006. There was working capital in the amount of
$153 million on December 31, 2005 and Precision expects this amount to
increase to approximately $350 million to exit 2006.
Precision has a number of committed and uncommitted lines of credit
available to finance its activities. The committed facilities consist of a
$550 million three-year revolving unsecured credit facility with a syndicate
led by a Canadian chartered bank. The facility matures in November 2008, and
is extendible annually with the consent of lenders. The facility has three
financial covenants which are tested quarterly: total liabilities to equity of
less than 1:1, total debt to the trailing four quarters' cash flow of less
than 2.75:1 and total distributions to unitholders of less than 100 percent of
consolidated cash flow, as defined in the credit facility agreement. As at
December 31, 2005, Precision was well within the financial covenant levels,
and is expected to remain so for 2006. There was $97 million outstanding under
the committed facilities at December 31, 2005. In addition to the committed
facilities, Precision also has a number of uncommitted operating facilities
which total approximately $66 million equivalent and are utilized for working
capital management and the issuance of letters of credit.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
66
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Corporation's contractual obligations are outlined in the following
table:
Payments Due by Period
(STATED IN THOUSANDS OF CANADIAN DOLLARS) TotalLess Than 1 Year 1 - 3 Years 4 - 5 Years After 5 Years
-------------------------------------------------------------------------------------------------------------
Long-term debt 96,838 - 96,838 - -
Operating leases 27,900 7,362 10,167 7,334 3,037
-------------------------------------------------------------------------------------------------------------
Total contractual obligations 124,738 7,362 107,005 7,334 3,037
=============================================================================================================
OUTSTANDING UNIT/SHARE DATA
February 28 December 31 December 31
2006 2005 2004
-------------------------------------------------------------------------------------------------------------
Trust units/common shares 124,352,921 124,352,921 121,580,424
Exchangeable LP units 1,108,382 1,108,382 -
Options to purchase common shares - - 6,695,120
=============================================================================================================
DISTRIBUTIONS
Upon Precision's conversion to an income trust effective November 7,
2005, the Trust adopted a policy of making regular monthly cash distributions
to unitholders. As previously disclosed in the Information Circular of
Precision Drilling Corporation dated October 3, 2005, distributions may be
reduced, increased or suspended entirely depending on the operations of
Precision and the performance of its assets. The actual cash flow available
for distribution to holders of Trust units and holders of Exchangeable LP
units is a function of numerous factors, including the Trust's: financial
performance; debt covenants and obligations; working capital requirements;
maintenance and expansion capital expenditure requirements for the purchase of
property, plant and equipment; and number of units outstanding.
The Trust considers these factors on a monthly basis and made its first
payment in December in the amount of $34 million at the rate of $0.27 for each
outstanding unit including Exchangeable LP units. At December 31, 2005 there
were 125,461,303 Trust and Exchangeable LP units outstanding. In December, a
distribution of $0.27 per unit plus a special distribution of $0.022 per unit
was declared by the Trust with a payment of $37 million being made on January
17, 2006.
The declaration of trust, the governing document of Precision Drilling
Trust, provides that, if necessary, on December 31 of each year, the Trust
will make an additional amount payable such that the Trust will not be liable
for ordinary income taxes for such year. Reference can be made to "Certain
Canadian Federal Income Tax Considerations - Taxation of the Trust" on pages
46 to 47 of the Special Meeting Information Circular dated October 3, 2005.
TURNING IN THE RIGHT DIRECTION
67
MANAGEMENT'S DISCUSSION AND ANALYSIS
QUARTERLY FINANCIAL SUMMARY
(STATED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT PER UNIT/SHARE AMOUNTS, WHICH ARE PRESENTED ON A DILUTED
BASIS)
YEAR ENDED DECEMBER 31, 2005 Q1 Q2 Q3 Q4 YEAR
-------------------------------------------------------------------------------------------------------------
Revenue 383,407 157,895 300,016 427,861 1,269,179
Operating earnings 153,020 24,505 111,956 175,897 465,378
Earnings from continuing operations 88,281 9,308 2,382 120,877 220,848
Per unit/share 0.71 0.07 0.08 0.96 1.76
Net earnings 138,518 25,851 1,382,648 83,546 1,630,563
Per unit/share 1.11 0.21 11.00 0.66 13.00
Cash provided by (used in) continuing operations 91,762 117,722 42,359 (48,742) 203,101
=============================================================================================================
YEAR ENDED DECEMBER 31, 2004 Q1 Q2 Q3 Q4 Year
-------------------------------------------------------------------------------------------------------------
Revenue 361,524 134,963 218,023 313,978 1,028,488
Operating earnings 131,570 24,065 61,799 113,879 331,313
Earnings from continuing operations 80,427 10,127 36,995 60,582 188,131
Per unit/share 0.71 0.09 0.31 0.49 1.61
Net earnings 100,519 15,995 42,707 88,183 247,404
Per unit/share 0.89 0.14 0.36 0.71 2.11
Cash provided by continuing operations 48,657 186,709 21,536 30,919 287,821
=============================================================================================================
FOURTH QUARTER DISCUSSION
Sustained high crude oil and natural gas prices generated a strong
environment for the oilfield services business in Canada. The unusually wet
spring and early summer caused many of the oil and natural gas customers to
delay drilling programs. This, along with high customer cash flows set the
stage for the extremely busy fourth quarter which had activity levels not
normally seen until the middle of the winter season. This left customers with
an abundance of wells to be drilled in order to meet production targets. This
demand, coupled with the weather pattern that occurred in the fourth quarter
of 2005 created an almost perfect scenario. Unseasonably warm weather
temperatures and dry conditions were ideal after exiting an extremely wet
second quarter. Customers were able to extend summer drilling programs and
mitigate land expiry issues. It was also beneficial to customers who did not
have rigs reserved for the winter and required windows to complete projects as
rigs were delayed moving north.
Contract Drilling Service's revenue of $308 million and operating
earnings of $155 million increased by 36 percent and 57 percent in the fourth
quarter of 2005 compared to the same period of 2004, respectively. Record
fourth quarter activity and the impact of increased winter dayrates which took
effect during the quarter were the primary reasons for this change. Rig demand
in the quarter remained extremely strong and reached unprecedented levels.
Completion and Production Service's revenue of $124 million and operating
earnings of $51 million increased by 35 percent and 87 percent in the fourth
quarter of 2005 compared to the same period of 2004, respectively. Precision
Well Servicing also set new highs for activity and profitability in the fourth
quarter. Completion work was abundant due to record drilling activity combined
with pent-up demand from weather delays in the first half of the year.
Workover demand was high as customers scheduled wells for production
maintenance to take advantage of strong commodity prices. Winter pricing took
effect October 1, 2005. Live Well's snubbing revenues for the fourth quarter
increased year over year even though activity decreased slightly as customers
were reluctant to release the rig assist units into the market place and were
charged standby fees. Precision Rentals had record revenue and operating
earnings due to increased utilization and pricing on select product categories
as a result of continued strong demand for equipment throughout the quarter.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
68
MANAGEMENT'S DISCUSSION AND ANALYSIS
Precision Drilling and Precision Well Servicing rig operations
experienced an activity level increase of 19 percent and 11 percent with
utilization of 68 percent and 65 percent in the quarter, respectively. The
drilling rig fleet achieved 14,350 operating days in the fourth quarter of
2005 and the service rig fleet generated 142,122 operating hours. Continued
favourable commodity prices and good weather conditions set the environment
for these results. Traditional winter pricing rate increases were addressed to
start the fourth quarter and benefited from an equipment supply/demand
shortfall carried over from the third quarter. As a result, Precision Drilling
was able to increase revenue per drilling rig operating day by an average of
12 percent during the fourth quarter and PWS was able to raise service rig
rates per operating hour by 23 percent.
Fourth quarter operating costs were lower as a percentage of revenue
despite crew wage rate increases of approximately seven percent effective
October 1, 2005. Operating expenses declined from 51 percent of revenue in the
fourth quarter of 2004 to 45 percent in 2005. Consistent with the third
quarter 2005 results, equipment repair and maintenance expenses were lower on
a per day basis as scheduled costs were spread over a higher activity level
relative to the last year. In addition, operating expenses have not increased
to the same magnitude as customer pricing.
Corporate and other costs, after excluding one time trust conversion
costs of $18 million were up $1 million to $13 million from $12 million in
2004. This increase was a result of an increase in foreign exchange expense of
$3 million offset by lower general and administrative costs due to the
resizing of the corporate function to meet the needs of the smaller business
organization.
In the fourth quarter, capital expenditures amounted to $45 million of
which $17 million was for the construction of new drilling rigs. Two of the
scheduled 19 new builds were completed and commenced drilling in the quarter.
The remaining $28 million was for maintenance capital expenditures to sustain
and upgrade existing equipment.
CRITICAL ACCOUNTING ESTIMATES
This Management's Discussion and Analysis of Precision's financial
condition and results of operations is based on its consolidated financial
statements which are prepared in accordance with Canadian generally accepted
accounting principles. The Trust's significant accounting policies are
described in Note 1 to its consolidated financial statements. The preparation
of these financial statements requires that certain estimates and judgments be
made that affect the reported assets, liabilities, revenues and expenses.
These estimates and judgments are based on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Anticipating future events cannot be done with certainty,
therefore, these estimates may change as new events occur, more experience is
acquired and as the Trust's operating environment changes.
The accounting estimates believed to require the most difficult,
subjective or complex judgments and which are the most critical to our
reporting of results of operations and financial position are as follows:
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
Precision performs ongoing credit evaluations of our customers and grants
credit based upon past payment history, financial condition and anticipated
industry conditions. Customer payments are regularly monitored and a provision
for doubtful accounts is established based upon specific situations and
overall industry conditions. Precision's history of bad debt losses has been
within expectations and generally limited to specific customer circumstances,
however, given the cyclical nature of the oil and natural gas industry and the
inherent risk of successfully finding hydrocarbon reserves, a customer's
ability to fulfill its payment obligations can change suddenly and without
notice.
TURNING IN THE RIGHT DIRECTION
69
MANAGEMENT'S DISCUSSION AND ANALYSIS
BUSINESS DIVESTITURE RECEIVABLE
In conjunction with disposition of the Energy Services and International
Contract Drilling divisions, Precision estimated and recorded a $20 million
receivable regarding a working capital and property, plant and equipment
adjustment. This amount is subject to change depending on the outcome of
ongoing discussions with the purchaser and could result in an adjustment to
the proceeds on disposition. Management estimates that ultimate settlement of
this issue will not have a material impact on the recorded gain on disposal of
discontinued operations.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, which include property, plant and equipment,
intangibles and goodwill, comprise the majority of Precision's assets. The
carrying value of these assets is periodically reviewed for impairment or
whenever events or changes in circumstances indicate that their carrying
amounts may not be recoverable. This requires Precision to forecast future
cash flows to be derived from the utilization of these assets based upon
assumptions about future business conditions and technological developments.
Significant, unanticipated changes to these assumptions could require a
provision for impairment in the future. During the fourth quarter of 2005,
Precision completed its goodwill assessment and concluded that there was no
impairment of the carrying value.
DEPRECIATION AND AMORTIZATION
Precision's property, plant and equipment and its intangible assets are
depreciated and amortized based upon estimates of useful lives and salvage
values. These estimates may change as more experience is gained, market
conditions shift or new technological advancements are made.
Effective January 1, 2005, Precision changed the useful life of its
drilling rigs for purposes of determining depreciation expense to 5,000
utilization days from 4,150 utilization days (3,650 operating days), and its
drill strings to 1,500 from 1,100 operating days. Utilization days include
both operating and rig move days. This change in accounting estimate has been
applied prospectively and resulted in an $11 million reduction of depreciation
expense or $0.09 per unit for the year ended December 31, 2005.
INCOME TAXES
The corporate subsidiaries of the Trust use the liability method which
takes into account the differences between financial statement treatment and
tax treatment of certain transactions, assets and liabilities. Future tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Valuation
allowances are established to reduce future tax assets when it is more likely
than not that some portion or all of the asset will not be realized. Estimates
of future taxable income and the continuation of ongoing prudent tax planning
arrangements have been considered in assessing the utilization of available
tax losses. Changes in circumstances and assumptions and clarifications of
uncertain tax regimes may require changes to the valuation allowances
associated with the Trust's future tax assets.
The business and operations of Precision are complex and Precision has
executed a number of significant financings, business combinations,
acquisitions and dispositions over the course of its history. The computation
of income taxes payable as a result of these transactions, and in particular
those completed within the last five years, involves many complex factors as
well as Precision's interpretation of relevant tax legislation and
regulations. Precision's management believes that the provision for income tax
is adequate.
However, there are a number of tax filing positions that can still be the
subject of review by taxation authorities who may successfully challenge
Precision's interpretation of the applicable tax legislation and regulations,
with the result that additional taxes could be payable by Precision and the
amount payable could be up to $300 million.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
70
MANAGEMENT'S DISCUSSION AND ANALYSIS
BUSINESS RISKS
The discussion of risk that follows is not a complete representation.
Refer to the "Cautionary Statement Regarding Forward-looking Information and
Statements" on page 2.
Certain activities of Precision are affected by factors that are beyond
its control or influence. The Canadian drilling rig, camp and catering,
service rig, snubbing, rentals and related service businesses and activities
of Precision are directly affected by fluctuations in the levels of
exploration, development and production activity carried on by its customers
which, in turn, is dictated by numerous factors, including world energy prices
and government policies. The addition, elimination or curtailment of
government regulations and incentives could have a significant impact on the
oil and gas business in Canada. These factors could lead to a decline in the
demand for Precision's services, resulting in a material adverse effect on
revenues, cash flows, earnings and cash distributions to unitholders. The
majority of Precision's operating costs are variable in nature which minimizes
the impact of downturns on our operational results.
CRUDE OIL AND NATURAL GAS PRICES
Precision's revenue, cash flow and earnings are substantially dependent
upon, and affected by, the level of activity associated with oil and natural
gas exploration and production. Both short-term and long-term trends in oil
and natural gas prices affect the level of such activity. Oil and natural gas
prices and, therefore, the level of drilling, exploration and production
activity have been volatile over the past few years and likely will continue
to be volatile. Crude oil prices in 2005 ranged from a low of US$43 per barrel
to a high of nearly US$70 per barrel. 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 natural gas. North American oilfield service activity is largely focused
on natural gas. Natural gas in 2005 averaged almost US$9 per mmbtu and ranged
from an approximate low and high of US$7 and US$16 per mmbtu respectively.
Weather conditions, governmental regulation (both in Canada and elsewhere),
levels of consumer demand, the availability of pipeline capacity, and other
factors beyond Precision's control may also affect the supply of and demand
for oil and natural gas and thus lead to future price volatility. Precision
believes that any prolonged reduction in oil and natural gas prices would
depress the level of exploration and production activity. Lower oil and
natural gas prices could also cause Precision's customers to seek to
terminate, renegotiate or fail to honour Precision's drilling contracts; which
could affect the fair market value of its rig fleet which in turn could
trigger a write-down for accounting purposes; which could affect Precision's
ability to retain skilled rig personnel; and which could affect Precision's
ability to obtain access to capital to finance and grow its businesses. There
can be no assurance that the future level of demand for Precision's services
or future conditions in the oil and natural gas industry will not decline.
WORKFORCE AVAILABILITY
Precision's ability to provide reliable services is dependent upon the
availability of well-trained, experienced crews to operate our field
equipment. Precision must also balance the requirement to maintain a skilled
workforce with the need to establish cost structures that fluctuate with
activity levels.
Within Precision, the most experienced people are retained during periods
of low utilization by having them fill lower level positions on field crews.
Precision has established training programs for employees new to the oilfield
service sector and works closely with industry associations to ensure
competitive compensation levels and attract new workers to the industry as
required. Many of Precision's businesses are currently experiencing manpower
shortages. These shortages are likely to be further challenged by the number
of rigs being added to the industry along with the entrance and expansion of
newly formed oilfield service companies.
TURNING IN THE RIGHT DIRECTION
71
MANAGEMENT'S DISCUSSION AND ANALYSIS
BUSINESS IS SEASONAL
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 reducing activity levels
and placing an increased level of importance on the location of our equipment
prior to imposition of the road bans. Additionally, certain oil and natural
gas producing areas are located in sections of the 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. Precision's business results depend, at least in part, upon
the severity and duration of the Canadian winter.
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. Drilling time has been reduced due to
improvements in drill bits, logging and measurement while drilling tools, as
well as innovative changes in other areas such as mud systems and top drives.
Precision's ability to deliver services that are more efficient is critical to
continued success.
CUSTOMER MERGER AND ACQUISITION ACTIVITY
Merger and acquisition activity in the oil and natural gas exploration
and production sector can impact demand for our services as customers focus on
internal reorganization activities prior to committing funds to significant
drilling and maintenance projects.
DISCLOSURE CONTROLS AND PROCEDURES
The Chief Executive Officer and the Chief Financial Officer have
evaluated the effectiveness of Precision's disclosure controls and procedures
as of December 31, 2005 and have concluded that such disclosure controls and
procedures were effective to provide reasonable assurance that material
information relating to the Trust or its divisions is made known to them.
OUTLOOK
Global macro energy fundamentals remain positive as worldwide energy
demand continues to be firm, supported to a large extent by the growing
economies of China, southeast Asia and India. OPEC has remained disciplined
and rational with respect to managing the supply dynamics for oil and
worldwide production capacity is challenged to meet growing needs. Natural gas
fundamentals are also strong in the face of healthy industrial demand and
ongoing production challenges. These factors, which analysts are predicting
will not change in the foreseeable future, have led to the sustainment of
historically high crude oil and natural gas prices. As a result, the financial
capabilities of Precision's customers have been greatly strengthened over the
past year and the returns they are generating are compelling them to increase
their exploration and development spending.
Macro energy fundamentals for Precision's Canadian businesses are
expected to be largely driven by North American natural gas prices, production
and consumption. Increasingly, oilfield service activity in Canada is weighted
towards natural gas production. Short-term natural gas fundamentals will be
impacted by industrial and residential consumption associated with seasonal
heating and air conditioning demand. Accordingly, weather patterns play a
large role in natural gas storage levels and impact near-term natural gas
pricing. Warm weather conditions throughout North America during the fourth
quarter of 2005 resulted in lower natural gas pricing to close out the
2005/2006 winter.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
72
MANAGEMENT'S DISCUSSION AND ANALYSIS
With these medium to long-term fundamentals as the backdrop, Precision
anticipates demand for its oilfield services to be robust in 2006. The
Canadian Association of Oilwell Drilling Contractors is forecasting just over
26,000 wells to be drilled, on a rig release basis, in the WCSB in 2006, an
all time high. A recurring challenge Precision faces in filling the increased
demand for its services is attracting employees with sufficient expertise and
training. Precision is focused on recruiting, training and retaining people so
that it can continue to respond to customers needs.
The first quarter of 2006 has provided an excellent start to the year.
Precision began the year at high levels as customers were extremely well
prepared to pursue their winter drilling, completion and production programs.
To the extent that warm weather was an issue, customers were prepared to shift
well locations to ensure high equipment utilization, thereby avoiding costly
standby charges or loss of equipment use. With industry's growing emphasis on
spreading drilling activity throughout the year, load leveling practices bode
well for the seasonally soft second and third quarters. Given that there is a
healthy inventory of wells to be drilled, completed and maintained, second
quarter slow downs caused by weather could heighten demand and allow for a
repeat of last year, which led to a sharp rebound in third quarter activity
and provided pricing leverage to start the winter drilling season. The most
important factor, however, would be a repeat of the record upward trend in
natural gas prices.
During the fourth quarter of 2005, Precision announced a growth
initiative to construct 19 new drilling rigs that will expand the fleet by
eight percent over the following 12 to 15 months. These new rigs are of a
versatile design and are being built to meet customer specifications. Ten of
the new builds will be of Precision's proprietary Super Single(R) design, with
the remaining nine rigs being diesel electric light triples rated to a depth
of 4,000 metres. Customer commitments on many of these rigs are symbolic of
the current strength in demand for drilling in Canada, as the contract term
from the date of rig commission will carry through to the first quarter of
2011. Industry indications suggest that an additional 100 drilling rigs will
be added by drilling contractors within the WCSB during 2006. This would
increase the industry drilling fleet to 870 rigs to a level that is
unprecedented. In the event that demand softens, the additional industry
capacity could put the market in an oversupply position. This would impact
pricing and lower profitability for drilling contractors and other oilfield
service businesses.
Precision has and will continue to apply conservative financial
principles in managing its balance sheet and to remain opportunistic in its
pursuit of North American growth opportunities.
TURNING IN THE RIGHT DIRECTION
73
MANAGEMENT'S REPORT TO THE UNITHOLDERS
The accompanying consolidated financial statements and all information in the
Annual Report are the responsibility of management. The consolidated financial
statements have been prepared by management in accordance with the accounting
policies in the notes to the consolidated financial statements. When
necessary, management has made informed judgments and estimates in accounting
for transactions which were not complete at the balance sheet date. In the
opinion of management, the consolidated financial statements have been
prepared within acceptable limits of materiality, and are in accordance with
Canadian generally accepted accounting principles (GAAP) appropriate in the
circumstances. The financial information elsewhere in the Annual Report has
been reviewed to ensure consistency with that in the consolidated financial
statements.
Management has prepared Management's Discussion and Analysis (MD&A). The
MD&A is based upon the Trust's financial results prepared in accordance with
Canadian GAAP. The MD&A compares the audited financial results for the years
ended December 31, 2005 to December 31, 2004 and the years ended December 31,
2004 to December 31, 2003. Note 16 to the consolidated financial statements
describes the impact on the consolidated financial statements of significant
differences between Canadian and United States GAAP.
Management maintains an appropriate system of internal control designed
to give reasonable assurance that transactions are properly authorized, assets
are safeguarded and financial records properly maintained to provide reliable
information for the preparation of financial statements.
KPMG LLP, an independent firm of Chartered Accountants, was engaged, as
approved by a vote of shareholders at the Trust's most recent annual and
special meeting, to audit the consolidated financial statements in accordance
with Canadian generally accepted auditing standards and provide an independent
professional opinion. The Audit Committee of the Board of Directors, which is
comprised of three independent directors who are not employees of the Trust,
provides oversight to the financial reporting process. Integral to this
process is the Audit Committee's review and discussion with management and the
external auditors of the quarterly and annual financial statements and reports
prior to their respective release. The Audit Committee is also responsible for
reviewing and discussing with management and the external auditors major
issues as to the adequacy of the Trust's internal controls. The consolidated
financial statements have been approved by the Board of Trustees on the
recommendation of the Board of Directors of Precision Drilling Corporation and
its Audit Committee.
/s/ Hank B. Swartout /s/ Doug J. Strong
Hank B. Swartout Doug J. Strong
CHAIRMAN AND CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER
PRECISION DRILLING CORPORATION, PRECISION DRILLING CORPORATION,
ADMINISTRATOR TO PRECISION DRILLING TRUST ADMINISTRATOR TO PRECISION DRILLING TRUST
MARCH 7, 2006 MARCH 7, 2006
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
74
AUDITORS' REPORT TO THE UNITHOLDERS
We have audited the consolidated balance sheets of Precision Drilling Trust as
at December 31, 2005 and 2004 and the consolidated statements of earnings and
retained earnings (deficit) and cash flow for each of the years in the
three-year period ended December 31, 2005. These consolidated financial
statements are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Trust as at December
31, 2005 and 2004 and the results of its operations and its cash flow for each
of the years in the three-year period ended December 31, 2005 in accordance
with Canadian generally accepted accounting principles.
/s/ KPMG LLP
Chartered Accountants
CALGARY, ALBERTA
MARCH 2, 2006
TURNING IN THE RIGHT DIRECTION
75
CONSOLIDATED BALANCE SHEETS
(STATED IN THOUSANDS OF DOLLARS)
As at December 31, 2005 2004
-----------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ - $ 122,012
Accounts receivable (NOTE 19) 500,655 309,292
Inventory 7,035 7,734
Assets of discontinued operations (NOTE 21) - 497,036
-----------------------------------------------------------------------------------------------------
507,690 936,074
Property, plant and equipment, net of accumulated depreciation (NOTE 4) 943,900 897,584
Intangibles, net of accumulated amortization of $413 (2004 - $380) 465 498
Goodwill 266,827 266,827
Deferred financing costs - 9,116
Assets of discontinued operations (NOTE 21) - 1,741,950
-----------------------------------------------------------------------------------------------------
$ 1,718,882 $ 3,852,049
=====================================================================================================
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (NOTE 6) $ 20,468 $ -
Accounts payable and accrued liabilities (NOTE 19) 134,303 120,432
Incomes taxes payable 163,530 13,624
Distributions payable (NOTE 5) 36,635 -
Liabilities of discontinued operations (NOTE 21) - 244,707
-----------------------------------------------------------------------------------------------------
354,936 378,763
Long-term debt (NOTE 7) 96,838 718,850
Future income taxes (NOTE 12) 192,517 354,268
Liabilities of discontinued operations (NOTE 21) - 78,427
Unitholders' equity:
Unitholders' capital (NOTE 8) 1,377,875 1,274,967
Contributed surplus (NOTE 8) - 26,024
Cumulative translation adjustment (NOTE 18) - (20,933)
Retained earnings (deficit) (303,284) 1,041,683
-----------------------------------------------------------------------------------------------------
1,074,591 2,321,741
Commitments and contingencies (NOTES 11 AND 20)
-----------------------------------------------------------------------------------------------------
$ 1,718,882 $ 3,852,049
=====================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Approved by the Board:
/s/ Robert J.S. Gibson /s/ Patrick M. Murray
Robert J.S. Gibson Patrick M. Murray
TRUSTEE TRUSTEE
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
76
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (DEFICIT)
(STATED IN THOUSANDS OF DOLLARS, EXCEPT PER UNIT/SHARE AMOUNTS)
Years ended December 31, 2005 2004 2003
-----------------------------------------------------------------------------------------------------------
Revenue $ 1,269,179 $ 1,028,488 $ 915,170
Expenses:
Operating 641,805 566,297 544,163
General and administrative 76,397 64,149 42,662
Depreciation and amortization 71,561 74,829 78,112
Foreign exchange (3,474) (8,100) (2,216)
Reorganization costs (NOTE 9) 17,512 - -
-----------------------------------------------------------------------------------------------------------
803,801 697,175 662,721
-----------------------------------------------------------------------------------------------------------
Operating earnings 465,378 331,313 252,449
Interest:
Long-term debt (NOTE 7) 38,735 46,575 34,492
Other 558 246 115
Income (10,023) (541) (541)
Premium on redemption of bonds (NOTE 7) 71,885 - -
Loss on disposal of short-term investments (NOTE 21) 70,992 - -
Gain on disposal of investments - (4,899) (1,493)
-----------------------------------------------------------------------------------------------------------
Earnings from continuing operations before income taxes 293,231 289,932 219,876
Income taxes: (NOTE 12)
Current 241,402 53,698 40,828
Future (169,019) 48,103 34,900
-----------------------------------------------------------------------------------------------------------
72,383 101,801 75,728
-----------------------------------------------------------------------------------------------------------
Earnings from continuing operations 220,848 188,131 144,148
Gain (loss) on disposal of discontinued operations,
net of tax (NOTE 21) 1,335,382 (616) 17,460
Discontinued operations, net of tax (NOTE 21) 74,333 59,889 18,866
-----------------------------------------------------------------------------------------------------------
Net earnings 1,630,563 247,404 180,474
Retained earnings, beginning of year (NOTE 3) 1,041,683 794,279 613,805
Adjustment on cash purchase of employee stock options,
net of tax of $22,060 (NOTE 8) (42,087) - -
Reclassification from contributed surplus on cash
buy-out of employee stock options (NOTE 8) 23,215 - -
Distribution of disposal proceeds (NOTE 21) (2,851,784) - -
Repurchase of common shares of dissenting
shareholders (NOTE 8) (34,364) - -
Distributions (NOTE 5) (70,510) - -
-----------------------------------------------------------------------------------------------------------
Retained earnings (deficit), end of year $ (303,284) $ 1,041,683 $ 794,279
===========================================================================================================
Earnings per unit/share from continuing operations: (NOTE 13)
Basic $ 1.79 $ 1.63 $ 1.33
Diluted $ 1.76 $ 1.61 $ 1.31
-----------------------------------------------------------------------------------------------------------
Earnings per unit/share: (NOTE 13)
Basic $ 13.22 $ 2.14 $ 1.66
Diluted $ 13.00 $ 2.11 $ 1.63
===========================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
TURNING IN THE RIGHT DIRECTION
77
CONSOLIDATED STATEMENTS OF CASH FLOW
(STATED IN THOUSANDS OF DOLLARS)
Years ended December 31, 2005 2004 2003
------------------------------------------------------------------------------------------------------------
Cash provided by (used in):
Continuing operations:
Earnings from continuing operations $ 220,848 $ 188,131 $ 144,148
Items not affecting cash:
Depreciation and amortization 71,561 74,829 78,112
Stock-based compensation 11,229 8,190 6,366
Future income taxes (169,019) 48,103 34,900
Write-off of deferred financing costs 7,664 - -
Loss in market value of short-term investments 70,992 - -
Gain on disposal of investments - (4,899) (1,493)
Amortization of deferred financing costs 1,453 1,579 1,286
Unrealized foreign exchange gain on long-term
monetary items (4,740) (4,284) (42)
Changes in non-cash working capital balances (NOTE 19) (6,887) (23,828) (62,356)
------------------------------------------------------------------------------------------------------------
203,101 287,821 200,921
Discontinued operations (NOTE 21):
Funds provided by discontinued operations 183,330 187,018 89,051
Changes in non-cash working capital balances
of discontinued operations (86,310) (26,797) (31,545)
------------------------------------------------------------------------------------------------------------
97,020 160,221 57,506
Investments:
Business acquisitions, net of cash acquired (NOTE 15) (30,421) (679,814) (6,800)
Purchase of property, plant and equipment (155,231) (122,692) (96,193)
Purchase of intangibles (20) - (6)
Proceeds on sale of property, plant and equipment 15,174 8,795 11,341
Purchase of property, plant and equipment
of discontinued operations (128,214) (159,532) (218,728)
Purchase of intangibles of discontinued operations - (320) -
Proceeds on sale of property, plant and equipment
of discontinued operations 17,785 21,145 13,082
Proceeds on disposal of investments - 8,665 10,966
Proceeds on disposal of short-term investments 14,569 - -
Investments - (90) (1,080)
Proceeds on disposal of discontinued operations 1,306,799 49,299 67,274
------------------------------------------------------------------------------------------------------------
1,040,441 (874,544) (220,144)
Financing:
Increase in long-term debt 96,826 522,136 85,228
Repayment of long-term debt (703,970) (173,260) (145,657)
Deferred financing costs on long-term debt - (5,612) -
Distribution of disposal proceeds (NOTE 21) (844,334) - -
Distributions (NOTE 5) (33,875) - -
Issuance of common shares, net of costs - 276,428 -
Issuance of common shares on exercise of options 73,930 55,361 23,613
Repurchase of common shares of dissenting shareholders (43,299) - -
Cash buy-out of employee stock options (64,147) - -
Issuance of trust units on exercise of options 8,263 - -
Issuance of trust units on purchase of options 5,504 - -
Changes in non-cash working capital balances 22,060 - -
Change in bank indebtedness 20,468 (147,909) 2,588
------------------------------------------------------------------------------------------------------------
(1,462,574) 527,144 (34,228)
------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (122,012) 100,642 4,055
Cash and cash equivalents, beginning of year 122,012 21,370 17,315
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ - $ 122,012 $ 21,370
============================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS STATED IN THOUSANDS OF DOLLARS EXCEPT PER UNIT/PER SHARE
AMOUNTS)
Precision Drilling Trust (the "Trust") is a provider of contract drilling,
service rig and ancillary services to oil and natural gas exploration and
production companies in Canada.
