Precision Drilling - Earnings Call - Q1 2018
April 26, 2018
Transcript
Speaker 0
Good day, ladies and gentlemen, and welcome to the Precision Drilling Corporation twenty eighteen First Quarter Results Conference Call and Webcast. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would now like to turn the conference over to Ashley Connolly, Manager of Investor Relations.
Ma'am, you may begin.
Speaker 1
Thank you, Ashley, and good afternoon, everyone. Welcome to Precision Drilling's first quarter twenty eighteen earnings conference call and webcast. Participating today on the call with me are Kevin Nevew, President and Chief Executive Officer and Carey Ford, Senior Vice President and Chief Financial Officer. Through our news release earlier today, Precision reported its first quarter twenty eighteen results. Please note that these financial figures are in Canadian dollars unless otherwise indicated.
Some of our comments today will refer to non IFRS financial measures such as EBITDA and operating earnings. Please see our news release for additional disclosure on these financial measures. Our comments today will include forward looking statements regarding Precision's future results and prospects. We caution you that these forward looking statements are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from our expectations. Please see our news release and other regulatory filings for more information on forward looking statements and these risk factors.
Carey will begin today's call with a brief discussion of our first quarter operating results and provide a financial overview. Kevin will then provide an operational update and outlook. Over to you, Carey.
Speaker 2
Thank you, Ashley. In addition to reviewing the first quarter results, I'll provide an update on our 2018 capital plan and management of our capital structure. Our 2018 financial performance is off to a strong start with first quarter adjusted EBITDA of $97,000,000 16% higher than the 2017. The increase in adjusted EBITDA from last year is primarily the result of higher activity levels in our U. S.
Business and improved profitability margins. In Canada, drilling activity for Precision decreased 5% from Q1 twenty seventeen, while margins were approximately $300 per day higher than the prior year. The margins for the quarter were positively impacted by higher day rates, slightly offset by higher operating costs. In The U. S, drilling activity for Precision increased 38% from Q1 twenty seventeen, while margins were up approximately USD 1,300 per day, positively impacted by lower operating costs and slightly higher day rates, offset by lower idle but contracted and rig mobilization revenue in the current period.
We continue to see average rates moving up throughout the balance of the year as current market conditions persist. Internationally, petroleum activity for Precision equaled activity in Q1 twenty seventeen. International average day rates were approximately $50,000 a decrease of approximately 400 per day from the prior year. In our CMP division, adjusted EBITDA this quarter was $4,600,000 effectively equal to last year. Capital expenditures for the quarter were $30,000,000 For 2018, our capital plan is $116,000,000 up $22,000,000 from previous guidance.
The 2018 capital plan is comprised of $57,000,000 for sustaining and infrastructure, 45,000,000 for upgrade and expansion and $14,000,000 for intangibles. Our capital plan is expected to align with industry activity and reflects our expectation to upgrade rigs, increase our AC Super Triple active rig count in The U. S. And deploy process automation control technology on additional Super Triple rigs. We have continued to build our contract book, signing 19 term contracts year to date.
And as of April 25, we had an average of 61 contracts in hand for the second quarter and an average of 50 contracts for the full year 2018. As of March 3138, our long term debt position net of cash is approximately $1,700,000,000 We had $82,000,000 in cash on our balance sheet, and our total liquidity position was $759,000,000 We continue to view cash flow generation and debt reduction as top priorities this year and plan to reduce debt $75,000,000 to $125,000,000 by year end. For 2018, we would expect depreciation to be approximately $350,000,000 and SG and A to be approximately $110,000,000 We would expect cash taxes to remain low and our effective tax rate to be in the 20% to 25% range. Finally, we are happy to report that earlier this month, we had a successful cutover to our new ERP environment and completed the twelve month long project on time and on budget. The success is attributable to hard work and collaboration of hundreds of dedicated Precision employees working together across multiple geographies where Precision operates.
I will now turn the call over to Kevin for further discussion of the business and outlook.
Speaker 3
Thank you, Carey, and good afternoon. So as Carey mentioned earlier, we're very pleased with Precision's strong start to 2018. With the strength in WTI supporting customer demand in The United States and Brent strength generating positive signals in our European Gulf business, our outlook for 2018 remains constructive and the opportunity set seems to be increasing. But before I dive deeper into our operations, I'd like to discuss our strategic priorities for 2018 and give you some additional color on how we'll drive our actions during the year. So recently, we disclosed total reduction total debt reduction target range.
