EX-99.2 5 ex99_2.htm CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2010.

Exhibit 99.2
P R E C I S I O N D R I L L I N G C O R P O R AT I O N 17

Precision Drilling Corporation |  |  |  |  |  |  |
CONSOLIDATED BALANCE SHEET |  |  |  |  |  |  |
(UNAUDITED) |  |  |  |  |  |  |
|  | September 30, |  | December 31, |
(stated in thousands of Canadian dollars) |  |  | 2010 |  |  | 2009 |
ASSETS |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |
Cash |  |  | $ | 208,709 |  |  | $ | 130,799 |
Accounts receivable |  |  |  | 339,366 |  |  |  | 283,899 |
Income tax recoverable |  |  |  | – |  |  |  | 25,753 |
Inventory |  |  | 9,733 |  |  |  | 9,008 |
|  |  |  | 557,808 |  |  |  | 449,459 |
Income tax recoverable |  |  |  | 64,579 |  |  |  | 64,579 |
Property, plant and equipment, net of accumulated depreciation |  |  |  | 2,811,144 |  |  |  | 2,913,966 |
Intangibles |  |  |  | 2,055 |  |  |  | 3,156 |
Goodwill |  |  | 752,910 |  |  |  | 760,553 |
|  |  | $ | 4,188,496 |  |  | $ | 4,191,713 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |  |
Accounts payable and accrued liabilities |  |  | $ | 159,212 |  |  | $ | 128,376 |
Income taxes payable |  |  |  | 2,056 |  |  |  | – |
Current portion of long-term debt | (note 6) |  |  | 4,483 |  |  |  | 223 |
|  |  |  | 165,751 |  |  |  | 128,599 |
Long-term liabilities |  |  |  | 25,511 |  |  |  | 26,693 |
Long-term debt | (note 6) |  |  | 679,291 |  |  |  | 748,725 |
Future income taxes |  |  | 701,171 |  |  |  | 703,195 |
|  |  | 1,571,724 |  |  |  | 1,607,212 |
Contingencies | (note 10) |  |  |  |  |  |  |  |
Shareholders’ equity: |  |  |  |  |  |  |  |  |
Shareholders’ capital | (note 3) |  |  | 2,770,853 |  |  |  | – |
Unitholders’ capital | (note 3) |  |  | – |  |  |  | 2,770,708 |
Contributed surplus | (note 3(c)) |  |  | 8,803 |  |  |  | 4,063 |
Retained earnings |  |  |  | 163,775 |  |  |  | 107,227 |
|  |  | (326,659 | ) |  |  | (297,497 | )
Accumulated other comprehensive loss | (note 7) |  |  | 2,616,772 |  |  |  | 2,584,501 |
|  |  | $ | 4,188,496 |  |  | $ | 4,191,713 |
See accompanying notes to consolidated financial statements |  |  |  |  |  |  |  |  |

18 C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

Precision Drilling Corporation
CONSOLIDATED STATEMENTS OF
EARNINGS AND RETAINED EARNINGS (UNAUDITED)

|  | Three months ended September 30, |  | Nine months ended September 30, |
(stated in thousands of Canadian dollars, except per share amounts) |  | 2010 |  |  | 2009 |  |  | 2010 |  |  | 2009 |
Revenue |  |  | $ | 359,152 |  |  | $ | 253,337 |  |  | $ | 994,116 |  |  | $ | 911,379 |
Expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Operating |  |  |  | 222,465 |  |  |  | 143,059 |  |  |  | 631,006 |  |  |  | 522,411 |
General and administrative |  |  |  | 24,090 |  |  |  | 24,539 |  |  |  | 73,116 |  |  |  | 74,582 |
Depreciation and amortization |  |  |  | 47,300 |  |  |  | 30,378 |  |  |  | 132,288 |  |  |  | 102,549 |
Foreign exchange |  |  |  | (18,003 | ) |  |  | (63,486 | ) |  |  | (11,670 | ) |  |  | (105,055 | )
Finance charges | (note 9) |  |  | 21,848 |  |  |  | 29,396 |  |  |  | 102,819 |  |  |  | 112,947 |
Earnings before income taxes |  |  |  | 61,452 |  |  |  | 89,451 |  |  |  | 66,557 |  |  |  | 203,945 |
Income taxes: | (note 4) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Current |  |  |  | 608 |  |  |  | 5,216 |  |  |  | 4,755 |  |  |  | 13,380 |
Future |  |  | (234 | ) |  |  | 12,539 |  |  |  | 5,254 |  |  |  | 3,977 |
|  |  | 374 |  |  |  | 17,755 |  |  |  | 10,009 |  |  |  | 17,357 |
Net earnings |  |  |  | 61,078 |  |  |  | 71,696 |  |  |  | 56,548 |  |  |  | 186,588 |
Retained earnings (deficit), beginning of period |  |  | 102,697 |  |  |  | 60,416 |  |  |  | 107,227 |  |  |  | (48,068 | )
Distributions declared |  |  | – |  |  |  | – |  |  |  | – |  |  |  | (6,408 | )
Retained earnings, end of period |  |  | $ | 163,775 |  |  | $ | 132,112 |  |  | $ | 163,775 |  |  | $ | 132,112 |
Earnings per share: | (note 11) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | $ | 0.22 |  |  | $ | 0.26 |  |  | $ | 0.21 |  |  | $ | 0.77 |
Diluted |  |  | $ | 0.21 |  |  | $ | 0.25 |  |  | $ | 0.20 |  |  | $ | 0.75 |
See accompanying notes to consolidated financial statements |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS) (UNAUDITED)