The Trust is an unincorporated, open-ended investment trust governed by
the laws of Alberta and created pursuant to a declaration of trust dated
September 22, 2005. On September 29, 2005, the Trust, Precision Drilling
Limited Partnership ("PDLP"), 1194312 Alberta Ltd., 1195309 Alberta ULC., and
Precision Drilling Corporation ("Precision") entered into an Arrangement
Agreement ("Plan of Arrangement" or "Plan") to convert Precision to an income
trust. As part of the Plan of Arrangement, on November 7, 2005, Precision
Drilling Corporation and certain of its subsidiaries were amalgamated and
continued as one corporation ("PDC"). After giving effect to the Plan and
related transactions, all of the shares of PDC are owned by PDLP and
indirectly by the Trust.
Prior to the Plan of Arrangement effective date of November 7, 2005, the
consolidated financial statements included the accounts of Precision, its
subsidiaries and its partnerships, substantially all of which were
wholly-owned. The conversion to a trust has been accounted for on a continuity
of interest basis and accordingly, the consolidated financial statements
reflect the financial position, results of operations and cash flows as if the
Trust had always carried on the business formerly carried on by Precision. Due
to the conversion to a trust, certain information included in the consolidated
financial statements for prior periods may not be directly comparable. For
purposes of these consolidated financial statements, the share capital of PDC
is reported under Unitholders' capital (Note 8). Pursuant to the Plan of
Arrangement, shareholders ultimately received either trust units or a
combination of trust units and exchangeable LP units of PDLP for previously
held common shares of Precision (other than dissenting shareholders, who
received cash equal to the fair value of their shares). After giving effect to
the Plan of Arrangement, the consolidated financial statements include the
accounts of the Trust, its subsidiaries and its partnerships.
The beneficiaries of the Trust are the holders of Trust units and the
partners of PDLP are the holders of exchangeable LP units and the Trust. The
monthly distributions made by the Trust are determined by the Trustees. PDLP
earns interest income from a promissory note issued by its subsidiary PDC at a
rate which is determined by the terms of the promissory note. PDLP in
substance pays distributions to holders of exchangeable LP units in amounts
equal to the distributions paid to the holders of Trust units. All
distributions are made to unitholders of record on the last business day of
each calendar month.
1. SIGNIFICANT ACCOUNTING POLICIES:
CONTINUING OPERATIONS
(a) PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Trust,
its subsidiaries and its partnerships, substantially all of which are
wholly-owned at December 31, 2005.
(b) CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist of cash and short-term investments with
original maturities of three months or less.
(c) INVENTORY:
Inventory is primarily comprised of operating supplies and spare parts
and is carried at the lower of average cost, being the cost to acquire the
inventory, and replacement cost. Inventory is charged to operating expenses as
items are sold or consumed at the amount of the average cost of the item.
TURNING IN THE RIGHT DIRECTION
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(d) PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are carried at cost, including costs of
direct material, labor, and indirect overhead for manufactured items. Where
costs are incurred to extend the useful life of property, plant and equipment
or to increase its capabilities, the amounts are capitalized to the related
asset. Costs incurred to repair or maintain property, plant and equipment are
expensed as incurred.
Drilling rig equipment is depreciated by the unit-of-production method
based on 5,000 utilization days (3,650 drilling days for the year ended
December 31, 2004 - see Note 2) with a 20 percent salvage value. Drill pipe
and drill collars are depreciated over 1,500 drilling days (1,100 drilling
days for the year ended December 31, 2004 - see Note 2) and have no salvage
value. Service rig equipment is depreciated by the unit-of-production method
based on 24,000 hours for single and double rigs and 48,000 hours for heavy
double rigs. Service rigs have a 20% salvage value.
Rental equipment is depreciated by the straight-line method over periods
ranging from 10 to 15 years. Other equipment is depreciated by the
straight-line method over periods ranging from three to ten years.
Light duty vehicles are depreciated by the straight-line method over four
years. Heavy-duty vehicles are depreciated by the straight-line method over
periods ranging from seven to ten years.
Buildings are depreciated by the straight-line method over periods
ranging from 10 to 20 years.
(e) INTANGIBLES:
Intangibles, which are comprised primarily of patents, are recorded at
cost and amortized by the straight-line method over their useful lives ranging
from 10 to 12 years. The weighted average amortization period is 12 years, and
amortization over the next five years is anticipated to be $75,000 per year.
(f) GOODWILL:
Goodwill is the amount that results when the purchase price of an
acquired business exceeds the sum of the amounts allocated to the assets
acquired, less liabilities assumed, based on their fair values. Goodwill is
allocated as of the date of the business combination to the Trust's reporting
segments that are expected to benefit from the business combination.
Goodwill is not amortized and is tested for impairment annually in the
fourth quarter, or more frequently if events or changes in circumstances
indicate that the asset might be impaired. The impairment test is carried out
in two steps. In the first step, the carrying amount of the reporting segment
is compared with its fair value. When the fair value of a reporting segment
exceeds its carrying amount, goodwill of the reporting segment is considered
not to be impaired and the second step of the impairment test is unnecessary.
The second step is carried out when the carrying amount of a reporting segment
exceeds its fair value, in which case the implied fair value of the reporting
segment's goodwill is compared with its carrying amount to measure the amount
of the impairment loss, if any. The implied fair value of goodwill is
determined in the same manner as the value of goodwill is determined in a
business combination described in the preceding paragraph, using the fair
value of the reporting segment as if it was the purchase price. When the
carrying amount of a reporting segment's goodwill exceeds the implied fair
value of the goodwill, an impairment loss is recognized in an amount equal to
the excess.
(g) LONG LIVED ASSETS:
On a periodic basis, management assesses the carrying value of long lived
assets for indications of impairment. Indications of impairment include items
such as an ongoing lack of profitability and significant changes in
technology. When an indication of impairment is present, the Trust tests for
impairment by comparing the carrying value of the asset to its net recoverable
amount. If the carrying amount is greater than the net recoverable amount, the
asset is written down to its estimated fair value.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(h) INVESTMENTS:
Investments in shares of associated companies, over which the Trust has
significant influence, are accounted for by the equity method. Other
investments are carried at cost. If there are other than temporary declines in
value, these investments are written down to their net realizable value.
(i) DEFERRED FINANCING COSTS:
Costs associated with the issuance of long-term debt are deferred and
amortized by the straight-line method over the term of the debt. The
amortization is included in interest expense.
(j) INCOME TAXES:
Income earned directly by PDLP is not subject to income taxes as its
income is taxed directly to the PDLP partners. The Trust is a taxable entity
under the Income Tax Act (Canada) and income earned is taxable only to the
extent it is not distributed or distributable to its unitholders. As the Trust
distributes all of its taxable income to its respective unitholders pursuant
to the requirements of the trust indenture, it does not make a provision for
future income taxes.
PDC and its subsidiaries follow the liability method of accounting for
future income taxes. Under the liability method, future income tax assets and
liabilities are determined based on "temporary differences" (differences
between the accounting basis and the tax basis of the assets and liabilities),
and are measured using the currently enacted, or substantively enacted, tax
rates and laws expected to apply when these differences reverse. The effect of
a change in income tax rates on future tax liabilities and assets is
recognized in income in the period in which the change occurs.
(k) REVENUE RECOGNITION:
The Trust's services are generally sold based upon purchase orders or
contracts with the customer that include fixed or determinable prices based
upon daily, hourly or job rates. Customer contract terms do not include
provisions for significant post-service delivery obligations. Revenue is
recognized when services and equipment rentals are rendered and only when
collectability is reasonably assured.
(l) EMPLOYEE BENEFIT PLANS:
At December 31, 2005, approximately 52% (2004 - 33%) of the Trust's
employees were enrolled in the Trust's defined contribution retirement plans.
Employer contributions to defined contribution plans are expensed as
employees earn the entitlement and contributions are made.
The Trust had entered into an employment agreement with a senior officer,
which provided for a one-time payment upon retirement. The amount of this
retirement allowance increased by a fixed amount for each year of service over
a ten year period commencing April 30, 1996. The estimated cost of this
benefit was being accrued and charged to earnings on a straight-line basis
over the ten year period. This retirement allowance was paid during the year
ended December 31, 2005 (see Note 10).
(m) FOREIGN CURRENCY TRANSLATION:
Accounts of the Trust's integrated foreign operations are translated to
Canadian dollars using average exchange rates for the year for revenue and
expenses. Monetary assets and liabilities are translated at the year-end
current exchange rate and non-monetary assets and liabilities are translated
using historical rates of exchange. Gains or losses resulting from these
translation adjustments are included in net earnings.
Transactions in foreign currencies are translated at rates in effect at
the time of the transaction. Monetary assets and liabilities are translated at
current rates. Gains and losses are included in net earnings.
TURNING IN THE RIGHT DIRECTION
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(n) STOCK-BASED COMPENSATION PLANS:
The Trust had equity incentive plans, which are described in Note 8. The
fair value of common share purchase options was calculated at the date of
grant using the Black-Scholes option pricing model and that value was recorded
as compensation expense on a straight-line basis over the grant's vesting
period with an offsetting credit to contributed surplus. Upon exercise of the
equity purchase option, the associated amount was reclassified from
contributed surplus to unitholders' capital. Consideration paid by employees
upon exercise of equity purchase options was credited to unitholders' capital.
(o) EXCHANGEABLE SHARES:
Exchangeable shares are presented as equity of the Trust as their
features make them economically equivalent to trust units.
(p) PER UNIT AMOUNTS:
Basic per unit amounts are calculated using the weighted average number
of trust units outstanding during the year. Diluted per unit amounts are
calculated based on the treasury stock method, which assumes that any proceeds
obtained on exercise of options would be used to purchase trust units at the
average market price during the period. The weighted average number of units
outstanding is then adjusted by the difference between the number of units
issued from the exercise of options and units repurchased from the related
proceeds.
Share and per share amounts prior to the trust conversion on November 7,
2005 are referred to as unit or per unit amounts in the consolidated financial
statements.
(q) MEASUREMENT UNCERTAINTY:
Certain items recognized in the consolidated financial statements are
subject to measurement uncertainty as they are based on management's estimate
using current information and judgment. The effect on the consolidated
financial statements of changes in such estimates in future years could be
significant.
DISCONTINUED OPERATIONS
(a) EMPLOYEE BENEFIT PLANS:
At December 31, 2004, approximately 36% of employees of discontinued
operations were enrolled in retirement plans. Of that, approximately 6% of
participating employees were enrolled in the defined benefit plan and
approximately 94% in the defined contribution plan.
Employer contributions to defined contribution plans were expensed as
employees earned the entitlement and contributions were made.
The Trust accrued the cost of pensions earned by employees under its
defined benefit plan, which was actuarially determined using the projected
benefit method pro-rated on services and management's best estimate of
expected plan investment performance, salary escalation and retirement ages of
employees. For the purpose of calculating the expected return on plan assets,
those assets were valued at quoted market value at the balance sheet date. The
discount rate used to calculate the interest cost on the accrued benefit
obligation was the long-term market rate at the balance sheet date. Past
service costs from plan amendments were amortized on a straight-line basis
over the average remaining service period of employees active at the date of
amendment (EARSL). The excess of the net cumulative unamortized actuarial gain
or loss over 10% of the greater of the accrued benefit obligation and the
market value of plan assets was amortized over EARSL.
(b) FOREIGN CURRENCY TRANSLATION:
Accounts of the Trust's self-sustaining operations were translated to
Canadian dollars using average exchange rates for the year for revenue and
expenses. Assets and liabilities were translated at the year-end current
exchange rate.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gains or losses resulting from these translation adjustments were
included in the cumulative translation account in unitholders' equity.
Gains and losses arising on translation of long-term debt designated as a
hedge of self-sustaining foreign operations were deferred and included in the
cumulative translation account in unitholders' equity on a net of tax basis.
(c) HEDGING RELATIONSHIPS:
The Trust utilized foreign currency long-term debt to hedge its exposure
to changes in the carrying values of the Trust's net investment in certain
self-sustaining foreign operations as a result of changes in foreign exchange
rates.
To be accounted for as a hedge, the foreign currency long-term debt must
be designated and documented as a hedge, and must be effective at inception
and on an ongoing basis. The documentation defined the relationship between
the foreign currency long-term debt and the net investment in the foreign
operations, as well as the Trust's risk management objective and strategy for
undertaking the hedging transaction. The Trust formally assessed, both at the
hedge's inception and on an ongoing basis, whether the changes in fair value
of the foreign currency long-term debt is highly effective in offsetting
changes in the fair value of the net investment in the foreign operations. If
the hedging relationship was terminated or ceased to be effective, hedge
accounting was not applied to subsequent gains or losses. Any previously
deferred amounts were carried forward and recognized in earnings in the same
period as the hedged item.
(d) RESEARCH AND ENGINEERING:
Research and engineering costs were charged to income as incurred. Costs
associated with the development of new operating tools and systems were
expensed during the period unless the recovery of these costs could be
reasonably assured given the existing and anticipated future industry
conditions. Upon successful completion and field testing of the tools, any
deferred costs were transferred to the related capital asset accounts.
2. ACCOUNTING ESTIMATES:
Effective January 1, 2005, the Trust changed the useful life of its
drilling rigs for purposes of determining depreciation expense to 5,000
utilization days from 4,150 utilization days (3,650 drilling days), and its
drill string to 1,500 from 1,100 drilling days. Utilization days include both
operating and rig move days. This change in accounting estimate has been
applied prospectively and resulted in a $10.7 million reduction in
depreciation expense, or $0.09 per diluted unit/share, for the year ended
December 31, 2005.
3. ACCOUNTING CHANGES:
STOCK-BASED COMPENSATION PLANS
Effective January 1, 2004, the Trust adopted the revised Canadian
accounting standards with respect to accounting for stock-based compensation.
Under those standards, the fair value of common share purchase options is
calculated at the date of the grant and that value is recorded as compensation
expense over the vesting period of those grants. Under the previous standard,
no compensation expense was recorded when stock options were issued with any
consideration received upon exercise credited to share capital.
The Trust has retroactively applied this standard, with restatement of
prior years, to all common share purchase options granted since January 1,
2002. This has resulted in a charge to net earnings for the year ended
December 31, 2004 of $13.8 million (2003 - $8.2 million) or $0.11 diluted
earnings per share (2003 - $0.08) and a reduction to opening retained earnings
of $14.5 million at January 1, 2004 ($6.3 million at January 1, 2003).
TURNING IN THE RIGHT DIRECTION
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY, PLANT AND EQUIPMENT:
ACCUMULATED NET BOOK
2005 COST DEPRECIATION VALUE
--------------------------------------------------------------------------------------------
Rig equipment $ 1,163,970 $ 386,191 $ 777,779
Rental equipment 81,099 35,307 45,792
Other equipment 102,727 62,852 39,875
Vehicles 68,911 20,703 48,208
Buildings 32,830 9,580 23,250
Land 8,996 - 8,996
---------------------------------------------------------------------------------------------
$ 1,458,533 $ 514,633 $ 943,900
=============================================================================================
Accumulated Net Book
2004 Cost Depreciation Value
---------------------------------------------------------------------------------------------
Rig equipment $ 1,070,428 $ 341,827 $ 728,601
Rental equipment 77,246 32,117 45,129
Other equipment 111,820 63,939 47,881
Vehicles 58,391 16,359 42,032
Buildings 32,901 8,715 24,186
Land 9,755 - 9,755
---------------------------------------------------------------------------------------------
$ 1,360,541 $ 462,957 $ 897,584
=============================================================================================
5. DISTRIBUTIONS PAYABLE:
Distributions were declared on trust and exchangeable LP units of $0.27
per unit for the month ended November 30, 2005 and $ 0.27 per unit plus a
special distribution of $0.022 per unit for the month ended December 31, 2005.
Total distributions were $70.5 million, of which $33.9 million was paid on
December 15, 2005 and $36.6 million was paid on January 17, 2006.
6. BANK INDEBTEDNESS:
At December 31, 2005, the Trust has available $60.0 million (December 31,
2004 - $63.0 million) and US$5.0 million (December 31, 2004 - US$30.7 million)
under uncommitted, unsecured credit facilities, of which $20.5 million had
been drawn (December 31, 2004 - $nil). Availability of these facilities was
reduced by outstanding letters of credit in the amount of $8.4 million
(December 31, 2004 - $33.3 million, of which $29.2 million related to
discontinued operations). Advances under the facilities are available at the
bank's prime lending rate, U.S. base rate, U.S. Libor plus applicable margin
or Banker's Acceptance plus applicable margin, or in combination. The
applicable margin is dependent on the Trust's consolidated debt to cashflow
ratio.
7. LONG-TERM DEBT:
2005 2004
---------------------------------------------------------------------------------------
Extendible revolving unsecured facility $ 96,838 $ -
Unsecured debentures - Series 1 - 200,000
Unsecured debentures - Series 2 - 150,000
Unsecured notes, US$300.0 million - 368,850
---------------------------------------------------------------------------------------
$ 96,838 $ 718,850
=======================================================================================
EXTENDIBLE REVOLVING UNSECURED FACILITY:
At December 31, 2005, PDC, a subsidiary of the Trust, has available a
three-year revolving unsecured facility of $550.0 million (or U.S. equivalent)
with a syndicate led by a Canadian chartered bank which is guaranteed by the
Trust. The facility matures November 2, 2008 and is renewable annually at the
option of the lenders. Advances are
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
available to PDC under this facility either at the bank's prime lending rate,
U.S. base rate, U.S. Libor plus applicable margin or Bankers' Acceptance plus
applicable margin or in combination. The applicable margin is dependent on the
Trust's consolidated debt to cashflow ratio and the percentage of the total
facility outstanding, which at December 31, 2005 was 75 basis points. The
facility requires that the Trust maintain a ratio of total liabilities to
total equity of less than 1:1 and a trailing 12 month ratio of consolidated
debt to cash flow of less than 2.75:1.
The above facility replaces those facilities available and outstanding as
at December 31, 2004 which were cancelled as follows:
For the year ended December 31, 2004, the Trust had a three-year
revolving unsecured facility of $335.0 million (or U.S. equivalent) with a
syndicate led by a Canadian chartered bank. The facility was to have matured
August 31, 2007 and was renewable annually at the option of the lenders.
Advances were available to the Trust under this facility either at the bank's
prime lending rate, U.S. base rate, U.S. Libor plus applicable margin or
Bankers' Acceptance plus applicable margin, or in combination. The applicable
margin was dependent on the Trust's credit rating and the percentage of the
total facility outstanding. The facility was extendable annually at the option
of the lenders and required that the Trust maintain a ratio of total
liabilities to total equity of less than 1:1 and a ratio of debt to cash flow
of less than 2.75:1. No amounts were drawn on this facility at December 31,
2004.
Also for the year ended December 31, 2004, the Trust had a US$50.0
million unsecured facility with Export Development Canada (EDC) that was to
have matured on December 8, 2005 and bore interest at six-month U.S. Libor
plus applicable margin. The margin was dependent upon the Trust's margin on
its $335.0 million three-year revolving unsecured credit facility, which at
December 31, 2004 resulted in a margin of 0.8%. The facility was extendable
upon mutual agreement between the Trust and EDC, or could be converted, at the
Trust's option, to a term loan repayable in two equal semi-annual
installments. No amounts were drawn on this facility at December 31, 2004.
UNSECURED DEBENTURES:
During the fourth quarter of 2005, Precision repaid all of its
outstanding debentures and notes pursuant to the early redemption provisions
of the related agreements. The difference between the $766.7 million
redemption price and the carrying value of the debentures was charged to
income.
o The $200.0 million 6.85% Series 1 unsecured debentures was to have
matured June 26, 2007 and had an effective interest rate of 7.44% after taking
into account deferred financing costs. The debentures were redeemable at any
time at the option of Precision upon payment of a redemption price equal to
the greater of an amount calculated with reference to the yield on a
Government of Canada bond with the same maturity, and par.
o The $150.0 million 7.65% Series 2 unsecured debentures was to have
matured October 27, 2010 and had an effective interest rate of 7.71% after
taking into account deferred financing costs. The debentures were redeemable
at any time at the option of Precision upon payment of a redemption price
equal to the greater of an amount calculated with reference to the yield on a
Government of Canada bond with the same maturity, and par.
UNSECURED NOTES:
o The US$300.0 million 5.625% unsecured notes were to have matured June
1, 2014 and had an effective interest rate of 5.71% after taking into account
deferred financing costs. The notes were redeemable at any time at the option
of Precision upon payment of a redemption price equal to the greater of an
amount calculated with reference to the yield on a United States treasury
security with the same maturity, and par.
OTHER:
o The $3.5 million unsecured term financing facility with EDC matured on
January 20, 2004 and bore interest at six-month U.S. Libor plus applicable
margin. The margin was dependent upon Precision's credit rating, which at
December 31, 2003 resulted in a margin of 0.8%.
TURNING IN THE RIGHT DIRECTION
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o The $26.2 million unsecured term financing facility with EDC was repaid
and canceled in 2004 and bore interest at six-month U.S. Libor plus applicable
margin. The margin was dependent upon Precision's credit rating, which at
December 31, 2003 resulted in a margin of 0.9%.
Principal repayments after 2005 are as follows:
------------------------------------------------------------------------------
2006 $ -
2007 -
2008 96,838
Thereafter -
------------------------------------------------------------------------------
2008 $ 96,838
==============================================================================
8. UNITHOLDERS' CAPITAL:
On November 7, 2005, Precision converted to an unincorporated, open-ended
investment trust pursuant to a Plan of Arrangement. The Plan resulted in
shareholders receiving one trust unit or one exchangeable LP unit or a
combination thereof, for previously held common shares. Common shares held by
shareholders who dissented to the Plan were repurchased and cancelled on the
effective date of the Plan. All outstanding common share purchase options were
converted to options to acquire trust units. The holder then had three
options: exercise the options, have the Trust repurchase them for cash using
the closing market price of the Trust one day prior to cash-out, or have the
Trust repurchase the options as set-out above and use the proceeds to purchase
an equivalent number of trust units.
(a) AUTHORIZED - unlimited number of voting trust units.
- unlimited number of voting exchangeable LP units
(b) COMMON SHARES:
NUMBER AMOUNT
-------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 54,066,753 $ 913,087
Options exercised - cash consideration 778,925 23,613
- reclassification from contributed surplus - 44
-------------------------------------------------------------------------------------------------------
Balance, December 31, 200 54,845,678 $ 936,744
Issuance of common shares, net of costs and related tax effect 4,400,000 280,783
Options exercised - cash consideration 1,544,534 55,361
- reclassification from contributed surplus - 2,079
-------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 60,790,212 $ 1,274,967
Options exercised - cash consideration 578,346 24,516
- reclassification from contributed surplus - 1,521
-------------------------------------------------------------------------------------------------------
Balance, May 18, 2005 61,368,558 $ 1,301,004
Issued on 2:1 stock split 61,368,558 -
Options exercised - cash consideration 1,679,110 49,414
- reclassification from contributed surplus - 10,284
Adjustment to number of shares outstanding 21,960 -
Cancellation of shares owned by dissenting shareholders (817,005) (8,936)
-------------------------------------------------------------------------------------------------------
BALANCE, NOVEMBER 7, 2005 123,621,181 $ 1,351,766
=======================================================================================================
Pursuant to the Plan, any shareholders of Precision could dissent and be
paid the fair value of the shares, being the trading price at the close of
business on the last business day prior to the Special Meeting of
Securityholders on October 31, 2005. As a result, the Trust repurchased for
cancellation a total of 817,005 shares for $43.3 million, of which a premium
of $34.4 million over the stated capital was charged to retained earnings.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the third quarter of 2004, the Trust issued 4,400,000 common shares at
US$49.80 for net proceeds of approximately $276.5 million. Proceeds of the
offering were primarily used to repay indebtedness incurred in connection with
the acquisition of all of the issued and outstanding shares of Reeves Oilfield
Services Ltd.
(c) TRUST UNITS:
NUMBER AMOUNT
------------------------------------------------------------------------------------------------------------
Balance, November 7, 2005 - $ -
Issued pursuant to the Plan 122,512,799 1,339,646
Options exercised - cash consideration 1,676,616 8,263
- reclassification from contributed surplus - 12,342
Issued for cash 163,506 5,504
------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2005 124,352,921 $1,365,755
============================================================================================================
Trust units are redeemable at the option of the holder, at which time all
rights with respect to such units are cancelled. Upon redemption, the
unitholder is entitled to receive a price per unit equal to the lesser of 90%
of the average market price of the Trust's units for the 10 trading days just
prior to the date of redemption, and the closing market price of the Trust's
units on the date of redemption. The maximum value of units that can be
redeemed for cash is $50,000 per month. Redemptions, if any, in excess of this
amount are satisfied by issuing a note from PDC to the unitholder, payable
over 15 years and bearing interest at a market rate set by the Board of
Directors.
NUMBER AMOUNT
-----------------------------------------------------------------------------------------------------------
Exchangeable LP units
Balance, November 7, 2005 - $ -
Issued pursuant to the Plan 1,108,382 12,120
-----------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2005 1,108,382 $ 12,120
===========================================================================================================
Exchangeable LP units have voting rights and are exchangeable, after May
6, 2006, for trust units on a one-for-one basis at the option of the holder.
Holders are entitled to monthly cash distributions equal to those paid to
holders of trust units.
NUMBER AMOUNT
------------------------------------------------------------------------------------------------------------
SUMMARY:
TRUST UNITS 124,352,921 $ 1,365,755
EXCHANGEABLE LP UNITS 1,108,382 12,120
------------------------------------------------------------------------------------------------------------
UNITHOLDERS' CAPITAL 125,461,303 $ 1,377,875
============================================================================================================
(d) CONTRIBUTED SURPLUS:
------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 6,108
Stock-based compensation expense 8,202
Reclassification to common shares on exercise of options (44)
------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ 14,266
Stock-based compensation expense 13,837
Reclassification to common shares on exercise of options (2,079)
------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 $ 26,024
Stock-based compensation expense 13,077
Accelerated vesting of options on disposal of discontinued operations 5,205
Reclassification to common shares on exercise of options prior to the Plan (11,805)
Accelerated vesting of options pursuant to the Plan 3,056
Reclassification to trust units on exercise of options (12,342)
Reclassification to retained earnings on cash buy-out of options (23,215)
------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2005 $ -
============================================================================================================
TURNING IN THE RIGHT DIRECTION
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(e) EQUITY INCENTIVE PLANS:
Prior to conversion to a Trust, Precision Drilling Corporation had equity
incentive plans under which the exercise price of each option equaled the
market value of Precision's stock on the date of grant and an option's maximum
term was 10 years. Options vested over a period of one to four years from the
date of grant as employees or directors rendered continuous service to
Precision.
Options held by employees of the Energy Services and International
Contract Drilling Divisions and of CEDA became fully vested when these
businesses were sold during the third quarter of 2005 (see Note 21). Pursuant
to the Plan, the remaining outstanding options were exchanged for newly vested
options to acquire trust units. The exercise prices of the options to acquire
trust units were adjusted downward to reflect the value of the transfer of
certain assets to shareholders as part of the Plan. The options to acquire
trust units expired on November 22, 2005.
Upon acceleration of the vesting of options, options holders were given
the choice to pay the exercise price and receive a common share or trust unit,
as applicable, or to surrender their option for a cash payment equal to the
difference between the closing market value of the common share or trust unit
one day prior to cash-out and the exercise price. All outstanding options were
exercised prior to December 31, 2005.
A summary of the equity incentive plans, adjusted retroactively to
reflect the 2 for 1 stock split on May 18, 2005, as at December 31, 2003, 2004
and 2005 and changes during the periods then ended is presented below:
COMMON SHARE PURCHASE OPTIONS:
Weighted
Range of Average
Options Exercise Exercise Options
Outstanding Price Price Exercisable
-----------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2002 8,238,656 $ 6.75 - 32.95 $19.47 3,255,554
Granted 832,000 24.64 - 25.52 25.31
Exercised (1,557,850) 6.75 - 25.50 15.17
Cancelled (726,418) 15.53 - 32.95 22.45
-----------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2003 6,786,388 $ 6.75 - 32.95 $20.85 4,076,396
Granted 3,381,000 20.13 - 36.32 31.77
Exercised (3,089,068) 6.75 - 28.78 17.92
Cancelled (383,200) 15.53 - 32.95 25.68
-----------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2004 6,695,120 $15.53 - 36.32 $27.44 2,580,302
Granted 696,200 37.76 - 48.29 41.42 -
Exercised (2,835,802) 15.53 - 48.29 26.07 -
Cancelled (141,650) 15.53 - 31.87 30.26 -
Purchased (1,105,018) 15.53 - 45.25 31.30 -
Exchanged for trust unit purchase options (3,308,850) 15.53 - 48.29 30.14 -
-----------------------------------------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 2005 - $ - $ - -
===========================================================================================================
TRUST UNIT PURCHASE OPTIONS:
Granted in exchange for Common share
purchase options pursuant to the Plan 3,308,850 $ nil - 27.25 $9.16 3,308,850
Granted on repricing of common share options 5,600 nil nil
Exercised (1,676,616) nil - 27.25 4.93
Purchased (1,637,834) nil - 27.25 13.46
-----------------------------------------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 2005 - $ - $ - -
===========================================================================================================
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with the Trust's stock option plans, options have an
initial exercise price equal to the market price at date of grant. The per
share weighted average fair value of stock options granted during the year
ended December 31, 2005 was $8.30 (2004 - $7.83; 2003 - $9.74) based on the
date of grant valuation using the Black-Scholes option pricing model with the
following assumptions: average risk-free interest rate of 3.28% (2004 - 3.44%;
2003 - 3.47%), average expected life of 2.92 years (2004 - 2.97 years; 2003 -
3.42 years) and expected volatility of 28.04% (2004 - 32.33%; 2003 - 47.00%).