And to be clear, before the end of twenty twenty one, we expect to reduce our total debt by 300,000,000 to $500,000,000 using cash from operations. And Kerry also mentioned our 2018 debt retirement target range of 75,000,000 to $125,000,000 Now despite our modest increase in projected capital spending and attractive U. S. And international growth opportunities, our primary use of cash will remain focused on debt reduction. During the first quarter, we demonstrated a strong improvement in cash from operations and a meaningful increase in cash on hand.
It's a very good start to meeting our debt reduction objectives for the year. Our second priority regarding enhanced financial performance is extremely important, particularly as customer demand increases and growth opportunities emerge. You should read this on two levels: one, we will maintain intense focus on cost management, tightly controlling our fixed costs and our variable costs. But secondly, we'll drive margin improvement via day rates and operational leverage. So during the first quarter, we demonstrated excellent cost control on all fronts, and that's despite the seasonal ramp up in Canada and several reactivations in The United States.
We expect to stay on track managing our controllable costs throughout the year. On the revenue front, our sales team is working closely with customers to increase day rates to normalized levels. Limited high spec rig availability, coupled with strong customer demand, has provided a helpful tailwind to this process. In The U. S, we've demonstrated three sequential quarters of average rate increases, and our press release mentions that we successfully repriced every rig renewal during the first quarter.
I'll give you a little more color on pricing later. In Canada, the rates we the rate increases we mentioned late last year held, as you can see, the positive impact of our year over year average rates. This all serves to enhance our financial performance, namely our free cash flow, which is a top priority for the year. We certainly have a good start in the first quarter. So regarding our third priority, this is the wide scale technology deployment initiative.
This is extremely important for Precision, and we remain on track. In our press release, we provided some indicative technology deployment statistics, and I won't repeat those. But I will add that we have also deployed revenue generating drilling performance apps on several rigs during the quarter. We are collaborating with our customers, with vendors, with partners and working internally to develop additional drilling apps. And these apps are targeted for a variety of purposes, including improving rig efficiencies, automating certain rig functions, reducing operating costs, capturing performance data or providing drilling process quality oversight.
Customer interest in our process automation, our directional guidance and our drilling app development remains extremely high. We count at least one new Precision customer and a rig activation driven by the PAC platform demand. We continue to believe that our market penetration, our first mover competitive advantage and the minimal capital requirement we need for this technology will deliver excellent value for our customers or precision for our investors. So now moving to our regional update. Our U.
S. Operations are performing very well. Today, we have 71 rigs running and further visibility to the mid to upper 70s with several additional rig activations scheduled for the third quarter. As our market share is outpacing the industry, we see this as a journey by our customers to maximize rig efficiency and transition from lower spec rigs to top tier performing rigs. So I'll remind you that our fleet of Super Triple rigs were designed and constructed to be easily upgradable.
And most of the typical upgrades, including pad walking systems, third pump additions or technology like our NOVOS PACK system, essentially bolt on to our rigs. And we've been describing upgrades of typically under $3,000,000 to do these upgrades. Our projected increase in capital spending should fund an additional three to four additional upgrades. And that depends on the scope of the customer requirements. Now as we move past 75 active rigs, we expect the next 10 to 15 upgrades will trend higher in cost.
You should be thinking about those in the 3,000,000 to $6,000,000 range per upgrade. Some of these upgrades will likely be SCR to AC rig conversions. Additionally, we believe we have the capability to utilize some of our spare equipment and some of the components we have in our inventory to assemble up to two additional new Super Triple 1,500 horsepower rigs, with additional cash outlays for drill pipe and some of the non inventory items of less than $10,000,000 each. Now we haven't committed to the spending. We don't plan to commit to the spending.
We will continue to monitor customer demand and will ensure that any investment we make meets our internal hurdles and that the incremental cash flow from the contract will fully fund any capital investment we make and not impair our client's retirement debt. As we look at regional activity in The U. S, the Permian remains a key focus. But I'll point out that the Permian accounts for only half of our activity. The balance of our activity is distributed between the SCOOPSTACK, the Utica, the Marcellus, the Niobrara, the Haynesville and Eagle Ford.
And I mentioned rate increases earlier. During the first quarter, 18 rigs renewed, and we achieved rate increases ranging from several $100 per day to several thousand dollars per day of those increases, depending on the prior contract tenure and the rig type. I also comment that High Spec rig pricing is consistent across all regions, and we continue to report that Feet 15 100 pricing for leading edge spec rigs is in the mid-twenty thousand dollars range mid-20s thousand dollars range. Currently, our customer bid activity remains very strong, but we expect a low in contract awards during the second quarter as our customers evaluate first quarter performance and determine second half needs. Now turning to Canada.