| Three months ended September 30, | Nine months ended September 30,
(stated in thousands of Canadian dollars) |  | 2010 |  |  | 2009 |  |  | 2010 |  |  | 2009 |
Net earnings |  | $ | 61,078 |  |  | $ | 71,696 |  |  | $ | 56,548 |  |  | $ | 186,588 |
Unrealized gain (loss) recorded on translation of |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
assets and liabilities of self-sustaining operations |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
in foreign currency |  |  | (52,228 | ) |  |  | (154,590 | ) |  |  | (29,162 | ) |  |  | (265,466 | )
Comprehensive income (loss) |  | $ | 8,850 |  |  | $ | (82,894 | ) |  | $ | 27,386 |  |  | $ | (78,878 | )
See accompanying notes to consolidated financial statements |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

P R E C I S I O N D R I L L I N G C O R P O R AT I O N 19

Precision Drilling Corporation |  |  |  |  |  |  |  |  |  |  |  |  |
CONSOLIDATED STATEMENTS OF CASH FLOW |  |  |  |  |  |  |
(UNAUDITED) |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Three months ended September 30, | Nine months ended September 30,
(stated in thousands of Canadian dollars) |  |  | 2010 |  |  | 2009 |  |  | 2010 |  |  | 2009 |
Cash provided by (used in): |  |  |  |  |  |  |  |  |  |  |  |  |
Operations: |  |  |  |  |  |  |  |  |  |  |  |  |
Net earnings |  |  | $ | 61,078 |  |  | $ | 71,696 |  |  | $ | 56,548 |  |  | $ | 186,588 |
Adjustments and other items not involving cash: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Long-term compensation plans |  |  |  | 3,079 |  |  |  | 4,786 |  |  |  | 8,884 |  |  |  | 2,914 |
Depreciation and amortization |  |  |  | 47,300 |  |  |  | 30,378 |  |  |  | 132,288 |  |  |  | 102,549 |
Future income taxes |  |  |  | (234 | ) |  |  | 12,539 |  |  |  | 5,254 |  |  |  | 3,977 |
Foreign exchange |  |  |  | (18,392 | ) |  |  | (67,321 | ) |  |  | (10,595 | ) |  |  | (118,319 | )
Amortization of debt issue costs | (note 9) |  |  | 7,621 |  |  |  | 7,056 |  |  |  | 50,400 |  |  |  | 30,119 |
Other |  |  |  | (2,472 | ) |  |  | – |  |  |  | (1,586 | ) |  |  | – |
Changes in non-cash working capital balances |  |  | (30,405 | ) |  |  | (39,186 | ) |  |  | (10,990 | ) |  |  | 226,270 |
|  |  |  | 67,575 |  |  |  | 19,948 |  |  |  | 230,203 |  |  |  | 434,098 |
Investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Purchase of property, plant and equipment |  |  | (35,786 | ) |  |  | (14,198 | ) |  |  | (64,953 | ) |  |  | (179,443 | )
Proceeds on sale of property, plant and equipment |  |  | 2,072 |  |  |  | 2,428 |  |  |  | 9,371 |  |  |  | 10,257 |
Changes in non-cash working capital balances |  |  | 2,395 |  |  |  | 1,741 |  |  |  | 7,785 |  |  |  | (20,147 | )
|  |  |  | (31,319 | ) |  |  | (10,029 | ) |  |  | (47,797 | ) |  |  | (189,333 | )
Financing: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Repayment of long-term debt |  |  |  | (13,387 | ) |  |  | (6,567 | ) |  |  | (103,760 | ) |  |  | (887,605 | )
Debt issue costs |  |  |  | – |  |  |  | (674 | ) |  |  | (2,165 | ) |  |  | (21,628 | )
Re-purchase of trust units | (note 3) |  |  | – |  |  |  | – |  |  |  | (6 | ) |  |  | – |
Distributions paid |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | (27,233 | )
Increase in long-term debt |  |  |  | – |  |  |  | – |  |  |  | – |  |  |  | 408,893 |
Issuance of trust units, net of issue costs |  |  | – |  |  |  | (533 | ) |  |  | – |  |  |  | 413,223 |
Change in non-cash working capital balances |  |  | – |  |  |  | (431 | ) |  |  | – |  |  |  | – |
|  |  |  | (13,387 | ) |  |  | (8,205 | ) |  |  | (105,931 | ) |  |  | (114,350 | )
Effect of exchange rate changes on cash and |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
cash equivalents |  |  |  | (295 | ) |  |  | (4,164 | ) |  |  | 1,435 |  |  |  | (14,397 | )
Increase (decrease) in cash and cash equivalents |  |  | 22,574 |  |  |  | (2,450 | ) |  |  | 77,910 |  |  |  | 116,018 |
Cash and cash equivalents, beginning of period |  |  | 186,135 |  |  |  | 179,979 |  |  |  | 130,799 |  |  |  | 61,511 |
Cash and cash equivalents, end of period |  | $ | 208,709 |  |  | $ | 177,529 |  |  | $ | 208,709 |  |  | $ | 177,529 |
See accompanying notes to consolidated financial statements |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

