Precision Drilling Trust Q3 2007 Earnings Call Transcript

Oct.26.07 | About: Precision Drilling (PDS)

Precision Drilling Trust (NYSE:PDS)

Q3 2007 Earnings Call

October 25, 2007, 2:00 PM ET

Executives

Kevin A. Neveu - CEO and Executive Director

Doug Strong - CFO and Sr. VP

Analysts

John Tasdemir - TRISTONE Capital

Alan Laws - Merrill Lynch

Dana Benner - Westwind Partners Inc.

Brian Purdy - National Bank Financial

Andrew Bradford - Canaccord Adams

Todd Garman - Peters & Co.

Michael Mazar - BMO Capital Markets

Operator

Good afternoon, ladies and gentlemen, and welcome to the Precision Drilling Trust’s Third Quarter 2007 Earnings Conference Call and Webcast. I would now like to turn the meeting over to Kevin Neveu, Chief Executive Officer. Mr. Neveu, please go ahead.

Kevin A. Neveu - Chief Executive Officer and Executive Director

Good afternoon, ladies and gentlemen. Let me begin by introducing myself, Kevin Neveu, the Chief Executive Officer of Precision Drilling. As this is my 72nd day in the job, I hope that you extend me a little latitude this time around too in your question-and-answer period. Joining me in the call today is Doug Strong, our Chief Financial Officer; Gene Stahl, our Chief Operating Officer is usually a regular participant in this call, but as he is traveling today he will not be participating.

Just before we start to review our business, on behalf of the employees, the Board of Directors, and the stakeholders of Precision Drilling, I want to extend a full thanks to Hank Swartout for his 22 years of incredible leadership for this company, the industry, and the community at large. I know Hank and his wife, Carol, will continue to be a large part of the Calgary community through their involvement in various charities, boards, and events around town. All of us will continue to draw inspiration from the leadership Hank provided to Precision and Hank and Carol's ongoing leadership with the community. Thank you, Hank.

Okay. Moving on, my early impressions of Precision Drilling are very clear. First, while Precision is very good at controlling costs, over the coming months you will see us refocus and aggressively drive cost reduction in every aspect of our business. Secondly, I am very pleased with our growth in United States. You can expect us to leverage this success with continued growth in US. Thirdly, despite this challenging environment for our customers, particularly natural gas storage levels, gas pricing, the Canadian F&D economics, and the current Alberta royalty uncertainty, our customers continue to recognize the exceptional value Precision provides. It's our plan to enhance that value through our people, our equipments, and our services going forward.

I want to make a special note of thanks to our employees who clearly understand the challenges we face and continue to work very hard to deliver safety and productivity results as our customers' demand. Notably, our drilling rig fleet achieved a new benchmark for safety in Q3 2007 with the total reportable incident rate of 2.98%. This record is exceptionally low and gives us confidence that we’ll achieve target zero, that is zero reportable incidents, a completely safe operation, a target we and our customers hold very dear. Again, thank you to our people for the success in safety.

Let me now turn this to Doug Strong to review our third quarter financial results.

Doug Strong - Chief Financial Officer and Senior Vice President

Thank you, Kevin. Ladies and gentlemen, through a news release this morning Precision Drilling Trust reported its financial results for the third quarter and nine-month period ended September 30, 2007. The news release included the unaudited consolidated financial statements consisting of the consolidated statements of earnings and deficit, the consolidated balance sheets, the consolidated statements of cash flows, as well as business segment information and Canadian drilling operating statistics.

Please note that the financial figures are stated in Canadian dollars. We remind our audience that today's comments may include forward-looking information and statements reflecting Precision's views and about events and their potential impact on our operating and financial performance and legal entity capital structure, including oil and natural gas commodity prices, weather trends, growth initiatives, demand trends, estimated capital expenditure levels and timing, projected equipment utilization, customer revenue rates, operating expense levels, earnings, cash flow, the likelihood of a special year-end distribution, the cash distribution policy of Precision Drilling Trust, and tax legislation and policy announcements by the Government of Canada. These expectations involve risks and uncertainties that could impact Precision's operation and financial results and cause actual results to differ from such forward-looking statements and information.

In addition, some of today's comments may refer to non-GAAP measures such as operating earnings, and we refer our listeners to the disclosures in the news release. The September 30, 2007 unaudited financial statements complete with notes and management's discussion and analysis will be filed with regulators and made available on sedar.com by November 14, 2007.

Precision Drilling Trust converted to an income trust on November 7, 2005, and now has generated a distribution history for 23 months, which includes seven complete quarters. During these quarters, Precision has declared cumulative cash distributions of C$624 million or C$4.97 per unit. Precision declared third quarter 2007 cash distributions of C$49 million or C$0.39 per unit based on a monthly rate of C$0.13. As indicated in the news release earlier today and consistent with the prior two years, it is likely that a special year-end distribution will be considered by the trustees of Precision Drilling Trust to effectively flow the taxable income of the trust to unitholders. Pursuant to the declaration of trust, an announcement will be made by December 20, 2007 in this regard. In the past, a special year-end distribution of C$0.022 per unit was declared and paid in cash for 2005. For 2006, a special year-end distribution of C$0.195 was declared in kind, meaning that no cash for additional units were received by unitholders. The in-kind amount was settled through units that were immediately consolidated back to the original number of units outstanding prior to the special in-kind distribution.

As many of our listeners know, Precision operates within a cyclical sector and with a large concentration of services in Canada it is subject to seasonal volatility for equipment utilization in addition to volatility in customer demand associated with commodity price and industry fundamentals. As they have in the past, these business risks play an important role in Precision's future performance. We encourage our investors to examine the 2006 management discussion and analysis in our 2006 Annual Report on pages 30 to 66 and the 2007 third quarter MD&A report to unitholders.

In summary, the third quarter of 2007 was a continuation of prior quarters characterized by low demand for natural gas drilling and well servicing in Canada. For Precision's rig divisions, both drilling and service rigs were lower than prior year activity levels by 32%. For service rigs, completion work has declined with a persistent lower level of drilling over the past 15 months. For the drilling division, the activity trend was similar to last year as drilling was at its highest level in July and moderated lower in each of August and September. In the quarter, Precision's US drilling operation built upon established momentum and reported a sequential 51% increase in operating days over the second quarter of 2007. Compared to the same quarter in 2006, operating days increased by 558%. Since Precision's entry into the US land drilling market in June 2006, rig utilization has been close to 100% as seasonality is not a large factor in most regions and customer demand has been strong relative to Canada.