Despite the longer than usual winter season, our customers reduced activity early, primarily due to budgetary constraints. We believe they remain focused on capital discipline, and we view this as prudent behavior by our customers. Regionally, in Eastern Alberta and Saskatchewan, I believe the day rates for shallow rigs remain too low. This segment is structurally oversupplied, and I believe customer price expectations are unrealistic. I mentioned earlier that we implemented modest price increases last year and that pricing held during the first quarter, but we believe rates for shallow rigs need to increase further by several thousand dollars per day.
If our customers expect the industry segment to deliver on the safety and performance they need, rates must increase. Now turning to the deeper place. Fortunately, in the Montney and Duvernay, the supply and demand remains in good balance. All of Precision's Super Triples were active in Q1, and the majority of our Q2 activity will come from these rigs. We expect our Q2 seasonal spring breakup activity will be in line with last year's activity levels.
Early indications are that most, if not all of our Super Triples will reactivate in Q3 and operate through the second half of the year. Now that said, we certainly have very strong demand for ST-1500s in The United States. I would not be surprised to see a U. S. Customer step up and pay the mobilization cost to redeploy Canadian ST-fifteen 100 to The U.
S. But at this point, we have no firm commitments to move any rigs. Generally, we view Canada as a relatively stable market where our fleet quality, our crew performance, our customer reputation and the scale we have provide a strong foundation for free cash flow. We'll continue to invest to sustain this fleet, we don't see any further growth investments in the near future. We view Canada as a stable free cash flow business.
We will manage very carefully. Now moving to our international business. The stronger commodity prices are causing uptick in customer interest. So first off, two of our three operating rigs in Saudi Arabia are due for contract renewals later this year. We should begin customer negotiations on those rigs mid summer.
And based on our strong operating performance metrics, we expect contract renewals are likely. We also continue to bid our four idle rigs in the region, and we believe interest in those rigs may improve if commodity prices remain strong. Now turning to Kuwait. There's been much industry talk of a large multi rig tender in Kuwait. I'll remind you that for Precision, we're most interested in the 3,000 horsepower high spec ultra deep drilling rigs.
Our operating performance in Kuwait has been exemplary, and we believe we're extremely well positioned. We hope to achieve a customer commitment for one additional new built rig. And if successful, we'd expect rig construction to commence later this year and deploy in mid-twenty nineteen. We are confident we can fund a single rig project from cash flow while meeting our stated debt reduction targets. So just turning to our Canadian Well Service division.
As you know, we made a management change early in the first quarter. Our team has substantially refocused on internal operational efficiency, and they are working hard to restore pricing to sustainable levels. Now as I've said in the past, this is a structurally oversupplied sector. Competition is intense, and our customers continue to apply unrealistic price expectations on the Canadian service rig industry. Our team is working hard to demonstrate the value Precision offers with our well trained crews, excellent logistical management and appropriately certified service equipment.
We see early signs that this is working and some of the price increases are taking hold. And I'll tell you, it's absolutely essential for the well service industry participants, for the crews and for customer performance expectations, the pricing needs to improve, and we need to return to some semblance of industry health. So as a final comment, with increased activity in The U. S. And Canadian winter seasonal rebound, our field safety performance was very strong, near record levels.
I want to thank all the dedicated Precision employees for their effective safety culture they sustained and the excellent results during the first quarter. I also want to reiterate Carey's comments and thank all the Precision employees who worked many extra hours and particularly through the Easter holiday weekend to ensure that our ERP go live went off without a hitch. So thank you. Thank you very much. And I'll turn the call back to the operator for questions.
Speaker 0
Thank Our first question comes from Sean Meakim of JPMorgan. Your line is open.
Speaker 4
Thanks. Hey, Kevin. Hey, Kerry.
Speaker 3
Sean. Hey, Sean.
Speaker 4
So just I thought maybe it'd great if we could get a little more feedback on the repricing of the contracts during the quarter, just kind of what precipitated that series of events and the receptivity from customers. Would be great to learn a little bit more about that. And maybe if we could quantify to some degree the positive impact of that repricing.
Speaker 3
So to give you some sense of repricing, I think Gerry talked about Q4, Q1 pricing, positive impacts were restorative pricing, negative impacts were mixed a little bit. I think if you look forward over time, I'd expect rates on average to move up probably in the range of $500 to $1,000 a quarter kind of looking forward on average. But it could move a little faster if oil prices stay strong. I'll tell you, there's no question that leading aspect rigs are pricing very quickly, repricing towards that mid-20s range. And even our smaller ST-1200s, will be into the low 20s.
And we've got some of the less capable rigs coming up on $20,000 a day. So rigs are moving pretty quickly. I commented that some rates were several $100, some were several thousand dollars. And that really just comes back to when the rig was last contracted.