For the year ended December 31, 2005, stock-based compensation costs
included in net earnings totaled $21.3 million (2004 - $13.8 million; 2003 -
$8.2 million), of which $10.1 million (2004 - $5.6 million; 2003 - $1.8
million) relates to discontinued operations.
9. REORGANIZATION PURSUANT TO PLAN OF ARRANGEMENT
To effect the reorganization into a trust, for the year ended December
31, 2005, the Trust incurred $17.5 million of reorganization costs comprised
as follows:
------------------------------------------------------------------------------
Severance $ 12,600
Legal, accounting, financial advisory services and other 4,912
------------------------------------------------------------------------------
$ 17,512
==============================================================================
10. EMPLOYEE BENEFIT PLANS:
The Trust has registered pension plans covering a significant number of
its employees. Of participating employees in continuing operations, all
participate in the defined contribution plan. Of participating employees in
discontinued operations, approximately 94% participated in the defined
contribution plan and approximately 6% participated in the defined benefit
plan.
(a) DEFINED CONTRIBUTION PLAN
Under the defined contribution plan, the Trust matches individual
contributions up to 5% of the employee's compensation. Total expense under the
defined contribution plan in 2005 was $8.5 million (2004 - $7.3 million; 2003
- $7.5 million), of which $3.2 million (2004 - $3.0 million; 2003 - $3.3
million) relates to discontinued operations.
(b) DEFINED BENEFIT PLANS
The defined benefit plans were acquired as part of the Reeves Oilfield
Services Ltd. acquisition in 2004 (see Note 15) and was closed to new
employees since the date of acquisition. The latest actuarial valuations of
the defined benefit pension plans were at December 31, 2004. The measurement
date used to determine plan assets and accrued benefit obligation was December
31, 2004. Significant actuarial assumptions adopted in measuring the Trust's
accrued benefit obligation at the measurement date included a liability
discount rate of between 5.5% and 6.0%, an expected long-term rate of return
on plan assets of between 5.8% and 6.4% and a rate of compensation increase of
between 3.8% and 5.0%, excluding promotions. At the measurement date, the
plans had an unfunded deficit of $13.5 million as the accrued benefit
obligation of $41.5 million exceeded plan assets of $28.0 million. The
unfunded deficit liability was included in accounts payable and accrued
liabilities in discontinued operations.
Expense under the defined benefit plans in 2004 totaled $1.1 million.
(c) RETIREMENT ALLOWANCE
With respect to the retirement allowance described in Note 1(l), the
Trust charged $201,000 to earnings in 2005 (2004 - $335,000; 2003 - $351,000),
and during the year ended December 31, 2005 paid $2.9 million as settlement of
this liability. As at December 31, 2004, the Trust had accrued a total of $2.7
million, which amount is included in accounts payable and accrued liabilities.
TURNING IN THE RIGHT DIRECTION
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS:
The Trust has commitments for operating lease agreements, primarily for
vehicles and office space, in the aggregate amount of $27.9 million. Payments
over the next five years are as follows:
Total
-------------------------------------------------------------------------------
2006 $ 7,362
2007 5,832
2008 4,335
2009 3,674
2010 3,660
===============================================================================
Rent expense included in the statements of earnings is as follows:
Continuing Discontinued
Operations Operations Total
-------------------------------------------------------------------------------
2005 $ 2,679 $ 11,983 $ 14,662
2004 5,874 17,284 23,158
2003 5,258 18,666 23,924
===============================================================================
12. INCOME TAXES:
The provision for income taxes differs from that which would be expected
by applying statutory rates. A reconciliation of the difference is as follows:
2005 2004 2003
-----------------------------------------------------------------------------------------------------------
Earnings from continuing operations before income taxes $ 293,231 $ 289,932 $ 219,876
Income tax rate 34% 36% 36%
-----------------------------------------------------------------------------------------------------------
Expected income tax provision $ 99,699 $ 104,375 $ 79,155
Add (deduct):
Non-deductible expenses 2,795 4,965 1,234
Non-deductible stock-based compensation 3,216 2,948 2,292
Income of the Trust (23,980) - -
Utilization of losses and surcharge credits (10,550) - -
Non-taxable disposition of investment - - (2,327)
Other 1,203 (7,600) (1,948)
-----------------------------------------------------------------------------------------------------------
72,383 104,688 78,406
Reduction of future tax balances due to
substantively enacted tax rate reductions - (2,887) (2,678)
-----------------------------------------------------------------------------------------------------------
$ 72,383 $ 101,801 $ 75,728
-----------------------------------------------------------------------------------------------------------
Effective income tax rate 25% 35% 34%
===========================================================================================================
In 2004, the Province of Alberta enacted a 1.0% reduction in tax rates
(2003 and 2002 - 0.5%). This reduction was reflected as a reduction in future
tax expense in the respective years.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net future tax liability is comprised of the tax effect of the
following temporary differences:
2005 2004
-----------------------------------------------------------------------------------------------------------
Liabilities:
Property, plant and equipment and intangibles $ 232,277 $ 232,770
Operations of a partnership with different tax year - 124,251
Deferred financing costs - 1,584
-----------------------------------------------------------------------------------------------------------
$ 232,277 $ 358,605
-----------------------------------------------------------------------------------------------------------
Assets:
Bond redemption premium $ 20,820 $ -
Losses carried forward 14,586 -
Share issue costs 3,039 -
Accrued liabilities 1,910 4,337
Valuation allowance (595) -
-----------------------------------------------------------------------------------------------------------
$ 39,760 $ 4,337
-----------------------------------------------------------------------------------------------------------
$ 192,517 $ 354,268
===========================================================================================================
PDC and its subsidiaries have available capital losses of $42.4 million
of which, after valuation allowances, the benefit of $40.7 million has been
recognized. These capital losses can be carried forward indefinitely.
During 2004, $7.5 million, representing future tax expense on foreign
exchange gains associated with the Trust's US$300 million unsecured notes was
charged to the cumulative translation account in unitholders' equity. This
amount was related to the Trust's discontinued operations. 13. PER UNIT/SHARE
AMOUNTS:
The following table summarizes the units, adjusted retroactively for a 2
for 1 stock split on May 18, 2005, used in calculating earnings per
unit/share:
For the years ended December 31, 2005 2004 2003
-----------------------------------------------------------------------------------------------------------
Weighted average units/shares outstanding - basic 123,304 115,654 108,860
Effect of unit/share purchase options 2,108 1,556 1,738
-----------------------------------------------------------------------------------------------------------
Weighted average units/shares outstanding - diluted 125,412 117,210 110,598
===========================================================================================================
14. SIGNIFICANT CUSTOMERS:
During the year ended December 31, 2005 no customers (2004 - one
customer; 2003 - two customers) accounted for more than 10% of the Trust's
revenue.
15. ACQUISITIONS:
Acquisitions have been accounted for by the purchase method with results
of operations acquired included in the financial statements from the effective
date of acquisition. The details of acquisitions for the past three years are
as follows.
On July 29, 2005, the Trust completed the acquisition of all the issued
and outstanding shares of CASCA Electric Ltd. and CASCA Tech Inc. for $30.4
million. No value was assigned to intangibles or goodwill. These operations
have been included in discontinued operations.
During the year ended December 31, 2004, in accordance with the Trust's
globalization and technology advancement strategies, the Trust completed
several acquisitions, the most significant of which were:
a) On May 14, 2004, the Trust acquired all of the issued and outstanding
shares of Reeves Oilfield Services Ltd. (Reeves), including a 56.5% interest
in Allegheny Wireline Services, Inc. (Allegheny). On October 14, 2004, the
Trust acquired the remaining 43.5% interest in Allegheny. In the intervening
period from the date of acquisition of
TURNING IN THE RIGHT DIRECTION
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reeves to the acquisition of the remaining interest in Allegheny, earnings
attributable to non-controlling interest totaled $1.3 million. Reeves provides
open hole and cased hole logging services to the oil and gas industry with
operations in Canada, the United States, Australia, Africa, Europe and the
Middle East. Intangible assets acquired relate entirely to intellectual
property. The Reeves operations have been included in discontinued operations.
b) On May 21, 2004, the Trust acquired land drilling assets, located in
Venezuela and the Middle East, from GlobalSantaFe Corporation (GlobalSantaFe).
Intangible assets acquired relate to non-competition agreements and customer
contracts. The Global SantaFe operations have been included in discontinued
operations.
Reeves GlobalSantaFe Other Total
---------------------------------------------------------------------------------------------
Net assets acquired at assigned values:
Working capital $ 23,000(a) $ 12,463 $ 60 $ 35,523
Intangible assets 106,900 33,138 - 140,038
Property, plant and equipment 41,730 296,655 1,547 339,932
Goodwill (no tax basis) 118,531 103,956 130 222,617
Non-controlling interest in
earnings of intervening
period 1,298 - - 1,298
Future income taxes (37,732) (9,720) - (47,452)
---------------------------------------------------------------------------------------------
$ 253,727 $ 436,492 $ 1,737 $ 691,956
---------------------------------------------------------------------------------------------
Consideration:
=============================================================================================
Cash $ 253,727 $ 436,492 $ 1,737 $ 691,956
=============================================================================================
(a) Includes cash of $12,142
In February 2003, Precision completed the acquisition of the operating
assets of MacKenzie Caterers (1984) Ltd., a provider of oilfield camp and
catering services in western Canada, for $6.8 million. No value was assigned
to intangibles or goodwill.
16. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:
These financial statements have been prepared in accordance with Canadian
GAAP which conform with United States generally accepted accounting principles
(U.S. GAAP) in all material respects, except as follows:
(a) INCOME TAXES
In 2000 the Trust adopted the liability method of accounting for future
income taxes without restatement of prior years. As a result, the Trust
recorded an adjustment to retained earnings and future tax liability in the
amount of $70.0 million at January 1, 2000. U.S. GAAP required the use of the
liability method prescribed in the Statement of Financial Accounting Standards
(SFAS) No. 109, which substantially conforms to the Canadian GAAP accounting
standard adopted in 2000. Application of U.S. GAAP in years prior to 2000
would have resulted in $70.0 million of additional goodwill being recognized
at January 1, 2000 as opposed to an implementation adjustment to retained
earnings allowed under Canadian GAAP. Prior to 2002 goodwill was amortized
under Canadian and U.S. GAAP. As a result, $7.0 million of amortization was
recorded on the additional goodwill in 2000 and 2001 under U.S. GAAP. In 2003,
2004 and 2005, the U.S. GAAP financial statements would reflect an increase in
goodwill of $63.0 million and a corresponding increase in retained earnings.
(b) STOCK-BASED COMPENSATION
In 2004, under Canadian GAAP, the Trust adopted the fair value of
accounting for stock-based compensation with restatement of prior years for
share purchase options granted after January 1, 2002. U.S. GAAP allows the use
of either the intrinsic method, as prescribed by Accounting Principles Board
(APB) Opinion 25, or the fair value method as prescribed by SFAS 123. Where
companies elect to use the intrinsic method, disclosure of the impact of using
the fair value method is required.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Application of the intrinsic method in accordance with APB Opinion 25
would have resulted in an increase in net earnings of $21.3 million for 2005
(2004 - $13.8 million; 2003 - $8.2 million) and with a corresponding increase
in unitholders' equity. Had the Trust determined compensation based on the
fair value at the date of grant for its options under SFAS 123, net earnings
in accordance with U.S. GAAP would have decreased to $1,588.5 million in 2005
(2004 decreased to $247.8 million; 2003 decreased to $180.7 million). Basic
earnings per unit/share would have been $12.88 in 2005 (2004 - $2.14; 2003 -
$1.66).
Under Financial Accounting Standards Board ("FASB") Intrepretation No. 44
(FIN 44") ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION,
compensation expense is required to be recognized on certain modifications to
stock-based compensation plans. During the year ended December 31, 2005,
employee stock options ("options") were subjected to a variety of changes or
restructurings which included accelerated vesting, repricing on the date of
conversion to an income trust to reflect the transfer of disposal
consideration to Precision's shareholders just prior to conversion, or
repurchase for cash depending on elections made by the option holders. Under
Canadian GAAP, even with the repricing, the options were treated as equity
awards and were not accounted for under a variable accounting method. However,
under U.S. GAAP, the accelerated vesting represents a restructuring in the
form of a modification that would result in a new measurement of compensation
expense on the date of the modification using the intrinsic method. For award
repricing, this restructuring only results in additional expense provided that
the aggregate intrinsic value of the awards immediately after the change is
not greater than that immediately before, and the ratio of exercise price per
unit/share to the market value per unit/share is not reduced. To the extent
that both the criteria are not met, the awards are accounted for under ABP
Opinion 25 as a variable award from the date of restructuring to the date the
award was exercised. For restructuring in the form of cash buy-out of the
options, the intrinsic value was charged to retained earnings under Canadian
GAAP, however, under U.S. GAAP the amount was charged to earnings.
(c) REDEMPTION OF TRUST UNITS
Under the trust indenture, trust units are redeemable at any time on
demand by the unitholder for cash and notes (see Note 8). Under U.S. GAAP, the
amount included on the consolidated balance sheet for unitholders' equity
would be moved to temporary equity and recorded at an amount equal to the
redemption value of the trust units as at the balance sheet date. The same
accounting treatment would be applicable to the exchangeable LP units. The
redemption value of the trust units and the exchangeable LP units is
determined with respect to the trading value of the trust units as at each
balance sheet date, and the amount of the redemption value is classified as
temporary equity. Changes (increases and decreases) in the redemption value
during a period results in a change to temporary equity and is reflected as a
reduction in earnings available to unitholders for the year.
(d) ACQUISITIONS
Under U.S. GAAP, when significant acquisitions have occurred,
supplemental disclosure is required on a pro forma basis of the results of
operations for the current prior periods as though the business combination
had occurred at the beginning of the period unless it is not practicable to do
so. At December 31, 2005, the Trust did not have access to sufficient
information to provide this disclosure for acquisitions completed in 2004.
(e) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, FASB issued SFAS 123R SHARE BASED PAYMENT - AN
AMENDMENT OF FASB STATEMENT NO. 123 AND 95. The Statement addresses the
accounting for transactions in which an enterprise receives employee services
in exchange for (a) equity instruments of the enterprise or (b) liabilities
that are based on the fair value of the enterprise's equity instruments or
that may be settled by the issuance of such equity instruments. Companies will
be required to recognize an expense for compensation cost related stock-based
compensation on a basis consistent with SFAS 123 for periods beginning on or
after June 15, 2005.
TURNING IN THE RIGHT DIRECTION
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2004, FASB issued Statement 153 Exchanges of Nonmonetary
Assets - An Amendment of APB Opinion 29. This Statement amends Opinion 29 to
eliminate the exception for nonmonetary exchanges or similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. Application is prospective
beginning after June 15, 2005, and management does not expect this statement
to have a material impact on the consolidated financial statements.
As of January 1, 2006, the Trust will be required to adopt, for U.S. GAAP
purposes, SFAS 154 Accounting Changes and Error Corrections - A Replacement of
APB Opinion 20 and SFAS 3. This Statement requires retrospective application
of voluntary changes in accounting principles, unless it is impracticable.
Management does not expect this standard to have a material impact on the
consolidated financial statements.
The application of U.S. accounting principles would have the following
impact on the consolidated financial statements:
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended December 31, 2005 2004 2003
----------------------------------------------------------------------------------------------------------------
Earnings from continuing operations under Canadian GAAP $ 220,848 $ 188,131 $ 144,148
Adjustments under U.S. GAAP:
Stock-based compensation expense 11,229 8,190 6,366
Cash buy-out of options (22,119) - -
Intrinsic value recognized on options exercised
and/or repriced (2,270) - -
----------------------------------------------------------------------------------------------------------------
Earnings from continuing operations under U.S. GAAP 207,688 196,321 150,514
----------------------------------------------------------------------------------------------------------------
Earnings from discontinued operations under Canadian GAAP 1,409,715 59,273 36,326
Adjustments under U.S. GAAP:
Stock-based compensation expense 10,109 5,647 1,836
Cash buy-out of options (19,968) - -
Intrinsic value recognized on options exercised
and/or repriced (11,796) - -
----------------------------------------------------------------------------------------------------------------
Earnings from discontinued operations under U.S. GAAP 1,388,060 64,920 38,162
----------------------------------------------------------------------------------------------------------------
Net earnings under U.S. GAAP $ 1,595,748 $ 261,241 $ 188,676
Cumulative translation adjustment - (20,933) -
----------------------------------------------------------------------------------------------------------------
Comprehensive income under U.S. GAAP $ 1,595,748 $ 240,308 $ 188,676
================================================================================================================
Net earnings under U.S. GAAP $ 1,595,748 $ 261,241 $ 188,676
Change in redemption value of unitholders' capital (378,456) - -
----------------------------------------------------------------------------------------------------------------
Net earnings available to unitholders under U.S. GAAP $ 1,217,292 $ 261,241 $ 188,676
================================================================================================================
Earnings from continuing operations per unit/share under U.S. GAAP:
Basic $ 1.68 $ 1.70 $ 1.38
Diluted $ 1.66 $ 1.67 $ 1.36
Earnings per unit/share under U.S. GAAP before change in redemption
value of unitholders' capital:
Basic $ 12.94 $ 2.26 $ 1.73
Diluted $ 12.72 $ 2.23 $ 1.71
Earnings per unit/share under U.S. GAAP
after change in redemption value of unitholders' capital:
Basic $ 9.87 $ 2.26 $ 1.73
Diluted $ 9.71 $ 2.23 $ 1.71
================================================================================================================
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS
DECEMBER 31, 2005 December 31, 2004
-----------------------------------------------------------------------------------------------------
AS REPORTED U.S. GAAP As reported U.S. GAAP
-----------------------------------------------------------------------------------------------------
Current assets $ 507,690 $ 507,690 $ 936,074 $ 936,074
Property, plant and equipment 943,900 943,900 897,584 897,584
Intangibles 465 465 498 498
Goodwill 266,827 329,856 266,827 329,856
Other assets - - 9,116 9,116
Long-term assets of discontinued operations - - 1,741,950 1,741,950
-----------------------------------------------------------------------------------------------------
$ 1,718,882 $ 1,781,911 $ 3,852,049 $ 3,915,078
=====================================================================================================
Current liabilities $ 354,936 $ 354,936 $ 378,763 $ 378,783
Long-term debt 96,838 96,838 718,850 718,850
Future income tax liability 192,517 192,517 354,268 354,268
Liabilities of discontinued operations - - 78,427 78,407
Temporary equity - 4,304,665 - -
Unitholders' equity (deficit) 1,074,591 (3,167,045) 2,321,741 2,384,770
-----------------------------------------------------------------------------------------------------
$ 1,718,882 $ 1,781,911 $ 3,852,049 $ 3,915,078
=====================================================================================================
17. SEGMENTED INFORMATION:
The Trust operates primarily in Canada, in two industry segments;
Contract Drilling Services and Completion and Production Services. Contract
Drilling Services includes drilling rigs, procurement and distribution of
oilfield supplies, camp and catering services, and manufacture, sale and
repair of drilling equipment. Completion and Production Services includes
service rigs and hydraulic well assist snubbing units, and oilfield equipment
rental.
Contract Completion and Corporate Inter-segment
2005 Drilling Services Production Services and Other Eliminations Total
-----------------------------------------------------------------------------------------------------------
Revenue $ 916,221 $ 369,667 $ - $ (16,709) $ 1,269,179
Operating earnings 404,385 121,643 (60,650) - 465,378
Depreciation and amortization 39,233 27,402 4,926 - 71,561
Total assets 1,159,687 486,701 72,494 - 1,718,882
Goodwill 172,440 94,387 - - 266,827
Capital expenditures* 106,986 34,576 13,689 - 155,251
===========================================================================================================
Contract Completion and Corporate Inter-segment
2004 Drilling Services Production Services and Other EliminationsTotal
-----------------------------------------------------------------------------------------------------------
Revenue $ 727,710 $ 313,386 $ - $ (12,608) $ 1,028,488
Operating earnings 282,315 77,074 (28,076) - 331,313
Depreciation and amortization 42,245 27,508 5,076 - 74,829
Total assets 971,863 461,191 180,009 - 1,613,063
Goodwill 172,440 94,387 - - 266,827
Capital expenditures* 74,975 31,759 15,958 - 122,692
===========================================================================================================
Contract Completion and Corporate Inter-segment
2003 Drilling Services Production Services and Other EliminationsTotal
-----------------------------------------------------------------------------------------------------------
Revenue $ 663,619 $ 263,218 $ - $ (11,667) $ 915,170
Operating earnings 218,012 48,706 (14,269) - 252,449
Depreciation and amortization 47,895 25,720 4,497 - 78,112
Total assets 919,383 448,067 90,984 - 1,458,434
Goodwill 172,440 94,387 - - 266,827
Capital expenditures* 47,918 25,410 22,871 - 96,199
===========================================================================================================
* EXCLUDES BUSINESS ACQUISITIONS
TURNING IN THE RIGHT DIRECTION
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. FINANCIAL INSTRUMENTS:
(a) FAIR VALUE
The carrying value of cash and cash equivalents, accounts receivable,
bank indebtedness, accounts payable and accrued liabilities, income tax
payable and distributions payable approximate their fair value due to the
relatively short period to maturity of the instruments. The fair value of
long-term debt approximates its carrying value as it bears interest at
floating rates.
The fair values of the unsecured debentures and notes have been
calculated with reference to the year end prevailing interest and foreign
exchange rates and are as follows:
DECEMBER 31, 2005 December 31, 2004
-----------------------------------------------------------------------------------------------------------
($ millions) CARRYING VALUE FAIR VALUE Carrying Value Fair Value
-----------------------------------------------------------------------------------------------------------
Unsecured debentures - Series 1 - - 200.0 215.4
Unsecured debentures - Series 2 - - 150.0 174.5
Unsecured notes, US$300.0 million - - 368.9 384.8
===========================================================================================================
(b) CREDIT RISK
Accounts receivable includes balances from a large number of customers
primarily operating in the oil and gas industry. The Trust assesses the credit
worthiness of its customers on an ongoing basis as well as monitoring the
amount and age of balances outstanding. Accordingly, the Trust views the
credit risks on these amounts as normal for the industry. As at December 31,
2005 the Trust's allowance for doubtful accounts was $5.1 million (December
31, 2004 - $13.7 million, of which $8.5 million related to discontinued
operations).
(c) INTEREST RATE RISK
The Trust is exposed to interest rate risk with respect to interest
expense on its extendible revolving credit facilities.
(d) FOREIGN CURRENCY RISK
The Trust was exposed to foreign currency fluctuations in relation to its
international operations prior to their disposal (see Note 21). To manage a
portion of this exposure, the Trust designated the U.S. $300.0 million notes
as a hedge against foreign currency fluctuations of its investment in
self-sustaining foreign operations. A net foreign exchange gain of $10.1
million associated with these notes was included in the cumulative translation
account during 2005 (2004 - gain of $43.1 million). The cumulative translation
account at August 31, 2005 of $24.8 million was charged to the gain on
disposal of discontinued operations.
19. SUPPLEMENTAL INFORMATION:
2005 2004 2003
-----------------------------------------------------------------------------------------------------------
Interest paid:
- continuing operations $ 43,232 $ 45,338 $ 34,917
- discontinued operations 304 997 1,804
-----------------------------------------------------------------------------------------------------------
$ 43,536 $ 46,335 $ 36,721
-----------------------------------------------------------------------------------------------------------
Income taxes paid:
- continuing operations $ 91,496 $ 38,759 $ 25,842
- discontinued operations 35,176 35,935 18,152
-----------------------------------------------------------------------------------------------------------
$ 126,672 $ 74,694 $ 43,994
-----------------------------------------------------------------------------------------------------------
Components of change in non-cash working capital balances:
Accounts receivable $ (171,363) $ (42,714) $ (98,501)
Inventory 699 (2,017) 1,269
Accounts payable and accrued liabilities 13,871 5,964 19,890
Income taxes payable 149,906 14,939 14,986
-----------------------------------------------------------------------------------------------------------
$ (6,887) $ (23,828) $ (62,356)
===========================================================================================================
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of accounts receivable are as follows:
2005 2004
-----------------------------------------------------------------------------------------------------------
Trade $ 306,264 $ 203,976
Accrued trade 148,537 88,746
Prepaids and other 45,854 16,570
-----------------------------------------------------------------------------------------------------------
$ 500,655 $ 309,292
===========================================================================================================
The components of accounts payable and accrued liabilities are as follows:
2005 2004
-----------------------------------------------------------------------------------------------------------
Accounts payable $ 71,027 $ 25,658
Accrued liabilities
Payroll 30,351 30,048
Other 32,925 64,726
-----------------------------------------------------------------------------------------------------------
$ 134,303 $ 120,432
===========================================================================================================
20. CONTINGENCIES:
The business and operations of the Trust are complex and the Trust has
executed a number of significant financings, business combinations,
acquisitions and dispositions over the course of its history. The computation
of income taxes payable as a result of these transactions, and in particular
those completed within the last five years, involves many complex factors as
well as the Trust's interpretation of relevant tax legislation and
regulations. The Trust's management believes that the provision for income tax
is adequate and in accordance with generally accepted accounting principles
and applicable legislation and regulations. However, there are a number of tax
filing positions that can still be the subject of review by taxation
authorities who may successfully challenge the Trust's interpretation of the
applicable tax legislation and regulations, with the result that additional
taxes could be payable by the Trust and the amount payable could be up to
$300.0 million.
The Trust, through the performance of its services, product sales and
business arrangements, is sometimes named as a defendant in litigation. The
outcome of such claims against the Trust is not determinable at this time,
however, their ultimate resolution is not expected to have a material adverse
effect on the Trust.
The Trust maintains a level of insurance coverage deemed appropriate by
management for matters for which insurance coverage can be acquired.
21. DISCONTINUED OPERATIONS:
On August 31, 2005, the Trust sold its Energy Services and International
Contract Drilling divisions to Weatherford International Ltd. ("Weatherford")
for proceeds of approximately $1.13 billion cash and 26 million common shares
of Weatherford, valued at $2.1 billion. In conjunction with the Plan of
Arrangement, the Trust then transferred a total of $2.9 billion of this
consideration to unitholders, being $844.3 million in cash and 25.7 million
Weatherford common shares, valued at $2.0 billion which represents the fair
value of the shares at the date of transfer. Included in the statement of
earnings for the year ended December 31, 2005 is a loss on disposal of these
shares of $71.0 million. In conjunction with this sale, a working capital
adjustment has been included as part of the purchase and sale agreement. This
adjustment is calculated based on the period January 1, 2005 to August 31,
2005 (the closing date of the sale) and is subject to certain interpretations
and assessments as to the working capital balances as at August 31, 2005 and
December 31, 2004. As at December 31, 2005, the Trust has included as part of
the gain on disposal of discontinued operations an amount of $20.0 million
owing to it, representing its best estimate of the final working capital
adjustment. However, this amount is subject to change depending on the
TURNING IN THE RIGHT DIRECTION
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
outcome of ongoing discussion and possible arbitration and could adjust the
disposal proceeds. Management estimates that ultimate settlement of this issue
will not have a material impact on the recorded gain on disposal of
discontinued operations.
On September 13, 2005, the Trust sold its industrial plant maintenance
business carried on by CEDA to Borealis Investments Inc., an investment entity
of the Ontario Municipal Employees Retirement System, for proceeds of
approximately $274.0 million. Included in the CEDA proceeds was $26.8 million
for the purchase of all the issued and outstanding shares of CASCA Electric
Ltd. and CASCA Tech Inc., a transaction undertaken by CEDA on July 29, 2005.
The Energy Services, International Contract Drilling and CEDA assets were
included in the Energy Services, Contract Drilling and Rental and Production
segments respectively and were disposed in accordance with an extensive
process undertaken by the Trust's board of directors to explore avenues of
valuation creation for the Trust's unitholders.
On February 12, 2004, the Trust sold substantially all of the assets of
Fleet Cementers, Inc. for proceeds of $25.7 million. On May 7, 2004, the Trust
sold the assets of the Polar Completions division for proceeds of $15.0
million, subject to working capital adjustments. On August 31, 2004, the Trust
sold its 65% interest in United Diamond Ltd. for proceeds of $8.5 million.
Additional proceeds in the amount of up to $9.5 million are receivable with
respect to the sale of United Diamond Ltd., contingent upon the extent of
future business undertaken between the Trust and United Diamond Ltd. No
portion of the $9.5 million of contingent proceeds has been recognized. These
assets were included in the Energy Services segment and were disposed of as
they were not a core component, at that time, to the energy services
globalization strategy.
Effective January 1, 2003, the Trust sold Energy Industries Inc., a
wholly-owned subsidiary for $60.0 million cash. Energy Industries designed and
manufactured modularized natural gas compression packages. These assets were
included in the Rental and Production segment and were disposed of as they
were not a core component, at that time, to the globalization strategy.