Accordingly, financial results for the 2007 third quarter include net earnings of C$73 million and cash distributions declared of C$49 million for an increase in unitholders’ equity of C$24 million. On a per unit basis, Precision reported C$0.58 in net earnings and cash distributions declared of C$0.39, a decrease of 48% and 58% respectively over the same period in 2006. Investing activities in the quarter led to C$41 million in capital expenditures for addition of property, plant, and equipment, and consisted of C$11 million in maintenance capital and C$30 million in expansion capital.

Precision's organic growth program to expand the drilling rig fleet commissioned three new drilling rigs and one new service rig during the quarter. Over the next year, the remaining nine drilling rigs for construction are scheduled for completion by Q2 2008 with six for Canada, three for the United States. Due to market conditions, Precision decreased its estimate of 2007 annual capital expenditures by C$55 million to C$220 million. These estimates consist of C$66 million for production capacity maintenance of existing assets and C$154 million for expansionary initiatives. There's no change to previously announced rigs being built in the new rig program. The C$55 million reduction relates to the deferral of certain maintenance, elimination of certain non-rig expansion, and the deferral of certain infrastructure initiatives for consideration in the 2008 capital plan.

Now, the highlights for the nine-month period ended September 30, 2007 include, net earning of C$256 million and cash distributions declared of C$177 million for an increase in unitholders’ equity of C$79 million. On a per unit basis, Precision reported C$2.04 in net earnings and cash distributions declared of C$1.41, a decrease of 43% and 46% respectively over the same period in 2006. Investing activities in the first three quarters of the year led to C$149 million in capital expenditures for additions to property, plant, and equipment, and consisted of C$37 million in maintenance capital and C$112 million in expansion capital. We expect completion of the current drilling rig expansionary initiatives during the second quarter of 2008, unchanged from last quarter.

During the third quarter of 2007, as compared to Q3 '06, Precision generated revenue of C$228 million, a decrease of C$123 million or 35%. Operating earnings for the quarter was C$73 million, a decrease of C$69 million or 48%. Consistent with trends in prior quarters, the financial deterioration over 2006 is consistent with declining activity and customer pricing decreases with excess equipment supply. Activity declines for Precision in Canada are consistent with industry well licensing trends. Near term, this trend has continued in October 2007 where Precision is averaging about 80 rigs drilling and 10 moving for a utilization rate of 37%. So far, this represents an unfavorable variance to the 2006 fourth quarter utilization rate of 43%.

In the third quarter of 2007, the operating earnings margin as a percentage of revenue equates to 32%, a decline of 9 percentage points over the comparable third quarter of 2006. In the third quarter of 2007, drilling rates in Canada declined 12% and operating expenses on a per operating day basis were 2% higher. The marginal cost increase highlights Precision's highly variable cost structure. For service rigs, revenue rates were up 2% with 2006 pricing strength carried over through most of the quarter, while operating expenses per operating hour were 11% higher due primarily to labor and fixed cost overhead allocations over less activity, unchanged from trends established in the second quarter of 2007. Operating costs as a percentage of revenue in the third quarter of 2007 were 54%, an increase of 6 points from Q3 2006. Actual operating costs in Q3 2007 on a daily and hourly basis for the drilling and service rig division were higher by 2% and 11% respectively or approximately C$165 per drilling rig operating day and C$40 per service rig operating hour. Consistent with last quarter, the increases were associated with labor scheduled equipment maintenance and other direct operating costs.

For the third quarter of 2007, general and administrative expenses reported at C$13 million, a decrease of C$7.5 million due to a net reduction in employee compensation accruals. Below the operating earnings line for the quarter, net interest expense in the amount of C$1.6 million remains low and in line with the prior year due to low debt levels.

Turning to the statement of cash flow, cash provided by operating activities in Q3 2007 was C$20 million, a decrease of C$55 million over Q3 '06 due to the quarterly earning decline and the associated favorable change to non-cash working capital balances. Investing activities for the third quarter of 2007 was C$36 million, a decrease of C$44 million over Q3 2006, due to lower expenditures for the purchase of property, plant, and equipment. Financing activities for the quarter provided funds of C$16 million, an increase of C$10 million over Q3 2006.

Turning to the balance sheet, as of September 30, 2007, Precision remains in strong financial position with working capital of C$150 million and long-term debt of C$124 million for a working capital in excess of long-term debt of C$26 million. We continue to carry financial strength and expect to add a conservative level of net debt as we proceed to complete expansion plans into next year. Precision continues to work well within a C$700 million syndicated bank loan facility and C$50 million operating line.

Unitholders’ book equity increased during Precision's third quarter of 2007 by C$0.19 a unit or C$24 million. For those listeners that are new to Precision and the Canadian oilfield service industry, we would emphasize that Precision's activity is seasonal and highly dependent on oil and natural gas commodity price levels. Once again, we recommend that listeners read Precision's regulatory filings.

In closing, we remind our audience that the Government of Canada has passed into legislation certain tax laws during June 2007 that were initially announced or proposed last October. Generally, the tax on distribution implications take effect on January 1, 2011, provided Precision complies with those guidelines. Obviously, we continue to monitor the situation carefully in terms of value maximization for unitholders.

Kevin, that concludes our financial overview.

Kevin A. Neveu - Chief Executive Officer and Executive Director

Thank you, Doug. Let me comment specifically on a few issues going forward. First of all, right now, our customers are currently reserving rigs at a rate very similar to last fall for the coming winter season. While these reservations have no contractual commitment, they do provide an interesting proxy for winter activity. I'll be very pleased if this proxy plays out and we see winter of 2008 like 2007. However, it remains to be seen that these reservations fully turn the rig to contracts.

Turning to rig rates, the fall market will continue to be pressured by the smaller operators and by the lower grade service providers. While these loss rates are a challenge on our overall margin blend, they really do not materially impact our rig rates on our term contracts with our core customers, where safety, drilling performance, and economic results are recognized and valued by those customers. Nonetheless, we fully expect continued pressure on pricing from our customers, as they fully understand the economics around the commodity prices and the potential impact of the changing royalty rates.

I want to reemphasize our renewed focus on cost and discuss the reduction in capital that Doug mentioned in 2007 on maintenance capital. These aspects are directly related, and let me provide a little more color. In Q4, we will permanently retire 11 drilling rigs and 16 well service rigs reducing our fleet size. These are some of our oldest, least efficient, and most costly rigs to operate and transport. Clearly, taking these rigs off of our fleet will improve our cost basis both from an operating cost and maintenance capital perspective, while having a minimal impact on our revenue potential. It's my belief that the Canadian rig fleet and for that matter the North American rig fleet has excess low performance rigs.