Speaker 2
Yes. And just to be clear, Sean, we didn't re price any existing contracts. But when the contract term ended and we rolled in a new contract, that's when we re priced.
Speaker 4
Got it. Okay. Yes. And as we think about the second quarter in Canada, maybe could you give us a sense of how you think mix shifts can impact the rates quarter over quarter and maybe as a comparison to the year prior? I know we talked about activity being fairly comparable, but maybe just a sense of how that mix could shift over the course of the quarter.
Speaker 2
Yes, Sean. The mix shift would look or the mix would be pretty similar to last Q2 where we'd have a much higher percentage of Super Triple rigs working in the deeper basins working on pads. So the rates would typically go up from Q1.
Speaker 4
Okay, great. Thank you.
Speaker 3
Thank you.
Speaker 0
Our next question comes from Chase Merkel of Wolfe Research. Your line is open.
Speaker 5
Hey, good afternoon, Carey and Kevin.
Speaker 3
I guess,
Speaker 5
so on the rig upgrades, it sounds like you're going to have 75 rigs or so kind of active in The U. S. In the next couple of months. Can you talk about what your total fleet size is in The U. S.
Relative to that 75? So how many do you actually have idled that you think are kind of options to upgrade? And then maybe can you just talk about the average cost to upgrade those? And I've got a follow-up as well.
Speaker 3
Chase, think the first comment I'd make is that I did in the prepared comments talk about if we get beyond 75 rigs, the cost of our next 10 to 15 upgrades will start to move up in the 3,000,000 to $6,000,000 range. So the average will move up a little bit. And if you just kind of pile those two together, that gets us to somewhere in the high 80s or maybe 90 ish range. We have one hundred and four one hundred and three or 104 rigs in The U. S.
Right now. So that gives you a of a sense of what the range could be.
Speaker 5
Okay. All right. That's helpful. And then thinking about moving rigs from Canada to The U. S, what rate would you need in The U.
S. To actually move those from Canada? And what kind of duration on the contract would you need?
Speaker 3
That's a really good question, Chase. I'd tell you there's a couple of things we look at. So first of all, we'd expect our customer to pay the full reload cost, which is it's meaningful. It could be in the range of $1,000,000 to 1,000,000 point dollars depending where it's going. And we want that paid either as a pure increment to the day rate or as a lump sum upfront, But we do have to be firmly committed.
The rates would have to be leading edge rates, so we'd be looking for the best rates in the market.
Speaker 5
All righty.
Speaker 3
Turn it
Speaker 6
back over.
Speaker 2
Yes. Just to follow on that, Chase, on the contract term. Typically, if there's any capital involved or really any cash outlay, expense or capital, we want to make sure that the term is long enough to cover that outlay.
Speaker 3
The incremental rate covered the outlay also. And
Speaker 0
our next question comes from James West of Evercore.
Speaker 7
Hey guys, good afternoon.
Speaker 3
Hey James.
Speaker 7
Kevin on the Kuwait potential contracts in Kuwait, how many rigs would you as Precision be willing to put into that market assuming you're successful on the tendering activity?
Speaker 3
So we're running today, we have five rigs running and we've made the comment many times that we think we've achieved the scale we need to deliver country level returns. We're pretty happy with our scale today. Adding one rig, if we're successful adding one rig next year, maybe one rig a year or two later, I think that's the kind of pace we'd like to see. We're really pleased with the business equates great relationship with the customer, demanding customer that expects our performance, we're able to deliver. But I'd also worry about becoming too levered to any one country or one area.
So I think we've balanced those things out and look at the market size. I wouldn't want to become 10% of the market or 15% of the market in Clay. We're just it's not the right mix for us today.
Speaker 7
Okay. Okay. Makes sense. And then maybe a similar question. Know Saudi is out looking for more rigs as well or will be out looking for more rigs.
How many more rigs would you be willing to put in Saudi?
Speaker 3
Well, I've also said in the past that, frankly, three rigs operating at subscale. And while the returns of the rig are adequate, the returns at the country level, we're cash flow positive, but the returns aren't adequate. And I'm not happy with that. If we could get the idle rig in Saudi and maybe the three rigs in Kurdistan in country running, I'd be very pleased with that. That would get us up to seven rigs running in that range.
That's pretty good. But we have to balance that out with the capital needs and the returns that are focused on paying down debt. So there's no easy answer for us.
Speaker 8
Okay, fair enough. Okay. Thanks, Kevin.
Speaker 3
Thank you.
Speaker 0
Our next question comes from Ben Owens of RBC Capital Markets. Your line is open.
