exh99_1.htm

Precision Drilling Corporation

Second Quarter Report for the six months ended June 30, 2014 and 2013

MANAGEMENT’S DISCUSSION AND ANALYSIS

Management’s Discussion and Analysis for the three and six month periods ended June 30, 2014 of Precision Drilling Corporation (“Precision” or the “Corporation”) prepared as at July 23, 2014 focuses on the unaudited Interim Consolidated Financial Statements and related notes and pertains to known risks and uncertainties relating to the oilfield services sector. This discussion should not be considered all inclusive as it does not include all changes regarding general economic, political, governmental and environmental events. This discussion should be read in conjunction with the Corporation’s 2013 Annual Report, Annual Information Form, unaudited June 30, 2014 Interim Consolidated Financial Statements and related notes and the cautionary statement regarding forward-looking information and statements on page 14 of this report.

SELECT FINANCIAL AND OPERATING INFORMATION

Adjusted EBITDA and funds provided by operations are additional GAAP measures. See “ADDITIONAL GAAP MEASURES”.

Financial Highlights

	Three months ended June 30,									Six months ended June 30,
(Stated in thousands of Canadian dollars, except per share amounts)	2014			2013			% Change			2014			2013			% Change
Revenue		475,174			378,898			25.4			1,147,423			974,618			17.7
Adjusted EBITDA		129,695			88,248			47.0			366,969			303,429			20.9
Adjusted EBITDA % of revenue		27.3	%		23.3	%					32.0	%		31.1	%
Net earnings (loss)		(7,174	)		473			n/m			94,383			93,786			0.6
Cash provided by operations		228,412			182,345			25.3			398,539			245,293			62.5
Funds provided by operations		97,805			33,791			189.4			329,198			178,473			84.5
Capital spending:
Expansion		117,654			81,788			43.9			185,839			158,303			17.4
Upgrade		25,593			34,117			(25.0	)		45,450			71,658			(36.6	)
Maintenance and infrastructure		31,607			20,332			55.5			49,564			36,881			34.4
Proceeds on sale		(9,979	)		(4,148	)		140.6			(17,236	)		(6,686	)		157.8
Net capital spending		164,875			132,089			24.8			263,617			260,156			1.3

Earnings (loss) per share:
Basic		(0.02	)		0.00			n/m			0.32			0.34			(5.9	)
Diluted		(0.02	)		0.00			n/m			0.32			0.33			(3.0	)
Dividends paid per share		0.06			0.05			20.0			0.12			0.10			20.0

n/m – calculation not meaningful

Operating Highlights

	Three months ended June 30,							Six months ended June 30,
	2014		2013		% Change			2014		2013		% Change
Contract drilling rig fleet		333		324		2.8			333		324		2.8
Drilling rig utilization days:
Canada		4,805		3,606		33.3			16,189		14,707		10.1
U.S.		8,490		7,320		16.0			16,963		14,598		16.2
International		962		815		18.0			1,952		1,534		27.2
Service rig fleet		221		219		0.9			221		219		0.9
Service rig operating hours		51,270		51,677		(0.8	)		133,834		141,069		(5.1	)

Financial Position

(Stated in thousands of Canadian dollars, except ratios)	June 30, 2014		December 31, 2013
Working capital		746,261		305,783
Long-term debt(1)		1,716,314		1,323,268
Total long-term financial liabilities		1,752,815		1,355,535
Total assets		5,061,476		4,579,123
Long-term debt to long-term debt plus equity ratio(1)		0.41		0.36

(1)

Net of unamortized debt issue costs.

Net loss this quarter was $7 million, or $0.02 per diluted share, compared to net earnings of $0.5 million, or $0.00 per diluted share, in the second quarter of 2013. Effective January 1, 2014 we began calculating depreciation on our drilling rigs and service rigs on a straight-line basis which reduced net earnings for the quarter by approximately $14 million or $0.05 per diluted share compared with what net earnings would have been using the previous depreciation method.

Revenue this quarter was $475 million, or 25% higher than the second quarter of 2013. The increase, of $96 million, was primarily due to a year-over-year increase in activity and rates from our contract drilling operations. Revenue from our Contract Drilling Services and Completion and Production Services segments both increased over the comparative prior year period by 26% and 20%, respectively.

Earnings before income taxes, finance charges, foreign exchange, and depreciation and amortization (adjusted EBITDA see “Additional GAAP Measures”) this quarter were $130 million or 47% higher than the second quarter of 2013. The increase in adjusted EBITDA was mainly the result of a year-over-year increase in activity and rates from our contract drilling operations partially offset by increases in share based compensation.

Adjusted EBITDA margin was 27% this quarter, compared to 23% in the second quarter of 2013. The increase in adjusted EBITDA margin was mainly due to higher dayrates and increased activity in our U.S. and international Contract Drilling operations and increased activity in our Canadian Drilling operation partially offset by increases in share based compensation accruals, which were $14 million this quarter. Our activity for the quarter, as measured by drilling rig utilization days, increased 33% in Canada, 16% in the U.S. and 18% internationally, compared to the second quarter of 2013.