And I want to be clear how I categorize these low performance rigs. These are rigs, which are expensive to operate, they're difficult to move, they're large, they're heavy, and they are currently being made obsolete by the higher performance rigs in the market. Conversely, higher performance rigs remain in high demand, they draw the best rates, these will operate with higher utilizations over the full cycle. Precision Drilling will do its part to rationalize the rig fleet focusing forward on the lower cost economic and efficient rigs. The rigs we retire have components, which will be used as spare parts in our operating fleet and this will not result in material breakdown of assets. And most importantly, this action fully aligns Precision internally to continue driving down costs in our internal structure.

We will also be instituting a series of additional cost reduction initiatives in Q4 and I'll talk about those early next year. We also note, though, that during 2007 we've added the total of 7 new rigs to our fleet, and we’ll continue to add new rigs with specific technology that significantly improves safety and economic performance for our people and for our customers. Currently… well, by the end of 2007, our Canadian rig fleet will end the year at 232 rigs. We began 2007 with 240 rigs. We've added 7 new rigs. We've relocated three rigs to the US. We've converted one rig to a training rig, and we will retire 11 rigs in Q4. Our well service fleet began 2007 at 237 rigs. In Q4, we'll retire 16 rigs and the fleet will be 221 by the year-end, and we expect a very slow write down tied to the service for retirements.

All right. Earlier, I commented very briefly about our progress in United States, specifically the Rockies and the Barnett Shale regions. We began 2007 with two rigs operating in United States. We will end the year with 12 rigs running in the US. Very importantly, our customers are telling us that our operating performance, our drilling economic efficiency, and our safety record is excellent. It's better than the rigs that they have with their existing contractor base. Those customers are extending commitments to our current rigs and they're asking for additional rigs. I'm going to stop short of forecasting how many additional rigs we expect to add in the coming months, but it's safe to say that our growth rate in United States will not slow down, in fact it may accelerate. Our safety record, our drilling performance, and our economic efficiency make us a very competitive addition to United States market. I can see a very strong future for our expansion.

All right. On those comments, I will now open the forum to questions.

Question and Answer

Operator

Thank you. We will now take questions from the telephone lines. [Operator Instructions]. The first question is from John Tasdemir from TRISTONE Capital. Please go ahead.

John Tasdemir - TRISTONE Capital

Hi. Good afternoon, guys. Kevin, welcome back to Alberta. Hope they gave you some kind of force majeure clause in your options contract for royalty changes. Anyway, first question is… I mean obviously we all kind of know what's going on in Canada right now. Activity levels are weak and there's a lot of cut-throat pricing going on out there, yet you guys managed to have really pretty good margins in the quarter, and I'm kind of wondering if that's how we look at that going forward. I know you're putting in some cost initiatives, but will we start to see margins… will we see margins continue to decline as we go forward as, I guess, spot contracts start to roll through your income statement? How should we look at that?

Kevin A. Neveu - Chief Executive Officer and Executive Director

John, thank you, and I appreciate coming back to Alberta. I was a little surprised, yesterday to have the temperature go from plus 24 through the day to snow this morning, but I'll adjust. In any event, your question on rates and margins going forward and our performance so far, let me begin by saying that I do believe Precision is excellent at managing cost and we’ve done a very good job to this point. And clearly, the steps we're taking in quarter four to further reduce cost is designed to try to manage our margin and sustain our margin rate through what's going to be a rocky period on prices over the next few months.

John Tasdemir - TRISTONE Capital

Does that mean you don't see material decline in margins?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Well, I'll stop short of forecasting forward on our margin rates, but I'll tell you that we are going to work very hard to try to make our margins.

John Tasdemir - TRISTONE Capital

Okay. Switch gears a bit. Your… the [inaudible] business, you guys I think posted 38% utilization and I'm told that the industry is closer to 55%. Can you explain the disparity there?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Yes, John, I think first of all the 55% you're quoting, I have to go back and look and see if our numbers would match that, but there's no question that we're running a few percentage points below industry as we typically like to do. We're not focused on driving utilization by pricing.

John Tasdemir - TRISTONE Capital

Fair enough. Okay. Yes, there might be just different ways to calculate the number. To clean up the model a bit, Doug, can you help me out with… so you're taking some of the rigs out of the mix in the fourth quarter, but you're also... have already announced some rig additions into next year. So, I was wondering if you could tell me, for the 232 rigs you'll have in Canada at year-end, how many should we be adding to that as we go into 2008 based on what you guys have already announced and the same with the US?

Doug Strong - Chief Financial Officer and Senior Vice President

John, just in terms of timing the rig additions, I think we've got six that we'll be adding in Canada between now and the second quarter of 2008 and you can proportionately add those into the fleet over that time period.

John Tasdemir - TRISTONE Capital

So, does that mean starting with 232 right now plus six?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Well, one of that 232 is addition, so five additional will be on the 232.

John Tasdemir - TRISTONE Capital

Okay.

Doug Strong - Chief Financial Officer and Senior Vice President

That's correct.

John Tasdemir - TRISTONE Capital

Okay. In the US?

Doug Strong - Chief Financial Officer and Senior Vice President

I think in the US you'll see we reported eight rigs as of the end of the quarter.

John Tasdemir - TRISTONE Capital

Yes.

Doug Strong - Chief Financial Officer and Senior Vice President

As Kevin indicated, we expect to be at 12 by the end of the year.

John Tasdemir - TRISTONE Capital

That's all that you've announced so far.

Doug Strong - Chief Financial Officer and Senior Vice President

Correct.

John Tasdemir - TRISTONE Capital

Okay. Is there… and then finally on… I know you guys have some thinking to do on capital spending for all of 2008, but has there already been a dedicated amount for 2008 to give us a starting point?

Doug Strong - Chief Financial Officer and Senior Vice President

No. We'll provide some indication on that in December when we announce as we have historically our capital expenditure plan for 2008. Clearly, as we just discussed, there is some carryover to do with completion of the existing rig build program.

John Tasdemir - TRISTONE Capital

Okay. That's helpful. Thanks, guys.

Kevin A. Neveu - Chief Executive Officer and Executive Director

Thank you, John.

Operator

Thank you. The next question is from Alan Laws from Merrill Lynch. Please go ahead.

Alan Laws - Merrill Lynch

Good afternoon. Hey, 10,000-foot question first. Other than say, I don't know, a swarm of Locusts descending on Western Canada, what could really get worse in the market right now, as you see it?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Why don't we answer that question tomorrow?

Alan Laws - Merrill Lynch

Is the general feeling that you're going to get a watered down response, is that what… the industry association that you belong to, is that what they are feeling or are you guys looking for the worst case here going into next year?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Alan, you know, it's my opinion that this is really a big issue for my customers, and frankly we operate a business, which is designed to be highly variable. We run with the seasonal variances and we'll run with the cycle variances and we'll deal with government activity that changes the business level for us. So, I think we're prepared to handle whatever happens.