20 C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

Precision Drilling Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(tabular amounts are stated in thousands of Canadian dollars except share numbers)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Precision Drilling Corporation (“Precision” or the “Corporation”) is a provider of contract drilling and completion and production services primarily to oil and natural gas exploration and production companies in Canada and the United States.
On June 1, 2010 Precision Drilling Trust (the “Trust”) completed its conversion (the “Conversion”) from an income trust to a corporation pursuant to a Plan of Arrangement (the “Arrangement”). Pursuant to the Arrangement, Trust unitholders and Exchangeable LP unitholders exchanged their Trust units and Exchangeable LP units for common shares of Precision on a one-for-one basis.
The Conversion has been accounted for on a continuity of interest basis and accordingly these interim financial statements reflect the financial position, results of operations and cash flows as if Precision had always carried on the business formerly carried on by the Trust and were prepared using accounting policies and methods of their application consistent with those used in the preparation of the Trust’s consolidated audited financial statements for the year ended December 31, 2009. All references to shares and shareholders in these financial statements pertain to common shares and common shareholders subsequent to the Conversion and units and unitholders prior to the Conversion. These interim financial statements conform in all material respects to the requirements of generally accepted accounting principles in Canada for annual financial statements with the exception of certain note disclosures. As a result, these interim financial statements should be read in conjunction with the Trust’s consolidated audited financial statements for the year ended December 31, 2009.
NOTE 2. SEASONALITY OF OPERATIONS
Precision has operations that are carried on in Canada which represent approximately 41% (2009 – 38%) of consolidated total assets as at September 30, 2010 and 52% (2009 – 45%) of consolidated revenue for the nine months ended September 30, 2010. The ability to move heavy equipment in Canadian oil and natural gas fields is dependent on weather conditions. As warm weather returns in the spring, the winter’s frost comes out of the ground rendering many secondary roads incapable of supporting the weight of heavy equipment until they have thoroughly dried out. The duration of this “spring break-up” has a direct impact on Precision’s activity levels. In addition, many exploration and production areas in northern Canada are accessible only in winter months when the ground is frozen hard enough to support equipment. The timing of freeze up and spring break-up affects the ability to move equipment in and out of these areas. As a result, late March through May is traditionally Precision’s slowest time in this region.
NOTE 3. SHAREHOLDERS’ CAPITAL
(a) Authorized – unlimited number of voting common shares
– unlimited number of preferred shares, issuable in series
(b) Issued

Common shares |  | Number |  |  | Amount |
Balance May 31, 2010 |  |  | – |  |  | $ | – |
Issued pursuant to the Arrangement |  |  | 275,663,344 |  |  |  | 2,770,853 |
Balance September 30, 2010 |  |  | 275,663,344 |  |  | $ | 2,770,853 |

P R E C I S I O N D R I L L I N G C O R P O R AT I O N 21

The following provides a continuity of Trust units and Exchangeable LP units from January 1, 2010 up to the Conversion on June 1, 2010.

Trust units |  | Number |  |  | Amount |
Balance December 31, 2009 |  |  | 275,516,778 |  |  | $ | 2,769,338 |
Issued on redemption of non-management directors DSU’s |  |  | 28,586 |  |  |  | 154 |
Cancellation of units owned by dissenting unitholders |  |  | (840 | ) |  |  | (9 | )
Balance May 31, 2010 |  |  | 275,544,524 |  |  | $ | 2,769,483 |

Exchangeable LP units |  | Number |  |  | Amount |
Balance December 31, 2009 and May 31, 2010 |  |  | 118,820 |  |  | $ | 1,370 |

Summary |  | Number |  |  | Amount |
Trust units |  |  | 275,544,524 |  |  | $ | 2,769,483 |
Exchangeable LP units |  |  | 118,820 |  |  |  | 1,370 |
Unitholders’ capital, May 31, 2010 |  |  | 275,663,344 |  |  | $ | 2,770,853 |

Pursuant to the Arrangement, any unitholder of the Trust could dissent and be paid the fair value of the units, being the trading price of Trust units at the close of business on the last business day prior to the Annual and Special Meeting of Unitholders on May 11, 2010. As a result a total of 840 units were repurchased for cancellation for six thousand dollars, of which a discount of three thousand dollars over the stated capital was credited to contributed surplus.