In May 2003, the Trust sold its 50% interest in Energy Equipment Rentals
General partnership ("EER") and Oil Drilling Exploration (Argentina) SA
("OD&E") for cash proceeds of $6.9 million, net of transaction costs. Both
entities were components of the Contract Drilling segment and were disposed of
as they were not a core component, at that time, to the contract drilling
globalization strategy.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Results of the operations of these businesses have been classified as
results of discontinued operations. The following table provides additional
information with respect to amounts included in the results of discontinued
operations:
2005 2004 2003
---------------------------------------------------------------------------------------------------
Revenue
Energy services $ 689,319 $ 898,199 $ 762,536
International contract drilling 204,987 246,612 114,691
Industrial plant maintenance 149,371 175,802 174,246
---------------------------------------------------------------------------------------------------
$ 1,043,677 $ 1,320,613 $ 1,051,473
===================================================================================================
Gain on disposal of Energy Industries $ - $ - $ 13,071
Gain on disposal of EER and OD&E - - 4,389
Loss on disposal of Fleet Cementers' assets - (362) -
Loss on disposal of United Diamond - (254) -
Gain on disposal of Energy services and
International contract drilling 1,203,309 - -
Gain on disposal of Industrial plant maintenance 132,073 - -
---------------------------------------------------------------------------------------------------
$ 1,335,382 $ (616) $ 17,460
---------------------------------------------------------------------------------------------------
Results of operations before income taxes
Energy services $ 76,607 $ 33,060 $ (12,631)
International contract drilling 41,171 65,043 42,959
Industrial plant maintenance 18,135 19,658 20,683
Other (22,298) (20,251) (29,210)
Writedown of assets held for sale - (6,117) (10,799)
---------------------------------------------------------------------------------------------------
113,615 91,393 11,002
Income tax expense (recovery) 39,282 28,824 (9,616)
---------------------------------------------------------------------------------------------------
Results of operations, before non-controlling interest 74,333 62,569 20,618
Non-controlling interest - 2,680 1,752
---------------------------------------------------------------------------------------------------
74,333 59,889 18,866
---------------------------------------------------------------------------------------------------
Discontinued operations $ 1,409,715 $ 59,273 $ 36,326
===================================================================================================
The following table provides additional information with respect to
amounts included in the balance sheet as assets and liabilities of
discontinued operations:
2005 2004
---------------------------------------------------------------------------------------------------
Accounts receivable $ - $ 381,707
Inventory - 106,618
Future income tax asset - 8,711
Other - -
---------------------------------------------------------------------------------------------------
$ - $ 497,036
===================================================================================================
Property, plant and equipment $ - $ 1,047,937
Intangibles - 191,167
Goodwill - 468,586
Future income tax asset - 34,260
---------------------------------------------------------------------------------------------------
$ - $ 1,741,950
===================================================================================================
Accounts payable and accrued liabilities $ - $ 219,940
Income taxes payable - 17,479
Future income tax liability - 7,270
Other - 18
---------------------------------------------------------------------------------------------------
$ - $ 244,707
===================================================================================================
Future income tax liability $ - $ 78,407
Other - 20
---------------------------------------------------------------------------------------------------
$ - $ 78,427
===================================================================================================
TURNING IN THE RIGHT DIRECTION
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides additional information with respect to
amounts included in the statements of cash flow related to discontinued
operations:
2005 2004 2003
----------------------------------------------------------------------------------------------------------
Net earnings of discontinued operations $ 1,409,715 $ 59,273 $ 36,326
Items not affecting cash:
Loss (gain) on disposal of discontinued operations (1,335,382) 616 (17,460
Depreciation and amortization 95,794 130,163 101,016
Writedown of assets of discontinued operations - 3,293 10,799
Stock-based compensation 10,109 5,647 1,836
Future income taxes (1,735) (17,383) (26,965)
Gain on disposal of investments - - (1,862)
Unrealized foreign exchange loss (gain)
on long-term monetary items 4,829 2,729 (16,391)
Non-controlling interest - 2,680 1,752
----------------------------------------------------------------------------------------------------------
Funds provided by discontinued operations $ 183,330 $ 187,018 $ 89,051
==========================================================================================================
Components of changes in non-cash working capital balances of
discontinued operations:
2005 2004 2003
----------------------------------------------------------------------------------------------------------
Accounts receivable $ (60,912) $ (93,743) $ (12,175)
Inventory (23,463) 5,725 (4,370)
Accounts payable and accrued liabilities 1,688 52,861 (15,327)
Income taxes payable (3,623) 8,360 327
----------------------------------------------------------------------------------------------------------
$ (86,310) $ (26,797) $ (31,545)
==========================================================================================================
22. GUARANTEES:
The Trust has entered into agreements indemnifying certain parties
primarily with respect to tax and specific third party claims associated with
businesses sold by the Trust. Due to the nature of the indemnifications, the
maximum exposure under these agreements cannot be estimated. No amounts have
been recorded for the indemnities as the Trust's obligations under them are
not probable and estimable.
23. RELATED PARTY TRANSACTIONS:
A director of PDC is a partner at a law firm used by PDC and the Trust
for various legal matters. During the year ended December 31, 2005, the Trust
incurred a total of $6.1 million in legal fees. These transactions were
incurred in the normal course of business and were recorded at the exchange
amounts.
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
100
SUPPLEMENTARY INFORMATION
SHARE TRADING SUMMARY
THE TORONTO STOCK EXCHANGE
Volume of
(IN CANADIAN DOLLARS) High ($) Low ($) Close ($) Units /Shares Value ($)
-----------------------------------------------------------------------------------------------------------
2005
March 31 48.75 42.70 45.25 45,071,824 1,970,416,258
June 30 52.06 43.41 48.29 53,934,967 2,587,665,996
September 30 60.98 55.68 57.21 63,120,732 3,456,991,440
December 31 58.00 30.50 38.38 101,050,308 4,489,458,985
-----------------------------------------------------------------------------------------------------------
60.98 30.50 38.38 263,177,831 12,504,532,679
===========================================================================================================
2004
March 31 33.75 27.95 30.65 34,474,650 1,075,594,484
June 30 34.69 29.08 31.87 40,331,590 1,273,947,954
September 30 36.62 31.28 36.32 32,232,546 1,075,975,183
December 31 39.35 34.66 37.76 37,885,030 1,399,243,059
-----------------------------------------------------------------------------------------------------------
39.35 27.95 37.76 144,923,816 4,824,760,679
===========================================================================================================
2003
March 31 28.34 23.88 24.64 35,534,762 911,709,933
June 30 27.39 22.65 25.41 37,006,528 935,497,293
September 30 27.87 24.31 25.52 29,212,892 757,572,958
December 31 29.37 25.06 28.38 29,326,660 786,325,972
-----------------------------------------------------------------------------------------------------------
29.37 22.65 28.38 131,116,842 3,391,106,156
===========================================================================================================
TRUST UNITS ARE EFFECTIVE FROM NOVEMBER 7, 2005 TO DECEMBER 31, 2005.
ON NOVEMBER 7, 2005 A SPECIAL CASH PAYMENT AND THE TRANSFER OF SHARES IN
WEATHERFORD INTERNATIONAL LTD. WAS MADE TO SHAREHOLDERS.
THE NEW YORK STOCK EXCHANGE
Volume of
(IN U.S. DOLLARS) High ($) Low ($) Close ($) Units/Shares Value ($)
-----------------------------------------------------------------------------------------------------------
2005
March 31 39.85 28.89 37.33 36,040,200 1,281,553,471
June 30 41.64 34.64 39.48 44,946,100 1,714,473,479
September 30 51.72 38.08 49.20 48,167,700 2,146,444,231
December 31 49.76 25.85 33.00 33,319,300 1,246,508,332
-----------------------------------------------------------------------------------------------------------
51.72 25.85 33.00 162,473,300 6,388,979,513
===========================================================================================================
2004
March 31 25.25 21.65 23.29 23,790,200 562,422,262
June 30 25.65 21.15 24.01 29,068,800 672,015,006
September 30 28.88 23.44 28.75 30,822,800 789,945,011
December 31 33.10 27.93 31.40 37,652,800 1,139,188,768
-----------------------------------------------------------------------------------------------------------
33.10 21.15 31.40 121,334,600 3,163,571,047
===========================================================================================================
2003
March 31 19.00 15.55 16.69 29,471,600 504,181,610
June 30 20.26 15.63 18.88 27,418,400 495,853,163
September 30 20.11 17.50 18.83 29,922,400 565,302,743
December 31 22.04 18.92 21.84 23,032,200 464,932,490
-----------------------------------------------------------------------------------------------------------
22.04 15.55 21.84 109,944,600 2,030,270,006
===========================================================================================================
TRUST UNITS ARE EFFECTIVE FROM NOVEMBER 7, 2005 TO DECEMBER 31, 2005.
ON NOVEMBER 7, 2005 A SPECIAL CASH PAYMENT AND THE TRANSFER OF SHARES IN
WEATHERFORD INTERNATIONAL LTD. WAS MADE TO SHAREHOLDERS.
TURNING IN THE RIGHT DIRECTION
101
SUPPLEMENTARY INFORMATION
STATEMENTS OF EARNINGS AND RETAINED EARNINGS (DEFICIT)
(STATED IN MILLIONS OF CANADIAN DOLLARS EXCEPT PER UNIT/SHARE AMOUNTS)
Years ended December 31, 2005 2004 2003
-----------------------------------------------------------------------------------------------
Revenue $ 1,269.2 $ 1,028.5 $ 915.2
Expenses:
Operating 641.8 566.3 544.2
General and administrative 76.4 64.2 42.7
Depreciation and amortization 71.6 74.8 78.1
Foreign exchange (3.5) (8.1) (2.2)
Reorganization costs 17.5 - -
-----------------------------------------------------------------------------------------------
Operating earnings 465.4 331.3 252.4
Interest, net 29.3 46.3 34.0
Premium on redemption of bonds 71.9 - -
Loss on disposal of short-term investments 71.0 - -
Gain on disposal of investments - (4.9) (1.5)
-----------------------------------------------------------------------------------------------
Earnings from continuing operations before income taxes 293.2 289.9 219.9
Income taxes 72.4 101.8 75.7
-----------------------------------------------------------------------------------------------
Earnings from continuing operations 220.8 188.1 144.2
Discontinued operations 1,409.8 59.3 36.3
-----------------------------------------------------------------------------------------------
Net earnings 1,630.6 247.4 180.5
Retained earnings, beginning of period 1,041.7 794.3 613.8
Adjustment on cash purchase of employee stock options (42.1) - -
Reclassification from contributed surplus on cash buyout
of employee stock options 23.2 - -
Distribution of disposal proceeds (2,851.8) - -
Repurchase of common shares of dissenting shareholders (34.4) - -
Distributions (70.5) - -
-----------------------------------------------------------------------------------------------
Retained earnings (deficit), end of period $ (303.3) $ 1,041.7 $ 794.3
================================================================================================
Earnings per unit/share from continuing operations:
Basic ($) 1.79 1.63 1.33
Diluted ($) 1.76 1.61 1.31
Earnings per unit/share:
Basic ($) 13.22 2.14 1.66
Diluted ($) 13.00 2.11 1.63
================================================================================================
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
102
SUPPLEMENTARY INFORMATION
ADDITIONAL SELECTED FINANCIAL INFORMATION
(STATED IN MILLIONS OF CANADIAN DOLLARS EXCEPT PER UNIT/SHARE AMOUNTS)
Years ended December 31, 2005 2004 2003
--------------------------------------------------------------------------------------------------------------
RETURNS
Return on sales - %(1) 17.4 18.3 15.8
Return on assets - %(2) 43.3 7.3 6.3
Return on equity - %(3) 66.1 12.3 11.0
--------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Working capital $ 152.8 $ 557.3 $ 249.0
Current ratio 1.43 2.47 1.57
PP&E and intangibles $ 944.4 $ 898.1 $ 887.7
Total assets $1,718.9 $3,852.0 $ 2,932.0
Long-term debt $ 96.8 $ 718.9 $ 399.4
Unitholders' equity $1,074.6 $2,321.7 $ 1,745.3
Long-term debt to long-term debt plus equity 0.08 0.24 0.19
Interest coverage(4) 15.9 7.2 7.4
--------------------------------------------------------------------------------------------------------------
OTHER FINANCIAL DATA
Net capital expenditures from continuing operations
excluding business acquisitions $ 140.1 $ 113.9 $ 84.9
EBITDA(5) $ 536.9 $ 406.1 $ 330.6
EBITDA - % of revenue 42.3 39.5 36.1
Operating earnings $ 465.4 $ 331.3 $ 252.4
Operating earnings - % of revenue 36.7 32.2 27.6
Cash flow from operations $ 203.1 $ 287.8 $ 200.9
Cash flow from operations per unit/share
Basic $ 1.65 $ 2.49 $ 1.85
Diluted $ 1.62 $ 2.46 $ 1.82
Book value per unit/share (6) $ 8.57 $ 19.10 $ 15.91
Price earnings ratio(7) 2.90 17.6 17.1
Basic weighted average trust units/shares outstanding (000's) 123,304 115,654 108,860
==============================================================================================================
(1) RETURN ON SALES WAS CALCULATED BY DIVIDING EARNINGS FROM CONTINUING
OPERATIONS BY TOTAL REVENUES.
(2) RETURN ON ASSETS WAS CALCULATED BY DIVIDING NET EARNINGS BY QUARTER
AVERAGE TOTAL ASSETS.
(3) RETURN ON EQUITY WAS CALCULATED BY DIVIDING NET EARNINGS BY QUARTER
AVERAGE TOTAL UNITHOLDER'S EQUITY.
(4) INTEREST COVERAGE WAS CALCULATED BY DIVIDING OPERATING EARNINGS BY NET
INTEREST EXPENSE.
(5) EARNINGS BEFORE NET INTEREST, TAXES, DEPRECIATION, AMORTIZATION,
NON-CONTROLLING INTEREST, DIVIDEND INCOME, GAIN ON DISPOSAL OF
INVESTMENTS AND SUBSIDIARY, REDUCTION IN CARRYING AMOUNTS OF INVESTMENTS
AND PROPERTY, PLANT AND EQUIPMENT AND DISCONTINUED OPERATIONS. EBITDA IS
NOT A RECOGNIZED MEASURE UNDER CANADIAN GAAP. MANAGEMENT BELIEVES THAT IN
ADDITION TO NET EARNINGS, EBITDA IS A USEFUL SUPPLEMENTAL MEASURE AS IT
PROVIDES AN INDICATION OF THE RESULTS GENERATED BY THE TRUST'S PRINCIPAL
BUSINESS ACTIVITIES PRIOR TO CONSIDERATION OF HOW THOSE ACTIVITIES ARE
FINANCED OR HOW THE RESULTS ARE TAXED IN VARIOUS JURISDICTIONS AND PRIOR
TO THE IMPACT OF DEPRECIATION AND AMORTIZATION. INVESTORS SHOULD BE
CAUTIONED, HOWEVER, THAT EBITDA SHOULD NOT BE CONSTRUED AS AN ALTERNATIVE
TO NET EARNINGS DETERMINED IN ACCORDANCE WITH GAAP AS AN INDICATOR OF
PRECISION'S PERFORMANCE. PRECISION'S METHOD OF CALCULATING EBITDA MAY
DIFFER FROM OTHER COMPANIES AND, ACCORDINGLY, EBITDA MAY NOT BE
COMPARABLE TO MEASURES USED BY OTHER COMPANIES.
(6) BOOK VALUE PER UNIT/SHARE WAS CALCULATED BY DIVIDING UNITHOLDERS' EQUITY
BY UNITS/SHARES OUTSTANDING.
(7) YEAR END CLOSING PRICED DIVIDED BY BASIC EARNINGS PER UNIT/SHARE.
TURNING IN THE RIGHT DIRECTION
103
UNITHOLDER INFORMATION
STOCK EXCHANGE LISTINGS
Units of Precision Drilling Trust are listed on the Toronto Stock Exchange
under the trading symbol PD.UN, in U.S dollars under the trading symbol PD.U,
and on the New York Stock Exchange under the trading symbol PDS.
VOTING RIGHTS
Unitholders receive one vote for each Trust unit or Precision Drilling Limited
Partnership Class B limited partnership unit held.
TRUST UNIT TRADING PROFILE
TORONTO (TSX: PD.UN)
November 7, 2005 to December 31, 2005:
High: $39.75, Low $30.50
Volume Traded: 46,918,431
NEW YORK (NYSE: PDS)
November 7, 2005 to December 31, 2005:
High: US$34.01, Low US$25.85
Volume Traded: 12,797,300
TORONTO (TSX: PD.U)
November 7, 2005 to December 31, 2005:
High: US$34.41, Low US$25.00
Volume Traded: 46,674
As a Precision Drilling Trust unitholder or as a holder of Class B limited
partnership units of Precision Drilling Limited Partnership which are
exchangeable on a one for one basis with units of the Trust, you are invited
to take advantage of unitholder services or to request more information about
Precision.
ACCOUNT QUESTIONS
Our Transfer Agent can help you with a variety of unitholder related services,
including:
o Change of address
o Lost unit certificates
o Transfer of trust units to another person
o Estate settlement
You can call our Transfer Agent toll free at: 1-888-267-6555
You can write to them at:
Computershare Trust Company of Canada
100 University Avenue, 9th Floor
Toronto, Ontario M5J 2Y1
Or you can email them at: caregistryinfo@computershare.com
Unitholders of record who receive more than one copy of this annual report can
contact our Transfer Agent and arrange to have their accounts consolidated.
Unitholders who own Precision Drilling Trust units through a brokerage firm
can contact their broker to request consolidation of their accounts.
QUARTERLY UPDATES
If you would like to receive interim reports but are not a registered
unitholder, please write or call us with your name and address. To receive our
news releases by fax, please forward your fax number to us.
ONLINE INFORMATION
To receive our news releases by email, or to view this annual report, please
visit our website at www.precisiondrilling.com and refer to the Investor
Relations section.
PUBLISHED INFORMATION
If you wish to receive copies of the 2005 Annual Information Form as filed
with the Canadian securities commissions and as filed under Form 40-F with the
United States Securities and Exchange Commission, or additional copies of this
annual report, please contact:
Vice President, Corporate Services and
Corporate Secretary
Precision Drilling Corporation
4200, 150 - 6th Avenue SW
Calgary, Alberta T2P 3Y7
Telephone: 403-716-4500
Facsimile: 403-264-0251
ESTIMATED INTERIM RELEASE DATE
2006 First Quarter - April 26, 2006
2006 Second Quarter - July 27, 2006
2006 Third Quarter - October 26, 2006
PRECISION DRILLING CORPORATION - ANNUAL REPORT 2005
104
CORPORATE INFORMATION
HEAD OFFICE LEAD BANK
PRECISION DRILLING TRUST ROYAL BANK OF CANADA
4200, 150 - 6th Avenue SW Calgary, Alberta
Calgary, Alberta, Canada T2P 3Y7
Telephone: 403-716-4500 AUDITOR
Facsimile: 403-264-0251 KPMG LLP
Email: info@precisiondrilling.com Calgary, Alberta
www.precisiondrilling.com
TRANSFER AGENT AND REGISTRAR
TRUSTEES AND DIRECTORS COMPUTERSHARE TRUST COMPANY OF CANADA
Calgary, Alberta
W.C. (Mickey) Dunn
Brian A. Felesky, CM, Q.C. TRANSFER POINT
Robert J.S. Gibson COMPUTERSHARE TRUST COMPANY, INC.
Patrick M. Murray New York, New York
Frederick W. Pheasey
Robert L. Phillips
Hank B. Swartout
H. Garth Wiggins
See page 41 for biographies
OFFICERS
HANK B. SWARTOUT
Chairman of the Board and
Chief Executive Officer
GENE C. STAHL
President and Chief Operating Officer
DOUG J. STRONG
Chief Financial Officer
DARREN J. RUHR
Vice President, Corporate Services and
Corporate Secretary
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
[LOGO - PRECISION DRILLING] [COMPUTERSHARE]
9th Floor, 100 University Avenue
Toronto, Ontario M5J 2Y1
www.computershare.com
Security Class
Holder Account Number
Intermediary
----
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================================================================================
VOTING INSTRUCTION FORM ("VIF") - ANNUAL MEETING TO BE HELD ON MAY 9, 2006
================================================================================
NON-REGISTERED (BENEFICIAL) UNITHOLDERS OF PRECISION DRILLING TRUST
1. We are sending to you the enclosed proxy-related materials that relate to
a meeting of the unityholders of the series or class of securities that
are held on your behalf by the intermediary identified above. Unless you
attend the meeting and vote in person, your securities can be voted only
by management, as proxy holder of the registered unitholder, in accordance
with your instructions.
2. WE ARE PROHIBITED FROM VOTING THESE SECURITIES ON ANY OF THE MATTERS TO BE
ACTED UPON AT THE MEETING WITHOUT YOUR SPECIFIC VOTING INSTRUCTIONS. In
order for these securities to be voted at the meeting, it will be
necessary for us to have your specific voting instructions. Please
complete and return the information requested in this VIF to provide your
voting instructions to us promptly.
3. If you wish to attend the meeting in person or appoint some other person
or company, who need not be a unitholder, to attend and act on your behalf
at the meeting, please insert your name(s) or the name of your chosen
appointee in the space provided (please see reverse).
4. This VIF should be signed by you in the exact manner as your name appears
on the VIF. If these voting instructions are given on behalf of a body
corporate set out the full legal name of the body corporate, the name and
position of the person giving voting instructions on behalf of the body
corporate and the address for service of the body corporate.
5. If this VIF is not dated, it will be deemed to bear the date on which it
is mailed by management to you.
6. When properly signed and delivered, securities represented by this VIF
will be voted as directed by you, however, if such a direction is not made
in respect of any matter, the VIF will direct the voting of the securities
to be made as recommended in the documentation provided by Management for
the meeting.
7. This VIF confers discretionary authority on the appointee to vate as the
appointee sees fit in respect of amendments or variations to matters
identified in the notice of meeting or other matters as may properly come
before the meeting or any adjournment thereof.
8. Should you wish to receive a legal form of proxy, please indicate in the
space provided (please see reverse) and one will be sent to you by mail.
Please remember that a legal proxy is subject to all the terms and
conditions that apply to proxies as outlined in the documentation provided
by Management including any cut-off time for receipt.
9. Your voting instructions will be recorded on receipt of the VIF and a
legal form of proxy will be submitted on your behalf.
10. By providing voting instructions as requested, you are acknowledging that
you are the beneficial owner of, and are entitled to instruct us with
respect to the voting of, these securities.
11. If you have any questions regarding the enclosed documents, please contact
the Registered Representative who services your account.
12. This VIF should be read in conjunction with the accompanying documentation
provided by Management.
----
Fold
VIFs submitted must be received by 3:00 pm, Calgary Time, on May 5, 2006.
VOTE USING THE TELEPHONE OR INTERNET 24 HOURS A DAY 7 DAYS A WEEK!
--------------------------- --------------------------
To Vote Using the Telephone To Vote Using the Internet
--------------------------- --------------------------
o Call the toll free number o Go to the following web site:
listed BELOW from a touch
tone telephone.
If you vote by telephone or the Internet, DO NOT mail back this VIF.
VOTING BY MAIL may be the only method for securities held in the name of a
corporation or securities being voted on behalf of another individual.
VOTING BY MAIL OR BY INTERNET are the only methods by which a holder may
choose an appointee other than the Management appointees named on the reverse
of this VIF. Instead of mailing this VIF, you may choose one of the two voting
methods outlined above to vote this VIF.
APPOINTEE(S)
The undersigned unitholder of If you wish to attend in
Precision Drilling Trust (the person or appoint someone
"Trust") hereby appoints Gene OR else to attend on your [______________]
Stahl of Calgary, Alberta, or behalf, print your name
failing him, Doug J. Strong of or the name of your
Calgary, Alberta appointee in this space
(see Note #3 on reverse).
as proxyholder to attend and vote for and on behalf of the undersigned at the
annual meeting of the Trust (the "Meeting") to be held at the Calgary
Petroleum Club, 319-5th Avenue SW Calgary, Alberta on Tuesday, May 9, 2006 at
3:00 p.m. (Calgary Time) and at any adjournments thereof, and without limiting
the foregoing, the said proxyholder is hereby instructed to vote at the said
Meeting as follows:
VOTING RECOMMENDATIONS ARE INDICATED BY HIGHLIGHTED TEXT OVER THE BOXES.
1. ELECTION OF THE BOARD OF TRUSTEES OF THE TRUST
Electing the following nominees as the Board of Trustees
of the Trust for the ensuing year: For Withhold
Robert J.S.Gibson
Patrick M. Murray [_] [_]
H. Garth Wiggins
----
Fold
------------------------------------------------------------------------------
2. APPROVAL OF THE BOARD OF DIRECTORS OF PRECISION DRILLING CORPORATION
Approving the following nominees for appointment to
the Board of Directors of Precision Drilling Corporation For Against
for the ensuing year:
W.C. (Mickey) Dunn [_] [_]
Brian A. Felesky
Robert J.S.Gibson
Patrick M. Murray
Frederick W. Pheasey
Robert L. Phillips
Hank B. Swartout
H. Garth Wiggins
------------------------------------------------------------------------------
3. APPOINTMENT OF AUDITORS
Appointing KPMG LLP as the auditor of the Trust for For Withhold
the ensuing year.
[_] [_]
------------------------------------------------------------------------------
4. ON ANY OTHER BUSINESS
which may properly come before the Meeting, or any For Withhold
adjoumment(s) thereof, the proxy is authorized to
act or vote as he or she in his or her discretion [_] [_]
may determine.
----
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------------------------------------------------------------------------------
Signature(s) Date
AUTHORIZED SIGNATURE(S) - THIS SECTION
MUST BE COMPLETED FOR YOUR INSTRUCTIONS [___________________] __|__|__
TO BE EXECUTED.
If you are voting on behalf of a corporation
or another individual you may be required to
provide documentation evidencing your power
to sign this VIF with signing capacity stated.
--------------------------------------------------------------------------------
INTERIM FINANCIAL STATEMENTS ANNUAL REPORT
Mark this box if you would like Mark this box if you would like Mark this box if you
to receive Interim Financial [_] to receive the Annual Report [_] would like to receive a [_]
Statements and accompanying and accompanying Annual legal form of proxy
Management's Discussion and Financial Statements (see Note #8 on reverse)
Analysis by mail. and Management's Discussion
and Analysis by mail.
If you are not mailing back your VIF, you may register online to receive the
above financial report(s) by mail at www.computershare.com/mailinglist.
o AR1 PDAQ +
[GRAPHIC OMITTED]
[LOGO - PRECISION DRILLING]
----
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================================================================================
FORM OF PROXY - ANNUAL MEETING TO BE HELD ON MAY 9,2006
================================================================================
THIS FORM OF PROXY IS SOLICITED BY AND ON BEHALF OF MANAGEMENT.
Notes to proxy
1. Every unitholder has the right to appoint some other person or company of
their choice, who need not be a unitholder, to attend and act on their
behalf at the meeting. If you wish to appoint a person or company other
than the persons whose names are printed herein, please insert the name of
your chosen proxyholder in the space provided (see reverse).
2. If the securities are registered in the name of more than one owner (for
example, joint ownership, trustees, executors, etc.), then all those
registered should sign this proxy. If you are voting on behalf of a
corporation or another individual you may be required to provide
documentation evidencing your power to sign this proxy with signing
capacity stated.
3. This proxy should be signed in the exact manner as the name appears on the
proxy.
4. If this proxy is not dated, it will be deemed to bear the date on which it
is mailed by Management to the unitholder.
5. The securities represented by this proxy will be voted as directed by the
unitholder, however, if such a direction is not made in respect of any
matter, this proxy will be voted as recommended by Management.
6. The securities represented by this proxy will be voted or withheld from
voting, in accordance with the instructions of the unitholder, on any
ballot that may be called for and, if the unitholder has specified a
choice with respect to any matter to be acted on, the securities will be
voted accordingly.
7. This proxy confers discretionary authority in respect of amendments to
matters identified in the notice of meeting or other matters that may
properly come before the meeting.
8. This proxy should be read in conjunction with the accompanying
documentation provided by Management.
Proxies submitted must be received by 3:00 pm, Calgary Time, on May 5, 2006.
----
Fold
APPOINTMENT OF PROXYHOLDER Print the name of the person
The undersigned unitholder of you are OR appointing
Precision Drilling Trust (the OR if this person is someone [___________]
"Trust") hereby appoints Gene other than the Management
Stahl of Calgary, Alberta, or Nominees listed herein.
failing him, Doug J. Strong of
Calgary, Alberta
as proxyholder to attend and vote for and on behalf of the undersigned at the
annual meeting of the Trust (the "Meeting") to be held at the Calgary
Petroleum Club, 319-5th Avenue SW Calgary, Alberta on Tuesday, May 9,2006 at
3:00 p.m. (Calgary Time) and at any adjournments thereof, and without limiting
the foregoing, the said proxyholder is hereby instructed to vote at the said
Meeting as follows:
VOTING RECOMMENDATIONS ARE INDICATED BY HIGHLIGHTED TEXT OVER THE BOXES.
1. ELECTION OF THE BOARD OF TRUSTEES OF THE TRUST
Electing the following nominees as the Board of Trustees For Withhold
of the Trust for the ensuing year:
Robert J.S. Gibson [_] [_]
Patrick M. Murray
H. Garth Wiggins
----
Fold
------------------------------------------------------------------------------
2. APPROVAL OF THE BOARD OF DIRECTORS OF PRECISION DRILLING CORPORATION
Approving the following nominees for appointment to For Against
the Board of Directors of Precision Drilling
Corporation for the ensuing year: [_] [_]
W.C. (Mickey) Dunn
Brian A. Felesky
Robert J.S. Gibson
Patrick M. Murray
Frederick W. Pheasey
Robert L. Phillips
Hank B. Swartout
H. Garth Wiggins
------------------------------------------------------------------------------
3. APPOINTMENT OF AUDITORS
Appointing KPMG LLP as the auditor of the Trust for For Withhold
the ensuing year.
[_] [_]
------------------------------------------------------------------------------
4. ON ANY OTHER BUSINESS
which may properly come before the Meeting, or any For Withhold
adjoumment(s) thereof, the proxy is authorized to
act or vote as he or she in his or her discretion [_] [_]
may determine.
------------------------------------------------------------------------------
Signature(s) Date
AUTHORIZED SIGNATURE(S) - THIS SECTION
MUST BE COMPLETED FOR YOUR INSTRUCTIONS [___________________] __|__|__
TO BE EXECUTED.
If you are voting on behalf of a corporation
or another individual you may be required to
provide documentation evidencing your power
to sign this Proxy with signing capacity stated.
--------------------------------------------------------------------------------
o P D A Q +
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
[LOGO - PRECISION DRILLING] [COMPUTERSHARE]
9th Floor, 100 University Avenue
Toronto, Ontario M5J 2Y1
www.computershare.com
Security Class
Holder Account Number
----
Fold
==============================================================================
FORM OF PROXY - ANNUAL MEETING TO BE HELD ON MAY 9,2006
==============================================================================
THIS FORM OF PROXY IS SOLICITED BY AND ON BEHALF OF MANAGEMENT.
Notes to proxy
1. Every unitholder has the right to appoint some other person or company of
their choice, who need not be a unitholder, to attend and act on their
behalf at the meeting. If you wish to appoint a person or company other
than the persons whose names are printed herein, please insert the name of
your chosen proxyholder in the space provided (see reverse).
2. If the securities are registered in the name of more than one owner (for
example, joint ownership, trustees, executors, etc.), then all those
registered should sign this proxy. If you are voting on behalf of a
corporation or another individual you may be required to provide
documentation evidencing your power to sign this proxy with signing
capacity stated.
3. This proxy should be signed in the exact manner as the name appears on the
proxy.
4. If this proxy is not dated, it will be deemed to bear the date on which it
is mailed by Management to the unitholder.
5. The securities represented by this proxy will be voted as directed by the
unitholder, however, if such a direction is not made in respect of any
matter, this proxy will be voted as recommended by Management.
6. The securities represented by this proxy will be voted or withheld from
voting, in accordance with the instructions of the unitholder, on any
ballot that may be called for and, if the unitholder has specified a
choice with respect to any matter to be acted on, the securities will be
voted accordingly.
7. This proxy confers discretionary authority in respect of amendments to
matters identified in the notice of meeting or other matters that may
properly come before the meeting.
8. This proxy should be read in conjunction with the accompanying
documentation provided by Management.
Proxies submitted must be received by 3:00 pm, Calgary Time, on May 5,2006.
----
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VOTE USING THE TELEPHONE OR INTERNET 24 HOURS A DAY 7 DAYS A WEEK!
--------------------------- -------------------------- ----------------------
To Vote Using the Telephone To Vote Using the Internet To Receive Documents
Electronically
--------------------------- -------------------------- ----------------------
o Call the toll free number o Go to the following web o You can enroll to receive future
listed BELOW from a touch site: securityholder communications
tone telephone. electronically, by visiting
www.computershare.com -
click "Enroll for e-deHvery"
under the Shareholder Services
menu.