Alan Laws - Merrill Lynch

As far as what's most topical that could affect things from where you are today, is it the gas price more so than anything or is it just tax issue or the Canadian dollar, like what's the biggest factor? I'm going to guess it is the gas price, but if it stays in this range, is this tax thing the next shoe [ph] to really grind you guys down?

Kevin A. Neveu - Chief Executive Officer and Executive Director

All right. Alan, certainly right now the gas price is not encouraging drilling in Alberta. We understand that. You understand that.

Alan Laws - Merrill Lynch

Yes.

Kevin A. Neveu - Chief Executive Officer and Executive Director

Longer term, I am extremely bullish on gas and I'm looking very carefully at the amount of rigs drilling in the US at decline rates and looking carefully at imports of LNG. And I firmly believe that over the longer term, and I'm thinking of past couple of quarters, but… probably not even a couple of years, but I don't think gas drilling has any real downside.

Alan Laws - Merrill Lynch

Okay. Well, what I was really getting at is if the gas prices were to recover and you had this tax issue come in, would this tax issue and, say, the Canadian dollar at par, would that delay the recovery in your mind of activity of your customers, or is it just gas prices go higher, it's not going to matter?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Well, I guess it's a pretty complex model that our customers run.

Alan Laws - Merrill Lynch

Very complex, that’s why--.

Kevin A. Neveu - Chief Executive Officer and Executive Director

And certainly, the exchange rate makes our cost bases here a little higher, but I think underlying all of this is that the gas reserves in Canada and the US are declining very quickly. And we're seeing a lot less activity drilling right now and the production rates are going to decline.

Alan Laws - Merrill Lynch

Okay.

Kevin A. Neveu - Chief Executive Officer and Executive Director

And I think that underlines everything that is going on.

Alan Laws - Merrill Lynch

I appreciate that. Another question I had was on, you've taken rigs out of service here and obviously utilizations in the 30s and we're going into the winter and the margins are compressing, you made some comments about the negative leverage inherent in pricing right now I think in your note. How far are margins from 2002 levels are right now? Are we at that or are we rapidly heading there or is it going to take longer to get there?

Doug Strong - Chief Financial Officer and Senior Vice President

Alan, it's Doug, I think when you look at the rates that we announced for the quarter, average day rate on the drilling rig fleet of C$17,112 per day, reflect back to 2002 how the industry evolved to that point. I think it is fair to say that rates today are still higher in terms of absolute numbers certainly.

Alan Laws - Merrill Lynch

Sure, but the costs are higher too.

Doug Strong - Chief Financial Officer and Senior Vice President

Costs are higher and the implied profit margin is higher as well currently when you look at the third quarter in isolation.

Alan Laws - Merrill Lynch

Okay. So, are you... with your comments, I'm assuming that we are rapidly heading towards those 2002 levels, or is there some reason why we won't hit those?

Doug Strong - Chief Financial Officer and Senior Vice President

I don't think you necessarily have to make that call. No, I think you have seen our results trend in Q2, Q3, and how we have sustained, and we are into the second year of lower drilling levels. So, we are hanging in pretty well.

Alan Laws - Merrill Lynch

Okay. Good answer. As far as the fleet goes and the movement the rig to the US, what percentage of your fleet would you view as having relocation potential?

Kevin A. Neveu - Chief Executive Officer and Executive Director

I guess we will deal with every rig on kind of a case-by-case basis. And as we are looking at opportunities right now today, I have got a sales team right now traveling to the US. It is really just case-by-case, application-by-application.

Alan Laws - Merrill Lynch

Sure. The demand for a single down here isn't that great, but as far as your kind of modern rigs and that… are they being fully utilized there enough that you would keep them there or any opportunity down here you just punting every rig you can out of Western Canada, is that fair?

Kevin A. Neveu - Chief Executive Officer and Executive Director

That’s probably not a fair statement. We have a strong base, we are very happy with the Western Canada base and we’ll protect our position here, as long as I am in this job no question about that. But we are going to be growing in US as quickly as we can. Whether it’s one rig at a time or whether it ends up being a three or four-rig contract or a ten-rig contract, we’ll be applying the processes and using the strengths we have in Northern Canada and our economic efficiency to be competitive in US.

Alan Laws - Merrill Lynch

Okay.

Kevin A. Neveu - Chief Executive Officer and Executive Director

This year, we have gone from two rigs to 12 rigs and I’m suggesting that next year we’ll be growing at that rate or better, pretty strong guidance.

Alan Laws - Merrill Lynch

All right. This is my last question, sorry. You mentioned in the release something about the non-compete coming off of the international business. Is this something you're interested in? And how aggressive would you be in taking a shot at building back what you used to have as a pretty big international position?

Kevin A. Neveu - Chief Executive Officer and Executive Director

We will balance our growth outside North America with our growth inside North America. This is the neat thing about moving outside Canada and US is that it gets us into fundamentally the oil market rather than the gas market. And opportunity to me is very exciting.

Alan Laws - Merrill Lynch

All right. Thanks. Sorry for taking up so much time.

Kevin A. Neveu - Chief Executive Officer and Executive Director

No problem. Thank you, Alan.

Operator

Thank you. The next question is from Neema Ballou [ph] from Bloom Investment Council [ph]. Please go ahead.

Unidentified Analyst

Good afternoon, gentlemen. First question, what is the split between contract and spot with respect to the Canadian drilling business?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Neema, we are still running pretty much at our historic range right now on contract rates with our core customers. Nothing has changed dramatically from Q2.

Unidentified Analyst

And the historic rate again, sorry, just to refresh?

Kevin A. Neveu - Chief Executive Officer and Executive Director

It is in the 20% range.

Unidentified Analyst

20% range. With respect to the question earlier in terms of international… pursuing international growth, is that going to take a significant capital commitment or are you going to be able to redeploy Canadian assets?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Well, I'm confident that we have Canadian assets we can redeploy internationally tomorrow.

Unidentified Analyst

Okay. And on the US side, I know you've got a business now taking some Canadian customers you are expending the US activities and you're building these rigs and they're contracted out. Is there anything you’re doing now to win new customers on the US side rather than just extending the Canadian business down south? What are the initiatives there to bring on new customers?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Well, it might fair to say that we’ve started with Canadian customers leveraging into the US, but right now we are developing a broad base and we're working primarily for US E&P companies.

Unidentified Analyst

So, you are gaining some new customers there?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Yes.

Unidentified Analyst

That's all the questions I had. Thank you.

Kevin A. Neveu - Chief Executive Officer and Executive Director

Thank you.

