04/28/2014 02:27 EDT | Updated 06/28/2014 01:59 EDT

Precision Drilling bumps up capital spending on strong customer demand

CALGARY - Precision Drilling Corp. is bumping up this year's capital spending by nearly a third in response to strong customer demand for its high-tech drilling equipment.

The Calgary-based oil and gas service firm (TSX:PD) said Monday its budget this year will be $833 million, up from its previous forecast of $634 million.

The additional spending will go toward four additional new rigs to be delivered in the United States in the second half of 2014 and five more to be delivered in early 2015.

Over the past five years, Precision has been turning a greater focus to providing equipment that's geared toward tapping technically challenging reservoirs. Its so-called "Super Series" fleet consists of "highly efficient, highly mobile" rigs that are designed to drill wells horizontally.

With the nine new rigs announced on Monday — eight of which are covered by firm, long-term contracts with U.S. customers — Precision expects to have 222 Super Series rigs operating by early next year.

"We will not deliver, nor will we complete rig construction, unless we have long-term customer contracts which meet or exceed Precision's internal financial hurdles. We also believe this production rate can be increased or decreased depending on customer demand," CEO Kevin Neveu told analysts on a conference call.

BMO Capital Markets analyst Michael Mazar said the new builds send a positive signal.

"These guys just don't build rigs willy nilly. They only will build to the extent that there's customer demand," Mazar said.

"It's non-speculative building," he added. "The reason that distinction is important is because the mere fact that they're building them indicates that demand is strong."

Neveu said it's too soon to get excited by a recent boost in natural gas prices — a result of the colder-than-normal winter experienced in much of North America.

"Despite the cold winter and the resulting very low natural gas storage levels and firm natural gas commodity price, we've seen very little reaction by our customers to increase dry gas activity in either Canada or the United States," Neveu said.

"We believe Precision's extremely well positioned with both available rig assets and the right customer relationships, should the industry decide to apply some capital to dry gas drilling. But I'll be careful not to hold my breath while we wait."

In recent years, producers have been turning away from ordinary dry natural gas, instead chasing after so-called "liquids-rich" gas that contains valuable products such as propane and butane.

Neveu said it looks as drilling activity hit a bottom in the first quarter and all signs are pointing to a stronger second half to 2014, but it's too soon to know for sure.

"The improved cash flows into our customer base are helpful. Barring any macro-dislocations and minding the summer weather in Canada, we're expecting activity increases for the latter half of the year in the range of 10-15 per cent better year over year."

Precision said Canada has been experiencing an increase in drilling for natural gas and gas liquids in northwestern Alberta and northeastern British Columbia — resources that could potentially be exported to energy-hungry Asian countries through multibillion-dollar liquefied natural gas terminals on the West Coast.

While there are many milestones yet to be met on those projects, "it certainly seems that all parties are being keenly focused on realizing the full LNG potential Canada has to offer," Neveu said.

Precision is expecting a final investment decision later this year on at least one of the several projects currently on the drawing board.

Also Monday, Precision posted first-quarter net earnings of $102 million, up from $93 million a year earlier.

The profits amounted to 35 cents per share, a penny shy of the average analyst estimate compiled by Thomson Reuters, but two cents higher than a year ago.

The company said revenue was 13 per cent higher at $672 million, mainly due to higher pricing and drilling activity in Canada, the United States and internationally.

Precision shares were down 14 cents to $13.70 on the Toronto Stock Exchange. They stock shot up about three per cent earlier in the day.

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