If you vote by telephone or the Internet, DO NOT mail back this proxy.
VOTING BY MAIL may be the only method for securities held in the name of a
corporation or securities being voted on behalf of another individual.
VOTING BY MAIL OR BY INTERNET are the only methods by which a unitholder may
appoint a person as proxyholder other than the Management nominees named on
the reverse of this proxy. Instead of mailing this proxy, you may choose one
of the two voting methods outlined above to vote this proxy.
APPOINTMENT OF PROXYHOLDER
The undersigned unitholder of Print the name of the person
Precision Drilling Trust (the you are appointing if this
"Trust") hereby appoints Gene OR person is someone other [____________]
Stahl of Calgary, Alberta, or than the Management Nominees
failing him, Doug J. Strong of listed herein.
Calgary, Alberta
as proxyholder to attend and vote for and on behalf of the undersigned at the
annual meeting of the Trust (the "Meeting") to be held at the Calgary
Petroleum Club, 319-5th Avenue SW Calgary, Alberta on Tuesday, May 9, 2006 at
3:00 p.m. (Calgary Time) and at any adjournments thereof, and without limiting
the foregoing, the said proxyholder is hereby instructed to vote at the said
Meeting as follows:
VOTING RECOMMENDATIONS ARE INDICATED BY HIGHLIGHTED TEXT OVER THE BOXES.
1. ELECTION OF THE BOARD OF TRUSTEES OF THE TRUST
Electing the following nominees as the Board of Trustees For Withhold
of the Trust for the ensuing year:
Robert J.S. Gibson [_] [_]
Patrick M. Murray
H. Garth Wiggins
----
Fold
------------------------------------------------------------------------------
2. APPROVAL OF THE BOARD OF DIRECTORS OF PRECISION DRILLING CORPORATION
Approving the following nominees for appointment to
the Board of Directors of Precision Drilling Corporation For Against
for the ensuing year:
W.C. (Mickey) Dunn [_] [_]
Brian A. Felesky
Robert J.S. Gibson
Patrick M. Murray
Frederick W. Pheasey
Robert L. Phillips
Hank B. Swartout
H. Garth Wiggins
------------------------------------------------------------------------------
3. APPOINTMENT OF AUDITORS
Appointing KPMG LLP as the auditor of the Trust for For Withhold
the ensuing year.
[_] [_]
------------------------------------------------------------------------------
4. ON ANY OTHER BUSINESS
which may properly come before the Meeting, or any For Withhold
adjoumment(s) thereof, the proxy is authorized to
act or vote as he or she in his or her discretion [_] [_]
may determine.
----
Fold
------------------------------------------------------------------------------
Signature(s) Date
AUTHORIZED SIGNATURE(S) - THIS SECTION
MUST BE COMPLETED FOR YOUR INSTRUCTIONS [___________________] __|__|__
TO BE EXECUTED.
If you are voting on behalf of a corporation
or another individual you may be required to
provide documentation evidencing your power
to sign this VIF with signing capacity stated.
--------------------------------------------------------------------------------
INTERIM FINANCIAL STATEMENTS ANNUAL REPORT
Mark this box if you would like [_] Mark this box if you would NOT [_]
to receive Interim Financial like to receive the Annual Report
Statements and accompanying and accompanying Annual Financial
Management's Discussion and Statements and Management's
Analysis by mail. Discussion and Analysis by mail.
If you are not mailing back your proxy, you may register online to receive the
above financial report(s) by mail at www.computershare.com/mailinglist.
o AR2 PDAQ +
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
[LOGO - PRECISION DRILLING] [COMPUTERSHARE]
9th Floor, 100 University Avenue
Toronto, Ontario M5J 2Y1
www.computershare.com
Security Class
Holder Account Number
----
Fold
================================================================================
VOTING INSTRUCTION FORM - ANNUAL MEETING TO BE HELD ON MAY 9,2006
================================================================================
NOTES TO VOTING INSTRUCTION FORM ("VIF")
1. EVERY HOLDER HAS THE RIGHT TO APPOINT SOME OTHER PERSON OF THEIR CHOICE,
WHO NEED NOT BE A UNITHOLDER, TO ATTEND AND ACT ON THEIR BEHALF AT THE
MEETING. IF YOU WISH TO APPOINT A PERSON OTHER THAN THE PERSONS WHOSE NAMES
ARE PRINTED HEREIN, PLEASE INSERT THE NAME OF YOUR CHOSEN PROXYHOLDER IN
THE SPACE PROVIDED (SEE REVERSE).
2. If the securities are registered in the name of more than one owner (for
example, joint ownership, trustees, executors, etc.), then all those
registered should sign this VIF. If you are voting on behalf of a
corporation or another individual you may be required to provide
documentation evidencing your power to sign this VIF with signing capacity
stated.
3. This VIF should be signed in the exact manner as the name appears on the
VIF.
4. If this VIF is not dated, it will be deemed to bear the date on which it is
mailed by management to the unitholder.
5. THE SECURITIES REPRESENTED BY THIS VIF WILL BE VOTED AS DIRECTED BY THE
HOLDER, HOWEVER, IF SUCH A DIRECTION IS NOT MADE IN RESPECT OF ANY MATTER,
THIS VIF WILL BE WITHHELD FROM VOTING ON THE MATTER FOR WHICH NO DIRECTION
IS MADE.
VIFs submitted must be received by 3:00 p.m., Calgary Time, on May 5, 2006.
THANK YOU ----
Fold
APPOINTMENT OF PROXYHOLDER
The undersigned holder of Print the name of the person
Class B Limited Partnership you are appointing as proxy-
Units of Precision Drilling OR holder of Computershare Trust [___________]
Limited Partnership hereby Company of Canada to attend
directs Computershare Trust and vote
Company of Canada as Voting and
Exchange Trustee
as proxyholder to attend and vote for and on behalf of the undersigned at the
annual meeting of Precision Drilling Trust (the "Meeting") to be held at the
Calgary Petroleum Club, 319-5th Avenue SW Calgary, Alberta on Tuesday, May
9,2006 at 3:00 p.m. (Calgary Time) and at any adjournments thereof, and
without limiting the foregoing, the said proxyholder is hereby instructed to
vote at the said Meeting as follows:
VOTING RECOMMENDATIONS ARE INDICATED BY HIGHLIGHTED TEXT OVER THE BOXES.
1. ELECTION OF THE BOARD OF TRUSTEES OF THE TRUST
Electing the following nominees as the Board of Trustees For Withhold
of the Trust for the ensuing year:
Robert J.S.Gibson [_] [_]
Patrick M. Murray
H. Garth Wiggins
----
Fold
------------------------------------------------------------------------------
2. APPROVAL OF THE BOARD OF DIRECTORS OF PRECISION DRILLING CORPORATION
Approving the following nominees for appointment
to the Board of Directors of Precision Drilling For Against
Corporation for the ensuing year:
W.C. (Mickey) Dunn [_] [_]
Brian A. Felesky
Robert J.S. Gibson
Patrick M. Murray
Frederick W. Pheasey
Robert L. Phillips
Hank B. Swartout
H. Garth Wiggins
------------------------------------------------------------------------------
3. APPOINTMENT OF AUDITORS
Appointing KPMG LLP as the auditor of the Trust For Withhold
for the ensuing year.
[_] [_]
------------------------------------------------------------------------------
4. ON ANY OTHER BUSINESS
which may propery come before the Meeting, or any For Withhold
adjoumment(s) thereof, the proxy is authorized to
act or vote as he or she in his or her discretion [_] [_]
may determine.
----
Fold
------------------------------------------------------------------------------
Signature(s) Date
AUTHORIZED SIGNATURE(S) - THIS SECTION
MUST BE COMPLETED FOR YOUR INSTRUCTIONS [___________________] __|__|__
TO BE EXECUTED.
If you are voting on behalf of a corporation
or another individual you may be required to
provide documentation evidencing your power
to sign this VIF with signing capacity stated.
------------------------------------------------------------------------------
INTERIM FINANCIAL STATEMENTS
In accordance with securities Mark this box if ANNUAL REPORT
regulations, unitholders may you would like to As a registered holder you Mark this box if
elect annually to receive [_] receive Interim [_] will receive an annual report. [_] you DO NOT want
interim financial statements, Financial Statements If you DO NOT want to receive to receive the
if they so request. If you wish by mail. an annual report, please mark Annual Report by
to receive such mailings, please the box. If you do not mark mail.
mark your selection. the box, you will continue to
receive an Annual Report by mail.
If you are not mailing back your proxy, you may register online to receive the
above financial report(s) by mail at www.computershare.com/mailinglist.
o AR2 PDPQ +
PRECISION DRILLING TRUST
PROXY STATEMENT AND INFORMATION CIRCULAR
FOR THE ANNUAL MEETING OF UNITHOLDERS
TO BE HELD MAY 9, 2006
DATED MARCH 15, 2006 (THE "EFFECTIVE DATE")
I. PROXY STATEMENT AND INFORMATION CIRCULAR
SOLICITATION OF PROXIES
THIS PROXY STATEMENT AND INFORMATION CIRCULAR (the "Circular") IS
FURNISHED IN CONNECTION WITH THE SOLICITATION OF PROXIES BY PRECISION DRILLING
CORPORATION ("Precision") ON BEHALF OF ROBERT J.S. GIBSON, PATRICK M. MURRAY
and H. GARTH WIGGINS AS THE BOARD OF TRUSTEES OF PRECISION DRILLING TRUST (the
"Trust") to be used at the annual meeting of holders of units of the Trust
(the "Trust Units") and holders of Class B Limited Partnership Units
("Exchangeable Units") of Precision Drilling Limited Partnership ("PDLP"), to
be held in the McMurray Room at the Calgary Petroleum Club, 319 - 5th Avenue
S.W., Calgary, Alberta, on the 9th day of May 2006 at 3:00 P.M. in the
afternoon, (Calgary time) and at any adjournment thereof for the purposes set
forth in the enclosed Notice of Meeting accompanying this Circular (the
"Meeting"). The cost of solicitation will be borne by Precision and reimbursed
by the Trust. All amounts referred to herein are in Canadian dollars unless
otherwise stated.
VOTING BY HOLDERS OF EXCHANGEABLE UNITS
This Circular is being mailed to holders of Trust Units and
Exchangeable Units (together the "Unitholders"). The Circular relates
principally to the Trust as PDLP is exempt from National Instrument 51-102
CONTINUOUS DISCLOSURE OBLIGATIONS ("NI 51-102") provided the Trust complies
with the requirements set out in Section 13.3 of NI 51-102. The Exchangeable
Units are the economic equivalent of the Trust Units, however, whereas each
Trust Unit outstanding on the record date (as defined herein) is entitled to
one vote, the Exchangeable Units are required to vote through a special voting
unit that has been issued to Computershare Trust Company of Canada as trustee
(the "Voting and Exchange Trustee") under a voting and exchange trust
agreement. The Exchangeable Units are entitled to that number of votes equal
to the number of Trust Units into which the Exchangeable Units may be
exchanged (on a one-for-one basis) as at the record date. The Voting and
Exchange Trustee is required to vote the special voting unit in the manner
that holders of Exchangeable Units instruct and to abstain from voting on the
Exchangeable Units for which the Voting and Exchange Trustee does not receive
instructions.
ADVICE TO BENEFICIAL HOLDERS OF TRUST UNITS
The information set forth in this section is of significant
importance to holders of Trust Units as a substantial number do not hold Trust
Units in their own name. Holders who do not hold Trust Units in their own name
(referred to herein as "Beneficial Holders") should note that only proxies
deposited by holders whose names appear on the records of the Trust as the
registered holders of Trust Units can be recognized and acted upon at the
Meeting. If Trust Units are listed in an account statement provided by a
broker, then in almost all cases those Trust Units will not be registered in
the Beneficial Holders' name on the records of the Trust and such Trust Units
will more likely be registered under the name of the Beneficial Holders'
broker or an agent of that broker. In Canada, the vast majority of such Trust
Units are registered under the name of CDS & Co., the registration name for
The Canadian Depository for Securities Limited, which acts as nominee for many
Canadian brokerage firms. Trust Units held by brokers or their nominees can
only be voted (for or against resolutions) upon the instructions of the
Beneficial Holder. Without specific instructions from Beneficial Holders, the
investment dealers and other
-1-
intermediaries are prohibited from voting Trust Units for their clients. The
Trust does not know for whose benefit the Trust Units registered in the name
of CDS & Co. are held.
Applicable regulatory policies require investment dealers and other
intermediaries to seek voting instructions from Beneficial Holders in advance
of meetings. Every intermediary has its own mailing procedures and provides
its own return instructions which should be carefully followed by Beneficial
Holders in order to ensure that their Trust Units are represented at the
Meeting. Often, the form of proxy supplied to a Beneficial Holder by
intermediaries is identical to the form of proxy provided to registered
Unitholders; however, its purpose is limited to instructing intermediaries
regarding how to vote on behalf of the Beneficial Holder. The majority of
brokers now delegate responsibility for obtaining instructions from clients to
ADP Investor Communications ("ADP"). ADP typically mails a scannable voting
instruction form in lieu of the form of proxy. The Beneficial Holder is
requested to complete and return the voting instruction form to ADP by mail or
facsimile, or to follow the instructions on the voting instruction form to
vote online or by calling a toll-free telephone number. ADP then tabulates the
results of all instructions received and provides appropriate instructions
respecting the voting of Trust Units to be represented at the Meeting. A
BENEFICIAL HOLDER RECEIVING A VOTING INSTRUCTION FORM CANNOT USE THAT VOTING
INSTRUCTION FORM TO VOTE TRUST UNITS DIRECTLY AT THE MEETING. A BENEFICIAL
HOLDER MUST FOLLOW THE DIRECTIONS WITHIN THE TIME FRAME SET OUT IN THE VOTING
INSTRUCTION FORM IN ORDER TO VOTE THE TRUST UNITS.
The foregoing discussion similarly applies to holders of Exchangeable
Units who do not hold their Exchangeable Units in their own name. Only holders
of Exchangeable Units whose names appear on the records of PDLP as the
registered holders of Exchangeable Units are entitled to instruct the Voting
and Exchange Trustee as to how to exercise voting rights in respect of their
Exchangeable Units at the Meeting. The procedure for voting Exchangeable Units
is described below under the heading "INSTRUCTIONS TO THE VOTING AND EXCHANGE
TRUSTEE".
APPOINTMENT OF PROXY
The persons named in the enclosed instrument of proxy, Mr. Gene
Stahl, President and Chief Operating Officer of Precision, and Mr. Doug J.
Strong, Chief Financial Officer of Precision, have indicated their willingness
to represent as proxies the Unitholders who appoint them. A UNITHOLDER
SUBMITTING A PROXY HAS THE RIGHT TO APPOINT ANOTHER PERSON OR COMPANY TO
REPRESENT SUCH UNITHOLDER AT THE MEETING AND MAY DO SO EITHER BY INSERTING
SUCH PERSON OR COMPANY'S NAME IN THE BLANK SPACE PROVIDED AND STRIKING OUT THE
EXISTING NAMES, OR BY COMPLETING ANOTHER PROPER FORM OF PROXY. In either case,
instruments of proxy must be deposited at Computershare Trust Company of
Canada, Proxy Department, 100 University Avenue, 9th Floor, Toronto, Ontario,
M5J 2YI, before 3:00 P.M. (Calgary Time) on May 5, 2006. A proxy must be
executed by the Unitholder or his or her attorney authorized in writing or, if
such Unitholder is a corporation, under its seal or by an officer or attorney
thereof duly authorized. Representatives of Unitholders appointed as proxies
are not required to be Unitholders themselves.
INSTRUCTIONS TO THE VOTING AND EXCHANGE TRUSTEE
Holders of Exchangeable Units may give their instructions to the
Voting and Exchange Trustee by proxy, designate a person to exercise their
vote by proxy or in person, or attend at the Meeting and vote in person. If
delivering a proxy or designating a person to execute the proxy on their
behalf, the instruments of proxy must be deposited to the Computershare Trust
Company of Canada as Voting and Exchange Trustee, Proxy Department, 100
University Avenue, 9th Floor, Toronto, Ontario, M5J 2YI, before 3:00 P.M.
(Calgary Time) on May 5, 2006.
REVOCATION OF PROXY
An instrument of proxy in respect of Trust Units and Exchangeable
Units may be revoked by the person giving it at any time prior to the exercise
thereof. If a person who has given a proxy attends personally at the Meeting,
such person may revoke the proxy and vote in person. In addition to revocation
in any other manner permitted by law, a proxy may be revoked by instrument in
writing or, if the holder of Trust Units or Exchangeable Units is a
corporation, under its corporate seal or by an officer or an attorney thereof
duly authorized, and
-2-
deposited either with Computershare Trust Company of Canada at the address
described above at any time up to and including the last day of business
preceding the day of the Meeting or at any adjournment thereof at which the
proxy is to be used, or with the Chairman of the Meeting on the day of the
Meeting or adjournment thereof, and upon either of such deposits, the proxy
will be revoked.
RECORD DATE
By resolution of the board of directors of Precision (the "Board of
Directors", and each member a "Director"), the record date for the Meeting has
been established as March 20, 2006 (the "Record Date"). Only Unitholders of
record as of the close of business on the Record Date will be entitled to
receive notice of and to vote at the Meeting or any adjournment thereof,
except that a transferee of Trust Units after the Record Date may, not later
than ten (10) days before the Meeting, establish the right to vote by
providing evidence of ownership of Trust Units and requesting that the
transferee's name be placed on the voting list in place of the transferor.
EXERCISE OF DISCRETION BY PROXIES
The persons named in the enclosed form of proxy will vote the Trust
Units in respect of which they are appointed in accordance with the direction
of the Unitholders appointing them where voting is by way of a show of hands
or by ballot, and if the Unitholder specifies a choice with respect to any
matter that may be acted upon, the Trust Units will be voted accordingly. In
the absence of such direction, the Trust Units will be voted for the election
of the nominees hereinafter set forth as the Board of Trustees of the Trust
(the "Board of Trustees", and each member a "Trustee"), for the approval of
the appointment of the Board of Directors of Precision, and for the
re-appointment of KPMG LLP, Chartered Accountants, as Auditor. The enclosed
form of proxy confers discretionary authority upon the persons named therein
with respect to any amendments or variations in the matters outlined in the
accompanying Notice of Meeting or any other business which may properly come
before the Meeting. The Trustees, Directors and executive officers of
Precision know of no such amendments, variations or other business to come
before the Meeting other than the matters referred to in the Notice of
Meeting.
VOTING SECURITIES AND PRINCIPAL HOLDERS OF VOTING SECURITIES
An unlimited number of Trust Units may be created and issued by the
Trust. At the Effective Date the Trust had outstanding 124,352,921 Trust
Units, each Trust Unit carrying the right to one vote. The Trust Units are the
only class of voting securities of the Trust which are issued and outstanding.
To the knowledge of the Board of Trustees, the Board of Directors and
executive officers of Precision, as at the Effective Date, no person or
company beneficially owned, directly or indirectly, or exercised control or
direction over Trust Units entitled to more than ten percent (10%) of the
votes which may be cast at the Meeting.
At the Effective Date, PDLP had outstanding 124,352,921 Class A
Limited Partnership Units, each of which is held by the Trust, and 1,108,382
Exchangeable Units, each of which are held by former shareholders of Precision
who elected to receive Exchangeable Units in lieu of Trust Units at the time
of the reorganization of the business of Precision into the Trust. The
Exchangeable Units are the economic equivalent of the Trust Units, will be
exchangeable for Trust Units on a one-for-one basis at the option of the
holder, entitle the holder to receive cash payments equal to cash
distributions made by the Trust on the Trust Units, and entitle the holder to
direct the Voting and Exchange Trustee to vote the special voting unit at all
meetings of holders of Trust Units. The Exchangeable Units are the only class
of voting securities of PDLP which are issued and outstanding and entitled to
vote at the Meeting together with the Trust Units as a single class. To the
knowledge of the directors and officers of 1194312 Alberta Ltd., the general
partner of PDLP (the "General Partner"), a wholly-owned subsidiary of the
Trust which has the exclusive authority to manage the business and affairs of
PDLP on behalf of the Trust, as at the Effective Date, no person or company
beneficially owned, directly or indirectly, or exercised contol or direction
over Exchangeable Units entitled to more than ten percent (10%) of the votes
which may be cast at the Meeting.
-3-
At the Effective Date, the Trustees, the Directors and the executive
officers of Precision, as a group, beneficially owned, directly or indirectly,
or exercised control over 1,668,279 Trust Units and 829,788 Exchangeable Units
or approximately 1.99% of the issued and outstanding Trust Units and
Exchangeable Units.
INDEBTEDNESS OF TRUSTEES, DIRECTORS AND EXECUTIVE OFFICERS
There are no loans outstanding from the Trust or Precision to the
Trustees, or the Directors or executive officers of Precision.
INTEREST OF INSIDERS IN MATERIAL TRANSACTIONS
There were no material interests, direct or indirect, of the
Trustees, or the Directors and executive officers of Precision, the nominees
for Trustee or Director, any Unitholder who beneficially owns more than 10% of
the Trust Units or Exchangeable Units, or any known associate or affiliate of
such persons, in any transaction since the commencement of the last completed
fiscal year, or any proposed transaction which has materially affected or
would materially affect the Trust or any of its subsidiaries.
INTEREST OF CERTAIN PERSONS AND COMPANIES IN MATTERS TO BE ACTED UPON
The Board of Trustees on behalf of the Trust, and the Board of
Directors and executive officers on behalf of Precision, are not aware of any
material interest of any Trustee, Director or nominee for Trustee or Director,
or officer or any one who has held office as such since the beginning of the
last fiscal year or any associate or affiliate of any of the foregoing in any
matter to be acted on at the Meeting.
II. PARTICULARS OF MATTERS TO BE ACTED UPON
1. ELECTION OF THE BOARD OF TRUSTEES OF THE TRUST
At the Meeting the Unitholders will be asked to elect three members
to the Board of Trustees. The persons named in the enclosed form of proxy
intend to vote for the election of the persons set out below. It is not
contemplated that nominees will be unable to serve as Trustees, but, if that
should occur for any reason prior to the Meeting, the persons named in the
enclosed form of proxy reserve the right to vote for other nominees at their
discretion. The following table sets forth, for each proposed Trustee: his
name; age; municipality, province or state and country of residence; all
positions and offices with the Trust now held by him; the month and year in
which he was first appointed as a Trustee; his principal occupation during the
preceding five years; and the number and percentage of Trust Units and
Exchangeable Units that he has advised are beneficially owned by him, directly
or indirectly, as of the Effective Date:
TRUST / EXCHANGEABLE
NAME, AGE, POSITION TRUSTEE PRINCIPAL OCCUPATION UNITS BENEFICIALLY
MUNICIPALITY, PROVINCE & PRESENTLY SINCE(2) DURING THE PRECEDING 5 YEARS OWNED, CONTROLLED OR
COUNTRY OF RESIDENCE HELD(1) DIRECTED(3)
=========================== ========== =============== =============================== ======================
Robert J.S. Gibson, 59 Trustee September 2005 President, Stuart & Company 63,200(4) / nil
Calgary, Alberta, Canada Limited 0.050% / nil
--------------------------- ---------- --------------- ------------------------------- ----------------------
Patrick M. Murray, 63 Trustee September 2005 Chairman & Chief Executive 40,000 / nil
Dallas, Texas, USA Officer, Dresser Inc. 0.032% / nil
--------------------------- ---------- --------------- ------------------------------- ----------------------
H. Garth Wiggins, 57 Trustee September 2005 Principal, Kenway, Mack, 21,100 / nil
Calgary, Alberta, Canada Slusarchuk, Stewart, Chartered 0.017% / nil
Accountants
--------------------------- ---------- --------------- ------------------------------- ----------------------
Notes:
(1) Each Trustee's term of office expires not later than the close of
business at the next annual meeting, or until successors are elected or
the Trustees vacate their office in accordance with the terms of the
declaration of trust dated September 22, 2005 (the "Declaration of
Trust").
(2) The Trust was created September 22, 2005 and the Trustees were appointed
to the Board of Trustees on the same date.
(3) Percentage of Trust Units and Exchangeable Units beneficially owned is
calculated based on an aggregate of 125,461,303 Trust Units and
Exchangeable Units outstanding as of the Effective Date.
(4) 8,000 of the Trust Units are held by Stuart & Company Limited, a company
controlled by Mr. Gibson, and 10,000 Trust Units are held in a registered
retirement savings plan for the benefit of Mr. Gibson.
-4-
2. APPROVAL OF THE BOARD OF DIRECTORS OF PRECISION
The Board of Trustees has delegated the management and general
administration of the affairs of the Trust to Precision pursuant to the terms
of an administration agreement. PDLP is the sole shareholder of Precision and
is entitled to appoint the Board of Directors. Since the Trust holds all of
the voting shares of the General Partner of PDLP, the Board of Trustees will
ensure that appropriate steps are taken by the General Partner on behalf of
PDLP to collect and act upon the votes of Unitholders to appoint the Board of
Directors. The directors of the General Partner are also the persons named in
the enclosed form of proxy and they intend to appoint the persons set out
below. It is not contemplated that the nominees set out below will be unable
to serve as Directors, but if that should occur for any reason prior to the
Meeting, the persons named in the enclosed form of proxy reserve the right to
appoint other nominees at their discretion on the advice of the Board of
Trustees.
In the event that the resolution to approve the appointment of the
Board of Directors is not passed, or if nominees other than those proposed
below are approved, the Board of Trustees will either act on the resolution or
promptly request that the Corporate Governance and Nominating Committee review
the voting results and make a recommendation to the Board of Trustees for an
alternate slate of Directors to be nominated for appointment, or such other
recommendation as they determine appropriate, following which the Board of
Trustees will seek approval from Unitholders, if required, for such
recommendation. The Board of Trustees will not take steps to implement or
approve any recommendation which would result in less than a majority of the
Board of Directors being independent or which would result in the Trustees
constituting a majority of the Board of Directors.
The following table sets forth, for each proposed Director: his name;
age; municipality, province or state and country of residence; all positions
and offices with Precision now held by him; the month and year in which he was
first appointed a Director; his principal occupation during the preceding five
years; and the number and percentage of Trust Units and Exchangeable Units
that he has advised are beneficially owned by him, directly or indirectly, as
of the Effective Date:
TRUST UNITS /
NAME, AGE, POSITION DIRECTOR PRINCIPAL OCCUPATION EXCHANGEABLE UNITS
MUNICIPALITY, PROVINCE & PRESENTLY SINCE DURING THE PRECEDING 5 YEARS BENEFICIALLY OWNED,
COUNTRY OF RESIDENCE HELD(1) CONTROLLED OR
Directed(2)
============================== =========== =========== =========================================== ====================
W.C. (Mickey) Dunn, 52 (3)(4) Director September Chairman, True Energy Trust 15,600 / nil
Edmonton, Alberta, Canada
------------------------------ ----------- ----------- ------------------------------------------- --------------------
Brian A. Felesky, CM, Q.C., 62 Director December Partner, Felesky Flynn LLP 2,800 / nil
Calgary, Alberta, Canada 2005
------------------------------ ----------- ----------- ------------------------------------------- --------------------
Robert J.S. Gibson, 59 (3) Director June 1996 President, Stuart & Company Limited 63,200(7) / nil
(4)(5)(6) 0.050% / nil
Calgary, Alberta, Canada
------------------------------ ----------- ----------- ------------------------------------------- --------------------
Patrick M. Murray, 63 (4)(5) Director July 2002 Chairman and Chief Executive Officer, 40,000 / nil
Dallas, Texas, USA Dresser Inc. 0.032% / nil
------------------------------ ----------- ----------- ------------------------------------------- --------------------
Frederick W. Pheasey, 63 (3) Director July 2002 Director of Dreco Energy Services Ltd. 44,000 / nil
(4)(6) 0.035% / nil
Edmonton, Alberta, Canada
------------------------------ ----------- ----------- ------------------------------------------- --------------------
Robert L. Phillips, 55(3) Director May 2004 President and Chief Executive Officer, BCR 5,000(8) / nil
(4)(6) Group of Companies, 2001-2004. 0.005% / nil
Vancouver, BC, Canada
------------------------------ ----------- ----------- ------------------------------------------- --------------------
Hank B. Swartout, 54 Director July 1987 CEO of Precision since 1985, President of 1,413,579(9) /
Calgary, Alberta, Canada CEO Precision 1985-2005 829,788(10)
1.127% / 0.661%
------------------------------ ----------- ----------- ------------------------------------------- --------------------
H. Garth Wiggins, 57 (4)(5) Director September Principal, Kenway, Mack, Slusarchuk, 21,100 / nil
Calgary, Alberta, Canada 1997 Stewart, Chartered Accountants 0.01% / nil
------------------------------ ----------- ----------- ------------------------------------------- --------------------
Notes:
(1) Each Director's term of office expires not later than the close of
business at the next annual meeting, or until successors are appointed or
Directors vacate their office, and Directors are normally not renominated
following the earlier of their fifteenth term or 69th birthday.
(2) Percentage of Trust Units and Exchangeable Units beneficially owned is
calculated based on an aggregate of 125,461,303 Trust Units and
Exchangeable Units outstanding as of the Effective Date.
(3) Member of the Corporate Governance and Nominating Committee.
(4) Member of the Special Committee formed during fiscal 2005.
(5) Member of the Audit Committee.
(6) Member of the Compensation Committee.
(7) 8,000 of the Trust Units are held by Stuart & Company Limited, a company
controlled by Mr. Gibson, and 10,000 Trust Units are held in a registered
retirement savings plan for the benefit of Mr. Gibson.
(8) 2,000 Trust Units are held by R.L. Phillips Investments Inc., a company
controlled by Mr. Phillips.
(9) The Trust Units include 10,541 held in a registered retirement plan for
the benefit of Mr. Swartout.
(10) The Exchangeable Units are held by 1201112 Alberta Ltd., a company
controlled by Mr. Swartout.
-5-
Each nominee for appointment to the board of Precision is independent
with the exception of Hank B. Swartout, Chairman of the Board of Directors and
Chief Executive Officer of Precision and accordingly an executive officer, and
Brian A. Felesky, CM, Q.C., who is a partner at Felesky Flynn, LLP, a law firm
which provides trust and tax counsel to the Trust and Precision.
The following table sets forth, for each Trustee and Director, a
brief biography and a list of other public company boards on which the
Trustees and Directors serve:
NAME BIOGRAPHY OTHER PUBLIC ISSUER
DIRECTORSHIPS
=========================== ============================================================= ============================
W.C. (Mickey) Dunn Mr. Dunn is the Chairman of the Board of True Energy Trust, True Energy Trust
a founding shareholder and director of Rentcash Inc. and a Rentcash Inc.
director of Vero Energy Inc. Previously, Mr. Dunn was
President and Chief Executive Officer of Cardium Service
and Supply Limited, Cardium Tool Services Inc. and Colorado
Silica Sands Inc. Mr. Dunn has been a Director of
Precision since September 1992.