For the six months ended June 30, 2014, Precision reported net earnings of $94 million or $0.32 per diluted share compared to $94 million or $0.33 per diluted share for the same period of 2013. Effective January 1, 2014 we began calculating depreciation on our drilling rigs and service rigs on a straight-line basis which reduced net earnings for the period by approximately $17 million or $0.06 per diluted share compared with what net earnings would have been using the previous depreciation method.

Revenue for the first half of 2014 was $1,147 million compared to $975 million for the corresponding period of 2013. Adjusted EBITDA totaled $367 million for the first half of 2014 compared to $303 million in the first half of 2013. The increase in revenue and EBITDA was mainly the result of higher activity levels and dayrates across our Contract Drilling Services segment partially offset by lower activity in our Completion and Production businesses and increased stock based compensation expense. Activity for Precision, as measured by drilling utilization days, increased 10% in Canada, 16% in the United States and 27% internationally for the first six months of the year compared with the same period in 2013.

During the quarter we issued US$400 million of 5.25% Senior Notes due in 2024 (the “Notes”) in a private offering. The Notes are guaranteed on a senior unsecured basis by current and future U.S. and Canadian subsidiaries that also guarantee our revolving credit facility and certain other indebtedness. We expect to use the net proceeds from this placement for general corporate purposes, including building new drilling rigs.

Our current expected capital plan for 2014 is $934 million, an increase of $101 million compared to the $833 million capital plan announced in April 2014. The capital increase is in response to strong customer demand for Precision new-build Super Series rigs. We currently have firm customer commitments on an additional 13 new-build drilling rigs consisting of two additional deliveries in 2014 and 11 additional deliveries in 2015. Additionally, we are expanding our long-lead program to shorten construction times for new-build rigs and will provide capacity of three rig deliveries per month starting this October and as many as four rigs per month to start 2015 if U.S., Canadian and international customer demand continues at the current pace. The number of new-build deliveries scheduled for Precision in 2014 totals 18 rigs (eight in the U.S., seven in Canada and three internationally). For 2015 deliveries, we have announced contracts or firm commitments for 16 new-build drilling rigs (15 for the U.S. and one for Kuwait).

On July 24, 2014 the Board of Directors declared a dividend of $0.06 per common share payable on August 20, 2014 to shareholders of record on August 8, 2014.

Our portfolio of term customer contracts, a scalable operating cost structure and economies achieved through vertical integration of the supply chain all help us manage our adjusted EBITDA margin.

Precision’s strategic priorities are as follows:

Execute our High Performance, High Value strategy - Invest in Precision’s physical and human capital infrastructure to advance field level professional development, provide industry leading service to customers and promote safe operations. Continue to measure and benchmark performance with a view to exceeding the high standards we set.

The construction of our Nisku Centre is underway and we expect to complete construction in the fall of this year. Our Nisku Centre will support safety and training for our Canadian workforce.

We recently entered into a technology and service agreement and marketing alliance with Schlumberger that enables us to market a full range of directional drilling downhole tools to our customers, significantly enhancing our technology and service offering to customers.

Leverage our scale in operations - Utilize established systems to promote consistent and reliable service and to improve operating efficiencies across all geographies and service lines.

We have demonstrated our ability to increase activity levels while driving down daily operating cost per rig in our operations. Additionally, we have increased the utilization of our centralized U.S. repair and maintenance facilities at our Houston Tech Centre.

Execute on existing organic growth opportunities - Deliver new-build and upgraded rigs to customer contracts, expand international activity in existing operating regions and grow our Canadian LNG drilling leadership position. Be a recognized leader in the integrated directional drilling transformation.

We have announced delivery or planned delivery for 18 new-build rigs in 2014, including six ST-1500 rigs for deep basin and LNG related drilling in Canada. In addition, we have contracted two new-build rigs for the Middle East and four existing rigs to long-term contracts for integrated project management projects in Mexico and began operations with the two Kuwait new-build rigs near the end of the second quarter. In addition, we now have signed contracts or firm customer commitments for delivery of 16 new-build rigs in 2015.

Increase returns for our investors.

We remain well positioned to increase returns for investors with our continued strong activity levels and margins, favorable contracted terms on new-build and upgraded rigs and our low cost and flexible capital structure.

For the second quarter of 2014, the average natural gas prices and the West Texas Intermediate price of oil were higher than the 2013 averages.