Speaker 9
Hey, good afternoon guys. So on the target debt reduction range you guys provided for $20.18 of $75,000,000
Speaker 2
to $125,000,000
Speaker 9
Just wondering what are some of the variables that could impact where you end up in that range? Does that contemplate potentially putting additional rigs to work in Kuwait and possibly needing to spend capital to get those rigs up to spec?
Speaker 2
So with the capital plan we disclosed today absolutely contemplates that. If we were successful to win a Kuwait rig award, it would be much more weighted to 2019 capital spend. So there could be some spend in 'eighteen, but it would be a small portion. The variables that would impact that would be how much cash we want to keep on the balance sheet would be one. So if we continue to build our contract position, we'd probably be more comfortable with a little bit less cash on the balance sheet.
And then the overall performance of the business from a cash flow generation standpoint, from the EBITDA level, if we continue to see strong pricing trends and good cost control and good utilization, we would be likely at the higher end of that range.
Speaker 9
Okay. On the Saudi rigs that are up for renewal later this year, do you think those rigs would require any capital investment to win the contract renewals?
Speaker 3
Nothing at all. We think those rigs are well maintained and able to continue working for a long period of time.
Speaker 0
Our next question comes from Taylor Zurcher of TPH. Your line is open.
Speaker 10
Hey guys, thanks. In Canada, maybe to start there. If I look back to, I guess, pre-twenty fourteen and 2014, the mix of term versus spot contracted rigs was sort of steady around 40% today. Well, that naturally migrated lower over the course of the downturn and today it still seems to be moving lower. I think it was 8% this quarter.
So I guess my question is, is that just a function of where commodity prices are today, Part A? And then I guess Part B, how do you envision that ratio unfolding the way you see it over the back half of the year?
Speaker 3
So I think there's a structural difference in the Canadian market and U. S. Market. So term contracts in Canada are just far, far less common. It tends to be annual pricing agreements with no obligation for days.
However, any time that driller in Canada deploys new capital, they usually seek a contract to cover the capital. So if the capital is a brand new rig, Canadian drillers, ourselves included, look for a contract to cover that entire capital investment. We get a probably typically a four year contract. So in 2014, we had a lot of newbuilds at the plant in Canada. I think we had, at one point, about 20 newbuilds.
So that was twenty four year contracts hanging out there. And then some we had some upgrades back then also, so we would have had a number of upgrade contracts. But as that upgrade and capital deployment has gone down year over year, the number of term contracts has naturally gone down. So you still see Canadian E and P companies or Canadian service companies doing term contracts unless there's some new investment tied to that rig. I'm not sure if that helps you.
It's just a fundamental of the business that's different between Canada and The U. S. Whereas in The U. S. Right now, we have a number of accounts that are locking up rigs for six months a year, sometimes eighteen months to secure that rig over a long horizon, so they don't have the same rig and same crew.
And that's been a common feature of The U. S. Market for over a decade, one years. Point
Speaker 10
Okay. That makes sense. And then a follow-up in Canada. I think you mentioned in prepared remarks that you'd like to see some additional pricing momentum on the shallower rigs. If the back half of the year ends up playing out flattish versus the back half of 2017, do you think you have the room to keep pushing pricing there?
Or is that likely you'll need to see more demand in order to get that extra $1,000 a day you called out?
Speaker 3
Yes. I actually said 1,000 sort of at the end. I'll tell you that message is actually quite intentional. We have customers listening and they need to understand how weak that business is and how important it is for the drillers to get back to some level of sustainability. So I made that comment because I know we have customers listening.
They need to understand this is a very tough business for everybody, ourselves included. Last year, we raised rates. We immediately saw the impact of market share reductions reductions immediately. Our guys worked really hard through the third quarter and fourth quarter to restore that market share. We brought it back.
The rates held in quarter one. I'm not going to give any guidance right now on future price negotiations because those are going on every day. But I'll tell you, across the industry, those rates need to come up. They need to come up to $2,003 $4,000 sometimes $5,000 a day. The industry is suffering right now.
We're doing our part, but we need our customers to recognize that the business needs to improve. Otherwise, they're going to suffer. Ultimately, they'll be the ones who suffer.
Speaker 10
Understood. And one last one for me. On Process Automation Control, I think you're still running 21 rigs equipped with PACS systems today. Could you just give us an update as to how many of those customers are paying for those services or how close you are to sort of full commercialization on those 21 rigs?
Speaker 3
Yes. The short answer is no, I won't. We have material metrics that we're meeting right now. So we're happy with what we're doing. I'll tell you, we've got a number of customers that are paying full rate, a handful more that we're working with on performance metrics, where there's a reduced rate.