--------------------------- ------------------------------------------------------------- ----------------------------
Brian A. Felesky, CM, Q.C. Mr. Felesky is a partner at Felesky Flynn LLP, a law firm Suncor Energy, Inc.
providing tax and trust law services. Mr. Felesky is a Epcor Power LP
Vice-Chair, Canada West Foundation, a member of the Senate Fairquest Energy Limited
of Athol Murray College of Notre Dame, a member of the
Board of Governors for the Council for Canadian Unity, a
board member of the Calgary Stampede Foundation and the
Calgary Arts Development Authority. Mr. Felesky has been a
Director of Precision since December 1, 2005.
--------------------------- ------------------------------------------------------------- ----------------------------
Robert J.S. Gibson Mr. Gibson has been President of a private investment firm,
Stuart & Company Limited, since 1973 and is also Managing
Director of Alsten Holdings Ltd. Mr. Gibson has been a
Director of Precision since June 1996 and was appointed to
the Board of Trustees on September 22, 2005.
--------------------------- ------------------------------------------------------------- ----------------------------
Patrick M. Murray Mr. Murray is Chairman and CEO of Dresser Inc., a member of Harvest Natural Resources,
the American Petroleum Institute, and the Society of Inc.
Petroleum Engineers, a member of the board of the World Dresser Inc.
Affairs Council of Greater Dallas, the Valve Manufacturers
Association, the Petroleum Equipment Supplier Association
and a Director of Houston-based Harvest Natural Resources,
Inc. Mr. Murray has been a Director of Precision since
July 2002 and was appointed to the Board of Trustees on
September 22, 2005.
--------------------------- ------------------------------------------------------------- ----------------------------
Frederick W. Pheasey Mr. Pheasey is the founder and continues to be a director
of Dreco Energy Services Ltd., which was acquired by
National Oilwell, Inc. in 1997. Mr. Pheasey served as
Executive Vice President and a director of National
Oilwell, Inc. from 1997 to 2004 and continued to serve on
the Board of National Oilwell, Inc. to May 2005. Mr.
Pheasey has been a Director of Precision since July 2002.
--------------------------- ------------------------------------------------------------- ----------------------------
Robert L. Phillips Mr. Phillips was most recently President and Chief Epcor Preferred Equity Inc.
Executive Officer of BCR Group of Companies from 2001 to Epcor Utilities Inc.
2004. Previously, he was Executive Vice President at Canadian Western Bank
MacMillan Bloedel Limited (1999 - 2001), President and TerraVest Income Fund
Chief Executive Officer of PTI Group Inc. (1998 - 1999) and Axia NetMedia Corporation
President and Chief Executive Officer of Dreco Energy MacDonald, Dettwiler and
Services Ltd. (1994 - 1998). Mr. Phillips has been a Associates Ltd.
Director of Precision since May 2004. Boston Pizza Royalties
Income Fund
Tree Island Wire Income
Fund
West Fraser Timber Co. Ltd.
-6-
NAME BIOGRAPHY OTHER PUBLIC ISSUER
DIRECTORSHIPS
=========================== ============================================================= ============================
Hank B. Swartout Mr. Swartout currently holds the position of Chairman of Harvest Energy Trust
the Board and Chief Executive Officer of Precision. For Highpine Oil & Gas Limited
the period from 1985 through 2005, Mr. Swartout held the
position of Chairman, President and Chief Executive Officer
of Precision. Previously, he held positions as Manager of
Bawden Western Oceanic Offshore, Vice President of Rig
Design and construction for Dreco, and Manager of
Construction for Nabors Drilling Canada.
--------------------------- ------------------------------------------------------------- ----------------------------
H. Garth Wiggins Mr. Wiggins has been the President of a private investment True Energy Trust
firm, Kamloops Money Management, since 1993. He is also
currently a Principal at Kenway, Mack, Slusarchuk, Stewart
Chartered Accountants. Previously, he was Vice President
Finance and Chief Financial Officer of Tri Link Resources
Ltd. and a partner of Farvolden, Wiggins, Balderston
Chartered Accountants. He has been a Director of Precision
since December 1997 and was appointed to the Board of
Trustees on September 22, 2005.
No Trustee, or Director or executive officer of Precision has, within
the last 10 years, been a director or officer of any reporting issuer that,
while such person was acting in that capacity, was the subject of a cease
trade or similar order or an order that denied the reporting issuer access to
any statutory exemption for a period of more than 30 consecutive days or was
declared a bankrupt or made a voluntary assignment in bankruptcy, made a
proposal under any legislation relating to bankruptcy or been subject to or
instituted any proceedings, arrangement or compromise with creditors or had a
receiver, receiver-manager or trustee appointed to hold assets of that person.
3. APPOINTMENT OF AUDITOR
The nominees named in the enclosed form of proxy intend to vote for
the re-appointment of KPMG LLP, Chartered Accountants, as auditor of the Trust
to hold office until the next annual meeting of the Trust. KPMG LLP was
appointed as auditor of the Trust on October 31, 2005. Should KPMG LLP for any
reason be unwilling or unable to accept re-appointment, the Board of Trustees
will exercise their discretion to appoint an alternate auditor.
Audit, audit related, tax and all other fees billed by KPMG LLP to
the Trust and Precision in 2005 and 2004 are disclosed in the Annual
Information Form of the Trust dated March 30, 2006 which is available on SEDAR
at www.sedar.com and will be provided free of charge to any Unitholder upon
request to the Vice President, Corporate Services and Corporate Secretary, at
the offices of Precision, 4200, 150 - 6th Avenue S.W., Calgary, Alberta,
Canada, T2P 3Y7, by telephone at 403.716.4500, facsimile at 403.264.0251 or
email at info@precisiondrilling.com.
III. REPORT ON EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE
Chief Executive Officer and senior executive compensation is
recommended by Precision's Compensation Committee which is currently comprised
of three independent members of the Board of Directors who are appointed by
and serve at the pleasure of the Board of Directors. A description of the
roles and responsibilities of the Compensation Committee is set out below
under the heading "STATEMENT OF CORPORATE GOVERNANCE PRACTICES - COMPENSATION
COMMITTEE". The Committee, as part of its mandate, evaluates the performance
of Precision's Chief Executive Officer and other senior executives and
recommends the Chief Executive Officer's compensation to the Board of
Directors. The Compensation Committee ratifies the compensation of Precision's
other executive officers and reviews the design and competitiveness of
Precision's incentive compensation to ensure that Precision is able to attract
and retain high calibre executive officers,
-7-
motivate executive officers' performance in furtherance of
Precision's strategic objectives, and align the interests of the executive
officers with Unitholders. The members of the Compensation Committee during
fiscal 2005 were Frederick W. Pheasey (Chairman), W.C. (Mickey) Dunn and
Robert L. Phillips. The Compensation Committee holds meetings as and when
required and met six times in 2005.
EXECUTIVE COMPENSATION
The following report sets forth the basis for the compensation of
Precision's senior executives during 2005 until November 7, 2005, being the
date that the plan of arrangement providing for the reorganization of the
business of Precision into an income trust (the "Plan of Arrangement") became
effective.
In 2005, the compensation of Precision's senior executives was
determined on the basis of several factors, including competitive compensation
structures in the locales the individuals are employed, compensation practices
prevailing in the oilfield service community, individual performance and
Precision's overall performance. Competitive compensation was measured using
benchmarks of peer group companies and periodic reviews of compensation
surveys. Compensation consisted of base salary, bonuses and benefits. The
overriding goal of the Compensation Committee's compensatory policies was to
create long-term investor value, motivate and reward superior executive
performance, and attract and retain individuals that meet and exceed
established performance targets.
BASE SALARY
The compensation of Precision's senior executives was designed to
have a significant portion of total compensation based on performance.
Accordingly, Precision endeavoured to establish base salaries for each of the
executive officers at or below the median level for similar positions in
companies of comparable size within the drilling and oilfield service
industry.
BONUSES FOR ELIGIBLE EXECUTIVES
In addition to base salaries, eligible senior executives participated
in a cash value added ("CVA") bonus plan (the "Bonus Plan") which commenced in
2001. The amount available for the payments in the Bonus Plan (the "CVA
Amount") was Precision's CVA, calculated using a formula pre-approved by the
Compensation Committee, less Precision's base operating earnings threshold or
cost of capital. The base earnings threshold was the product of Precision's
capital employed as defined for the CVA calculation and Precision's weighted
average cost of capital percentage. If Precision's base earnings were not
exceeded, no payouts were made. If there was a CVA Amount, the Compensation
Committee determined the percentage of the CVA Amount available for Bonus Plan
payments (the "CVA payout") and the allocation to each eligible executive. The
guidelines were that up to 50% of the CVA payout to a maximum of four times
base salary could be awarded to the Chief Executive Officer, with the balance
of the CVA payout to the remaining eligible executives to a maximum of two
times their base salary.
The CVA Amount for 2001 was $233 million and the Compensation
Committee set the amount available for the payments at 3.2% of the CVA Amount,
being $7.2 million. Of the amount available for payments pursuant to the bonus
plan, the Chief Executive Officer received $2.2 million, four times his base
salary and two other eligible executives received two times their base salary,
totalling in aggregate $1.1 million. The amounts were paid in 2002 and no
other payouts under the Bonus Plan were made from the 2001 CVA amount. There
was no CVA Amount for 2002. The amount available for payments in 2003 was set
at 3.2% of the CVA Amount. Precision generated a CVA Amount of $97.4 million
in 2003, and thus the amount available for the payments was $3.1 million. The
Chief Executive Officer was awarded $1.9 million which was more than 50% of
the CVA payout but less than four times his base salary. Three other eligible
executives were awarded two times their base salary, totalling in aggregate,
$1.2 million. The amounts were paid in 2004. The amount available for payments
in 2004 was set at 3.2% of the CVA Amount. Precision generated a CVA Amount of
$172 million in 2004, and thus the amount available for the payments was $5.5
million. The Chief Executive Officer received $3.2 million, which was four
times his base salary. Three other eligible executives were awarded two times
their base salary, totalling
-8-
in aggregate $1.4 million. The amounts were paid in 2005 and no additional
discretionary bonuses were awarded to the eligible executives for 2004. The
CVA Amount in 2005 was $252 million and the Compensation Committee set the
amount available for the payments at 3.2% of the CVA Amount, being $8.1
million. Of the amount available for payments pursuant to the bonus plan, the
Chief Executive Officer received $3.36 million, representing four times his
base salary, and no other payouts under the Bonus Plan were made in 2005.
BENEFITS
Precision's group benefits are essentially the same for all full time
employees. Employees are eligible to participate in basic, optional, and
dependent life insurance, accidental death and dismemberment insurance,
extended health and dental care, short and long term disability, and an
employee assistance program. In addition, executives have additional
accidental death and dismemberment benefits.
Employees pay for long term disability and optional benefits and
Precision pays the balance of the benefit cost for salaried employees, with
non salaried employees contributing towards basic and dependent life
insurance, accidental death and dismemberment insurance, and extended health
and dental care premiums.
Precision has a voluntary defined contribution pension plan covering
all full time employees. In addition, Precision has a group registered
retirement savings plan available to all employees.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Throughout Precision's growth since 2000, the Chief Executive Officer
was compensated in different manners, evolving from a salary based on
achievements to compensation based on a base salary plus a percentage of
Precision's cash flow.
By 2000, Precision was embarking on a venture, relatively new to it,
in the energy services segment of the oil and natural gas industry that would
entail a significant increase in research and development expenditures for new
and improved downhole tool technology as well as capital to provide for
worldwide geographical expansion of that expanding business. The Board of
Directors determined that this strategic investment would need to be made over
several years and would require a significant personal commitment from the
Chief Executive Officer to generate a result meaningful to Precision.
The new venture with the inherent risks involved in developing new or
improved technology, coupled with the cyclical nature of the international
oilfield services industry, led the Board of Directors to recognize that the
formula that establishes the CVA Amount could result in the amounts available
for payments in the Bonus Plan being substantially reduced. Thus, the
Compensation Committee reasoned that a higher relative weight should be given
to options granted to the Chief Executive Officer over a longer period, which
the Board of Directors deemed advisable to provide a meaningful incentive.
Hank B. Swartout, Precision's Chief Executive Officer, has been
compensated in accordance with the terms of an employment agreement effective
January 1, 2001. Precision entered into the agreement in part referring to
compensation surveys current at that time. Mr. Swartout's employment agreement
provided a base salary which was subject to annual review. The Compensation
Committee determined an $840,000 base salary for 2005 was warranted. The
employment agreement was terminated by Mr. Swartout in 2005 pursuant to its
terms after the reorganization of the business of Precision pursuant to the
Plan of Arrangement, following which Mr. Swartout resigned as President of
Precision. Mr. Swartout received a retirement allowance and change of control
payment as a result. Mr. Swartout's salary, bonus and other compensation
information is contained in the table below under the heading "COMPENSATION OF
EXECUTIVE OFFICERS - SUMMARY COMPENSATION TABLE." Notwithstanding Mr.
Swartout's resignation as President, the Compensation Committee has approved
the retention of Mr. Swartout as Chief Executive Officer for a transition
period in order to mentor Precision's executive management team following
Precision's reorganization into an income trust.
-9-
POST-REORGANIZATION EXECUTIVE COMPENSATION
Prior to reorganizing Precision's business into an income trust,
Precision's senior executives were compensated pursuant to employment
contracts that provided for base compensation plus incentive compensation
based on performance metrics. The post-conversion executive compensation
structure will be designed to achieve the same objectives as the former
structure with appropriate modifications to adapt it to the income trust
structure and will be comprised of base salary (determined and administered as
before) and incentives. A principal component of longer-term incentive
compensation had been Precision's stock option plan, where growth in the
market value of Precision's stock over time was seen to be beneficial to both
employees and shareholders. As a result of the Plan of Arrangement, all
outstanding stock options were accelerated and Precision's stock option plan
was discontinued. The Compensation Committee has no current intention to
recommend the implementation of a unit option plan to replace the discontinued
stock option plan. The Compensation Committee expects that the Bonus Plan will
also no longer be used as a component of incentive compensation.
The Compensation Committee is currently considering the
implementation of two compensation plans for 2006 to replace the discontinued
plans in order to better align the performance targets of management of
Precision within the new structure of the Trust. Incentive compensation plans
are being developed that will be based on a combination of employee retention
and Unitholder distribution growth over time. A performance savings plan is
being considered to provide an annual cash bonus tied to the satisfactory
achievement of financial performance metrics (including growth in
distributions) and safety performance metrics, in each case to be determined
annually by the Compensation Committee. A recipient may be able to elect to
receive all or a portion of an annual award in the form of three-year deferred
Trust Units which are redeemable in cash. A long-term incentive plan is also
being considered and will likely be comprised of time-based and
performance-based awards, with performance being principally measured by
distribution growth. Such plans have not yet been adopted but the Compensation
Committee expects that such plans will be implemented during the 2006 fiscal
year.
PRESENTED BY THE COMPENSATION COMMITTEE
FREDERICK W. PHEASEY, Chairman
W.C. (MICKEY) DUNN
ROBERT L. PHILLIPS
-10-
IV. COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth all annual and long-term compensation
for services in all capacities to Precision, in Canadian dollars, of the
individuals who were, at December 31, 2005, the Chief Executive Officer, the
Chief Financial Officer and the next three most highly compensated executive
officers, as well as the compensation of the former Chief Financial Officer
and Senior Vice President, Operations Finance (collectively, the "Named
Executive Officers") of Precision.
ANNUAL COMPENSATION LONG TERM COMPENSATION
---------------------------------- ----------------------- --------
AWARDS PAYOUTS
---------------------------- ------- --------- ---------- ------------- ------------ ---------- -------- -------------
NAME AND PRINCIPAL POSITION FISCAL SALARY BONUS OTHER SECURITIES SHARES LTIP ALL
YEAR ($) ($)(1) ANNUAL UNDER OR UNITS PAYOUTS OTHER
COMPENSATION OPTIONS/SARS SUBJECT ($) COMPENSATION
($)(2) GRANTED TO ($)
(#) RESALE
RESTRICTIONS
($)
============================ ======= ========= ========== ============= ============ ========== ======== =============
Hank B. Swartout 2005 840,000 3,360,000 (3)403,038 (4)15,589,000
Chief Executive Officer 2004 831,000 3,200,000 200,000 138,520
2003 800,000 1,870,000 200,000 147,800
---------------------------- ------- --------- ---------- ------------- ------------ ---------- -------- -------------
Doug J. Strong(5) 2005 153,461 169,000 - -
Chief Financial Officer 2004 140,038 115,000 12,000 -
2003 129,798 100,000 - -
---------------------------- ------- --------- ---------- ------------- ------------ ---------- -------- -------------
Dwayne Peters 2005 200,000 320,000 (6)60,000 -
Senior Vice President 2004 166,154 235,000 - -
2003 160,000 225,000 - -
---------------------------- ------- --------- ---------- ------------- ------------ ---------- -------- -------------
Ron Berg 2005 174,615 169,000 - -
Senior Vice President, 2004 163,830 125,000 18,000 -
Operations 2003 149,730 110,000 7,000 -
---------------------------- ------- --------- ---------- ------------- ------------ ---------- -------- -------------
John Jacobsen 2005 166,538 169,000 - -
Vice President, Operations 2004 163,892 125,000 20,000 -
2003 151,999 110,000 - -
---------------------------- ------- --------- ---------- ------------- ------------ ---------- -------- -------------
Dale E. Tremblay(7) 2005 120,269 229,167 - 1,550,000
Senior Vice President, 2004 260,000 500,000 - -
Finance and Chief 2003 250,000 500,000 - -
Financial Officer
---------------------------- ------- --------- ---------- ------------- ------------ ---------- -------- -------------
Michael J. McNulty(8) 2005 150,000 300,000 - 1,214,000
Senior Vice President, 2004 208,000 400,000 - -
Operations Finance 2003 194,000 400,000 - -
---------------------------- ------- --------- ---------- ------------- ------------ ---------- -------- -------------
Notes:
(1) The amounts listed are the bonus amounts earned during the year indicated
and relate to performance criteria which was met for that year, but the
cash amounts, if applicable, are paid during the following year.
(2) "Other Annual Compensation" did not exceed the lesser of $50,000 and 10%
of the total annual salary and bonus of Named Executive Officers.
(3) Mr. Swartout was originally granted 300,000 options in 2005. 100,000 of
the options granted were doubled to 200,000 on May 18, 2005, the
effective date of Precision's stock split on a two-for-one basis. 3,038
additional options were issued pursuant to the formula for the treatment
of granted options under the Plan of Arrangement which is contained in
the Management Information Circular of Precision dated October 3, 2005
commencing on page 33, incorporated herein by reference, and available to
Unitholders on SEDAR at www.sedar.com and without charge upon request to
the Vice President, Corporate Services and Corporate Secretary of
Precision.
(4) Mr. Swartout's executive employment agreement provided for a retirement
allowance equal to US$1,500,000 plus US$100,000 per year for each year of
service commencing April 30, 1996, a change of control payment equal to
three times his highest annual salary and bonus, and the option to
purchase the vehicle then driven by Mr. Swartout for a purchase price of
$1.00. Mr. Swartout resigned as President of Precision on the completion
of the reorganization of the business of Precision into the Trust and was
paid a retirement allowance of $2,915,000(Cdn.), a change of control
payment of $12,600,000 and has agreed to purchase the vehicle driven by
him valued at $74,000.
(5) Mr. Strong was appointed as Chief Financial Officer effective November 7,
2005.
(6) Mr. Peters was originally granted 30,000 options in 2005, which were
doubled to 60,000 on May 18, 2005, the effective date of Precision's
stock split on a two-for-one basis.
(7) Mr. Tremblay retired as Senior Vice President, Finance and Chief
Financial Officer effective June 15, 2005 and served in his capacity as
CFO for five and a half months in 2005.
(8) Mr. McNulty retired as Senior Vice President, Operations Finance
effective September 30, 2005 and served in his capacity as Senior Vice
President, Operations Finance for nine months in 2005.
-11-
OPTION GRANTS DURING FINANCIAL YEAR ENDED DECEMBER 31, 2005
The following options were issued to the Named Executive Officers
during the financial year ended December 31, 2005.
NAME SECURITIES PERCENTAGE OF EXERCISE MARKET VALUE OF EXPIRATION
UNDER OPTIONS 701,800 OPTIONS OR BASE SECURITIES DATE(2)
(#) GRANTED TO PRICE UNDERLYING OPTIONS
EMPLOYEES IN ($/SECURITY) ON THE DATE OF
FINANCIAL YEAR (1) GRANT ($/SECURITY)
========================= ================= ================== ================= ==================== =================
Hank B. Swartout (3)200,000 28.5% (3)$37.76 $37.76 Nov 23, 2005
200,000 28.5% $48.29 $48.29 Nov 23, 2005
(4)3,038 0.4% (4)$0.00 $31.75 Nov 23, 2005
------------------------- ----------------- ------------------ ----------------- -------------------- -----------------
Doug J. Strong - - - - -
------------------------- ----------------- ------------------ ----------------- -------------------- -----------------
Dwayne Peters (5)60,000 8.5% (5)$37.76 $37.76 Nov 23, 2005
------------------------- ----------------- ------------------ ----------------- -------------------- -----------------
Ron Berg - - - - -
------------------------- ----------------- ------------------ ----------------- -------------------- -----------------
John Jacobsen - - - - -
------------------------- ----------------- ------------------ ----------------- -------------------- -----------------
Dale E. Tremblay - - - - -
------------------------- ----------------- ------------------ ----------------- -------------------- -----------------
Michael J. McNulty - - - - -
------------------------- ----------------- ------------------ ----------------- -------------------- -----------------
Notes:
(1) The exercise price of options was based upon the closing price on the TSX
on the last trading day preceding the date of grant.
(2) The original expiration date for the options granted in 2005 was
shortened to November 23, 2005 in accordance with the terms of the Plan
of Arrangement and all options were exercised, cashed out, terminated, or
dealt with on or before November 23, 2005.
(3) Mr. Swartout was awarded 100,000 options on January 1, 2005 which were
doubled to 200,000 on May 18, 2005, the effective date of Precision's
stock split on a two-for-one basis
(4) 3,038 additional options were issued to Mr. Swartout pursuant to the
formula for the treatment of granted options under the Plan of
Arrangement which is contained in the Management Information Circular of
Precision dated October 3, 2005 commencing on page 33, incorporated
herein by reference, and available to Unitholders on SEDAR at
www.sedar.com and without charge upon request to the Vice President,
Corporate Services and Corporate Secretary of Precision at 4200, 150 -
6th Avenue S.W., Calgary, Alberta T2P 3Y7.
(5) Mr. Peters was awarded 30,000 options on January 1, 2005 which were
doubled to 60,000 on May 18, 2005, the effective date of Precision's
stock split on a two-for-one basis.
AGGREGATED OPTION EXERCISES DURING FINANCIAL YEAR ENDED DECEMBER 31, 2005 AND
FINANCIAL YEAR END OPTION VALUES
Pursuant to the Plan of Arrangement, all option plans and all options
issued to Directors, executive officers and employees of Precision were
exercised, cashed out or terminated prior to the effective date of the Plan of
Arrangement or dealt with pursuant to the terms of the Plan of Arrangement. As
of November 23, 2005, Precision had no options issued or outstanding to any
Director, executive officer or employee. Between January 1, 2005 and November
23, 2005, the following options were exercised by the Named Executive
Officers:
VALUE OF UNEXERCISED
NAME SECURITIES AGGREGATE UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED VALUE AT DECEMBER 31, 2005 AT DECEMBER 31, 2005
ON REALIZED (#) EXERCISABLE / ($) EXERCISABLE/
EXERCISE (#) ($)(1) UNEXERCISABLE UNEXERCISABLE
======================= ====================== ====================== ====================== ======================
Hank B. Swartout(2) 2,203,038 55,035,331 nil / nil nil / nil
----------------------- ---------------------- ---------------------- ---------------------- ----------------------
Doug J. Strong(2) 34,000 1,042,316 nil / nil nil / nil
----------------------- ---------------------- ---------------------- ---------------------- ----------------------
Dwayne Peters(2) 90,000 2,159,900 nil / nil nil / nil
----------------------- ---------------------- ---------------------- ---------------------- ----------------------
Ron Berg(2) 64,000 1,937,244 nil / nil nil / nil
----------------------- ---------------------- ---------------------- ---------------------- ----------------------
John Jacobsen(2) 46,000 1,139,900 nil / nil nil / nil
----------------------- ---------------------- ---------------------- ---------------------- ----------------------
Dale E. Tremblay 133,000 3,299,733 nil / nil nil / nil
----------------------- ---------------------- ---------------------- ---------------------- ----------------------
Michael J. McNulty 130,000 3,768,714 nil / nil nil / nil
----------------------- ---------------------- ---------------------- ---------------------- ----------------------
Notes:
(1) The amount was calculated by multiplying the number of Precision common
shares under options exercised by an amount equal to the difference
between the market value of the common shares on the date of exercise and
the exercise price of those options.
(2) The options issued to the Named Executive Officers were dealt with
pursuant to the formula contained in the Plan of Arrangement which is
contained in the Management Information Circular of Precision dated
October 3, 2005, commencing on page 33, which is incorporated herein by
reference, and available to Unitholders on SEDAR at www.sedar.com and
without charge upon request to the Vice President, Corporate Services and
Corporate Secretary of Precision at 4200, 150 - 6th Avenue S.W., Calgary,
Alberta T2P 3Y7.
-12-
COMPENSATION AND LONG TERM INCENTIVE PLANS
Precision's compensation and long term incentive plans terminated on
the reorganization of the business of Precision pursuant to the Plan of
Arrangement. Precision is currently in the process of adopting new
compensation plans.
EMPLOYMENT CONTRACTS
At the Effective Date, Precision has existing employment contracts
with two of its Named Executive Officers.
The executive employment agreement between Precision and Ron Berg
(the "Berg Agreement") provides for a base salary, benefits, bonuses and stock
options to be determined by Precision from time to time. In the event of
termination without cause within two years of a change of control, or
constructive dismissal within two years after a change of control, the Berg
Agreement provides for a payment: (i) equal to the Best Year Amount (as
defined below) plus one-twelfth of the Best Year Amount for each full year
from the effective date of service to the date of termination of employment,
up to a maximum of one-half of the Best Year Amount; (ii) a payment of the
lesser of $15,000 or an amount equal to 8% of the base salary at the date of
termination representing compensation for lost benefits; and, (iii)
acceleration of vesting of all outstanding options. In the event of
termination without cause or constructive dismissal prior to a change of
control, or in the event of constructive dismissal within two years after a
change of control, the Berg Agreement provides for a payment, if Mr. Berg has
been employed for in excess of two years, of the Average Year Amount (as
defined below) plus one-twelfth the Average Year Amount for each full year of
employment from the effective date of service up to a maximum of one-half of
the Average Year. The "Best Year Amount" means the highest annual base salary
during any of the two most recent calendar years, including the year of
termination, and the highest amount of the bonus attributable to Mr. Berg for
any one year during the two calendar years prior to the year of termination.
The "Average Year Amount" means the annual base salary for the year during
which the employment of Mr. Berg is terminated and the simple average amount
of the bonuses attributable to Mr. Berg for the two years immediately
preceding the year during which his employment is terminated.
The executive employment agreement between Precision and Dwayne
Peters (the "Peters Agreement") provides for: a base salary, benefits, bonuses
and stock options to be determined by Precision, from time to time, for the
duration of the "Succession Period", ending on January 1, 2007. The Peters
Agreement provides, in the event of termination without cause prior to or
within twelve months of a change of control prior to the end of the Succession
Period, for a retirement allowance equal to the base salary earned from the
date of termination until the end of the Succession Period; a lump sum bonus
in the amount equal to two times the average amount of bonuses paid for the
two years immediately preceding the year in which employment is terminated; a
payment in the amount equal to 10% of the base salary at the date of
termination representing compensation for lost benefits; and acceleration of
vesting of all outstanding options.
Hank B. Swartout, Precision's Chief Executive Officer, was
compensated in 2005 in accordance with the terms of an employment agreement
effective January 1, 2001 (the "Swartout Agreement"). The Swartout Agreement
provided for an annual base salary to be reviewed annually but which was to be
based on the base salaries of chief executive officers of similar
corporations. The base salary for Mr. Swartout in his capacity as President
and Chief Executive Officer of Precision for 2005 was set at $840,000. The
Swartout Agreement contained a provision for an annual bonus in an amount
based upon certain parameters established by the Directors which were subject
to a CVA calculation up to a maximum of four times the base salary for the
applicable year. The bonus amount was recommended by the Compensation
Committee and approved by the Board of Directors.
The Swartout Agreement also provided for the issuance of options to
purchase common shares of Precision on the basis of 100,000 options each six
months commencing effective January 1, 2001 and ending July 1, 2005. Such
options vested after a one year period and were exercisable until the earlier
of December 31, 2010 or 60 days after Mr. Swartout ceased to be employed full
time by Precision, however, all such options were
-13-
terminated pursuant to the Plan of Arrangement providing for new options to be
converted into Trust Units. The Swartout Agreement also contained clauses
which provided that upon termination of Mr. Swartout's employment; (i) as a
result of a hostile takeover bid, he would be entitled to compensation equal
to four times the Best Year; (ii) as a result of termination without cause or
a change of control of Precision (except pursuant to a hostile takeover bid)
he would be entitled to compensation equal to three times the Best Year; and
(iii) in any event, a retirement allowance equal to US$1.5 million plus a
separate amount of US$100,000 which was to be accumulated each fiscal year
commencing April 30, 1996 and for a period of 10 years thereafter. For the
purposes of the foregoing, "Best Year" means the amount equal to the highest
amount paid (or payable) with respect to base salary plus bonus for any one
year during the last three years prior to the termination date. The completion
of the Plan of Arrangement constituted a change in control under Mr.
Swartout's employment agreement. Mr. Swartout terminated his employment
agreement in 2005 pursuant to its terms, retired as President of Precision,
and received the payments set out in the tables on page 11 hereof as a result
of such termination.
PERFORMANCE GRAPHS
The following graphs compare the yearly percentage change in the
cumulative Unitholder value (and prior to November 7, 2005, the effective date
of the Plan of Arrangement, the shareholder value of common shares of
Precision) over the last five years assuming a $100 investment was made
December 31, 2000, with the cumulative total return of the S&P/TSX Composite
Index, the S&P/NYSE Composite Index, and the Philadelphia Stock Exchange Oil
Service Sector Index ("OSX"). The graphs assume the reinvestment of the
November and December 2005 distributions of $0.27 and $0.292, respectively,
per Trust Unit, as well as the reinvestment in Trust Units of the distribution
of cash of $6.83 per Precision common share and 0.2089 per Precision common
share representing the value of the pro-rated distribution of shares of
Weatherford International Ltd. which were distributed on November 7, 2006 at a
value of $16.24 pursuant to the Plan of Arrangement.