	Three months ended June 30,				Year ended Dec 31,
	2014		2013		2013
Average oil and natural gas prices
Oil
West Texas Intermediate (per barrel) (US$)		103.14		94.16		98.02

Natural gas
Canada
AECO (per MMBtu) (Cdn$)		4.69		3.53		3.18
U.S.
Henry Hub (per MMBtu) (US$)		4.58		4.01		3.73

Summary for the three months ended June 30, 2014:

● As a result of our annual review of the estimated useful lives and method of depreciation for our property, plant and equipment, effective January 1, 2014 we are calculating depreciation on our drilling rigs and service rigs on a straight-line basis. Existing assets were assessed for their remaining useful lives and are being depreciated prospectively on a straight-line basis. New drilling rigs will be depreciated based on the expected life of individual asset components with an approximate weighted average life of 15 years and approximately 7% salvage value. New service rigs will be depreciated based on the expected life of the asset component with an approximate weighted average life of 20 years with approximately 10% salvage value. The move to straight-line reflects the demand for technologically advanced assets which are expected to depreciate over time rather than on a per unit basis. The use of straight-line depreciation will result in idle assets being more aggressively depreciated. In the second quarter of 2014 depreciation expense calculated using the straight-line method with revised asset life expectancy was $106 million. Had we continued to depreciate assets using units of production, depreciation would have been $86 million. The estimated additional depreciation expense for the year ending December 31, 2014 from this change is approximately $45 million.

● Operating earnings (see “Additional GAAP Measures”) this quarter were $24 million, or 5% of revenue, compared to $16 million and 4% of revenue in 2013. Operating earnings were positively impacted by the increase in drilling activity and dayrates in our contract drilling rig operations partially offset by an increase in depreciation from moving to the straight-line method and the depreciation on asset additions.

● General and administrative expenses this quarter were $41 million, $9 million higher than the second quarter of 2013. The increase is primarily due to higher costs associated with incentive compensation which are tied to the price of our common shares.

● Net finance charges were $26 million, an increase of $2 million compared with the second quarter of 2013 due to the issuance of US$400 million of 5.25% Senior Notes on June 3, 2014.

● Average revenue per utilization day for contract drilling rigs decreased slightly in the second quarter of 2014 to $22,217 from the prior year second quarter of $22,276 in Canada and increased in the U.S. to US$24,320 from US$23,850. The decrease in revenue rates for Canada is primarily due to rig mix and competitive pricing in some rig segments during spring break-up, partially offset by additional Tier 1 and upgraded rigs entering the fleet compared to the prior year quarter. In Canada, for the second quarter of 2014, 53% of our utilization days were achieved from drilling rigs working under term contracts compared to 50% in the 2013 comparative period. The increase in revenue rates for the U.S. is primarily due to additional Tier 1 and upgraded rigs entering the fleet compared to the prior year quarter. In the U.S., for the second quarter of 2014, 72% of our utilization days were generated from rigs working under term contracts compared to 58% in the 2013 comparative period. Turnkey revenue for the second quarter of 2014 was US$20 million compared with US$18 million in the 2013 comparative period. Within the Completion and Production Services segment, average hourly rates for service rigs were $961 in the second quarter of 2014 compared to $842 in the second quarter of 2013. The increase in the average hourly rate is the result of rig mix with the introduction of coil tubing rigs in the U.S., which command a higher average hourly rate. Canadian well servicing rig average hourly rate increased by $58 per hour from the second quarter of 2014 compared with the 2013 comparative period.

● Average operating costs per utilization day for drilling rigs decreased in the second quarter of 2014 to $11,695 from the prior year second quarter of $13,497 in Canada while in the U.S. costs decreased to US$13,502 in 2014 from US$14,912 in 2013. The cost decrease in Canada was primarily due to lower labour burden, lower repairs and maintenance expenditures, and a larger activity base to spread fixed costs. The cost decrease in the U.S. was primarily due to labour efficiencies, reduction in labour related costs and a larger activity base to spread fixed costs. Within the Completion and Production Services segment, average hourly operating costs for service rigs increased to $679 in the second quarter of 2014 as compared to $627 in the second quarter of 2013 primarily due to costs associated with coil tubing.

● Precision realized revenue from international contract drilling of $46 million in the second quarter of 2014, a $17 million increase over the prior year period.

● Directional drilling services realized revenue of $23 million in the second quarter of 2014 compared with $27 million in the prior year period.

● Funds provided by operations in the second quarter of 2014 were $98 million, an increase of $64 million from the prior year comparative quarter of $34 million. The increase was primarily the result of improved operations and a decrease in income tax installments paid.

● Capital expenditures for the purchase of property, plant and equipment were $175 million in the second quarter, an increase of $39 million over the same period in 2013. Capital spending for the second quarter of 2014 included $118 million for expansion capital, $26 million for upgrade capital and $32 million for the maintenance of existing assets and infrastructure spending.

Summary for the six months ended June 30, 2014:

● Revenue for the first half of 2014 was $1,147 million, an increase of 18% from the 2013 period.

● For the first half of 2014 depreciation expense calculated using the straight-line method with revised asset life expectancy was $212 million. Had we continued to depreciate assets using units of production, depreciation would have been $187 million.

● Operating earnings were $155 million, an increase of $9 million or 6% from 2013. Operating earnings were 14% of revenue in 2014 compared to 15% in 2013. Operating earnings were positively impacted by the increase in drilling activity and rates in our contract drilling rig operations partially offset by an increase in depreciation from moving to the straight-line method and the depreciation on asset additions.

● General and administrative costs were $81 million, an increase of $10 million over the first half of 2013 primarily as a result of the increase in incentive compensation costs tied to the performance of Precision’s common shares in 2014.