And I'm really pleased with the progress we're making. But at this point, we're going to hold back on providing a lot of disclosure on rates and terms. But nothing tells me that the targets we put out for ourselves last year at our Investor Day need to change or come down.
Speaker 10
Okay. I appreciate it. Thanks.
Speaker 3
Great. Thank you.
Speaker 0
Our next question comes from Ian Gillies of GMP. Your line is open.
Speaker 11
Good afternoon, everyone.
Speaker 3
Hey, Ian. Hi, Ian.
Speaker 11
Kevin, was I correct in hearing that you're contemplating building two newbuild AC rigs out of, I guess, and spares at some point this year?
Speaker 3
No, you're not correct. We're not contemplating building anything. We just commented that we could if we saw the right type of contractor demand, we could assemble up to two new rigs probably for less than $10,000,000 of cash out that we could deliver in short order. So we could do that. At this point, we have nothing on the books.
Speaker 11
Okay. And that's good to know. And I mean with respect to the SCR to AC conversions, are you able to provide, I guess, bit of color on what you think that may cost, given that's probably going to be a different sort of upgrade than what you guys have been doing previously? And whether it may are there any sort of performance limitations if you go and do those sorts of upgrades? Or do you think those rigs immediately compete with some of the other super spec AC triples in your fleet once that's done?
Speaker 3
I would view those rigs. If we did an AC to DC conversion or DC to AC conversion, I would just view it as an additional AC rig in the fleet. It doesn't compete with our existing rigs. Many of those rigs are actually already configured with three pump ups and pad walking. So it's just a power consistent conversion.
So I think our guidance on 3,000,000 to $6,000,000 for the next 10 to 15 rigs is the appropriate guidance. With
Speaker 11
respect to potential newbuild heading into Kuwait, I mean, in U. S. Dollar terms, they still in that $45,000,000 to $50,000,000 range? Or am I way off the mark there?
Speaker 3
You're right, probably closer to $60,000,000 in that range, 55,000,000 to $60,000,000 in that range.
Speaker 11
And then to be clear, that's S. In dollars?
Speaker 3
Yes.
Speaker 11
Okay. And then I guess as you
Speaker 3
So let me be really clear on a couple of things here. First of all, our top priority is pay down debt. And while we just spent the last five minutes talking about areas we can spend capital, we're not spending capital until we are certain we're paying down debt. We gave the range on 2018, and we gave the range by 2021. And that target is not going to be modified.
Speaker 11
Okay. No, thank you. That's I think that will be helpful. That's helpful for me and I think probably for a number of listeners. And with and then I guess the last thing, I mean, respect to when you look across your peer group and you look at the industry, I mean, you concerned at all about the number of potential rig upgrades that may come and end up hampering any sort of pricing gains you're getting in The U.
S. Right now?
Speaker 3
What we're seeing out there in public disclosure by some of our peers are upgrade costs that are 6,000,008 million $9,000,010 sometimes $14,000,000 And so that's one thing. The upgrade costs are getting quite high. I'd comment that we've actually watched our competitors operate with very good discipline in that. They seek contracts, they want capital returns. The hurdles may be different company to company, but in fact, the industry is behaving in a very disciplined manner right now, and that's encouraging.
Speaker 11
Okay. No, that's helpful. And I'll turn it back over now. Thanks very much for the color and clarity.
Speaker 0
Our next question comes from Jon Morrison of CIBC Capital Markets. Your line is open.
Speaker 6
Afternoon all. From a high level perspective, can you talk about whether day rates in Canada are largely holding across rate classes and geographies? Or are we starting to see a diversion in trends at this point that could unfold in the back half of the year just given some of the different supply and demand dynamics for rigs that you're seeing right now in different regions?
Speaker 3
John, there are my comments earlier about shallower rigs were targeted comments because there's going on right now, really tough conversations. But I'll commend our guys for doing a very good job. We are our rigs are running in the field excellently, and we're our sales team is holding rigs.
Speaker 6
Okay. Sorry if I missed this in the preamble, but on the upgrade CapEx increases that you announced, can you just clarify whether ultimately that is all being applied to rigs that are in the field working today or some of it is going to some of the incremental rigs you talked about in The U. S. Likely going to work in the coming months?
Speaker 3
Yes. Some of that capital will be
Speaker 2
going to rigs that are working today. But as Kevin said earlier, that capital will get us up to 75 rigs running in The U. S.