(c) Contributed surplus |  |  |
|  | Amount |
Balance December 31, 2009 |  | $ | 4,063 |
Share based compensation expense |  |  | 4,891 |
Redemption of non-management directors DSU’s |  |  | (154 | )
Cancellation of units owned by dissenting unitholders |  |  | 3 |
Balance September 30, 2010 |  | $ | 8,803 |

NOTE 4. INCOME TAXES
The provision for income taxes differs from that which would be expected by applying statutory Canadian income tax rates. A reconciliation of the difference at September 30 is as follows:

| Three months ended September 30, |  | Nine months ended September 30, |
|  | 2010 |  |  | 2009 |  |  | 2010 |  |  | 2009 |
Earnings before income taxes |  | $ | 61,452 |  |  | $ | 89,451 |  |  | $ | 66,557 |  |  | $ | 203,945 |
Federal and provincial statutory rates |  |  | 28% |  |  |  | 29% |  |  |  | 28% |  |  |  | 29% |
Tax at statutory rates |  | $ | 17,207 |  |  | $ | 25,941 |  |  | $ | 18,636 |  |  | $ | 59,144 |
Adjusted for the effect of: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-deductible expenses |  |  | 4,879 |  |  |  | 1,644 |  |  |  | 5,343 |  |  |  | 6,372 |
Non-taxable capital gains |  |  | (128 | ) |  |  | (16,248 | ) |  |  | (128 | ) |  |  | (16,816 | )
Income taxed at lower rates |  |  | (19,191 | ) |  |  | (1,388 | ) |  |  | (21,173 | ) |  |  | (36,812 | )
Income to be distributed to unitholders, |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
not subject to tax in the Trust |  |  | – |  |  |  | (202 | ) |  |  | – |  |  |  | (2,525 | )
Other |  |  | (2,393 | ) |  |  | 8,008 |  |  |  | 7,331 |  |  |  | 7,994 |
Income tax expense |  | $ | 374 |  |  | $ | 17,755 |  |  | $ | 10,009 |  |  | $ | 17,357 |

22 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

NOTE 5. BANK INDEBTEDNESS
During the second quarter of 2010 a U.S. subsidiary of the Corporation arranged a new US$15.0 million secured operating facility with a U.S. bank. Advances under this facility are available at the bank’s prime lending rate.
In total the Corporation and its subsidiaries have $25.0 million and US$15.0 million of secured operating facilities. At September 30, 2010 no amounts were drawn on these facilities. Availability of the $25.0 million facility was reduced by outstanding letters of credit in the amount of $0.7 million at September 30, 2010.

NOTE 6. LONG-TERM DEBT | September 30, |  | December 31, |
|  | 2010 |  |  | 2009 |
Secured facility: |  |  |  |  |  |
Term Loan A |  | $ | 271,018 |  |  | $ | 288,887 |
Term Loan B |  |  | 327,208 |  |  |  | 422,097 |
Revolving credit facility |  |  | – |  |  |  | – |
Unsecured senior notes |  |  | 175,000 |  |  |  | 175,000 |
|  |  | 773,226 |  |  |  | 885,984 |
Less net unamortized debt issue costs |  |  | (89,452 | ) |  |  | (137,036 | )
|  |  | 683,774 |  |  |  | 748,948 |
Less current portion |  |  | (4,483 | ) |  |  | (223 | )
|  | $ | 679,291 |  |  | $ | 748,725 |

At September 30, 2010 the Term Loan A facility consists of a term A-1 facility denominated in U.S. dollars in the amount of US$245.3 million and a term A-2 facility denominated in Canadian dollars in the amount of $18.4 million.
At September 30, 2010 the Term Loan B facility consists of a term loan B-1 facility and a term loan B-2 facility denominated in U.S. dollars in the amounts of US$270.3 million and US$47.4 million, respectively.
During the second quarter of 2010, the terms of the secured facility were amended to lower the LIBOR floor for the Term Loan B facility to 1.75% from 3.25% and lower the LIBOR interest rate margin on existing loans under the Term Loan B facility to 5.0% from an average interest rate margin of 6.45% . The secured facility was also amended to provide for the payment in certain circumstances by Precision to lenders under the Term Loan B facility of a fee equal to 1.0% of the aggregate principal amount of loans subsequently prepaid or re-priced under the Term Loan B facility on or prior to September 30, 2011. In connection with the amendments to the secured facility, non-consenting holders of US$74.0 million in loans under the Term Loan B facility were repaid. After the amendment the current blended cash interest cost of Precision’s debt is approximately 7.0% .
In addition, the revolving credit facility lending capacity increased by US$150.0 million to US$410.0 million and is available to Precision to finance working capital needs and for general corporate purposes. Availability of the revolving credit facility was reduced at September 30, 2010 by outstanding letters of credit of US$24.9 million.
During the first quarter of 2010 Precision amended certain covenants and terms contained in the secured facility. These amendments included an increase in the leverage ratio test from 3.00:1 to 3.50:1 through December 31, 2011, a decrease in the interest coverage ratio test from 3.00:1 to 2.75:1 through December 31, 2011 and the removal of the restrictions on expansion related capital expenditures (limitations on total capital expenditures remained unchanged).