● Net finance charges were $50 million, an increase of $3 million from the first half of 2013. During the quarter we issued US$400 million of 5.25% Senior Notes.

● The change in depreciation calculation added approximately $25 million to our depreciation expense over the prior period.

● Funds provided by operations (see “Additional GAAP Measures”) in the first half of 2014 were $329 million, an increase of $151 million from the prior year comparative period of $178 million.

● Capital expenditures for the purchase of property, plant and equipment were $281 million in the first half of 2014, an increase of $14 million over the same period in 2013. Capital spending for 2014 to date included $186 million for expansion capital, $45 million for upgrade capital and $50 million for the maintenance of existing assets and infrastructure.

OUTLOOK

Contracts

Our portfolio of term customer contracts provides a base level of activity and revenue and, as of July 23, 2014, we had term contracts in place for an average of 48 rigs in Canada, 51 in the U.S. and 11 internationally for the third quarter of 2014 and an average of 52 rig contracts in Canada, 51 in the U.S. and 11 internationally for the full year. In Canada, term contracted rigs normally generate 250 utilization days per year because of the seasonal nature of well site access. In most regions in the U.S. and internationally, term contracts normally generate 365 utilization days per year.

Drilling Activity

In the U.S., our average active rig count in the quarter was 93 rigs, up 13 rigs over the second quarter in 2013 and in line with the first quarter of 2014. We currently have 96 rigs active in the U.S.

In Canada, our average active rig count in the quarter was 53 rigs, an increase of 13 over the second quarter in 2013. We currently have 95 rigs active in Canada and expect typical seasonal volatility through the third quarter but in general we expect to benefit from the fleet enhancements over the past several years and the delivery of five contracted new-build rigs and several contracted upgrade rigs in the second half of this year.

Internationally, our average active rig count in the quarter was 11 rigs, up two rigs over the second quarter in 2013 and in line with the first quarter of 2014. During the quarter two new-build rigs went to work in Kuwait and both were operating at the end of the quarter. We currently have 11 rigs active internationally and expect delivery of two new-build rigs for the Middle East, one to begin operations in the Kingdom of Saudi Arabia in late 2014 and the other to begin operations in Kuwait in mid-2015. In Mexico, the four recently signed rigs for integrated project management contracts have all begun working while two rigs are currently idle. Two rigs are currently moving from Mexico back to the U.S. to work under contract.

Industry Conditions

To date in 2014, drilling activity has increased relative to this time last year for both Canada and the U.S. According to industry sources, as of July 18, 2014, the U.S. active land drilling rig count was up approximately 6% from the same point last year and the Canadian active land drilling rig count was up approximately 18%. The increase in the North American rig count has been driven by demand for Tier 1 assets, which continues to be strong, benefiting drilling contractors, like Precision, with a high percentage of Tier 1 assets.

Canada has been experiencing an increase in natural gas and gas liquids drilling activity related to deep basin drilling in northwestern Alberta and northeastern British Columbia while the trend towards oil-directed drilling in the U.S. continues. To date in 2014, approximately 60% of the Canadian industry’s active rigs and 82% of the U.S. industry’s active rigs were drilling for oil targets, compared to 71% for Canada and 78% for the U.S. at the same time last year.

Capital Spending

Capital spending in 2014 is expected to be $934 million:

●

The 2014 capital expenditure plan includes $561 million for expansion capital, $199 million for sustaining and infrastructure expenditures, and $174 million to upgrade existing rigs. We expect that the $934 million will be split $894 million in the Contract Drilling segment and $40 million in the Completion and Production Services segment.

●	Precision’s expansion capital plan for 2014 includes 18 new-build drilling rigs delivered in 2014 including seven for Canada, eight for the U.S., and three for the Middle East.

The seven rigs for Canada include six Super Triple rigs for northern gas and gas liquids drilling and one Precision Super Single for heavy oil development drilling. The U.S. new-builds consist of eight ST-1500 rigs. Internationally in Kuwait two ST-3000 rigs began operations in the second quarter with an additional new-build contracted rig, an ST-2000 expected to be deployed to the Kingdom of Saudi Arabia late in 2014 and an ST-1500 expected to be deployed in Kuwait in mid-2015.

The majority of the remainder of the expansion capital is allocated to long-lead items which we anticipate using for new-build drilling rigs for delivery in 2015.

Following is a new-build delivery schedule for deliveries in the first half of 2014 and expected deliveries in the second half of 2014 and full year 2015 where we have either a long-term contract or a firm customer commitment for a long-term contract.

	2014							2015
		Q1	Q2	Q3	Q4	Total			Q1	Q2	Q3	Q4	Total
Rig Deliveries
Canada		2	-	1	4		7		-	-	-	-		-
U.S.		1	1	1	5		8		6	7	2	-		15
International		-	2	-	1		3		-	1	-	-		1
		3	3	2	10		18		6	8	2	-		16

●	The 2014 capital plan includes approximately 20 rig upgrades and will vary depending on scope of the upgrades.