Speaker 6
Okay. When you talk about the capital investments needed to meet your thresholds, but also talking about how you can lean on inventory, obviously, from a strategic advantage that limits the amount of cash outflow that you have to put out. But when you're talking about running your economic thresholds on making sure that you meet your return thresholds, am I right assuming that you're treating all of those inventory items as essentially having to pay new cost for it and not reducing that from the total build cost to meet your thresholds when you're thinking about building a new rig? Like are you agnostic to whether you spent the money already versus having to spend the money on the horizon?
Speaker 2
No, we would always look at opportunity costs, John.
Speaker 6
Okay. Is the day rate to build a new rig in The U. S. Right now of a very high two handle or low three handle still at this point?
Speaker 3
So I can really speak for Precision. I think there's two different things to think about, John. I think that I talked about building a couple of rigs out of inventory. I think others could build rigs out of inventory like we can. We're not unique in having spare parts.
But I think you get into a cadence of new builds, where you've got to people talking about building one rig every two months or one rig a month into a cadence. I expect day rates likely need to move up around $30,000 a day or maybe even higher for our leasing and spec rig today.
Speaker 2
And a term longer than what
Speaker 3
we're seeing. Yes, much longer term. So I think we're a long ways away from the kind of pricing and term duration required to get it through a cadence of new builds. I noticed that one other driller in The U. S.
Announced converting some inventory into a rig a while ago. And I think you could see a few of those this year with day rates sub-thirty. But to get into a cadence of newbuilds, rates seem to have gone quite a bit.
Speaker 6
Okay. And just to clarify on the potential SCR to AC conversions, that would all be based on demand from customers and none of it would be a speculative read of the market, correct?
Speaker 3
No investments in rigs will be spec. It will all be through contracts.
Speaker 6
If the market continues to improve and your ratios start to look a lot better two years out, is there any way that your absolute debt repayment goals get diminished by virtue of your leverage ratios improving? And then you could look at adding more rigs if the economics make sense? Or are you definitive in that those are the debt repayment goals that you intend to meet?
Speaker 3
John, it's really hard for us to answer a long term question that as if, is it three times?
Speaker 6
I apologize for being annoying.
Speaker 2
No, no, no.
Speaker 3
If this happens and if that happens and if this happens, what would you do? It's a hard one to answer. What I'd tell you is we have no intent to change our targets.
Speaker 6
Okay. Last one just for me on the international side. When you talk about needing better fixed cost absorption in Saudi, are you agnostic to the region in which more rigs go to work in that, whether it was Kurdistan getting reactivated or putting more rigs into Kuwait? Are you do you need better fixed cost absorption in Saudi specifically? Or is it just more activity in The Middle East?
Speaker 3
Well, more activity in Middle East would be helpful, but we're really focused on trying to get more activity in Saudi.
Speaker 6
Okay. Sorry, I'm going be annoying.
Speaker 3
The answer is we wouldn't turn down an opportunity to fire up three rigs in Kurdistan, but that would not help Saudi.
Speaker 6
Okay. And I'm going be annoying and ask one more, sorry. On the Kuwait opportunity, is it fair to assume that the economic payback for the current bids that are out there in the market is probably somewhat in line with what you're currently generating, at least at the rig level?
Speaker 2
Not really following you there, Jon. I think you
Speaker 3
said the returns on the potential new build in line with previous rigs.
Speaker 6
Exactly. And naturally, you'll get better fixed cost absorption. But at the rig level, are they likely in line?
Speaker 2
They're at least as good.
Speaker 6
Okay. Appreciate the color. I'll turn it back.
Speaker 3
Thanks, John.
Speaker 0
Our next question comes from Jeff Batterley of Peters and Co. Your line is open.
Speaker 8
Hi, all. A couple of clarification questions. On the capital program side, so previously you talked about the program contemplating between ten and twenty upgrades in 2018. Is that still the range with the pro form a change?
Speaker 3
You should think about this like it might go up two, three or four rigs depending on what the scope of some of these upfront upgrades end up being. So it could go from 10 to 20 to like 12 to 23 or 24. I think the real key here is it's a range, and we get to hung up on 2020 or 2021.
Speaker 8
Can you give us a sense of how many rig upgrades you've committed to or completed so far in 2018?
Speaker 2
It would be pretty close to the low end of that range.
Speaker 8
Okay. And the increase both to maintenance capital and upgrade capital, does that essentially contemplate your U. S. Rig count getting to 75? Or does that contemplate the rig count moving above 75?
Speaker 3
Since we don't forecast forward hard revenue or activity levels, I've given numbers for a coming quarter like I've given the 75 and sort of mid-70s by the end of this quarter. I think the simplest answer is that it's a proxy for our view on activity for the balance of the year.
Speaker 2
And I think we've said a couple of times that, that capital is enough to fund upgrades to get us to 75 rigs.
