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Precision Drilling Q1 revenue up, net profit drops 46 per cent to $57 million

CALGARY - Precision Drilling Trust (TSX:PD.UN) says its first-quarter profits fell by nearly half from a year ago, as dismally low natural gas prices prompt oilpatch firms to leave their drilling rigs idle.

The Calgary-based company said Wednesday it earned $57.4 million in the first three months of 2009, down 46 per cent from a year-earlier $106.3 million.

"As we move through this second quarter, the sector is experiencing record low activity levels in Canada and again, the impact is mitigated by the less seasonal nature of our expanded United States operations," Precision chief executive Kevin Neveu stated.

"The economic conditions and continuing weak commodity prices continue to drive activity down in Canada and the United States at an unprecedented rate."

Revenue rose 31 per cent from $343 million to $448 million, thanks to the $2.1-billion acquisition of U.S. driller Grey Wolf Inc. in December.

Neveu said the consolidation of Grey Wolf's 123 drilling rigs with Precision's fleet of 257 rigs has been successful, despite the tough economic environment.

Precision's first-quarter net earnings, worth 30 cents per unit, compared with 84 cents per unit in the first three months of 2008.

The results were below a consensus estimate compiled by Thomson Reuters. Analysts, on average, expected revenue of $458 million and earnings per share of 35 cents.

BMO Capital Markets analyst Michael Mazar said he had expected a rough first quarter for Precision, which did reasonably well from an operational standpoint.

"They were able to control their costs, margins were reasonable, despite the fact that rig utilization was way down," he said.

"The one thing that was holding this company back was the balance sheet. The debt issues were not insurmountable, but they were certainly acting as an overhang on the stock."

Precision said it took a $34-million foreign exchange hit and a $36-million increase in interest expense during the quarter, and per-unit earnings were diluted by a 56 per cent increase in the number outstanding.

Earlier this week, the company said an Alberta government crown corporation is taking a 15 per cent stake in Precision through $280 million in financing, paving the way for the oilfield services company to restructure its heavy debt load.

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Precision said Monday that Alberta Investment Management Corp. (AIMCo), will invest in $175 million in 10 per cent senior unsecured notes issued by the trust, $105 million in equity and 15 million in equity purchase warrants.

Precision would have been better off waiting until its stock bounced back to get the financing, Mazar said.

"It was an expensive form of financing. They're really giving away the farm as far as the equity goes, but it is being done in exchange for getting out from under some pretty onerous debt obligations," he said.

It was the timing of the Grey Wolf acquisition that got Precision into the debt bind in the first place, Mazar said.

When the deal was reached last summer, Precision's stock price was well above $20. On Wednesday it was trading at around $5.60 - a seven per cent improvement from Tuesday's close.

"Why didn't they issue the equity then if they knew that they were looking at a deal? They could have issued the equity, raised the capital and bought Grey Wolf with that money and not stretched the balance sheet at all," Mazar said.

"Rather they waited to finance it when the equity markets and the debt markets had kind of closed up on them."

But buying Grey Wolf was still a good move strategically, according to Mazar.

"They'll start to reap the benefits of that when we see a cyclical recovery here in drilling activity in North America," he said, adding he doesn't see an improvement until at least mid-2010.

"They'll have a huge amount of torque to that recovery because they're so much bigger."

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