Operator

Thank you. The next question is from Dana Benner from Westwind Partners. Please go ahead.

Dana Benner - Westwind Partners Inc.

Good afternoon, guys, and welcome Kevin. I guess I'd like to comment a little bit differently in terms of focusing on the margins, maybe we could just look at spot day rates right now. So, you having reported a number for Q3, can you give us a sense for where spot day rates would be right now, both from the drilling side and then you are already charging in-service rigs, even as a percentage change would be fine?

Kevin A. Neveu - Chief Executive Officer and Executive Director

I can't comment on the service rigs today. I don't have the information in front of me. But on the drilling side, spot day rates are all over the map and people tend to focus in on the lowest rate they've heard in the last few weeks and there’s no question, people are talking about rates and I’ve heard rumors and talk about rates that get down to the C$10,000 range, maybe slightly above, slightly below. This depends on... the spot depends on the region, the type of rig, and location, and the range of spot rates could be a 100% range. So, I'm not going to focus too much in on the lowest rates that I've heard in the last two weeks.

Dana Benner - Westwind Partners Inc.

Right, but--.

Kevin A. Neveu - Chief Executive Officer and Executive Director

I’m not going to [inaudible].

Dana Benner - Westwind Partners Inc.

You'd have had a notional rig working in the third quarter, and that same notional rig would be working in the fourth quarter. Let’s call it maybe the change on a super single or maybe look at our midrange double, let’s say, and there is probably some sense for how rates have moved since then, maybe it’s just a couple of points, maybe a 5, I don't know, but you must be able to give us at least some sense.

Kevin A. Neveu - Chief Executive Officer and Executive Director

Again, I'm quite aware of the competition out there right now and certainly aware of what some of our larger and some of our smaller competitors are doing on prices. Frankly, our rates in Q2 and Q3, both spot and contract, haven't changed in a measurable way.

Dana Benner - Westwind Partners Inc.

All right. I guess I'm looking at it more on a Q4 basis, kind of on a real-time level as we head into winter.

Kevin A. Neveu - Chief Executive Officer and Executive Director

And typically, we try to firm things up in wintertime to enjoy better rates. Now, this year it will be probably no different than most years when the best rigs will demand great rates and more regional rigs will be more subject to the spot market, but frankly we’re not concerned about rates going into the winter despite the discussion in the marketplace about rates.

Dana Benner - Westwind Partners Inc.

Okay. That's helpful. With respect to the C$55 million decline in CapEx, you suggested deferred maintenance, which I think is self-explanatory, but then you’ve also talked about non-rig initiatives and also our infrastructure. Can you give us a bit more color on those two items?

Doug Strong - Chief Financial Officer and Senior Vice President

Dana, it's Doug. The non-rig expansion typically relates to our camp and catering business and the infrastructure is literally brick-and-mortar type infrastructure, building those types of--.

Dana Benner - Westwind Partners Inc.

So, this would be… presumably, it would be much more weighted to the camps and the catering.

Doug Strong - Chief Financial Officer and Senior Vice President

It’s not a huge amount, but that is the... there is not a lot of expansion capital in that number, but that is the primary part of it.

Dana Benner - Westwind Partners Inc.

All right. Okay. Thirdly, distribution policy, interesting market, obviously you’ve got a good balance sheet and you’ve brought the payout ratio within your operations down quite nicely. I would be curious to know how wedded you are to the distributions you have right now and maybe you want to pontificate a little bit longer term on the effectiveness of the current structure?

Doug Strong - Chief Financial Officer and Senior Vice President

Dana, I think if you take a good look at our outlook, clearly we are now in a challenging market heading into 2008. If you look back on our 21-month history, I think you have seen that we have been very balanced in terms of the cash that we have generated. That cash is pretty much at a very close one-to-one ratio in terms of cash from operations, cash used for distributions to unitholders, and cash used to fund our capital expenditure program. So, as we read the market going forward, we will certainly relay information to our trustees and our directors to ensure that the best information is available to make those calls. You know the uncertainty in the marketplace and how difficult that is.

Dana Benner - Westwind Partners Inc.

I guess just one final question. Can you give us a sense for the... let's think about the term weighting of your current contract structure within Canadian drilling. Would the rollover point be largely in, say, first half of '08 or how... would we get a sense for how long you are protected contractually?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Well, I'm not going to give real specific guidance on that. What I will say is that on the rigs that are under term contracts, those are generally our best-performing rigs and highest demand rigs, and I can tell you that the demand for those rigs remain very strong.

Dana Benner - Westwind Partners Inc.

I guess, so no sense as to whether they are generally rolling over in '08 versus '09, let's say, or prefer not to comment?

Doug Strong - Chief Financial Officer and Senior Vice President

No, Dana, in general, Dana, our long-term contracts carry through 2008 quite nicely.

Dana Benner - Westwind Partners Inc.

Okay. That is exactly what I'm looking for. Okay, guys. That's great. Thanks.

Operator

Thank you. The next question is from Brian Purdy from National Bank Financial. Please go ahead.

Brian Purdy - National Bank Financial

Hi, guys. I was wondering if you could give us maybe a bit more color on your rig fleet. You mentioned that you are going to retire a certain number. Is there another percentage that you would classify that is close to that low performance category that you mentioned in your comments?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Great question, Brian, and it is one you need to ask us again at the end of Q1.

Brian Purdy - National Bank Financial

Just ask you again in Q1, is that whatever you said?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Yes, we will come back and we’ll look at the fleet again every quarter.

Brian Purdy - National Bank Financial

Okay. Fair enough.

Doug Strong - Chief Financial Officer and Senior Vice President

But right now, at this point in time, we think that we have made the right steps in our fleet.

Brian Purdy - National Bank Financial

Okay, great. And in terms of the US market, you mentioned that you are seeing good demand and good performance from your rigs there. I have seen a few comments from your competitors that there is a bit of price pressure and maybe an oversupply of equipment in the US. Can you comment on the market dynamics there and how you plan to attack it?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Right. Brian, I'll come back to my comments earlier that I think that there is an oversupply of under-performing rigs. I think on the high-performance rigs, there is still a significant under-supply. And high performance is not just the quality of the rig itself, it’s also a big factor on the crew. I believe that we have excellent crews, maybe the best crews in the business. Our safety record is phenomenal and our overall performance is phenomenal. So, I believe that we have a rig fleet that in some cases is high technology, some cases mid-technology, and some cases traditional technology run by very good crews that makes them generally high performance rigs. So, I think as we look at the US right now, we're only really focusing on the customers looking for high performance results and I believe that market is highly under-supplied.

