Precision Drilling cuts rigs to cut debt

Gary Park

For Petroleum News

There’s no bigger window on the state of Canada’s drilling sector than Precision Drilling Trust, which has decided to start some drastic house-cleaning.

The largest oil and gas driller in Canada said it will decommission 38 drilling rigs and 30 service rigs, to reduce spending in 2010 and start clawing back its debts.

The trust’s capital budget for 2010 has been slashed to C$75 million from an expected C$194 million this year and C$230 million in 2008, while its cash payouts to unit holders will remain frozen.

In addition, Precision has tagged C$25 million for performance improvements to 13 to 15 existing rigs to prepare them for work on unconventional resource plays in Canada and the United States.

The moves will allow Precision to exit 2010 with more than 72 percent of its fleet as Tier 1, Super Series and Tier 2, horizontally capable, high performance rigs, which Chief Executive Officer Kevin Neveu said puts the trust in good position once customer demand returns.

Once the decommissioning is finished, Precision will have 352 rigs— 203 in Canada, 146 in the U.S. and three outside North America.

The trust recently reduced its outstanding debt by a cash payment of US$75 million, leaving long-term debt at C$899 million on Nov. 30, with secured-term loans of C$724 million and an unsecured senior note of C$175 million.

Precision lost some favor with analysts when it acquired substantial debt from its C$2 billion takeover of U.S. competitor Grey Wolf just as international credit markets wound down in 2008.

UBS Research analyst Chad Friess said the deal was “absolutely not worth it,” diluting Precision stock “so horribly to pay down debt.”

He said Canada has a fleet of 850 rigs, but has never seen 600 rigs operating since 2006, endorsing Precision’s decommissioning action.