At September 30, 2010 mandatory principal repayments are as follows: |  |  |
For the twelve month periods ended September 30, |  |  |
2011 |  | $ | 4,483 |
2012 |  |  | 55,094 |
2013 |  |  | 71,243 |
2014 |  |  | 467,406 |
2015 |  |  | 58,333 |
Thereafter |  |  | 116,667 |

P R E C I S I O N D R I L L I N G C O R P O R AT I O N 23

NOTE 7. ACCUMULATED OTHER COMPREHENSIVE LOSS |  |  |
Balance, December 31, 2009 |  | $ | (297,497 | )
Unrealized foreign currency translation |  |  | (29,162 | )
Balance, September 30, 2010 |  | $ | (326,659 | )

NOTE 8. SHARE BASED COMPENSATION PLANS
The Conversion did not result in any significant changes to Precision’s share based compensation plans except that certain elements of the plans that were based on the Trust’s unit price prior to the Conversion are now based on Precision’s common share price.
(a) Officers and employees
During 2009 Precision introduced two new share based incentive plans to replace the Performance Saving Plan and the Long-Term Incentive Plan. Under the Restricted Share incentive plan shares granted to eligible employees vest annually over a three year term. Vested shares are automatically paid out in cash in the first quarter of the year following vesting at a value determined by the fair market value of the shares as at December 31 of the vesting year. Under the Performance Share incentive plan shares granted to eligible employees vest at the end of a three year term. Vested shares are automatically paid out in cash in the first quarter following the vested term at a value determined by the fair market value of the shares at December 31 of the vesting year and based on the number of performance shares held multiplied by a performance factor that ranges from zero to two times. The performance factor is based on Precision achieving a predetermined rate of return on capital employed and share price performance compared to a peer group over the three year period. As at September 30, 2010 $2.9 million is included in accounts payable and $7.3 million in long-term liabilities for the plans. Included in net earnings for the three and nine months ended September 30, 2010 is an expense of $2.1 million (2009 – $2.9 million) and $5.6 million (2009 – $5.3 million), respectively.
Notwithstanding that the Performance Savings Plan was replaced in 2009, certain liabilities continue to exist as eligible participants were able to elect to receive a portion of their annual performance bonus in the form of deferred shares. All deferred shares must be redeemed within 60 days of ceasing to be an employee of Precision or by the end of the second full calendar year after receipt. A summary of the deferred shares outstanding under this share based incentive plan is presented below:

Deferred Shares |  | Outstanding |
Balance, December 31, 2009 |  |  | 245,916 |
Redeemed on employee resignations and withdrawals |  |  | (35,419 | )
Balance, September 30, 2010 |  |  | 210,497 |

As at September 30, 2010 $1.4 million is included in accounts payable and accrued liabilities for outstanding deferred shares. Included in net earnings for the three and nine months ended September 30, 2010 is an expense recovery of $0.1 million (2009 – $0.5 million expense) and $0.3 million (2009 – $0.8 million expense), respectively.
Precision has a Unit Appreciation Rights (“UAR”) plan. Under the plan eligible participants were granted UAR’s that entitle the rights holder to receive cash payments calculated as the excess of the market price per common share over the exercise price per UAR on the exercise date. The UAR’s vest over a period of 5 years and expire 10 years from the date of grant. No amounts relating to the UAR plan have been recorded as compensation expense or accrued liability as at September 30, 2010 and 2009 as the intrinsic value of the awards was nil.
24 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

(b) Executive
In 2007 Precision instituted a Deferred Signing Bonus Share Plan for its Chief Executive Officer. Under the plan 178,336 notional shares were granted on September 1, 2007. The shares were redeemable one-third annually beginning September 1, 2008 and were settled for cash based on the share trading price on redemption. The final tranche from this plan was redeemed during the third quarter of 2010. Included in net earnings for the three months and nine months ended September 30, 2010 is an expense recovery of $20 thousand (2009 – $0.2 million expense) and $60 thousand (2009 – $0.4 million expense recovery), respectively.
(c) Non-management directors
Precision has a deferred share plan for non-management directors. Under the plan fully vested deferred shares are granted quarterly based upon an election by the non-management director to receive all or a portion of their compensation in deferred shares. These deferred shares are redeemable into an equal number of common shares any time after the director’s retirement. A summary of deferred shares outstanding under this share based incentive plan is presented below:

|  | Number |
|  | Outstanding |
Balance, December 31, 2009 |  |  | 290,732 |
Granted |  |  | 105,381 |
Redeemed |  |  | (28,586 | )
Balance, September 30, 2010 |  |  | 367,527 |