Brian Purdy - National Bank Financial

Okay. And with those comments then, would you expect that any rigs that went into the US… that you put into the US market would either be new or relatively new rigs, is that fair to say?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Not necessarily.

Brian Purdy - National Bank Financial

Because some of your older rigs are... you would put them in the high performance category as well?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Depending on the application, we've some rigs that are surprisingly not very young with good crews that are very high performance rigs.

Brian Purdy - National Bank Financial

That's great.

Kevin A. Neveu - Chief Executive Officer and Executive Director

And I don't want call them in by saying 15 years or 20 years or 5 years. I don't want to get into that trap. But clearly, the performance of a rig is tied to the technology and to the crew.

Brian Purdy - National Bank Financial

Okay great. And could you give us any comments on what you're seeing in terms of day rates in the US for new rigs? Obviously, most of your rigs are under contract I believe, but are there the rates that you would be looking at similar to the rates you've got on the rigs you are deploying now?

Kevin A. Neveu - Chief Executive Officer and Executive Director

The rates on the high performance rigs are markedly better than they are for the rigs in Canada right now.

Brian Purdy - National Bank Financial

And would you say they're stable there as well?

Kevin A. Neveu - Chief Executive Officer and Executive Director

On the high performing… And I’ll keep qualifying this by saying high performance rigs, but yes, on those rigs. Those rigs are quite stable on the good rigs.

Brian Purdy - National Bank Financial

Okay. Greats. Thanks very much. That's it from me.

Kevin A. Neveu - Chief Executive Officer and Executive Director

Thank you, Brian.

Operator

Thank you. The next question is from Robert Ulicky [ph] from Ferris Wealth Management [ph]. Please go ahead.

Unidentified Analyst

Hi. Good afternoon. I'd like to know, under what circumstances would you consider converting to a corp. prior to 2011?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Robert, that is a question, which is really with our Board of Directors or trustees, and they’ll be discussing that on an ongoing basis. But I am not prepared to make any comments today.

Unidentified Analyst

Okay. And then, can you comment whether or not… have you renegotiated any long-term contracts prior to exploration?

Kevin A. Neveu - Chief Executive Officer and Executive Director

No, we've not.

Unidentified Analyst

Thank you.

Operator

Thank you.

Kevin A. Neveu - Chief Executive Officer and Executive Director

Thank you, Robert.

Operator

The next question is from Andrew Bradford, Canaccord Adams. Please go ahead.

Andrew Bradford - Canaccord Adams

Thank you. I’m in danger of sounding fairly mundane here. I want to come back to this deferred maintenance capital item. So, C$55 million, the way I look at that’s C$0.45 a unit that you ultimately don't have to spend. And so, I guess the question I have is, what does deferred maintenance mean, because it is not that obvious to me? Does that mean that it was something that… it was like I have to take my car and to get the oil changed every once in a while, I am just going to decide not to do that this year or does it mean that something maybe breaks down a rig and we will just the stack the rig for now So, I am going to have a certain number of rigs back anyway, and if we want to bring that rig back into the market at some point in the future, then we'll fix whatever it is that might have broken down on it?

Doug Strong - Chief Financial Officer and Senior Vice President

Andrew, this is Doug. The way to reflect on maintenance capital, the maintenance term we really brought first to try to standardize based on some accounting pronouncements in prior years. Maintenance, you can really think of in terms of betterment and upgrades to existing equipment.

Kevin A. Neveu - Chief Executive Officer and Executive Director

But not on routine maintenance.

Andrew Bradford - Canaccord Adams

Sorry maintenance capital is a betterment and an upgrade?

Doug Strong - Chief Financial Officer and Senior Vice President

Correct.

Andrew Bradford - Canaccord Adams

That is not a... okay. So, you're... it’s just you are keeping the equipment running, but you're not doing anything to improve upon it as you go forward?

Doug Strong - Chief Financial Officer and Senior Vice President

I am saying that is exactly the nature, that we are improving upon it, upgrading the capacity of the piece of equipment that we are referring to.

Andrew Bradford - Canaccord Adams

I'm referring to the C$55 million in deferred CapEx, as you’re deciding you're not going to do those upgrades at this point in time.

Kevin A. Neveu - Chief Executive Officer and Executive Director

By taking rigs out of the fleet permanently we’re reducing our need for maintenance capital.

Andrew Bradford - Canaccord Adams

Great. And now is the second part of the question, a good portion of that relates to rigs that you just… that you’re not going to be... you're not going to be marketing or you’re going to be taking out of the fleet?

Kevin A. Neveu - Chief Executive Officer and Executive Director

A portion of it does. The rigs we’ve identified we’re pulling out of our fleet, some of that capital is tied to those rigs.

Doug Strong - Chief Financial Officer and Senior Vice President

And also, think about it in terms of just aligning those expenditures with near-term prospects for the equipment to go to work. So, when you reflect on the activity declines in Canada, the number reduction for that type of discretionary spending is simply in line, it is not elimination, it is a deferral.

Andrew Bradford - Canaccord Adams

Okay. Not to belabor the point, but if I thought for whatever reasons that 2008 is going to be a great year again, then I’d have to… I’d put all that money back into my forecast for your capital spending for 2008. That’s fair?

Doug Strong - Chief Financial Officer and Senior Vice President

There again variable activity, that is a good premise.

Andrew Bradford - Canaccord Adams

Okay. And just one other question here. With your background, Kevin, I assume that you at least out of the corner or your eye at this in time you are scanning the globe for opportunities. Now, I am not going to ask anything specific here, but just generally speaking whether it's in Canada or whether it's in the US or abroad, where do you think… given where secondary market pricing is on rigs, where do you think you get the best... you could get the best bang for your buck today?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Well, I think it is probably fair to say that we’ll look for placed where our customers value performance as opposed to places where customers are simply looking for the lowest cost.

Andrew Bradford - Canaccord Adams

Where are those places?

Kevin A. Neveu - Chief Executive Officer and Executive Director

It is probably a little bit early to start pointing out and waking up my competition.

Andrew Bradford - Canaccord Adams

Okay. That's fair enough.

Kevin A. Neveu - Chief Executive Officer and Executive Director

But clearly, there are some markets outside of Canada and the United States where performance and on time and drilling cycle time and having knowledgeable crews and safe crews has measurable value to our customers.

Andrew Bradford - Canaccord Adams

Okay. Is there… just one last question. Is there any place geographically where you find that has changed a lot in the last little while where all of a sudden sort of the market has grown up and the demand for rigs have become much more sophisticated?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Clearly, South America is warming up right now.

Andrew Bradford - Canaccord Adams

Thank you, guys.

Kevin A. Neveu - Chief Executive Officer and Executive Director

And certainly, the Middle East remains very strong.