●

Precision’s sustaining and infrastructure capital plan is based upon currently anticipated activity levels for 2014 and includes a technical and operational support centre in Nisku, Alberta along with regional support facilities and corporate systems. The Nisku Centre consolidates Precision’s existing operations and technical support centres and will contain a new employee training centre complete with a fully functioning training rig equipped with the latest drilling technology. The centre is expected to support Canadian operations for several decades, provide increased capacity and efficiency, and ensure that we continue to deliver services with highly skilled and well trained field personnel. This centre accounts for approximately $30 million of the 2014 capital expenditure plan.

SEGMENTED FINANCIAL RESULTS

Precision’s operations are reported in two segments: the Contract Drilling Services segment which includes the drilling rig, directional drilling, oilfield supply and manufacturing divisions; and the Completion and Production Services segment which includes the service rig, snubbing, coil tubing, rental, camp and catering and wastewater treatment divisions.

	Three months ended June 30,									Six months ended June 30,
(Stated in thousands of Canadian dollars)	2014			2013			% Change			2014			2013			% Change
Revenue:
Contract Drilling Services		410,882			327,336			25.5			982,804			823,574			19.3
Completion and Production Services		66,508			55,420			20.0			169,573			159,008			6.6
Inter-segment eliminations		(2,216	)		(3,858	)		(42.6	)		(4,954	)		(7,964	)		(37.8	)
		475,174			378,898			25.4			1,147,423			974,618			17.7
Adjusted EBITDA:(1)
Contract Drilling Services		148,491			101,555			46.2			388,189			308,760			25.7
Completion and Production Services		5,137			2,293			124.0			24,590			32,408			(24.1	)
Corporate and other		(23,933	)		(15,600	)		53.4			(45,810	)		(37,739	)		21.4
		129,695			88,248			47.0			366,969			303,429			20.9

(1) See “ADDITIONAL GAAP MEASURES”.

SEGMENT REVIEW OF CONTRACT DRILLING SERVICES

	Three months ended June 30,									Six months ended June 30,
(Stated in thousands of Canadian dollars, except where noted)
	2014			2013			% Change			2014			2013			% Change
Revenue		410,882			327,336			25.5			982,804			823,574			19.3
Expenses:
Operating		249,937			213,320			17.2			568,844			490,366			16.0
General and administrative		12,454			12,461			(0.1	)		25,771			24,448			5.4
Adjusted EBITDA(1)		148,491			101,555			46.2			388,189			308,760			25.7
Depreciation		92,365			63,398			45.7			184,476			137,109			34.5
Operating earnings(1)		56,126			38,157			47.1			203,713			171,651			18.7
Operating earnings as a percentage of revenue		13.7	%		11.7	%					20.7	%		20.8	%
Drilling rig revenue per utilization day in Canada		22,217			22,276			(0.3	)		22,608			22,293			1.4
Drilling rig revenue per utilization day in the U.S.(2) (US$)		24,320			23,850			2.0			24,235			23,920			1.3

(1) See “ADDITIONAL GAAP MEASURES”.

(2) Includes revenue from idle but contracted rig days and lump sum payouts in 2013.

	Three months ended June 30,
Canadian onshore drilling statistics:(1)	2014						2013
	Precision			Industry(2)			Precision			Industry(2)
Number of drilling rigs (end of period)		189			810			188			820
Drilling rig operating days (spud to release)		4,312			18,293			3,213			13,579
Drilling rig operating day utilization		25	%		25	%		19	%		18	%
Number of wells drilled		393			1,430			371			1,162
Average days per well		11.0			12.8			8.7			11.7
Number of metres drilled (000s)		793			3,430			707			2,604
Average metres per well		2,018			2,399			1,905			2,241
Average metres per day		184			188			220			192

	Six months ended June 30,
Canadian onshore drilling statistics:(1)	2014						2013
	Precision			Industry(2)			Precision			Industry(2)
Number of drilling rigs (end of period)		189			810			188			820
Drilling rig operating days (spud to release)		14,366			63,070			13,002			56,877
Drilling rig operating day utilization		42	%		43	%		38	%		39	%
Number of wells drilled		1,343			4,881			1,426			4,726
Average days per well		10.7			12.9			9.1			12.0
Number of metres drilled (000s)		2,627			11,090			2,536			9,951
Average metres per well		1,956			2,272			1,779			2,106
Average metres per day		183			176			195			175

(1) Canadian operations only.

(2) Canadian Association of Oilwell Drilling Contractors (“CAODC”), and Precision – excludes non-CAODC rigs and non-reporting CAODC members.

United States onshore drilling statistics:(1)	2014				2013
	Precision		Industry(2)		Precision		Industry(2)
Average number of active land rigs for quarters ended:
March 31		94		1,724		81		1,706
June 30		93		1,802		80		1,710
Year to date average		94		1,763		81		1,708

(1) United States lower 48 operations only.

(2) Baker Hughes rig counts.

Revenue from Contract Drilling Services was $411 million this quarter, or 26% higher than the second quarter of 2013, while adjusted EBITDA increased by 46% to $148 million. The increases were mainly due to higher drilling rig utilization days and dayrates in our U.S. and international drilling business and higher utilization days in Canada.