For the three and nine months ended September 30, 2010 Precision expensed $0.3 million (2009 – $0.3 million) and $0.8 million (2009 – $1.1 million), respectively, as unit based compensation, with a corresponding increase in contributed surplus.
(d) Option plan
Precision has a share option plan under which a combined total of 10,303,253 options to purchase common shares are reserved to be granted to employees. Of the amount reserved, 4,022,925 options have been granted. Under this plan, the exercise price of each option equals the fair market value of the option at the date of grant determined by the weighted average trading price for the five days preceding the grant. The options vest over a period of three years from the date of grant as employees render continuous service to Precision and have a term of seven years.
A summary of the status of the equity incentive plan as at September 30, 2010 is presented below:

|  | Options |  |  | Range of |  | Weighted average |  | Options |
| outstanding |  | exercise price |  | exercise price |  | exercisable |
Outstanding as at December 31, 2009 |  |  | 1,787,700 |  |  | $ | 5.22 – 7.23 |  |  | $ | 5.61 |  |  | – |
Granted |  |  | 2,093,725 |  |  |  | 7.33 – 8.59 |  |  |  | 8.27 |  |  |  |
Forfeitures |  |  | (128,000 | ) |  |  | 5.10 – 8.59 |  |  |  | 6.12 |  |  |  |
Outstanding as at September 30, 2010 |  |  | 3,753,425 |  |  | $ | 5.10 – 8.59 |  |  | $ | 7.13 |  |  | 571,022 |

The weighted average fair value of the options granted during 2010 was $3.78 per option estimated on the grant date using the Black-Scholes option pricing model with the following assumption: average risk-free interest rate 2.2%, average expected life of four years, expected forfeiture rate of 5% and expected volatility of 59%. Included in net earnings for the three and nine months ended September 30, 2010 is an expense of $1.3 million (2009 – $0.9 million) and $4.1 million (2009 – $1.1 million), respectively.
P R E C I S I O N D R I L L I N G C O R P O R AT I O N 25

NOTE 9. FINANCE CHARGES |  |  |  |  |  |  |  |  |  |  |  |
The following table provides a summary of the finance charges: |  |  |  |  |  |  |  |  |  |
| Three months ended September 30, | Nine months ended September 30,
|  | 2010 |  |  | 2009 |  |  | 2010 |  |  | 2009 |
Interest: |  |  |  |  |  |  |  |  |  |  |  |
Long-term debt |  | $ | 14,533 |  |  | $ | 21,794 |  |  | $ | 51,893 |  |  | $ | 80,262 |
Other |  |  | 31 |  |  |  | 635 |  |  |  | 63 |  |  |  | 2,856 |
Income |  |  | (337 | ) |  |  | (89 | ) |  |  | (534 | ) |  |  | (290 | )
Amortization of debt issue costs |  |  | 7,017 |  |  |  | 7,056 |  |  |  | 24,777 |  |  |  | 20,220 |
Accelerated amortization of debt issue costs |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
from voluntary debt repayments |  |  | 604 |  |  |  | – |  |  |  | 1,590 |  |  |  | – |
Loss on settlement of debt facilities |  |  | – |  |  |  | – |  |  |  | 25,030 |  |  |  | 9,899 |
Finance charges |  | $ | 21,848 |  |  | $ | 29,396 |  |  | $ | 102,819 |  |  | $ | 112,947 |

NOTE 10. CONTINGENCIES
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 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 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 Precision’s interpretation of the applicable tax legislation and regulations, with the result that additional taxes could be payable by Precision and the amount owed, with estimated interest but without penalties, could be up to $412 million, including the estimated amount pertaining to the long-term income tax recoverable.
NOTE 11. PER SHARE AMOUNTS
The following tables reconcile the net earnings and weighted average shares outstanding used in computing basic and diluted earnings per share:

| Three months ended September 30, |  | Nine months ended September 30, |
|  | 2010 |  |  | 2009 |  |  | 2010 |  |  | 2009 |
Net earnings – basic |  | $ | 61,078 |  |  | $ | 71,696 |  |  | $ | 56,548 |  |  | $ | 186,588 |
Impact of assumed conversion of convertible debt, |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
net of tax |  |  | – |  |  |  | – |  |  |  | – |  |  |  | 1,723 |
Net earnings – diluted |  | $ | 61,078 |  |  | $ | 71,696 |  |  | $ | 56,548 |  |  | $ | 188,311 |
Weighted average shares outstanding – basic |  |  | 275,663 |  |  |  | 275,636 |  |  |  | 275,650 |  |  |  | 233,119 |
Effect of rights offering |  |  | – |  |  |  | – |  |  |  | – |  |  |  | 8,236 |
Weighted average shares outstanding – basic |  |  | 275,663 |  |  |  | 275,636 |  |  |  | 275,650 |  |  |  | 241,355 |
Effect of common share warrants |  |  | 8,161 |  |  |  | 7,335 |  |  |  | 8,629 |  |  |  | 4,227 |
Effect of share options and other equity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
compensation plans |  |  | 490 |  |  |  | 218 |  |  |  | 550 |  |  |  | 155 |
Effect of convertible debt |  |  | – |  |  |  | – |  |  |  | – |  |  |  | 5,195 |
Effect of rights offering |  |  | – |  |  |  | – |  |  |  | – |  |  |  | 456 |
Weighted average shares outstanding – diluted |  |  | 284,314 |  |  |  | 283,189 |  |  |  | 284,829 |  |  |  | 251,388 |

26 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S

NOTE 12. SEGMENTED INFORMATION
Precision operates primarily in Canada and the United States, in two 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, snubbing units, wastewater treatment units, and oilfield equipment rental.

|  | Contract |  |  | Completion |  |  |  |  |  |  |  |  |  |
|  | Drilling |  |  | and Production |  |  | Corporate |  |  | Inter-segment |  |  |  |
Three months ended September 30, 2010 |  | Services |  |  | Services |  |  | and Other |  |  | Eliminations |  |  | Total |
Revenue |  | $ | 305,813 |  |  | $ | 55,209 |  |  | $ | – |  |  | $ | (1,870 | ) |  | $ | 359,152 |
Segment profit (loss) |  |  | 65,297 |  |  |  | 9,973 |  |  |  | (9,973 | ) |  |  | – |  |  |  | 65,297 |
Depreciation and amortization |  |  | 40,509 |  |  |  | 5,611 |  |  |  | 1,180 |  |  |  | – |  |  |  | 47,300 |
Total assets |  |  | 3,502,044 |  |  |  | 388,220 |  |  |  | 298,232 |  |  |  | – |  |  |  | 4,188,496 |
Goodwill |  |  | 640,771 |  |  |  | 112,139 |  |  |  | – |  |  |  | – |  |  |  | 752,910 |
Capital expenditures |  |  | 30,416 |  |  |  | 3,613 |  |  |  | 1,757 |  |  |  | – |  |  |  | 35,786 |

|  | Contract |  |  | Completion |  |  |  |  |  |  |  |  |  |
|  | Drilling |  |  | and Production |  |  | Corporate |  |  | Inter-segment |  |  |  |
Three months ended September 30, 2009 |  | Services |  |  | Services |  |  | and Other |  |  | Eliminations |  |  | Total |
Revenue |  | $ | 216,391 |  |  | $ | 38,738 |  |  | $ | – |  |  | $ | (1,792 | ) |  | $ | 253,337 |
Segment profit (loss) |  |  | 60,484 |  |  |  | 4,536 |  |  |  | (9,659 | ) |  |  | – |  |  |  | 55,361 |
Depreciation and amortization |  |  | 25,610 |  |  |  | 3,714 |  |  |  | 1,054 |  |  |  | – |  |  |  | 30,378 |
Total assets |  |  | 3,721,044 |  |  |  | 399,172 |  |  |  | 240,645 |  |  |  | – |  |  |  | 4,360,861 |
Goodwill |  |  | 660,060 |  |  |  | 112,139 |  |  |  | – |  |  |  | – |  |  |  | 772,199 |
Capital expenditures |  |  | 11,862 |  |  |  | 501 |  |  |  | 1,835 |  |  |  | – |  |  |  | 14,198 |

|  | Contract |  |  | Completion |  |  |  |  |  |  |  |  |  |
|  | Drilling |  |  | and Production |  |  | Corporate |  |  | Inter-segment |  |  |  |
Nine months ended September 30, 2010 |  | Services |  |  | Services |  |  | and Other |  |  | Eliminations |  |  | Total |
Revenue |  | $ | 845,515 |  |  | $ | 156,239 |  |  | $ | – |  |  | $ | (7,638 | ) |  | $ | 994,116 |
Segment profit (loss) |  |  | 167,003 |  |  |  | 20,737 |  |  |  | (30,034 | ) |  |  | – |  |  |  | 157,706 |
Depreciation and amortization |  |  | 112,562 |  |  |  | 16,164 |  |  |  | 3,562 |  |  |  | – |  |  |  | 132,288 |
Total assets |  |  | 3,502,044 |  |  |  | 388,220 |  |  |  | 298,232 |  |  |  | – |  |  |  | 4,188,496 |
Goodwill |  |  | 640,771 |  |  |  | 112,139 |  |  |  | – |  |  |  | – |  |  |  | 752,910 |
Capital expenditures |  |  | 55,090 |  |  |  | 6,246 |  |  |  | 3,617 |  |  |  | – |  |  |  | 64,953 |