Andrew Bradford - Canaccord Adams

Okay. Perfect. Thank you.

Operator

Thank you. Next question is from Todd Garman from Peters & Co. Please go ahead.

Todd Garman - Peters & Co.

Good afternoon. Just want to come back to Canada here and big bookings and rates this winter. Is it still reasonable to assume that you're going to be able to charge for winter equipment here for when it does actually became cold, or is that something that is going to change?

Doug Strong - Chief Financial Officer and Senior Vice President

Todd, it's Doug. The traditional ancillary charges for winter equipment is very well established in the industry and that will continue.

Todd Garman - Peters & Co.

Okay. And then, does that include service rigs as well, Doug? You mentioned some rate pressure in the release here that surfaced recently. Is that going to impact that you think or not?

Doug Strong - Chief Financial Officer and Senior Vice President

The same would apply.

Todd Garman - Peters & Co.

All right. And then, in the US I understand that the higher performing rigs are obviously in high demand. You also mentioned rate pressure there. Is that specific to the clients that you are currently working for or is that rate pressure for new work that you are trying to acquire?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Okay. Let me be clear of rate pressure. First of all, all of our clients all the time apply rate pressure, but the places where it has most impact clearly is not on the high performance end of the market. Although rigs are performing and exceeding customer expectations and exceeding contract requirements, the rate pressure is probably less than it is at the lower end of the market. So, in the US right now, we have chosen to participate specifically in the high end of the market, the high performance end, and I think that our rates will be commensurate of the services we provide.

Todd Garman - Peters & Co.

Okay. And then, just last question, coming back to the equipment that has been retired, what type of rigs were retired in each of drilling and service?

Kevin A. Neveu - Chief Executive Officer and Executive Director

I've got a list… a detailed list of the rigs, but generally speaking, they are some of the older rigs that have heavier loads and more loads, more lifts, more difficult to rig up, and then a little bit less on the control system side of the rigs. And typically, these were the rigs that we would put to work later in the cycle rather than early in the cycle.

Todd Garman - Peters & Co.

But where they focused towards singles, doubles, triples, where they coil, can you kind of give us some color on that?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Yes. We don't retire anything in single size, nothing in singles.

Todd Garman - Peters & Co.

Okay. And then, does that apply to service rigs as well?

Kevin A. Neveu - Chief Executive Officer and Executive Director

No, service rigs are really just kind of across the fleet looking at the oldest rigs, least efficient rigs. And no particular trend there.

Todd Garman - Peters & Co.

Okay. Thank you.

Operator

Thank you. The next question is from Alan Laws from Merrill Lynch. Please go ahead.

Alan Laws - Merrill Lynch

Hi, guys again. Sorry, a follow-up to I think Roberts question and he was asking about potential conversion back. I know you can't comment on it or it is up to the Board of Trustees, but if you were going to, can you maybe lay out how that would work? From us down here, is this a complicated type process or just a shareholder vote?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Okay. See, this is more of a clarification of the process than it is about what we're going to do?

Alan Laws - Merrill Lynch

Yes, exactly. I just want to know what the process would be to do this.

Kevin A. Neveu - Chief Executive Officer and Executive Director

Alan, we really haven't spent a lot of time talking about the conversion at this point, and I’d really prefer not to.

Alan Laws - Merrill Lynch

Okay. But it is a when, not an if thing, right? 2011 is just on the horizon.

Kevin A. Neveu - Chief Executive Officer and Executive Director

Well, from a tax standpoint, it is compelling to look at some kind of a structure change, yes.

Alan Laws - Merrill Lynch

Okay. But from, say, an investor in this, you have to provide an extra incentive for them to want to convert back, is that fair?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Again, we really haven't [inaudible].

Alan Laws - Merrill Lynch

Okay. All right, thanks.

Operator

Thank you. The next question is from William Dong [ph] from Merrill Lynch. Please go ahead.

Unidentified Analyst - Merrill Lynch

Yes. I guess following up a few questions ago, you were talking about lower 40, the US market and you are moving equipment down there. It seems to me by following those companies pretty closely and looking at what is happening with them, I mean the market is pretty weak, is this just a matter of it being relatively attractive versus… because Canada is in such bad shape? And you mentioned a shortage of I guess high-end equipment there. Is there a way to maybe spend more on CapEx to build equipment for that market if you really think there is an opportunity there that is not being I guess satisfied by Nabors and Grey Wolf and guys like that?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Okay. So, I think, you had two questions there, William. The first question was comment about softness in the market, in the US generally from the US drilling contractors?

Unidentified Analyst - Merrill Lynch

Yes.

Kevin A. Neveu - Chief Executive Officer and Executive Director

I am not going to comment on what US drilling contractors are saying. What I will comment on is that I know the US fleets very well having worked in the supply side for a long time, and I have a really good sense of the condition of the US fleet and the strengths and weakness of the US fleet. And I firmly believe that the surplus or the oversupply or the softness is really in the soft-bellied part of the rig fleet that dates back… that predates the year 2000 in the US and maybe even predate year 1984 and that number is still a large number, probably over 1000 rigs. When you move to the newer investments and the more efficient rigs and the safer rigs in the US, I am still a firm believer that that market isn't over supplied.

Unidentified Analyst - Merrill Lynch

Okay. How many rigs--?

Kevin A. Neveu - Chief Executive Officer and Executive Director

The second half of your question was I believe, is it worth more investment to pursue the second half of the market, it may be very well be. So far this year, we have invested in new rigs in 2007 for the US fleet and it’s not unlikely to think we might do that going forward.

Unidentified Analyst - Merrill Lynch

So, but we are cutting back our CapEx overall, right?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Only our 2007 CapEx has currently forecasted and budgeted.

Unidentified Analyst - Merrill Lynch

I guess what we have to do to be able to... let's assume the Canadian market kind of stays where it is for a little while longer from another season. What do we have to do spend extra money? I mean are we talking distribution cuts if that were in the cards or would you not sacrifice that to maybe take advantage of a market like that you see up to in the US?

Kevin A. Neveu - Chief Executive Officer and Executive Director

I think that our capital budget in 2007 will allow us to take care of expansion, and we would expect to see things differently going forward.

Unidentified Analyst - Merrill Lynch

All right. Last question. How many rigs is Nabors building per year?

Kevin A. Neveu - Chief Executive Officer and Executive Director

I know that number about 90 days ago, but I don't know it today.

Unidentified Analyst - Merrill Lynch

What was it 90 days ago?

Kevin A. Neveu - Chief Executive Officer and Executive Director

I am not going to quote it. It is not relevant to my business now.