Operating results for our international business improved as we averaged 11 rigs active compared to nine in the prior year comparative quarter. Drilling rig utilization days in our international operations for the quarter were 962, 18% higher than the prior year comparative period.

Drilling rig utilization days in Canada (drilling days plus move days) during the second quarter of 2014 were 4,805, an increase of 33% compared to 2013 while drilling rig utilization days in the U.S. were 8,490, or 16% higher than the same quarter of 2013. The increase in Canadian and U.S. activity was primarily due to strong demand for Tier 1 assets and resulted in market share gains during the second half of 2013. The majority of our North American activity came from oil and liquids-rich natural gas related plays.

Compared to the same quarter in 2013, drilling rig revenue per utilization day was up 2% in the U.S. while Canada was down slightly. The increase in average dayrates for the U.S. was driven by improved rig mix and higher rates for well-to-well and re-contracted rigs. In Canada the $59 per day in dayrate decrease was the result of rig mix during the quarter and competitive pricing in some rig segments during spring break-up partially offset by additional Tier 1 and upgraded rigs entering the fleet compared to the prior year quarter.

In Canada, 53% of utilization days in the quarter were generated from rigs under term contract, compared to 50% in the second quarter of 2013. In the U.S., 72% of utilization days were generated from rigs under term contract as compared to 58% in the second quarter of 2013. At the end of the quarter, we had 54 drilling rigs under contract in Canada, 61 in the U.S. and 11 internationally.

Operating costs were 61% of revenue for the quarter, which was four percentage points lower than the prior year period. On a per utilization day basis, operating costs for the drilling rig division in Canada were down over the prior year primarily because of the impact of fixed costs on higher activity increase, lower labour burden and lower repair and maintenance costs. In the U.S., operating costs for the quarter on a per day basis were down from the second quarter in 2013 primarily as a result of labour efficiencies and reduction in labour related costs.

Depreciation expense in the quarter was 46% higher than in the second quarter of 2013 due to changes in the estimated remaining useful life of our capital equipment, a change to straight-line depreciation and depreciation expense associated with new equipment. The depreciation variance of moving to straight-line depreciation should be most significant in the second quarter due to lower activity in Canada from spring break-up.

SEGMENT REVIEW OF COMPLETION AND PRODUCTION SERVICES

	Three months ended June 30,									Six months ended June 30,
(Stated in thousands of Canadian dollars, except where noted)	2014			2013			% Change			2014			2013			% Change
Revenue		66,508			55,420			20.0			169,573			159,008			6.6
Expenses:
Operating		56,564			49,307			14.7			135,548			118,205			14.7
General and administrative		4,807			3,820			25.8			9,435			8,395			12.4
Adjusted EBITDA(1)		5,137			2,293			124.0			24,590			32,408			(24.1	)
Depreciation		11,433			7,073			61.6			22,861			16,318			40.1
Operating earnings(1) (loss)		(6,296	)		(4,780	)		31.7			1,729			16,090			(89.3	)
Operating earnings (loss) as a percentage of revenue		(9.5	%)		(8.6	%)					1.0	%		10.1	%
Well servicing statistics:
Number of service rigs (end of period)		221			219			0.9			221			219			0.9
Service rig operating hours		51,270			51,677			(0.8	)		133,834			141,069			(5.1	)
Service rig operating hour utilization		25	%		26	%					36	%		36	%
Service rig revenue per operating hour(2)		961			842			14.1			920			834			10.3

(1)

See “ADDITIONAL GAAP MEASURES”.

(2)

Prior year comparatives have changed to include U.S. based rig activity.

Revenue from Completion and Production Services was up $11 million or 20% compared to the second quarter of 2013, as higher rates and the expansion of services in the U.S was partially offset by lower demand in the Canadian market. Well servicing activity in the second quarter was 1% lower than the second quarter of 2013, as a decrease in Canadian well servicing activity was offset by an increase in the U.S. Approximately 93% of the second quarter Canadian service rig activity was oil related.

Average service rig revenue per operating hour in the second quarter was $961, or $119 higher than the second quarter of 2013. The increase was primarily the result of increased coil tubing and snubbing operations in the current quarter, which operate at higher rates.

Adjusted EBITDA was $3 million higher than the second quarter of 2013 due to higher average rates in both Canada and in the U.S.

Our rental division activity in the quarter was higher than the second quarter of 2013 mainly due to increased drilling activity.

Operating costs as a percentage of revenue decreased to 85% in the second quarter of 2014, from 89% in the second quarter of 2013. Operating costs per service rig operating hour were higher than in the second quarter of 2013 mainly because of the increase in costs associated with the new coil tubing operations.

Depreciation in the second quarter of 2014 was 62% higher than the second quarter of 2013 because of changes in the estimated remaining useful life of our capital equipment, a change to straight-line depreciation and depreciation expense associated with new equipment. The second quarter is generally the period with the most significant variance due to the lower activity in Canada with spring break-up.