Speaker 3
That was some of the maintenance capital piece, think, the question. Yes.
Speaker 8
Well, sorry, it's on both sides. So previously, Kevin, you talked about how the upgrade capital is sufficient to get you to 75 rigs. At the beginning of the call, mentioned that you had line of sight for somewhere between 75 and high 70s.
Speaker 2
Yes.
Speaker 8
So if you were to get to high 70s, does that mean that your upgrade capital and your maintenance capital will increase from the budget that you talked about today?
Speaker 3
I think our upgrade capital is fine, and I think our maintenance capital is fine.
Speaker 8
Okay. So even though it's less than $3,000,000 per rig to get to 75,000,000 and then 3,000,000 to $6,000,000 per rig above 75,000,000 that's essentially contemplated or blended within the sustaining capital?
Speaker 3
We may have some rigs that no capital. Yes. So there's no direct correlation between the number of upgrades, the number of rigs to get 75. But I'm trying to we're trying to give you some ways to judge what it's going to take to move the next step up, which is why we gave the next 15 rigs will be 3,000,000 to $6,000,000 for upgrade.
Speaker 8
And so sorry, go ahead.
Speaker 2
One more clarification there, Jeff. Our upgrade plan that we announced today does not contemplate an upgrade above $3,000,000 on a rig.
Speaker 8
Okay. And just to clarify, you said earlier that 3,000,000 to $6,000,000 per rig range that would include some DC to AC conversions that would have about 10 to 15 rigs in the fleet that would be potentially available for that?
Speaker 3
That's correct.
Speaker 8
Okay. And just a follow-up on the newbuild question. So I know you said 30 ish or higher and obviously longer term. Even though does that apply even though your cash outlay would be, as you said, less than $10,000,000 for those two inventory newbuilds?
Speaker 3
So first of all, my guidance on the day rate was to get back into a cadence of newbuilds. So a cadence would be we're going to build one rig a quarter, one rig a month, some kind of an ongoing manufacturing process rather than just taking spare parts inventory like some others have done and taking essentially idle inventory turning it into a rig. So I think that our expectations will be different for converting inventory to a rig versus a cadence of newbuild rigs.
Speaker 8
And so what do you need to see, either rate or term, from where the market sits today to convert inventory into two new rigs?
Speaker 3
So we're not going to give guidance at that level because we're going to be giving away our marketing strategy to our peers.
Speaker 8
But safety
Speaker 3
say We is expect that our hurdles and our hurdles on returns and our opportunity cost calculations don't change the way we view things the most.
Speaker 8
Last item. On the Canadian side, the potential transfers you alluded to earlier, I know there's nothing committed to at this point. But when you look at the fleet profile in Canada and the customer commitments that are tied to the either the 1,200 or 15 sorry, the 1,200 horsepower triples, how many rigs realistically could be available to move to The U. S. Later this year if It The U.
S. Customers step
Speaker 3
could be a number of close to the 20s. It could be that much, but that's not highly likely. I don't think it happens at all. I think the chance of that would be zero. I think the most desirable rig to move to The U.
S. Would be an ST-fifteen 100. We have five of those in Canada, but I can tell you all five right now are utilized. So again, what I don't want to do is have you come along in seven months' time and say, Unitil tells you to move rig to The U. S.
We would consider moving one if it becomes available in Canada and if the customer in The U. S. Pays above and that the rates and terms in The U. S. Are quite supportive.
Speaker 8
Okay. But conceptually, when you balance customer commitments and your inventory in Canada, the five ST-1500s, as you said, are committed, but there would be upwards of 20 on the ST-twelve 100 side that could conceptually be available?
Speaker 3
But I think the more desirable rig in The U. S. Right now would be the ST-fifteen 100. And we're doing quite well, the ST-1200s in The U. S, but I don't think there'll be a market for 20 of those drop to the market at once.
So that's why I just and I think that the ST-1200s performing quite well to Montney. Jeff, really don't think we're certainly going be moving any mass amount of rigs in Canada to The U. S. Could be one, could be two, if we find the customer pays for the low cost. But I think the comment is the option we have an option on that, but it really isn't core strategy.
Speaker 8
Great. I'll turn it over. Thank you.
Speaker 2
Thanks, Jon.
Speaker 0
I'm showing no further questions in queue. I would now like to turn the call back to Kevin Neveu, President and CEO, for closing remarks.
Speaker 3
All right. Thank you for joining us on our first quarter conference call, and we'll be hosting our Annual General Meeting in Calgary in the coming weeks. And then look forward to having you join us on our Q2 conference call in mid July. Thank you very much.
Speaker 0
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.