Unidentified Analyst - Merrill Lynch

You are talking about getting into a market where we have got a dominant supplier and it spends readily and invests money and builds their own rigs. So, I think it is relevant to the discussion if we are talking about putting more of our rigs and business there.

Kevin A. Neveu - Chief Executive Officer and Executive Director

Okay. Sure enough. I'm not going to comment on Nabors’ expansions plans. That is their plan.

Unidentified Analyst - Merrill Lynch

Yes. But it is our market. Okay.

Kevin A. Neveu - Chief Executive Officer and Executive Director

Fair enough.

Unidentified Analyst - Merrill Lynch

So, will you answer the question or not?

Kevin A. Neveu - Chief Executive Officer and Executive Director

I can’t comment on Nabors’ plans or where they are spending their money, I can’t. What I can tell you is, the customers we're seeing and doing business with right now continues to demand more of our rigs and we believe that it will carry forward into 2008.

Unidentified Analyst - Merrill Lynch

Okay. But I guess you'd hope that you would take into account the size of the market and market potential, and I guess that does kind of include other players.

Kevin A. Neveu - Chief Executive Officer and Executive Director

William, I mentioned earlier that I still believe that the high performance rig market is well under-supplied.

Unidentified Analyst - Merrill Lynch

Okay. Thank you.

Kevin A. Neveu - Chief Executive Officer and Executive Director

Thank you.

Operator

Thank you. The next question is from Mike Mazar from BMO Capital Markets. Please go ahead.

Michael Mazar - BMO Capital Markets

Okay, guys. Most of my questions have been answered, but just on the cost control priority that Kevin mentioned off the top, I mean CAODC sort of mandated wage rates being what they are. Can you give us some examples of specifically what you can do as for as cost cutting goes?

Kevin A. Neveu - Chief Executive Officer and Executive Director

I am not going to today, but I can tell you that we have some initiatives right now that are in place that we are moving forward on that I'll prefer to comment on probably on our next conference call.

Michael Mazar - BMO Capital Markets

Sure, okay. And just lastly, I don't suppose you'd tell us those international regions you thought you could deploy Canadian rigs tomorrow?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Once again, if I do that I will be alerting competition, which I really don't want to do this early. We are still 10 months away from the earliest we could deploy a rig to most international markets.

Michael Mazar - BMO Capital Markets

Okay. Sure. Let me ask you this one. When you are talking about say a 1000 rigs, legacy rigs, let’s say, in the US, I think was the number you just threw out, as that fleet gets high-graded and those rigs… something has to happen to them. If those go overseas where there is a bit more resistance to new technology so they maybe willing to take those older rigs, does that market suddenly get saturated and kind of ruins the economics or deteriorate the economics, is that something you guys worry about or is that not the right way to think about the international market?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Mike, I am not sure if I caught the question correctly, but let me try to answer to what I thought I heard. What you’re really looking at is the global pool of rigs and deciding whether or not the global pool of rigs is really saturated or not saturated.

Michael Mazar - BMO Capital Markets

I guess that’s it, exactly. Particularly, in light of those older rigs you said in the US that are not necessarily in demand, I am wondering if they would be in demand overseas and if so when they move there to what extent that deteriorates the economics of the international market?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Okay. First of all, rigs are not completely fungible. I mean some of those rigs in US aren't wouldn't be good rigs in Canada, wouldn't be good rigs in Kuwait, and some of the rigs would be. So, there’s an issue with fungibility of rigs. I think the fact of the matter is that a large portion of the worldwide fleet is a lot less effective than a very small portion of the worldwide fleet. And as rig technology and rig performance continues to develop, I mean both crews and technology, a lot of the soft underbelly of the worldwide land rig fleet is going to be obsoleted by performance.

Michael Mazar - BMO Capital

Is there demand for that new technology overseas? I mean it only seems to me just kind of anecdotally that they're willing to put up with these older rigs for safety record things like that and they haven't really adopted new rigs in most markets, is that fair?

Kevin A. Neveu - Chief Executive Officer and Executive Director

No, not really. Having been a rig manufacturer in a lot of those markets, it is really case-by-case, customer-by-customer.

Michael Mazar - BMO Capital Markets

Sure. Okay.

Kevin A. Neveu - Chief Executive Officer and Executive Director

And there is no broad-brush trend.

Michael Mazar - BMO Capital Markets

Right. Okay. Terrific.

Operator

Thank you. The next question is from Robert Ulicky [ph] from Ferris Wealth Management [ph]. Please go ahead.

Unidentified Analyst

Two more questions. I am not sure if I heard correctly, but did you say it is advantageous to convert back to a corp.?

Kevin A. Neveu - Chief Executive Officer and Executive Director

No, I didn't say that. And we are making no comments about conversion. We don't plan to make any comments.

Unidentified Analyst

Okay. Then the last question on potential conversion, if you do convert to a corp., is a shareholder vote required or can you just do it arbitrarily?

Doug Strong - Chief Financial Officer and Senior Vice President

Robert, I think you’ve seen already with certain income trusts that there certainly are cases where a unitholder vote is required. I think that that is something that is reasonable to expect.

Unidentified Analyst

All right. Thank you very much.

Kevin A. Neveu - Chief Executive Officer and Executive Director

All right. We’re kind of running short of time and I want to keep everybody on their own calendars. We will take one more question.

Operator

Thank you. The next question is from Todd Garman from Peters & Co. Please go ahead.

Todd Garman - Peters & Co.

Kevin, wondering if you... do you think that there are... are there any differences between Canada and the US in terms of how work is awarded by E&P companies? Is there more use of contracts in the US as compared to here? Do they use procurement departments more or consulting firms more? Can you clarify or provide any color on whether or not there might be any differences?

Kevin A. Neveu - Chief Executive Officer and Executive Director

Todd, the answer might be almost basin-to-basin and operator-to-operator. In certain states, there are a lot of E&P operators in Canada or US, behaves relatively similarly. Mid-size, intermediates, again generally similarly, it’s the smaller companies that might behave differently. And since I’ve commented that we are kind of focusing towards the high performance end of the drilling spectrum, we’re probably going to be talking more to the large E&P companies and large intermediates.

Todd Garman - Peters & Co.

Okay. Thank you.

Kevin A. Neveu - Chief Executive Officer and Executive Director

Thank you.

Operator

Thank you. I would now like to turn the meeting back over to Mr. Neveu.

Kevin A. Neveu - Chief Executive Officer and Executive Director

All right. Well, thank you. We look very much forward to meeting many of you over the coming weeks. Clearly, I’m very enthusiastic about the momentum we have in Precision Drilling and frankly believe that the challenges in this sector right now create excellent opportunities for our company. Thank you.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation. Have a great day.

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