SEGMENT REVIEW OF CORPORATE AND OTHER

Our Corporate and Other segment provides support functions to our operating segments. The Corporate and Other segment had an adjusted EBITDA loss of $24 million for the second quarter of 2014, $8 million higher than 2013 comparative period due primarily to share based incentive compensation.

OTHER ITEMS

Net financial charges for the quarter were $26 million, an increase of $2 million from the second quarter of 2013, driven by the impact of the weaker Canadian dollar on the value of our U.S. dollar denominated debt and the issuance of US$400 million 5.25% Senior Notes on June 3, 2014. We had a foreign exchange gain of $0.3 million during the second quarter of 2014 due to the strengthening of the Canadian dollar versus the U.S. dollar, which affected the net U.S. dollar denominated monetary position in the Canadian dollar-based companies.

Income tax expense for the quarter was $6 million compared with a recovery of $4 million in the same quarter in 2013. The increase is due to improved pretax earnings in the current quarter compared to the prior year period. Our effective tax rate on earnings before income taxes for the six months ended June 30, 2014 was 14%.

In June 2013, a wholly owned subsidiary of Precision lost a tax appeal in the Ontario Superior Court of Justice related to a reassessment of Ontario income tax for the subsidiary’s 2001 through 2004 taxation years. Precision appealed the decision to the Ontario Court of Appeal and that appeal was heard in May 2014. We expect the Ontario Court of Appeal to render its decision in the second half of 2014. Despite the decision in the Superior Court, management believes it is more likely than not that Precision will prevail on appeal. Should Precision lose on appeal, approximately $55 million of the long-term income tax recoverable related to this issue would be expensed.

LIQUIDITY AND CAPITAL RESOURCES

The oilfield services business is inherently cyclical in nature. To manage this, we focus on maintaining a strong balance sheet so we have the financial flexibility we need to continue to manage our growth and cash flow, no matter where we are in the business cycle.

We apply a disciplined approach to managing and tracking results of our operations to keep costs down. We maintain a variable cost structure so we can be responsive to changes in demand.

Our maintenance capital expenditures are tightly governed by and highly responsive to activity levels with additional cost savings leverage provided through our internal manufacturing and supply divisions. Term contracts on expansion capital for new-build rig programs provide more certainty of future revenues and return on our capital investments.

Liquidity

During the quarter we issued US$400 million of 5.25% Senior Notes due in 2024 in a private offering. The Notes are guaranteed on a senior unsecured basis by current and future U.S. and Canadian subsidiaries that also guarantee our revolving credit facility and certain other indebtedness. We expect to use the net proceeds from this placement for general corporate purposes, including building new drilling rigs.

In addition, we amended our credit agreement governing our revolving credit facility to, among other things, voluntarily reduce the size of the revolving credit facility from US$850 million to US$650 million and extend the maturity to June 3, 2019.

In addition to a cash balance of $576 million as at June 30, 2014, we had available capacity of $718 million under our secured facilities.

As at June 30, 2014 we had $1,748 million outstanding under our senior unsecured notes.

Amount	Availability	Used for	Maturity
Senior facility (secured)
US$650 million (extendible, revolving term credit facility with US$250 million accordion feature)	Drawn US$26 million in outstanding letters of credit	General corporate purposes	June 3, 2019
Operating facilities (secured)
$40 million	Undrawn, except $16 million in outstanding letters of credit	Letters of credit and general corporate purposes
US$15 million	Undrawn	Short term working capital requirements
Demand letter of credit facility (secured)
US$25 million	Undrawn, except US$14 million in outstanding letters of credit	Letters of credit
Senior notes (unsecured)
$200 million	Fully drawn	Debt repayment	March 15, 2019
US$650 million	Fully drawn	Debt repayment and general corporate purposes	November 15, 2020
US$400 million	Fully drawn	Capital expenditures and general corporate purposes	December 15, 2021
US$400 million	Fully drawn	Capital expenditures and general corporate purposes	November 15, 2024

Our secured facility includes financial ratio covenants that are tested quarterly; we are compliant with these covenants and expect to remain compliant.

The current blended cash interest cost of our debt is approximately 6.2%.

Hedge of investments in U.S. operations

We have designated a portion of our U.S. dollar denominated long-term debt as a hedge of our investment in our operations in the U.S. To be accounted for as a hedge, the foreign currency denominated long-term debt must be designated and documented as such and must be effective at inception and on an ongoing basis. We recognize the effective amount of this hedge (net of tax) in other comprehensive income. We recognize ineffective amounts (if any) in earnings.