|  | Contract |  |  | Completion |  |  |  |  |  |  |  |  |  |
|  | Drilling |  |  | and Production |  |  | Corporate |  |  | Inter-segment |  |  |  |
Nine months ended September 30, 2009 |  | Services |  |  | Services |  |  | and Other |  |  | Eliminations |  |  | Total |
Revenue |  | $ | 791,496 |  |  | $ | 127,303 |  |  | $ | – |  |  | $ | (7,420 | ) |  | $ | 911,379 |
Segment profit (loss) |  |  | 221,536 |  |  |  | 17,411 |  |  |  | (27,110 | ) |  |  | – |  |  |  | 211,837 |
Depreciation and amortization |  |  | 87,007 |  |  |  | 12,405 |  |  |  | 3,137 |  |  |  | – |  |  |  | 102,549 |
Total assets |  |  | 3,721,044 |  |  |  | 399,172 |  |  |  | 240,645 |  |  |  | – |  |  |  | 4,360,861 |
Goodwill |  |  | 660,060 |  |  |  | 112,139 |  |  |  | – |  |  |  | – |  |  |  | 772,199 |
Capital expenditures |  |  | 171,769 |  |  |  | 1,022 |  |  |  | 6,652 |  |  |  | – |  |  |  | 179,443 |

P R E C I S I O N D R I L L I N G C O R P O R AT I O N 27

A reconciliation of segment profit to earnings before income taxes is as follows: |  |  |  |  |  |  |
|  | Three months ended September 30, |  |  | Nine months ended September 30, |
(stated in thousands of Canadian dollars) |  | 2010 |  |  | 2009 |  |  | 2010 |  |  | 2009 |
Total segment profit |  | $ | 65,297 |  |  | $ | 55,361 |  |  | $ | 157,706 |  |  | $ | 211,837 |
Add (deduct): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange |  |  | 18,003 |  |  |  | 63,486 |  |  |  | 11,670 |  |  |  | 105,055 |
Finance charges |  |  | (21,848 | ) |  |  | (29,396 | ) |  |  | (102,819 | ) |  |  | (112,947 | )
Earnings before income taxes |  | $ | 61,452 |  |  | $ | 89,451 |  |  | $ | 66,557 |  |  | $ | 203,945 |

Precision’s operations are carried on in the following geographic locations: |  |  |  |  |  |  |  |

|  |  |  |  |  |  |  |  |  |  | Inter-segment |  |  |  |
Three months ended September 30, 2010 |  | Canada |  |  | United States |  |  | International |  |  | Elimination |  |  | Total |
Revenue |  | $ | 184,302 |  |  | $ | 168,759 |  |  | $ | 7,252 |  |  | $ | (1,161 | ) |  | $ | 359,152 |
Total assets |  |  | 1,702,228 |  |  |  | 2,428,838 |  |  |  | 57,430 |  |  |  | – |  |  |  | 4,188,496 |

|  |  |  |  |  |  |  |  |  |  | Inter-segment |  |  |  |
Three months ended September 30, 2009 |  | Canada |  |  | United States |  |  | International |  |  | Elimination |  |  | Total |
Revenue |  | $ | 126,690 |  |  | $ | 120,872 |  |  | $ | 6,148 |  |  | $ | (373 | ) |  | $ | 253,337 |
Total assets |  |  | 1,671,133 |  |  |  | 2,632,495 |  |  |  | 57,233 |  |  |  | – |  |  |  | 4,360,861 |

|  |  |  |  |  |  |  |  |  |  | Inter-segment |  |  |  |
Nine months ended September 30, 2010 |  | Canada |  |  | United States |  |  | International |  |  | Elimination |  |  | Total |
Revenue |  | $ | 517,434 |  |  | $ | 459,516 |  |  | $ | 19,671 |  |  | $ | (2,505 | ) |  | $ | 994,116 |
Total assets |  |  | 1,702,228 |  |  |  | 2,428,838 |  |  |  | 57,430 |  |  |  | – |  |  |  | 4,188,496 |

|  |  |  |  |  |  |  |  |  |  | Inter-segment |  |  |  |
Nine months ended September 30, 2009 |  | Canada |  |  | United States |  |  | International |  |  | Elimination |  |  | Total |
Revenue |  | $ | 410,987 |  |  | $ | 484,747 |  |  | $ | 18,627 |  |  | $ | (2,982 | ) |  | $ | 911,379 |
Total assets |  |  | 1,671,133 |  |  |  | 2,632,495 |  |  |  | 57,233 |  |  |  | – |  |  |  | 4,360,861 |

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30 C O R P O R AT E I N F O R M AT I O N

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