TORONTO STOCK EXCHANGE
[GRAPHIC OMITTED -- LINE CHART]
DEC 00 DEC 01 DEC 02 DEC 03 DEC 04 DEC 05
------ ------ ------ ------ ------ ------
PD 100 73 91 101 134 220
S&P/TSX 100 86 74 92 104 126
-14-
NEW YORK STOCK EXCHANGE
[GRAPHIC OMITTED -- LINE CHART]
DEC 00 DEC 01 DEC 02 DEC 03 DEC 04 DEC 05
------ ------ ------ ------ ------ ------
PDs 100 69 87 116 167 282
S&P 100 87 67 84 92 95
OSX 100 70 69 75 99 146
V. ADMINISTRATION AGREEMENT AND COMPENSATION OF THE TRUSTEES AND DIRECTORS
ADMINISTRATION AGREEMENT
The Trust and Precision are parties to an administration agreement
entered into on November 7, 2005 (the "Administration Agreement"). Under the
terms of the Administration Agreement, Precision provides administrative and
support services to the Trust including, without limitation, those necessary
to (i) ensure compliance by the Trust with continuous disclosure obligations
under applicable securities legislation, (ii) provide investor relations
services, (iii) provide or cause to be provided to Unitholders all information
to which Unitholders are entitled under the Declaration of Trust including
relevant information with respect to financial reporting and income taxes,
(iv) call and hold meetings of Unitholders and distribute required materials,
including notices of meetings and information circulars, in respect of all
such meetings, (v) assist the Board of Trustees in calculating distributions
to Unitholders, (vi) ensure compliance with the Trust's limitations on
non-resident ownership, if applicable, and (viii) generally provide all other
services as may be necessary or as may be requested by the Board of Trustees.
Precision charges the Trust for such administrative and support services an
amount equal to Precision's cost of providing such services plus 5%.
TRUSTEE COMPENSATION
The Compensation Committee determines the compensation to be received
by the Trustees. In determining the compensation to be awarded, the time
commitment in service to the Trust, comparative fees received by other
trustees of trusts of a similar size, and the responsibilities of the Board of
Trustees were considered. In 2005, each Trustee received a base retainer of
US$1,431 and meeting fees of US$1,000 per meeting for attendance in person,
and US$500 for attendance by telephone, for an aggregate of US$5,432 fees per
Trustee. Each member of the Board of Trustees attended each of the four
meetings of the Board of Trustees held in 2005.
NAME TRUSTEE RETAINER MEETING FEES (US$) TRAVEL ALLOWANCE TOTAL (US$)
(US$) (US$)
==================== ==================== =================== ==================== ==============
Robert J.S. Gibson 1,432 4,000 - 5,432
-------------------- -------------------- ------------------- -------------------- --------------
Patrick M. Murray 1,432 4,000 - 5,432
-------------------- -------------------- ------------------- -------------------- --------------
H. Garth Wiggins 1,432 4,000 - 5,432
-------------------- -------------------- ------------------- -------------------- --------------
-15-
In 2006, each Trustee will be paid an annual retainer of $10,000 and
meeting fees of $1,250 per meeting, to be paid quarterly in arrears commencing
on March 31, 2006.
DIRECTOR COMPENSATION
The Compensation Committee periodically reviews the adequacy and form
of Directors' compensation and determines the compensation to be awarded to
Directors. In determining the compensation to be awarded, the Compensation
Committee considers the time commitment of the Directors, the time commitment
of the Chairman of each committee of the Board of Directors (each a
"Committee"), and the lead director of the Board of Directors (the "Lead
Director"), and compares the remuneration to that received by directors of
comparatively sized issuers. In 2005, each Director received a base retainer
of US$16,000 and meeting fees of US$1,000 per meeting for attendance in
person, and US$500 for attendance by telephone. The Chairmen of the
Compensation Committee and the Corporate Governance and Nominating Committee
received an additional annual retainer of US$5,000, and the Chairman of the
Audit Committee received an additional annual retainer of US$10,000. Members
of the Audit Committee received meeting fees of US$2,000 per meeting for
attendance in person and US$500 for attendance by telephone, and members of
the Compensation Committee and Corporate Governance and Nominating Committees
received meeting fees of US$1,000 per meeting for attendance in person and
US$500 per meeting for attendance by telephone. The Lead Director who was
responsible for ensuring that the Board of Directors exercised independent
judgment in making decisions (and whose role is further described under the
heading "STATEMENT OF CORPORATE GOVERNANCE PRACTICES - LEAD DIRECTOR OF THE
BOARD OF DIRECTORS" below) received US$2,000 for each meeting at which he
served as Lead Director. Directors who are required to travel more than three
hours by air to Board of Directors or Committee meetings were paid a travel
allowance of US$1,000. Expenses that were incurred by each Director as a
consequence of attending Board of Directors or Committee meetings were
reimbursed. Mr. Swartout, the Chief Executive Officer of Precision, did not
receive fees in respect of his role as a Director.
During the financial year ended December 31, 2005, the Directors were
paid compensation, in aggregate, of US$408,733. The following table sets forth
all compensation, including expenses paid to the Directors, for the 2005
financial year.
NAME BOARD COMMITTEE CHAIR SPECIAL TRAVEL TOTAL EXPENSES
MEETING / BOARD RETAINER COMMITTEE ALLOWANCE FEES PAID
FEES RETAINER (US$)(1) RETAINER (US$) (US$) (CDN$)
(US$) (US$) (US$)
============================ ========= ============ ========= ============= =========== ========== ===========
W.C. (Mickey) Dunn 24,000 16,000 - 17,184 - 57,184 3,888
---------------------------- --------- ------------ --------- ------------- ----------- ---------- -----------
Brian A. Felesky, CM,
Q.C.(2)(3) 1,000 1,333 - - - 2,333 -
---------------------------- --------- ------------ --------- ------------- ----------- ---------- -----------
Robert J.S. Gibson 29,500 16,000 5,000 17,184 - 67,684 1,139
---------------------------- --------- ------------ --------- ------------- ----------- ---------- -----------
Patrick M. Murray 30,500 16,000 10,000 17,184 15,000 88,684 37,405
---------------------------- --------- ------------ --------- ------------- ----------- ---------- -----------
Frederick W. Pheasey 22,500 16,000 5,000 17,184 - 60,684 9,538
---------------------------- --------- ------------ --------- ------------- ----------- ---------- -----------
Robert L. Phillips 25,000 16,000 - 17,184 - 58,184 14,669
---------------------------- --------- ------------ --------- ------------- ----------- ---------- -----------
Hank B. Swartout(4) - - - - - - -
---------------------------- --------- ------------ --------- ------------- ----------- ---------- -----------
H. Garth Wiggins 36,500 16,000 - 21,480 - 73,980 95
---------------------------- --------- ------------ --------- ------------- ----------- ---------- -----------
Notes:
(1) Includes fees paid to independent Directors serving as Lead Director each
quarter and attendance at strategic planning meetings.
(2) Mr. Felesky is not an independent Director and accordingly does not serve
on a Committee.
(3) Mr. Felesky was appointed to the Board of Directors on December 1, 2005,
and received 1/12th of the retainer for 2005 for attendance at the only
meeting of the Board of Directors called after his appointment.
(4) Mr. Swartout is an executive officer and accordingly did not receive a
retainer or meeting fees for his attendance at meetings of the Board of
Directors.
In 2006, each member of the Board of Directors will be paid an annual
retainer of $30,000 and meeting fees of $1,250 per meeting, to be paid
quarterly in arrears commencing on March 31, 2006. The Chairman of the Audit
Committee will receive an additional annual retainer of $12,500 and the
Chairmen of the Corporate Governance & Nominating Committee and Compensation
Committee will each receive an additional retainer of $6,250. Lead Directors
will be paid a fee of $2,500 during the quarter in which they serve as Lead
Director and
-16-
will be paid meeting fees for attending Committee meetings of which they are
not members. Members of the Audit Committee will receive $1,250 for each
meeting of the Audit Committee in addition to regular meeting fees.
OWNERSHIP GUIDELINES
The Board of Trustees and the Board of Directors have established
ownership guidelines which became effective in 2006. Trustees and Directors
are expected to own Trust Units or Exchangeable Units equal to at least four
times the amount of their respective annual retainers. The Chief Executive
Officer, Chief Financial Officer, President and Vice Presidents are expected
to own Trust Units or Exchangeable Units equal to at least five times their
base salary and all other senior employees are expected to own Trust Units or
Exchangeable Units equal to at least three times their base salary. The
ownership guidelines are set for achievement within five years.
TRUSTEES INDEMNITY
The Declaration of Trust provides that each Trustee must act honestly
and in good faith with a view to the best interests of the Trust and exercise
the degree of care, diligence and skill that a reasonably prudent person would
exercise in comparable circumstances. The Declaration of Trust provides that
each Trustee is entitled to indemnification from the Trust in respect of the
exercise of the Trustee's power and the discharge of the Trustee's duties,
provided that the Trustee acted honestly and in good faith with a view to the
best interests of the Trust or, in the case of a criminal or administrative
action or proceeding that is enforced by a monetary penalty, where the Trustee
had reasonable grounds for believing that his conduct was lawful.
TRUSTEES, DIRECTORS AND OFFICERS LIABILITY INSURANCE
The Trust has purchased a liability insurance policy which expires
May 1, 2006. The policy covers corporate indemnification of the Trustees,
Directors and officers. The policy has a $70 million limit and corporate
indemnification deductibles apply. The annual premium for this coverage is
$778,131.
VI. STATEMENT OF CORPORATE GOVERNANCE PRACTICES
The Board of Trustees and the Board of Directors routinely review and
update mandates, guidelines, policies and procedures relating to the corporate
governance mandates and policies of the Trust and Precision (collectively, the
"Governance Mandates and Policies"). Such Governance Mandates and Policies
have recently been updated to reflect the reorganization of Precision's
business into an income trust. In connection therewith, the Board of Trustees
and the Board of Directors have each adopted a new mandate and new corporate
governance guidelines. In addition, the Board of Directors has adopted new
position descriptions for the Chairman of the Board of Directors and the Lead
Director, new Charters and Terms of Reference for each Committee, and revised
position descriptions for the Chairman of each Committee. The revised
Governance Mandates and Policies were adopted at meetings of the Board of
Trustees and the Board of Directors, as applicable, on March 7, 2006 and
supersede all former governance mandates, guidelines, policies and procedures
of the Trust and Precision.
The Trust and Precision exercise their authority in accordance with
the Governance Mandates and Policies as well as applicable laws and
regulations, including those imposed by Canadian securities regulatory
authorities and the United States Securities and Exchange Commission.
The Trust Units are listed on the Toronto Stock Exchange (the "TSX")
in Canadian and U.S. dollars, and the New York Stock Exchange (the "NYSE").
The Governance Mandates and Policies are consistent with the governance
guidelines set out in National Policy 58-201 (the "Governance Guidelines") and
the audit committee rules set out in Multilateral Instrument 52-110 (the
"Audit Committee Rules") adopted by the Canadian securities regulatory
authorities. Applicable NYSE rules (the "NYSE Rules") with respect to
disclosure of corporate governance practices do not require a foreign issuer,
such as the Trust, to comply with NYSE corporate governance rules, except for
certain audit committee and other specified requirements, including a
requirement to disclose the significant ways in which the Governance Mandates
and Policies differ from those required of United
-17-
States domestic companies under NYSE listing standards. The Governance
Mandates and Policies comply with the NYSE Rules in all significant respects,
except as disclosed in the Corporate Governance section of the Trust's website
at www.precisiondrilling.com.
This Statement of Corporate Governance Practices is responsive to the
disclosure rules (the "Disclosure Rules") adopted by the Canadian securities
regulatory authorities and certain NYSE Rules and SEC rules adopted pursuant
to the United States Sarbanes-Oxley Act of 2002 ("SOX"). The Board of Trustees
and the Board of Directors have approved this Statement of Corporate
Governance Practices on the recommendation of the Corporate Governance and
Nominating Committee.
Additional information about the Governance Mandates and Policies is
set forth in the following documents, which are posted on the Corporate
Governance section of the Trust's website at www.precisiondrilling.com:
o the Mandates of the Board of Trustees and the Board of Directors;
o the Corporate Governance Guidelines of the Trust and Precision;
o the Charters and Terms of Reference for each of Precision's Committees of
the Board of Directors (the "Committees");
o Position Descriptions for the Chairman of the Board of Directors, the
Lead Director and the Chairman of each Committee;
o this Statement of Corporate Governance Practices;
o the Code of Business Conduct and Ethics; and
o a summary of significant differences between the NYSE Rules and the
Governance Mandates and Policies.
INDEPENDENCE OF THE TRUSTEES AND DIRECTORS
As an issuer whose Trust Units are listed on the TSX and NYSE, the
Trust is subject to various guidelines, requirements and disclosure rules
governing the independence of the members of the Board of Trustees, the Board
of Directors and Committees, including those requirements and rules imposed by
the Governance Guidelines, the Audit Committee Rules, the Disclosure Rules,
the NYSE Rules and SOX.
The Trust meets the standards of the Governance Guidelines and Audit
Committee Rules regarding independence and voluntarily conforms to the
standards of the NYSE Rules regarding independent board members.
On the recommendation of the Corporate Governance and Nominating
Committee, the Board of Trustees has affirmatively determined that each of the
three nominees for election to the Board of Trustees has no direct or indirect
material relationship with the Trust and is therefore independent. On this
basis, the following three nominees for election to the Board of Trustees are
independent: Robert J.S. Gibson, Patrick M. Murray and H. Garth Wiggins.
On the recommendation of the Corporate Governance and Nominating
Committee, the Board of Directors has affirmatively determined that six of the
eight nominees to be approved by Unitholders for appointment to the Board of
Directors have no direct or indirect material relationship with Precision or
the Trust and are therefore independent. On this basis, the following six
nominees to be approved for appointment to the Board of Directors are
independent: W.C. (Mickey) Dunn, Robert J.S. Gibson, Patrick M. Murray,
Frederick W. Pheasey, Robert L. Phillips, and H. Garth Wiggins. Hank B.
Swartout, the Chief Executive Officer of Precision, is not independent because
of his executive office and Brian A. Felesky, CM, Q.C. is not independent
because he is a partner at Felesky Flynn LLP, a law firm that provides trust
and tax counsel to the Trust and Precision.
The biographies set out on page 6 of this Circular identify the other
reporting issuers on which each nominee to be approved for appointment to the
Board of Directors is a director.
-18-
CHAIRMAN OF THE BOARD OF DIRECTORS
Mr. Swartout, the Chief Executive Officer of Precision and a
non-independent Director, has been appointed as Chairman of the Board of
Directors. The Board of Directors hold sessions at each meeting of the Board
of Directors at which members of management are not in attendance. During the
2005 financial year, there were 12 such sessions that were attended only by
Directors who are not also members of management. The independent members of
the Board of Directors have concluded that Mr. Swartout's dual role does not
impair the Board of Directors' ability to function independently of
management. Mr. Swartout's extensive knowledge of Precision's business is of
significant benefit to the operation of Precision's Board of Directors. The
Chairman of the Board of Directors serves as a liaison among the Directors and
the Board of Trustees. The Board of Directors has approved a written position
description for the Chairman of the Board which is available on the Corporate
Governance section of the Trust's website at www.precisiondrilling.com.
LEAD DIRECTOR OF THE BOARD OF DIRECTORS
In order to provide leadership to the independent members of the
Board of Directors, a Lead Director is appointed on a rotating quarterly basis
from among the independent Directors. The Lead Director is responsible for
working with the Chairman of the Board and the Vice President, Corporate
Services and Corporate Secretary to set the agenda for meetings of the Board
of Directors and for chairing sessions of the independent and non-management
members of the Board of Directors. The Lead Director also acts as the liaison
between the independent Directors and the Chairman of the Board on sensitive
issues. The Board of Directors has approved a written position description for
the Lead Director which is available on the Corporate Governance section of
the Trust's website at www.precisiondrilling.com.
ATTENDANCE RECORD OF TRUSTEES AND DIRECTORS
During the fiscal year ended December 31, 2005, the Board of Trustees
held four meetings at which each of the Trustees attended in person. The
following table sets forth the attendance of each Director at meetings of the
Board of Directors and, as applicable, the attendance of members of Committees
at Committee meetings:
DIRECTOR BOARD AUDIT COMPENSATION CORPORATE SPECIAL
MEETINGS(1) COMMITTEE COMMITTEE GOVERNANCE COMMITTEE
MEETINGS MEETINGS AND MEETINGS
NOMINATING
COMMITTEE
MEETINGS
============================= ============== ============== =============== =============== ============
W.C. (Mickey) Dunn 11/12 - 6/6 5/5 3/3
----------------------------- -------------- -------------- --------------- --------------- ------------
Brian A. Felesky, CM, Q.C. 1/1 (2) - - - -
----------------------------- -------------- -------------- --------------- --------------- ------------
Robert J.S. Gibson 12/12 6/6 - 5/5 3/3
----------------------------- -------------- -------------- --------------- --------------- ------------
Patrick M. Murray 12/12 6/6 - - 3/3
----------------------------- -------------- -------------- --------------- --------------- ------------
Frederick W. Pheasey 11/12 - 6/6 4/5 3/3
----------------------------- -------------- -------------- --------------- --------------- ------------
Robert L. Phillips 12/12 - 6/6 5/5 3/3
----------------------------- -------------- -------------- --------------- --------------- ------------
Hank B. Swartout 12/12 - - - -
----------------------------- -------------- -------------- --------------- --------------- ------------
H. Garth Wiggins 12/12 6/6 - - 3/3
----------------------------- -------------- -------------- --------------- --------------- ------------
Notes:
(1) Attendance in person or by telephone
(2) Mr. Felesky was appointed to the Board of Directors on December 1, 2005
and attended the one board meeting called subsequent to his appointment.
MANDATE OF THE BOARD OF TRUSTEES
The Board of Trustees has overall responsibility and full authority
to manage the Trust's investments pursuant to the Declaration of Trust.
Effective November 7, 2005, the Board of Trustees delegated responsibility for
the management and administration of the Trust's operational matters to
Precision pursuant to an administration agreement between the Trust and
Precision. The duties of the Board of Trustees are more
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specifically described in the Mandate of the Board of Trustees which is
attached as Appendix A and is also available on the Corporate Governance
section of the Trust's website at www.precisiondrilling.com.
MANDATE OF THE BOARD OF DIRECTORS
In addition to ensuring that Precision discharges its obligations as
administrator of the Trust, the Board of Directors is responsible for the
stewardship of the business and affairs of Precision. As such, the Board of
Directors has responsibility to oversee the conduct of Precision's business,
provide direction to management and ensure that all major issues affecting the
business and affairs of Precision are given proper consideration. A complete
list of the specific matters the Trust has delegated to Precision is set out
in Schedule A of the Mandate of the Board of Trustees.
The Board of Directors discharges its responsibilities directly and
through its Committees. The Board of Directors may delegate to its Committees
matters for which it is responsible, but retains its oversight function for
all delegated responsibilities. Similarly, as permitted by applicable law, the
Board of Directors may from time to time delegate certain of its
responsibilities to management. The Board of Directors' duties are more
specifically described in its Mandate of the Board of Directors which is
attached as Appendix B and is also available on the Corporate Governance
section of the Trust's website at www.precisiondrilling.com.
COMMITTEES OF THE BOARD OF DIRECTORS
To assist it in discharging its responsibilities more effectively,
the Board of Directors has established three Committees: the Audit Committee,
the Corporate Governance and Nominating Committee and the Compensation
Committee. From time to time the Board of Directors also creates special ad
hoc committees to address important matters.
Each Committee is chaired by an independent Director and at least
annually evaluates its effectiveness in carrying out the duties specified in
its Charter and Terms of Reference. The Board of Directors has approved a
position description for the Chairman of each Committee which is available on
the Corporate Governance section of the Trust's website at
www.precisiondrilling.com.
The Charters and Terms of Reference of the Committees are reproduced
in full in the Corporate Governance section of the Trust's website at
www.precisiondrilling.com.
The members of each Committee must all be independent in accordance
with the requirements or guidelines for committee service under applicable
securities laws and the rules of any stock exchange on which the Trust Units
are listed for trading. Based on the information provided by the Directors,
the Board of Directors has determined that all members of each Committee are
currently independent.
POSITION DESCRIPTION OF THE CHIEF EXECUTIVE OFFICER
The Board of Directors has not approved a written position
description describing the roles and responsibilities of the Chief Executive
Officer. However, the Compensation Committee approves the corporate objectives
that the Chief Executive Officer is responsible for meeting at least annually
and assesses the Chief Executive Officer against these objectives.
TRUSTEE AND DIRECTOR INFORMATION, EDUCATION AND ORIENTATION
Both the Board of Trustees and the Board of Directors have procedures
designed to ensure that their respective members have timely access to the
information they need to carry out their duties. Each Trustee and each
Director receives a comprehensive package of materials prior to each meeting,
and after each Committee meeting the full Board of Directors receives a report
on each Committee's work.
The Corporate Governance and Nominating Committee ensures the
provision of an appropriate orientation for new Trustees and Directors as well
as the availability of continuing education programs for Trustees and
Directors. The Board of Trustees and the Board of Directors encourage Trustees
and Directors to periodically
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participate in or attend appropriate programs, sessions or receive materials
as to the responsibility of Trustees or Directors, as applicable, of publicly
traded entities.
BUSINESS CONDUCT AND ETHICS
The Board of Directors has adopted a Code of Business Conduct and
Ethics (the "Code"), expressing the fundamental principles that guide the
Directors in their deliberations and shape Precision's business activities.
The Code applies to Directors, executive officers and all employees. The Code
incorporates Precision's guiding principles for business conduct and ethical
behaviour to promote integrity and deter wrongdoing. It also creates a frame
of reference for dealing with sensitive and complex issues and provides for
accountability if standards of conduct are not met. The executive officers of
Precision have each acknowledged that they have read, understood and will
abide by the Code. A copy of the Code is posted on the Corporate Governance
section of the Trust's website at www.precisiondrilling.com.
The Board of Trustees has adopted the principles set out in the Code
and is currently in the process of working with the Board of Directors to
develop a Joint Code of Business Conduct which will apply to the activities of
the Trust, PDLP and Precision.
All Precision personnel, including Trustees and Directors, are
expected to conduct their business affairs in a manner that ensures their
private or personal interests do not interfere with the interests of the Trust
or Precision, including conflicts relative to personal, financial or other
gain. Should conflicts arise, or be perceived to arise, disclosure will be
made in an appropriate manner and the person about whom disclosure is to be
made will not participate in any decision or action in which there is a
conflict.
NOMINATION OF TRUSTEES AND DIRECTORS
The Board of Trustees is elected by the Unitholders at every annual
meeting of the Trust. The Corporate Governance and Nominating Committee of
Precision, which is comprised entirely of independent Directors, reviews and
recommends to the Board of Directors the candidates for nomination as
Trustees. The Board of Directors then submits its recommendations to the Board
of Trustees and the Board of Trustees approves the final choice of candidates
for nomination and election by Unitholders.
If it becomes necessary to appoint a new Trustee or Director to fill
a vacancy on the Board of Trustees or Board of Directors, as applicable, the
existing Board of Trustees or the Board of Directors on the approval of the
Board of Trustees, may appoint one or more additional Trustees, or instruct
the General Partner to appoint one or more additional Directors, as
applicable, for a term to expire at the close of the next annual meeting of
Unitholders.
The Board of Trustees is also ultimately responsible for arranging
for the appointment of the Board of Directors. In that regard, the Corporate
Governance and Nominating Committee recommends to the Board of Directors the
candidates for nomination as Directors. The Board of Directors approves the
choice of candidates for recommendation to the Board of Trustees, which, in
turn, submits the recommended candidates for approval by Unitholders and
causes the General Partner of PDLP to appoint the recommended candidates.
As the Board of Trustees and the Board of Directors derive their
strength from their members, Trustees and Directors should have an appropriate
mix of skills, knowledge and experience in business and a history of
achievement. Trustees and Directors are required to commit the requisite time
for all of the Board of Trustees' or Board of Directors' business, as
applicable, and must demonstrate integrity, accountability and informed
judgement.
A majority of each of the Board of Trustees and the Board of
Directors must be Canadian residents and determined to be "independent" as
defined in applicable rules and regulations.
Each Trustee and each Director is expected to attend in person at all
regularly-scheduled meetings of the Board of Trustees or Board of Directors,
as applicable, and Directors are expected to attend all regularly-scheduled
meetings of each Committee on which they serve.
The Corporate Governance and Nominating Committee, among other
things, sets criteria for the evaluation of Directors, develops and recommends
corporate governance principles, evaluates Directors, makes
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recommendations as to the members of various Committees, ensures appropriate
orientation and continuing education programs and reviews the Corporate
Governance Guidelines of Precision. In particular, the Corporate Governance
and Nominating Committee annually reviews the competencies, skills and
personal qualities of each current Trustee or Director, and the contributions
made by such Trustee or Director to the effective operation of the Board of
Trustees or the Board of Directors, as the case may be, and any significant
change in the primary occupation of such Trustee or Director. The Corporate
Governance and Nominating Committee identifies and recommends qualified
nominees for election to the Board of Trustees at the annual meeting of
Unitholders, and recruits candidates to serve as Trustees or Directors and
reviews any recommended candidates based on the competencies, skills, personal
qualities and time commitment required of a Trustee or Director in order to
add value.
The Corporate Governance and Nominating Committee considers all
qualified candidates identified by members of the Board of Trustees and Board
of Directors, by management and by Unitholders. Any Unitholder who wishes to
recommend a candidate to be considered by the Committee may do so by
submitting the candidate's name and biographical information, including
background, qualifications and experience to the Vice President, Corporate
Services and Corporate Secretary of Precision. Proposals for nomination will
be forwarded to the Chairman of the Board of Directors as well as presented to
the Committee for consideration. Potential candidates may be informally
approached to determine their interest in joining the Board of Trustees or the
Board of Directors.
Trustees are not renominated for election, and Directors are not
renominated to be approved for appointment, at the annual meeting of
Unitholders following their fifteenth year as a Trustee or Director, or
following their 69th birthday, whichever is earlier. The Board of Directors
has waived application of this guideline with respect to the reappointment of
Mr. W.C. (Mickey) Dunn, who has served as a Director of Precision since 1992,
given the need for continuity during the process of converting the business of
Precision into an income trust and in order to provide continued stewardship
to Precision's management team.
COMPENSATION
The Compensation Committee of the Board of Directors is comprised
entirely of independent Directors. It is generally responsible for discharging
the responsibilities of the Board of Directors relating to reviewing the
compensation of Precision's executives, and for producing an annual report on
executive compensation for inclusion in the Trust's annual proxy statement and
information circular.
The compensation for Trustees and Directors is determined by the
Compensation Committee based on individuals' time commitment in service to the
Trust or Precision, comparative fees received by other trustees of trusts and
directors of corporations of a similar size to the Trust and Precision, the
responsibilities of the Board of Trustees and Board of Directors, and the
responsibilities of independent Directors who are the Chairman or a member of
Committees of the Board of Directors.
The compensation for senior management is determined by the
Compensation Committee based on several factors, including competitive
compensation structures in the locales the individuals are employed,
compensation practices prevailing in the oilfield service community,
individual performance and overall corporate performance. Competitive
compensation is measured using benchmarks of peer group companies and periodic
reviews of compensation surveys. Compensation consists of base salary, bonuses
and benefits. The overriding goals of the compensation policies are to create
long-term investor value, motivate and reward superior executive performance
and attract and retain individuals that help to create long-term investor
value.
The Compensation Committee reviews and approves Precision's goals and
objectives relevant to the Chief Executive Officer's compensation and
evaluates the Chief Executive Officer's performance in light of these goals
and objectives to determine and recommend for approval, by the independent
members of the Board of Directors, the Chief Executive Officer's compensation
package based on this evaluation. The Compensation
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Committee also makes recommendations to the Board of Directors with respect to
independent Director compensation, senior executive compensation and the
general compensation policies of Precision.
The Compensation Committee has the sole authority to retain and
terminate any compensation consultant to be used to assist in the evaluation
of Director, Chief Executive Officer or senior executive compensation and to
approve the consultant's fees and other retention terms as it relates to such
evaluation. The Compensation Committee also has the authority to obtain advice
and assistance from internal or external legal, accounting or other advisors.
No compensation consultants were retained by the Compensation Committee during
the 2005 fiscal year.
BOARD ASSESSMENT
The Corporate Governance and Nominating Committee has been delegated
the responsibility for evaluating annually the effectiveness of the Board of
Directors, the various Committees of the Board of Directors and the
contribution of individual Directors and make any necessary recommendations to
the Board of Directors. The Board of Trustees and the Board of Directors will
annually review their own performance, and review and reassess the adequacy of
the Mandate of the Board of Trustees or Mandate of the Board of Directors, as
applicable, and make a determination annually as to whether it and, in the
case of the Board of Directors, its Committees, are functioning effectively.
ADDITIONAL INFORMATION
Additional financial information is provided in the Trust's annual
audited consolidated financial statements and management's discussion and
analysis for the most recently completed fiscal year ended December 31, 2005,
contained in the Trust's Annual Report for the year ended December 31, 2005,
which has been mailed to Unitholders with this Circular. Precision will
provide to Unitholders upon request: (i) a copy of the Trust's current annual
information form, (ii) a copy of any document or the pertinent pages of any
document incorporated by reference in the annual information form, (iii) a
copy of the Trust's annual audited consolidated financial statements and
related management discussion and analysis contained in the annual report for
the year ended December 31, 2005, together with the report of the auditors
thereon, (iv) a copy of the interim unaudited financial statements subsequent
to such annual audited consolidated financial statements, and (v) a copy of
this Circular. These documents are available on the Trust's website at
www.precisiondrilling.com, on SEDAR at www.sedar.com, and may be obtained
without charge upon request to the Vice President, Corporate Services and
Corporate Secretary of Precision at 4200, 150 - 6th Avenue S.W., Calgary,
Alberta T2P 3Y7, by facsimile at 403.264.0251, by telephone at 403.715.4500 or
by email at info@precisiondrilling.com.
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APPENDIX A
MANDATE OF THE BOARD OF TRUSTEES OF PRECISION DRILLING TRUST
GENERAL
The board of trustees (the "Board of Trustees") of Precision Drilling
Trust (the "Trust") has overall responsibility and full authority to manage
the Trust's investments pursuant to the declaration of trust dated as of
September 22, 2005 (the "Declaration of Trust"). The Board of Trustees has
delegated responsibility for the management and general administration of the
affairs of the Trust to Precision Drilling Corporation ("Precision") pursuant
to an administration agreement dated as of November 7, 2005 between the Trust
and Precision (the "Administration Agreement").