QUARTERLY FINANCIAL SUMMARY

(Stated in thousands of Canadian dollars, except per share amounts)

	2013				2014
Quarters ended	September 30		December 31		March 31		June 30
Revenue		488,450		566,909		672,249		475,174
Adjusted EBITDA(1)		137,660		197,744		237,274		129,695
Net earnings (loss):		29,443		67,921		101,557		(7,174	)
Per basic share		0.11		0.24		0.35		(0.02	)
Per diluted share		0.10		0.24		0.35		(0.02	)
Funds provided by operations(1)		127,684		155,816		231,393		97,805
Cash provided by operations		88,341		94,452		170,127		228,412
Dividends paid per share		0.05		0.06		0.06		0.06

	2012					2013
Quarters ended	September 30		December 31			March 31		June 30
Revenue		484,761		533,948			595,720		378,898
Adjusted EBITDA(1)		151,000		177,026			215,181		88,248
Net earnings (loss):		39,357		(116,339	)		93,313		473
Per basic share		0.14		(0.42	)		0.34		0.00
Per diluted share		0.14		(0.42	)		0.33		0.00
Funds provided by operations(1)		146,124		142,576			144,682		33,791
Cash provided by operations		61,183		136,317			62,948		182,345
Dividends paid per share		-		0.05			0.05		0.05

(1) See “ADDITIONAL GAAP MEASURES”.

ADDITIONAL GAAP MEASURES

We reference Generally Accepted Accounting Principles (GAAP) measures that are not defined terms under International Financial Reporting Standards to assess performance because we believe they provide useful supplemental information to investors.

Adjusted EBITDA

We believe that adjusted EBITDA (earnings before income taxes, financing charges, foreign exchange, and depreciation and amortization) as reported in the Consolidated Statement of Earnings (Loss) is a useful measure, because it gives an indication of the results from our principal business activities prior to consideration of how our activities are financed and the impact of foreign exchange, taxation and non-cash depreciation and amortization charges.

Operating Earnings

We believe that operating earnings, as reported in the Consolidated Statements of Earnings (Loss), is a useful measure because it provides an indication of the results of our principal business activities before consideration of how those activities are financed and the impact of foreign exchange and taxation.

Funds Provided by Operations

We believe that funds provided by operations, as reported in the Consolidated Statements of Cash Flow is a useful measure because it provides an indication of the funds our principal business activities generate prior to consideration of working capital, which is primarily made up of highly liquid balances.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS

Certain statements contained in this report, including statements that contain words such as "could", "should", "can", "anticipate", "estimate", "intend", "plan", "expect", "believe", "will", "may", "continue", "project", "potential" and similar expressions and statements relating to matters that are not historical facts constitute "forward‐looking information" within the meaning of applicable Canadian securities legislation and "forward‐looking statements" within the meaning of the "safe harbor" provisions of the United States Private Securities Litigation Reform Act of 1995 (collectively, "forward‐looking information and statements").

In particular, forward looking information and statements include, but are not limited to, the following:

the payment of our declared second quarter dividend;

our strategic priorities;

the expected benefits from our technology and service agreement and marketing alliance with Schlumberger;

our capital expenditure plans including the amounts allocated for expansion capital, sustaining and infrastructure expenditures and rig upgrades;

the timing on delivery and number of new build rigs to be deployed to Canada, the U.S. and internationally;

the expected completion of our Nisku technical support centre and its impact on our operational capabilities;

the outcome of the tax appeal proceedings in Ontario involving one of our subsidiaries;

the expected use of the net proceeds from our 2014 Notes offering; and

our expectations regarding our ability to remain compliant with our financial ratio covenants under our secured facility.

These forward‐looking information and statements are based on certain assumptions and analysis made by Precision in light of our experience and our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate in the circumstances. These include, among other things:

continued strong drilling demand in Canada, the U.S., and our target international markets;

continued market demand for our Super Series rigs;

the status of current negotiations with our customers;

the economic viability of unconventional North American oil and gas plays including the growing potential of LNG export development in Canada; and

the general stability of the economic and political environment in the jurisdictions where we operate;

Whether actual results, performance or achievements will conform to our expectations and predictions is subject to a number of known and unknown risks and uncertainties which could cause actual results to differ materially from our expectations. Such risks and uncertainties include, but are not limited to:

volatility in the price and demand for oil and natural gas;

fluctuations in the demand for contract drilling, well servicing and ancillary oilfield services and its impact on customer spending;

the risks associated with our investments in capital assets and changing technology;

shortages, delays and interruptions in the delivery of equipment, supplies and other key inputs;

the effects of seasonal and weather conditions on operations and facilities;

the availability of qualified personnel and management;

the existence of competitive operating risks inherent in our businesses;

changes in environmental and safety rules or regulations including increased regulatory burden on horizontal drilling and hydraulic fracturing;

terrorism, social, civil and political unrest in the foreign jurisdictions where we operate;

fluctuations in foreign exchange, interest rates and tax rates; and

other unforeseen conditions which could impact the use of services supplied by Precision and Precision’s ability to respond to such conditions.

Readers are cautioned that the foregoing list of risk factors is not exhaustive. Additional information on these and other factors that could affect our business, operations or financial results are included in reports on file with applicable securities regulatory authorities, including but not limited to Precision’s Annual Information Form for the year ended December 31, 2014, which may be accessed on Precision’s SEDAR profile at www.sedar.com or under Precision’s EDGAR profile at www.sec.gov. The forward-looking statements contained in this report are made as of the date hereof and Precision undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.