The specific matters the Trust has delegated to Precision are set out
in Schedule A hereto. The matters the Trust has retained responsibility for
under the Declaration of Trust are set out in Schedule B hereto.
As permitted by applicable law, the Board of Trustees may from time
to time delegate certain of its responsibilities to Precision or management of
Precision, but the Board of Trustees retains its oversight function for all
delegated responsibilities.
Each trustee of the Trust (a "Trustee") is expected to attend in
person at all regularly-scheduled meetings of the Board of Trustees. To
prepare for meetings, Trustees are expected to review the materials that are
sent to each of them in advance of such meetings.
The Trustees, in exercising the powers and authority conferred upon
them, will act honestly and in good faith with a view to the best interests of
the Trust and in connection therewith will exercise the degree of care,
diligence and skill that a reasonably prudent person would exercise in
comparable circumstances. A Trustee will not be liable in carrying out his or
her duties except in cases where the Trustee fails to act honestly and in good
faith with a view to the best interests of the Trust or to exercise the degree
of care, diligence and skill that a reasonably prudent person would exercise
in comparable circumstances. The duties and standard of care of Trustees are
intended to be similar to, and not greater than, those imposed on a director
of a corporation under the BUSINESS CORPORATIONS ACT (Alberta). The Trustees
will not be required to devote their entire time to the investments, business
or affairs of the Trust.
STRUCTURE AND AUTHORITY
The composition of the Board of Trustees, including the
qualifications of its members, will comply with all requirements of the
applicable laws and securities legislation and the rules of any stock exchange
upon which the units of the Trust (the "Trust Units") are listed for trading.
The Trustees are elected by holders of units of the Trust and holders
of Class B Limited Partnership Units of Precision Drilling Limited Partnership
(together the "Unitholders") at every annual meeting of the Unitholders. The
Corporate Governance and Nominating Committee of Precision reviews and
recommends to the board of directors of Precision (the "Board of Directors"),
the candidates for nomination to the Board of Trustees. The Board of Directors
then submits its recommendations to the Board of Trustees and the Board of
Trustees approves the final choice of candidates for nomination and for
election by Unitholders. The term of each Trustee expires at the close of the
annual meeting of Unitholders following the meeting at which such Trustee was
elected. In addition, Trustees are not renominated for election at the annual
meeting of Unitholders following their fifteenth year as a Trustee, or
following their 69th birthday, whichever is earlier.
The Board of Trustees may, between annual meetings of Unitholders,
appoint one or more additional Trustees for a term to expire at the close of
the next annual meeting of Unitholders, provided that the number of additional
Trustees so appointed will not exceed one-third of the number of Trustees who
held office at the immediately preceding annual meeting of Unitholders. If it
becomes necessary to appoint a new Trustee to fill a vacancy on the Board of
Trustees or to complement the existing Board of Trustees, the Board of
Trustees will, upon the recommendation of the Corporate Governance and
Nominating Committee and the Board of Directors, consider a wide potential
base of possible candidates and assess the qualifications of proposed new
Trustees against a range of criteria, including background, experience,
A-1
professional skills, personal qualities, prior membership on a board including
the Board of Trustees or the Board of Directors, the potential for the
candidate's skills to augment the existing Board of Trustees and the
candidate's availability to commit to the Board of Trustees' activities.
The Board of Trustees is also ultimately responsible for the
appointment of directors (the "Directors") to the Board of Directors. In that
regard, the Corporate Governance and Nominating Committee recommends to the
Board of Directors the candidates for nomination as Directors. The Board of
Directors then submits its recommendations to the Board of Trustees and the
Board of Trustees approves the final choice of candidates who will be
submitted to Unitholders for approval. Following the vote of Unitholders, the
Board of Trustees directs 1194312 Alberta Ltd. (the "General Partner") of
Precision Drilling Limited Partnership to appoint those candidates who have
been approved by Unitholders as Directors of Precision. In the event that a
resolution to approve the appointment of the Board of Directors is not passed,
or if nominees other than those proposed are approved, the Board of Trustees
will either act on the resolution or promptly request that the Corporate
Governance and Nominating Committee review the voting results and make a
recommendation to the Board of Trustees for an alternate slate of Directors to
be nominated for appointment, or such other recommendation as they determine
appropriate, following which the Board of Trustees will seek approval from
Unitholders, if required, for such recommendation. The Board of Trustees will
not take steps to implement or approve any recommendation which would result
in less than a majority of the Board of Directors being independent, or which
would result in the Trustees constituting a majority of the Board of
Directors.
Trustees should have an appropriate mix of skills, knowledge and
experience in business and a history of achievements. Trustees are required to
commit the requisite time for all of the Board of Trustees' business and will
demonstrate integrity, accountability and informed judgement. A majority of
the Board of Trustees will be comprised of Trustees who are determined to be
"independent" as defined in applicable securities laws and the rules or
guidelines of any stock exchange upon which the units of the Trust are listed
for trading.
RESPONSIBILITIES
Notwithstanding the delegation of authority for management and
administration of all operational matters of the Trust to Precision, the Board
of Trustees has retained responsibility for the following matters pursuant to
the Declaration of Trust:
o supervision of the activities and management of the investments
and affairs of the Trust;
o declaration of distributions to Unitholders;
o issuance, repurchase, redemption, consolidation or subdivision
of units of the Trust or other securities of the Trust and
matters related thereto;
o the exercise of reasonable commercial efforts to maintain at all
times the "mutual fund trust" status of the Trust pursuant to
section 132(6) of the INCOME TAX ACT (Canada); and
o adoption or amendment of any by-laws of the Trust.
In addition, under applicable securities legislation and stock
exchange rules, the Board of Trustees have oversight responsibility for the
following matters:
o review and approval of the annual and interim financial
statements and accompanying management's discussion and
analysis;
o compliance with public disclosure obligations and insider
trading restrictions;
o review and approval of the Trust's core public disclosure
documents including its annual information forms, proxy
circulars and annual reports;
o retention, direction and monitoring the independence of the
auditors;
o review and approval of the Trust's system of internal controls
and procedures; and
o nomination of Trustees for election and appointment of the Board
of Directors.
A-2
The Trustees should exercise their responsibility in respect of the
foregoing matters by:
o considering and either rejecting or accepting the
recommendations of the Board of Directors, management of
Precision or another body authorized by the Board of Directors
such as the Audit Committee or the Corporate Governance and
Nominating Committee;
o satisfying themselves that the appropriate individuals or
consultants are doing the required work to discharge their
duties in respect of any delegated matters; and
o ensuring that the Board of Trustees have received the necessary
information, recommendations and professional advice required to
make decisions.
The integrity of Precision's internal control and management
information systems is monitored by the Board of Directors and its committees
of the Board of Directors (each a "Committee"). The Audit Committee of
Precision is responsible for reviewing internal controls over accounting and
financial reporting systems. Quarterly financial presentations are made to the
Audit Committee and the Audit Committee receives direct reports from the
internal and external auditors of the Trust, including discussions without the
presence of management.
Upon the recommendation of the Audit Committee and on the
recommendation of the Board of Directors, the Board of Trustees approves the
annual audited consolidated financial statements of the Trust and the interim
unaudited consolidated financial statements of the Trust.
The Board of Trustees requires that Precision, as administrator of
the Trust, make accurate, timely and effective communication to Unitholders of
the Trust and the investment community. Precision has a written communication
policy pertaining to communication with the media and with respect to all
continuous disclosure and public reporting requirements to Unitholders and the
investment community.
The Board of Trustees, on the recommendation of the Corporate
Governance and Nominating Committee, has formally adopted and posted on the
Trust's website a set of Corporate Governance Guidelines that affirm the
Trust's commitment to maintaining a high standard of corporate governance.
LIMITATION ON THE TRUSTEES' ROLE
In order for the Trust to maintain its status as a "mutual fund
trust" under the INCOME TAX ACT (Canada) the Board of Trustees will not
undertake any activities beside the investment and management of the Trust's
property.
The Board of Trustees may request reports on the operations of the
business of Precision and may comment thereon, but will not make actual
business decisions relating to operational matters in relation to the business
of Precision.
Approved by the Board of Trustees of Precision Drilling Trust on March 7,
2006.
A-3
SCHEDULE A
TRUST MATTERS DELEGATED TO PRECISION DRILLING CORPORATION
Capitalized terms used in this Schedule A but not otherwise defined
have the meanings ascribed to them under the Declaration of Trust. Subject to
and in accordance with the terms, conditions and limitations of the
Declaration of Trust, the Trustees have delegated to Precision, and Precision
has agreed to be responsible for, the management and general administration of
the affairs of the Trust, including, without limitation, the following:
a. other than those matters set out in Schedule B, undertake any matters
required by the terms of the Declaration of Trust to be performed by
the Trustees, which are not otherwise delegated therein, and
generally provide all other services as may be necessary or as
requested by the Trustees for the administration of the Trust;
b. prepare or cause to be prepared all returns, filings and documents
and make all determinations necessary for the discharge of the
Trustees' obligations under the Declaration of Trust;
c. the retention and monitoring, on behalf of the Trustees, of the
transfer agent and other organizations serving the Trust;
d. the authorization and payment on behalf of the Trust of operation
expenses incurred on behalf of the Trust and the negotiation of
contracts with third party providers of services (including, but not
limited to, transfer agents, legal counsel, auditors and printers);
e. the provision of office space, telephone, office equipment,
facilities, supplies and executive, secretarial and clerical
services;
f. dealing with: (i) banks and other institutional lenders, including,
without limitation, in respect of the maintenance of bank records and
the negotiation and securing of bank financing or refinancing of one
or more credit or debt facilities, hedging or swap facilities or
other ancillary facilities; (ii) any and all other arrangements for
the borrowing of funds in any manner whatsoever; (iii) the grant or
issue of covenants, guarantees and/or security of any nature
whatsoever to ensure or secure any such facilities or other
arrangements, in respect of the Trust or any entity in which the
Trust holds any direct or indirect interest and any amendment,
deletion or supplement thereto or termination thereof, including
without limitation the execution and delivery of all agreements,
indentures and other documents giving effect thereto; and (iv) any
and all actions reasonably necessary in connection with, or in
relation to, those matters referred to in Section 9.5 of the
Declaration of Trust;
g. prepare or cause to be prepared and provide to the Board of Trustees
so as to be approved for delivery to Unitholders, annual audited
consolidated and interim unaudited financial statements of the Trust,
as well as relevant tax information;
h. submit all income tax returns and filings to the Board of Trustees in
sufficient time prior to the dates upon which they must be filed so
that the Board of Trustees have a reasonable opportunity to review
them, execute them and return them to Precision, and arrange for
their filing within the time required by applicable tax law;
i. administer distributions declared payable by the Board of Trustees
and administer on behalf of the Trust such distribution reinvestment
plans and other similar plans as the Trust may establish from time to
time;
j. ensure compliance by the Trust with, and enforcing all rights of the
Trust under, all agreements entered into by the Trust, including the
Support Agreement and the Voting and Exchange Trust Agreement;
k. ensure compliance by the Trust with all applicable securities
legislation including, without limitation, continuous disclosure
obligations;
l. prepare or cause to be prepared on behalf of the Trust any circular
or other disclosure document required under applicable securities
legislation with respect to an offer to acquire securities of another
person or in response to an offer to purchase Trust Units;
m. provide investor relations services to the Trust;
A-4
n. prepare or cause to be prepared and arrange for the distribution of
all materials approved for delivery by the Trustees (including
notices of meetings and information circulars) in respect of all
annual and/or special meetings of Unitholders;
o. prepare or cause to be prepared and provide or cause to be provided
to Unitholders on a timely basis all information to which Unitholders
are entitled under the Declaration of Trust and under applicable
laws, including information or proxy circulars, annual information
forms, prospectuses, quarterly and annual reports, notices, financial
reports and tax information relating to the Trust, the form and
content of which will be approved by the Trustees;
p. once approved by the Board of Trustees, take all steps necessary to
complete the issuance of securities of the Trust;
q. attend to all administrative and other matters (including making
determinations) arising in connection with any redemptions of Trust
Units including, without limitation, the matters set forth in Article
6 of the Declaration of Trust and any designation of capital gain
pursuant to Section 5.5 of the Declaration of Trust;
r. obtain and maintain appropriate liability insurance for the benefit
of the Board of Trustees, Board of Directors and officers of
Precision and its affiliates;
s. ensure that the Trust elects in the prescribed manner and within the
prescribed time under subsection 132(6.1) of the INCOME TAX ACT
(Canada) to be a "mutual fund trust" within the meaning of that act
since inception, and assuming the requirements for such election are
met, monitor the Trust's status as such a mutual fund trust and
provide the Board of Trustees with written notice when the Trust
ceases or is at risk of ceasing to be such a mutual fund trust;
t. monitor whether more than 10% of the fair market value of the
property of the Trust is "specified property" or "taxable Canadian
property" for purposes of the INCOME TAX ACT (Canada);
u. monitor the beneficiaries of the Trust to ensure that no fewer than
150 beneficiaries hold one "block of units" (as that expression is
defined in the INCOME TAX ACT (Canada)) with an aggregate fair market
value of not less than $500;
v. undertake, manage and prosecute any and all proceedings from time to
time before or in respect of governmental authorities on behalf of
the Trust;
w. prepare or cause to be prepared for approval by the Board of Trustees
any prospectus or comparable documents of the Trust to qualify the
sale of securities of the Trust from time to time; and
x. promptly notify the Trust of any event that might reasonably be
expected to have a material adverse effect on the affairs of the
Trust.
A-5
SCHEDULE B
RETAINED RESPONSIBILITIES OF THE BOARD OF TRUSTEES
UNDER THE DECLARATION OF TRUST
Capitalized terms used in this Schedule B but not otherwise defined
have the meanings ascribed to them under the Declaration of Trust. Pursuant to
the Declaration of Trust, the Board of Trustees has retained the following
responsibilities:
a. to supervise the activities and manage the investments and affairs of
the Trust;
b. to invest, hold shares, trust units, beneficial interests,
partnership interests (other than general partnership interests),
joint venture interests or other interests in any person necessary or
useful to carry out the purpose of the Trust;
c. to enter into any agreement or instrument to create or provide for
the issue of Trust Units and Special Voting Units (including any firm
or best efforts underwriting agreement), to cause such Trust Units
and Special Voting Units to be issued for such consideration as the
Trustees, in their sole discretion, may deem appropriate and to do
such things and prepare and sign such documents, including the
prospectus and any registration rights agreement, to qualify such
Trust Units and Special Voting Units for sale in whatever
jurisdictions they will be sold or offered for sale;
d. except as prohibited by applicable law, to delegate any of the powers
and duties of the Board of Trustees to any one or more agents,
representatives, officers, employees, independent contractors or
other persons the doing of such things and the exercise of such
powers hereunder as the Board of Trustees may from time to time
reasonably require, so long as any such delegation is not
inconsistent with any of the provisions of the Declaration of Trust
and subject at all times to the general control and supervision of
the Board of Trustees;
e. to redeem Trust Units (or rights, warrants, convertible securities,
options or other securities) for such consideration as the Board of
Trustees may deem appropriate in their sole discretion and to redeem
Special Voting Units for no consideration and such redemption to be
subject to the terms and conditions of the Declaration of Trust;
f. without the approval or confirmation of Unitholders, enact and from
time to time amend or repeal by-laws not inconsistent with the
Declaration of Trust containing provisions relating to the Trust, the
Trust Assets and the conduct of the affairs of the Trust, but not in
conflict with any provision of the Declaration of Trust;
g. to subdivide or consolidate from time to time the issued and
outstanding Trust Units; and h. to purchase Trust Units for
cancellation in accordance with applicable regulatory requirements.
A-6
APPENDIX B
MANDATE OF THE BOARD OF DIRECTORS OF PRECISION DRILLING CORPORATION
ADMINISTRATOR OF PRECISION DRILLING TRUST
GENERAL
The board of directors (the "Board of Directors", and each member a
"Director") of Precision Drilling Corporation ("Precision") is responsible for
the stewardship of the business and affairs of Precision. As such, the Board
of Directors has responsibility to oversee the conduct of Precision's
business, provide direction to management and ensure that all major issues
affecting the business and affairs of Precision are given proper
consideration.
The Board of Directors discharges its responsibilities directly and
through its committees of the Board of Directors (each a "Committee"). The
Board of Directors appoints from its members an Audit Committee, a Corporate
Governance and Nominating Committee, and a Compensation Committee
(collectively, the "Committees"). The Board of Directors may delegate to such
Committees matters for which it is responsible, but the Board of Directors
retains its oversight function for all delegated responsibilities. Similarly,
as permitted by applicable law, the Board of Directors may from time to time
delegate certain of its responsibilities to management.
Each Director is expected to attend in person all regularly-scheduled
meetings of the Board of Directors and all meetings of each Committee on which
they serve. To prepare for meetings, Directors are expected to review the
materials that are sent to them in advance of such meetings.
The Directors, in exercising the powers and authority conferred upon
them, will act honestly and in good faith with a view to the best interests of
Precision and in connection therewith will exercise the care, diligence and
skill that a reasonably prudent person would exercise in comparable
circumstances. A Director will not be liable in carrying out his or her duties
except in cases where the Director fails to act honestly and in good faith
with a view to the best interests of Precision or to exercise the degree of
care, diligence and skill that a reasonably prudent person would exercise in
comparable circumstances.
STRUCTURE AND AUTHORITY
The composition of the Board of Directors, including the
qualifications of its members, will comply with all requirements of the
BUSINESS CORPORATIONS ACT (Alberta), the articles and by-laws of Precision,
applicable securities legislation and the rules of any stock exchange upon
which the units ("Trust Units") of Precision Drilling Trust (the "Trust") are
listed for trading.
The Corporate Governance and Nominating Committee recommends to the
Board of Directors the candidates for nomination as Directors. The Board of
Directors then submits its recommendations to the Board of Trustees and the
Board of Trustees approves the final choice of candidates who will be
submitted to holders of Trust Units and holders of Class B Limited Partnership
Units of Precision Drilling Limited Partnership (together the "Unitholders")
for approval. Following the vote of Unitholders, the Board of Trustees directs
1194312 Alberta Ltd. (the "General Partner") of Precision Drilling Limited
Partnership to appoint those candidates who have been approved by Unitholders
as Directors of Precision. In the event that a resolution to approve the
appointment of the Board of Directors is not passed, or if nominees other than
those proposed are approved, the Board of Trustees will either act on the
resolution or promptly request that the Corporate Governance and Nominating
Committee review the voting results and make a recommendation to the Board of
Trustees for an alternate slate of Directors to be nominated for appointment,
or such other recommendation as they determine appropriate, following which
the Board of Trustees will seek approval from Unitholders, if required, for
such recommendation. The Board of Trustees will not take steps to implement or
approve any recommendation which would result in less than a majority of the
Board of Directors being independent, or which would result in the Trustees
constituting a majority of the Board of Directors.
The Board of Directors will appoint the Chairman of the Board of
Directors from among Precision's Directors. The term of each Director will
expire at the close of the next annual meeting of Unitholders or when their
successor is
B-1
appointed by the General Partner of PDLP. In addition, Directors are not
renominated for appointment at the annual meeting of Unitholders following
their fifteenth year as a Director, or following their 69th birthday,
whichever is earlier.
If it becomes necessary to appoint a new Director to fill a vacancy
on the Board of Directors or to complement the existing Board of Directors,
the Board of Directors will, upon the recommendation of the Corporate
Governance and Nominating Committee and with the approval of the Board of
Trustees, consider a wide potential base of possible candidates and assess the
qualifications of proposed new Directors against a range of criteria,
including background experience, professional skills, personal qualities, the
potential for the candidate's skills to augment the existing Board of
Directors and the candidate's availability to commit to the Board of
Directors' activities. The Board of Directors may, with the approval of the
Board of Trustees, between annual meetings of the Unitholders, request that
the General Partner appoint one or more additional Directors for a term to
expire at the close of the next annual meeting of Unitholders, provided that
the number of additional Directors so appointed will not exceed one-third of
the number of Directors who held office at the immediately preceding annual
meeting of Unitholders.
Directors must have an appropriate mix of skills, knowledge and
experience in business and a history of achievements. Directors are required
to commit the requisite time for all of the Board of Directors' business and
will demonstrate integrity, accountability and informed judgement. A majority
of the Board of Directors will be comprised of Directors who must be
determined to be "independent" as defined in applicable securities laws and
the rules or guidelines of any stock exchange upon which the Trust Units are
listed for trading.
RESPONSIBILITIES
The Board of Directors will review and consider the reports and
recommendations of the Committees, and if approved by the Board of Directors,
will communicate such reports and recommendations to the Board of Trustees for
their approval.
The Board of Directors will approve all material transactions
involving Precision. In addition, the Board of Directors will approve banking
relationships and key borrowing and financing decisions, appoint officers,
determine the compensation of senior management and the Directors, and
establish the compensation policies of Precision.
The Board of Directors is responsible, to the extent feasible, to
satisfy itself of the integrity of the Chief Executive Officer and executive
officers and ensure that the Chief Executive Officer and executive officers
create a culture of integrity throughout the organization.
The Board of Directors is responsible for ensuring that Precision
provides administrative and support services to the Trust in accordance with
the terms of the administration agreement, dated November 7, 2005 entered into
between Precision and the Trust, as such agreement may be amended from time to
time (the "Administration Agreement"). The Board of Directors acknowledges
that as part of its responsibility for matters delegated to it by the Trust
under the Administration Agreement, it will adhere to principles of good
corporate governance, including the use of Committees.
The Board of Directors takes responsibility for appointing the Chief
Executive Officer and is consulted on the appointment of other senior
management. The Board of Directors, through the Compensation Committee,
formally reviews the Chief Executive Officer's remuneration and performance
and the compensation of other members of management. Senior management
participates in appropriate professional and personal development activities,
courses and programs on a self-directed basis and the Board of Directors
supports management's commitment to training and development of all employees.
The Board of Directors is responsible for the consideration of
succession issues and reviews the adequacy of Precision's succession plan at
least annually.
The Board of Directors and its Committees are responsible for the
integrity of Precision's internal control and management information systems.
The Audit Committee is responsible for reviewing internal controls over
accounting and financial reporting systems and reporting to the Board of
Directors on such matters. The Board of Directors will submit any such report
of the Audit Committee, once approved by the Board of Directors, to the Board
of Trustees. Quarterly financial presentations are made to the Audit
Committee. The Audit Committee meets separately with, and receives direct
reports from the internal and external auditors of the Trust. Such meetings
include discussions between the Audit Committee members and the external
auditors without the presence of management.
B-2
The Board of Directors is responsible for the strategic direction of
Precision. The Board of Directors has established a formal strategic planning
process which takes into account, among other things, the opportunities and
risks of the business. The strategic plan is reviewed on an annual basis at a
special meeting of the Board of Directors and senior management at which
concepts discussed in the strategic plan are discussed and adopted.
The Board of Directors approves the annual business plan of Precision
and an annual operating budget for Precision and its subsidiaries.
The Board of Directors approves the annual audited consolidated
financial statements of the Trust and approves the interim unaudited
consolidated financial statements of the Trust. The Board of Directors may at
any time and from time to time delegate approval of interim unaudited
consolidated financial statements to the Audit Committee. Once approved,
annual and quarterly financial statements must be submitted by the Board of
Directors or the Audit Committee, as the case may be, to the Board of Trustees
for final approval.
The Board of Directors is responsible for identifying the principal
risks of Precision's business and for ensuring the implementation of systems
to manage these risks. With the assistance of senior management, who report to
the Board of Directors on the risks of Precision's business, the Board of
Directors considers such risks and discusses the management of such risks on a
regular basis. In addition, the Board of Directors receives quarterly
environmental and occupational health and safety reports, reports on
litigation issues and appropriate compliance reports from management.
The Board of Directors is responsible for considering appropriate
measures it may take if the performance of Precision falls short of its goals
or as other circumstances warrant.
The Board of Directors is responsible for overseeing the accurate
reporting of the financial performance of Precision and the Trust to the
Unitholders and the investment community, and that the financial results of
Precision and the Trust are reported fairly and in accordance with generally
accepted accounting standards. The Board of Directors must report regularly to
the Board of Trustees on such matters.
The Board of Directors requires that Precision, as administrator of
the Trust, make accurate, timely and effective communication of all material
information to Unitholders and the investment community. The Board of
Directors has adopted a written communication policy (the "Communications
Policy") in respect of communications with the media and to the continuous
disclosure and public reporting obligations of the Trust. The disclosed
information is released through newswire services, Precision's website,
mailings to Unitholders and, where required, filed on SEDAR and EDGAR. Regular
news releases are made at least quarterly and the Trust reports quarterly and
annual financial results. Supplemental releases are made highlighting material
facts regarding Precision and the Trust. The Board of Directors currently
delegates this ongoing reporting responsibility to management. Issues arising
from the Communications Policy are dealt with by a committee of executive
officers of Precision consisting of the Chief Executive Officer, President and
Chief Operating Officer, Chief Financial Officer, Vice President, Corporate
Services and Corporate Secretary and outside legal counsel. Material
disclosure relating to the Trust, including without limitation, the Trust's
annual information form, annual report and annual proxy circular must, once
approved by the Board of Directors, be submitted to the Board of Trustees for
approval.
The Corporate Governance and Nominating Committee is responsible for
recommending the Trust's approach to corporate governance and reporting to the
Board of Directors on all matters relating to the governance of the Trust. The
Board of Directors will submit the reports of the Corporate Governance and
Nominating Committee, once approved, to the Board of Trustees. The Board of
Directors, through its Corporate Governance and Nominating Committee, has
formally adopted and posted on the Trust's website at
www.precisiondrilling.com a set of Corporate Governance Guidelines which
affirms Precision's commitment to maintaining a high standard of corporate
governance.
The Board of Directors, through its Corporate Governance and
Nominating Committee, annually reviews the effectiveness of the Board of
Directors, its Committees and individual Directors.
The Board of Directors is responsible for approving policies and
procedures designed to ensure that Precision operates at all times within
applicable laws and regulations and for monitoring compliance with all such
policies and procedures.
B-3
Unitholders and other interested parties may communicate with the
Board of Directors and with the independent members of the Board of Directors
by contacting the office of the Vice President, Corporate Services and
Corporate Secretary at the offices of Precision, 4200, 150 - 6th Avenue S.W.,
Calgary, Alberta, Canada, T2P 3Y7, by telephone at 403.716.4500, facsimile at
403.264.0251 or email at info@precisiondrilling.com.
All communications received will be reviewed and delivered as
requested, or if an individual member of the Board of Directors is not
specified by the communication, to the appropriate member at the Vice
President, Corporate Services and Corporate Secretary's discretion. The
process for communication with the Vice President, Corporate Services and
Corporate Secretary is also posted on the Trust's website at
www.precisiondrilling.com.
Approved by the Board of Directors of Precision Drilling Corporation on March
7, 2006.
B-4
PRECISION DRILLING TRUST
NOTICE OF THE ANNUAL MEETING OF UNITHOLDERS
NOTICE IS HEREBY given that the annual meeting (the "Meeting") of the holders
of units (the "Trust Units") of Precision Drilling Trust (the "Trust") and
holders of Class B Limited Partnership Units ("Exchangeable Units") of
Precision Drilling Limited Partnership ("PDLP") will be held in the McMurray
Room, at the Calgary Petroleum Club, 319 - 5th Avenue S.W., Calgary, Alberta,
on the 9th day of May 2006, at 3:00 P.M. in the afternoon (Calgary Time) for
the following purposes:
1. to elect the Trustees of the Trust for the ensuing year;
2. to approve the appointment of the directors of Precision Drilling
Corporation, administrator to the Trust, for the ensuing year;
3. to appoint KPMG LLP as Auditor for the ensuing year;
4. to transact such other business as may properly come before the
Meeting or any adjournment thereof.
The specific details of the matters proposed to be put before the
Meeting are set forth in the proxy statement and management information
circular accompanying and forming part of this notice.
The directors of Precision Drilling Corporation have, on behalf of
the Trust, fixed the record date for the Meeting as March 20, 2006 (the
"Record Date"). Only holders of Trust Units and Exchangeable Units (together
the "Unitholders") of record at the close of business on March 20, 2006 are
entitled to receive notice of the Meeting. Unitholders of record will be
entitled to vote those units included in the list of Unitholders entitled to
vote at the Meeting prepared as at the Record Date, unless any holder of Trust
Units transfers his or her Trust Units after the Record Date and the
transferee of those Trust Units establishes that he or she owns the Trust
Units and demands, not later than 10 days before the Meeting, that the
transferee's name be included in the list of Unitholders entitled to vote at
the Meeting, in which case such transferee shall be entitled to vote such
Trust Units at the Meeting.
Holders of Trust Units who are unable to be personally present at the
Meeting may date and sign the form of proxy accompanying this Notice and
return the same to the offices of Computershare Trust Company of Canada, Proxy
Department, 100 University Avenue, 9th Floor, Toronto, Ontario, M5J 2YI by
3:00 P.M. (Calgary Time) on May 5, 2006, or vote by phone or by internet in
the manner described in the form of proxy.
Holders of Exchangeable Units are required to vote through a special
voting unit that has been issued to Computershare Trust Company of Canada (the
"Voting and Exchange Trustee") as trustee under a voting and exchange trust
agreement. The Exchangeable Units are entitled to that number of votes equal
to the number of Trust Units into which each Exchangeable Unit may be
exchanged (on a one-for-one basis) as at the Record Date. The Voting and
Exchange Trustee is required to vote the special voting unit in the manner
that holders of Exchangeable Units instruct and to abstain from voting on the
Exchangeable Units for which the Voting and Exchange Trustee does not receive
instructions.
Forms of proxy, in order to be valid and acted upon at the Meeting,
must be returned to the aforesaid offices of Computershare Trust Company of
Canada, or voted by phone or internet, not less than 48 hours before the time
fixed for holding the Meeting or any adjournment thereof, or in the case of
the Trust Units only, with the Chairman of the Meeting prior to commencement
thereof.
A copy of the Trust's current annual report, which includes its
annual audited consolidated financial statements and management's discussion
and analysis for the financial years ended December 31, 2005 and 2004, the
proxy statement and management information circular with respect to the
Meeting, the Trust's annual information form for the fiscal year ended
December 31, 2005 as filed with Canadian provincial securities commissions and
under cover of an annual report on Form 40-F with the United States Securities
and Exchange Commission, and any unaudited interim financial statements of the
Trust subsequent to the financial statements for the year ended December 31,
2005, may be obtained without charge by writing to Precision Drilling
Corporation, Vice President, Corporate Services and Corporate Secretary, Suite
4200, 150-6th Avenue S.W., Calgary, Alberta T2P 3Y7.
Dated at Calgary, Alberta this 15th day of March 2006.
By order of the Board of Directors of Precision Drilling Corporation,
administrator to Precision Drilling Trust
Vice President, Corporate Services and Corporate Secretary